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

                                  FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 1998

                           OR

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

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

COMMISSION FILE NUMBER:  333-50475

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

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

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

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

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

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

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

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

<PAGE>

                          KMC TELECOM HOLDINGS, INC.

                                    INDEX



PART I.  FINANCIAL INFORMATION                                          PAGE NO.

ITEM 1. Financial Statements

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

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

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

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

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

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.....  11


PART II.  OTHER INFORMATION

ITEM 1. Legal Proceedings..............................................  12

ITEM 2. Changes in Securities and Use of Proceeds......................  12

ITEM 3. Defaults Upon Senior Securities................................  12

ITEM 4. Submission of Matters to a Vote of Security Holders............  12

ITEM 5. Other Information..............................................  12

ITEM 6. Exhibits and Reports on Form 8-K...............................  12

SIGNATURES.............................................................  13


<PAGE>

                        PART I - FINANCIAL INFORMATION

                          KMC TELECOM HOLDINGS, INC.

               UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                       DECEMBER 31,     JUNE 30,
                                                          1997            1998
                                                       -----------     ---------
<S>                                                      <C>          <C>
ASSETS
Current assets:
  Cash and cash equivalents...........................    $ 15,553     $ 41,613
  Accounts receivable, net of allowance for doubtful
    accounts..........................................       1,318        3,438
  Prepaid expenses and other current assets...........         489          896
                                                          --------    ---------
Total current assets..................................      17,360       45,947
Investments held for future capital expenditures......           -      153,500
Networks and equipment, net...........................      71,371      119,640
Intangible assets, net................................       2,655        3,723
Deferred financing costs, net.........................       4,196       15,280
Other assets..........................................         361        5,653
                                                          --------    ---------
                                                           $95,943     $343,743
                                                          ========    =========

LIABILITIES AND REDEEMABLE AND NONREDEEMABLE EQUITY
Current liabilities:
  Accounts payable....................................     $ 5,513     $ 29,724
  Accrued expenses....................................       8,128        8,194
  Due to affiliates...................................          47            -
                                                           -------      -------
Total current liabilities.............................      13,688       37,918
Notes payable.........................................      51,277       40,476
Subordinated notes payable............................      10,000            -
Senior discount notes payable.........................           -      252,419
                                                           -------      -------
Total liabilities.....................................      74,965      330,813
Redeemable equity:
  Redeemable  cumulative  convertible  preferred
   stock, par value $.01 per share 498,800 shares
   authorized; shares issued and outstanding:
    Series A, 123,800 shares in 1997 and 1998.........      18,879       25,466
    Series C, 150,000 shares in 1997 and 175,000      
      shares in 1998..................................      14,667       19,438
    Series D, 25,000 shares in 1997 and 0 shares in   
      1998............................................       2,379            -
  Redeemable common stock, shares issued and
    outstanding: 132,773 in 1997 and 224,041 in 1998..      11,187       21,604
  Redeemable common stock warrants....................         539          610
                                                         ---------     --------
Total redeemable equity...............................      47,651       67,118
                                                         ---------     --------
Nonredeemable equity (deficiency):
  Common stock, par value  $.01 per share; 3,000,000
    shares authorized, 613,835 shares issued and      
    outstanding.......................................           6            6
  Additional paid-in capital..........................      15,374       20,817
  Unearned compensation...............................      (6,521)      (5,883)
  Accumulated deficit.................................     (35,532)     (69,128)
                                                         ----------   ---------
Total nonredeemable equity (deficiency)...............     (26,673)     (54,188)
                                                         ----------   ---------
                                                           $95,943     $343,743
                                                        ===========   =========
</TABLE>

                           See accompanying notes.


<PAGE>

                          KMC TELECOM HOLDINGS, INC.

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

<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED          SIX MONTHS ENDED
                                              JUNE 30,                   JUNE 30,
                                       -----------------------   -----------------------
                                          1997        1998          1997        1998
                                       ----------- -----------   ----------- -----------
<S>                                   <C>          <C>          <C>          <C>
Revenue ............................   $     388    $   4,545    $     513    $   7,338
Operating expenses:
  Network operating costs ..........         792        8,103        1,063       13,919
  Selling, general and 
    administrative..................       2,102        5,747        3,565        9,220
  Stock option compensation expense           66        5,097          132        6,196
  Depreciation and amortization ....         151        1,063          286        2,056
                                       ---------    ---------    ---------    ---------
    Total operating expenses .......       3,111       20,010        5,046       31,391
                                       ---------    ---------    ---------    ---------
Loss from operations ...............      (2,723)     (15,465)      (4,533)     (24,053)
Interest expense, net ..............         314        5,168          477        9,544
                                       ---------    ---------    ---------    ---------
Net loss ...........................      (3,037)     (20,633)      (5,010)     (33,597)
Dividends and accretion on
  redeemable preferred stock .......      (1,470)      (6,687)      (1,634)     (10,040)
                                       ---------    ---------    ---------    ---------
Net loss applicable to common
  shareholders......................   $  (4,507)   $ (27,320)   $  (6,644)   $ (43,637)
                                       =========    =========    =========    =========
Net loss per common share ..........   $   (7.51)   $  (32.61)   $  (11.07)   $  (52.71)
                                       =========    =========    =========    =========
Weighted average number of common
  shares outstanding ...............     600,000      837,876      600,000      827,827
                                       =========    =========    =========    =========
</TABLE>

                           See accompanying notes.


<PAGE>

                          KMC TELECOM HOLDINGS, INC.

          UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                            SIX MONTHS ENDED
                                                                JUNE 30,
                                                         -----------------------
                                                            1997         1998
                                                         ----------- -----------
<S>                                                       <C>        <C>        
OPERATING ACTIVITIES
Net loss..............................................     $(5,010)   $ (33,597)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and amortization.......................         286        2,056
  Non-cash interest expense...........................          69       14,142
  Non-cash stock option compensation expense..........         132        6,196
  Changes in assets and liabilities:
    Accounts receivable...............................        (101)      (2,120)
    Prepaid expenses and other current assets.........        (426)        (407)
    Other assets......................................           3         (292)
    Accounts payable..................................      (1,052)      (3,889)
    Accrued expenses..................................         811          697
    Due to affiliates.................................         (45)         (47)
                                                         ----------- -----------
Net cash used in operating activities.................      (5,333)     (17,261)
                                                         ----------- -----------

INVESTING ACTIVITIES
Construction of networks and purchases of equipment...      (8,897)     (22,081)
Acquisitions of franchises, authorizations and              
  related assets......................................      (1,635)      (1,212)
Deposit on purchase of equipment......................            -      (5,000)
Purchases of investments, net.........................            -    (153,500)
                                                         ----------- -----------
Net cash used in investing activities.................     (10,532)    (181,793)
                                                         ----------- -----------

FINANCING ACTIVITIES
Proceeds from notes payable...........................      16,909            -
Repayment of notes payable............................            -     (20,801)
Proceeds from issuance of common stock................            -      10,000
Proceeds from issuance of senior discount notes and
  warrants, net of issuance costs of $13.5 million....            -     236,507
Dividends on preferred stock of subsidiary............            -        (592)
                                                         ----------- -----------
Net cash provided by financing activities.............      16,909      225,114
                                                         ----------- -----------
Net increase in cash and cash equivalents.............       1,044       26,060
Cash and cash equivalents, beginning of period........       1,487       15,553
                                                         ----------- -----------
Cash and cash equivalents, end of period..............     $ 2,531    $  41,613
                                                         =========== ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of          
  amounts capitalized.................................     $   186    $   2,200
                                                         =========== ===========
</TABLE>

                                  See accompanying notes.


<PAGE>

                          KMC TELECOM HOLDINGS, INC.

        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                JUNE 30, 1998


1. BASIS OF PRESENTATION AND ORGANIZATION

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

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

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

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

2. INVESTMENTS HELD FOR FUTURE CAPITAL EXPENDITURES

     The  Company  has  designated  a portion  of the  proceeds  from the Senior
Discount  Notes  offering (See Note 6) as  investments  held for future  capital
expenditures.  As of June 30, 1998,  the Company's  investments  held for future
capital  expenditures  consisted  of cash  equivalents  (bank term  deposits and
commercial  paper with  maturities  of less than 90 days) of $113.5  million and
debt  securities (US government  obligations  and commercial  bonds due within 1
year) of $40.0 million.  All debt securities have been designated by the Company
as   held-to-maturity.   Accordingly,   such  securities  are  recorded  in  the
accompanying  June 30, 1998 financial  statements at amortized cost. At June 30,
1998, the carrying value of such held-to-maturity  debt securities  approximated
their fair value.

3. NETWORKS AND EQUIPMENT

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

                                                     DECEMBER         JUNE 30,  
                                                     31, 1997           1998    
                                                     ----------      -----------
Fiber optic systems..............................     $20,484        $  24,838  
Telecommunications equipment.....................      27,406           46,291  
Furniture and fixtures and other.................       1,518            4,370  
Leasehold improvements...........................         792              990  
Construction-in-progress.........................      23,555           47,460  
                                                     ----------      -----------

                                                       73,755          123,949  
Less accumulated depreciation....................      (2,384)          (4,309) 
                                                     ----------      -----------
                                                                                
                                                      $71,371         $119,640  
                                                     ==========      ===========

      Costs capitalized during the development of the Company's networks include
amounts  incurred  related to network  engineering,  design and construction and
capitalized  interest.  Capitalized  interest related to the construction of the
networks  for the  three  months  ended  June  30,  1997 and  1998  amounted  to
approximately  $142,000 and $1.4 million respectively.  For the three months and
six months ended June 30, 1998,  interest  expense is net of interest  income of
$2.9 million and $5.0 million, respectively.


<PAGE>

4. INTANGIBLE ASSETS

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

                                                       DECEMBER       JUNE 30,  
                                                       31, 1997         1998    
                                                       ----------     ----------
Franchise costs....................................      $1,342         $1,670  
Authorizations and rights-of-ways..................       1,151          1,639  
Building access agreements and other...............         567            961  
                                                       ----------     ----------
                                                          3,060          4,270  
Less accumulated amortization......................        (405)          (547) 
                                                       ----------     ----------
                                                         $2,655         $3,723  
                                                       ==========     ==========


5. OTHER ASSETS

     At June 30, 1998,  other assets  includes  non-refundable  deposits for the
purchase of switching equipment aggregating $5,000,000.

6. SENIOR DISCOUNT NOTES

     On January 29, 1998, KMC Holdings sold 460,800 units,  each unit consisting
of a 12 1/2% senior discount note with a principal  amount at maturity of $1,000
due 2008 (the "Senior Discount Notes") and one warrant to purchase .21785 shares
of Common Stock of KMC Holdings at an exercise price of $.01 per share. Interest
on the Senior  Discount  Notes will be payable in cash on each  February  15 and
August  15,   commencing   August  15,  2003.  The  Senior  Discount  Notes  are
unsubordinated, unsecured indebtedness of KMC Holdings. However, KMC Holdings is
a holding company and the Senior Discount Notes will be effectively subordinated
to all  existing  and  future  liabilities  (including  trade  payables)  of the
Company's  subsidiaries.  The  gross  and  net  proceeds  of the  offering  were
approximately $250.0 million and $236.5 million, respectively.  Upon the closing
of the  offering,  the Company  used the proceeds as follows:  $10.8  million to
repay all amounts borrowed by the Company's subsidiary, KMC Telecom II, under an
Amended and Restated Loan and Security  Agreement with AT&T  Commercial  Finance
Corporation ("AT&T Finance"); $10.1 million to repay all amounts borrowed by the
Company's  subsidiaries,  KMC Telecom and KMC Telecom II,  under a  subordinated
term loan from AT&T Finance  (including  $100,000 of accrued interest  thereon);
$5.0 million as a non-refundable  down payment for future purchases of switching
equipment;  and $592,000 to pay dividend  arrearages  on the Series A Cumulative
Convertible  Preferred Stock of KMC Telecom. The balance will be used to finance
the planned expansion and further  development of the Company's  networks and to
fund operating losses and for the other general corporate  purposes.  As of June
30, 1998,  $153.5  million of the proceeds have been  classified as  non-current
assets, as such amounts have been designated for future capital expenditures.

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

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


<PAGE>

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

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

7. COMMITMENTS AND CONTINGENCIES

LITIGATION

     By letter dated August 29, 1997, KMC Telecom notified I-Net, Inc. ("I-NET")
that  KMC   Telecom   considered   I-NET  to  be  in  default   under  a  Master
Telecommunications  System  Rollout  Agreement  dated as of October 1, 1996 (the
"I-NET Agreement"), pursuant to which I-NET had agreed to manage construction of
telephone  systems for KMC Telecom in several cities,  including the preparation
of design plans and specifications for each system. KMC Telecom considered I-NET
to be in  default as a result of I-NET's  failure  to provide  design  plans and
specifications for several systems for which it had agreed to provide such plans
and  specifications,  to properly  supervise  construction  of the systems or to
provide personnel with the necessary expertise to manage the projects. By letter
dated October 27, 1997,  I-NET  demanded  payment of all amounts it alleged were
due under the I-NET Agreement and a related agreement (aggregating $4.1 million)
and stated  that it would  invoke  the  arbitration  provisions  under the I-NET
Agreement if the parties  could not agree as to the amount due and payment terms
on or before November 27, 1997. By letter dated December 1, 1997, I-NET extended
its deadline for reaching  agreement to December 15, 1997.  Although the Company
and I-NET  conducted  discussions  they were unable to reach an agreement and on
February  12,  1998,  the Company  received a demand for  arbitration  from Wang
Laboratories,  Inc. ("Wang"),  the successor to I-NET. The demand seeks at least
$4.1 million.  The Company  believes that it has meritorious  defenses to Wang's
claims and has  asserted  counterclaims  seeking in excess of $2.5  million as a
result of I-NET's defaults under the I-NET Agreement.  The Company believes that
resolution  of this  matter  will  not have a  material  adverse  impact  on its
financial  condition.  No assurance  can be given,  however,  as to the ultimate
resolution of this matter.

PURCHASE COMMITMENTS

     As of June 30, 1998, the Company has  outstanding  commitments  aggregating
approximately $48.0 million related to purchases of telecommunications equipment
and fiber optic cable and its  obligations  under its  agreements  with  certain
suppliers.

REDEMPTION RIGHTS

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

     The  redeemable  preferred  stock,  redeemable  common stock and redeemable
common  stock  warrants are being  accreted up to their fair market  values from
their  respective  issuance dates to their earliest  potential  redemption  date
(October 22,  2003).  At June 30, 1998,  the aggregate  redemption  value of the
redeemable  equity  was  approximately   $140  million,   reflecting  per  share
redemption amounts of $630 for the Series A Preferred Stock, $248 for the Series
C and D Preferred Stock and $130 for the redeemable  common stock and redeemable
common stock warrants.


<PAGE>

8. NET LOSS PER COMMON SHARE

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

                                 THREE MONTHS ENDED         SIX MONTHS ENDED    
                                      JUNE 30,                  JUNE 30,        
                               -----------------------   -----------------------
                                  1997        1998          1997        1998    
                               ----------- -----------   ----------- -----------
Numerator:                                                                      
  Net loss..................     $(3,037)   $(20,633)      $(5,010)   $(33,597) 
  Dividends and accretion                                                       
    on redeemable preferred                                                     
    stock...................      (1,470)     (6,687)       (1,634)    (10,040) 
                               ----------- -----------   ----------- -----------
  Numerator for net loss                                                        
    per common share - basic     $(4,507)   $(27,320)      $(6,644)   $(43,637) 
                               =========== ===========   =========== ===========

Denominator:                                                                    
Denominator for net loss                                                        
  per common share -                                                            
  weighted average number                                                       
  of common shares                                                              
  outstanding                    600,000     837,876        600,000    827,827  
                               =========== ===========   =========== ===========
                                                                                
                                                                                
Net loss per common share -                                                     
  basic.....................    $  (7.51)  $  (32.61)     $ (11.07)   $ (52.71) 
                               =========== ===========   =========== ===========


     Options and warrants to purchase an aggregate of 182,840 and 251,885 shares
of common stock were outstanding as of June 30, 1997 and 1998, respectively, but
a computation  of diluted net loss per common share has not been  presented,  as
the effect would be anti-dilutive.


<PAGE>

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

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


RESULTS OF OPERATIONS

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

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

     REVENUE.  Revenue  increased  from $388,000 for the three months ended June
30, 1997 (the "1997 Second  Quarter") to $4.5 million for the three months ended
June  30,  1998  (the  "1998  Second   Quarter").   The  increase  is  primarily
attributable  to the fact that the  Company  had  eight  systems  in  commercial
operation  during the 1998  Second  Quarter  compared  to only three  systems in
commercial  operation  during the entire 1997  Second  Quarter.  Two  additional
systems became  commercially  operational during the 1997 Second Quarter but did
not generate significant  revenues during that period.  Revenue for the 1997 and
1998 Second  Quarters  included  $200,000  and $3.1  million,  respectively,  of
revenue  derived  from resale of switched  services and an aggregate of $188,000
and $1.4 million,  respectively,  of revenue derived from on-net special access,
private line and switched services.

     NETWORK OPERATING COSTS. Network operating costs increased from $792,000 in
the 1997  Second  Quarter  to $8.1  million  in the 1998  Second  Quarter.  This
increase of approximately  $7.3 million was due primarily to the increase in the
number of systems in  commercial  operation  in the 1998 Second  Quarter and the
related  increases of $3.5 million in costs  associated  with  providing  resale
services,   $1.4  million  in  personnel  costs,   $600,000  in  consulting  and
professional  services costs,  $500,000 in contracted network support costs, and
$1.3 million in facilities, travel and other direct operating costs.

     SELLING,  GENERAL  AND  ADMINISTRATIVE   EXPENSES.   Selling,  general  and
administrative  expenses increased from $2.1 million for the 1997 Second Quarter
to $5.7 million for the 1998 Second Quarter. This increase of approximately $3.6
million resulted primarily from increases of $2.5 million in personnel costs and
$500,000 in professional costs (consisting primarily of legal costs), as well as
increases in other marketing and general and  administrative  costs  aggregating
approximately $600,000.

     STOCK OPTION COMPENSATION  EXPENSE.  Stock option  compensation  expense, a
non-cash  charge,  increased  from  $66,000 in the 1997  Second  Quarter to $5.1
million in the 1998 Second Quarter,  primarily as a result of an increase in the
fair market value of KMC Telecom's  common stock and, to a lesser  extent,  as a
result of the  greater  number of options  outstanding  during  the 1998  Second
Quarter.

     DEPRECIATION  AND  AMORTIZATION.   Depreciation  and  amortization  expense
increased from $151,000 for the 1997 Second Quarter to $1.1 million for the 1998
Second Quarter primarily as a result of depreciation expense associated with the
greater  number of  networks  commercially  operational  during the 1998  Second
Quarter.

     INTEREST  EXPENSE.  Interest  expense  increased  from $314,000 in the 1997
Second Quarter to $5.2 million in the 1998 Second Quarter. The increase resulted
primarily  from the  issuance  of the  Senior  Discount  Notes  during the first
quarter of 1998,  which generated  interest  expense of $8.2 million in the 1998
Second  Quarter,  as well as the increased  expense  attributable  to the higher
level of borrowings under the Company's $70.0 million senior line of credit with
AT&T Commercial  Finance  Corporation  (the "AT&T  Facility") in the 1998 Second
Quarter.  The increase was partially  offset by $2.9 million of interest  income
earned on the  investment  of the unused  portion of the  proceeds of the Senior
Discount Note offering.  The Company capitalized interest of $802,000 related to
network construction projects during the 1998 Second Quarter.


<PAGE>

     NET LOSS.  For the  reasons  stated  above,  net loss  increased  from $3.0
million  for the 1997  Second  Quarter  to  $20.6  million  for the 1998  Second
Quarter.

                  SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO
                        SIX MONTHS ENDED JUNE 30, 1997

     REVENUE.  Revenue increased from $513,000 for the six months ended June 30,
1997 (the "1997 Six  Months") to $7.3  million for the six months ended June 30,
1998 (the "1998 Six  Months").  This increase is primarily  attributable  to the
fact that for the 1998 Six Months the  Company had eight  systems in  commercial
operation  during the entire  period as compared to the 1997 Six Months when the
Company had one system in commercial operation during the entire period and four
systems  beginning  commercial  operations at various  points during the period.
Revenue for the 1997 Six Months and 1998 Six Months  included  $325,000 and $5.3
million,  respectively,  of revenue derived from resale of switched services and
an aggregate of $188,000 and $2.0 million, respectively, of revenue derived from
on-net special access, private line and switched services.

     NETWORK  OPERATING  COSTS.  Network  operating  costs  increased  from $1.1
million in the 1997 Six Months to $13.9  million  in the 1998 Six  Months.  This
increase of approximately $12.8 million was due primarily to the increase in the
number of systems in commercial operation in the 1998 Six Months and the related
increases of $5.8 million in costs  associated with providing  resale  services,
$3.3 million in personnel  costs,  $1.0 million in consulting  and  professional
services  costs,  $1.0 million in contracted  network  support  costs,  and $1.7
million in facilities, travel and other direct operating costs.

     SELLING,  GENERAL  AND  ADMINISTRATIVE   EXPENSES.   Selling,  general  and
administrative  expenses  increased  from $3.6 million in the 1997 Six Months to
$9.2 million in the 1998 Six Months. This increase of approximately $5.6 million
resulted  primarily  from  increases  of $4.0  million  in  personnel  costs and
$400,000 in professional costs (consisting primarily of legal costs), as well as
increases in other marketing and general and  administrative  costs  aggregating
approximately $1.2 million.

     STOCK OPTION COMPENSATION  EXPENSE.  Stock option  compensation  expense, a
non-cash charge,  increased from $132,000 in the 1997 Six Months to $6.2 million
in the 1998 Six Months,  primarily as a result of an increase in the fair market
value of KMC Telecom's common stock and, to a lesser extent,  as a result of the
greater number of options outstanding during the 1998 Six Months.

     DEPRECIATION  AND  AMORTIZATION.   Depreciation  and  amortization  expense
increased from $286,000 for the 1997 Six Months to $2.1 million for the 1998 Six
Months,  primarily  as a result  of  depreciation  expense  associated  with the
greater number of networks commercially operational during the 1998 Six Months.

     INTEREST EXPENSE.  Interest expense increased from $477,000 in the 1997 Six
Months to $9.5 million in the 1998 Six Months.  This increase resulted primarily
from the issuance of the Senior Discount Notes during the first quarter of 1998,
which  generated  interest  expense of $13.8 million in the 1998 Six Months,  as
well as the  increased  expense  attributable  to the higher level of borrowings
under the AT&T  Facility in the 1998 Six Months.  This  increase  was  partially
offset by $5.0 million of interest income earned on the investment of the unused
portion of the proceeds of the Senior Discount Note offering during the 1998 Six
Months.  The Company  capitalized  interest of $1.4  million  related to network
construction projects during the 1998 Six Months.

     NET LOSS.  For the  reasons  stated  above,  net loss  increased  from $5.0
million for the 1997 Six Months to $33.6 million for the 1998 Six Months.


<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

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

     Under the AT&T Facility, the Company may borrow up to an aggregate of $70.0
million  for the  construction  of fiber  optic  telecommunications  networks in
certain markets,  subject to certain  conditions.  At June 30, 1998, the Company
had $40.5 million of  indebtedness  outstanding  under the AT&T Facility and had
$29.5 million in borrowing capacity  available under the AT&T Facility,  subject
to certain conditions. On January 29, 1998, the Company completed an offering of
460,800 units, each unit consisting of one 12 1/2% Senior Discount Note due 2008
with a principal  amount at maturity of $1,000 (the "Senior Discount Notes") and
one  warrant to  purchase  .21785  shares of Common  Stock of the  Company at an
exercise  price of $.01 per share.  The net  proceeds  to the  Company  from the
offering were  approximately  $236.5  million.  The AT&T Facility  restricts the
ability of KMC Telecom to pay  dividends  to, or to pay principal or interest on
loans from, KMC Holdings. Such restrictions could adversely affect the Company's
liquidity  and ability to meet its cash  requirements,  including its ability to
repay the Senior Discount Notes.

     Net cash  provided  by  financing  activities  from  borrowings  and equity
issuances  was $225.1  million for the 1998 Six Months.  The  Company's net cash
used in operating and investment  activities was $199.1 million for the 1998 Six
Months.

     The Company  made  capital  expenditures  of $22.1  million in the 1998 Six
Months. These capital expenditures were financed from the proceeds of the Senior
Discount Note offering.  The Company currently plans to make additional  capital
expenditures  of  approximately  $130.0  million  during the  remainder of 1998.
Continued  significant capital  expenditures are expected to be made thereafter.
The  majority  of  these  expenditures  are  expected  to be  made  for  network
construction  and the purchase of switches and related  equipment to  facilitate
the offering of the  Company's  services.  In addition,  the Company  expects to
continue to incur operating  losses while it expands its business and builds its
customer base.  Actual capital  expenditures and operating losses will depend on
numerous  factors,  including  the nature of future  expansion  and  acquisition
opportunities  and factors  beyond the  Company's  control,  including  economic
conditions,   competition,  regulatory  developments  and  the  availability  of
capital.

     At June 30,  1998  the  Company  had  outstanding  commitments  aggregating
approximately  $48.0  million  related to the  purchase of fiber optic cable and
telecommunications equipment as well as engineering services.

     At June 30, 1998 the Company had cash and cash  equivalents  and marketable
securities of  approximately  $195.1  million.  The Company  believes that these
funds,  together with  available  cash and  borrowings  expected to be available
under the AT&T Facility, will provide sufficient funds for the Company to expand
its business as currently planned and to fund its currently anticipated expenses
through the  completion  of its eight  existing  networks,  the ten new networks
currently  under  construction  and expected to be completed by the end of 1998,
and the five additional  networks  expected to be completed in 1999, and to fund
its working capital requirements for 1999. Thereafter,  the Company will require
additional financing. However, in the event that the Company's plans change, the
assumptions  upon which the  Company's  plans are based  prove  inaccurate,  the
Company  expands or accelerates  its business plan or the Company  determines to
consummate additional acquisitions,  the foregoing sources of funds may prove to
be insufficient  to complete all such networks,  and the Company may be required
to seek additional financing.


<PAGE>

YEAR 2000 COMPLIANCE

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


ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not Applicable.


<PAGE>

                         PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

     Not Applicable.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

     Not Applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

     Not Applicable.

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

     Not Applicable.

ITEM 5.  OTHER INFORMATION.

     Not Applicable.

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

     (a) EXHIBITS

      27.         Financial Data Schedule.

     (b) REPORTS ON FORM 8-K

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


<PAGE>

                                  SIGNATURES

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

DATED: August 13, 1998



                                                   KMC TELECOM HOLDINGS, INC.
                                                         (Registrant)


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


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


<PAGE>

                                  EXHIBIT INDEX



NO.             DESCRIPTION

27              Financial Data Schedule