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                           LOAN AND SECURITY AGREEMENT

                          DATED AS OF FEBRUARY 4, 1999

                                      AMONG

                              KMC TELECOM III, INC.

                                       AND

                           KMC TELECOM LEASING III LLC

                                  AS BORROWERS,

                     THE FINANCIAL INSTITUTIONS FROM TIME TO
                              TIME PARTIES HERETO,
                                   AS LENDERS,

                                       AND

                            LUCENT TECHNOLOGIES INC.

                            AS AGENT FOR THE LENDERS

                                       and

                       STATE STREET BANK AND TRUST COMPANY

                       AS COLLATERAL AGENT FOR THE LENDERS



                                     




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<PAGE>

                                TABLE OF CONTENTS
ARTICLE I   DEFINITIONS......................................................1
      SECTION 1.01.  DEFINITIONS.............................................1
      SECTION 1.02.  ACCOUNTING TERMS.......................................22
      SECTION 1.03.  OTHERS DEFINED IN NEW YORK UNIFORM COMMERCIAL CODE.....22
ARTICLE II  LOANS...........................................................22
      SECTION 2.01.  AGREEMENT TO LEND......................................22
      SECTION 2.02.  LOANS..................................................23
      SECTION 2.03.  PROCEDURE FOR LOAN REQUEST AND BORROWING COMMITMENT....24
      SECTION 2.04.  THE NOTES..............................................26
      SECTION 2.05.  INTEREST ON LOANS......................................26
      SECTION 2.06.  CONVERSION OR CONTINUATION.............................27
      SECTION 2.07.  SPECIAL PROVISIONS GOVERNING LIBOR LOANS...............28
      SECTION 2.08.  PAYMENTS...............................................30
      SECTION 2.09.  OPTIONAL AND MANDATORY PREPAYMENT OF LOANS; OPTIONAL  
                     AND MANDATORY REDUCTION OF COMMITMENT AMOUNT...........31
      SECTION 2.10.  FEES...................................................32
      SECTION 2.11.  MANNER OF PAYMENT; SPECIAL TAX CONSIDERATIONS..........33
      SECTION 2.12.  MAXIMUM LAWFUL INTEREST RATE...........................38
      SECTION 2.13.  FUNDING ISSUES.........................................38
ARTICLE III REPRESENTATIONS AND WARRANTIES..................................40
      SECTION 3.01.  ORGANIZATION; POWERS...................................40
      SECTION 3.02.  CORPORATE AUTHORIZATION................................40
      SECTION 3.03.  FINANCIAL STATEMENTS...................................41
      SECTION 3.04.  NO MATERIAL ADVERSE CHANGE.............................41
      SECTION 3.05.  LITIGATION.............................................41
      SECTION 3.06.  TAX RETURNS............................................41
      SECTION 3.07.  NO DEFAULTS............................................41
      SECTION 3.08.  PROPERTIES.............................................42
      SECTION 3.09.  LICENSES, MATERIAL AGREEMENTS, INTELLECTUAL PROPERTY...42
      SECTION 3.10.  COMPLIANCE WITH LAWS...................................42
      SECTION 3.11.  ERISA..................................................43
      SECTION 3.12.  INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING
                     COMPANY ACT............................................43
      SECTION 3.13.  FEDERAL RESERVE REGULATIONS............................44
      SECTION 3.14.  COLLATERAL.............................................44
      SECTION 3.15.  CHIEF PLACE OF BUSINESS................................44
      SECTION 3.16.  OTHER CORPORATE NAMES..................................44
      SECTION 3.17.  INSURANCE..............................................44
      SECTION 3.18.  KMC III TIER III PLAN..................................44
      SECTION 3.19.  CAPITALIZATION AND SUBSIDIARIES........................45
      SECTION 3.20.  REAL PROPERTY, LEASES AND EASEMENTS....................45
      SECTION 3.21.  SOLVENCY...............................................45
      SECTION 3.22.  BROKERS, ETC...........................................45
      SECTION 3.23.  NO MATERIAL MISSTATEMENTS..............................46
      

                                      i
<PAGE>



      SECTION 3.24.  YEAR 2000 PROBLEMS.....................................46
ARTICLE IV  CONDITIONS FOR LOANS............................................46
      SECTION 4.01.  CONDITIONS PRECEDENT TO INITIAL LOANS..................46
      SECTION 4.02.  CONDITIONS PRECEDENT TO ALL LOANS......................51
      SECTION 4.03.  CONDITIONS PRECEDENT TO LOANS IN 
                     EXCESS OF THE LEVEL 1 LENDING......................... 52
      SECTION 4.04.  CONDITIONS PRECEDENT TO LOANS IN 
                     EXCESS OF THE LEVEL 2 LENDING LIMIT................... 52
ARTICLE V   AFFIRMATIVE COVENANTS...........................................53
      SECTION 5.01.  CORPORATE AND FRANCHISE EXISTENCE......................53
      SECTION 5.02.  COMPLIANCE WITH LAWS, ETC..............................53
      SECTION 5.03.  MAINTENANCE OF PROPERTIES..............................54
      SECTION 5.04.  INSURANCE..............................................54
      SECTION 5.05.  OBLIGATIONS AND TAXES..................................59
      SECTION 5.06.  FINANCIAL STATEMENTS, REPORTS, ETC.....................60
      SECTION 5.07.  LITIGATION AND OTHER NOTICES...........................62
      SECTION 5.08.  MORTGAGES; LANDLORD CONSENTS;
                     LICENSES AND OTHER AGREEMENTS..........................62
      SECTION 5.09.  ERISA..................................................63
      SECTION 5.10.  ACCESS TO PREMISES AND RECORDS.........................63
      SECTION 5.11.  DESIGN AND CONSTRUCTION................................64
      SECTION 5.12.  ENVIRONMENTAL NOTICES..................................64
      SECTION 5.13.  AMENDMENT OF ORGANIZATIONAL DOCUMENTS..................64
      SECTION 5.14.  THIRD PARTY AGREEMENTS AND DELIVERY
                     AND ACCEPTANCE CERTIFICATES............................64
      SECTION 5.15.  ACCOUNTS PAYABLE.......................................65
      SECTION 5.16.  INTELLECTUAL PROPERTY..................................65
      SECTION 5.17.  FISCAL YEAR............................................65
      SECTION 5.18.  COMPLETED SYSTEMS......................................65
      SECTION 5.19.  YEAR 2000 PROBLEMS.....................................65
      SECTION 5.20.  SUBSIDIARY GUARANTEES AND PLEDGES......................65
      SECTION 5.21.  ACCOUNTING.............................................66
      SECTION 5.22.  FURTHER ASSURANCES.....................................66
ARTICLE VI  NEGATIVE COVENANTS..............................................66
      SECTION 6.01.  LIENS, ETC.............................................66
      SECTION 6.02.  USE OF PROCEEDS........................................67
      SECTION 6.03.  SALE OF ASSETS, CONSOLIDATION, MERGER, ETC.............67
      SECTION 6.04.  DIVIDENDS AND DISTRIBUTIONS; SALE OF EQUITY INTERESTS..67
      SECTION 6.05.  MANAGEMENT FEES AND PERMITTED CORPORATE OVERHEAD.......68
      SECTION 6.06.  GUARANTEES; THIRD PARTY SALES AND LEASES...............68
      SECTION 6.07.  INVESTMENTS............................................68
      SECTION 6.08.  SUBSIDIARIES...........................................68
      SECTION 6.09.  PERMITTED ACTIVITIES...................................69
      SECTION 6.10.  DISPOSITION OF LICENSES, ETC...........................69
      SECTION 6.11.  TRANSACTIONS WITH AFFILIATES...........................69
      SECTION 6.12.  ERISA..................................................69

                                       ii
<PAGE>

      SECTION 6.13.  INDEBTEDNESS...........................................70
      SECTION 6.14.  PREPAYMENT AND DEBT DOCUMENTS..........................70
      SECTION 6.15.  SALE AND LEASEBACK TRANSACTIONS........................71
      SECTION 6.16.  MARGIN REGULATION......................................71
      SECTION 6.17.  MANAGEMENT AND TAX SHARING AGREEMENTS..................71
ARTICLE VII   FINANCIAL COVENANTS...........................................71
      SECTION 7.01.  FINANCIAL COVENANTS PRIOR TO ACHIEVING POSITIVE EBITDA.71
      SECTION 7.02.  FINANCIAL COVENANTS AFTER ACHIEVING POSITIVE EBITDA....72
ARTICLE VIII  COLLATERAL SECURITY...........................................74
      SECTION 8.02.  PRESERVATION OF COLLATERAL AND PERFECTION
                     OF SECURITY INTERESTS THEREIN..........................75
      SECTION 8.03.  APPOINTMENT OF THE COLLATERAL AGENT AS THE
                     BORROWERS' ATTORNEY-IN-FACT............................76
      SECTION 8.04.  COLLECTION OF ACCOUNTS AND RESTRICTED
                     ACCOUNT ARRANGEMENTS...................................76
      SECTION 8.05.  CURE RIGHTS............................................77
ARTICLE IX  EVENTS OF DEFAULT; REMEDIES.....................................77
      SECTION 9.01.  EVENTS OF DEFAULT......................................77
      SECTION 9.02.  TERMINATION OF COMMITMENT; ACCELERATION................81
      SECTION 9.03.  WAIVERS................................................81
      SECTION 9.04.  RIGHTS AND REMEDIES GENERALLY..........................81
      SECTION 9.05.  ENTRY UPON PREMISES AND ACCESS TO INFORMATION..........82
      SECTION 9.06.  SALE OR OTHER DISPOSITION OF COLLATERAL BY THE AGENT...82
      SECTION 9.07.  GOVERNMENTAL APPROVALS.................................82
      SECTION 9.08.  APPOINTMENT OF RECEIVER OR TRUSTEE.....................83
      SECTION 9.09.  RIGHT OF SETOFF........................................84
ARTICLE X   THE AGENT AND THE COLLATERAL AGENT..............................84
      SECTION 10.01.  APPOINTMENT OF AGENT..................................84
      SECTION 10.02.  AGENT'S RELIANCE, ETC.................................85
      SECTION 10.03.  LUCENT AND AFFILIATES.................................86
      SECTION 10.04.  LENDER CREDIT DECISION................................86
      SECTION 10.05.  INDEMNIFICATION.......................................87
      SECTION 10.06.  SUCCESSOR AGENT.......................................87
      SECTION 10.07.  PAYMENTS; NON-FUNDING LENDERS; 
                      INFORMATION; ACTIONS IN CONCERT.......................88
      SECTION 10.08.  COLLATERAL MATTERS....................................89
      SECTION 10.09.  AGENCY FOR PERFECTION.................................90
      SECTION 10.10.  CONCERNING THE COLLATERAL AND THE RELATED
                      LOAN DOCUMENTS AND THE COLLATERAL AGENT...............91
ARTICLE XI  MISCELLANEOUS...................................................91
      SECTION 11.01.  NOTICES; ACTION ON NOTICES, ETC.......................91
      SECTION 11.02.  NO WAIVERS; AMENDMENTS................................92
      SECTION 11.03.  GOVERNING LAW AND JURISDICTION........................93
      SECTION 11.04.  EXPENSES..............................................93
      SECTION 11.05.  EQUITABLE RELIEF......................................93

                                      iii
<PAGE>

      SECTION 11.06.  INDEMNIFICATION; LIMITATION OF LIABILITY..............94
      SECTION 11.07.  SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC.......95
      SECTION 11.08.  SUCCESSORS AND ASSIGNS; ASSIGNMENTS; PARTICIPATIONS...95
      SECTION 11.09.  SEVERABILITY..........................................98
      SECTION 11.10.  COVER PAGE, TABLE OF CONTENTS AND SECTION HEADINGS....98
      SECTION 11.11.  COUNTERPARTS..........................................98
      SECTION 11.12.  APPLICATION OF PAYMENTS...............................98
      SECTION 11.13.  MARSHALLING; PAYMENTS SET ASIDE.......................98
      SECTION 11.14.  SERVICE OF PROCESS....................................99
      SECTION 11.15.  WAIVER OF JURY TRIAL, ETC.............................99
      SECTION 11.16.  CONFIDENTIALITY.......................................99
      SECTION 11.17.  ENTIRE AGREEMENT, ETC................................100
      SECTION 11.18.  NO STRICT CONSTRUCTION...............................100


                                    EXHIBITS

EXHIBIT A         KMC III Tier III Plan
                  
EXHIBIT B         Form of Collateral Assignment of Leases
                  
EXHIBIT C         Form of Collateral Assignment of Licenses
                  
EXHIBIT D         Form of Landlord Waiver
                  
EXHIBIT E         Form of Note
                  
EXHIBIT F         Form of Periodic Reporting Certificate
          
EXHIBIT G-1       Form of Guaranty of KMC Holdings
                  
EXHIBIT G-2       Form of Guaranty of KMC IHC
                  
EXHIBIT H-1       Form of Notice of Borrowing
                  
EXHIBIT H-2       Form of Notice of Continuation/Conversion
                  
EXHIBIT I         Financials
                  
EXHIBIT J-1       Form of Secretary's Certificate of Borrower
           
EXHIBIT J-2       Form of Secretary's Certificate of KMC Holdings
                  
EXHIBIT J-3       Form of Secretary's Certificate of KMC IHC
                  
EXHIBIT K-1       Form of Opinion of Borrowers' Special Counsel
                  
EXHIBIT K-2       Form of Opinion of Borrowers' Regulatory Counsel
                  
EXHIBIT K-3       Form of Opinion of Borrowers' Local Counsel
                  

                                       iv
<PAGE>

EXHIBIT L         Form of Pledge Agreement
           
EXHIBIT M         Form of Loss Payable Endorsement
                  
EXHIBIT N         Form of Restricted Account Agreement
                  
EXHIBIT O         Form of Assignment Agreement
                  
EXHIBIT P         Form of Delivery and Acceptance Certificate
                  
EXHIBIT Q         Form of Trademark Security Agreement
                  
EXHIBIT R         Form of Contribution Agreement
         


                                       v
<PAGE>

                                    SCHEDULES


SCHEDULE 1.01(a) Services
                 
SCHEDULE 3.02    Consents
                 
SCHEDULE 3.05    Litigation
                 
SCHEDULE 3.09(a) Governmental Authorizations and Approvals
                 
SCHEDULE 3.09(b) Material Agreements
                 
SCHEDULE 3.09(c) Intellectual Property
                
SCHEDULE 3.10    Environmental Matters
                 
SCHEDULE 3.11    Plans
                 
SCHEDULE 3.14    Filing Offices
                 
SCHEDULE 3.16    Corporate and Fictitious Names
                 
SCHEDULE 3.17    Insurance
                 
SCHEDULE 3.19    Capitalization and Subsidiaries
             
SCHEDULE 3.20    Real Property, Leased Real Property and Easements
                 
SCHEDULE 3.22    Fees
                 
SCHEDULE 6.11    Transactions With Affiliates
                 
SCHEDULE 8.04    Collection Accounts
                      
                      
                                     ANNEXES
                      
ANNEX A  -  Commitment Amounts
            
ANNEX B  -  Financial Covenant Information
            
ANNEX C  -  Amortization Schedule
                               
                     

                                       vi
<PAGE>


     LOAN AND  SECURITY  AGREEMENT  ("AGREEMENT")  dated as of  February 4, 1999
among KMC TELECOM III,  INC., a Delaware  corporation  ("KMC III"),  KMC TELECOM
LEASING III LLC, a Delaware  limited  liability  company  ("KMC LEASING III" and
together with KMC III the  "BORROWERS"),  the financial  institutions  signatory
hereto from time to time, as lenders (the "LENDERS"),  Lucent Technologies Inc.,
as agent for the Lenders (in such  capacity,  the "AGENT") and State Street Bank
and Trust Company,  as collateral  agent for the Lenders (in such capacity,  the
"COLLATERAL AGENT").

     WHEREAS,  the Borrowers  have requested the Lenders to extend credit to the
Borrowers;

     WHEREAS,  the Lenders  are  willing to extend such credit to the  Borrowers
subject to, and on the terms and conditions of, this Agreement;

     Accordingly,  in consideration of the mutual promises contained herein, the
Borrowers, the Agent, the Collateral Agent and the Lenders agree as follows:


                                    ARTICLE I
                                   DEFINITIONS

     SECTION 1.01. DEFINITIONS.  As used in this Agreement,  the following words
and terms shall have the meanings specified below:

     "ACCESS LINES" shall mean the total number of installed business lines that
provide  service  to a  business  customer  of a  Borrower  including  "resale",
"on-net" and "unbundled network element"; PROVIDED, that resale shall constitute
no more than twenty-five percent (25%) of the total Access Lines.

     "ACCOUNTS"  shall mean all  present  and future  rights of any  Borrower to
payment  for  goods  sold or  leased  or for  services  rendered  which  are not
evidenced by  instruments  or chattel  paper,  and whether or not they have been
earned by performance.

     "ADDITIONAL PURCHASE AGREEMENT" shall mean a purchase agreement between any
Borrower and an Additional Vendor relating to the purchase of Telecommunications
Equipment on terms and conditions reasonably satisfactory to the Agents, if such
purchase agreement contemplates Telecommunications Equipment purchases in excess
of $5,000,000 in any one year or $15,000,000 in the aggregate,  otherwise on the
terms and conditions reasonably satisfactory to the Collateral Agent.

     "ADDITIONAL  VENDOR"  shall mean a vendor of  Telecommunications  Equipment
other than Lucent,  which Additional Vendor shall be reasonably  satisfactory to
the Agent if the Additional  Purchase Agreement the Additional Vendor is a party

<PAGE>

to contemplates  Telecommunications  Equipment purchases in excess of $5,000,000
in any one year or  $15,000,000  in the  aggregate,  otherwise  on the terms and
conditions reasonably satisfactory to the Collateral Agent.

     "AFFILIATE"  shall  mean any  Person  other  than any  Lender  directly  or
indirectly controlling,  controlled by or under common control with any Borrower
and any officer or shareholder of such Person or any Borrower, which shareholder
beneficially  owns at least ten percent  (10%) of the Equity  Interests  of such
Person  or  any  Borrower.  For  the  purposes  of  this  definition,  "control"
(including, with correlative meanings, the terms "controlling," "controlled by",
and "under common control with"), as used with respect to any Person,  means the
possession,  directly  or  indirectly,  of the  power to  direct  or  cause  the
direction  of the  management  or policies of such Person,  whether  through the
ownership  of voting  securities,  by  agreement or  otherwise;  PROVIDED,  that
beneficial  ownership of at least 10% of the Equity  Interests of a Person shall
be deemed to constitute control.

     "AGED EQUIPMENT" shall mean Telecommunications Equipment, which has been in
commercial operation for more than twelve months.

     "AGENTS" shall mean collectively, the Agent and the Collateral Agent.

     "APPLICABLE  MARGIN" shall mean with respect to each Loan bearing  interest
based  upon the Base Rate and each Loan  bearing  interest  based  upon the LIBO
Rate, the rate per annum set forth under the relevant column  headings  opposite
the applicable Total Leverage Ratio.

<TABLE>
<CAPTION>


                                APPLICABLE MARGIN
--------------------------------------------------------------------------------

                       BEFORE THE STEP DOWN DATE        AFTER THE STEP DOWN DATE

                      Applicable      Applicable     Applicable     Applicable
Total Leverage        Margin for      Margin for     Margin for    Margin for
    Ratio              Base Rate      LIBOR Loans    Base Rate     LIBOR Loans
                         Loans                         Loans
---------------      ------------     -----------   ------------  -------------
<S>                   <C>             <C>            <C>           <C>

Greater than           3.25%           4.25%         2.75%         3.75%
or equal to
12.0 to 1.0

Less than 12.0         3.00%           4.00%         2.50%         3.50%
but greater
than or equal
to 10.0 to 1.0

Less than 10.0         2.75%           3.75%         2.25%         3.25%
but greater
than or equal
to 8.0 to 1.0

Less than 8.0          2.50%           3.50%         2.00%         3.00%
but greater
than or equal
to 6.0 to 1.0

Less than 6.0          2.25%           3.25%         1.75%         2.75%
to 1.0

</TABLE>

                                       2
<PAGE>



The Total Leverage Ratio on the Initial  Funding Date shall be greater than 12.0
to 1.0.  Thereafter such Ratio shall be determined on the notes of the financial
statements  provided  pursuant to SECTION  5.06;  PROVIDED  that if the Borrower
fails thereby to deliver such financial  statements,  without otherwise limiting
the rights of the Lenders under the Agreement, the Total Leverage Ratio shall be
deemed greater than 12.0 to 1.0 until such time as such financial statements are
delivered.  Any change in the  Applicable  Margin  shall be  effective as of the
fifth Business Day following the Agent's receipt of such financial statements.

     "ASSIGNMENT  AGREEMENT" shall mean an assignment  agreement entered into in
connection  with an assignment  pursuant to SECTION 11.08  substantially  in the
form of EXHIBIT O hereof.

     "BASE LIBO  RATE"  shall  mean,  during any  Interest  Period,  the rate of
interest  per annum  (rounded  upward to the nearest  whole  multiple of 1/16 of
1.0%,  if such  rate is not  such a  multiple)  equal  to the  rate of  interest
notified  to the Agent by the  Reference  Bank at which  Dollar  deposits in the
approximate  amount of the Loans to be made or continued as, or converted  into,
LIBOR Loans for such  Interest  Period and having a maturity  comparable to such
Interest  Period would be offered by the London  lending office of the Reference
Bank in the London interbank  market at  approximately  11:00 a.m. (London time)
two (2) Business Days prior to the commencement of such Interest Period.

     "BASE  RATE"  shall  mean the  higher of (i) a rate per annum  equal to the
corporate  base  rate,  prime  rate or base  rate of  interest,  as  applicable,
announced by the  Reference  Bank from time to time,  changing  when and as such
rate changes,  it being understood that such rate of interest is not necessarily
the lowest or best rate charged by the Reference Bank to its customers, and (ii)
the sum of the Federal Funds  Effective Rate plus one-half  percent  (0.50%) per
annum.

     "BASE RATE LOAN" shall mean a Loan, or portion  thereof,  during any period
in which it bears interest at a rate based upon the Base Rate.

     "BENEFIT  PLAN"  shall  mean a defined  benefit  plan as defined in Section
3(35)  of ERISA  (other  than a  Multiemployer  Plan) in  respect  of which  any
Borrower or any ERISA Affiliate is, or within the immediately  preceding six (6)
years was, an "employer" as defined in Section 3(5) of ERISA.

     "BORROWER" shall mean either KMC III or KMC Leasing III.

     "BUSINESS"  shall  mean  with  respect  to (i) KMC  III,  the  business  of
designing, developing, constructing, operating and maintaining the Systems owned
by it, all equipment used and useful in connection  therewith  including but not
limited to Switch Equipment and (ii) KMC Leasing III, the business of owning and
leasing Telecommunications Equipment.

                                       3
<PAGE>

     "BUSINESS  DAY"  shall  mean (a) any day not a  Saturday,  Sunday  or legal
holiday  in the  State of New York or New  Jersey,  on which  banks are open for
business  in New  York  and New  Jersey  and (b) with  respect  to all  notices,
determinations,  fundings and payments in connection with the LIBO Rate or LIBOR
Loans,  any day that is a Business  Day pursuant to CLAUSE (A) above and that is
also a day on which  trading is carried  on by and  between  banks in the London
interbank market.

     "CAPITALIZATION" shall mean funded equity capitalization of KMC Holdings.

     "CAPITALIZED  LEASE OBLIGATIONS" shall mean Debt represented by obligations
under a  lease  that is  required  to be  capitalized  for  financial  reporting
purposes  in  accordance  with  GAAP,  and the  amount of such Debt shall be the
capitalized amount of such obligations determined in accordance with GAAP.

     "CASH ADVANCE" shall have the meaning set forth in SECTION 2.03(A).

     "CHANGE OF CONTROL"  shall mean (A) Harold N. Kamine  ceases to have senior
management  responsibilities with respect to the Borrowers or KMC Holdings,  (B)
KMC Holdings no longer beneficially owns all the outstanding Equity Interests of
KMC IHC, the Borrowers and their respective subsidiaries, if any, (C) a "person"
or "group"  (within the meaning of Sections  13(d) and  14(d)(2) of the Exchange
Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the
Exchange  Act) of more than 35% of the total voting power of the Voting Stock of
KMC Holdings on a fully  diluted basis and such  ownership  represents a greater
percentage of the total voting power of the Voting Stock of KMC  Holdings,  on a
fully diluted basis, than is held by the Existing  Stockholders on such date, or
(D)  individuals  who on the  Closing  Date  constitute  the Board of  Directors
(together  with any new  directors  whose  election by the Board of Directors or
whose  nomination  by the  Board of  Directors  for  election  by KMC  Holdings'
stockholders was approved by a vote of at least a majority of the members of the
Board of  Directors  then in office  who  either  were  members  of the Board of
Directors on the Closing Date or whose  election or nomination  for election was
previously  so  approved)  cease for any reason to  constitute a majority of the
members of the Board of Directors then in office.

     "CLOSING  DATE" shall mean the date on which this Agreement is executed and
delivered by the parties hereto.

     "COLLATERAL"  shall mean,  all property and interests in property now owned
or hereafter acquired by any Borrower in or upon which a security interest, lien
or mortgage is granted to the  Collateral  Agent by any Borrower,  whether under
this Agreement or the other Loan Documents.

                                       4
<PAGE>

     "COLLATERAL  ASSIGNMENT OF LEASES" shall mean the Collateral  Assignment of
Leases in the form of EXHIBIT B attached  hereto,  to be executed and  delivered
pursuant to SECTION 4.01.

     "COLLATERAL ASSIGNMENT OF LICENSES" shall mean the Collateral Assignment of
Licenses in the form of EXHIBIT C attached hereto,  to be executed and delivered
pursuant to SECTION 4.01.

     "COLLECTION  ACCOUNTS" AND "COLLECTION AGENT" shall have the meanings given
to such terms in SECTION 8.04.

     "COMMITMENT"  shall mean Lenders'  commitment to make Loans as set forth in
SECTION 2.01.

     "COMMITMENT  AMOUNT"  shall  mean  (a)  as to  any  Lender,  such  Lender's
Commitment  Amount as set forth  opposite  such Lender's name on ANNEX A to this
Agreement or in the most recent Assignment Agreement executed by such Lender and
(b) as to all Lenders,  the aggregate of all Lenders' Commitment Amounts,  which
aggregate commitment shall be Six Hundred Million Dollars  ($600,000,000) on the
Closing  Date,  as such amount may be adjusted  from time to time in  accordance
with this Agreement.

     "COMMITMENT TERMINATION DATE" shall mean February 1, 2002.

     "COMMON STOCK" shall mean with respect to any Person,  all Equity Interests
of such  Person  that are  generally  entitled  to (i) vote in the  election  of
directors  of such Person or (ii) if such Person is not a  corporation,  vote or
otherwise participate in the selection of the governing body, partners, managers
or others that will control the management and policies of such Person.

     "COMPLETED SYSTEM" shall mean any System which is fully operational,  which
if contemplated  by the KMC III Tier III Plan,  shall have a Lucent 5-ESS Switch
Equipment or other comparable Switch Equipment  manufactured by Lucent deployed,
which shall be switching paid traffic on its owned Telecommunications Equipment,
and which shall have sales,  customer service and billing systems operational to
the satisfaction of the Agent and the Requisite  Lenders and consistent with the
then current operating Systems of any Borrower or any Subsidiary of KMC Holdings
(without regard to installation of fiber), with switching capabilities, and with
respect to which all Governmental  Approvals have been obtained and connectivity
to at least one major interexchange carrier point-of-presence has been achieved.

     "CONSOLIDATED" or "cONSOLIDATED" refers, with respect to any Person, to the
consolidation  of the accounts of such Person and its  Subsidiaries,  if any, in
accordance  with  GAAP;  PROVIDED  that with  respect  to KMC  Holdings,  unless
otherwise   indicated,   its   Subsidiaries   shall  not  include  any  Excluded
Subsidiaries.

     "CONSOLIDATED  DEBT"  shall  mean,  with  respect  to  KMC  Holdings  on  a
consolidated  basis,  at any  date,  the sum of the  following  determined  on a
consolidated  basis,  without  duplication,  in  accordance  with GAAP:  (a) all
liabilities, obligations and indebtedness for borrowed money, including, but not
limited to, obligations evidenced by bonds,  debentures,  notes or other similar
instruments of any Borrower, KMC Holdings or KMC IHC, (b) all obligations to pay
the  deferred  purchase  price of  property or  services  of any  Borrower,  KMC
Holdings or KMC IHC (exclusive of rent for real property under leases that would
not be capitalized in accordance with GAAP), including,  but not limited to, all
obligations under  noncompetition  agreements,  except trade payables arising in
the ordinary course of business not more than ninety (90) days past due, (c) all
obligations  of any  Borrower,  KMC Holdings or KMC IHC as lessee under  capital
leases (exclusive of the interest component thereof),  (d) all Debt of any other
Person secured by a Lien on any asset of any Borrower,  KMC Holdings or KMC IHC,
(e) all guaranty  obligations of any Borrower,  KMC Holdings or KMC IHC, (f) all
obligations,  contingent or otherwise,  of any Borrower, KMC Holdings or KMC IHC
relative  to the face  amount of letters of  credit,  whether or not drawn,  and
banker's acceptances issued for the account of any Borrower or KMC Holdings, (g)
all  obligations  to redeem,  repurchase,  exchange,  defease or otherwise  make
payments in respect of capital stock or other  securities  of any Borrower,  KMC
Holdings  or KMC IHC at any time prior to the third  annual  anniversary  of the
Termination  Date,  and (h) all  termination  payments  which  would  be due and
payable by any  Borrower or KMC  Holdings  pursuant  to any  hedging  agreement.
"Consolidated Debt" shall not include any intercompany Debt between the Borrower
and KMC IHC,  between KMC  Holdings  and KMC IHC or between any Borrower and KMC
Holdings.

     "CONTAMINANT"  shall  mean  any  pollutant,   hazardous  substance,   toxic
substance,  hazardous  waste,  special  waste,  petroleum or  petroleum  derived
substance or waste, or any constituent of any such substance or waste.

     "CONTRIBUTED  CAPITAL" shall mean,  with respect to the  Borrowers,  at any
date of determination,  all contributed  capital to such Borrowers including all
funded equity  (other than  Disqualified  Stock) and all Qualified  Intercompany
Loans.

     "CONTRIBUTION  AGREEMENT" shall mean the  Contribution  Agreement among the
Borrowers of even date herewith substantially in the form of Exhibit R.

     "CREDIT ADVANCE" shall have the meaning set forth in SECTION 2.03(A).

     "DEBT"  shall  mean,  with  respect to any  Person,  (i)  indebtedness  for
borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other
similar  instruments,  (iii)  obligations which have been incurred in connection
with the  acquisition of property or services  (including,  without  limitation,
obligations  to pay the  deferred  purchase  price  of  property  or  services),
excluding trade payables and accrued expenses incurred in the ordinary course of


                                       5
<PAGE>

business,  (iv)  obligations  as lessee  under  leases  which shall have been or
should be, in accordance with GAAP, recorded as capital or operating leases, (v)
all Guarantees of such Person,  including  without  limitation,  all debt of any
other  Person  which is secured by a Lien on property of such  Person,  (vi) all
reimbursement  obligations,  contingent or otherwise, with respect to letters of
credit or banker's acceptances issued for the account of any Borrower, and (vii)
all  indebtedness,  obligations or other  liabilities in respect of any Interest
Rate Agreement,  PROVIDED that Debt shall not include any liability for Federal,
state, local or other taxes, and PROVIDED,  FURTHER, that the amount outstanding
at any time of any Debt issued with  original  issue  discount is the  principal
amount of such Debt less the remaining unamortized portion of the original issue
discount of such Debt at such time as determined in  conformity  with GAAP,  and
that with respect to any  high-yield  Debt, the amount thereof shall not include
fees incurred in raising such Debt or overfunded amounts set aside solely to pay
interest.  Notwithstanding any other provision of the foregoing definition,  any
trade  payable  arising  from the purchase of goods or materials or for services
obtained in the  ordinary  course of business not more than 90 days past due and
not in dispute (and for which such Borrower has adequate  reserves in accordance
with GAAP) shall not be deemed to be "Debt" of any Borrower for purposes of this
definition.  Furthermore,  guarantees of (or obligations with respect to letters
of credit  supporting)  Debt  otherwise  included in the  determination  of such
amount shall not be included.

     "DEFAULT"  shall mean any event which but for the passage of time or giving
of notice, or both, would constitute an Event of Default.

     "DISQUALIFIED  STOCK"  shall mean any Equity  Interest of a Person,  to the
extent  that it is (i)  redeemable,  payable  or  required  to be  purchased  or
otherwise  retired or extinguished or convertible  into Debt or other liability,
obligation,  covenant or duty of or binding upon, or any term or condition to be
observed by or binding upon such Person or any of its assets,  (1) at a fixed or
determinable date,  whether by operation of a sinking fund or otherwise,  (2) at
the option of any other  Person or (3) upon the  occurrence  of a condition  not
solely  within the control of such Person  such as a  redemption  required to be
made  utilizing  future  earnings,  in each case prior to the third  anniversary
after the Termination  Date or (ii) convertible into Equity Interests which have
the features set forth in clause (i).

     "DOLLARS" or "$" shall mean lawful money of the United States of America.

     "EASEMENTS" shall have the meaning given to such term in SECTION 3.20.

     "EBITDA" shall mean, with respect to any Person,  for any period, an amount
equal to (i) Net  Income  PLUS  (ii)  the sum of the  following,  to the  extent
deducted in determining Net Income: (A) income and franchise taxes, (B) interest
expense, (C) amortization,  depreciation and other non-cash charges, MINUS (iii)
the sum of interest income plus extraordinary gains, as determined in accordance
with GAAP as calculated at the end of such period.

     "ENVIRONMENTAL  LAWS" shall mean all federal,  state and local laws, rules,
regulations, ordinances, programs, permits, guidance, orders and consent decrees


                                       6
<PAGE>

or  other  binding  determination  of any  Governmental  Authority  relating  to
protection of the environment, the handling, disposal or Release of Contaminants
and occupational  safety and health.  Such laws and regulations  include but are
not limited to the Resource Conservation and Recovery Act, 33 U.S.C. ss. 6901 eT
SEq., as amended;  the Comprehensive  Environmental  Response,  Compensation and
Liability  Act, 42 U.S.C.  ss. 9601 eT SEq.,  as amended;  the Toxic  Substances
Control  Act, 15 U.S.C.  ss. 2601 eT SEq.,  as amended;  the Clean Water Act, 33
U.S.C.  ss. 1251 eT SEq., as amended;  the Clean Air Act, 42 U.S.C.  ss. 7401 ET
seq., as amended; state and federal environmental lien and environmental cleanup
programs; the Occupational Safety and Health Act, 29 U.S.C. ss. 651 eT Seq.; and
U.S.  Department of Transportation  regulations related to the transportation of
hazardous materials, each as from time to time hereafter in effect.

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

     "EQUITY  INTEREST"  shall mean,  with  respect to any  Person,  any and all
shares or other equivalents  (however  designated) of capital stock,  membership
units,  partnership interests or any other participation right or other interest
in the nature of an equity  interest in such  Person or any  option,  warrant or
other security convertible into any of the foregoing.

     "ERISA" shall mean the Employee  Retirement Income Security Act of 1974, as
amended from time to time.

     "ERISA  AFFILIATE" shall mean (i) any corporation  which is a member of the
same controlled  group of corporations  (within the meaning of Section 414(b) of
the IRC) as any  Borrower,  (ii) any  partnership  or  other  trade or  business
(whether  or not  incorporated)  under  common  control  (within  the meaning of
Section  414(c) of the IRC) with any  Borrower  and (iii) any member of the same
affiliated  service group  (within the meaning of Section  414(m) of the IRC) as
any Borrower,  any corporation  described in CLAUSE (I) above or any partnership
or trade or business described in CLAUSE (II) above.

     "EUROCURRENCY  LIABILITIES" shall have the meaning assigned to that term in
Regulation D of the Federal Reserve Board, as in effect from time to time.

     "EVENT OF DEFAULT" shall have the meaning given to such term in ARTICLE IX.

     "EVENT OF LOSS" shall mean,  with  respect to any item of  Collateral,  the
actual or constructive  loss of such item of Collateral or the use thereof,  due
to theft, destruction, damage beyond repair or damage from any reason whatsoever
which  is not  reimbursable  by  insurance,  to an  extent  which  makes  repair


                                       7
<PAGE>

uneconomical,  or rendition  thereof unfit for normal use, or the  condemnation,
confiscation  or seizure of, or  requisition of title to or use of, such item of
Collateral by any  Governmental  Authority or any other Person,  acting under or
deemed to be acting under color of any Governmental Authority.

     "EXCESS  OPERATING  CASH FLOW" in respect of the  Borrowers  for any fiscal
quarter shall mean Net Income of the Borrowers plus non-cash  interest  expense,
depreciation  and  amortization  and any other  non-cash items of the Borrowers,
MINUS  scheduled  principal  payments on the Loans,  lease  payments and capital
expenditures  PLUS OR MINUS  changes in working  capital  of the  Borrowers,  as
appropriate.

     "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934.

     "EXCLUDED  SUBSIDIARY"  shall mean (a) any Subsidiary of KMC Holdings other
than a Borrower or a Person  which  directly  or  indirectly  beneficially  owns
Equity  Interests  in any  Borrower;  PROVIDED  that (i) at the time such  other
Subsidiary  was created or acquired,  no Default or Event of Default  shall have
occurred  and be  continuing  before or after  giving  effect to the creation or
acquisition   of  such   Subsidiary,   and  (ii)  no  portion  of  the  Required
Contributions or the Commitment  Amount shall have been or shall be used to fund
the acquisition or operations of such Subsidiary,  and KMC Holdings has external
sources of funding  (other than the Required  Contributions  and the  Commitment
Amount) to finance the acquisition and operations of such Subsidiary, or (b) any
other Subsidiary of KMC Holdings which KMC Holdings or any Borrower requests the
Lenders  to  designate  as such,  and  which  designation  is  agreed  to by the
Requisite Lenders.

     "EXISTING STOCKHOLDERS" shall mean Harold N. Kamine, his Equity Affiliates,
Nassau  Capital  Partners  L.P.,  NAS  Partners  I L.L.C.  or  their  respective
successors, and their Equity Affiliates.

     "FCC" shall mean the Federal  Communications  Commission  or any  successor
commission or agency of the United States of America  having  jurisdiction  over
any Borrower or any System.

     "FEDERAL FUNDS  EFFECTIVE  RATE" shall mean, for any period,  a fluctuating
interest  rate per  annum  equal  for each day  during  such  period  to (a) the
weighted  average of the rates on  overnight  federal  funds  transactions  with
members of the Federal  Reserve  System  arranged by federal funds  brokers,  as
published  for such day (or if such day is not a Business Day, for the preceding
Business Day) by the Federal  Reserve Bank of New York in the Composite  Closing
Quotations  for  U.S.  Government  Securities;  or (b) if  such  rate  is not so
published for any day which is a Business Day, the average of the  quotations at
approximately  10:30  a.m.  (New York  time)  for such day on such  transactions
received by the  Reference  Bank from three  federal funds brokers of recognized
standing selected by it.



                                       8
<PAGE>

     "FEDERAL  RESERVE  BOARD"  shall mean the Board of Governors of the Federal
Reserve System or any successor thereto.

     "FEE LETTER" shall mean the letter  agreement  dated as of February 3, 1999
among the Borrowers, KMC Holdings, KMC IHC, the Agent and the Collateral Agent.

     "FINANCIALS" shall have the meaning given to such term in SECTION 3.03.

     "FIXED CHARGES" shall mean, with respect to any period for the Borrowers on
a combined basis, the sum of the following amounts calculated at the end of such
period with respect to such period without  duplication  and in accordance  with
GAAP:

          (i) the product of two multiplied by scheduled  principal and interest
     payments  with respect to Debt for the six month  period then ending,  (ii)
     capital  expenditures  for the four quarter  period then ending,  (iii) the
     product of two  multiplied  by income tax payments for the six month period
     then  ending,  and (iv) the  product  of two  multiplied  by cash  dividend
     payments for the six month period then ending.

     "FIXED CHARGE COVERAGE RATIO" shall have the meaning  assigned to such term
in SECTION 7.02(C).

     "FUNDING DATE" shall mean any date after the Initial Funding Date but prior
to the  Commitment  Termination  Date upon which  Loans are made,  in each case,
subject to the  satisfaction  of all conditions  precedent  contained in SECTION
4.02 and, (i) if the aggregate principal amount of Loans outstanding exceeds the
Level 1 Lending Limit,  SECTION 4.03 and (ii) if the aggregate  principal amount
of Loans outstanding exceeds the Level 2 Lending Limit, SECTION 4.04.

     "GOVERNMENTAL  APPROVAL"  shall mean,  with  respect to any  Borrower,  any
license,  permit,  franchise or certificate of public  convenience and necessity
issued to any Borrower by the FCC, any PUC or any other  Governmental  Authority
in connection with any System.

     "GOVERNMENTAL  AUTHORITY"  shall mean any  federal,  state,  local or other
political subdivision thereof and any entity exercising executive,  legislative,
judicial, regulatory or administrative functions of or pertaining to government.

     "GUARANTEE"  shall mean any  obligation,  contingent or  otherwise,  of any
Person guaranteeing any indebtedness of any other Person (the "Primary Obligor")
in any manner,  whether directly or indirectly,  and including any obligation of
such Person,  direct or  indirect,  (i) to purchase or pay (or advance or supply
funds for the  purchase or payment of) such  indebtedness  or to purchase (or to
advance or supply  funds for the  purchase  of) any  security for the payment of


                                       9
<PAGE>

such  indebtedness;  (ii) to purchase  property,  securities or services for the
purpose  of  assuring  the owner of such  indebtedness  of the  payment  of such
indebtedness;  or (iii) to maintain working capital,  equity capital, net worth,
liquidity or other financial statement condition of the Primary Obligor so as to
enable the Primary Obligor to pay such indebtedness.

     "HIGH YIELD DEBT" shall mean any Debt issued by KMC  Holdings  which by its
terms is  unsecured,  is issued  either in a  registered  public  offering  or a
private placement of notes,  bonds or other securities,  has a maturity date not
earlier than 367 days after the Termination  Date, does not restrict the payment
of  Obligations  and the  proceeds of which are made  available  to KMC III as a
capital   contribution   (other  than   Disqualified   Stock)  or  as  Qualified
Intercompany Loans.

     "INDENTURE"  shall mean the Indenture  dated as of January 29, 1998 between
KMC Holdings,  as Issuer and The Chase Manhattan  Bank, as Trustee,  relating to
KMC Holdings' 12 1/2% Senior Discount Notes due 2008.

     "INITIAL  FUNDING  DATE"  shall  mean the date upon  which,  subject to the
satisfaction of all conditions precedent contained in SECTIONS 4.01 and 4.02, or
the waiver thereof by the Agent and the Requisite Lenders, the initial Loans are
made.

     "INTELLECTUAL  PROPERTY  DOCUMENTS"  shall mean (i) the Trademark  Security
Agreement  of even date  herewith,  in the form of  EXHIBIT Q  attached  hereto,
executed by the  Borrowers in favor of the  Collateral  Agent for the benefit of
the Agents and the Lenders, as amended, restated or otherwise modified from time
to time and (ii) any other  trademark,  patent or copyright  security  agreement
executed pursuant to SECTION 5.16 by any Borrower.

     "INTEREST  EXPENSE" shall mean for any period,  the total interest  expense
(including, without limitation, interest expense attributable to capital leases)
determined  on a combined  basis,  without  duplication,  for the  Borrowers  in
accordance with GAAP.

     "INTEREST PERIOD" shall mean, with respect to each LIBOR Loan, the interest
period  applicable to such LIBOR Loan as set forth in the  applicable  Notice of
Borrowing or Notice of Conversion or Continuation.

     "INTEREST RATE AGREEMENT" shall mean for any Person, any interest rate swap
agreement,  interest rate cap agreement, interest rate collar agreement or other
similar  agreement  designed  to protect  the party  indicated  therein  against
fluctuations in interest rates.

     "INVESTMENT"  shall mean, as applied to any Person,  any direct or indirect
purchase or other  acquisition by that Person of securities,  or of a beneficial
interest in  securities,  of any other Person,  and any direct or indirect loan,
advance  (other  than  deposits  with  financial   institutions   available  for
withdrawal on demand,  prepaid  expenses,  advances to  employees,  officers and
directors  and similar  items,  each made or incurred in the ordinary  course of


                                       10
<PAGE>

business), or capital contribution by that Person to any other Person, including
all Debt of such other Person to that Person,  but  excluding  accounts  owed by
that other Person in the ordinary course of business.  Investments shall exclude
(i) extensions of trade credit on  commercially  reasonable  terms in accordance
with normal trade  practices and (ii) the repurchase of securities of any Person
by such Person.  The amount of any Investment  shall be determined in conformity
with GAAP.

     "IRC" shall mean the Internal Revenue Code of 1986, as amended from time to
time, and the rules and regulations  promulgated  thereunder,  and any successor
statutes or rules and regulations.

     "IRS" shall mean the Internal Revenue Service or any successor agency.

     "KMC  HOLDINGS"  shall  mean  KMC  Telecom   Holdings,   Inc.,  a  Delaware
corporation.

     "KMC HOLDINGS  GUARANTY" shall mean the unlimited  guaranty of KMC Holdings
in the form of EXHIBIT G-1 attached hereto.

     "KMC IHC" shall mean KMC Telecom III Holding, Inc., a Delaware corporation.

     "KMC IHC GUARANTY" shall mean the unlimited guaranty of KMC IHC in the form
of EXHIBIT G-2 attached hereto.

     "KMC  TIER  III - TIER IV  PLAN"  shall  mean a  business  plan in form and
substance  satisfactory  to the Agent and the Lenders  setting forth among other
things the projected sources, uses and schedule for the design,  development and
construction  by KMC III of an agreed upon number of Tier III Cities and Tier IV
Cities.

     "KMC III" shall mean KMC Telecom III, Inc., a Delaware corporation.

     "KMC III TIER III PLAN" shall mean the business plan of KMC III attached as
EXHIBIT A hereto together with the information  contained on a computer diskette
entitled  "KMC III 27 Tier III City Plan" which  diskette  has  previously  been
delivered  to the Agent,  as such KMC III Tier III Plan may be amended from time
to time with the prior written consent of the Requisite Lenders.

     "KMC  LEASING  III"  shall  mean KMC  Telecom  Leasing  III LLC, a Delaware
limited liability company.

     "LENDERS" shall have the meaning given to such term in the heading.

     "LENDING OFFICE" shall mean, with respect to a Lender or Agent, any office,
branch, subsidiary or affiliate of such Lender or Agent.



                                       11
<PAGE>

     "LEVEL 1 LENDING LIMIT" shall mean Loans in an aggregate  principal  amount
of $125,000,000.

     "LEVEL 2 LENDING LIMIT" shall mean Loans in an aggregate  principal  amount
of $250,000,000.

     "LIBO RATE" shall mean, for any Interest Period with respect to LIBOR Loans
comprising part of the same  borrowing,  the rate of interest per annum equal to
the per annum rate of interest  displayed  on the Dow Jones  Market  Screen Page
3750,  as  being  the  one-month,   two-month,   three-month  or  six-month,  as
applicable,  reserve adjusted "London Interbank Offered Rate", PROVIDED, that if
such rate is not  displayed  or  published,  then the rate of interest per annum
(rounded  upward to the nearest whole  multiple of 1/16 of 1.0%, if such rate is
not such a multiple) shall be determined by the Agent as follows:


      LIBO Rate  =             Base LIBO rate            
                    ---------------------------------------
                       1.00 - LIBOR Reserve Percentage

     "LIBOR INTEREST PAYMENT DATE" shall mean, with respect to a LIBOR Loan, the
last day of each Interest Period  applicable to such Loan, and, if such Interest
Period has a duration of more than three months, on each day which occurs during
such  Interest  Period  every three  months from the first day of such  Interest
Period.

     "LIBOR  INTEREST  RATE   DETERMINATION   DATE"  shall  mean  each  date  of
calculating  the LIBO Rate for purposes of  determining  the interest  rate with
respect to an Interest Period.  The LIBOR Interest Rate  Determination  Date for
any LIBOR Loan shall be the  second  Business  Day prior to the first day of the
related Interest Period for such LIBOR Loan.

     "LIBOR LOAN" shall mean a Loan,  or portion  thereof,  during any period in
which it bears interest at a rate based upon the LIBO Rate.

     "LIBOR RESERVE PERCENTAGE" shall mean for any day for any Interest
Period the maximum reserve percentage (expressed as a decimal, rounded upward to
the next  1/100th of 1.0%) in effect on such day (whether or not  applicable  to
any Lender) for United States domestic banks under regulations  issued from time
to time by the  Federal  Reserve  Board  for  determining  the  maximum  reserve
requirement  (including any emergency,  supplemental  or other marginal  reserve
requirement) with respect to Eurocurrency  Liabilities  having a term comparable
to such Interest Period.

     "LIEN" shall mean any mortgage,  pledge, deed of trust,  assignment,  lien,
charge,  encumbrance  or  security  interest of any kind,  or the  interest of a
vendor or lessor under any conditional  sale  agreement,  capital lease or other
title retention  agreement,  but excluding  easements,  rights of way or similar
encumbrances  on real property which are in the ordinary course and which do not


                                       12
<PAGE>

materially  affect  the  value,  use and  insurability  of  title  of such  real
property.

     "LOAN"  shall  mean any  loan  made to any  Borrower  pursuant  to  Section
2.01(a).

     "LOAN  DOCUMENTS"  shall mean all  agreements,  instruments  and documents,
including,  without limitation,  security  agreements,  loan agreements,  notes,
guarantees, mortgages, deeds of trust, subordination agreements, pledges, powers
of  attorney,  consents,  assignments,  contracts,  notices,  leases,  financing
statements,  Interest Rate Agreements between any Borrower,  KMC Holdings or KMC
IHC and the Agent,  the  Collateral  Agent or the Lenders and all other  written
matter  whether  heretofore,  now, or hereafter  executed by or on behalf of any
Borrower or any other Person in connection  with the  transactions  contemplated
hereby and delivered to the Agent, the Collateral Agent or the Lenders, together
with all agreements and documents  referred to therein or contemplated  thereby;
PROVIDED,  that the documents  executed in  connection  with the purchase by the
Agent or any Lender of Equity  Interests  in KMC Holdings  shall not  constitute
Loan Documents.

     "LUCENT" shall mean Lucent Technologies Inc., a Delaware corporation.

     "LUCENT PURCHASE  AGREEMENT" shall mean General  Agreement as amended dated
as of December 22, 1998 among KMC III and certain KMC III  Affiliates and Lucent
for the  purchase of  Telecommunications  Equipment,  as such  Agreement  may be
modified or amended from time to time.

     "MANAGEMENT  AGREEMENT"  shall mean the  Management  Agreement  dated as of
December 18, 1998, as amended as of January 29, 1999,  among KMC  Holdings,  KMC
III, KMC Leasing III, KMC Telecom International, Inc., KMC Telecom II, Inc., KMC
Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC
and KMC IHC.

     "MATERIAL  ADVERSE  EFFECT"  shall  mean,  with  respect to any  Person,  a
material adverse effect upon the condition (financial or otherwise),  operations
or  properties  of such  Person,  or upon the  ability of such Person to perform
under the Loan Documents.

     "MAXIMUM RATE" shall have the meaning given to such term in SECTION 2.12.

     "MORTGAGES"  shall  mean  mortgages  or  deeds  of  trust  in  favor of the
Collateral  Agent,  with respect to any  Borrower's  (i) owned Real Property and
(ii) other interests in those items of real property and Easements, as specified
by the Collateral Agent, which mortgages and deeds of trust shall be in form and
substance satisfactory to the Agents.

     "MULTIEMPLOYER  PLAN"  shall  mean a  "multiemployer  plan" as  defined  in
Section  4001(a)(3) of ERISA which is, or within the  immediately  preceding six
(6) years was, contributed to by any Borrower or an ERISA Affiliate.



                                       13
<PAGE>

     "NET INCOME" shall mean, with respect to any Person for any period, the net
income (loss) of such Person determined in accordance with GAAP.

     "NOTE" shall mean a promissory note of the Borrowers  substantially  in the
form of Exhibit E attached hereto.

     "NOTICE  OF  BORROWING"  shall mean a notice  substantially  in the form of
EXHIBIT H-1 attached hereto.

     "NOTICE OF  CONVERSION/CONTINUATION"  shall have the meaning  given to such
term in SECTION 2.06(B).

     "OBLIGATIONS"  shall  mean  all  the  obligations  of any  Borrower  now or
hereafter  existing under this Agreement or any other Loan Document to which any
Borrower  is  a  party,  whether  for  principal,   interest,   fees,  expenses,
reimbursement,  indemnification or otherwise. Obligations shall include, without
limitation,   all  interest,   charges,  expenses,  fees,  attorneys'  fees  and
disbursements,  and paralegals'  fees which accrue after the commencement of any
case  or  proceeding  in  bankruptcy   after  the  insolvency  of,  or  for  the
reorganization  of any  Borrower,  in each case,  whether or not allowed in such
proceeding.

     "PARTICIPANTS"  shall  have  the  meaning  given  to such  term in  SECTION
11.08(B).

     "PAYMENT  ACCOUNT"  shall mean an account of the Agent as  designated  from
time to time by the Agent by notice to the Borrowers and the Lenders.

     "PAYMENT DATE" shall mean the first day of January, April, July and October
in each  calendar  year,  but if any such date is not a Business  Day,  the next
succeeding Business Day, commencing April 1, 1999.

     "PBGC" shall mean the Pension Benefit Guaranty  Corporation referred to and
defined in ERISA.

     "PERIODIC   REPORTING   CERTIFICATE"   shall  mean  a  periodic   reporting
certificate in the form of EXHIBIT F attached hereto.

     "PERMITTED  LIENS"  shall  have the  meaning  given to such term in SECTION
6.01.

     "PERSON"  shall  mean  any  natural  person,  corporation,  division  of  a
corporation,  business trust, joint venture, association,  company, partnership,
unincorporated organization or other legal entity, or a government or any agency
or political subdivision thereof.



                                       14
<PAGE>

     "PLAN" shall mean any  employee  benefit plan as defined in Section 3(3) of
ERISA (other than a Multiemployer  Plan) in respect of which any Borrower or any
ERISA  Affiliate is, or within the  immediately  preceding six (6) years was, an
"employer" as defined in Section 3(5) of ERISA.

     "PLEDGE AGREEMENT" shall mean a pledge agreement  substantially in the form
of EXHIBIT L attached hereto.

     "PREPAYMENT PREMIUM" shall mean(a) with respect to the period commencing on
the Initial  Funding  Date and ending on the first annual  anniversary  thereof,
three  percent  (3.0%) of the  amount  prepaid,  (b) with  respect to the period
commencing thereafter and ending on the second annual anniversary of the Initial
Funding Date, two percent (2.0%) of the amount prepaid,  (c) with respect to the
period commencing  thereafter and ending on the third annual  anniversary of the
Initial Funding Date, one percent (1.0%) of the amount  prepaid,  and (d) at all
times thereafter, $0.

     "PRINCIPAL  PAYMENTS"  shall mean,  for any  period,  total  required  Debt
amortization (including, without limitation, the principal payments attributable
to capital leases) determined on a combined basis, without duplication,  for the
Borrowers in accordance with GAAP.

     "PRO RATA SHARE"  shall mean with  respect to all  matters  relating to any
Lender the percentage  obtained by dividing (1) at any time prior to the date on
which  the  Loans  are  funded,  the  Commitment  Amount  of such  Lender by the
Commitment  Amount  of all  Lenders,  and (2) on and after the date on which the
Loans are funded, the aggregate  outstanding principal balance of the Loans held
by such Lender, by the aggregate outstanding principal balance of the Loans held
by all Lenders.

     "PUC"  shall  mean any  state  Governmental  Authority  having  utility  or
telecommunications regulatory authority over any Borrower or any System.

     "PURCHASE  DEBT"  shall  have the  meaning  given to such  term in  SECTION
6.13(IV).

     "QUALIFIED  INTERCOMPANY  LOAN"  shall mean a loan to a  Borrower  from KMC
Holdings or KMC IHC, which loan is expressly  subordinated to the Obligations on
terms and conditions satisfactory to the Agent, has a maturity date occurring on
or after the third annual  anniversary of the Termination  Date, and requires no
cash payment of principal or interest  prior to the  scheduled  maturity date of
such loan.

     "REAL PROPERTY" shall have the meaning given to such term in SECTION 3.20.

     "REFERENCE  BANK"  shall  mean (i) if  Lucent  is the  Agent,  First  Union
National  Bank and  (ii) if  Lucent  is no  longer  the  Agent,  such  financial
institution  as the  Agent  may  designate  (and  which  may be the Agent or any
Affiliate of the Agent),  PROVIDED,  that such financial  institution shall be a


                                       15
<PAGE>

commercial banking institution organized under the laws of the United States (or
any state  thereof) or a United States branch or agency of a foreign  commercial
banking  institution,  and, in each case, has combined capital and surplus of at
least $250,000,000.

     "REGISTER"   shall  have  the  meaning   given  to  such  term  in  SECTION
11.08(C)(III).

     "RELEASE"  shall  mean any  release,  spill,  emission,  leaking,  pumping,
injection, deposit, disposal,  discharge,  dispersal, leaching or migration into
the  environment  or into or out of any  property,  including  the  movement  of
Contaminants  through  or in  the  air,  soil,  surface  water,  groundwater  or
property.

     "REMEDIAL  ACTION"  shall mean  actions  required to (1) clean up,  remove,
treat or in any other way address  Contaminants in the environment;  (2) prevent
the Release or threat of Release or prevent or minimize  the further  Release of
Contaminants  so they do not migrate or endanger or threaten to endanger  public
health or welfare or the  environment;  or (3) perform  preremedial  studies and
investigations and postremedial monitoring and care.

     "REPORTABLE  EVENT" shall mean any  reportable  event as defined in Section
4043 of ERISA unless the reporting  requirement  with respect to such reportable
event has been waived by the PBGC or other appropriate Governmental Authority.

     "REQUIRED CONTRIBUTION" shall have the meaning assigned to such term in the
KMC Holdings Guaranty.

     "REQUISITE  LENDERS"  shall mean (i) so long as Lucent  shall hold not less
than 66 2/3% of the Loans and Commitments, Lucent and Lenders holding a majority
of the remaining  Loans and  Commitments and (ii) if Lucent shall no longer hold
at least 66 2/3% of the Loans and  Commitments,  Lenders holding at least 66 2/3
of the Loans and Commitments.

     "SOLVENT"  shall mean,  at any time of  determination,  with respect to any
Person:

          (i) the assets of such Person,  at a fair valuation,  are in excess of
     the total amount of its debts (including,  without  limitation,  contingent
     liabilities); and

          (ii) the present fair saleable value of its assets is greater than its
     probable  liability on its existing debts as such debts become absolute and
     matured; and

          (iii)  it is then  able  and  expects  to be  able  to pay  its  debts
     (including, without limitation,  contingent debts and other commitments) as
     they mature; and

          (iv) it has capital sufficient to carry on its business as conducted.



                                       16
<PAGE>

For  purposes  of  determining  whether a Person is  Solvent,  the amount of any
contingent  liability  shall be computed as the amount that, in light of all the
facts and  circumstances  existing at such time,  represents the amount that can
reasonably be expected to become an actual or mature liability.

     "STEP DOWN DATE" shall mean the date on which the Borrower has
completed Systems in 18 of 27 Tier 3 III cities.

     "SUBSIDIARY"  shall  mean,  with  respect to any Person,  any  corporation,
partnership,  joint venture,  association or other business entity,  whether now
existing or hereafter  organized or acquired,  (i) in the case of a corporation,
of which  more  than 50% of the  total  voting  power  of the  Equity  Interests
entitled  (without  regard to the occurrence of any  contingency) to vote in the
election of  directors,  officers or trustees  thereof is held by such Person or
any of its  Subsidiaries;  or (ii) in the case of a partnership,  joint venture,
association or other business  entity,  with respect to which such Person or any
of its  Subsidiaries  has the  power to direct  or cause  the  direction  of the
management  and  policies  of such  entity by  contract  or  otherwise  or if in
accordance  with  GAAP such  entity is  consolidated  with the such  Person  for
financial statement purposes.

     "SWITCH  EQUIPMENT" shall mean  telecommunications  switches and associated
electronics.

     "SYSTEM"  shall  mean each  telephone,  telecommunications  or  information
system (including,  without limitation,  any voice, video transmission,  data or
Internet  services) and any related,  ancillary or  complementary  services,  as
described in the KMC III Tier III Plan or the KMC III Tier III-Tier IV Plan, and
all replacements, enhancements or additions thereto.

     "TAX SHARING  AGREEMENT"  shall mean that certain Tax Allocation  Agreement
dated as of  December  18,  1998,  amended as of  January  29,  1999,  among KMC
Holdings,  KMC III, KMC Telecom  International,  Inc., KMC Telecom II, Inc., KMC
Telecom  Inc.,  KMC Telecom of Virginia,  Inc.,  KMC Telecom  Leasing I LLC, KMC
Telecom Leasing II LLC, KMC Leasing III and KMC IHC.

     "TAXES"  shall  mean  any and all  license,  documentation,  recording  and
registration fees, and all taxes, including,  without limitation,  income (other
than net income taxes, franchise taxes and capital taxes imposed on the Lenders,
the Agent or the Collateral  Agent other than by  withholding),  gross receipts,
sales,  value-added,  use, excise,  personal property (tangible and intangible),
real  estate  and stamp,  documentary,  transfer  or  recording  taxes,  levies,
imposts, deductions, duties, assessments, fees, charges, and withholdings of any
nature  whatsoever,  whether or not  presently in  existence,  together with any
penalties,  fines, additions to tax, or interest thereon,  imposed by any taxing
authority or other Governmental Authority.

     "TELECOMMUNICATIONS  EQUIPMENT" shall mean fiber optic cable,  Lucent 5-ESS
Switch  Equipment or other comparable  Switch Equipment  manufactured by Lucent,
transmission   equipment  and  other  ancillary   equipment  necessary  for  the


                                       17
<PAGE>

installation  and operation of a switch room or central  office and  co-location
with other  telecommunications  providers  that will  enable a Borrower to offer
telephony services, including voice, data and video, as well as all software and
hardware  associated with the network  operating  center and back office systems
(including  operations  support  systems,  billing  systems and data  services),
together  with  all  related  support,   construction  and  installation   costs
associated with an operational system and services set forth in SCHEDULE 1.01(A)
connected  therewith,  provided  that  such  costs  (other  than the cost of any
services set forth on SCHEDULE 1.01(A)) are capitalized in accordance with GAAP.

     "TEMPORARY  CASH  INVESTMENTS"  shall mean (i)  Investments  in marketable,
direct obligations  issued or guaranteed by the United States of America,  or of
any governmental agency or political  subdivision  thereof,  maturing within 365
days of the date of purchase; (ii) Investments in certificates of deposit issued
by a bank organized  under the laws of the United States of America or any state
thereof or the District of Columbia,  in each case having  capital,  surplus and
undivided  profits  totaling  more  than  $500,000,000  and  rated at least A by
Standard & Poor's Ratings  Service and A-2 by Moody's  Investors  Service,  Inc.
maturing  within 365 days of purchase;  or (iii)  Investments  not exceeding 365
days in duration in money  market  funds that invest  substantially  all of such
funds'  assets in the  Investments  described in the  preceding  CLAUSES (I) and
(II).

     "TERMINATION DATE" shall mean January 1, 2007.

     "TERMINATION  EVENT"  shall mean (i) a  Reportable  Event with respect to a
Benefit Plan;  (ii) the withdrawal of any Borrower or any ERISA Affiliate from a
Benefit  Plan during a plan year in which any  Borrower or such ERISA  Affiliate
was a "substantial  employer" as defined in Section  4001(a)(2) of ERISA;  (iii)
the  imposition of an obligation  on any Borrower or any ERISA  Affiliate  under
Section 4041 of ERISA to provide  affected  parties  written notice of intent to
terminate a Benefit Plan in a distress termination  described in Section 4041(c)
of ERISA; (iv) the institution by the PBGC of proceedings to terminate a Benefit
Plan; (v) any event or condition  which might  constitute  grounds under Section
4042 of ERISA  for the  termination  of,  or the  appointment  of a  trustee  to
administer,  any Benefit Plan; or (vi) the partial or complete withdrawal of any
Borrower or any ERISA Affiliate from a Multiemployer Plan.

     "THIRD  PARTY  INTERACTIVES"  shall mean all Persons with whom any Borrower
exchanges data  electronically  in the ordinary  course of business,  including,
without limitation,  customers, suppliers,  third-party vendors, subcontractors,
processors-converters, shippers and warehousemen.

     "TIER III CITIES" shall mean cities each with a population  between 100,000
and 750,000 in which KMC III shall operate a System.

     "TIER IV CITIES" shall mean cities served out of a KMC III Tier III
City.



                                       18
<PAGE>

     "TOTAL DEBT" shall mean,  with respect to the  Borrowers,  at any date, the
sum of the following,  determined on a combined basis without  duplication:  (a)
all liabilities, obligations and indebtedness for borrowed money, including, but
not limited  to,  obligations  evidenced  by bonds,  debentures,  notes or other
similar  instruments,  (b) all obligations to pay the deferred purchase price of
property  or services  (exclusive  of any rent for real  property  pursuant to a
lease that would not be capitalized in accordance with GAAP), including, but not
limited to, all  obligations  under  non-competition  agreements,  except  trade
payables  arising in the  ordinary  course of business not more than ninety (90)
days past due, (c) all obligations as lessee under capital leases  (exclusive of
the  interest  component  thereof that is not  capitalized)  (d) all Debt of any
other Person  secured by a Lien on any asset of any  Borrower,  (e) all guaranty
obligations, (f) all obligations,  contingent or otherwise, relative to the face
amount of  letters  of credit,  whether  or not drawn and  banker's  acceptances
issued  for  the  account  of any  Borrower,  (g)  all  obligations  to  redeem,
repurchase,  exchange,  defease or otherwise make payments in respect of capital
stock or other  securities at any time prior to the third annual  anniversary of
the Termination  Date, and (h) all  termination  payments which would be due and
payable by any  Borrower  thereof  pursuant to any  Interest  Rate  Agreement or
hedging agreement.  "Total Debt" shall not include any intercompany Debt between
the Borrowers, or any Borrower and KMC Holdings or any Borrower and KMC IHC.

     "TOTAL  LEVERAGE  RATIO"  shall  mean the ratio of (i) Total Debt as of the
last day of any fiscal quarter, to (ii) the product of (A) two multiplied by (B)
EBITDA of the  Borrowers  on a combined  basis for the most  recently  ended six
month period.

     "TRIGGER  DATE"  shall mean the date on which KMC III shall  have  fourteen
(14) Completed Systems.

     "VOTING  STOCK"  shall  mean  securities  of  any  class  or  classes  of a
corporation,   the  holders  of  which  are   ordinarily,   in  the  absence  of
contingencies,  entitled  to elect a majority  of the  corporate  directors  (or
Persons performing similar functions).

     "YEAR 2000 CORRECTIVE ACTIONS" shall mean, as to each Borrower, all actions
necessary to eliminate such  Borrower's Year 2000 Problems,  including,  without
limitation,  computer code enhancements and revisions, upgrades and replacements
of  Year  2000  Date-Sensitive  Systems/Components,  and  coordination  of  such
enhancements,   revisions,   upgrades   and   replacements   with  Third   Party
Interactives.

     "YEAR 2000 CORRECTIVE  PLAN" shall mean,  with respect to each Borrower,  a
comprehensive  plan to  eliminate  all of its Year  2000  Problems  on or before
September 30, 1999, including without limitations (i) computer code enhancements
or  revisions,  (ii)  upgrades  or  replacements  of  Year  2000  Date-Sensitive
Systems/Components, (iii) test and validation procedures, (iv) an implementation
time line and budget  and (v)  designation  of  specific  employees  who will be
responsible for planning, coordinating and implementing each phase or subpart of
the Year 2000 Corrective Plan.



                                       19
<PAGE>

     "YEAR 2000 DATE-SENSITIVE SYSTEM/COMPONENT" shall mean any system software,
network  software,  applications  software,  database,  computer file,  embedded
microchip,  firmware or hardware  that  accepts,  creates,  manipulates,  sorts,
sequences,  calculates,  compares or outputs  calendar-related  data accurately;
such  systems  and  components  shall  include,  without  limitation,  mainframe
computers,  file server/client system,  computer  workstations,  routers,  hubs,
other network-related hardware, and other computer-related software, firmware or
hardware  and  information  processing  and  delivery  systems  of any  kind and
telecommunications  systems  and  other  communications   processors,   security
systems, alarms, elevators and HVAC systems.

     "YEAR 2000 IMPLEMENTATION TESTING" shall mean, as to each Borrower, (i) the
performance of test and  validation  procedures  regarding Year 2000  Corrective
Actions on a unit basis and a system wide basis,  (ii) the  performance  of test
and validation  procedures  regarding data exchanges  among the Borrowers'  Year
2000  Date-Sensitive  Systems/Components  and data  exchanges  with Third  Party
Interactives,  and (iii) the design and implementation of additional  Corrective
Actions,  the  need  for  which  has been  demonstrated  by test and  validation
procedures.

     "YEAR 2000 PROBLEMS"  shall mean with respect to each Borrower  limitations
on the  capacity or readiness of any such  Borrower's  Year 2000  Date-Sensitive
Systems/Components  to accurately accept,  create,  manipulate,  sort, sequence,
calculate,  compare or output calendar date information with respect to calendar
year 1999 or any subsequent  calendar year beginning on or after January 1, 2000
(including leap year computations),  including, without limitation, exchanges of
information among Year 2000 Date-Sensitive  Systems/Components  of the Borrowers
and exchanges of  information  among the Borrowers and Year 2000  Date-Sensitive
Systems/Components  of Third Party  Interactives and functionality of peripheral
interfaces, firmware and embedded microchips.

     SECTION 1.02.  ACCOUNTING  TERMS.  Except as otherwise herein  specifically
provided,  each  accounting  term used herein shall have the meaning given to it
under generally accepted accounting  principles ("GAAP") applied on a consistent
basis.

     SECTION 1.03. OTHERS DEFINED IN NEW YORK UNIFORM COMMERCIAL CODE. All other
terms  contained in this  Agreement  (and which are not  otherwise  specifically
defined herein) shall have the meanings provided by the Uniform  Commercial Code
of the State of New York (the "CODE") to the extent the same are used or defined
therein.


                                   ARTICLE II
                                      LOANS

     SECTION 2.01.  AGREEMENT TO LEND. (a) Each Lender severally  agrees, on the
terms and conditions hereinafter set forth, to make term loans to the Borrowers,
from  time to time,  on and  after the  Initial  Funding  Date and until but not
including the Commitment  Termination  Date in an aggregate amount not to exceed


                                       20
<PAGE>

such Lender's  Commitment  Amount;  PROVIDED that (i) until the Borrowers  shall
have  satisfied the condition in SECTION 4.03,  the maximum amount of Loans that
may be borrowed  from the Lenders shall not exceed  $125,000,000  and (ii) until
the Borrowers shall have satisfied the conditions set forth in SECTION 4.04, the
maximum  amount of Loans that may be borrowed  from all Lenders shall not exceed
$250,000,000.

     (b) Loans which are repaid or prepaid may not be reborrowed.

     SECTION  2.02.  LOANS.  (a) The  proceeds of the Loans made by Lucent under
this   Agreement   shall  be  used  by  the   Borrowers   solely   to   purchase
Telecommunications  Equipment  manufactured  or  produced  by Lucent  and to pay
transactions  costs  incurred in  connection  with the  execution,  delivery and
performance of the Loan Documents; PROVIDED that

            (i) if the  Borrower  shall  fail to  raise,  on or prior to the six
      month  anniversary of the Initial  Funding Date, at least  $200,000,000 of
      additional  funded  equity (other than  Disqualified  Stock) or High Yield
      Debt but shall have  contributed  any amounts so raised to KMC IHC and KMC
      IHC shall have  contributed  such amounts to KMC III as either  additional
      funded equity or Qualified  Intercompany  Loans,  the aggregate  principal
      amount  of the  Loans  that the  Borrower  may use for  Telecommunications
      Equipment  not  manufactured  or produced  by Lucent  shall not exceed the
      lesser of

                    (x) the sum of (1) the aggregate  amount of Commitments that
               Lucent   shall  have   syndicated   to  one  or  more   financial
               institutions  without  recourse to or credit  support from Lucent
               PLUS (2) $37,500,000 and

                    (y) 35% of the  aggregate  principal  amount  of the  Loans
               outstanding, or

          (ii) if the Borrower shall have raised at least  $200,000,000  of such
     additional funded equity (other than Disqualified Stock) or High Yield Debt
     the net  proceeds  of which  shall  have been  contributed  as set forth in
     clause  (i) above,  the  aggregate  principal  amount of the Loans that the
     Borrower  may use for  Telecommunications  Equipment  not  manufactured  or
     produced by Lucent shall not exceed the lesser of

                    (x ) the aggregate  amount of Commitments  that Lucent shall
               have  syndicated to one or more  financial  institutions  without
               recourse to or credit support from Lucent and

                    (y ) 35% of the  aggregate  principal  amount  of the  Loans
               outstanding.

Except   as  set   forth  in   SCHEDULE   1.01(A),   Loans   with   respect   to
Telecommunications Equipment purchases may not be made to finance (1) soft costs
(including  installation,  delivery and engineering  costs) in excess of fifteen
percent (15%) of the invoiced price for the related Switch  Equipment or (2) any


                                       21
<PAGE>

support or installation  costs associated with an operational  system that would
not be capitalized in accordance with GAAP.

     (b)  Each  Base  Rate  Loan  shall  be in a  minimum  principal  amount  of
$1,000,000.  Each  LIBOR  Loan  shall  be  in  a  minimum  principal  amount  of
$5,000,000.

     (c) In any calendar month not more than one Loan may be requested.

     SECTION 2.03.  PROCEDURE FOR LOAN REQUEST AND BORROWING  COMMITMENT.  (a) A
Borrower  requesting  a Loan shall  deliver  to the Agent a Notice of  Borrowing
substantially in the form of EXHIBIT H-1 attached hereto on or before 11:00 a.m.
(New York time) at least five (5) Business  Days prior to the date on which such
Loan is requested to be made if such Loan is requested to be a LIBOR Loan and at
least three (3) Business  Days prior to the date on which such Loan is requested
to be made if such Loan is requested to be a Base Rate Loan, which notice,  once
given, shall be irrevocable;  PROVIDED,  that a Notice of Borrowing requesting a
Cash  Advance (as  hereinafter  defined)  must be received by the Agent at least
seven  (7)  Business  Days  prior to the  date on which  such  Cash  Advance  is
requested to be made if the amount of the requested Cash Advance is greater than
$50,000,000  and  PROVIDED,  FURTHER,  that in no event  may the  amount  of any
requested Cash Advance exceed $100,000,000. The Loans may be made (i) in cash in
accordance with the provisions of SECTION 2.03(B) (a "Cash Advance") and/or (ii)
by means of a credit  against  amounts due to Lucent  under the Lucent  Purchase
Agreement (or other agreement with Lucent), in accordance with the provisions of
SECTION 2.03(C) (a "Credit Advance"). The Loans made on the Initial Funding Date
shall be Base Rate Loans and  thereafter  may be continued as Base Rate Loans or
converted into LIBOR Loans in the manner provided in SECTION 2.06 and subject to
the other  conditions  and  limitations  therein set forth and set forth in this
ARTICLE II. In the case of a Loan the proceeds of which will be used to purchase
or reimburse  any  Borrower  for  Telecommunications  Equipment  (including  any
Telecommunications  Equipment  being  purchased or  reimbursed  under the Lucent
Purchase Agreement), the Notice of Borrowing delivered to the Agent will include
a schedule supporting one hundred percent (100%) of Telecommunications Equipment
requested  to be funded.  To the extent any portion of the Loans are not used to
fund  Telecommunications  Equipment  manufactured  or produced  by Lucent,  such
schedule  will detail all invoices for  equipment,  third party labor,  permits,
other third party costs and all capitalized internal costs of the Borrowers with
respect to such Telecommunications  Equipment permitted under GAAP. All invoices
over  $25,000 will be attached to such  schedule and  delivered to the Agent and
when combined with the above-described  capitalized  internal costs will support
seventy  percent  (70%) of the total  requested  funding.  In  addition,  if the
Telecommunications  Equipment is being purchased or reimbursed  under the Lucent
Purchase  Agreement,  and the Agent so requests,  a certificate  of delivery and
acceptance  in the  form of  EXHIBIT  P  shall  be  attached  to the  Notice  of
Borrowing.  In the case of a Loan the  proceeds  of which will be used to pay or
reimburse  any  Borrower for  transaction  costs,  the Notice of Borrowing  will
include  a copy of the  invoice  from  the  provider  of the  service  or  other
appropriate  supporting  documentation.  The  Notice of  Borrowing  shall,  with
respect to any Loans  requested,  specify whether such requested Loans are to be


                                       22
<PAGE>

made as Cash  Advances  or Credit  Advances,  are to bear  interest as Base Rate
Loans or LIBOR Loans,  and if such  requested  Loans are to be LIBOR Loans,  the
requested Interest Period for such Loans.

     (b) If any Notice of Borrowing  requests that a Cash Advance be made on the
date  specified  therein to finance  amounts  theretofore  paid by any  Borrower
(other  than  with the  proceeds  of  Loans)  under  invoices  submitted  to the
Borrower,  such Notice of Borrowing  shall  identify such  invoices  pursuant to
SECTION 2.03(A),  and, in accordance with SECTION 2.03(D), each Lender will make
available  to the Agent  such  Lender's  Pro Rata  Share of such  Cash  Advance.
Notwithstanding  the  foregoing,  Lucent  shall have the right,  upon giving the
Borrower  not less  than 30 days  prior  written  notice,  to  require  that the
Borrower  request  Cash  Advances  to  finance  amounts  previously  paid by the
Borrower (other than with the proceeds of Loans) under invoices submitted to the
Borrower by Lucent pursuant to the Lucent Purchase Agreement.

     (c) If any Notice of Borrowing  requests  that a Credit  Advance be made on
the date specified therein to finance amounts then due under invoices  submitted
to a Borrower,  such Borrowing  Notice shall identify such invoices  pursuant to
SECTION  2.03(A),  and, in accordance with SECTION  2.03(D),  each Lender (other
than  Lucent) will make  available to the Agent such  Lender's Pro Rata Share of
such Credit Advance.

     (d) The Agent agrees,  promptly  upon receipt of a Notice of Borrowing,  to
notify each Lender of the date and amount of the Loan  proposed  thereunder  and
the  amount of such  Lender's  Pro Rata  Share  therein.  So long as no Event of
Default has occurred and is continuing  and upon  fulfillment  of the applicable
conditions  set forth in ARTICLE IV, each such Lender  (other than Lucent in the
case of a Credit Advance)  severally  agrees,  on or before 12:00 P.M. (New York
time) on the date of each  proposed  Loan, to pay into the Payment  Account,  an
amount equal to such Lender's Pro Rata Share of such Loan in dollars and in same
day funds.  After the Agent's receipt of such Lender's Loan proceeds,  the Agent
shall make available  such proceeds to the Borrower  requesting the Loan (in the
case of a Cash Advance),  Lucent (in the case of a Credit Advance) or the Person
entitled to payment  thereof at the bank  account(s)  specified in the Notice of
Borrowing  on the date  specified  in such  Notice of  Borrowing  in  Dollars in
immediately  available  funds,  it being  understood  that Lucent  shall have no
obligation to make available to the Agent any funds for any Loan in respect of a
Credit Advance.

     (e) Unless the Agent has received written notice from a Lender prior to the
date of any proposed Loan that such Lender will not make  available to the Agent
such  Lender's Pro Rata Share of such Loan,  the Agent may, but is not obligated
to,  assume that such Lender has made its Pro Rata Share of such Loan  available
to the Agent on the date of such Loan in  accordance  with  PARAGRAPH (D) above,
and the Lenders may, in reliance  upon such  assumption,  make  available to the
Borrower on such date a corresponding  amount. If such Pro Rata Share is not, in
fact,  paid to Agent by such  Lender  when due,  the Agent will be  entitled  to
recover  such amount on demand from such Lender or the Borrower  which  received
the  proceeds of such Loan  without  set-off,  counterclaim  or deduction of any


                                       23
<PAGE>

kind, together with interest thereon,  for each day from the date such amount is
made  available  to such  Borrower  until the date such  amount is repaid to the
Agent  either  by such  Borrower  or such  Lender,  at,  (1) in the case of such
Borrower, the interest rate applicable to such Loan, and (2) in the case of such
Lender,  the Federal Funds  Effective  Rate.  Nothing in this SECTION 2.03(E) or
elsewhere  in this  Agreement  or the other  Loan  Documents  shall be deemed to
require  Agent to advance funds on behalf of any Lender or to relieve any Lender
from its  obligation  to fulfill its  Commitment  hereunder or to prejudice  any
rights that the  Borrower may have against any Lender as a result of any default
by such Lender  hereunder.  Without limiting the foregoing,  with respect to any
Lender which for any reason fails to make timely payment to the Agent of its Pro
Rata Share of any Loan,  the Agent,  in  addition to other  rights and  remedies
which it may have,  shall be entitled  to withhold or set off from any  payments
due to such Lender hereunder,  an amount equal to the Pro Rata Share required to
have been paid by such Lender plus interest as described  above, and to withhold
from such Lender any right of consent provided to such Lender by ARTICLE V or VI
of this  Agreement and to bring an action or suit against such Lender in a court
of competent jurisdiction to recover such Pro Rata Share thereof and any related
interest  thereon.  If such Lender  shall repay to the Agent such  corresponding
amount, such amount so repaid shall constitute such Lender's applicable Pro Rata
Share of such Loan for purposes of this Agreement.  If both such Lender and such
Borrower shall have repaid the  corresponding  amount,  the Agent shall promptly
return to such Borrower its corresponding amount.

     SECTION 2.04.  THE NOTES.  Each Borrower  shall execute and deliver to each
Lender a Note to evidence the  Commitment of that Lender.  Each Note shall be in
the principal amount of the Commitment  Amount of the applicable  Lender,  dated
the  Initial  Funding  Date,  stated  to  mature  on the  Termination  Date  and
substantially  in the form of  EXHIBIT E. The Notes  payable  to a Lender  shall
represent  the  obligation  of the  Borrower to pay the amount of each  Lender's
Commitment  Amount or, if less,  the  applicable  Lender's Pro Rata Share of the
aggregate  unpaid  principal  amount of all Loans to the Borrower  together with
interest  thereon as prescribed in SECTION 2.05. The aggregate  principal amount
of all the Notes shall not exceed the aggregate  Commitments of all the Lenders.
The Agent is hereby  authorized  by such  Borrower to record in the Register the
date and amount of each Loan made to such  Borrower,  and to record  therein the
date and  amount of each  payment on each Loan made to such  Borrower,  and such
recordation  shall be conclusive  evidence  against such Borrower of the amounts
owing to the Lenders with respect to the Loans in the absence of manifest error;
PROVIDED, that the failure of the Agent to register any such information on such
schedule shall not in any manner affect the obligation of such Borrower to repay
the Loans made to such Borrower in accordance with the terms of this Agreement.

     SECTION 2.05. INTEREST ON LOANS. (a) GENERAL.  Subject to the provisions of
SECTIONS  2.05(B),  2.06 and 2.07, each Loan shall bear interest at the rate per
annum  equal to (i) the Base Rate plus the  Applicable  Margin,  computed on the
basis of a 365 or 366 day year,  as  applicable,  or (ii) the LIBO Rate plus the
Applicable  Margin,  computed on the basis of a 360 day year, as selected by the
requesting   Borrower   in  the   Notice  of   Borrowing   and  the   Notice  of
Continuation/Conversion with respect to such Loan.



                                       24
<PAGE>

     (b) DEFAULT  INTEREST.  If any Borrower shall default in the payment of the
principal of or interest on any Loan or any other amount  becoming due hereunder
on its due date and such default shall continue uncured for three days, then the
Borrowers shall, on demand, from the Agent, thereafter pay interest on all Loans
at a rate that is four  percent  (4.00%)  per annum  above the rates of interest
otherwise payable on all the Loans (assuming the Total Leverage Ratio is greater
than  12.0 to 1.0) from the date such  payment  is due to the date such  payment
default is either cured or waived in writing by the  Requisite  Lenders.  If any
other Event of Default  shall occur and be  continuing  and shall be declared by
the Agent upon the direction of the Requisite Lenders, then the Borrowers shall,
on  demand,  thereafter  pay  interest  on all the  Loans at a rate  that is two
percent (2.00%) per annum above the rates of interest  otherwise  payable on the
Loans  (assuming the Total  Leverage Ratio is greater than 12.0 to 1.0) from the
date of the  occurrence  of such Event of  Default  until the date such Event of
Default has been cured or waived in writing by the Requisite  Lenders;  PROVIDED
that if an Event of Default  described in the first  sentence of this CLAUSE (B)
shall  occur at any  time  that an Event of  Default  described  in this  second
sentence has occurred and is continuing,  then the rate of interest described in
the first  sentence of this CLAUSE (B) shall  apply.  After the  occurrence  and
during the  continuance of any Event of Default,  the Borrowers shall be subject
to the limitations on borrowings of, conversions into and continuations as LIBOR
Loans set forth in SECTION 2.06(A).

     SECTION 2.06. CONVERSION OR CONTINUATION.  (a) Subject to the provisions of
SECTION 2.07, each Borrower shall have the option (i) to convert all or any part
of its  outstanding  Loans,  in a minimum  amount  of  $5,000,000  and  integral
multiples of $1,000,000 in excess of that amount,  from Loans that are Base Rate
Loans to LIBOR;  (ii) to convert all or any part of its  outstanding  Loans from
LIBOR  Loans  to Base  Rate  Loans  on the  expiration  of the  Interest  Period
applicable  thereto;  and  (iii)  upon the  expiration  of any  Interest  Period
applicable to its  outstanding  LIBOR Loan to continue all such LIBOR Loans as a
LIBOR  Loan;  PROVIDED  that no  outstanding  Loans may be  converted  into,  or
continued  as, LIBOR Loans when any Default or Event of Default has occurred and
is continuing.

     (b)  Whenever a Borrower  elects to convert or  continue  Loans  under this
SECTION  2.06,  such  Borrower  shall  deliver  to the  Agent a  written  notice
substantially  in the form of that attached  hereto as EXHIBIT H-2 (a "NOTICE OF
CONVERSION/ CONTINUATION"), signed by an authorized officer of such Borrower (i)
no later than 10:00 a.m. (New York time) two (2) Business Days in advance of the
requested conversion date, in the case of a conversion into Base Rate Loans, and
(ii) no later than 10:00 a.m (New York time) three (3) Business  Days in advance
of the requested  conversion or  continuation  date, in the case of a conversion
into, or  continuation  of, LIBOR Loans.  The Notice of  Conversion/Continuation
shall specify (1) the conversion or continuation date (which shall be a Business
Day), (2) the amount and type of the Loans to be converted or continued, (3) the
nature of the  requested  conversion or  continuation,  and (4) in the case of a
conversion into, or continuation of, LIBOR Loans, the requested Interest Period.
Promptly after receipt of a Notice of  Conversion/Continuation  pursuant to this
SECTION  2.06(B),  the Agent shall notify the Lenders by telecopy,  telephone or
other similar form of transmission, of the requested conversion or continuation.
In  the  event   that  a   Borrower   should   fail  to   provide  a  Notice  of


                                       25
<PAGE>

Conversion/Continuation  with respect to any LIBOR Loans as provided above, such
Loans, on the last day of the Interest Period with respect to such Loans,  shall
convert to Base Rate Loans.

     (c)  Any  Notice  of   Conversion/Continuation   for   conversion   to,  or
continuation  of, Loans made pursuant to this SECTION 2.06 shall be  irrevocable
and the applicable  Borrower shall be bound to convert or continue in accordance
therewith.

     SECTION 2.07. SPECIAL PROVISIONS GOVERNING LIBOR LOANS. Notwithstanding any
other  provisions  to the contrary  contained in this  Agreement,  the following
provisions shall govern with respect to LIBOR Loans as to the matters covered:

     (a) AMOUNT OF LIBOR LOANS.  Each  continuation  of or  conversion  to LIBOR
Loans shall be in a minimum  amount of $5,000,000  and in integral  multiples of
$1,000,000 in excess of that amount.

     (b)  DETERMINATION  OF INTEREST  PERIOD.  By giving  notice as set forth in
SECTION  2.06(B),  a  Borrower  shall  have the  option,  subject  to the  other
provisions of this SECTION 2.07, to specify whether the Interest Period for such
LIBOR Loan shall be a one, two, three or six month period.  The determination of
Interest Periods shall be subject to the following provisions:

          (i) In the  case of  immediately  successive  Interest  Periods,  each
     successive Interest Period shall commence on the day on which the preceding
     Interest Period expires.

           (ii) If any Interest Period would otherwise  expire on a day which is
      not a Business Day, the Interest Period shall be extended to expire on the
      next  succeeding  Business  Day;  PROVIDED  that  if the  next  succeeding
      Business Day occurs in the following  calendar  month,  then such Interest
      Period shall expire on the immediately preceding Business Day.

          (iii) A Borrower may not select an Interest Period for any LIBOR Loan,
      which Interest Period expires later than the maturity date of such Loan.

           (iv) A Borrower may not select an Interest Period with respect to any
      portion of such  Borrower's  Loans  which  extends  beyond an  installment
      payment date for such Loans unless, after giving effect to such selection,
      the  portion of such Loans not subject to Interest  Periods  ending  after
      such  installment  payment date is equal to or greater than the  principal
      due on such installment payment date.

            (v) There shall be no more than four (4) Interest  Periods in effect
      at any one time.



                                       26
<PAGE>

     (c) DETERMINATION OF INTEREST RATE. As soon as practicable after 10:00 a.m.
(New York time) on the LIBOR Interest Rate  Determination  Date, the Agent shall
determine (which  determination,  absent manifest error,  shall be presumptively
correct)  the  interest  rate for the LIBOR Loans for which an interest  rate is
then being  determined  and shall promptly give notice thereof (in writing or by
telephone confirmed in writing) to the applicable Borrower. In the event that on
any LIBOR  Interest  Rate  Determination  Date the Agent  shall have  determined
(which determination,  absent manifest error, shall be presumptively correct and
binding upon all parties) that:

            (i)  adequate  and fair  means do not  exist  for  ascertaining  the
      applicable  interest  rates by reference to which the LIBO Rate then being
      determined is to be fixed; or

           (ii) the LIBO Rate plus the Applicable Margin for any Interest Period
      for such  Loans  will not  adequately  reflect  the cost to any  Lender of
      making,  funding or maintaining  its LIBOR Loan for such Interest  Period,
      the Agent  shall  forthwith  so notify  the  applicable  Borrower  and the
      Lender, whereupon:

            (A)   each  LIBOR  Loan will  automatically,  on the last day of the
                  then existing  Interest Period  therefor,  convert into a Base
                  Rate Loan; and

            (B)   the  obligation  of the Lenders to make,  or to convert  Loans
                  into,  LIBOR  Loans shall be  suspended  until the Agent shall
                  notify  the  applicable  Borrower  and the  Lenders  that  the
                  circumstances causing such suspension no longer exist.

     (d) ILLEGALITY.  Notwithstanding any other provision of this Agreement,  if
any Lender shall notify the Agent that the  introduction  of or any change in or
in the interpretation of any law or regulation makes it unlawful, or any central
bank or other Governmental Authority asserts that it is unlawful, for any Lender
to perform its obligations  hereunder to make LIBOR Loans or to fund or maintain
LIBOR Loans hereunder,  (i) the obligation of the Lenders to make, or to convert
Loans into or to continue  Loans as,  LIBOR Loans shall be  suspended  until the
Agent shall notify the Borrowers and the Lenders that the circumstances  causing
such  suspension no longer exist and (ii) the Borrowers shall on the termination
of the Interest Period then applicable thereto, or on such earlier date required
by law,  prepay in full all LIBOR Loans then  outstanding  together with accrued
interest  thereon,  or  convert  all such  LIBOR  Loans  into Base Rate Loans in
accordance with SECTION 2.06.

     (e) COMPENSATION. In addition to such amounts as are required to be paid by
the Borrowers  pursuant to the other  Sections of this ARTICLE II, the Borrowers
agree to  compensate  any  Lender  for all  losses,  expenses  and  liabilities,
including,  without  limitation,  any loss or expense  incurred by reason of the
liquidation or  reemployment  of deposits or other funds acquired by such Lender


                                       27
<PAGE>

to fund or maintain such Lender's LIBOR Loans  (including the Applicable  Margin
component  thereof) to the  Borrowers,  which such Lender may sustain (i) if for
any  reason a funding  of any  LIBOR  Loans  does not occur on a date  specified
therefor in a Notice of  Borrowing  or Notice of  Conversion/Continuation,  or a
successive  Interest  Period does not commence  after  notice  therefor is given
pursuant to SECTION  2.06 as a result of any act or  omission  of any  Borrower,
(ii) if any voluntary or mandatory  prepayment of any LIBOR Loans occurs for any
reason on a date  which is not the last  scheduled  day of an  Interest  Period,
(iii) as a  consequence  of any required  conversion of LIBOR Loans to Base Rate
Loans as a result of any of the events indicated in SECTION 2.07(D),  or (iv) as
a  consequence  of any other  failure by the  Borrower to repay LIBOR Loans when
required by the terms of this Agreement.

     (f) BOOKING OF LIBOR LOANS; DISCRETION AS TO MANNER OF FUNDING. The Lenders
may make,  carry or  transfer  LIBOR Loans at, to, or for the account of, any of
their  respective  branch  offices  or the  office  of any of  their  respective
affiliates.  Each Lender  shall be entitled to fund and  maintain its funding of
all or any part of its Loans in any manner it sees fit, it being understood that
for  purposes  of this  Agreement  all  determinations  hereunder  shall be made
assuming each Lender had actually  funded and maintained each LIBOR Loan through
the  purchase  of deposits of Dollars in the London  Interbank  market  having a
maturity  corresponding  to each Loan's  Interest Period and bearing an interest
rate equal to the LIBO Rate for such Interest Period.

     SECTION 2.08. PAYMENTS. (a) Interest on each LIBOR Loan shall be payable in
arrears on each LIBOR  Interest  Payment Date and, if such LIBOR Loan is paid in
full  other than on such  LIBOR  Interest  Payment  Date,  on such  other  date.
Interest on each Base Rate Loan will be payable in arrears on each  Payment Date
and, if such Base Rate Loan is paid in full other than on such Payment  Date, on
such other date.

     (b) Subject to the  provisions of SECTIONS 2.09 and 9.02,  the  outstanding
principal  balance of the Loans made to the Borrowers shall be payable in twenty
consecutive  quarterly  payments  commencing  on the Payment  Dates set forth in
Annex C. On each such Payment Date,  the Borrowers  shall pay an amount equal to
the product of the  percentage  set forth on Annex C opposite  such Payment Date
multiplied by the aggregate principal amount of the Loans made.

     (c)  Payments  made with  respect  to the Loans by each  Borrower  shall be
applied by the Agent first to unpaid and accrued  fees and  interest and then to
the  outstanding  unpaid  principal  balance  of the  Loans  of  such  Borrower;
PROVIDED,  that upon the  occurrence  and during the  continuance of an Event of
Default,  all payments and  prepayments  with respect to the Obligations and all
proceeds of Collateral shall be applied in the following order by the Agent; (it
being  understood that the order of priority set forth in the following  clauses
may be altered upon direction from the Requisite Lenders to the Agent):

     (1) first,  to pay  Obligations  in respect  of any  expenses  then due and
     payable by the Borrowers to the Agents or the Lenders;



                                       28
<PAGE>

     (2)  second,  to  pay  Obligations  in  respect  of  any  reimbursement  or
     indemnities then due and payable to the Agents or the Lenders;

     (3) third,  to pay  Obligations in respect of any fees due and owing to the
     Agent or the Collateral Agent;

     (4) fourth,  to pay  Obligations  in respect of the  commitment fee and any
     other fees and commissions then due and owing to the Agents or the Lenders;

     (5) fifth, to pay Obligations in respect of any accrued and unpaid interest
     due in respect of Loans;

     (6) sixth,  to pay  termination  payments  due and payable  pursuant to any
     Interest Rate Agreement or other hedging agreement;

     (7) to the ratable  payment or prepayment  of principal of any  outstanding
     Loans; and

     (8) to the ratable payment of all other Obligations.

     SECTION  2.09.  OPTIONAL AND MANDATORY  PREPAYMENT  OF LOANS;  OPTIONAL AND
MANDATORY  REDUCTION OF COMMITMENT AMOUNT. (a) Provided that no Event of Default
has  occurred and is  continuing,  the  Borrowers  shall have the right upon the
provision of sixty (60) days' prior written  notice to the Agent,  which notice,
once given,  shall be irrevocable,  on any Payment Date with respect to any Base
Rate Loans and on the last day of the applicable Interest Period with respect to
any LIBOR Loans, to prepay the outstanding principal of the Base Rate Loans in a
minimum  principal  amount of  $1,000,000  and  increments of $250,000 in excess
thereof, or the outstanding  principal of the LIBOR Loans in a minimum principal
amount of $5,000,000 and increments of $1,000,000 in excess  thereof,  together,
in each case, with accrued interest thereon and the aggregate Prepayment Premium
applicable  thereto.  The amount of principal so prepaid shall be applied to the
remaining  principal payments of the type of Loans prepaid (i.e. Base Rate Loans
or LIBOR Loans) in the inverse order of maturity.

     (b) Upon the  occurrence of any Event of Loss in excess of $1,000,000  with
respect to any item of  Collateral  that is not  repaired  or  replaced,  or any
Events of Loss which,  in the aggregate,  exceed  $5,000,000 with respect to any
item or items of  Collateral  that are not  repaired or replaced  (in each case,
other than an item of Collateral no longer used or useful in the Business)  such
that after such repair or replacement it has a value at least equal to its value
prior to the  occurrence  of such  Event  of Loss,  the  Borrower  shall  make a
principal  prepayment within thirty (30) days of such Event of Loss in an amount
equal to the  replacement  value of the item of Collateral  which  suffered such
Event  of  Loss,  together  with  accrued  interest  thereon  (but  without  the


                                       29
<PAGE>

Prepayment  Premium) with such principal  payment to be applied,  to outstanding
principal balance of the Loans.

     (c) The Borrowers shall prepay Loans in a principal amount equal to (i) all
the net proceeds of any sales of assets of any Borrower  other than sales in the
ordinary course of business,  which proceeds are not reinvested  within 270 days
after receipt thereof in replacement assets, plus, in the case of any Loans held
by Lenders other than Lucent, the applicable  Prepayment  Premium,  and (ii) the
proceeds of insurance  policies paid to any Borrower and not applied  within 270
days after any such payment to replacing, rebuilding or restoring the Collateral
which was the subject of insurance loss, without any Prepayment Premium, in each
case,  within  five (5) days  after the  expiration  of the  applicable  270 day
period.

     (d) Provided  that no Event of Default has occurred and is  continuing  and
that the Borrower can  demonstrate to the Agent that it has adequate funds as to
ensure  that all work to be  performed  with  respect to any  System  then under
construction  shall be performed  and that each such System shall be a Completed
System on or before  December 31, 2000, the Borrowers  shall have the right upon
the provision of thirty days' prior written  notice to the Agent,  which notice,
once given, shall be irrevocable,  on any Payment Date, to reduce the Commitment
Amount of all the Lenders.  Each such reduction shall be in a minimum  principal
amount of $1,000,000 and increments of $250,000 in excess thereof.

     (e) Any  reduction  in the  Commitment  Amount of all the Lenders  shall be
allocated  to each  Lender  based  on its Pro Rata  Share.  All  prepayments  of
principal  shall be applied to the remaining  principal  payments of the type of
Loans prepaid in the inverse order of maturity.

     SECTION 2.10.  FEES. (a) The Borrowers shall pay and the Borrowers shall be
jointly  and  severally  liable to the Agent for the  account of the Lenders for
payment of a nonutilization fee calculated on a per annum basis and equal to (1)
in the case of each Lender other than Lucent, the product of (x) 1.25% per annum
multiplied by (y) the average  unused  Commitment  Amount of such Lender for the
quarterly  period  preceding a Payment Date  (PROVIDED that until the conditions
set  forth  in  SECTION  4.03  and  SECTION  4.04  have  been  satisfied,   such
nonutilization  fee shall be paid only on the  Commitment  Amount which together
with  Loans  then  outstanding  aggregate  $250,000,000)  and (2) in the case of
Lucent,  the product of (x) 1.25% per annum  multiplied by (y) the lesser of (A)
the average of the unused Commitment Amount of Lucent and (B) the average of the
excess of (I)  $250,000,000  over  (II) the  principal  amount of Loans  held by
Lucent,  in each case, for the quarterly  period  preceding a Payment Date. Such
fees shall be payable on each Payment Date  following such last day of a quarter
beginning on the Payment Date following the Closing Date until and including the
Payment Date following the Commitment Termination Date:

In  the  event  that  at any  time  the  Borrowers  fails  to  comply  with  the
requirements of SECTION 2.03(D) for any calendar year, the  nonutilization  fees
shall be increased by 100 basis points for the entire calender year with payment
of such increment in the nonutilization fee being due and payable not later than
the last Business Day of such calendar year.



                                       30
<PAGE>

     (b) The  Borrowers  shall  pay and  the  Borrowers  shall  be  jointly  and
severally liable to the Agent and the Collateral Agent, for payment of an annual
administrative  fee and a  collateral  monitoring  fee at the  times  and in the
amounts set forth in the Fee Letters.

     (c) The Borrowers shall on the Closing Date pay the Agent the  underwriting
fee and the structuring fee referred to in the Fee Letter.

     (d) All fees once paid shall be nonrefundable.

     SECTION  2.11.  MANNER OF  PAYMENT;  SPECIAL  TAX  CONSIDERATIONS.  (a) All
payments  by the  Borrowers  hereunder  and under the Notes shall be made to the
Agent by wire transfer or other electronic payment method to the Payment Account
or to such bank  account  as the Agent may  designate,  for the  account  of the
Lenders in Dollars in immediately  available funds by 11:00 a.m., New York time,
on the  date on which  such  payment  shall  be due.  The  Agent  will  promptly
thereafter  cause to be  distributed  like  funds  relating  to the  payment  of
principal or interest or other fees ratably (other than amounts payable pursuant
to SECTION 2.13) to each Lender in accordance  with SECTION  10.07.  Interest in
respect of any Loan hereunder  shall accrue from the day such Loan is made up to
and  including  the day  prior to the date on which  such  Loan is paid in full.
Payments  received  after 12:00 p.m.  shall not be given  credit  until the next
Business Day, and the Borrowers shall be liable for interest,  if any,  accruing
on such payment until the next Business Day.

     (b)(1) Any and all payments by each Borrower  hereunder  shall be made free
and clear of and without  deduction for any and all Taxes. If any Borrower shall
be  required  by law to deduct any Taxes  from or in respect of any sum  payable
hereunder or under the other Loan Documents to any Lender or Agent,  (A) the sum
payable shall be increased as may be necessary so that after making all required
deductions  (including  deductions  applicable to additional  sums payable under
this SECTION  2.11) such Lender or Agent  receives an amount equal to the sum it
would have received had no such  deductions  been made,  (B) such Borrower shall
make such  deductions,  and (C) such Borrower shall pay the full amount deducted
to the  relevant  taxation  authority  or other  authority  in  accordance  with
applicable  law.  If a  withholding  tax of the United  States of America or any
other Governmental Authority shall be or become applicable (y) after the date of
this  Agreement,  to the payments by any Borrower made to the Lending  Office or
any other  office  that a Lender may claim as its Lending  Office,  or (z) after
such Lender's  selection and  designation of any other Lending  Office,  to such
payments made to such other  Lending  Office,  such Lender shall use  reasonable
efforts to make,  fund and maintain its Loans through  another Lending Office of
such  Lender in  another  jurisdiction  so as to reduce to the  greatest  extent
possible,  but not increase,  the applicable Borrower's liability hereunder,  if
the making,  funding or  maintenance  of such Loans  through such other  Lending
Office of such  Lender  does not,  in the  judgment  of such  Lender,  otherwise
materially  adversely  affect such Loans,  such Lender's  obligations  under its
Commitment or such Lender.  Notwithstanding  anything to the contrary hereunder,
if a Person becomes a Lender under this Agreement pursuant to SECTION 11.08, the


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<PAGE>

Borrowers  shall in no event be  required to  increase  any payment  pursuant to
paragraph  (b) of this SECTION 2.11 by an amount that would exceed the amount of
any  increase  that would be  required  to be made under  paragraph  (b) of this
SECTION 2.11 to the assigning Lender.

     (2) The Borrowers will jointly and severally  indemnify each Lender and the
Agent and hold them  harmless for the full amount of Taxes  (including,  without
limitation,  any Taxes imposed by any Governmental  Authority on amounts payable
under this SECTION 2.11 or any other documentary  taxes,  assessments or charges
made by any  Governmental  Authority by reason of the  execution and delivery of
this  Agreement or any other Loan Document) paid by such Lender or the Agent (as
the case may be) and any liability (including penalties, interest, and expenses)
arising therefrom or with respect thereto.  This  indemnification  shall be made
within thirty (30) days after the date such Lender or the Agent (as the case may
be) makes written demand  therefor.  A certificate  as to any additional  amount
payable to any Lender or the Agent  under this  SECTION  2.11  submitted  to the
Borrowers  and the Agent (if a Lender is so  submitting)  by such  Lender or the
Agent shall show in reasonable  detail the amount  payable and the  calculations
used to determine such amount. With respect to such deduction or withholding for
or on account of any Taxes and to confirm  that all such Taxes have been paid to
the appropriate Governmental  Authorities,  the Borrowers shall promptly (and in
any event not later than thirty (30) days after receipt)  furnish to each Lender
and the Agent such certificates, receipts and other documents as may be required
(in the  reasonable  judgment of such Lender or the Agent) to establish  any tax
credit to which such Lender or the Agent may be entitled.

     (3)  Within  thirty  (30) days  after the date of any  payment  of Taxes on
amounts  payable  hereunder by any  Borrower,  such Borrower will furnish to the
Agent, at its address  referred to in SECTION 11.01, the original or a certified
copy of a receipt evidencing payment thereof.

     (4)  Without  prejudice  to the  survival  of any  other  agreement  of the
Borrowers  hereunder,  the agreements and obligations of such Borrower contained
in this SECTION 2.11 shall survive the payment in full of principal and interest
hereunder and the termination of this Agreement.

     (5) Each  Lender  that is not  created or  organized  under the laws of the
United States of America or a political subdivision thereof shall deliver to the
Borrowers  and the Agent on or before the effective  date hereof,  or, if later,
the date on which such Lender becomes a Lender pursuant to SECTION 11.08, a true
and accurate  certificate  executed in duplicate by a duly authorized officer of
such Lender,  in a form  satisfactory  to the  Borrowers  and the Agent,  to the
effect:

      (A) that such Lender is capable under the  provisions of an applicable tax
      treaty  concluded  by the  United  States of  America  (in which  case the
      certificate shall be accompanied by two original,  executed copies of Form


                                       32
<PAGE>

      1001 of the IRS or any  successor  form) or under  Section 1442 of the IRC
      (in which  case the  certificate  shall be  accompanied  by two  original,
      executed  copies  of  Form  4224  of the  IRS or any  successor  form)  of
      receiving  payments of interest hereunder exempt from or at a reduced rate
      of deduction or withholding of United States federal income tax, or

      (B)  if  such  Lender  is not a  "bank"  within  the  meaning  of  Section
      881(c)(3)(A) of the IRC and intends to claim  exemption from U.S.  federal
      withholding  tax under  Section  871(h) or Section  881(c) of the IRC with
      respect to payments of "portfolio interest", (i) that such Lender is not a
      "bank"  within  the  meaning  of  Section  881(c) of the IRC,  is not a 10
      percent  shareholder  (within the meaning of Section  871(h)(3)(B)  of the
      IRC) of any Borrower and is not a controlled foreign  corporation  related
      to any Borrower (within the meaning of Section 864(d)(4) of the IRC), (ii)
      that such Lender claims complete  exemption from U.S. federal  withholding
      tax on payments of interest by the Borrowers  under this Agreement and the
      other Loan Documents and (iii) that the Lender has received in replacement
      of any Note held by or assigned to it, a QFL Note in accordance  with this
      SECTION 2.11(B).

Each such Lender  further  agrees to deliver to the Borrowers and the Agent from
time to time a true and  accurate  certificate  executed in  duplicate by a duly
authorized  officer of such Lender  substantially in a form  satisfactory to the
Borrowers  and the Agent,  before or promptly  upon the  occurrence of any event
requiring a change in the most recent certificate  previously delivered by it to
the Borrowers and the Agent pursuant to this SECTION 2.11(B)(5).  Further,  each
Lender  which  delivers  a  certificate  accompanied  by  Form  1001  of the IRS
covenants  and agrees to deliver to the Borrower  and the Agent  within  fifteen
(15) days  prior to the date on which the first  payment  becomes  payable to it
hereunder  or  under  any  Note,  and  every  third  anniversary  of  such  date
thereafter, on which this Agreement is still in effect, another such certificate
and two  accurate  and  complete  original  signed  copies  of Form 1001 (or any
successor form or forms  required  under the IRC or the  applicable  regulations
promulgated thereunder), and each Lender that delivers a certificate accompanied
by Form 4224 of the IRS  covenants and agrees to deliver to the Borrower and the
Agent within fifteen (15) days prior to the beginning of each subsequent taxable
year of such Lender during which this Agreement is still in effect, another such
certificate  and two accurate and complete  original  signed  copies of IRS Form
4224 (or any successor  form or forms  required  under the IRC or the applicable
regulations promulgated  thereunder).  Each such certificate shall certify as to
one of the following:

     (a) that such Lender is capable of receiving payments of interest hereunder
exempt from or at a reduced rate of deduction or withholding of United States of
America federal income tax;

     (b) that such  Lender is not  capable of  receiving  payments  of  interest
hereunder exempt from or at a reduced rate of deduction or withholding of United
States federal income tax as specified  therein but is capable of recovering the


                                       33
<PAGE>

full amount of any such  deduction or  withholding  from a source other than the
Borrowers and will not seek any such recovery from the Borrowers; or

     (c) that, as a result of the adoption of or any change in any law,  treaty,
rule, regulation,  guideline or determination of a Governmental Authority or any
change in the interpretation or application thereof by a Governmental  Authority
after the date such Lender became a party hereto,  such Lender is not capable of
receiving  payments of interest  hereunder  without  deduction or withholding of
United States of America federal income tax as specified  therein and that it is
not capable of  recovering  the full amount of the same from a source other than
the Borrowers.

     Each Lender  shall  promptly  furnish to the  Borrowers  and the Agent such
additional documents as may be reasonably required by the Borrowers or the Agent
to  establish  any  exemption  from or  reduction  of any Taxes  required  to be
deducted or withheld  and which may be obtained  without  undue  expense to such
Lender

     (6) For a period  with  respect to which a Lender has failed to provide the
Agent and the  Borrowers  with the  appropriate  form  described in this SECTION
2.11(B)(5)  (other  than if such  failure  is due to a change  in law  occurring
subsequent to the date on which a form  originally was required to be provided),
such Lender  shall not be entitled to  indemnification  under this  SECTION 2.11
with respect to Taxes  imposed by the United  States by reason of such  failure;
PROVIDED, that should a Lender become subject to Taxes because of its failure to
deliver a form required  hereunder,  the Borrowers shall take such steps as such
Lender shall reasonably request to assist such Lender to recover such Taxes.

     (7)  Any  Lender  that  is not a  "bank"  within  the  meaning  of  Section
881(c)(3)(A)  of the IRC and satisfies the  applicable  requirements  of SECTION
2.11(B)(5)  (a  "Qualified  Foreign  Lender")  shall upon receipt of the written
request of the Agent or the Borrowers  and may, upon its own written  request to
the Agent,  exchange any Note held by or assigned to it for a qualified  foreign
lender  Note ( a "QFL  Note").  A QFL  Note  shall  be in the  form of the  Note
attached as Exhibit E but shall contain the following legend,"This Note is a QFL
Note, and as such, ownership of the obligation  represented by such QFL Note may
be  transferred  only in  accordance  with Section 2.11 of the Loan and Security
Agreement."  Any QFL Note issued in replacement of any existing Note pursuant to
this Section shall be (i) dated the Closing Date, (ii) issued in the name of the
entity in whose name such  existing Note was issued and (iii) issued in the same
principal  amount as such  existing  Note.  Any Note  replaced  pursuant to this
Section is sometimes referred to herein as a "Replaced Note".

     (8) Each Borrower agrees that, upon the request of or delivery of a request
to a Qualified Foreign Lender pursuant to paragraph (7) of this SECTION 2.11(B),
it shall  execute  and  deliver  a QFL Note to the Agent in  replacement  of the
Replaced  Note  surrendered  in connection  with such request  conforming to the
requirements  of this paragraph.  Each Qualified  Foreign Lender shall surrender
its Note in connection with any replacement  pursuant to this SECTION 2.11. Upon


                                       34
<PAGE>

receipt by the Agent, in connection with any replacement,  of a QFL Note and the
existing Note to be replaced by such QFL Note in accordance with this paragraph,
the Agent shall  forward the QFL Note to the Lender  which has  surrendered  its
Note for replacement by such QFL Note and shall forward the surrendered  Note to
the relevant  Borrower marked  "canceled".  Once issued,  QFL Notes (i) shall be
deemed to and shall be "Notes" for all purposes under the Loan  Documents,  (ii)
may not be exchanged for Notes which are not QFL Notes, notwithstanding anything
to the contrary in the Loan Documents and (iii) shall at all times thereafter be
QFL Notes, including,  without limitation,  following any transfer or assignment
thereof.

     (9) Notwithstanding anything to the contrary in the Loan Documents, the QFL
Notes are  registered  obligations  as to both  principal  and  interest  with a
Borrower  and  transfer  of the  obligations  underlying  such  QFL  Note may be
effected  only  by  surrender  of the  QFL  Note to  such  Borrower  and  either
reissuance  by such  Borrower of such QFL Note to the  transferee or issuance by
such  Borrower  of a new QFL  Note to the  transferee.  A QFL  Note  shall  only
evidence the Lender's or an assignee's  right,  title and interest in and to the
related  obligation,  and in no event is a QFL  Note to be  considered  a bearer
instrument  or  obligation.  This  SECTION  2.11 shall be  construed so that the
obligations  underlying the QFL Notes are at all times maintained in "registered
form" within the meaning of Sections 871(h)(2) and 881(c)(3) of the IRC.

     (c)(1) If a Borrower  pays any  additional  amount  under this SECTION 2.11
and, as a result, any Lender,  together with the Agent,  subsequently,  in their
sole discretion and based on their own  interpretation of any relevant laws (but
acting in good faith) receive or are granted a final and  non-appealable  credit
against or deduction  from or in respect of any tax payable by such  Lender,  or
obtain any other final and non-appealable relief in respect of any tax, which in
the  opinion  of such  Lender  and the  Agent,  acting  in good  faith,  is both
reasonably  identifiable and quantifiable by them without  requiring any Lender,
the Agent or their professional  advisers to expend a material amount of time or
incur a material cost in so identifying or quantifying (any of the foregoing, to
the extent so reasonably  identifiable and quantifiable,  being referred to as a
"SAVING"),  such Lender shall, to the extent that it can do so without prejudice
to the  retention of the Saving,  reimburse  such Borrower  promptly  after such
identification and quantification with the amount of such Saving; PROVIDED, that
any such  Saving  shall be reduced by any costs  incurred  by such Lender or the
Agent in obtaining such Saving.

     (2) Nothing in this SECTION 2.11(C) shall require any Lender to disclose to
any Person any  information  regarding its tax affairs or to arrange its tax and
other affairs in any particular manner.

     SECTION 2.12. MAXIMUM LAWFUL INTEREST RATE.  Notwithstanding  any provision
contained  herein,  the total liability of the Borrowers for payment of interest
pursuant hereto and the Notes,  including any other charges or other amounts, to
the extent such charges and other  amounts are deemed to be interest,  shall not
exceed the  maximum  amount of such  interest  permitted  by law to be  charged,


                                       35
<PAGE>

collected,  or received from the Borrowers (the "MAXIMUM RATE"). If any payments
by any Borrower for the account of any Lender include  interest in excess of the
Maximum Rate, such Lender shall apply such excess to the reduction of the unpaid
principal amount owing by such Borrower, or if none is due, such excess shall be
returned to such Borrower.

     SECTION 2.13.  FUNDING ISSUES.  (a) INCREASED  COSTS. If, due to either (i)
the  introduction  after the date hereof of, or any change after the date hereof
in or in the  interpretation  of, any applicable  law, rule or regulation by any
Governmental  Authority,  central  bank or  comparable  agency  charged with the
interpretation or administration  thereof or (ii) compliance by any Lender after
the date hereof with any final request or final directive  issued after the date
hereof  (whether  or not  having  the  force  of law) by any  such  Governmental
Authority,  central bank or  comparable  agency,  and, as a result of any of the
events  set forth in the above  CLAUSES  (I) and  (II),  (x) there  shall be any
increase in the cost to such Lender in  maintaining  its  Commitment  under this
Agreement or funding or  maintaining  its Pro Rata Share of the Loans under this
Agreement,  or (y) any Lender is subjected to any charge or  withholding  on its
obligations  hereunder,  or changes in the basis of  taxation of payments to any
Lender in connection  with any of the foregoing  (except for changes in the rate
of tax on overall net income of any Lender)  (collectively,  "INCREASED COSTS"),
then the Borrowers  shall,  from time to time, pay, to the Agent for the benefit
of such Lender  within 15 days after such Lender shall have  provided  notice to
the Agent (and the Agent shall have  provided  notice to the  Borrowers) of such
Increased  Cost,  an  amount  sufficient  to  compensate  such  Lender  for such
Increased Cost, as provided  herein.  A certificate  setting forth in reasonable
detail the  computation of the amount of such Increased Cost (which  increase in
cost shall be determined by such Lender's reasonable allocation of the aggregate
of such cost increases resulting from such event), submitted to the Borrowers by
such Lender,  absent  manifest  error,  shall be conclusive  and binding for all
purposes.

     (b) INCREASED  CAPITAL.  If any Lender which is subject to minimum  capital
requirements  determines that  compliance by such Lender,  with any guideline or
request from any central bank or other  Governmental  Authority  (whether or not
having the force of law) affects or would affect the amount of capital  required
or expected to be maintained by such Lender, or any corporation controlling such
Lender, and such Lender reasonably determines that the amount of such capital is
increased  by or based  upon any  commitment  to lend  hereunder  or  making  or
maintaining  Loans,  then,  upon demand by such Person,  the Borrowers agree to,
within five (5) days of such demand,  pay to such  Person,  from time to time as
specified by such Person,  additional  amounts  sufficient  to  compensate  such
Person in the  light of such  circumstances,  to the  extent  that  such  Person
reasonably  determines such increase in capital to be allocable to such Person's
commitment or maintenance of Loans hereunder.  A certificate as to the amount of
such increased cost, submitted to the Borrowers by the applicable Person, absent
manifest  error,  shall be  conclusive  and  binding  on the  Borrowers  for all
purposes.

     (c) REPLACEMENT OF LENDER. If any Borrower, as a result of the requirements
of either  SECTION  2.13(A) or SECTION  2.13(B),  shall be  required  to pay any
particular Lender (an "AFFECTED  LENDER") the additional  amounts referred to in


                                       36
<PAGE>

such  Section,  which  costs  are not  imposed  by the other  Lenders,  and such
additional amounts are material,  then such Borrower shall be entitled to find a
replacement Lender,  reasonably acceptable to the Agents (the Agents' consent to
such  replacement  Lender  not to be  unreasonably  withheld),  to  replace  the
Affected Lender. The Affected Lender and the replacement Lender shall execute an
Assignment  Agreement with respect to all of the Affected  Lender's  Commitments
and all Loans owing to the Affected Lender and comply with the other  provisions
of SECTION 11.08(c).  Upon the payment by the replacement Lender to the Affected
Lender of the then  outstanding  principal amount of Loans owing to the Affected
Lender,  together with accrued interest thereon, and the payment by the Borrower
to the Affected Lender of any compensation  required with respect to LIBOR Loans
pursuant to SECTION 2.07(E),  the replacement Lender shall succeed to all of the
Affected Lender's rights and obligations under this Agreement and the other Loan
Documents.

                                   ARTICLE III
                         REPRESENTATIONS AND WARRANTIES

     Each Borrower  represents and warrants to the Agent,  the Collateral  Agent
and the Lenders that:

     SECTION 3.01. ORGANIZATION;  POWERS. (a) Such Borrower (i) is a corporation
or limited  liability  company  duly  organized,  validly  existing  and in good
standing  under  the  laws  of its  jurisdiction  of  organization  and  (ii) is
qualified to do business in the  jurisdiction  in which its  principal  place of
business is located and in every other  jurisdiction where such qualification is
necessary;

     (b) such  Borrower has the power and  authority to own its  properties,  to
carry on its business as now conducted; and

     (c) such  Borrower  has the power and  authority to execute and deliver and
perform this Agreement and the other Loan  Documents to which it is a party,  to
borrow  hereunder,  and will have the power to execute and deliver any Mortgages
and Collateral  Assignments of Leases or other instruments to be delivered by it
subsequent to the date hereof.

     SECTION  3.02.  CORPORATE  AUTHORIZATION.   The  execution,   delivery  and
performance  of this  Agreement  and the  other  Loan  Documents  to which  such
Borrower is a party, and the Loans hereunder:

     (a) have been duly  authorized  by such  Borrower's  Board of  Directors or
managers and, if necessary, such Borrower's stockholders or members;

     (b) (1) do not violate (i) any existing  provision of law applicable to the
Borrower and not immaterial to its business, (ii) such Borrower's Certificate of
Incorporation or by-laws or other organizational  documents, as the case may be,
or (iii) any applicable order of any court or other governmental agency, and (2)
do not conflict  with,  result in a breach of or constitute  (with due notice or


                                       37
<PAGE>

lapse of time or both) a default  under any  indenture,  agreement  for borrowed
money, bond, note or other similar instrument or any other material agreement to
which such  Borrower is a party or by which such Borrower or any of its property
is bound;

     (c) do not result in the creation or  imposition  of any Lien of any nature
whatsoever  upon any  property or assets of such  Borrower  other than the Liens
granted pursuant to this Loan Agreement or the other Loan Documents;

     (d)  constitute  legal,  valid and binding  obligations  of such  Borrower,
enforceable against such Borrower in accordance with their respective terms; and

     (e) do not, as of the date of execution  hereof,  require any  governmental
consent, filing, registration or approval except as set forth on SCHEDULE 3.02.

     SECTION 3.03.  FINANCIAL  STATEMENTS.  The Borrowers  have furnished to the
Agent and the Lenders  the  audited  consolidated  financial  statements  of KMC
Holdings dated as of December 31, 1997, and the unaudited consolidated financial
statements  for the fiscal  quarter ended  September 30, 1998 and for the period
ended  October 31,  1998,  which  statements  are  attached  hereto as EXHIBIT I
(collectively,   the  "FINANCIALS").   The  Financials  have  been  prepared  in
accordance  with GAAP  applied  on a basis  consistent  with  that of  preceding
periods and are complete and correct in all material respects. As of the date of
the  Financials,  (a) the Financials  fairly  represent KMC Holdings'  financial
position  and results of  operations;  and (b) there are no  omissions  from the
Financials or any other facts or  circumstances  not reflected in the Financials
which are or may be material according to GAAP.

     SECTION  3.04.  NO  MATERIAL  ADVERSE  CHANGE.  There has been no  material
adverse  change  in  the  condition  (financial  or  otherwise),  operations  or
properties of such Borrower since the date of the Financials.

     SECTION 3.05.  LITIGATION.  Except as set forth on SCHEDULE 3.05, there are
no  actions,  suits or  proceedings  at law or in  equity  or by or  before  any
Governmental Authority now pending or, to the knowledge of such Borrower against
or  affecting  such  Borrower or any  property or rights of such  Borrower as to
which there is a reasonable  possibility of an adverse  determination and which,
if adversely  determined,  would  individually  or in the  aggregate  materially
impair the right of any Borrower to carry on business substantially as now being
conducted or as presently  contemplated or would result in any Material  Adverse
Effect.

     SECTION  3.06.  TAX RETURNS.  Such Borrower has filed or caused to be filed
all Federal,  state and local tax returns which are required to be filed and has
paid or  caused  to be paid  all  taxes  as  shown  on  such  returns  or on any
assessment  received by it to the extent that such taxes have become due, except
such taxes the amount, applicability or validity of which are being contested in


                                       38
<PAGE>

good faith by  appropriate  proceedings  and with respect to which such Borrower
shall have set aside on its books  adequate  reserves with respect to such taxes
as are required by GAAP.

     SECTION 3.07. NO DEFAULTS. Such Borrower is not in default (i) with respect
to  any  judgment,   writ,  injunction,   decree,  rule  or  regulation  of  any
Governmental  Authority which is likely to have a Material  Adverse  Effect,  or
(ii) in the  performance,  observance or fulfillment of any of the  obligations,
covenants or  conditions  contained in any material  agreement or  instrument to
which such Borrower is a party or by which any of its assets are bound, which is
likely to have a Material Adverse Effect.

     SECTION 3.08.  PROPERTIES.  Such Borrower has good and marketable  title to
all its material  properties  and assets and all  Collateral of such Borrower is
free and clear of all Liens of any nature whatsoever, except Permitted Liens.

     SECTION 3.09. LICENSES,  MATERIAL AGREEMENTS,  INTELLECTUAL  PROPERTY.  (a)
Such Borrower has made or will make  application  for and expects to receive all
Governmental  Approvals  and  approvals  of any  Governmental  Authority  having
jurisdiction over such Borrower,  which Governmental Approvals and approvals are
necessary or appropriate  for the  construction  and operation of the Systems as
contemplated  in the KMC III Tier III  Plan,  other  than  immaterial  municipal
business permits. Such Governmental Approvals and approvals are correctly listed
on SCHEDULE  3.09(A)  and  constitute  the only  material  licenses,  permits or
franchises  or  other  Governmental  Approvals  of  any  Governmental  Authority
required in  connection  with the Systems as are presently  operating.  All such
Governmental Approvals are in full force and effect, are duly issued in the name
of, or validly  assigned to, such  Borrower and such  Borrower has the power and
authority to operate thereunder.

     (b)  SCHEDULE   3.09(B)   accurately  and  completely  lists  all  material
agreements to which such Borrower is a party, including, without limitation, all
purchase agreements,  construction contracts, right of way or right of occupancy
agreements,  lease agreements,  consulting,  employment,  management and related
agreements. All the foregoing agreements are valid, subsisting and in full force
and  effect and  neither  such  Borrower,  nor,  to the best of such  Borrower's
knowledge and belief,  any other parties,  are in material  default  thereunder.
Such Borrower has given true and complete  copies of all such  agreements to the
Agent and the Lenders.

     (c) Such Borrower owns or possesses  all the patents,  trademarks,  service
marks, trade names,  copyrights and licenses, and all rights with respect to the
foregoing  (the  "INTELLECTUAL  PROPERTY"),  necessary  for the  conduct  of its
business as presently  conducted  without any known  conflict with the rights of
others.  SCHEDULE  3.09(C)  accurately  and  completely  lists all  Intellectual
Property owned or possessed by or licensed to such  Borrower.  Such Borrower has
entered into  Intellectual  Property  Documents with respect to its Intellectual
Property, as requested by the Agent (or the Requisite Lenders).



                                       39
<PAGE>

     SECTION 3.10.  COMPLIANCE WITH LAWS.  Except as disclosed on SCHEDULE 3.10,
the  operations  of such  Borrower  comply  in all  material  respects  with all
applicable federal, state or local laws and regulations, including Environmental
Laws.  Except as  disclosed on SCHEDULE  3.10,  none of the  operations  of such
Borrower is subject to any judicial or  administrative  proceeding  alleging the
violation of any Environmental  Laws. Except as disclosed on SCHEDULE 3.10, such
Borrower neither knows nor reasonably  should know that any of the operations of
such  Borrower  is the  subject  of federal  or state  investigation  evaluating
whether  any  Remedial  Action is  needed to  respond  to a  Release.  Except as
disclosed  on SCHEDULE  3.10,  the  Borrower  has not filed any notice under any
federal or state law indicating past or present  treatment,  storage or disposal
of a hazardous  waste or  reporting a Release.  Except as  disclosed on SCHEDULE
3.10,  such  Borrower has no  contingent  liability  of which such  Borrower has
knowledge or reasonably should have knowledge in connection with any Release.

     SECTION 3.11. ERISA.  Neither such Borrower nor any ERISA Affiliate of such
Borrower  maintains  or  contributes  to any Plan  other  than a Plan  listed on
SCHEDULE 3.11 hereto.  Each Plan which is intended to be qualified under Section
401(a) of the IRC has been  determined by the IRS to be so  qualified,  and each
trust  related to any such Plan has been  determined  to be exempt from  federal
income tax under  Section  501(a) of the IRC.  Except as  disclosed  on SCHEDULE
3.11, neither such Borrower nor any ERISA Affiliate  maintains or contributes to
any  employee  welfare  benefit plan within the meaning of Section 3(1) of ERISA
which provides  benefits to employees after termination of employment other than
as  required  by  Section  601 of ERISA.  Neither  such  Borrower  nor any ERISA
Affiliate  has  breached  any of the  responsibilities,  obligations  or  duties
imposed on it by ERISA or regulations promulgated thereunder with respect to any
Plan  which  breach  could  result in a  Material  Adverse  Effect.  No Plan has
incurred any accumulated  funding deficiency (as defined in Section 302(a)(2) of
ERISA and Section 412(a) of the IRC), whether waived or not waived. Neither such
Borrower nor any ERISA  Affiliate  nor any  fiduciary of any Plan which is not a
Multiemployer  Plan (i) has  engaged  in a  nonexempt  "prohibited  transaction"
described  in Section 406 of ERISA or Section  4975 of the IRC or (ii) has taken
or failed to take any action which would  constitute  or result in a Termination
Event.  Neither such Borrower nor any ERISA Affiliate has incurred any liability
to the PBGC  which  remains  outstanding  and which  could  result in a Material
Adverse  Effect,  other than the payment of  premiums,  and there are no premium
payments  which have become due which are unpaid.  Schedule B to the most recent
annual  report  filed  with the IRS with  respect to each Plan is  complete  and
accurate.  Since the date of each such  Schedule  B,  there has been no  adverse
change in the funding status or financial condition of the Plan relating to such
Schedule B. Neither such Borrower nor any ERISA Affiliate has (i) failed to make
a  required  contribution  or  payment  to a  Multiemployer  Plan or (ii) made a
complete  or  partial  withdrawal  under  Sections  4203 or 4205 of ERISA from a
Multiemployer  Plan. Neither such Borrower nor any ERISA Affiliate has failed to
make a required  installment or any other required  payment under Section 412 of
the IRC on or before the due date for such installment or other payment. Neither
such Borrower nor any ERISA Affiliate is required to provide  security to a Plan
under Section  401(a)(29) of the IRC due to a Plan  amendment that results in an
increase in current liability for the plan year.



                                       40
<PAGE>

     SECTION 3.12.  INVESTMENT  COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT.
Such Borrower is not an "investment  company" as that term is defined in, and is
not otherwise subject to regulation  under, the Investment  Company Act of 1940.
Such Borrower is not a "holding  company" as that term is defined in, and is not
otherwise subject to regulation under, the Public Utility Holding Company Act of
1935.

     SECTION 3.13.  FEDERAL  RESERVE  REGULATIONS.  Such Borrower is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of  purchasing  or carrying any margin stock  (within the
meaning of Regulation U of the Board of Governors of the Federal  Reserve System
of the United  States),  and no part of the  proceeds  of the Loans made to such
Borrower  will be used to purchase  or carry any such margin  stock or to extend
credit to others for the purpose of purchasing or carrying any such margin stock
or for any purpose that  violates,  or is  inconsistent  with, the provisions of
Regulation T, U or X of said Board of Governors.

     SECTION 3.14.  COLLATERAL.  The security interests granted by ARTICLE VIII,
and the accompanying  financing  statements,  when duly filed in the offices and
jurisdictions  set forth on  SCHEDULE  3.14  create  valid and  perfected  first
priority Liens in and to the Collateral of such  Borrower,  enforceable  against
other Persons in all jurisdictions  securing the payment, as applicable,  of the
Obligations hereunder. Upon filing such financing statements, to the extent that
the  filing of a  financing  statement  is  sufficient  to  perfect  a  security
interest,  no further  action is  required  to perfect the Liens of the Agent in
favor of the Lenders in the  Collateral  of such  Borrower  described in SECTION
8.01.

     SECTION 3.15.  CHIEF PLACE OF BUSINESS.  As of the Closing Date,  the chief
executive  office and  principal  place of business  address of such Borrower is
1545 Route 206, Bedminster, New Jersey 07921. If any change in any such location
occurs,  such  Borrower  shall notify the Agent  thereof not later than ten days
after the occurrence  thereof. As of the date of execution hereof, the books and
records of such  Borrower  and all chattel  paper and all records of account are
located at the  principal  place of business or chief  executive  office of such
Borrower and if any change in such location  occurs,  such Borrower shall notify
the  Collateral  Agent  thereof  not later  than ten days  after the  occurrence
thereof.

     SECTION 3.16. OTHER CORPORATE NAMES.  Except as set forth on SCHEDULE 3.16,
such  Borrower has not used and does not now use and will not use any  corporate
or fictitious name.

     SECTION  3.17.  INSURANCE.  SCHEDULE  3.17  contains a  description  of all
insurance which such Borrower  maintains or has maintained on its behalf. All of
such insurance is in full force and effect.



                                       41
<PAGE>

     SECTION 3.18. KMC III TIER III PLAN.  The KMC III Tier III Plan  represents
good faith projections of future financial  performance of the Borrowers for the
periods set forth  therein.  Such document has been prepared on the basis of the
assumptions  set forth  therein,  which the Borrowers  believe are reasonable in
light of current and reasonably foreseeable business conditions.

     SECTION  3.19.  CAPITALIZATION  AND  SUBSIDIARIES.  The  classes  of Equity
Interests,  number of authorized  shares,  number of outstanding  shares and par
values or other  designations of the Equity Interests or other equity securities
or  beneficial  interests of such  Borrower are  correctly set forth on SCHEDULE
3.19. All the outstanding  shares of Equity Interests or other equity securities
or beneficial interests of such Borrower are duly and validly issued, fully paid
and  nonassessable,  and none of such  issued  and  outstanding  shares,  equity
securities  or  beneficial  interests  has been  issued in  violation  of, or is
subject to, any preemptive or subscription rights. There are no: (A) outstanding
shares of Equity Interests or other equity securities or beneficial interests or
other securities convertible into or exchangeable for shares of Equity Interests
or other equity securities or other beneficial  interests of such Borrower,  (B)
outstanding rights of subscription, warrants, calls, options, contracts or other
agreements  of any kind,  issued,  made or granted  to or with any Person  under
which such Borrower may be obligated to issue, sell, purchase,  retire or redeem
or  otherwise  acquire or dispose  of any  shares of Equity  Interests  or other
equity securities or beneficial interests of such Borrower,  or (C) Subsidiaries
of such Borrower.  KMC Holdings  beneficially owns, directly or indirectly,  all
the Equity Interests of such Borrower and KMC IHC.

     SECTION 3.20. REAL PROPERTY,  LEASES AND EASEMENTS. Such Borrower leases or
owns the real property described on SCHEDULE 3.20. Set forth on SCHEDULE 3.20 is
a list of (i) all real  property  leased or owned by such  Borrower  (the  "REAL
PROPERTY") and (ii) all easements, rights of way, rights of occupancy,  licenses
and similar  rights with respect to real  property  granted to such Borrower not
otherwise  disclosed to the  Collateral  Agent and the Lenders on a title report
delivered to the Collateral  Agent and the Lenders  pursuant to the terms hereof
(together with all easements,  rights of way, rights of occupancy,  licenses and
similar rights with respect to real property  granted to such Borrower which are
so disclosed, collectively, the "EASEMENTS"). Also set forth on SCHEDULE 3.20 is
a street address of the Real Property  locations  described  above,  including a
description  of such  properties'  current use.  Except as set forth in SCHEDULE
3.20,  such  Borrower's  interests in the Real  Property and the  Easements  are
sufficient in order for such Borrower to conduct its business and  operations as
presently conducted.

     SECTION  3.21.  SOLVENCY.  After  giving  effect to any Loans  made to such
Borrower  hereunder,  the disbursement of the proceeds of such Loans pursuant to
the Borrower's instructions and the execution,  delivery and performance of each
of the Loan Documents and transactions  contemplated  thereby,  such Borrower is
Solvent and is not contemplating either the filing of a petition by it under any
state or federal  bankruptcy or insolvency  laws or the  liquidation of all or a
substantial  portion  of its  property,  and  has  no  knowledge  of any  Person
contemplating the filing of any such petition against such Borrower.



                                       42
<PAGE>

     SECTION 3.22. BROKERS, ETC. Except as otherwise described on SCHEDULE 3.22,
such Borrower has not dealt with any broker,  finder,  commission agent or other
similar Person in connection with the Loans or the  transactions  being effected
contemporaneously with this Agreement, and such Borrower covenants and agrees to
indemnify  and hold  harmless the Agent,  and the Lenders from and against,  any
broker's fee, finder's fee or commission in connection with such transactions.

     SECTION  3.23.  NO MATERIAL  MISSTATEMENTS.  Neither any report,  financial
statement, exhibit or schedule furnished by or on behalf of such Borrower to the
Agent,  or any Lender in connection  with the  negotiation of this Agreement and
the  other  Loan  Documents  or  included  herein  or  therein,  nor  any  other
information  required to be furnished  pursuant to the  provisions  of ARTICLE V
contains any material  misstatement  of fact or omits to state any material fact
necessary to make the statements therein not materially misleading.
    
     SECTION  3.24.  YEAR  2000  PROBLEMS.  Such  Borrower  has  made a full and
complete assessment of the Year 2000 Problems and has a realistic and achievable
program for remediating the Year 2000 Problems on a timely basis.  Based on such
assessment and program,  such Borrower does not reasonably  anticipate that Year
2000 Problems will have a Material Adverse Effect.


                                   ARTICLE IV
                              CONDITIONS FOR LOANS

     The  obligations of each Lender to make Loans  hereunder are subject to the
accuracy, as of the Initial Funding Date and as of the date of making of each of
the Loans after the Initial Funding Date, of the  representations and warranties
contained in ARTICLE III (except that any  representations  or  warranties  that
relate to a  specified  date shall only be  reaffirmed  as of such date) and the
other Loan Documents,  to the performance by such Borrower of its obligations to
be  performed  hereunder  on or  before  the  date  of  such  Loan  and  to  the
satisfaction of the following further conditions:

     SECTION 4.01.  CONDITIONS  PRECEDENT TO INITIAL  LOANS.  In the case of the
Loans to be made on the Initial Funding Date:

     (a) All then  applicable  legal matters  incident to this Agreement and the
other  Loan  Documents  shall be  reasonably  satisfactory  to the Agent and its
counsel.

     (b) The Agent and the Collateral Agent, as applicable,  shall have received
payment  in full of the fees  set  forth in the Fee  Letter,  and all the  other
documented  out-of-pocket  costs  and  expenses  of the  Agent  and the  Lenders
incurred on or prior to the Initial Funding Date, including, without limitation,
reasonable  attorneys'  and  paralegals'  fees  and  expenses  and the  fees and
expenses incurred in connection with preparation of any environmental audits.



                                       43
<PAGE>

     (c)  (1) The  Agent  and the  Collateral  Agent  shall  have  received  the
following  items, in each case in form and substance  satisfactory to the Agent,
the Collateral Agent and the Lenders:

          (i) the Financials;

          (ii) the KMC III  Tier  III Plan  showing  in  reasonable  detail  and
     specifying any material underlying assumptions, for the subsequent nine (9)
     year period, the Borrower's anticipated revenues and expenses and projected
     statements of cash flow and information  with respect to projected  capital
     expenditures  and  changes  in  working  capital  over such  period,  and a
     detailed Systems construction and buildout schedule;

          (iii) certificates  substantially in the form of EXHIBITS J-1, J-2 and
     J-3 hereto,  dated the Initial Funding Date or dated the Closing Date and a
     reaffirmation  of such  certificate  dated the Initial Funding Date, of the
     secretaries or assistant secretaries of each Borrower, KMC Holdings and KMC
     IHC,  certifying  (1)  the  names  and  true  signatures  of  the  officers
     authorized to sign each Loan  Document to which any Borrower,  KMC Holdings
     and KMC IHC is a party,  (2) the  resolutions  of the Board of Directors of
     KMC III, KMC Holdings or KMC IHC approving the transactions contemplated by
     the Loan Documents to which each is a party,  (3) KMC III's,  KMC Holdings'
     or KMC IHC's bylaws,  and (A) only with respect to the  certificate  of KMC
     Holdings,  (x) a true  and  correct  copy of the  Indenture,  (y)  true and
     correct  copies of the Management  Agreement and the Tax Sharing  Agreement
     and (z) that KMC Holdings has made the  Required  Contributions  to and (B)
     only  with  respect  to KMC  IHC,  that  KMC  IHC  has  made  the  Required
     Contributions to KMC III;

          (iv) the written opinions of special, regulatory and local counsel for
     each Borrower,  KMC Holdings and KMC IHC,  dated the Initial  Funding Date,
     addressed to the Agent, the Collateral  Agent and the Lenders  satisfactory
     to  (and  containing  only  such  qualifications  and  limitations  as  are
     satisfactory  to) the  Agents  and its  counsel,  which  opinions  shall be
     substantially  in the  forms  set  forth  in  EXHIBITS  K-1,  K-2 and  K-3,
     respectively, attached hereto;

          (v)  certificates of appropriate  public officials dated not more than
     30 days prior to the Initial  Funding  Date,  as to the legal  existence or
     qualification, and good standing of each Borrower, KMC Holdings and KMC IHC
     from such Person's  jurisdiction of organization  and from the jurisdiction
     in which such Person has its principal place of business;



                                       44
<PAGE>

          (vi) each  Borrower's,  KMC  Holdings'  and KMC IHC's  Certificate  of
     Incorporation,  as  amended,  modified or  supplemented  on or prior to the
     Initial  Funding Date,  each certified to be true,  correct and complete by
     the Secretary of State of the state in which such Person is organized;

          (vii) completed Year 2000 questionnaire executed by the Borrower;

          (viii) the Notes duly executed and delivered by the Borrowers; and

          (ix) this Agreement duly executed and delivered by the Borrowers.

     (2) The  Collateral  Agent shall have received the following  items in each
case in form and substance satisfactory to the Collateral Agent and the Lenders:

          (i) the Pledge Agreements duly executed by (A) KMC IHC with respect to
     the Equity  Interests in KMC III and (B) KMC III with respect to the Equity
     Interests in KMC Leasing III together  with, in the case of KMC III,  stock
     certificates  and, in each case,  undated stock powers executed in blank in
     form and substance satisfactory to the Collateral Agent and the Lenders;

          (ii) the KMC Holdings Guaranty, duly executed by KMC Holdings;

          (iii) the KMC IHC Guaranty, duly executed by KMC IHC;

          (iv) loss payable endorsements  substantially in the form of EXHIBIT M
     attached hereto with respect to each Borrower's insurance policies relating
     to the Collateral,  and insurance  certificates required by SECTION 5.04(G)
     from  nationally   recognized   insurance  brokers  with  respect  to  each
     Borrower's insurance policies;

          (v) with respect to each Borrower's then existing Collection Accounts,
     Restricted  Account  Agreements  substantially  in the  form of  EXHIBIT  N
     attached  hereto,  duly executed by  applicable  Borrower and the financial
     institutions maintaining the Collection Accounts;

          (vi) a  Collateral  Assignment  of  Licenses  duly  executed  by  each
     Borrower,  together with consents to assignment of licenses and rights from
     Persons  designated by the Collateral Agent and the Lender duly executed by
     such  Persons,  including  agreements as to default  notices,  cure rights,
     waiver of lien rights,  conveyance of nondisturbance rights and other terms
     satisfactory  to  the  Collateral  Agent  and  the  Lenders  (provided  the
     Borrowers shall have the  post-closing  period provided for in SECTION 5.08


                                       45
<PAGE>

     with respect to obtaining the consents to Collateral Assignment of Licenses
     required pursuant to such Section);

          (vii)  a  Collateral  Assignment  of  Leases  duly  executed  by  each
     Borrower,  together  with  consents  to  assignment,  duly  executed by the
     appropriate  Persons,  including  agreements  as to default  notices,  cure
     rights,  waiver of lien rights,  conveyance  of  nondisturbance  rights and
     other terms  satisfactory  to the  Collateral  Agent and the  Lenders  with
     respect to those leased properties specified by the Collateral Agent or the
     Requisite Lenders,  together with landlord waivers in the form of EXHIBIT D
     hereto  executed by the  appropriate  landlord with respect to those leased
     properties specified by the Collateral Agent or the Requisite Lenders;

          (viii) completed environmental  questionnaires and indemnity agreement
     executed by each Borrower and Phase I Environmental Reports with respect to
     premises described on SCHEDULE 3.10 (if any);

          (ix) an Access Agreement  executed and delivered by Kamine Development
     Corp.  with respect to the Borrower's  premises  located at 1545 Route 206,
     Suite 300, Bedminster, New Jersey in form and substance satisfactory to the
     Collateral Agent and the Lenders;

          (x) a Trademark  Security  Agreement  in the form of EXHIBIT Q hereto,
     duly executed and delivered by the Borrowers;

          (xi) a  Contribution  Agreement in the form of EXHIBIT R hereto,  duly
     executed and delivered by the Borrowers.

     (d)  The  Agent  or  the  Collateral  Agent,  as  applicable,   shall  have
satisfactorily  completed  its  review of any  Additional  Purchase  Agreements,
construction   and   maintenance   contracts,   right  of  way   agreements  and
interconnection  agreements related to the Systems being financed with the Loans
made on the Initial Funding Date.

     (e) The Collateral  Agent shall have received  evidence  satisfactory to it
and the Lenders that its security interests in the Collateral have been properly
perfected and  constitute  first and prior  security  interests  subject only to
Permitted Liens, including by (i) filing Mortgages, the Collateral Assignment of
Licenses,  the Collateral  Assignment of Leases,  leasehold  mortgages and UCC-1
financing  statements in certain filing and recording  offices,  (ii) filing the
Trademark  Security  Agreement in the United States Patent and Trademark Office,
(iii)  obtaining  consents to the  Collateral  Assignments  of Licenses  and the
Collateral  Assignments  of  Leases  (provided  the  Borrowers  shall  have  the
post-closing  period  provided for in SECTION 5.08 with respect to obtaining the
consents to certain Collateral Assignments of Licenses required pursuant to such


                                       46
<PAGE>

Section) and (iv) taking possession of stock certificates and other instruments,
in each case, as requested by the Collateral Agent or the Requisite Lenders.

     (f) The Collateral Agent shall have received  evidence  satisfactory to it,
including the results of searches conducted in the mortgage recording,  UCC, tax
Lien  and  judgment  filing  records  in  each  appropriate   filing  office  or
jurisdiction,  that there are no Liens against the Collateral  except  Permitted
Liens.

     (g) The Agent shall have received  evidence  satisfactory  that no Borrower
has any Debt other than as described in SECTION 6.13 and that the holders of any
such Debt  described  in  CLAUSES  (V) and (VII) of SECTION  6.13 have  executed
subordination and standstill agreements satisfactory to the Collateral Agent and
the Lenders.

     (h) The Collateral Agent, as it or the Requisite Lenders may require, shall
have obtained or waived in writing with respect to each real estate and material
equipment lease and each mortgage of any Borrower  relating to the Systems being
financed  with the initial  Loan made after the Closing  Date (i) the right from
the applicable  lessors and  mortgagees to cure all payment  defaults under such
leases and mortgages by making payment  directly to the  applicable  lessors and
mortgagees and (ii) landlord  waivers and consents,  as the Collateral  Agent or
the Requisite Lenders may require, with respect to each leased facility.

     (i) The Agent  shall  have  satisfactorily  completed  their due  diligence
investigation  of the Borrowers and the Systems and the Borrowers' other assets,
and their  respective  officers and  directors  including,  without  limitation,
environmental reviews, engineering reviews, review of material agreements of the
Borrowers and review of easement matters.

     (j)  All  right  of way  agreements  with  respect  to  each  System  under
construction  shall be  sufficient  to allow full  operation of such System and,
upon  request  of  the  Collateral  Agent  or the  Requisite  Lenders  shall  be
assignable to the Collateral Agent or its designee.

     (k) KMC Holdings or KMC IHC, by either the making of capital  contributions
or Qualified  Intercompany  Loans,  shall have contributed or loaned cash to KMC
III in an aggregate amount equal to at least $58,500,000.

     (l) Without the prior written consent of the Lenders,  there shall not have
been  any  change  in the  ownership  of 5% or more of the  Voting  Stock of KMC
Holdings.

     SECTION 4.02.  CONDITIONS  PRECEDENT TO ALL LOANS. In the case of each Loan
hereunder:

     (a) The  representations  and  warranties  of each  Borrower  set  forth in
ARTICLE  III or in any other  Loan  Document  shall be true and  correct  in all
material  respects  on and as of the date of such Loan  with the same  effect as


                                       47
<PAGE>

though such representations and warranties had been made on and as of such date,
except that any  representations  or warranties  that relate to a specified date
shall only be reaffirmed as of such date.

     (b) At the time of each such Loan,  and after  giving  effect to such Loan,
each Borrower shall be in compliance with all the terms and provisions set forth
herein on its part to be  observed  or  performed,  and no Event of  Default  or
Default shall have occurred and be continuing.

     (c) At the time of each  such  Loan and  after  giving  effect to each such
Loan,  there  shall  have  been no  material  adverse  change  in the  condition
(financial or  otherwise),  operations,  properties or prospects of any Borrower
since the date of the Financials.

     (d) Such Loan,  when combined with Loans  previously made to the Borrowers,
shall not exceed the Commitment Amount.

     (e) All legal matters incident to such Loan and the Loan Documents shall be
satisfactory to the Agent and its counsel.

     (f) The Agent shall have  received a Notice of  Borrowing  for the Loan and
acceptance certificate and invoices required by SECTION 2.03.

     (g) The  Collateral  Agent shall have first  priority Liens on all personal
and real property  assets that comprise or relate to each System to be funded by
such Loan,  shall have received  collateral  assignments  of all material  third
party agreements relating to such Systems,  consented to by the applicable third
parties,  as requested by the Agents,  and shall have received evidence that all
necessary Governmental Approvals for such System have been obtained.

     (h) The  Collateral  Agent shall have received  copies of such lien waivers
and  other   acknowledgments   from  Persons   constructing  the  Systems,   any
subcontractors  or vendors  (including  Lucent or each  Additional  Vendor) with
respect to the construction of the Systems as the Agent may reasonably request.

     (i) All fees and  expenses  which are due and  payable  to the Agents on or
prior to the date of the advance of such Loan shall have been paid.

     (j)  The  Agent  or  the  Collateral  Agent,  as  applicable,   shall  have
satisfactorily  completed  their review of any Additional  Purchase  Agreements,
construction  and  maintenance  contracts  related to the Systems being financed
with such Loan and the interconnection agreements for each System being financed
with such Loan.

     (k) The  Collateral  Agent shall have  obtained  or waived in writing  with
respect to each real estate and material  equipment  lease,  each mortgage,  and
each material third party agreement  relating to the Systems being financed with
such Loan (i) the right from the  applicable  lessors and mortgagees to cure all


                                       48
<PAGE>

payment defaults under such leases and mortgages by making payments  directly to
the applicable lessors and mortgagees,  as the Agents may request, (ii) landlord
waivers and  consents,  as the Agents may  require,  with respect to each leased
facility,  and (iii)  consents  to  collateral  assignment,  as the Agent or the
Requisite  Lenders may require,  with respect to each such material  third party
agreement.

     (l)  There  shall not have  occurred  in the  opinion  of the  Agents,  any
material  adverse change in any two of the three members of (i) KMC III's or KMC
Leasing  III's,  (ii) KMC Holdings' or (iii) KMC IHC's senior  management  team,
which shall comprise its Chief Executive  Officer,  Chief Financial  Officer and
Executive Vice President - Field Sales and Operations.

     (m) If a Loan is  requested  to finance  Aged  Equipment,  the Agent or the
Requisite  Lenders,  if it or they so elect, shall have obtained an appraisal of
such Aged Equipment  from an appraiser  selected by the Agent,  which  appraisal
shall be satisfactory to the Collateral Agent and the Requisite Lenders, and the
cost of which shall be borne by such Borrower.

     (n)  Each  Borrower   shall  have   delivered  to  the  Agents  such  other
certificates,  documents,  legal opinions or other  information as the Agent may
reasonably request.

     SECTION  4.03.  CONDITIONS  PRECEDENT  TO LOANS IN  EXCESS  OF THE  LEVEL 1
LENDING LIMIT.  The obligation to make Loans  hereunder in excess of the Level 1
Lending Limit shall be subject to the  satisfaction  of the  condition  that the
Borrowers  shall have  received an  additional  $35,000,000  of funded equity or
Qualified Intercompany Loans.

     SECTION  4.04.  CONDITIONS  PRECEDENT  TO LOANS IN  EXCESS  OF THE  LEVEL 2
LENDING LIMIT.  The obligation to make Loans  hereunder in excess of the Level 2
Lending  Limit shall be subject to the  satisfaction  of the  following  further
conditions:

     (a) Lucent shall have assigned or sold  participations  in its Loans and/or
Commitment,  without  recourse to or credit support from Lucent,  so that, after
giving effect to the Loans being made on such Funding Date, the aggregate  Loans
of Lucent do not exceed $250,000,000.

     (b) KMC Holdings or KMC IHC shall have obtained  through the sale of Equity
Interests (other than Disqualified  Stock) in KMC Holdings or High Yield Debt of
either KMC Holdings or KMC IHC net cash  proceeds of not less than  $300,000,000
and,  either by the making of capital  contributions  or Qualified  Intercompany
Loans,  KMC Holdings or KMC IHC shall have  contributed  or loaned such net cash
proceeds to KMC III.

     (c) Prior to December 31, 1999 the Borrowers  shall have  delivered the KMC
III Tier III - Tier IV Plan.



                                       49
<PAGE>

     (d) the Borrowers shall have revised financial covenants in accordance with
the KMC III Tier  III-Tier IV Plan in a manner that is  acceptable  to the Agent
and the Requisite Lenders.<F1> Under review.<F1>


                                    ARTICLE V
                              AFFIRMATIVE COVENANTS

     Each  Borrower  covenants and agrees that so long as this  Agreement  shall
remain  in  effect,  any  Commitment  hereunder  shall  be  outstanding  or  any
Obligations  hereunder  or under any of the other  Loan  Documents  are  unpaid,
unless the Requisite Lenders shall have otherwise given prior written consent:

     SECTION  5.01.  CORPORATE  AND FRANCHISE  EXISTENCE.  Such  Borrower  shall
preserve and maintain its corporate existence, rights, franchises,  licenses and
privileges  in  its  jurisdiction  of  its   organization,   and  in  all  other
jurisdictions  in which such  qualification is necessary in view of its business
and  operations  and property and  preserve,  protect and keep in full force and
effect its material rights and its Governmental Approvals.

     SECTION 5.02.  COMPLIANCE WITH LAWS, ETC. Such Borrower shall comply in all
material  respects with all laws and  regulations  applicable to it,  including,
without limitation,  Environmental Laws, regulations  promulgated by the FCC and
any PUC, and other  telecommunications  laws and  regulations,  and all material
contractual obligations applicable to it.

     SECTION 5.03.  MAINTENANCE OF PROPERTIES.  Such Borrower shall at all times
maintain in good repair,  working order and condition,  excepting  ordinary wear
and tear, all its properties material to its operations and make all appropriate
repairs, replacements and renewals thereof, in each case consistent with prudent
industry  practices  and  sound  business  judgment  and  with  respect  to  the
maintenance of machinery and equipment, in compliance with applicable government
regulations, manufacturers' warranty requests and any licensing requirements.

     SECTION 5.04. INSURANCE.

     (a) COVERAGE.  Without limiting any of the other obligations or liabilities
of such Borrower under this  Agreement,  such Borrower shall carry and maintain,
and require each contractor  retained in connection with the construction of any
System to carry and  maintain,  each at its own  expense,  at least the  minimum
insurance  coverage set forth in this SECTION  5.04.  Such  Borrower  shall also
carry  and  maintain  any  other  insurance  that  the  Collateral  Agent or the
Requisite  Lenders  may  reasonably  require  from time to time.  All  insurance
carried  pursuant to this SECTION 5.04 shall be placed with such  insurers  that


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have an A.M.  Best  rating  of A:X or  better,  or as may be  acceptable  to the
Collateral Agent and the Requisite Lenders. Such coverage shall be in such form,
with terms,  conditions,  limits and  deductibles  as shall be acceptable to the
Collateral Agent and the Requisite Lenders.

     (b)  CONSTRUCTION  PERIOD.  During  the  period  from,  and  including  the
commencement of  construction of any System,  to and including the completion of
construction  of any  System,  such  Borrower  shall  maintain in full force and
effect,  pay all premiums  when due in respect of, and comply with all terms and
conditions of the following coverages:

          (i) ALL RISK  BUILDER'S  RISK.  The Borrower  shall  maintain all risk
     builder's  risk insurance  covering  physical loss or damage to such System
     including, but not limited to, fire and extended coverage, collapse, flood,
     earth movement,  and comprehensive boiler and machinery coverage (including
     electrical  malfunction  and mechanical  breakdown).  Such insurance  shall
     cover all property during  construction and testing, as well as any and all
     materials, equipment and machinery intended for such System during off-site
     storage and inland transit and, if necessary, during ocean and air transit.
     All transit coverage shall be on a "warehouse to warehouse"  basis. The all
     risk builder's risk policy shall be written on a replacement cost basis for
     the full construction cost of such System or in an amount acceptable to the
     Collateral  Agent and the  Requisite  Lenders  and shall  contain an agreed
     amount  endorsement  waiving any  coinsurance  penalty.  Coverage shall not
     exclude resultant damage caused by faulty workmanship,  design or materials
     nor shall it exclude  machinery and equipment  under guarantee or warranty;
     and

          (ii)  COMPREHENSIVE  OR COMMERCIAL  GENERAL  LIABILITY.  Such Borrower
     shall maintain  comprehensive  general  liability  insurance  written on an
     occurrence  basis  with a limit  of  liability  not less  than  $1,000,000.
     Coverage  shall  include,  but  not  be  limited  to,  premises/operations,
     explosion,  collapse,  and  underground  hazards,  broad form  contractual,
     independent contractors  products/completed operations, broad form property
     damage,  and personal  injury  liability.  Such insurance shall not exclude
     coverage for punitive or exemplary damages where insurable by law; and

          (iii) WORKERS' COMPENSATION/EMPLOYER'S  LIABILITY. Such Borrower shall
      maintain  workers'  compensation  insurance in accordance  with  statutory
      provisions covering accidental injury,  illness or death of an employee of
      such Borrower while at work or in the scope of his or her employment  with
      such  Borrower and  employer's  liability  insurance in an amount not less
      than $1,000,000.  Such coverage shall not contain any occupational disease
      exclusions; and

          (iv)  AUTOMOBILE  LIABILITY.  Such Borrower shall maintain  automobile
      liability insurance covering owned,  non-owned,  leased, hired or borrowed
      vehicles  against  bodily injury or property  damage.  Such coverage shall
      have a limit of not less than $1,000,000; and



                                       51
<PAGE>

            (v) EXCESS/UMBRELLA  LIABILITY.  Such Borrower shall maintain excess
      or umbrella  liability  insurance  in an amount not less than  $25,000,000
      written on an occurrence basis providing  coverage limits in excess of the
      insurance limits required under SECTION 5.04(B)(II),  (B)(III) (employer's
      liability only), and (b)(iv). Such insurance shall follow from the primary
      insurances and drop down in case of exhaustion of underlying limits and/or
      aggregates.  Such  insurance  shall not exclude  coverage  for punitive or
      exemplary damages where insurable by law.

     (c)  CONTRACTOR   INSURANCE  COVERAGE.   Such  Borrower  shall  cause  each
contractor  retained in connection with the  construction of any System to carry
and maintain,  in full force and effect,  such  insurance and such bonds as such
contractor is required to maintain pursuant to the following:

            (i) BOND.  Such  contractor  shall maintain  performance and payment
      bonds  written in a form and by a surety  acceptable  to the Agent and the
      Requisite  Lenders.  Such bonds  shall  cover all  payments,  performance,
      material and other obligations of such contractor and all  subcontractors.
      The applicable performance and payment bonds shall, at all times, be in an
      amount equal to the full value of the  construction  contracts.  Each bond
      shall cover the faithful  performance of the construction  contract.  Such
      Borrower and the  Collateral  Agent shall be named as obligees  under each
      bond; and

           (ii) COMPREHENSIVE OR COMMERCIAL  GENERAL LIABILITY.  Such contractor
      shall maintain  comprehensive  general  liability  insurance  covering the
      construction of such System written on an occurrence basis with a limit of
      liability not less than  $25,000,000.  Coverage shall include,  but not be
      limited to,  premises/operations,  explosion,  collapse,  and  underground
      hazards,   sudden  and  accidental  pollution,   broad  form  contractual,
      independent  contractors,   products/completed   operations,   broad  form
      property  damage,  and personal  injury  liability.  Such insurance may be
      written in any  combination  of primary  and  excess/umbrella  forms.  The
      products  completed  operations  coverage  shall be extended to cover such
      System for two years after completion of such System. Such insurance shall
      not exclude coverage for punitive or exemplary  damages where insurable by
      law; and

          (iii)  WORKERS'  COMPENSATION/EMPLOYER'S  LIABILITY.  Such  contractor
      shall  maintain  workers'   compensation   insurance  in  accordance  with
      statutory  provisions covering  accidental injury,  illness or death of an
      employee  of such  contractor  while at work or in the scope of his or her
      employment with such contractor and employer's  liability  insurance in an
      amount not less than $25,000,000 written in any combination of primary and
      excess/umbrella policies, and

           (iv) AUTOMOBILE LIABILITY.  Such contractor shall maintain automobile
      liability insurance covering owned,  non-owned,  leased, hired or borrowed


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<PAGE>

      vehicles  against  bodily injury or property  damage.  Such coverage shall
      have a limit of not less than  $25,000,000  written in any  combination of
      primary and excess/umbrella policies.

     (d) OPERATIONS  PERIOD.  Beginning on the  completion  date of each System,
such Borrower shall maintain in full force and effect, pay all premiums when due
in  respect  of,  and  comply  with all terms and  conditions  of the  following
insurance coverages for each System.

            (i) ALL RISK PROPERTY  INSURANCE.  Such Borrower  shall maintain all
      risk  property  insurance  covering such System  against  physical loss or
      damage, including but not limited to fire and extended coverage, collapse,
      flood,  earth  movement and  comprehensive  boiler and machinery  coverage
      (including  electrical   malfunction  and  mechanical   breakdown).   Such
      insurance  shall cover each and every  component  of such System and shall
      not  contain  any  exclusion   for  resultant   damage  caused  by  faulty
      workmanship,   design  or  materials.  Coverage  shall  be  written  on  a
      replacement  cost  basis  in an  amount  acceptable  to the  Agents.  Such
      insurance  policy shall contain an agreed amount  endorsement  waiving any
      coinsurance penalty; and

           (ii) BUSINESS INTERRUPTION.  As an extension of the coverage required
      under  SECTION   5.04(D)(I),   such  Borrower  shall   maintain   business
      interruption  insurance  in an agreed  amount  equal to twelve (12) months
      projected  loss of net  profits,  continuing  expenses  and  debt  service
      payments of such  System and shall  contain an agreed  amount  endorsement
      waiving  any  coinsurance   penalty.   Contingent  business   interruption
      insurance  shall  also be  included  to  cover  the  major  suppliers  and
      customers of the  Borrowers.  Coverage  shall be included  for  expediting
      expenses in an amount not less than $1,000,000.  Such insurance shall also
      cover service interruption. Deductibles shall not exceed thirty (30) days;
      and

          (iii)  COMPREHENSIVE OR COMMERCIAL GENERAL LIABILITY  INSURANCE.  Such
      Borrower shall maintain  comprehensive general liability insurance written
      on an  occurrence  basis  with a limit of not less than  $1,000,000.  Such
      coverage  shall  include,  but  not be  limited  to,  premises/operations,
      explosion,   collapse,   underground   hazards,   contractual   liability,
      independent contractors,  products, completed operations,  property damage
      and personal injury  liability.  Such insurance shall not exclude coverage
      for punitive or exemplary damages where insurable by law; and

           (iv) WORKERS' COMPENSATION/EMPLOYER'S  LIABILITY. Such Borrower shall
      maintain  workers'  compensation  insurance in accordance  with  statutory
      provisions covering accidental injury,  illness or death of an employee of
      such Borrower while at work or in the scope of his or her employment  with
      such  Borrower and  employer's  liability  insurance in an amount not less
      than $1,000,000.  Such coverage shall not contain any occupational disease
      exclusions; and



                                       53
<PAGE>

            (v) AUTOMOBILE  LIABILITY.  Such Borrower shall maintain  automobile
      liability insurance covering owned,  non-owned,  leased, hired or borrowed
      vehicles  against  bodily injury or property  damage.  Such coverage shall
      have a limit of not less than $1,000,000; and

           (vi) EXCESS/UMBRELLA  LIABILITY.  Such Borrower shall maintain excess
      or umbrella  liability  insurance  in an amount not less than  $25,000,000
      written on an occurrence basis providing  coverage limits in excess of the
      insurance limits required under SECTIONS 5.04(D)(III), (D)(IV) (employer's
      liability only), and (D)(V).  Such insurance shall follow from the primary
      insurances and drop down in case of exhaustion of underlying limits and/or
      aggregates.  Such  insurance  shall not exclude  coverage  for punitive or
      exemplary damages where insurable by law.

     (e)  ENDORSEMENTS.  Such  Borrower  shall cause all  insurance  carried and
maintained in accordance with this SECTION 5.04 to be endorsed as follows:

            (i) Such  Borrower  shall be the named  insured  and the  Collateral
      Agent shall be an additional  named insured and loss payee with respect to
      policies  described  in  SECTION  5.04(B)(I),  (D)(I)  and  (D)(II).  Such
      Borrower shall be the named insured and the  Collateral  Agent shall be an
      additional   insured  with  respect  to  policies   described  in  SECTION
      5.04(B)(II),   (B)(III)   (to  the  extent   allowed  by  law),   (B)(IV),
      (B)(V),(D)(III),  (D)(IV)  (to the  extent  allowed  by law),  (D)(V)  and
      (D)(VI).  Such  Borrower  and the  Collateral  Agent  shall be  additional
      insureds under all insurances carried by contractors under SECTION 5.04(C)
      to the  extent  allowed  by law.  All  policies  shall  provide  that  any
      obligation imposed upon such Borrower and/or any contractor, including but
      not  limited  to  the  obligation  to pay  premiums,  shall  be  the  sole
      obligation  of such  Borrower  and/or the  contractor  and not that of the
      Agent, the Collateral Agent or any Lender; and

           (ii) with respect to policies described in SECTION 5.04(B)(I), (D)(I)
      and  (D)(II),   the  interests  of  the  Collateral  Agent  shall  not  be
      invalidated  by any  action or  inaction  of such  Borrower,  or any other
      Person,  and shall insure the Collateral Agent regardless of any breach or
      violation by such  Borrower,  any  contractor or any other Person,  of any
      warranties, declarations or conditions of such policies, and

          (iii)  inasmuch as the  liability  policies  are written to cover more
      than  one  insured,  all  terms,   conditions,   insuring  agreements  and
      endorsements, with the exception of the limits of liability, shall operate
      in the same  manner  as if there  were a  separate  policy  covering  such
      insured; and

           (iv) the insurers  thereunder  shall waive all rights of  subrogation
      against the Agent,  the  Collateral  Agent,  or the Lenders,  any right of
      setoff  or  counterclaim  and any other  right to  deduction,  whether  by
      attachment or otherwise; and



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<PAGE>

            (v) such insurance shall be primary without right of contribution of
      any other insurance  carried by or on behalf of the Agent,  the Collateral
      Agent or the  Lenders  with  respect  to their  interests  as such in such
      System; and

           (vi)  if such  insurance  is  canceled  for  any  reason  whatsoever,
      including  nonpayment  of premium,  or any changes are  initiated  by such
      Borrower or carrier  which affect the interests of the  Collateral  Agent,
      such  cancellation  or change shall not be effective as to the  Collateral
      Agent until thirty (30) days, except in the case of non-payment of premium
      which shall be ten (10) days,  after  receipt by the  Collateral  Agent of
      written notice sent by registered mail from such insurer.

     (f)  CERTIFICATIONS.  On the  Initial  Funding  Date,  and at  each  policy
renewal,  but not  less  than  annually,  such  Borrower  shall  provide  to the
Collateral  Agent approved  certification  from each insurer or by an authorized
representative  of  each  insurer.   Such   certification   shall  identify  the
underwriters,  the type of insurance, the limits, deductibles,  and term thereof
and shall specifically list the special provisions delineated for such insurance
required for this SECTION 5.04.

     (g) INSURANCE REPORT.  Concurrently with the furnishing of all certificates
referred to in this SECTION 5.04,  the Borrower  shall furnish the Agent with an
opinion from an independent insurance broker,  acceptable to the Agents, stating
that all  premiums  then due have  been paid and that,  in the  opinion  of such
broker,  the insurance  then  maintained by such Borrower is in accordance  with
this section.  Furthermore,  upon its first knowledge,  such broker shall advise
the Agent  promptly in writing of any default in the payment of any  premiums or
any other act or omission,  on the part of any Person, which might invalidate or
render  unenforceable,  in whole  or in part,  any  insurance  provided  by such
Borrower hereunder.

     (h)  APPLICATION OF PAYMENTS.  All payments  received by such Borrower from
any  insurance  referred  in SECTION  5.04(B)(I),  (D)(I) and  (D)(II)  shall be
promptly  delivered directly to the Agent, which amounts shall be applied by the
Agent,  upon  request by such  Borrower  and  provision to the Agent of detailed
information,  including  a  construction  schedule  and  cost  estimates,  which
establish to the reasonable  satisfaction of the Agent and the Requisite Lenders
that the amounts  available  and the proposed  schedule are adequate to restore,
replace or  rebuild  the  property  subject to  insurance  payments  in a timely
manner,  to such  restoration,  replacement  or  rebuilding  unless  an Event of
Default or Default shall have occurred and be continuing or such Borrower  shall
have failed to make such request  within  thirty (30) days after receipt of such
amounts by Agents,  in which case such amounts shall be applied in the Requisite
Lenders'  sole   discretion  to  the  repayment  of  the   Obligations  or  such
restoration, replacement or rebuilding.

     (i) GENERAL. The Agents shall be entitled,  upon reasonable advance notice,
to review  and/or  receive  copies  of such  Borrower's  (or  other  appropriate
party's)  books  and  records  regarding  all  insurance  policies  carried  and
maintained with respect to each System and the Borrower's obligations under this
SECTION 5.04.  Notwithstanding  anything to the contrary herein, no provision of
this Agreement or any other Loan Document shall impose on the Collateral  Agent,


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<PAGE>

or any Lender any duty or  obligation to verify the existence or adequacy of the
insurance coverage maintained by such Borrower,  nor shall the Collateral Agent,
the Agent or any Lender be  responsible  for any  representations  or warranties
made by or on  behalf of such  Borrower  to any  insurance  broker,  company  or
underwriter.  The Agent at the direction of the Requisite  Lenders or the Agent,
at its sole option,  may obtain such  insurance if not provided by the Borrower;
in such event,  such Borrower shall reimburse the Collateral  Agent or the Agent
upon demand for the cost thereof  together with  interest,  and such costs shall
constitute Obligations secured by the Collateral.

     (j)  PERFORMANCE  BY KMC HOLDINGS.  The  obligations of such Borrower under
this SECTION  5.04 may be performed by KMC Holdings on behalf of such  Borrower.

     SECTION  5.05.  OBLIGATIONS  AND  TAXES.  Such  Borrower  shall pay all its
indebtedness and obligations promptly and in accordance with their terms and pay
and discharge promptly all taxes, assessments and governmental charges or levies
imposed  upon it or upon its income or  profits  or in respect of its  property,
before the same shall become in default, as well as all lawful claims for labor,
materials and supplies or otherwise  which, if unpaid,  might become a Lien upon
such  properties or any part thereof;  PROVIDED that such Borrower  shall not be
required to pay and  discharge  or to cause to be paid and  discharged  any such
tax, assessment, charge, levy or claim so long as the validity or amount thereof
shall be contested in good faith by appropriate  proceedings diligently pursued,
and the Borrower  shall set aside on its books such  reserves as are required by
GAAP  with  respect  to any  such  tax,  assessment,  charge,  levy or  claim so
contested.

     SECTION 5.06.  FINANCIAL  STATEMENTS,  REPORTS,  ETC.  Such Borrower  shall
furnish to the Agent and the Lenders (except as otherwise provided herein):

     (a) within one hundred  twenty (120) days after the end of each fiscal year
of such Borrower,  two sets of annual  consolidated and consolidating  financial
statements  for  KMC  Holdings  (one  excluding  Excluded  Subsidiaries  and one
including  Excluded  Subsidiaries),  and combined  financial  statements for the
Borrowers,  including the balance sheets and  statements of operations,  income,
stockholders'  equity  and  cash  flows,  for  such  fiscal  year,  prepared  in
accordance with GAAP, which  consolidated  financial  statements and other above
described  financial  information  shall  have  been  audited  by  a  nationally
recognized  independent  certified  public  accounting firm  satisfactory to the
Agent, and accompanied by such independent  certified public  accounting  firm's
unqualified opinion;

     (b) within forty-five (45) days after the end of each month and each fiscal
quarter   during  each  fiscal  year  of  such   Borrowers,   consolidated   and
consolidating  unaudited  balance  sheets and  statements of operations  for KMC
Holdings, and combined unaudited balance sheets and statements of operations for
the Borrower and  consolidated  and  consolidating  statements of  stockholders'
equity and cash flows of KMC Holdings,  and combined consolidated  statements of
stockholders'  equity and cash flows of the Borrowers as of the end of each such
month or fiscal quarter, as applicable,  and for the then elapsed portion of the
fiscal year;  PROVIDED that with respect to the consolidated  and  consolidating


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<PAGE>

unaudited  balance  sheets and  statements  of  operations  for KMC Holdings and
statements of stockholders'  equity and cash flows of KMC Holdings  delivered as
of the end of each fiscal quarter,  such Borrower shall provide two sets of such
statements  (one  excluding  Excluded  Subsidiaries  and one including  Excluded
Subsidiaries);  PROVIDED,  further,  that such Borrower shall not be required to
deliver the items  described in this SECTION  5.06(B) on a monthly  basis at any
time that, and only for so long as, the Borrowers have achieved positive EBITDA;

     (c) concurrently with provision of the financial  statements referred to in
CLAUSES (A) and (B) above, a certificate of KMC Holdings'  independent certified
public accountant or KMC Holdings' chief financial  officer,  as applicable,  to
the effect that the financial statements referred to in CLAUSE (A) or (B) above,
present fairly the financial position and results of operations of KMC Holdings,
and  the  Borrowers  and  as  having  been  prepared  in  accordance  with  GAAP
consistently applied, in each case, subject to normal year end audit adjustments
except for the statements referred to in CLAUSE (A) above;

     (d) concurrently with (a) above, and any statements  delivered  pursuant to
(b) above in respect of the month of March and the period  ending  March 31, the
month of June and the period  ending June 30 or the month of  September  and the
period  ending  September  30, a  Periodic  Reporting  Certificate  of the chief
financial officer of KMC Holdings setting forth the calculations contemplated in
ARTICLE VII, the number of Completed  Systems and certifying as to the fact that
such Person has examined the  provisions of this  Agreement and that no Event of
Default or any  Default,  shall have  occurred and be  continuing  or if such an
event has  occurred,  a statement  explaining  its nature and extent and setting
forth the steps the Borrowers propose to take to cure such Event of Default;

     (e) (i) not later than December 1 of each calendar year,  consolidating and
consolidated  projected  and annual  revenue  and income  statements,  including
detailed revenue and expense statements, balance sheets and cash flow statements
for  KMC  Holdings  for  the  succeeding  fiscal  year,  such  statements  to be
reasonably  acceptable  to the Agents,  and (ii) not later than July 1, 1999, an
annual  operating budget on a monthly basis for such calendar year and not later
than January 15 of each  calendar  year  beginning  January 15, 2000,  an annual
operating  budget on a quarterly  basis for such calendar  year,  with each such
budget to be in compliance with the KMC III Tier III Plan;

     (f) to the  Agent,  all  material  agreements  or  licenses  affecting  the
Governmental  Approvals  of the any  Borrower or any System  promptly  after any
execution, or material amendment thereto;

     (g) to the Agent,  promptly upon their  becoming  available,  copies of any
material periodic or special documents, statements or other information filed by
any Borrower  with the FCC, PUC or other  Governmental  Authority in  connection
with the  construction  and/or  operation  of any System or with  respect to the


                                       57
<PAGE>

transactions  contemplated  by any of the  Loan  Documents,  and  copies  of any
material notices and other material communications from the FCC, PUC or from any
other Governmental Authority;

     (h) immediately upon any officer of any Borrower obtaining knowledge of any
condition  or event  (i)  which  either  constitutes  an Event of  Default  or a
Default,  (ii) which renders any  representation  or warranty  contained  herein
materially false or misleading,  or when made,  renders any document  materially
false or  misleading,  or (iii) which would result in any financial  results for
any fiscal year to materially  deviate from the financial  results projected for
such  fiscal  year in the KMC III  Tier III  Plan or the  financial  projections
described in CLAUSE (E) above, a certificate  signed by an authorized officer of
such Borrower specifying in reasonable detail the nature and period of existence
thereof and what  corrective  action such Borrower has taken or proposes to take
with respect thereto;

     (i)  within  thirty  (30) days  after the end of each  fiscal  year of such
Borrower,  a certificate  signed by an  authorized  officer of such Borrower (x)
setting  forth all the Real  Property,  Easements,  licenses,  rights of way and
other  similar  interests  in real  property  acquired  by such  Borrower in the
preceding  year and (y)  confirming  that no  Default  or Event of  Default  has
occurred and is continuing;

     (j)  evidence  in the  manner set forth in  SECTION  5.04(E)  of  insurance
complying with SECTION 5.04;

     (k) following the written  request of the Agent,  not later than forty-five
(45) days after the end of each fiscal month, reports on accounts receivable and
accounts payable of such Borrower in such detail and format as may be reasonably
requested by the Agent;

     (l) promptly upon the filing thereof, copies of all registration statements
and annual,  quarterly,  monthly or other regular reports which such Borrower or
KMC Holdings files with the Securities and Exchange Commission; and

     (m)  promptly  from  time to time  such  other  information  regarding  the
operations  (including,  without limitation,  construction  budgeting and System
completion),  business  affairs and  condition  (financial or otherwise) of such
Borrower or KMC Holdings as the Agent may reasonably request.

     SECTION 5.07.  LITIGATION AND OTHER  NOTICES.  Such Borrower shall give the
Agent prompt written notice upon obtaining  knowledge of the following:  (a) all
Events of Default or Defaults  and all events of default or any event that would
become an event of default upon notice or lapse of time or both under any of the
terms or  provisions of any note, or of any other  evidence of  indebtedness  or
agreement or contract  governing the borrowing of money in excess of $250,000 in
the aggregate of such  Borrower;  (b) any levy,  attachment,  execution or other
process against any of its property or assets, real or personal, in an amount in
excess of  $250,000  of such  Borrower;  (c) the filing or  commencement  of any
action, suit or proceeding by or before any court or any Governmental  Authority


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which, if adversely  determined  against it, would result in a Material  Adverse
Effect; (d) any material adverse notice,  letter or other  correspondence of any
kind  from the FCC or the PUC  relating  to the  Governmental  Approvals  or any
System; (e) any default under any other material license,  agreement or contract
to which it is a party;  and (f) any matter which has resulted in, or which such
Borrower  reasonably  believes will result in, a Material Adverse Effect on such
Borrower.

     SECTION 5.08. MORTGAGES;  LANDLORD CONSENTS; LICENSES AND OTHER AGREEMENTS.
As security for the Obligations,  such Borrower,  with respect to each Completed
System,  and each System which is not a Completed  System but which is requested
to be financed with the proceeds of Loans (a) shall execute promptly and deliver
to the  Collateral  Agent (1)  Mortgages  in favor of the  Collateral  Agent and
satisfactory  to the Agents with respect to any real property  purchased by such
Borrower on which a switch or network  operating center is located,  and, at the
request of the Agents,  with respect to any other real property purchased by the
Borrower,  together  with  lender's  title  policies for any such real  property
satisfactory to the Agents, if requested by the Agents, (2) leasehold  mortgages
or  collateral  assignments  of  leases,   landlord  waivers  or  consents,  and
appropriate Uniform Commercial Code fixture financing  statements,  in each case
satisfactory  to the Agents  with  respect to any real  property  leased by such
Borrower and on which Switch Equipment or a network operating center is located,
and at the request of the Agents, with respect to any other leased real property
of  such  Borrower,   (3)  Mortgages  or  collateral  assignments  and  consents
satisfactory to the Agents with respect to such Borrower's  Easements and rights
of way, as requested by the Agents,  (4)  collateral  assignments  of leases and
lessor consents, satisfactory to and as requested by the Agents, with respect to
any  long-haul  fiber  leased  by such  Borrower  and (5) with  respect  to each
Completed  System or System,  at all times from and after the date on which such
Borrower requests funding for such other Completed System or System,  collateral
assignments and within 45 days thereafter the consents to such  assignments from
the applicable third Persons, for each other material lease,  license,  contract
or other  agreement or  instrument  entered into by the Borrower  after the date
hereof, as required by the Collateral Agent and (b) (1) update Schedule 1 to the
Collateral  Assignment of Licenses to cover all Governmental  Approvals obtained
by such  Borrower  after the Closing  Date and  agreements  entered into by such
Borrower  after the  Closing  Date with third  Persons,  (2) obtain  consents to
collateral  assignments from the licensors  granting the Governmental  Approvals
referred to in CLAUSE (B)(1) above and from those third  Persons  referred to in
CLAUSE  (B)(1)  above  that  are  specified  by the  Agents,  such  consents  to
collateral assignment to be in form and substance satisfactory to the Agents and
(3) update Schedule 1 to the Collateral Assignment of Leases to cover all leases
referred to in CLAUSE (A)(2) above.

     SECTION 5.09.  ERISA.  Such Borrower shall comply in all material  respects
with the applicable provisions of ERISA and furnish to the Agent, (i) as soon as
possible,  and in any event within  thirty (30) days after such  Borrower or any
officer of such Borrower knows or has reason to know that any  Reportable  Event
with respect to any Plan has occurred or any Termination  Event has occurred,  a
statement  of an  officer  of such  Borrower  setting  forth  details as to such
Reportable  Event or  Termination  Event  and the  corrective  action  that such
Borrower  proposes to take with  respect  thereto,  together  with a copy of the


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<PAGE>

notice of any such  Reportable  Event given to the PBGC, and (ii) promptly after
receipt  thereof,  a copy of any notice such  Borrower may receive from the PBGC
relating  to the  intention  of the PBGC to  terminate  any Plan or to appoint a
trustee to administer any such Plan.

     SECTION 5.10.  ACCESS TO PREMISES AND RECORDS.  Such Borrower  shall permit
representatives  of the  Agents  to have  access  to such  Borrower's  books and
records and to the  Collateral  and the premises of such  Borrower at reasonable
times upon reasonable notice and to make such excerpts from such records as such
representatives deem necessary and to inspect the Collateral.

     SECTION  5.11.  DESIGN  AND  CONSTRUCTION.   Such  Borrower  shall  design,
construct,  equip and operate its Systems  substantially as previously disclosed
to Lenders in the KMC III Tier III Plan and in accordance with prudent  industry
standards.

     SECTION 5.12.  ENVIRONMENTAL  NOTICES.  If such Borrower  shall (a) receive
written  notice  that any  violation  of any  Environmental  Law may  have  been
committed  or is about to be  committed by such  Borrower,  (b) receive  written
notice that any  administrative or judicial complaint or order has been filed or
is  about  to  be  filed  against  such  Borrower  alleging  violations  of  any
Environmental  Law or requiring  such  Borrower to take any action in connection
with any Release of any  Contaminant  into the  environment,  or (c) receive any
written notice from a Governmental Authority or private party alleging that such
Borrower may be liable or responsible for costs associated with a response to or
cleanup of a Release or any damages caused thereby,  such Borrower shall provide
the Agent with a copy of such notice  within  twenty (20)  Business Days of such
Borrower's receipt thereof.

     SECTION 5.13.  AMENDMENT OF ORGANIZATIONAL  DOCUMENTS.  Such Borrower shall
notify the Agent and the Collateral Agent of any amendment to its Certificate of
Incorporation  or other  organizational  documents  within  ten (10) days of the
occurrence of any such event,  and provide the  Collateral  Agent with copies of
any  amendments  certified by the  secretary  of such  Borrower and of all other
relevant  documentation.  Such Borrower shall promptly deliver to the Collateral
Agent such financing  statements  executed by such Borrower which the Agents may
request as a result of any such event.

     SECTION  5.14.   THIRD  PARTY   AGREEMENTS   AND  DELIVERY  AND  ACCEPTANCE
Certificates.  Such Borrower shall provide the Collateral  Agent with (i) copies
of all interconnection agreements, right of way agreements, easement agreements,
real property leases,  construction  agreements,  equipment purchase agreements,
fiber leases,  telephone line leases,  state and local franchise  agreements and
other agreements with municipalities, that in each case relate to each System of
such Borrower,  promptly after execution of each such agreement;  PROVIDED, that
with respect to certain of the foregoing  categories of agreements  specified by
the Agent or the Requisite Lenders,  such Borrower shall be permitted to provide
the Agent with  inventories  of the  particular  types of  agreements in lieu of
delivering copies of the agreements,  which inventories shall be (x) in form and
substance  satisfactory to the Agents and (y) updated by the applicable Borrower


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<PAGE>

promptly  following  the  execution  of any  additional  agreement  of the  type
inventoried;  PROVIDED,  FURTHER,  that nothing in the  foregoing  proviso shall
limit the Collateral Agent's ability to, at any time, request and receive a copy
of any third party agreement from the applicable  Borrower,  and (ii) (A) if the
Lenders are funding a Completed  System,  a delivery and acceptance  certificate
substantially  in the form of EXHIBIT P hereto  with  respect to such  Completed
System  and (B)  otherwise,  copies  of  delivery  and  acceptance  certificates
substantially  in the form of  EXHIBIT  P hereto  with  respect  to each item of
Telecommunications  Equipment  with an  invoiced  purchase  price in  excess  of
$250,000, in each case, where such certificates are not required to be delivered
to the Agent  pursuant to SECTION  2.03(A),  promptly  after  completion of such
System or  acceptance of such item of Equipment,  as  applicable.

     SECTION  5.15.  ACCOUNTS  PAYABLE.  Such  Borrower  shall  pay  each of its
accounts  payable in accordance with its practices as of the Closing Date but in
any event no later than sixty (60) days after the due date, PROVIDED,  that such
Borrower  shall  not be  required  to pay  any  account  payable  as long as the
validity  thereof  shall be  contested in good faith by  appropriate  protest or
proceedings  and such  Borrower  shall  have set aside  adequate  reserves  with
respect thereto in accordance with GAAP.

     SECTION  5.16.  INTELLECTUAL  PROPERTY.  Such  Borrower  shall  enter  into
Intellectual Property Documents, in form and substance satisfactory to the Agent
and the Requisite Lenders,  with respect to all the Intellectual  Property owned
by such Borrower.

     SECTION  5.17.  FISCAL YEAR.  Such  Borrower  shall  maintain a fiscal year
ending on December 31.

     SECTION  5.18.  COMPLETED  SYSTEMS.  On or prior to December 31, 1999,  the
Borrowers shall have Completed  Systems in ten (10) Tier III Cities. On or prior
to December 31, 2000, the Borrower shall have Completed  Systems in twenty-seven
(27) Tier 3 III Cities.

     SECTION  5.19.  YEAR 2000  PROBLEMS.  On or prior to March 31,  1999,  each
Borrower shall complete and deliver to the Agent a Year 2000 Corrective Plan. On
or prior to April 30, 1999,  each Borrower shall  implement Year 2000 Corrective
Actions.  On or prior to June 30, 1999,  each Borrower  shall complete Year 2000
Corrective  Actions  and  Year  2000  Implementation  Testing.  On or  prior  to
September 30, 1999, each Borrower shall eliminate all Year 2000 Problems, except
where the failure to correct the same could not reasonably be expected to have a
Material Adverse Effect, individually or in the aggregate.

     SECTION 5.20.  SUBSIDIARY  GUARANTEES AND PLEDGES.  Such Borrower shall (i)
cause each  Person  which  becomes a  Subsidiary  of such  Borrower to execute a
guaranty of the Obligations  substantially in the form of EXHIBIT G hereto,  but
exclusive of any financial covenants,  (ii) execute a contribution  agreement in
form and  substance  acceptable to the Agent,  (iii) execute a Pledge  Agreement
pursuant to which all the Equity Interests in such Person will be pledged to the
Collateral  Agent,  PROVIDED  that  in the  event  such  Person  is an  indirect
Subsidiary  of  such  Borrower,   such  Borrower  shall  cause  each  applicable


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Subsidiary of such Borrower to pledge all the Equity Interests in such Person to
the Collateral Agent, (iv) execute a security  agreement  pursuant to which such
Person shall  provide to the  Collateral  Agent for the benefit of the Lenders a
Lien on and security  interest in all of such Person's  tangible and  intangible
personal property,  real property leaseholds,  fixtures, and easement rights and
(v) enter  into  such  other  agreements  and  provide  such  other  instruments
(including opinions of counsel) as the Agent may reasonably request.

     SECTION 5.21.  ACCOUNTING;  MAINTENANCE  OF RECORDS.  Such  Borrower  shall
maintain a system of accounting  established and administered in accordance with
GAAP.  Such Borrower  shall keep and maintain in all material  respects,  proper
books of record and account in which  entries in  conformity  with GAAP shall be
made of all dealings and transactions in relation to their respective businesses
and activities.

     SECTION 5.22. FURTHER  ASSURANCES.  Such Borrower agrees to do such further
acts and things and to execute and deliver to the Agent or the Collateral  Agent
such  additional  assignments,  agreements,  powers  and  instruments,  at  such
Borrower's  expense, as the Agent or the Collateral Agent may reasonably require
or deem  advisable to carry into effect the purposes of this  Agreement  and the
other  Loan  Documents  or to better  assure and  confirm  unto the Agent or the
Collateral Agent its rights, powers and remedies hereunder and thereunder.


                                   ARTICLE VI
                               NEGATIVE COVENANTS

     Each Borrower covenants and agrees with the Agent, the Collateral Agent and
the  Lenders  that as long  as  this  Agreement  shall  remain  in  effect,  any
Commitment hereunder shall be outstanding or any Obligations  hereunder or under
any of the Loan Documents  shall be unpaid,  unless the Requisite  Lenders shall
have otherwise given prior written consent:

     SECTION 6.01. LIENS, ETC. Such Borrower shall not create,  incur, assume or
suffer to exist, directly or indirectly, any Lien upon or with respect to any of
its properties or the Collateral,  now owned or hereafter acquired,  or upon any
proceeds, products, issues, income or profits therefrom except for the following
("PERMITTED LIENS"):

          (i) Liens granted pursuant to the Loan Documents;

          (ii) Liens  securing  any  Purchase  Debt to the extent that the Liens
     cover only the subject assets purchased with such Purchase Debt;

          (iii) Liens for taxes,  assessments or governmental  charges or levies
      on  such  Borrower's  property  if the  same  shall  not at  the  time  be
      delinquent  or  thereafter  can be  paid  without  penalty,  or are  being
      diligently contested in good faith and by appropriate  proceedings and for
      which such Borrower shall have set aside reserves on its books as required
      by GAAP;


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<PAGE>

           (iv)  Liens   imposed  by  law,   such  as   landlord's,   carrier's,
      warehousemen's  and  mechanic's  liens,  which  liens  shall be  waived in
      writing to the extent  waivable,  and with respect to obligations  not yet
      due or being  contested in good faith by  appropriate  proceedings  and in
      either case for which the such Borrower  shall have set aside  reserves on
      its books as required by GAAP;

            (v)  Liens  arising  out of  pledges  or  deposits  under  workmen's
      compensation  laws,  unemployment  insurance,  old age pensions,  or other
      social security benefits other than any Lien imposed by ERISA; or

           (vi)  Liens  incurred  or  deposits  made in the  ordinary  course of
      business to secure surety bonds provided that such Liens shall extend only
      to cash collateral for such surety bonds.

     SECTION 6.02. USE OF PROCEEDS.  Such Borrower shall not use the proceeds of
any Loan for any purpose other than as provided in SECTION 2.02.

     SECTION 6.03.  SALE OF ASSETS,  CONSOLIDATION,  MERGER,  ETC. Such Borrower
shall not consolidate with or merge into any other Person,  or without the prior
written consent of the Requisite  Lenders,  sell,  lease,  transfer or otherwise
dispose of any  Collateral,  except for (a) sales of  inventory  in the ordinary
course of business and (b) any sale,  lease,  transfer or other  disposition  of
assets no longer  used or useful in the  conduct  of the  Business  for the fair
market value thereof not to exceed $250,000 in the aggregate.

     SECTION 6.04.  DIVIDENDS AND DISTRIBUTIONS;  SALE OF EQUITY INTERESTS.  (a)
Such  Borrower  shall not  purchase,  redeem or  otherwise  acquire  any  Equity
Interest in such  Borrower,  declare or make or pay any  dividends in any fiscal
year of such  Borrower  on any class or  classes of stock or  membership  units,
return capital of the Borrower to its  stockholders  or members,  make any other
distribution  on or in respect  of any  shares of any class of capital  stock or
membership  units of such Borrower or make other payments to any  shareholder or
member of such Borrower  (including in the form of compensation,  loan,  expense
reimbursement or management fee); PROVIDED, that provided no Event of Default or
Default has  occurred and is  continuing  or would  result  therefrom,  (i) such
Borrower may make payments of fees or compensation for services which are in the
nature of  management,  corporate  overhead  or  administrative  services to the
extent  permitted by SECTION 6.05,  (ii) provided  further,  that (A) during the
previous  four  fiscal  quarters  of the  Borrowers,  EBITDA  equaled  at  least
eighty-five  percent  (85%) of  "Estimated  EBITDA" (as defined  below) and such
Estimated  EBITDA is a positive  number,  (B) during the  previous  four  fiscal
quarters of the  Borrowers,  the  Borrowers  maintained a Fixed Charge  Coverage
Ratio  of at least  1.10 to  1.00,  (C) with  respect  to the next  four  fiscal


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<PAGE>

quarters of the  Borrowers,  EBITDA for the  Borrower,  as projected in the most
recent financial information furnished pursuant to SECTION 5.06(E), is projected
to equal at least eighty-five  percent (85%) of Estimated EBITDA for such fiscal
quarters and such Estimated EBITDA is a positive number, and (D) with respect to
the next four fiscal quarters of the Borrowers,  the Fixed Charge Coverage Ratio
as projected in the most recent financial information submitted to the Agent and
the Lenders pursuant to SECTION 5.06(E),  is projected to equal at least 1.10 to
1.00,  the  Borrower  may pay to KMC  IHC  and  KMC IHC may pay to KMC  Holdings
dividends  in the amount  necessary  to make  scheduled  principal  and interest
payments  under the  Indenture,  and any other  amounts due under the  Indenture
(including  Sections  4.14 and 7.07  thereunder).  Estimated  EBITDA  shall mean
"EBITDA" as calculated in the KMC III Tier III Plan. (b) Such Borrower shall not
sell  or  issue  any  additional  Equity  Interests  other  than  to KMC  IHC in
connection  with the  contribution of additional cash equity into such Borrower;
PROVIDED that any such Equity  Interests are pledged to the Collateral Agent for
the benefit of the Agents and the Lenders.

     SECTION  6.05.  MANAGEMENT  FEES AND  PERMITTED  CORPORATE  OVERHEAD.  Such
Borrower  shall  not  pay or  enter  into  any  arrangement  to pay  any  fee or
compensation,  or  reimburse  expenses  of, an Affiliate or any other Person for
services  which  are  in  the  nature  of  management,   corporate  overhead  or
administrative  services  except to the extent  provided for in the KMC III Tier
III Plan,  the  Management  Agreement or as described on SCHEDULE  6.11 attached
hereto.

     SECTION 6.06. GUARANTEES; THIRD PARTY SALES AND LEASES. Such Borrower shall
not directly or indirectly, (i) assume any obligation or indebtedness of another
Person,  (ii) make or assume any  Guarantee,  or (iii)  finance  any third party
sales or leases, other than its obligations under SECTION 2.13.

     SECTION 6.07. INVESTMENTS. Such Borrower shall not, directly or indirectly,
make any Investments except:

            (i)   Temporary Cash Investments;

           (ii) Investments in certificates of deposit,  repurchase  agreements,
      money market or other cash management  accounts,  bankers  acceptances and
      short term Eurodollar time deposits with financial  institutions  having a
      long term deposit  rating of at least A+ from Moody's  Investors  Service,
      Inc. or Standard & Poor's Ratings Group, respectively;

          (iii)  Investments  in  commercial  paper  rated  P1 or A1 by  Moody's
      Investors Service, Inc. or Standard & Poor's Ratings Group respectively.

     SECTION 6.08.  SUBSIDIARIES.  Such Borrower shall not create or acquire any
Subsidiary other than with the prior written consent of the Requisite Lenders.



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     SECTION 6.09. PERMITTED  ACTIVITIES.  Such Borrower shall not engage in any
business or activity other than the operation of its Business in accordance with
the KMC III Tier III Plan  without the prior  written  consent of the  Requisite
Lenders.

     SECTION 6.10.  DISPOSITION OF LICENSES,  ETC. Such Borrower shall not sell,
assign,  transfer or  otherwise  dispose or attempt to dispose of in any way any
Governmental  Approval or any other licenses,  permits or approvals (i) prior to
the Trigger  Date,  material,  in each case,  to the  operation of any System in
accordance with the KMC III Tier III Plan and (ii) on or after the Trigger Date,
the assignment, transfer or disposal of which would result in a Material Adverse
Effect, without the prior written consent of the Requisite Lenders.

     SECTION  6.11.  TRANSACTIONS  WITH  AFFILIATES.  Except for the  Management
Agreement,  the Tax Sharing  Agreement  or as set forth on SCHEDULE  6.11,  such
Borrower  shall  not  directly  or  indirectly,   enter  into  any  transaction,
including,  without  limitation,  leases or other agreements for the purchase or
use of any goods or services, with any Affiliate,  except in the ordinary course
of and pursuant to reasonable requirements of such Borrower's business upon fair
and reasonable  terms no less favorable to such Borrower than it would obtain in
a comparable arm's length transaction with an unaffiliated Person.

     SECTION 6.12. ERISA. Such Borrower shall not:

     (A) engage,  or permit any ERISA  Affiliate  to engage,  in any  prohibited
transaction  described  in  Section  406 of ERISA or 4975 of the IRC for which a
statutory or class  exemption is not  available or a private  exemption  has not
been previously obtained from the United States Department of Labor;

     (B)  permit to exist any  accumulated  funding  deficiency  (as  defined in
Section 302 of ERISA and Section 412 of the IRC), whether or not waived;

     (C) fail,  or permit any ERISA  Affiliate to fail,  to pay timely  required
contributions  or annual  installments  due with  respect to any waived  funding
deficiency to any Benefit Plan;

     (D) terminate, or permit any ERISA Affiliate to terminate, any Benefit Plan
which would result in any material  liability of such Borrower under Title IV of
ERISA;

     (E) fail to make any  contribution  or  payment to any  Multiemployer  Plan
which such the Borrower or any ERISA Affiliate may be required to make under any
agreement relating to such Multiemployer Plan, or any law pertaining thereto;

     (F) amend,  or permit any ERISA  Affiliate to amend, a Plan resulting in an
increase  in  current  liability  for the plan year such that such  Borrower  is
required to provide  security to such Plan under Section  401(a)(29) of the IRC;
or



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     (G)  fail,  or permit  any ERISA  Affiliate  to fail,  to pay any  required
installment  under  Section  412 of the IRC on or  before  the due date for such
installment or other payment.

     SECTION  6.13.  INDEBTEDNESS.  Such  Borrower  shall  not  enter  into  any
commitment for, create or suffer to exist any Debt or any other  obligations for
the deferred purchase price of property or services except:

          (i) the Obligations;

          (ii) the obligations arising under any Loan Document;

          (iii)  obligations  under leases  contemplated in the KMC III Tier III
     Plan and the Schedules to this Agreement;

          (iv) obligations  under Capitalized  Leases,  financing leases or loan
     agreements  or similar debt  documents  with respect to the  financing  and
     contemplated  purchase  of office  equipment,  vehicles  and  non-essential
     telecommunications  equipment,  not to exceed an  aggregate  amount for the
     Borrowers of $5,000,000 at any time ("PURCHASE Debt");

          (v)  additional  unsecured  Debt  subordinate  to the  payment  of the
     Obligations on terms and conditions  approved by the Agents but in no event
     to exceed an aggregate  amount for the Borrowers of $1,000,000 in principal
     amount outstanding at any time;

          (vi)  performance   bonds  executed  solely  in  connection  with  the
     construction of Systems in the ordinary course of business; and

          (vii) Qualified Intercompany Loans.

     SECTION 6.14.  PREPAYMENT AND DEBT  DOCUMENTS.  (a) Such Borrower shall not
voluntarily prepay any Debt, except the Obligations in accordance with the terms
hereof.

     (b) Such Borrower shall not amend any agreement relating to Debt other than
the  Obligations  in any manner which would  increase  the amount of  principal,
interest or fees on such debt, or accelerate any payments of such Debt.

     SECTION 6.15.  SALE AND LEASEBACK  TRANSACTIONS.  Such Borrower  shall not,
directly or indirectly, enter into any arrangement with any Person providing for
such Borrower to lease or rent  property that any Borrower,  KMC Holdings or KMC
IHC has sold or will sell or otherwise transfer to such Person.



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<PAGE>

     SECTION 6.16. MARGIN REGULATION.  Such Borrower shall not use or permit any
other  Person to use any portion of the  proceeds of any credit  extended  under
this  Agreement in any manner which might cause the  extension of credit made by
any Lender or the  application of such proceeds to violate the Securities Act of
1933 or Securities Exchange Act of 1934 (or any successor statute) or to violate
Regulation G,  Regulation  U, or  Regulation  X, or any other  regulation of the
Federal  Reserve Board,  in each case, as in effect on the date or dates of such
extension of credit and such use of proceeds.

     SECTION 6.17.  MANAGEMENT AND TAX SHARING  AGREEMENTS.  Such Borrower shall
not amend the  Management  Agreement or the Tax Sharing  Agreement in any manner
that would have a material  adverse effect on the Lenders,  the Borrowers or the
transactions contemplated hereby.


                                   ARTICLE VII
                               FINANCIAL COVENANTS

     Such  Borrower  covenants and agrees with the Agent and the Lenders that as
long as this Agreement shall remain in effect, any Commitment hereunder shall be
outstanding  or the  Obligations  hereunder  or under any of the Loan  Documents
shall be unpaid,  unless the Requisite  Lenders shall have otherwise given prior
written consent:

     SECTION 7.01. FINANCIAL COVENANTS PRIOR TO ACHIEVING POSITIVE EBITDA. Until
the  earlier  to  occur of (i)  July 1,  2002  and  (ii)  the date on which  the
BORROWERS  shall  have  achieved  positive  EBITDA  for all the  Borrowers  on a
combined basis for two consecutive fiscal quarters as determined by reference to
the financial statements submitted pursuant to SECTION 5.06:

     (a) TOTAL DEBT TO  CONTRIBUTED  CAPITAL.  The  Borrowers  shall not, at any
time,  commencing with the fiscal quarter ending  December 31, 1999,  permit the
ratio of the Total Debt to Contributed Capital to exceed 1.00 to 1.00.

     (b)  MINIMUM  REVENUES.  As of the last  day of each  fiscal  quarter,  the
Borrowers  shall on a combined  basis have revenues at least equal to the lesser
of (i) 85% of the  amount  projected  for such date in the KMC III Tier III Plan
and (ii) such  projected  amount for such date minus  $1,000,000  in the KMC III
Tier III Plan, which amount is set forth in ITEM 1 on ANNEX B attached hereto.

     (c) EBITDA.

          (i) As of the last day of each fiscal  quarter  occurring  on or after
     the Closing Date to and including the fiscal quarter ending March 31, 2002,
     the  Borrowers  shall not permit the EBITDA  losses for the  Borrowers on a


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     combined  basis for the two  fiscal  quarters  then  ending  to exceed  the
     greater of (A) 115% of such losses  projected for each such date in the KMC
     III Tier III Plan,  which amount is set forth in ITEM 2 on ANNEX B attached
     hereto  and (B)  $5,000,000  less  than  the  aggregate  amount  of  EBITDA
     projected for each such date in the KMC III Tier III Plan,  which amount is
     set forth in ITEM 2 on ANNEX B attached hereto.

          (ii)  As of the  last  day of  each  fiscal  quarter  thereafter,  the
     Borrowers shall not permit EBITDA for the Borrowers on a combined basis for
     the two fiscal  quarters then ending to be less than the greater of (A) 85%
     of the  amount of EBITDA  projected  for each such date in the KMC III Tier
     III Plan,  which  amount is set forth in ITEM 3 on ANNEX B attached  hereto
     and (B) $5,000,000 less than the aggregate  amount of EBITDA  projected for
     each such date in the KMC III Tier III Plan,  which  amount is set forth as
     ITEM 3 on ANNEX B attached hereto.

     (d) CAPITAL  EXPENDITURES.  As of the last day of each fiscal quarter,  the
Borrowers shall not permit capital expenditures on a combined,  cumulative basis
beginning on the Closing Date to exceed the amounts set forth in ITEM 4 on ANNEX
B attached hereto.

     (e)  MINIMUM  ACCESS  LINES.  As of the  last  day of each  fiscal  quarter
beginning with the fiscal quarter ending September 30, 2000, the Borrowers shall
have in place at least seventy-five  percent (75%) of the Access Lines projected
for each such date in the KMC III Tier III Plan,  which amounts are set forth in
ITEM 5 on Annex B attached hereto.

     SECTION 7.02.  FINANCIAL  COVENANTS AFTER ACHIEVING POSITIVE EBITDA. On and
after the earlier of (i) July 1, 2002,  and (ii) the date on which the Borrowers
have achieved  positive  EBITDA on a combined basis for two  consecutive  fiscal
quarters as  determined  by  reference  to the  financial  statements  submitted
pursuant to SECTION 5.06:

     (a)  MAXIMUM  TOTAL  LEVERAGE  RATIO.  As of the  last  day of each  fiscal
quarter,  commencing  with the fiscal  quarter  ended  September  30, 2002,  the
Borrowers  shall not permit  the Total  Leverage  Ratio to be  greater  than the
following:

<TABLE>
<CAPTION>
                                               MAXIMUM TOTAL
FISCAL QUARTER ENDING                          LEVERAGE RATIO  
---------------------                          --------------
<S>                                            <C>     

9/30/02                                        10.0 to 1.0
12/31/02                                        8.0 to 1.0
3/31/03                                         5.0 to 1.0
6/30/03                                         5.0 to 1.0
9/30/03                                         4.0 to 1.0
12/31/03                                        3.0 to 1.0
Last Day of Each Fiscal
  Quarter Thereafter                            2.0 to 1.0
</TABLE>



                                       68
<PAGE>

     (b) MINIMUM DEBT SERVICE  COVERAGE RATIO. As of the last day of each fiscal
quarter,  commencing with the fiscal quarter ended March 31, 2003, the Borrowers
shall not permit the ratio of (1) EBITDA for the  Borrowers on a combined  basis
for the most recently  ended six month period,  to (2) Interest  Expense for the
most recently ended six month period plus Principal Payments required during the
most recently ended six month period to be less than the following:

<TABLE>
<CAPTION>
                                               MINIMUM DEBT SERVICE
FISCAL QUARTER ENDING                          COVERAGE RATIO             
---------------------                          --------------------
<S>                                            <C>     

3/31/03                                         1.0 to 1.0
6/30/03                                         1.0 to 1.0
9/30/03                                         1.0 to 1.0
12/31/03                                        1.5 to 1.0
3/31/04                                         1.5 to 1.0
Last Day of Each Fiscal
  Quarter Thereafter                            2.0 to 1.0
</TABLE>

     (c) MINIMUM FIXED CHARGE  COVERAGE RATIO. As of the last day of each fiscal
quarter,  commencing  with the fiscal  quarter  ended  December  31,  2003,  the
Borrowers  shall not permit the ratio of (1) the product of two times the EBITDA
for the  Borrowers  on a combined  basis for the most  recently  ended six month
period to (2) Fixed Charges for the Borrowers  (such ratio being  referred to as
the "FIXED CHARGE COVERAGE RATIO") to be less than the following:

<TABLE>
<CAPTION>
                                               MINIMUM FIXED CHARGE
FISCAL QUARTER ENDING                          COVERAGE RATIO      
---------------------                          --------------------
<S>                                            <C>     

12/31/03 to 6/30/06                             0.5 to 1.0
Last Day of Each Fiscal
   Quarter Thereafter                           1.0 to 1.0
</TABLE>

     (d) MAXIMUM CONSOLIDATED  LEVERAGE RATIO. As of the last day of each fiscal
quarter,  commencing  with the fiscal  quarter  ended  September  30, 2002,  the
Borrowers shall not permit the ratio of (1) Consolidated Debt to (2) the product
of two times the sum of EBITDA for KMC Holdings and its Subsidiaries  (excluding
its Excluded  Subsidiaries) on a consolidated  basis for the most recently ended
six month period to be greater than the following:

                                       69
<PAGE>

<TABLE>
<CAPTION>
                                               MAXIMUM TOTAL
FISCAL QUARTER ENDING                          LEVERAGE RATIO      
---------------------                          --------------------
<S>                                            <C>     
9/30/02                                        35.0 to 1.0
12/31/02                                       25.0 to 1.0
3/31/03                                        20.0 to 1.0
6/30/03                                        15.0 to 1.0
9/31/03                                        12.0 to 1.0
12/31/03                                       11.0 to 1.0
3/31/04                                        10.0 to 1.0
6/30/04                                        10.0 to 1.0
9/30/04                                        10.0 to 1.0
12/31/04                                       10.0 to 1.0
3/31/05                                        10.0 to 1.0
6/30/05                                        10.0 to 1.0
9/30/05                                        10.0 to 1.0
12/31/05                                       10.0 to 1.0
3/31/06                                         8.0 to 1.0
6/30/06                                         8.0 to 1.0
9/30/06                                         8.0 to 1.0
12/31/06                                        8.0 to 1.0
Last Day of Each Fiscal Quarter
      Thereafter                                6.0 to 1.0
</TABLE>


                                  ARTICLE VIII
                               COLLATERAL SECURITY

     SECTION 8.01. COLLATERAL SECURITY. (a) To secure payment and performance of
all the Obligations, each of the Borrowers hereby grants to the Collateral Agent
for the benefit of the Agent, and the Lenders, to the extent permitted by law, a
right of setoff  against and a continuing  security  interest in and to all such
Borrower's tangible and intangible personal property, fixtures and real property
leasehold and easement  interests,  whether now owned or existing,  or hereafter
acquired or arising, wheresoever located, including, without limitation, all the
following  property,  or interests in property:  (a) all  machinery,  equipment,
Telecommunications  Equipment and fixtures,  including without limitation, fiber
optic and other  cables,  transmission  and  switching  equipment,  transmission
facilities,   connection   equipment,   conduit,   carrier   pipes,   junctions,
regenerators, power sources, alarm systems, electronics, structures and shelters
and  cable  laying  equipment;  (b) all  Accounts,  accounts  receivable,  other
receivables,  contract rights, leases,  chattel paper,  investment property, and
general intangibles of such Borrower (including,  without limitation,  goodwill,
going  concern  value,   patents,   trademarks,   trade  names,  service  marks,
blueprints,  designs,  product lines and research and  development),  including,
without  limitation,  all the  Borrower's  rights  under all  present and future
Governmental Approvals, permits, licenses and franchises heretofore or hereafter
granted to Borrower for the operation  and  ownership of its Systems  (excluding
licenses  and  permits  issued  by the FCC,  any PUC or any  other  Governmental
Authority  to the  extent,  and only to the  extent,  it is  unlawful to grant a
security  interest in such licenses and permits,  but including,  to the maximum
extent permitted by law, all rights incident or appurtenant to such licenses and


                                       70
<PAGE>

permits,  including,  without  limitation,  the right to  receive  all  proceeds
derived  from or in  connection  with the sale,  assignment  or transfer of such
licenses and permits), whether now owned or hereafter acquired by such Borrower,
or in which the Borrower may now have or hereafter acquire an interest;  (c) all
instruments, letters of credit, documents of title, policies and certificates of
insurance,   securities,   bank  deposits,   deposit  accounts  (including  such
Borrower's  Collection  Accounts),  checking  accounts and cash now or hereafter
owned by such  Borrower,  or in which such  Borrower  may now have or  hereafter
acquire  an  interest;  (d)  all  inventory,   including  all  merchandise,  raw
materials,  work in process, finished goods and supplies, now or hereafter owned
by the Borrower or in which the  Borrower  may now have or hereafter  acquire an
interest;  (e) all such Borrower's leasehold interest in any real property,  all
such  Borrower's  licenses,  easements  and  rights of way with  respect to real
property;  (f) all accessions,  additions or improvements to,  substitutions for
and all  proceeds  and products  of, all the  foregoing,  including  proceeds of
insurance;  and (g) all  books,  records,  documents,  computer  tapes and discs
relating to all the foregoing.

     SECTION  8.02.  PRESERVATION  OF  COLLATERAL  AND  PERFECTION  OF  SECURITY
INTERESTS  THEREIN.  Such Borrower  shall execute and deliver to the  Collateral
Agent for the  benefit  of the  Agents  and the  Lenders,  prior to the  Initial
Funding  Date,  and at any  time  or  times  thereafter  at the  request  of the
Collateral  Agent or the Requisite  Lenders,  all financing  statements or other
documents  (and pay the  cost of  filing  or  recording  the same in all  public
offices deemed  necessary by the Collateral  Agent),  as the Collateral Agent or
the Requisite  Lenders may request,  in a form  satisfactory  to the  Collateral
Agent and the  Requisite  Lenders,  to perfect and keep  perfected  the security
interest in the Collateral  granted by such Borrower to the Collateral  Agent or
to otherwise  protect and preserve the  Collateral  and the  Collateral  Agent's
security interest therein or to enforce the Collateral Agent's security interest
in the Collateral.  Should such Borrower fail to do so, the Collateral  Agent is
authorized to sign any such financing  statements as such Borrower's agent. Such
Borrower  further agrees that a carbon,  photographic  or other  reproduction of
this  Agreement  or  of a  financing  statement  is  sufficient  as a  financing
statement.

     SECTION  8.03.  APPOINTMENT  OF THE  COLLATERAL  AGENT  AS  THE  BORROWERS'
ATTORNEY-IN-FACT.   Such  Borrower   hereby   irrevocably   designates,   makes,
constitutes and appoints the Collateral Agent (and all persons designated by the
Collateral  Agent) as its true and lawful  attorney-in-fact,  and authorizes the
Collateral  Agent,  in its or the  Collateral  Agent's name,  to,  following the
occurrence and during the continuance of an Event of Default: (i) demand payment
of the Borrower's Accounts;  (ii) enforce payment of such Borrower's Accounts by
legal  proceedings or otherwise;  (iii) exercise all such Borrower's  rights and
remedies with respect to proceedings brought to collect an Account; (iv) sell or
assign any Account upon such terms, for such amount and at such time or times as
the Collateral Agent deems advisable; (v) settle, adjust, compromise,  extend or
renew an Account;  (vi) discharge and release any Account;  (vii) prepare,  file
and sign  such  Borrower's  name on any  proof of claim in  bankruptcy  or other
similar document  against an account debtor of such Borrower;  (viii) notify the
post office  authorities  to change the address for delivery of such  Borrower's
mail to an address  designated by the Collateral  Agent,  and open and deal with
all mail  addressed  to the  Borrower;  (ix) do all acts and  things  which  are
necessary,  in the  Collateral  Agent's  discretion (as advised by the Requisite
Lenders), to fulfill such Borrower's obligations under this Agreement;  (x) take


                                       71
<PAGE>

control  in any manner of any item of payment  or  proceeds  thereof;  (xi) have
access  to any  lockbox  or  postal  box  into  which  such  Borrower's  mail is
deposited;  (xii)  endorse  such  Borrower's  name upon any items of  payment or
proceeds  thereof  and  deposit the same in the  Collateral  Agent's  account on
account of the Obligations; (xiii) endorse such Borrower's name upon any chattel
paper, document, instrument,  invoice, or similar document or agreement relating
to any Account or any goods pertaining  thereto;  and (xiv) sign such Borrower's
name on any verification of Accounts and notices thereof to account debtors.

     SECTION 8.04.  COLLECTION OF ACCOUNTS AND RESTRICTED ACCOUNT  ARRANGEMENTS.
Such  Borrower  hereby  represents  and warrants  that each  depository  account
("COLLECTION ACCOUNT") now maintained by it at any bank ("COLLECTION AGENT") for
the collection of checks and cash constituting proceeds of Accounts and sales of
other  personal  property  which are part of the  Collateral  is  identified  on
SCHEDULE  8.04  attached  hereto and made a part  hereof.  With  respect to each
Collection Account, such Borrower shall, no later than the Initial Funding Date,
deliver to the Collateral Agent, a "RESTRICTED ACCOUNT AGREEMENT"  substantially
in the form of EXHIBIT N attached  hereto and made a part hereof,  duly executed
and delivered by such Borrower and the applicable Collection Agent,  authorizing
and directing  such  Collection  Agent,  upon receipt of written notice from the
Collateral  Agent that an Event of Default has  occurred and is  continuing,  to
deposit all checks and cash  received into a restricted  account (a  "RESTRICTED
ACCOUNT")  and remit all amounts  deposited  in such  Restricted  Account to the
Collateral  Agent's account specified in such Restricted Account Agreement until
such time as the Collection  Agent  receives  written notice from the Collateral
Agent rescinding such instruction. Such Borrower shall, following the occurrence
and during the continuance of an Event of Default and any subsequent  request by
the Agent  therefor,  take such further  action as the  Collateral  Agent or the
Requisite  Lenders  may  reasonably  deem  desirable  to effect the  transfer of
exclusive  ownership and control of the  Restricted  Accounts and all Collection
Accounts  to  the  Collateral  Agent.   Until  all  the  Obligations  have  been
indefeasibly  paid in full, such Borrower agrees not to enter into any agreement
or execute and deliver any  direction  which would  modify,  impair or adversely
affect the rights and  benefits of the  Collateral  Agent  under any  Restricted
Account  Agreement.  Such  Borrower  shall not open,  establish  or maintain any
Collection Account (other than those identified on SCHEDULE 8.04 hereto) without
first having  delivered to the  Collateral  Agent a duly  executed and delivered
Restricted  Account  Agreement  with respect to such  Collection  Account.  Such
Borrower  shall  notify the  Collateral  Agent in writing not less than five (5)
days prior to the date it shall open or establish any  Collection  Account other
than an account described on SCHEDULE 8.04 hereto.

     SECTION  8.05.  CURE  RIGHTS.   Such  Borrower  expressly   authorizes  the
Collateral  Agent and the Agent,  and the  Collateral  Agent (as directed by the
Requisite  Lenders) and the Agent may, but shall not be required to, at any time
and from time to time, to take any and all action that it reasonably  determines
to be  necessary  or  desirable  to cure any default or  violation  (including a
payment  default) of such  Borrower in  connection  with any real estate  lease,
license agreement,  Governmental Approval or any other material lease, agreement
or contract entered into with respect to the Systems.




                                       72
<PAGE>

                                   ARTICLE IX
                           EVENTS OF DEFAULT; REMEDIES

     SECTION 9.01. EVENTS OF DEFAULT. The following events shall each constitute
an "EVENT OF DEFAULT":

     (a) any  Borrower  shall fail to pay the  principal  of or  interest on its
Notes or any other  amounts  payable  hereunder  or under any of the other  Loan
Documents when due,  whether as scheduled,  at a date fixed for  prepayment,  by
acceleration or otherwise, and five (5) Business Days shall have elapsed; or

     (b) any  Borrower  shall fail to observe  or  perform  any other  covenant,
condition  or  agreement  to be observed or  performed  by it in any of the Loan
Documents,  and such Borrower fails to cure such breach within ten (10) Business
Days after  written  notice  thereof  unless  the  breach  relates to a covenant
contained  in SECTIONS  5.04,  or ARTICLE VI (other than SECTION 6.05 or SECTION
6.07) or VII, in which case no notice or grace period shall apply, or unless the
breach relates to SECTION 5.06, in which case an Event of Default shall occur on
the thirtieth day following the breach  without any notice  requirement,  unless
the breach shall have been cured before such date; or

     (c) any  representation  or warranty made by any Borrower,  KMC Holdings or
KMC IHC in connection  with this  Agreement or any other Loan  Document,  or the
Loans  or any  statement  or  representation  made in any  report,  certificate,
financial  statement  or other  instrument  furnished  by or on  behalf  of such
Borrower,  KMC Holdings or KMC IHC pursuant to this  Agreement or any other Loan
Document,  shall prove to have been false or misleading in any material  respect
when made or delivered or when deemed made in  accordance  with the terms hereof
or thereof; or

     (d) any  Borrower,  KMC  Holdings or KMC IHC shall fail to make any payment
due (whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) on any other obligation for borrowed money in excess of $250,000 with
respect to any  Borrower or KMC IHC or in excess of  $1,000,000  with respect to
KMC Holdings, and such failure shall continue after the applicable grace period,
if any, specified in the agreement or instrument  relating to such indebtedness;
or any other default or event under any agreement or instrument  relating to any
indebtedness  for  borrowed  money in excess of  $250,000  with  respect  to any
Borrower or KMC IHC or in excess of $1,000,000 with respect to KMC Holdings,  or
any other  event,  shall occur and shall  continue  after the  applicable  grace
period, if any,  specified in such agreement or instrument if the effect of such
default  or event is to  accelerate,  or to  permit  the  acceleration  of,  the
maturity of such indebtedness in excess of $250,000 with respect to any Borrower
or KMC IHC or in excess of $1,000,000 with respect to KMC Holdings;  or any such
indebtedness in excess of $250,000 with respect to any Borrower or KMC IHC or in
excess of  $1,000,000  with respect to KMC Holdings  shall be declared to be due
and  payable or required  to be prepaid  (other  than by a  regularly  scheduled
required prepayment) prior to the stated maturity thereof; or



                                       73
<PAGE>

     (e) any Borrower, KMC Holdings or KMC IHC shall (i) apply for or consent to
the  appointment  of a receiver,  trustee,  custodian,  sequestrator  or similar
official for such Borrower, KMC Holdings or KMC IHC or for a substantial part of
its property, (ii) make a general assignment for the benefit of creditors, (iii)
become  unable,  or admit in  writing  its  inability,  to pay its debts as they
become due, (iv) voluntarily or involuntarily dissolve, liquidate or wind up its
affairs,  or (v) take action for the purpose of effecting any of the  foregoing;
or

     (f) a  proceeding  under any  bankruptcy,  reorganization,  arrangement  of
debts,  insolvency or receivership law is filed by or against any Borrower,  KMC
Holdings  or KMC IHC,  or any  Borrower  or KMC  Holdings  takes  any  action to
authorize any of the foregoing  matters,  and in the case of any such proceeding
instituted against any Borrower,  KMC Holdings or KMC IHC (but not instituted by
any  Borrower,  KMC Holdings or KMC IHC),  either such  proceeding  shall remain
undismissed  or unstayed for a period of 60 days or any of the actions sought in
such proceeding (including, without limitation, the entry of an order for relief
against, or the appointment of a receiver, trustee or other similar official for
any Borrower,  KMC Holdings or KMC IHC or any substantial  part of its property)
shall be granted or shall occur; or

     (g) a Termination  Event occurs which the  Requisite  Lenders in good faith
believe would subject any Borrower to a material liability; or

     (h) the plan  administrator of any Plan applies under Section 412(d) of the
IRC for a waiver of the minimum  funding  standards of Section 412(a) of the IRC
and the Requisite Lenders in good faith believe that the approval of such waiver
could subject any Borrower or any ERISA Affiliate to material liability; or

     (i) any of the  Governmental  Approvals or any other license,  Governmental
Approval or other governmental  consent or approval necessary for the continuing
operation  of the  Borrower  or any  System or any other  material  Governmental
Approval or approval  of or material  filing with the FCC,  any PUC or any other
Governmental  Authority  with  respect  to the  conduct by any  Borrower  of its
business and operations,  including its Business, shall not be obtained or shall
cease  to be in  full  force  and  effect,  which  in  respect  of  any  of  the
Governmental  Approvals  shall,  in the case of an order of the FCC,  any PUC or
other Governmental Authority having jurisdiction with respect thereto, revoking,
or  deciding  not to  renew,  any such  Governmental  Approval,  occur  upon the
issuance  of such  order,  and,  in the  case of any  other  order  revoking  or
terminating  any of the  Governmental  Approvals  or deciding  not to renew such
Governmental  Approvals prior to the termination thereof,  occur when such order
becomes final, and, in each case, with respect to any such event occurring on or
after the  Trigger  Date,  such event is also  reasonably  likely to result in a
Material Adverse Effect; or



                                       74
<PAGE>

     (j) the FCC, any PUC or any other Governmental  Authority,  by final order,
determines that the existence or performance of this Agreement or any other Loan
Document   will  result  in  a  revocation,   suspension  or  material   adverse
modification  of any of the  Governmental  Approvals  for any  System,  and with
respect  to any such  event  occurring  on and  after  the  Trigger  Date,  such
determination is reasonably likely to result in a Material Adverse Effect; or

     (k) for any reason any Loan Document  shall not be in full force and effect
or shall not be  enforceable  in  accordance  with its  terms,  or any  security
interest or lien granted pursuant  thereto with respect to Collateral  having an
aggregate value of $500,000 or greater shall fail to be perfected or to have its
intended  priority,  or any Borrower or any Affiliate  thereof shall contest the
validity of any Lien granted under, or shall disaffirm its obligations under any
Loan Document; or

     (l) any  Borrower  shall  default  under any Lucent  Purchase  Agreement or
Additional Purchase Agreement, which default shall not have been cured or waived
within the applicable grace period thereunder unless such Borrower is contesting
such default in good faith by appropriate  protest or proceedings and shall have
set aside adequate reserves in accordance with GAAP; or

     (m) for any reason,  any Borrower ceases to operate any System or ceases to
own any of its Governmental  Approvals necessary for the continuing operation of
any System, and with respect to any such event occurring on or after the Trigger
Date,  such  cessation  is  reasonably  likely to result in a  Material  Adverse
Effect; or

     (n) a judgment or judgments  for the payment of money in excess of $250,000
individually  or  $500,000  in the  aggregate  at any one time  shall  have been
rendered  against any Borrower and the same shall have remained  unsatisfied and
in effect for any period of sixty (60) days  during  which no stay of  execution
shall have been obtained; or

     (o) any Borrower is  enjoined,  restrained  or in any way  prevented by the
order of any court or  administrative  or regulatory  agency from conducting its
business in any material  respect with respect to any one or more of its Systems
and with respect to any such event  occurring on or after the Trigger Date, such
event is reasonably likely to result in a Material Adverse Effect; or

     (p) any  Borrower  becomes  subject to any  liabilities,  costs,  expenses,
damages,  fines or  penalties  which  could  reasonably  be  expected  to have a
Material  Adverse Effect arising out of or related to (i) any Remedial Action in
response to a Release or threatened  Release at any location of any  Contaminant
into the indoor or outdoor  environment  or (ii) any  material  violation of any
Environmental Law; or 

     (q) a Change of Control shall occur; or



                                       75
<PAGE>

     (r) KMC Holdings  shall fail to observe or perform any covenant,  condition
or agreement to be observed or performed by it in the KMC Holdings Guaranty; or

     (s) KMC IHC shall fail to observe or perform any  covenant,  conditions  or
agreement to be observed by it in the KMC IHC Guaranty; or

     (t) any Borrower  shall fail to observe or perform any covenant,  condition
or agreement to be observed or performed by it in any material  agreement (other
than a Loan  Document  or an  agreement  referred to in SECTION  9.01(D)),  such
Borrower  fails to cure such breach  within ten (10) Business Days after written
notice thereof,  and with respect to any such failure  occurring on or after the
Trigger Date, such failure is reasonably  likely to result in a Material Adverse
Effect, unless such Borrower is contesting such covenant, condition or agreement
by appropriate protest or proceedings and shall have set aside adequate reserves
in accordance with GAAP.

     SECTION 9.02. TERMINATION OF COMMITMENT;  ACCELERATION. Upon the occurrence
and at any time during the continuance of any Event of Default,  the Agent shall
upon direction from the Requisite Lenders:

     (a) by notice to the Borrowers, terminate Lenders' Commitment to make Loans
hereunder; or

     (b) by notice to the Borrower,  declare the  Obligations  to be immediately
due and payable,  whereupon all the  Obligations  shall be  immediately  due and
payable  without  further  notice  of any  kind,  PROVIDED,  that if an Event of
Default  described in SECTION 9.01(F) shall exist or occur,  all the Obligations
shall  automatically,  without declaration or notice of any kind, be immediately
due and payable and the Commitment shall be automatically terminated.

     SECTION  9.03.  WAIVERS.  Demand,  presentment,   protest  and  notices  of
nonpayment, protest, dishonor and acceptance are hereby waived by each Borrower.
Each Borrower also waives the benefit of all valuation,  appraisal and exemption
laws and the posting of any bond required of the Collateral  Agent, the Agent or
any Lender in connection with any judicial process to realize on the Collateral,
to enforce any judgment or other court order entered in favor of the  Collateral
Agent, the Agent or any Lender or to enforce by specific performance,  temporary
restraining order, or preliminary or permanent injunction, this Agreement or any
other Loan Documents. Each Borrower waives the right, if any, to the benefit of,
or  to  direct  the  application  of,  any  Collateral.   Each  Borrower  hereby
acknowledges  that none of the Collateral Agent, the Agent or any Lender has any
obligation  to resort to any  Collateral  or make claim against any other Person
before seeking payment or performance from any Borrower.



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     SECTION 9.04. RIGHTS AND REMEDIES GENERALLY.  If an Event of Default occurs
and is continuing, the Agent and the Collateral Agent shall have, in addition to
any other rights and remedies contained in this Agreement or in any of the other
Loan Documents, all the rights and remedies of a secured party under the Code or
other applicable  laws, which rights and remedies shall be cumulative,  and none
exclusive,  to the extent  permitted  by law. In addition to all such rights and
remedies,  the sale, lease or other  disposition of the Collateral,  or any part
thereof,  by the Collateral  Agent or the Agent after the occurrence of an Event
of  Default  may  be for  cash,  credit  or any  combination  thereof,  and  the
Collateral  Agent or the Agent may purchase all or any part of the Collateral at
public or, if permitted by law,  private sale,  and in lieu of actual payment of
such purchase  price,  may set off the amount of such purchase price against the
Obligations  then owing.  Any sales of the Collateral may be adjourned from time
to time with or without notice.  The Agent or the Collateral  Agent, may, in its
sole discretion, cause the Collateral to remain on the premises of any Borrower,
at the  expense  of the  Borrower,  pending  sale or  other  disposition  of the
Collateral.  The Agent or the  Collateral  Agent shall have the right to conduct
such sales on the premises of any Borrower, at the expense of the Borrowers,  or
elsewhere, on such occasion or occasions as it may see fit.

     SECTION 9.05. ENTRY UPON PREMISES AND ACCESS TO INFORMATION. If an Event of
Default occurs and is continuing,  the Agent and the Collateral Agent shall have
the right to enter upon the premises of any  Borrower  where any  Collateral  is
located (or is believed to be  located)  without any  obligation  to pay rent to
such Borrower,  or any other place or places where the Collateral is believed to
be located and kept, and render the Collateral unusable or remove the Collateral
therefrom to the premises of the Agent or the  Collateral  Agent or any agent of
the Agent or the Collateral  Agent, for such time as the Agent or the Collateral
Agent may desire,  in order  effectively to collect or liquidate the Collateral,
and/or the Agent or the  Collateral  Agent may require any  Borrower to assemble
the Collateral  and make it available to the Agent or the Collateral  Agent at a
place or places to be designated  by the Agent or the  Collateral  Agent.  If an
Event of Default  occurs and is continuing,  the Agent or the  Collateral  Agent
shall  have  the  right to  obtain  access  to any  Borrower's  data  processing
equipment,  computer hardware and software relating to the Collateral and to use
all of the foregoing  and the  information  contained  therein in any manner the
Agent or the Collateral Agent deems appropriate.

     SECTION 9.06.  SALE OR OTHER  DISPOSITION  OF COLLATERAL BY THE AGENT.  Any
notice  required  to be given by the  Agent or the  Collateral  Agent of a sale,
lease  or  other  disposition  or  other  intended  action  by the  Agent or the
Collateral Agent with respect to any of the Collateral which is deposited in the
United States mails, registered or certified, postage prepaid and duly addressed
to the Borrowers at the address  specified in SECTION  11.01,  at least ten days
prior to such proposed action shall constitute fair and reasonable notice to the
Borrowers  of any such  action.  The net  proceeds  realized by the Agent or the
Collateral  Agent upon any such sale or other  disposition,  after deduction for
the expense of retaking,  holding,  preparing for sale,  selling or the like and
the reasonable  attorneys' fees and legal expenses  incurred by the Agent or the
Collateral  Agent in connection  therewith,  shall be applied as provided herein
toward  satisfaction of the Obligations.  The Agent or the Collateral  Agent, as
applicable,  shall account to the  Borrowers for any surplus  realized upon such
sale or  other  disposition,  and the  Borrowers  shall  remain  liable  for any
deficiency. The commencement of any action, legal or equitable, or the rendering
of any  judgment or decree for any  deficiency  shall not affect the  Collateral
Agent's  security  interest  in the  Collateral.  The  Borrowers  agree that the


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Collateral Agent has no obligation to preserve rights to the Collateral  against
any other  parties.  The Agent and the  Collateral  Agent are  hereby  granted a
license or other right to use, without charge, the Borrowers'  labels,  patents,
copyrights,  rights of use of any name, trade secrets, trade names,  trademarks,
service marks and advertising matter, or any property of a similar nature, as it
pertains to the Collateral, and the Borrowers' rights under all licenses and all
franchise  agreements  shall  inure to the Agent's  and the  Collateral  Agent's
benefit until the Obligations are paid in full.

     SECTION 9.07. GOVERNMENTAL APPROVALS. In connection with the enforcement by
the Agent or the Collateral Agent of any remedies available to it as a result of
any Event of Default,  each  Borrower  agrees  that it shall join and  cooperate
fully with, at the request of the Agent or the  Collateral  Agent,  any receiver
referred to below  and/or the  successful  bidder or bidders at any  foreclosure
sale in a filing of an application  (and  furnishing any additional  information
that may be required in connection with such application or which the Agent, the
Collateral  Agent  or  the  Requisite  Lenders  may  believe  relevant  to  such
application)  with  the  FCC,  any  PUC and all  other  applicable  Governmental
Authorities, requesting their prior approval of (i) the operation or abandonment
of all or the portion of any System  and/or (ii) the transfer of control of such
Borrower or assignment of all licenses,  certificates,  Governmental  Approvals,
approvals  and permits,  issued to each Borrower by the FCC, any PUC or any such
Governmental  Authorities with respect to any System and the operation  thereof,
to the Agent or the Collateral  Agent, the receiver or to the successful  bidder
or bidders.  In  connection  with the  foregoing,  the Borrower  shall take such
further actions, and execute all such instruments,  as the Agent, the Collateral
Agent or the Requisite  Lenders  reasonably  deems necessary or desirable.  Each
Borrower  agrees  that  the  Agent  or the  Collateral  Agent  may  enforce  any
obligation  of such  Borrower  as set forth in this  section  by an  action  for
specific performance.  In addition, each Borrower hereby irrevocably constitutes
and appoints the Agent and the Collateral Agent and any agent or officer thereof
(which  appointment  is  coupled  with  an  interest)  as its  true  and  lawful
attorney-in-fact  with full irrevocable power and authority and in the place and
stead of such Borrower and in the name of such Borrower or in its own name, from
time to time in its discretion  after the occurrence and during the  continuance
of an Event of Default and in connection with the foregoing,  for the purpose of
executing  on  behalf  and in  the  name  of the  Borrower  any  and  all of the
above-referenced  instruments  and to take  any and all  appropriate  action  in
furtherance of the foregoing.  THE EXERCISE OF ANY RIGHTS OR REMEDIES  HEREUNDER
OR UNDER ANY OTHER LOAN  DOCUMENT  BY ANY  LENDER,  THE AGENT OR THE  COLLATERAL
AGENT THAT MAY REQUIRE FCC, ANY PUC OR ANY OTHER GOVERNMENTAL AUTHORITY APPROVAL
SHALL BE SUBJECT TO OBTAINING SUCH APPROVAL. PENDING THE RECEIPT OF ANY FCC, ANY
PUC OR ANY OTHER GOVERNMENTAL  AUTHORITY APPROVAL, NO BORROWER SHALL DO ANYTHING
TO DELAY,  HINDER,  INTERFERE  OR  OBSTRUCT  THE  EXERCISE OF THE AGENT'S OR THE
COLLATERAL AGENT'S RIGHTS OR REMEDIES HEREUNDER IN OBTAINING SUCH APPROVALS.



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     SECTION 9.08.  APPOINTMENT OF RECEIVER OR TRUSTEE.  In connection  with the
exercise of its remedies under this Agreement, the Agent or the Collateral Agent
may, upon the  occurrence of an Event of Default,  obtain the  appointment  of a
receiver or trustee to assume, upon receipt of all necessary judicial,  FCC, any
PUC or  other  Governmental  Authority  consents  or  approvals,  control  of or
ownership of any of the Governmental  Approvals.  Such receiver or trustee shall
have all rights and powers  provided  to it by law or by court order or provided
to the Agent or the Collateral Agent under this Agreement.  Upon the appointment
of such trustee or receiver,  the Borrowers  agree to  cooperate,  to the extent
necessary or appropriate,  in the expeditious preparation,  execution and filing
of an application to the FCC, any PUC or any other Governmental Authority or for
consent to the transfer of control or assignment of any Borrower's  Governmental
Approvals to the receiver or trustee.

     SECTION 9.09.  RIGHT OF SETOFF.  In addition to any rights now or hereafter
granted  under  applicable  law and not by way of limitation of any such rights,
upon the  occurrence and during the  continuance  of any Event of Default,  each
Lender and each holder of any Note is hereby authorized at any time or from time
to time,  without notice to any Borrower or to any other Person, any such notice
being hereby  expressly  waived,  to set off and to appropriate and to apply any
and  all  balances  held by it at any of its  offices  for  the  account  of any
Borrower (regardless of whether such balances are then due to such Borrower) and
any other  properties  or assets  any time held or owing by that  Lender or that
holder to or for the credit or for the  account of any  Borrower  against and on
account  of any of the  Obligations  which are not paid when due.  Any Lender or
holder of any Note  exercising  a right to set off or  otherwise  receiving  any
payment on account of the  Obligations  in excess of its Pro Rata Share  thereof
shall  purchase  for cash (and the other  Lenders  or holders  shall  sell) such
participation  in each such other  Lender's  or  holder's  Pro Rata Share of the
Obligations  as would be  necessary  to cause such Lender to share the amount so
set off or otherwise  received  with each other  Lender or holder in  accordance
with their  respective  Pro Rata Shares.  Each Borrower  agrees,  to the fullest
extent permitted by law, that (a) any Lender or holder may exercise its right to
set off  with  respect  to  amounts  in  excess  of its Pro  Rata  Share  of the
Obligations  and may  sell  participations  in such  amount  so set off to other
Lenders and holders and (b) any Lender or holder so  purchasing a  participation
in the Loans made or other  Obligations  held by other  Lenders  or holders  may
exercise all rights of set-off,  bankers' lien,  counterclaim  or similar rights
with respect to such  participation  as fully as if such Lender or holder were a
direct  holder  of the Loans and the  other  Obligations  in the  amount of such
participation.  Notwithstanding  the  foregoing,  if all or any  portion  of the
set-off amount or payment  otherwise  received is thereafter  recovered from the
Lender that has exercised the right of set-off,  the purchase of  participations
by that Lender  shall be  rescinded  and the  purchase  price  restored  without
interest. Each Borrower hereby agrees that the foregoing provisions are intended
to be construed so as to satisfy the  requirements of Section 553 of the Federal
Bankruptcy Code or amendments thereto (including any requirement of mutuality of
obligations therein).




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                                    ARTICLE X
                       THE AGENT AND THE COLLATERAL AGENT

     SECTION 10.01. APPOINTMENT OF AGENT. (a) Lucent Technologies Inc. is hereby
appointed to act as  contractual  representative  on behalf of all Lenders under
this  Agreement  and the other Loan  Documents.  The Agent agrees to act as such
contractual representative upon the express conditions contained in this ARTICLE
X. The  provisions of this SECTION 10.01 are solely for the benefit of the Agent
and the Lenders and no Borrower or any other  Person  shall have any rights as a
third party  beneficiary  of any of the  provisions  hereof.  In performing  its
functions  and duties under this  Agreement  and the other Loan  Documents,  the
Agent  shall act solely as an agent of the Lenders and does not assume and shall
not be deemed to have assumed any obligation toward or relationship of agency or
trust with or for any  Borrower  or any other  Person.  The Agent  shall have no
duties  or  responsibilities  except  for  those  expressly  set  forth  in this
Agreement and the other Loan Documents.  Notwithstanding  the use of the defined
term  "Agent",  it is expressly  understood  and agreed that the Agent shall not
have any fiduciary  responsibilities  to any Lender by reason of this  Agreement
and that the Agent is merely  acting as the  representative  of the Lenders with
only those duties as are  expressly  set forth in this  Agreement  and the other
Loan Documents. In its capacity as the Lenders' contractual representative,  the
Agent (i) does not assume any fiduciary duties to any of the Lenders,  (ii) is a
"representative"  of the Lenders  within the meaning of Section 9-105 of the UCC
and (iii) is acting as an independent contractor, the rights and duties of which
are limited to those  expressly  set forth in this  Agreement and the other Loan
Documents.  Each of the Lenders  agrees to assert no claim  against the Agent on
any agency theory or any other theory of liability for breach of fiduciary duty,
all of which  claims  each  Lender  waives.  Neither  the  Agent  nor any of its
Affiliates nor any of their respective officers, directors, employees, agents or
representatives shall be liable to any Lender for any action taken or omitted to
be taken by it  hereunder  or under any other Loan  Document,  or in  connection
herewith  or  therewith,  except  for  damages  caused by its or their own gross
negligence or willful misconduct.

     (b) If the Agent shall  request  instructions  from all Lenders,  Requisite
Lenders or all affected  Lenders  with  respect to any act or action  (including
failure to act) in connection  with this  Agreement or any other Loan  Document,
then the Agent shall be entitled to refrain  from such act or taking such action
unless and until the Agent shall have  received  instructions  from all Lenders,
Requisite  Lenders,  or all affected Lenders,  as the case may be, and the Agent
shall not incur  liability to any Person by reason of so  refraining.  The Agent
shall be fully justified in failing or refusing to take any action  hereunder or
under any other Loan  Document (a) if such action  would,  in the opinion of the
Agent,  be  contrary  to law or the terms of this  Agreement  or any other  Loan
Document,  (b) if such action  would,  in the  opinion of the Agent,  expose the
Agent to  liabilities  beyond the limits of this  Agreement  or (c) if the Agent
shall not first be indemnified to its satisfaction against any and all liability
and expense  which may be incurred  by it by reason of taking or  continuing  to
take any such action.  Without limiting the foregoing,  no Lender shall have any
right of action whatsoever  against the Agent as a result of the Agent acting or
refraining from acting  hereunder or under any other Loan Document in accordance
with the instructions of all Lenders, Requisite Lenders or all affected Lenders,
as applicable.



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     SECTION  10.02.  AGENT'S  RELIANCE,  ETC.  Neither the Agent nor any of its
Affiliates nor any of their respective directors,  officers, agents or employees
shall be liable for any action  taken or omitted to be taken by it or them under
or in connection  with this  Agreement or the other Loan  Documents,  except for
damages  caused by its or their  own gross  negligence  or  willful  misconduct.
Without limitation of the generality of the foregoing,  the Agent: (a) may treat
the payee of any Note as the holder  thereof  until the Agent  receives  written
notice of the  assignment or transfer  thereof  signed by such payee and in form
satisfactory  to the Agent;  (b) may  consult  with legal  counsel,  independent
public  accountants and other experts selected by it and shall not be liable for
any action taken or omitted to be taken in good faith by it in  accordance  with
the advice of such  counsel,  accountants  or experts;  (c) makes no warranty or
representation  to any Lender and shall not be responsible to any Lender for any
statements,  warranties or  representations  made in or in connection  with this
Agreement or the other Loan Documents;  (d) shall not have any duty to ascertain
or to inquire as to the performance or observance of any of the terms, covenants
or conditions of this  Agreement or the other Loan  Documents on the part of any
Borrower or to inspect the  Collateral  (including  the books and records);  (e)
shall  not be  responsible  to any  Lender  for  the  due  execution,  legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement or
the other Loan Documents or any other instrument or document  furnished pursuant
hereto or thereto;  and (f) shall incur no liability under or in respect of this
Agreement  or the other  Loan  Documents  by acting  upon any  notice,  consent,
certificate or other instrument or writing (which may be by telecopy,  telegram,
cable or telex)  believed  by it to be genuine  and signed or sent by the proper
party or parties.

     SECTION  10.03.  LUCENT AND  AFFILIATES.  With  respect to its  Commitments
hereunder, Lucent shall have the same rights and powers under this Agreement and
the other Loan Documents as any other Lender and may exercise the same as though
it were  not the  Agent;  and the  term  "Lender"  or  "Lenders"  shall,  unless
otherwise expressly indicated, include Lucent in its individual capacity. Lucent
and its  Affiliates  may lend money to, invest in, and  generally  engage in any
kind of business  with,  any Borrower,  any of its Affiliates and any Person who
may do business with or own  securities  of any Borrower or any such  Affiliate,
all as if Lucent were not the Agent and without any duty to account  therefor to
the Lenders.  Lucent and its Affiliates may accept fees and other  consideration
from any Borrower for services in  connection  with this  Agreement or otherwise
without  having to account for the same to Lenders.  Lucent may also purchase or
hold Equity  Interests or warrants in KMC Holdings,  KMC IHC or the Borrower and
make subordinated loans to any Borrower.  Each Lender acknowledges the potential
conflict  of  interest  between  Lucent  as a  Lender  holding  disproportionate
interests in the Loans,  Lucent as a member or  subordinated  debt holder of the
Borrower,  Lucent as a vendor under the Lucent Purchase  Agreement and Lucent as
Agent.

     SECTION 10.04.  LENDER CREDIT DECISION.  Each Lender  acknowledges  that it
has,  independently  and without reliance upon the Agent or any other Lender and
based on the  financial  information  given it by the  Borrowers  and such other
documents and information as it has deemed appropriate,  made its own credit and


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financial  analysis  of the  Borrowers  and its own  decision to enter into this
Agreement. Each Lender also acknowledges that it will, independently and without
reliance  upon the Agent or any other  Lender  and based on such  documents  and
information as it shall deem  appropriate at the time,  continue to make its own
credit  decisions  in taking or not taking  action  under this  Agreement.  Each
Lender acknowledges the potential conflict of interest of each other Lender as a
result of Lenders holding disproportionate interests in the Loans, and expressly
consents to, and waives any claim based upon, such conflict of interest.

     SECTION 10.05. INDEMNIFICATION. Each of the Lenders agrees to indemnify the
Agent (to the extent not  reimbursed by the  Borrowers and without  limiting the
obligations of Borrowers  hereunder),  ratably according to their respective Pro
Rata  Shares,  from and against any and all  liabilities,  obligations,  losses,
damages, penalties,  actions, judgments, suits, costs, expenses or disbursements
of any kind or  nature  whatsoever  which may be  imposed  on,  incurred  by, or
asserted  against  the  Agent  in any way  relating  to or  arising  out of this
Agreement or any other Loan Document or any action taken or omitted by the Agent
in  connection  therewith;  PROVIDED,  that no Lender  shall be  liable  for any
portion of such liabilities,  obligations,  losses, damages, penalties, actions,
judgments,  suits, costs,  expenses or disbursements  resulting from the Agent's
gross negligence or willful  misconduct.  Without  limiting the foregoing,  each
Lender agrees to reimburse the Agent  promptly upon demand for its ratable share
of any out-of-pocket  expenses (including counsel fees) incurred by the Agent in
connection   with  the   preparation,   execution,   delivery,   administration,
modification,  amendment or enforcement  (whether  through  negotiations,  legal
proceedings  or  otherwise)  of,  or  legal  advice  in  respect  of  rights  or
responsibilities  under,  this  Agreement and each other Loan  Document,  to the
extent that the Agent is not reimbursed for such expenses by the Borrowers.

     SECTION 10.06.  SUCCESSOR AGENT. The Agent may resign at any time by giving
not less than thirty (30) days' prior written  notice thereof to Lenders and the
Borrowers. Upon any such resignation, the Requisite Lenders shall have the right
to appoint a successor Agent. If no successor Agent shall have been so appointed
by the Requisite Lenders and shall have accepted such appointment within 30 days
after the resigning  Agent's  giving notice of  resignation,  then the resigning
Agent may, on behalf of Lenders,  appoint a  successor  Agent,  which shall be a
Lender, if a Lender is willing to accept such appointment, or otherwise shall be
a commercial bank or financial  institution or a subsidiary of a commercial bank
or financial  institution if such  commercial  bank or financial  institution is
organized under the laws of the United States of America or of any State thereof
and has a combined capital and surplus of at least $300,000,000. If no successor
Agent has been appointed  pursuant to the  foregoing,  by the 30th day after the
date  such  notice  of  resignation  was  given  by the  resigning  Agent,  such
resignation  shall become  effective and the Requisite  Lenders shall thereafter
perform  all the  duties of Agent  hereunder  until such  time,  if any,  as the
Requisite  Lenders appoint a successor  Agent as provided  above.  Any successor
Agent  appointed  by the  Requisite  Lenders  hereunder  shall be subject to the
approval of Borrowers, such approval not to be unreasonably withheld or delayed;
PROVIDED  that such  approval  shall not be required if a Default or an Event of
Default  shall have  occurred  and be  continuing.  Upon the  acceptance  of any


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appointment as Agent hereunder by a successor Agent,  such successor Agent shall
succeed to and become vested with all the rights, powers,  privileges and duties
of the resigning Agent. Upon the earlier of the acceptance of any appointment as
Agent  hereunder by a successor  Agent or the  effective  date of the  resigning
Agent's resignation, the resigning Agent shall be discharged from its duties and
obligations  under this Agreement and the other Loan Documents,  except that any
indemnity  rights  or  other  rights  in  favor of such  resigning  Agent  shall
continue.  After any resigning Agent's resignation hereunder,  the provisions of
this SECTION 10.06 shall inure to its benefit as to any actions taken or omitted
to be taken by it while it was Agent  under  this  Agreement  and the other Loan
Documents.

     SECTION  10.07.  PAYMENTS;  NON-FUNDING  LENDERS;  INFORMATION;  ACTIONS IN
CONCERT.

     (a) LOANS;  PAYMENTS.  Whenever the Agent  receives a payment of principal,
interest,  fee or premium (if any) or other payment, or whenever the Agent makes
an application of funds, in connection  with the Loans or the Notes  (including,
without limitation,  any payment or application from any Collateral),  the Agent
will on the date such  payment is received  or applied,  if on or prior to 11:00
a.m.  (Eastern  time) on such date,  or otherwise on the next  Business Day, pay
over to each Lender as instructed by such Lender in writing,  an amount equal to
such  Lender's  Pro Rata Share of such  payment  provided  that such  Lender has
funded all Loans  required to be made by it and has purchased all  participation
required to be purchased by it under this Agreement and the other Loan Documents
as of such date.  To the extent  that any Lender (a  "NON-FUNDING  LENDER")  has
failed to fund all such payments and Loans or failed to fund the purchase of all
such  participation,  the  Agent  shall  be  entitled  to set  off  the  funding
short-fall  against  that  Non-Funding  Lender's  Pro Rata Share of all payments
received  from  the  Borrowers.  All  payments  by  Agent  shall be made by wire
transfer to such  Lender's  account (as specified by such Lender) not later than
2:00 p.m. (Eastern time) on the applicable Business Day.

     (b) RETURN OF PAYMENTS.  (i) If Agent pays an amount to a Lender under this
Agreement in the belief or expectation  that a related  payment has been or will
be  received by the Agent from the  Borrowers  and such  related  payment is not
received by Agent,  then the Agent will be entitled to recover  such amount from
such Lender on demand without set-off, counterclaim or deduction of any kind.

          (ii) If the Agent  determines at any time that any amount  received by
     the Agent under this  Agreement must be returned to any Borrower or paid to
     any  other  Person  pursuant  to any  insolvency  law or  otherwise,  then,
     notwithstanding  any other term or condition of this Agreement or any other
     Loan  Document,  the Agent will not be required to  distribute  any portion
     thereof to any  Lender.  In  addition,  each  Lender will repay to Agent on
     demand any portion of such amount  that the Agent has  distributed  to such
     Lender,  together  with  interest  at such  rate,  if any,  as the Agent is
     required to pay to any  Borrower  or such other  Person,  without  set-off,
     counterclaim or deduction of any kind.



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<PAGE>

     (c) NON-FUNDING  LENDERS. The failure of any Non-Funding Lender to make any
portion  of its  Loans  or any  payment  required  by it  hereunder  on the date
specified  therefor  shall not relieve any other Lender (each such other Lender,
an "OTHER  LENDER") of its  obligations  to make any such Loan on such date, but
neither any Other Lender nor the Agent shall be  responsible  for the failure of
any  Non-Funding  Lender to make any Loan.  Notwithstanding  anything  set forth
herein to the  contrary,  a  Non-Funding  Lender  shall  not have any  voting or
consent  rights  under or with  respect to any Loan  Document  or  constitute  a
"Lender" (or be included in the calculation of "Requisite Lenders" or "Requisite
Revolving  Lenders"  hereunder)  for any voting or consent  rights under or with
respect to any Loan Document.

     (d) DISSEMINATION OF INFORMATION.  The Agent will use reasonable efforts to
provide  Lenders with any notice of Default or Event of Default  received by the
Agent from,  or  delivered  by the Agent to, the  Borrowers,  with notice of any
Event of Default of which the Agent has actually become aware and with notice of
any action taken by the Agent following any Event of Default;  PROVIDED that the
Agent shall not be liable to any Lender for any failure to do so,  except to the
extent that such failure is  attributable  to the Agent's  gross  negligence  or
willful  misconduct.  Lenders  acknowledge  that the  Borrowers  are required to
provide  financial  statements and other  documents to Lenders  pursuant to this
Agreement  and agree that the Agent  shall  have no duty to provide  the same to
Lenders.

     (e)  ACTIONS  IN  CONCERT.  Anything  in  this  Agreement  to the  contrary
notwithstanding, each Lender hereby agrees with each other Lender that no Lender
shall  take any action to protect  or  enforce  its rights  arising  out of this
Agreement  or the Notes  (including  exercising  any rights of set-off)  without
first obtaining the prior written consent of the Agent and Requisite Lenders, it
being the intent of Lenders  that any such  action to protect or enforce  rights
under  this  Agreement  and the  Notes  shall  be taken  in  concert  and at the
direction or with the consent of Agent.

     SECTION 10.08. COLLATERAL MATTERS.

     (a)  The  Collateral  Agent,  at the  written  direction  of the  Requisite
Lenders,  may release any Lien upon any Collateral  (i) upon the  termination of
the  Commitments  and  payment  and  satisfaction  of all  Loans  and all  other
Obligations  and which the Agent has been  notified  in writing are then due and
payable;  (ii) constituting property being sold or disposed of if the applicable
Borrower  certifies to the Collateral Agent that the sale or disposition is made
in compliance with SECTION 6.03 (and the Agent may rely conclusively on any such
certificate,  without further inquiry); or (iii) constituting property leased to
the applicable  Borrower under a lease which has expired or been terminated in a
transaction  permitted under this Agreement or which will expire  imminently and
which has not been,  and is not  intended  by such  Borrower  to be,  renewed or
extended and with respect to which such  Borrower has not exercised any purchase
option.  The  Collateral  Agent may not  release  all or  substantially  all the
Collateral  without the consent of the Lenders.  Upon request by the  Collateral


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Agent or the  Borrowers  at any time,  the Lenders  will  confirm in writing the
Collateral  Agent's  authority  to release any Liens  pursuant  to this  SECTION
10.08(A).

     (b) Upon  receipt by the  Collateral  Agent of any  authorization  required
pursuant  to  SECTION  10.08(A)  from  the  Requisite  Lenders  or  Lenders,  as
applicable,  of the  Collateral  Agent's  authority  to  release  any Liens upon
particular  types or items of  Collateral,  and upon at least five (5)  Business
Days' prior written  request by the  applicable  Borrower,  and provided that no
Event of Default has occurred and is then continuing, the Collateral Agent shall
(and is hereby irrevocably  authorized by the Lenders to) execute such documents
as may be necessary  to evidence the release of the Liens upon such  Collateral;
PROVIDED,  that (i) the  Collateral  Agent  shall not be required to execute any
such document on terms which, in the Collateral  Agent's  opinion,  would expose
the  Collateral  Agent to  liability  or create  any  obligation  or entail  any
consequence  other than the release of such Liens without  recourse or warranty,
and (ii) such release  shall not in any manner  discharge,  affect or impair the
Obligations or any Liens (other than those  expressly  being  released) upon (or
obligations of the applicable  Borrower in respect of) all interests retained by
the applicable  Borrower,  including  (without  limitation)  the proceeds of any
sale, all of which shall continue to constitute part of the Collateral.

     (c) The Collateral Agent shall have no obligation  whatsoever to any of the
Lenders to assure that the  Collateral  exists or is owned by any Borrower or is
cared for, protected or insured or has been encumbered, or, other than a duty to
act without recklessness, willful misconduct or gross (but not mere) negligence,
that  the  Liens  have  been  properly  or  sufficiently  or  lawfully  created,
perfected,  protected or enforced or are entitled to any particular priority, or
to  exercise  at all or in any  particular  manner  or  under  any duty of care,
disclosure  or  fidelity,  or  to  continue  exercising,   any  of  the  rights,
authorities  and powers  granted or  available  to the  pursuant to this SECTION
10.08 or pursuant to any of the Loan Documents,  it being  understood and agreed
that in  respect  of the  Collateral,  or any act,  omission  or  event  related
thereto, the Collateral Agent may act in any manner it may deem appropriate,  in
its reasonable  business judgment,  given the Collateral Agent's own interest in
the  Collateral  in its  capacity as one of the Lenders and that the  Collateral
Agent shall have no other duty or liability  whatsoever  to any Lender as to any
of the foregoing.

     SECTION  10.09.  AGENCY FOR  PERFECTION.  Each Lender hereby  appoints each
other  Lender as agent for the  purpose  of  perfecting  the  Lenders'  security
interest  in  assets  which,  in  accordance  with  Article  9 of the UCC can be
perfected  only by  possession.  Should any Lender  (other  than the  Collateral
Agent) obtain  possession of any such  Collateral,  such Lender shall notify the
Collateral  Agent thereof,  and,  promptly upon the Collateral  Agent's  request
therefor shall deliver such Collateral to the Collateral Agent.

     SECTION 10.10. CONCERNING THE COLLATERAL AND THE RELATED LOAN DOCUMENTS AND
THE  COLLATERAL  AGENT.  (a) Each Lender  authorizes  and directs the Collateral
Agent to enter into this Agreement and the other Loan Documents  relating to the
Collateral,  for  the  ratable  benefit  of the  Lenders.  The  exercise  by the
Collateral Agent or the Requisite  Lenders of their respective  powers set forth


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in this  Agreement  or the other  Loan  Documents  relating  to the  Collateral,
together with such other powers that are reasonably incidental thereto, shall be
binding upon all of the Lenders;  PROVIDED that the  Collateral  Agent shall not
without the consent of the Requisite  Lenders take any action in accordance with
the  terms  of this  Agreement  or the  other  Loan  Documents  relating  to the
Collateral (other than, in the exercise of its reasonable  judgment,  actions to
preserve the value of the Collateral).

     (b)  The  Collateral  Agent  with  respect  to  the  administration  of the
Collateral  shall have the same rights,  obligations  and status as the Agent as
are set forth in SECTION 10.01, 10.02, 10.03, 10.04, 10.05, and 10.06 above.


                                   ARTICLE XI
                                  MISCELLANEOUS

     SECTION  11.01.  NOTICES;  ACTION ON  NOTICES,  ETC.  (a) Notices and other
communications provided for herein shall be in writing and shall be delivered by
a courier service of recognized standing  (specifying one (1) day delivery),  or
by registered or certified mail, postage prepaid,  return receipt requested (or,
if by telecopy communications  equipment of the sending party, delivered by such
equipment) addressed,  if to the Borrowers, at KMC Telecom III, Inc., 1545 Route
206, Suite 300, Bedminster, NJ 07921; Attention:  President; (telecopy no. (908)
719-8775,  confirmation no. (908) 470-2200) with a copy to Alan M. Epstein Esq.,
Kelley Drye & Warren LLP, 101 Park Avenue,  New York,  NY 10178;  (telecopy  no.
(212) 808-7897,  confirmation  no. (212)  808-7800),  if to the Agent, at Lucent
Technologies Inc., 283 King George Road, Warren, NJ 07059; Attention:  Financing
Operations Group (telecopy no. (908) 559-1706),  and if to the Collateral Agent,
at   ____________________________,   Attention:_________________________________
(telecopy no. ______________,  confirmation no. ______________). All notices and
other communications given to any party hereto in accordance with the provisions
of this  Agreement  shall be deemed to have been  given (a) five  Business  Days
after mailing when sent by registered or certified mail, postage prepaid, return
receipt  requested,  or (b) upon receipt,  if by courier service or any telecopy
communications  equipment of the sender, in each case addressed to such party as
provided in this Section or in accordance  with the latest  unrevoked  direction
from such party.

     (b) Each  Borrower  agrees that the Agent or the  Collateral  Agent may act
upon any notice,  consent,  certificate,  cable,  telex or other  instrument  or
writing  believed by the Agent or the Collateral  Agent to be genuine,  that the
Agent or the Collateral  Agent may consult with legal  counsel,  selected by the
Agent or the  Collateral  Agent and shall not be liable to any  Borrower for any
action taken or omitted to be taken in good faith by Lender in  accordance  with
the advice of such counsel.



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     SECTION  11.02.  NO  WAIVERS;  AMENDMENTS.  (a) No  failure or delay of the
Agent,  the  Collateral  Agent or any Lender to exercise any right  hereunder or
under any other Loan Document shall operate as a waiver  thereof,  nor shall any
single or partial  exercise  of any such  right,  preclude  any other or further
exercise  thereof or the exercise of any other right. No waiver of any provision
of this Agreement or any other Loan Document nor consent to any departure by any
Borrower  therefrom shall in any event be effective  unless the same shall be in
writing and signed by the Agent and the Requisite Lenders,  and then such waiver
or consent shall be effective only in the specific  instance and for the purpose
for which given.  No notice or demand on any Borrower in any case shall  entitle
any  Borrower  to any other or  further  notice or  demand in  similar  or other
circumstances.

     (b) Subject to the  provisions  of this  SECTION  11.02(B),  the  Requisite
Lenders (or the Agent with the consent in writing of the Requisite  Lenders) and
the Borrowers may enter into agreements  supplemental  hereto for the purpose of
adding or  modifying  any  provisions  to the Loan  Documents or changing in any
manner the rights of the Lenders or the Borrowers hereunder or waiving any Event
of Default or Default  hereunder;  PROVIDED that no such supplemental  agreement
shall,  without the consent of each Lender  affected  thereby and in the case of
clause (vii) below,  so long as Lucent shall have any unused  Commitment  Amount
without the consent of Lucent:

          (i) Postpone or extend the Commitment  Termination  Date, the maturity
     date for the loans or any other date fixed for any payment of principal of,
     or  interest  on,  the Loans or any fees or other  amounts  payable to such
     Lender  except  with  respect to (A) any  modifications  of the  provisions
     relating to prepayments of Loans and other  Obligations and (B) a waiver of
     the  application  of the  default  rate of  interest  pursuant  to  SECTION
     2.05(B).

          (ii) Reduce the principal  amount of any Loans,  or reduce the rate or
     extend the time of payment of interest or fees thereon.

          (iii) Reduce the  percentage  specified in the definition of Requisite
     Lenders or any other  percentage of Lenders  specified to be the applicable
     percentage  in this  Agreement  to act on  specified  matters  or amend the
     definition of "Pro Rata Share".

          (iv) Increase the amount of any Commitment of any Lender  hereunder or
     increase any Lender's Pro Rata Share.

          (v) Permit any Borrower to assign its rights under this Agreement.

          (vi) Release all or substantially all the Collateral.

          (vii) Amend Section 2.02.

          (viii) Amend this SECTION 11.02(B).



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No amendment of any  provision  of this  Agreement  relating to the Agent or the
Collateral Agent shall be effective  without the written consent of the Agent or
the Collateral Agent, as applicable.

     SECTION 11.03. GOVERNING LAW AND JURISDICTION. THIS AGREEMENT AND THE OTHER
LOAN  DOCUMENTS  SHALL BE  CONSTRUED  IN  ACCORDANCE  WITH AND  GOVERNED  BY THE
INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY CONFLICTS OF
LAWS PRINCIPLES.  THE BORROWERS, THE AGENT, THE COLLATERAL AGENT AND THE LENDERS
CONSENT TO THE JURISDICTION OF ANY LOCAL,  STATE OR FEDERAL COURT LOCATED IN THE
CITY AND STATE OF NEW YORK AND WAIVE ANY OBJECTION RELATING TO IMPROPER VENUE OR
FORUM NON CONVENIENCE TO THE CONDUCT OF ANY PROCEEDING BY SUCH COURT.

            SECTION  11.04.  EXPENSES.  The  Borrowers  will pay all  documented
out-of-pocket  third-party  expenses  (including  in each  case  all  reasonable
attorneys' and paralegals' fees and related expenses and costs), (i) incurred by
the  Agent  and  the  Collateral  Agent  in  connection  with  the  negotiation,
preparation and execution of the Loan Documents (whether or not the transactions
contemplated  hereby  shall be  consummated),  (ii)  incurred by the Agents,  in
connection  with the  administration  of the Loan  Documents,  and the creation,
perfection,  priority and protection of the Liens in the  Collateral,  and (iii)
incurred by the Agent, the Collateral Agent or any Lender in connection with the
enforcement of the rights of the Agent,  the  Collateral  Agent or any Lender in
connection with this Agreement,  any other Loan Documents or the Collateral,  or
any restructuring or workout of this Agreement or the other Loan Documents.

            SECTION 11.05.  EQUITABLE RELIEF.  Each Borrower recognizes that, in
the event it fails to perform,  observe or discharge any of its  obligations  or
liabilities under this Agreement,  or any other Loan Document, any remedy at law
may prove to be inadequate  relief to the Agent,  the  Collateral  Agent and the
Lenders; therefore, such Borrower agrees that the Agent or the Collateral Agent,
if it so  requests,  shall be entitled to  temporary  and  permanent  injunctive
relief in any such case without the necessity of proving actual damages.

     SECTION 11.06. INDEMNIFICATION;  LIMITATION OF LIABILITY. (a) The Borrowers
agree to protect,  indemnify and hold harmless the Agent,  the Collateral  Agent
each  Lender  and  each of their  respective  officers,  affiliates,  directors,
employees,  attorneys,  accountants,  consultants,  representatives  and  agents
(collectively   called  the   "Indemnitees")   from  and  against  any  and  all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims,  costs,  expenses  and  disbursements  (including,  without  limitation,
payment by the Agent,  the Collateral Agent or any Lender of any obligations due
or past due under any  contract or agreement to which any Borrower is or becomes
a party) of any kind or nature whatsoever  (including,  without limitation,  the


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fees and  disbursements  of counsel for and  consultants of such  Indemnitees in
connection  with  any  investigative,  administrative  or  judicial  proceeding,
whether or not such Indemnitees shall be designated a party thereto),  which may
be imposed  on,  incurred  by, or asserted  against  such  Indemnitees  (whether
direct,  indirect,  or  consequential  and whether based on any federal or state
laws or other statutory regulations,  including, without limitation, securities,
environmental  and  commercial  laws and  regulations,  under  common  law or at
equitable  cause or on  contract  or  otherwise)  in any manner  relating  to or
arising out of this  Agreement or any of the other Loan  Documents,  or any act,
event or transaction related or attendant thereto,  the agreements of the Agent,
the Collateral Agent or the Lenders contained  herein,  the making of Loans, the
management  of such  Loans or the  Collateral  (including  any  liability  under
Environmental  Laws) or the use or  intended  use of the  proceeds of such Loans
hereunder (collectively,  the "INDEMNIFIED MATTERS");  PROVIDED that no Borrower
shall  have  any  obligation  to  any  Indemnitee   hereunder  with  respect  to
Indemnified  Matters caused by or resulting from the willful misconduct or gross
negligence of such  Indemnitee;  PROVIDED,  FURTHER that the Borrowers shall not
have any obligation to any  Indemnitee  hereunder with respect to taxes that are
imposed on the net income of any  Indemnitee or any franchise or doing  business
taxes  imposed  on any  Indemnitee.  To  the  extent  that  the  undertaking  to
indemnify,  pay and hold  harmless  set forth in the  preceding  sentence may be
unenforceable because it is violative of any law or public policy, the Borrowers
shall contribute the maximum portion which they are permitted to pay and satisfy
under applicable law, to the payment and satisfaction of all Indemnified Matters
incurred by the Indemnitees.

     (b) To the extent  permitted by applicable law, no claim may be made by the
Borrowers or any other  Person  against the Agent,  the  Collateral  Agent,  any
Lender or any of their respective affiliates,  directors,  officers,  employees,
agents, attorneys, accountants,  representatives or consultants for any special,
indirect,  consequential  or punitive damages in respect of any claim for breach
of contract or any other  theory of  liability  arising out of or related to the
transactions  contemplated by any of the Loan Documents or any act,  omission or
event occurring in connection therewith; and the Borrowers hereby waive, release
and agree not to sue upon any claim for any such damages, whether or not accrued
and whether or not known or suspected to exist in its favor.

     SECTION  11.07.  SURVIVAL  OF  REPRESENTATIONS  AND  WARRANTIES,  ETC.  All
warranties and  representations  made by any Borrower in any Loan Document shall
survive  the  execution  and  delivery  of this  Agreement  and the  other  Loan
Documents and the making and repayment of the Obligations.  The  confidentiality
obligations of each Borrower in SECTION 11.16, the  indemnification  obligations
of each  Borrower  in SECTION  11.06,  and to the extent the second  sentence of
SECTION  11.13 is  applicable,  all  covenants  of each  Borrower,  survive  the
repayment of the Obligations.

     SECTION 11.08. SUCCESSORS AND ASSIGNS; ASSIGNMENTS; PARTICIPATIONS.

     (a)  GENERAL.  The  terms and  provisions  of the Loan  Documents  shall be
binding  upon  and  inure  to the  benefit  of the  Borrowers,  the  Agent,  the
Collateral  Agent and the Lenders and their  respective  successors and assigns,
except  that (i) no  Borrower  shall  have any  right to  assign  its  rights or


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obligations  under the Loan Documents and (ii) any assignment by any Lender must
be made in compliance with  SUBSECTION (C) below.  With respect to any Borrower,
successors and assigns shall include, without limitation,  any receiver, trustee
or debtor-in-possession of or for such Borrower.  Notwithstanding the foregoing,
any Lender may at any time,  without the consent of the  Borrowers or the Agent,
assign all or any portion of its rights under this  Agreement and its Notes to a
Federal  Reserve Bank or to an affiliate of such Lender;  PROVIDED  that no such
assignment shall release the transferor  Lender from its obligations  hereunder.
The Agent shall be entitled to utilize its  Register to  determine  the payee of
any Note for all  purposes  hereof.  Any  request,  authority  or consent of any
Person,  who at the time of making  such  request or giving  such  authority  or
consent  is the  holder of any Note,  shall be  conclusive  and  binding  on any
subsequent  holder,  transferee or assignee of such Note or of any Note or Notes
issued in exchange therefor.

     (b) PARTICIPATIONS.

          (i)  Subject  to the  terms set forth in this  SECTION  11.08(B),  any
     Lender may, in the ordinary  course of its business and in accordance  with
     applicable  law,  at any time sell to one or more  banks or other  entities
     ("PARTICIPANTS")  participating interests in any Loan owing to such Lender,
     any Note held by such Lender,  any  Commitment  of such Lender or any other
     interest of such Lender  under the Loan  Documents on a pro rata or non-pro
     rata  basis.  Notice of such  participation  to the Agent shall be required
     prior to any participation becoming effective with respect to a Participant
     which is not a Lender  or an  Affiliate  thereof.  In the event of any such
     sale by a Lender of participating interests to a Participant, such Lender's
     obligations  under the Loan Documents shall remain  unchanged,  such Lender
     shall  remain  solely  responsible  to the  other  parties  hereto  for the
     performance of such obligations, such Lender shall remain the holder of any
     such Note for all purposes under the Loan  Documents,  such Lender shall be
     solely  responsible  for any  withholding  taxes or any filing or reporting
     requirements  in connection  therewith  relating to such  Participant,  all
     amounts  payable by the Borrowers  under this Agreement shall be determined
     as if such  Lender  had not  sold  such  participating  interests,  and the
     Borrowers  and the Agent shall  continue to deal solely and  directly  with
     such Lender in connection with such Lender's  rights and obligations  under
     the  Loan  Documents  except  that,  for  purposes  of  SECTION  2.13,  the
     Participants  shall be entitled to the same rights as if they were Lenders,
     PROVIDED  that no  Participant  shall be  entitled  to receive  any greater
     amount  pursuant to SECTION 2.13 than such Lender would have been  entitled
     to receive in respect  of the amount of the  participation  transferred  to
     such Participant had no transfer occurred.

          (ii) Each Lender shall  retain the sole right to approve,  without the
     consent of any  Participant,  any amendment,  modification or waiver of any
     provision of the Loan Documents  other than any amendment,  modification or
     waiver with respect to any Loan or Commitment in which such Participant has
     an  interest  which  forgives  principal,  interest  or fees or reduces the


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     interest rate or fees payable  pursuant to the terms of this Agreement with
     respect to any such Loan or  Commitment,  postpones  any date fixed for any
     regularly-scheduled  payment of  principal  of, or interest or fees on, any
     such  Loan  or  Commitment,  or  releases  all  or  substantially  all  the
     Collateral,  if any, securing any such Loan. 

          (iii) The  Borrowers  agree that each  Participant  shall be deemed to
     have the  right of  setoff  provided  in  SECTION  9.09 in  respect  to its
     participating  interest in amounts  owing under the Loan  Documents  to the
     same  extent as if the  amount of its  participating  interest  were  owing
     directly to it as a Lender  under the Loan  Documents;  PROVIDED  that each
     Lender  shall  retain the right of setoff  provided  in  SECTION  9.09 with
     respect to the amount of  participating  interests sold to each Participant
     except to the extent such  Participant  exercises its right of setoff.  The
     Lenders  agree to share with each  Participant,  and each  Participant,  by
     exercising  the right of setoff  provided in SECTION 9.09,  agrees to share
     with each Lender, any amount received pursuant to the exercise of its right
     of setoff,  such amounts to be shared in accordance with SECTION 9.09 as if
     each Participant were a Lender.

     (c) ASSIGNMENTS.

          (i) Any Lender  may, in the  ordinary  course of its  business  and in
     accordance  with applicable law, at any time assign to one or more banks or
     other  entities   ("PURCHASERS")  all  or  a  portion  of  its  rights  and
     obligations  under  this  Agreement  (including,  without  limitation,  its
     Commitment  and the Loans owing to it  hereunder)  in  accordance  with the
     provisions  of  this  SECTION  11.08(C).  Each  assignment  shall  be  of a
     constant,  and not a varying,  ratable  percentage  of all of the assigning
     Lender's rights and obligations under this Agreement. Such assignment shall
     be evidenced by an Assignment  Agreement in form and  substance  reasonably
     satisfactory to the Agent and shall not be permitted  hereunder unless such
     assignment is either for all of such Lender's rights and obligations  under
     the Loan Documents or, for Loans and Commitments in an aggregate  principal
     amount  equal to the  lesser of  $5,000,000  (which  minimum  amount may be
     waived by the Requisite Lenders after the occurrence of a Default) and such
     Lender's Commitment Amount.

          (ii)  Upon (i)  delivery  to the Agent of a notice  of  assignment  (a
     "NOTICE OF ASSIGNMENT"),  together with any consent required hereunder, and
     (ii) payment of a $3,500  processing fee to the Agent for  processing  such
     assignment  if such  assignment is to a Person which is not an affiliate of
     the  assigning  Lender,  such  assignment  shall  become  effective  on the
     effective date specified in such Notice of Assignment. The assigning Lender
     shall be obligated to reimburse  the Agent for all other costs and expenses
     associated with the preparation and execution of such assignment (including
     reasonable attorneys' fees arising out of such preparation and execution of
     such  assignment).  The Notice of Assignment shall contain a representation
     by the Purchaser to the effect that none of the consideration  used to make
     the purchase of the Commitment  and Loans under the  applicable  assignment
     agreement  are "plan assets" as defined under ERISA and that the rights and
     interests  of the  Purchaser  in and under the Loan  Documents  will not be


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     "plan  assets"  under  ERISA.  On and  after  the  effective  date  of such
     assignment, such Purchaser, if not already a Lender, shall for all purposes
     be a Lender party to this Agreement and any other Loan  Documents  executed
     by the  Lenders and shall have all the rights and  obligations  of a Lender
     under the Loan  Documents,  to the same  extent  as if it were an  original
     party  hereto,  and no  further  consent  or action by the  Borrowers,  the
     Lenders or the Agent shall be required  to release  the  transferor  Lender
     with  respect  to the  percentage  of the  aggregate  Commitment  and Loans
     assigned to such  Purchaser.  Upon the  consummation of any assignment to a
     Purchaser pursuant to this SECTION 11.08(C)(II), the transferor Lender, the
     Agent  and  the  Borrowers  shall  make  appropriate  arrangements  so that
     replacement Notes are issued to such transferor Lender and new Notes or, as
     appropriate,  replacement Notes, are issued to such Purchaser, in each case
     in principal  amounts  reflecting  their  Commitment  and their  Loans,  as
     adjusted pursuant to such assignment.

          (iii) The Agent shall  maintain at its address  referred to in SECTION
     11.01 a copy of each assignment delivered to and accepted by it pursuant to
     this SECTION 11.08 and a register (the  "REGISTER")  for the recordation of
     the names and addresses of the Lenders and the  Commitment of and principal
     amount of the Loans  owing to,  each  Lender  from time to time and whether
     such  Lender  is an  original  Lender or the  assignee  of  another  Lender
     pursuant to an  assignment  under this  SECTION  11.08.  The entries in the
     Register shall be conclusive and binding for all purposes,  absent manifest
     error,  and the Borrowers,  the Agent and the Lenders may treat each Person
     whose  name is  recorded  in the  Register  as a Lender  hereunder  for all
     purposes of this Agreement.  The Register shall be available for inspection
     by the Borrowers or any Lender at any reasonable time and from time to time
     upon reasonable prior notice.

     SECTION  11.09.  SEVERABILITY.  In case  any one or more of the  provisions
contained in this Agreement or any other Loan Document shall be invalid, illegal
or unenforceable in any respect,  the validity,  legality and  enforceability of
the remaining  provisions  contained  herein and therein shall not in any way be
affected or impaired thereby.

     SECTION  11.10.  COVER PAGE,  TABLE OF CONTENTS AND SECTION  HEADINGS.  The
cover  page,  Table  of  Contents  and  section  headings  used  herein  are for
convenience  of reference  only,  are not part of this  Agreement and are not to
affect the construction of or be taken into  consideration in interpreting  this
Agreement.

     SECTION 11.11.  COUNTERPARTS.  This Agreement may be signed in counterparts
with the same effect as if the signatures  thereof and hereto were upon the same
instrument.

     SECTION  11.12.  APPLICATION  OF  PAYMENTS.  Notwithstanding  any  contrary
provision  contained in this  Agreement  or in any of the other Loan  Documents,
upon the  occurrence and during the  continuance  of any Event of Default,  each
Borrower  irrevocably  waives the right to direct the application of any and all
payments at any time or times hereafter received by the Agent or any Lender from


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<PAGE>

such Borrower or with respect to any of the  Collateral,  and such Borrower does
hereby  irrevocably agree that the Agent or any Lender shall have the continuing
exclusive  right to apply and reapply any and all payments  received at any time
or times hereafter, whether with respect to the Collateral or otherwise, against
the  Obligations  in such manner as the Agent or any Lender may deem  advisable,
notwithstanding  any entry by the Agent or any Lender  upon any of its books and
records, subject, however, to the provisions of SECTION 2.08(C).

     SECTION 11.13.  MARSHALLING;  PAYMENTS SET ASIDE. Neither the Agent nor the
Agent  shall be under any  obligation  to  marshall  any  assets in favor of any
Borrowers  or the other  party or  against  or in  payment  of any or all of the
Obligations.  To the extent that any Borrower makes a payment or payments to any
Agent or any Lender,  or the Agent, the Collateral Agent any Lender enforces its
security  interests  or  exercises  its  rights of setoff,  and such  payment or
payments or the proceeds of such  enforcement  or setoff or any part thereof are
subsequently invalidated,  declared to be fraudulent or preferential,  set aside
and/or required to be repaid to a trustee, receiver or any other party under any
bankruptcy law, state or federal law, common law or equitable cause, then to the
extent of such recovery,  the obligation or part thereof originally  intended to
be satisfied  shall be revived and continued in full force and effect as if such
payment had not been made or such enforcement or setoff had not occurred.

     SECTION 11.14. SERVICE OF PROCESS. EACH BORROWER WAIVES PERSONAL SERVICE OF
ANY PROCESS UPON IT AND,  CONSENTS  THAT ALL SERVICE OF PROCESS SHALL BE MADE BY
REGISTERED  MAIL,  RETURN  RECEIPT  REQUESTED,  DIRECTED TO EACH BORROWER AT THE
ADDRESS  INDICATED  IN SECTION  11.01 AND  SERVICE SO MADE SHALL BE DEEMED TO BE
COMPLETED FIVE (5) BUSINESS DAYS AFTER SAME SHALL HAVE BEEN POSTED AS AFORESAID.

     SECTION 11.15. WAIVER OF JURY TRIAL, ETC. EACH OF THE BORROWERS, THE AGENT,
THE COLLATERAL AGENT AND THE LENDERS WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE
IN RESOLVING  ANY DISPUTE,  WHETHER  SOUNDING IN CONTRACT,  TORT,  OR OTHERWISE,
BETWEEN THE AGENT,  THE COLLATERAL  AGENT OR ANY LENDER AND ANY BORROWER ARISING
OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED
BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY
OTHER  INSTRUMENT,  DOCUMENT OR AGREEMENT  EXECUTED OR  DELIVERED IN  CONNECTION
THEREWITH OR THE TRANSACTIONS RELATED THERETO. EACH OF THE BORROWERS, THE AGENT,
THE  COLLATERAL  AGENT AND THE LENDERS  HEREBY AGREES AND CONSENTS THAT ANY SUCH
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT
A JURY AND THAT ANY OF THEM  MAY FILE AS AN  ORIGINAL  COUNTERPART  OR A COPY OF
THIS AGREEMENT WITH ANY COURT AS WRITTEN  EVIDENCE OF THE CONSENT OF THE PARTIES
HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.



                                       93
<PAGE>

     SECTION  11.16.  CONFIDENTIALITY.  No Borrower  shall at any time before or
after  payment  in full  and  satisfaction  of all of the  Obligations,  reveal,
divulge or make known, or knowingly  permit to be so revealed,  divulged or made
known, to any Person  (including  Persons within its own organization who do not
have a definite need to know for the purpose of performance of this  Agreement),
the terms or conditions of the Fee Letter; PROVIDED that the foregoing shall not
apply to  information  required to be disclosed by order of a court of competent
jurisdiction or in connection with any governmental  investigation (in each case
to the extent  disclosure is required,  but no further) so long as such Borrower
notifies  the Agent in writing of any  circumstances  of which such  Borrower is
aware that may lead to such a requirement or order,  so as to allow the Agent to
take steps to contest such order or investigation;  PROVIDED,  FURTHER, that the
foregoing  shall not apply to  information  which is required to be disclosed by
such  Borrower or  information  which in the  reasonable  determination  of such
Borrower  is  desirable  for  it to  disclose,  pursuant  to  federal  or  state
securities  laws,  pursuant to the rules or  regulations  of the FCC, any PUC or
other  applicable  Governmental  Authority,  or to Persons who are  consultants,
advisors  (including  but not  limited to  attorneys  and  auditors),  officers,
directors  or  employees  of such  Borrower,  provided  that each such Person is
required by such Borrower to keep such information confidential.

     SECTION  11.17.  ENTIRE  AGREEMENT,  ETC.  This  Agreement  (including  all
schedules and exhibits  referred to herein),  the Notes, the Fee Letters and all
other Loan Documents  constitute the entire contract  between the parties hereto
with respect to the subject  matter  hereof and thereof and shall  supersede and
take the place of any other  instrument  purporting  to be an  agreement  of the
parties hereto relating to such subject matter.

     SECTION   11.18.   NO  STRICT   CONSTRUCTION.   The  parties   hereto  have
participated,  jointly in the negotiation and drafting of this Agreement. In the
event of any  ambiguity  or question of intent or  interpretation  arises,  this
Agreement  shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring  any party by
virtue of authorship of any provisions of this  Agreement.  IN WITNESS  WHEREOF,


                                       94
<PAGE>

the parties  hereto have caused this Agreement to be duly executed by their duly
authorized officers as of the day and year first above written.


                                   KMC TELECOM III, INC., as Borrower


                                   By:  /s/ Cynthia Worthman
                                        ----------------------------------------
                                        Name:
                                        Title:


                                   KMC TELECOM LEASING III LLC, as Borrower
                                   By:   KMC Telecom III, Inc., as Sole Member


                                   By:  /s/ Cynthia Worthman
                                        ----------------------------------------
                                        Name:
                                        Title:


                                   LUCENT TECHNOLOGIES INC., as Agent


                                   By:  /s/ Leslie L. Rogers
                                        ----------------------------------------
                                        Name:
                                        Title:


                                   STATE STREET BANK AND TRUST COMPANY,
                                   as Collateral Agent


                                   By:__________________________________________
                                        Name:
                                        Title:




                                       95
<PAGE>

                                     ANNEX A
<TABLE>
<CAPTION>
                               COMMITMENT AMOUNTS

                                      LOANS

Lender                                  Commitment Amount
<S>                                     <C>         

Lucent Technologies Inc.                $600,000,000

TOTAL COMMITMENTS                       $600,000,000
</TABLE>


<PAGE>

                                     ANNEX B
<TABLE>
<CAPTION>
                  FINANCIAL COVENANT INFORMATION (IN THOUSANDS)

   FISCAL            
QUARTER ENDED     ITEM 1     ITEM 2     ITEM 3   ITEM 4      ITEM 5
-------------     ------     ------     ------   ------      ------
<S>               <C>        <C>        <C>      <C>         <C>     

03/31/99               -     ( 7,569)             50,000         N/A
06/30/99               -     (15,136)             82,358         N/A
09/30/99               -     (21,386)            185,677         N/A
12/31/99               -     (25,541)            261,795         N/A
03/31/06           1,432     (32,100)            308,626         N/A
06/30/00           3,544     (35,968)            330,861         N/A
09/30/00           6,157     (34,535)            340,094      24,904
12/31/00           9,910     (32,520)            349,103      39,079
03/31/01          14,398     (32,458)            354,383      56,130
06/30/01          19,502     (29,651)            363,120      75,667
09/30/01          24,803     (22,120)            369,979      95,809
12/31/01          30,860     (15,784)            376,514     118,887
03/31/02          37,328     ( 7,243)            381,737     143,599
06/30/02          44,176                3,783    399,183     169,991
</TABLE>


<TABLE>
<CAPTION>

<PAGE>

                                     ANNEX C

                             AMORTIZATION SCHEDULE

      PAYMENT DATE                              PERCENTAGE REDUCTION
      <S>                                       <C> 
      
      May 1, 2002                               2.5%
      August 1, 2002                            2.5%
      November 1, 2002                          2.5%
      February 1, 2003                          2.5%

      May 1, 2003                               5.0%
      August 1, 2003                            5.0%
      November 1, 2003                          5.0%
      February 1, 2004                          5.0%

      May 1, 2004                               5.0%
      August 1, 2004                            5.0%
      November 1, 2004                          5.0%
      February 1, 2005                          5.0%

      May 1, 2005                               5.0%
      August 1, 2005                            5.0%
      November 1, 2005                          5.0%
      February 1, 2006                          5.0%

      May 1, 2006                               7.5%
      August 1, 2006                            7.5%
      November 1, 2006                          7.5%
      Termination Date                          7.5%
</TABLE>

--------
     1      Under review.