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                                WARRANT AGREEMENT

                                      among

                           KMC TELECOM HOLDINGS, INC.

                                       and

                            THE CHASE MANHATTAN BANK,
                                as Warrant Agent

                                       and

                           FIRST UNION INVESTORS, INC.

                                       and

               HAROLD N. KAMINE and NASSAU CAPITAL PARTNERS L. P.
                           for purposes of Section 8.5


                           Dated as of April 30, 1999



--------------------------------------------------------------------------------


<PAGE>

                                TABLE OF CONTENTS
                                                                            Page

ARTICLE I......................................................................2
CERTAIN DEFINITIONS............................................................2

ARTICLE II.....................................................................5
ORIGINAL ISSUE OF WARRANTS.....................................................5

   Section 2.1.  Form of Warrant Certificates..................................6
   Section 2.2.  Restrictive Legends...........................................6
   Section 2.3.  Execution and Delivery of Warrant Certificates................7
   Section 2.4. Springing Warrants.............................................8

ARTICLE III....................................................................8
EXERCISE PRICE AND EXERCISE OF WARRANTS........................................8

   Section 3.1.  Exercise Price................................................8
   Section 3.2.  Exercise; Restrictions on Exercise............................8
   Section 3.3.  Method of Exercise; Payment of Exercise Price.................8

ARTICLE IV....................................................................10
ADJUSTMENTS...................................................................10

   Section 4.1.  Adjustments..................................................10
   Section 4.2.  Notice of Adjustment.........................................16
   Section 4.3.  Statement on Warrants........................................17
   Section 4.4.  Notice of Consolidation, Merger, Etc.........................17
   Section 4.5.  Fractional Interests.........................................18
   Section 4.6.  When Issuance or Payment May Be Deferred.....................18
   Section 4.7.  Initial Public Offering......................................18

ARTICLE V.....................................................................18
DECREASE IN EXERCISE PRICE....................................................18

ARTICLE VI....................................................................19
LOSS OR MUTILATION............................................................19

ARTICLE VII...................................................................19
RESERVATION AND AUTHORIZATION.................................................19
OF COMMON SHARES..............................................................19

ARTICLE VIII..................................................................20
WARRANT TRANSFER BOOKS; RESTRICTIONS ON TRANSFER; CERTAIN TRANSFER RIGHTS.....20

   Section 8.1.  Transfer and Exchange........................................20
   Section 8.3.  Special Transfer Provisions..................................20
   Section 8.4.  Surrender of Warrant Certificates............................22
   Section 8.5.  Tag-Along Right..............................................22
   Section 8.6.  Bring Along Right............................................24

ARTICLE IX....................................................................25
WARRANT HOLDERS...............................................................25

   Section 9.1.  Warrant Holder Deemed Not a Shareholder......................25
   Section 9.2.  Right of Action..............................................25

ARTICLE X.....................................................................25
THE WARRANT AGENT.............................................................25

   Section 10.1.  Duties and Liabilities......................................25
   Section 10.2.  Right to Consult Counsel....................................27
   Section 10.3.  Compensation; Indemnification...............................27
   Section 10.4.  No Restrictions on Actions..................................27
   Section 10.5.  Discharge or Removal; Replacement Warrant Agent.............27
   Section 10.6.  Successor Warrant Agent.....................................28

ARTICLE XI....................................................................29
MISCELLANEOUS.................................................................29

   Section 11.1.  Monies Deposited with the Warrant Agent.....................29
   Section 11.2.  Payment of Taxes............................................29
   Section 11.3.  No Merger, Consolidation or Sale of Assets of the Company...29
   Section 11.4.  Reports to Holders..........................................29
   Section 11.5.  Notices; Payment............................................30
   Section 11.6.  Binding Effect..............................................31
   Section 11.7.  Counterparts................................................31
   Section 11.8.  Amendments..................................................31
   Section 11.9.  Headings....................................................32
   Section 11.10. Common Shares Legend.......................................32
   Section 11.11. Third Party Beneficiaries..................................33
   Section 11.12. Termination................................................33
   Section 11.13. Governing Law..............................................33



EXHIBIT A       FORM OF WARRANT CERTIFICATE

EXHIBIT B-1     FORM OF  CERTIFICATE  TO BE DELIVERED BY  TRANSFEROR  IN
                CONNECTION WITH TRANSFERS TO PERSONS OTHER THAN QIBs

EXHIBIT B-2     FORM OF CERTIFICATE TO BE DELIVERED BY TRANSFEREES IN CONNECTION
                WITH TRANSFERS TO PERSONS OTHER THAN QIBs

APPENDIX A      LIST OF FINANCIAL EXPERTS



<PAGE>

                                WARRANT AGREEMENT

          WARRANT  AGREEMENT,  dated as of April 30,  1999  (this  "AGREEMENT"),
among KMC TELECOM HOLDINGS,  INC., a Delaware  corporation (the "COMPANY"),  and
FIRST UNION INVESTORS,  INC., a North Carolina corporation (the "PURCHASER") and
The Chase  Manhattan  Bank, as warrant agent (the  "WARRANT  AGENT").  Harold N.
Kamine and Nassau  Capital  Partners L. P. are parties to this Agreement for the
purposes of Section 8.5.

                              W I T N E S S E T H:

          WHEREAS,  in connection with the sale of shares of its preferred stock
from time to time,  the  Company  intends to issue and sell  warrants  (each,  a
"WARRANT" and  collectively,  the "WARRANTS") to be issued under this Agreement,
each Warrant initially  entitling the holder thereof to purchase 0.471756 shares
of Common Stock (as defined  below) of the Company at an exercise  price of $.01
per Common Share (as defined below);

          WHEREAS,  pursuant to the terms of a Securities  Purchase Agreement of
even date  herewith  (the  "PURCHASE  AGREEMENT"),  between  the Company and the
Purchaser, the Company has agreed to issue and sell to the Purchaser a unit (the
"SERIES E UNIT"),  consisting of 35,000 shares of the Company's Series E Senior,
Redeemable,  Exchangeable  PIK Preferred Stock (the "SERIES E PREFERRED  STOCK")
and 94,513 Warrants;

          WHEREAS, the Series E Preferred Stock and the Warrants included in the
Series E Unit will become separately  transferable on the Business Day after the
date the Series E Unit is initially issued (the "SEPARATION DATE");

          WHEREAS, as described in Section 2.4 of the Existing Warrant Agreement
(as defined  below),  holders of Series E Preferred Stock and Series F Preferred
Stock are entitled to receive  227,273  warrants  unless certain  conditions are
satisfied;

          WHEREAS,  the  Company  has  previously  issued  shares  of  Series  E
Preferred  Stock,   shares  of  the  Company's  Series  F  Senior,   Redeemable,
Exchangeable PIK Preferred Stock (the "SERIES F PREFERRED STOCK"),  warrants and
springing warrants under a Securities Purchase Agreement dated as of February 4,
1999;

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


                                       1
<PAGE>

          NOW,  THEREFORE,  in  consideration of the foregoing and of the mutual
agreements  contained  herein and in the Purchase  Agreement,  the Company,  the
Purchaser and the Warrant Agent hereby agree as follows:

                                    ARTICLE I

                               CERTAIN DEFINITIONS

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

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

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

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

          "Buyout  Notice"  shall  have the  meaning  ascribed  to such  term in
Section 8.6.

          "Capital  Stock" shall mean capital  stock or share capital of, and/or
other equity  participations  in, the Company,  including,  without  limitation,
partnership interests,  and/or conversion privileges,  warrants,  options and/or
other rights to acquire such capital  stock,  share capital  and/or other equity
participations.

          "Certificate  for Surrender" means the form on the reverse side of the
Warrant Certificate substantially in the form included in Exhibit A hereto.

          "Closing Date" means April 30, 1999.

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

          "Common Shares" means the shares of the Common Stock of the Company.

          "Common Stock" means the common stock,  par value $0.01 per share,  of
the Company.

                                       2
<PAGE>

          "Common Stock  Equivalents"  means any security or obligation which is
by its terms convertible into shares of Common Stock and any option,  warrant or
other subscription or purchase right with respect to Common Stock.

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

          "Current  Market  Value" has the meaning  specified in Section  4.1(f)
hereof.

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

          "Exercise Price" has the meaning specified in Section 3.1 hereof.

          "Existing  Stockholders" means those stockholders who are from time to
time parties to the  Stockholders  Agreement  dated as of October 31,  1997,  as
amended.

          "Existing  Warrant  Agreement" means the Warrant Agreement dated as of
February 4, 1999 among the Company,  Newcourt Commercial Finance Corporation and
Lucent Technologies Inc, as amended to date.

          "Expiration Date" means February 1, 2009.

          "Financial  Expert"  means one of the  Persons  listed in  Appendix  A
hereto.

          "Fully Diluted" or "Fully Diluted Basis" shall mean, at any date as of
which the number of shares of Common Stock is to be  determined,  such number of
shares  determined  on  a  basis  that  includes  all  shares  of  Common  Stock
outstanding  at such date and the  maximum  shares of Common  Stock  issuable in
respect  of  Common  Stock  Equivalents  (giving  effect  to  the  then  current
respective  conversion  prices)  and  other  rights  to  purchase  (directly  or
indirectly) shares of Common Stock or Common Stock  Equivalents,  outstanding on
such  date,  whether  or not  such  rights  to  convert,  exchange  or  exercise
thereunder are presently exercisable.

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

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

                                       3
<PAGE>

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

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

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

          "Opinion of Counsel" means a written  opinion signed by legal counsel,
who may be an employee of or counsel to the Company or an applicable Holder.

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

          "Principal  Holders" means each of the following two groups (i) Nassau
Capital  Partners L.P and its general and limited partners and any Affiliates of
the  foregoing  and (ii) Harold N.  Kamine and his  parents,  siblings,  spouse,
descendants,  heirs and devisees, and any trust or Person the sole beneficiaries
or equity holders of which are the foregoing Persons.

          "Private  Placement  Legend" means the legend set forth on the Warrant
Certificates in the form set forth in Section 2.2 hereof.

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

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

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

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

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

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



                                       4
<PAGE>

          "Separation  Date" has the meaning  specified  in the recitals to this
Agreement.

          "Series E Preferred  Stock" has the meaning  specified in the recitals
to this Agreement.

          "Series E Unit" has the  meaning  specified  in the  recitals  to this
Agreement.

          "Series F Preferred  Stock" has the meaning  specified in the recitals
to this Agreement.

          "Spread" means,  with respect to any Warrant,  the last reported trade
price of the Common  Shares  issuable upon exercise of such Warrant at the close
of business on any Business Day on the principal exchange or quotation system on
which the Company's  Common Shares are listed,  less the Exercise  Price of such
Warrant, as adjusted as provided herein.

          "Springing Warrants means the warrants which may be issued pursuant to
Section 2.4 of the Existing Warrant Agreement.

          "Subscription  Form" means the form on the reverse side of the Warrant
Certificate substantially in the form included in Exhibit A hereto.

          "Tag-Along  Notice"  shall have the  meaning  ascribed to such term in
Section 8.5.

          "Tag-Along  Purchaser" shall have the meaning ascribed to such term in
Section 8.5.

          "Tag-Along  Shares"  shall have the  meaning  ascribed to such term in
Section 8.5.

          "Third Party  Purchaser"  shall have the meaning ascribed to such term
in Section 8.6.

          "Transfer Agent" means Chase Mellon Shareholder Services,  L.L.C., the
transfer agent for the Series E Preferred Stock, and its successors and assigns,
or as  appointed  by the  Company  which in no event  shall be the Company or an
Affiliate of the Company.

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

          "Value Report" has the meaning specified in Section 4.1(k) hereof.

          "Warrants"  has  the  meaning   specified  in  the  recitals  to  this
Agreement, including the Springing Warrants.

          "Warrant  Agent" has the  meaning  specified  in the  preamble to this
Agreement.



                                       5
<PAGE>

          "Warrant  Certificates"  has the  meaning  specified  in  Section  2.1
hereof.

          "Warrant Registration Rights Agreement" means the Warrant Registration
Rights Agreement, of even date herewith, between the Company and the Purchaser.

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

                                   ARTICLE II

                           ORIGINAL ISSUE OF WARRANTS

          SECTION 2.1. FORM OF WARRANT CERTIFICATES.  Certificates  representing
the Warrants (the "WARRANT  CERTIFICATES")  shall be  substantially  in the form
attached  hereto as Exhibit  A,  shall be dated the date on which  such  Warrant
Certificates  are  countersigned  by the  Warrant  Agent  and  shall  have  such
insertions as are appropriate or required or permitted by this Agreement and may
have such letters, numbers or other marks of identification and such legends and
endorsements stamped,  printed,  lithographed or engraved thereon as the Company
may deem  appropriate  and as are not  inconsistent  with the provisions of this
Agreement,  or as may be  required  to  comply  with any law or with any rule or
regulation  pursuant  thereto or with any rule or regulation  of any  securities
exchange on which the Warrants may be listed, or to conform to usage.

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

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

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

THE WARRANTS  REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
U.S.  SECURITIES ACT OF 1933, AS AMENDED (THE  "SECURITIES  ACT"),  OR ANY STATE
SECURITIES LAWS, AND ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE
TRANSFERRED  EXCEPT AS SET FORTH IN THE FOLLOWING  SENTENCE.  BY ITS ACQUISITION
HEREOF,  THE HOLDER (1)  REPRESENTS  THAT (A) IT IS A  "QUALIFIED  INSTITUTIONAL


                                       6
<PAGE>

BUYER"  (AS  DEFINED  IN RULE  144A  UNDER THE  SECURITIES  ACT) OR (B) IT IS AN
INSTITUTIONAL  "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1),  (2), (3) OR
(7) OF  REGULATION D UNDER THE  SECURITIES  ACT) (AN  "INSTITUTIONAL  ACCREDITED
INVESTOR"),  (2) AGREES THAT IT WILL NOT,  WITHIN THE TIME PERIOD REFERRED TO IN
RULE 144(k)  (TAKING  INTO  ACCOUNT  THE  PROVISIONS  OF RULE  144(d)  UNDER THE
SECURITIES  ACT,  IF  APPLICABLE)  RESELL OR  OTHERWISE  TRANSFER  THE  WARRANTS
REPRESENTED BY THIS CERTIFICATE  EXCEPT (A) TO KMC TELECOM  HOLDINGS,  INC. (THE
"COMPANY") OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED  INSTITUTIONAL BUYER IN
COMPLIANCE  WITH RULE 144A UNDER THE  SECURITIES  ACT,  (C) TO AN  INSTITUTIONAL
ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE WARRANT AGENT
A SIGNED LETTER CONTAINING CERTAIN  REPRESENTATIONS  AND AGREEMENTS  RELATING TO
THE  RESTRICTIONS  ON TRANSFER OF THE WARRANTS  REPRESENTED BY THIS  CERTIFICATE
(THE FORM OF WHICH  LETTER CAN BE  OBTAINED  FROM THE  WARRANT  AGENT),  AND, AN
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN
COMPLIANCE  WITH  THE  SECURITIES  ACT,  (D)  PURSUANT  TO  THE  EXEMPTION  FROM
REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (E)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3)
AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE WARRANTS  REPRESENTED  BY
THIS  CERTIFICATE ARE TRANSFERRED A NOTICE  SUBSTANTIALLY  TO THE EFFECT OF THIS
LEGEND.  IN  CONNECTION  WITH ANY TRANSFER OF THE WARRANTS  REPRESENTED  BY THIS
CERTIFICATE  WITHIN THE TIME PERIOD REFERRED TO ABOVE, THE HOLDER MUST CHECK THE
APPROPRIATE  BOX SET FORTH ON THE REVERSE HEREOF  RELATING TO THE MANNER OF SUCH
TRANSFER  AND SUBMIT THIS  CERTIFICATE  TO THE WARRANT  AGENT.  IF THE  PROPOSED
TRANSFEREE IS AN INSTITUTIONAL  ACCREDITED  INVESTOR,  THE HOLDER MUST, PRIOR TO
SUCH  TRANSFER,  FURNISH  TO EACH OF THE  WARRANT  AGENT  AND THE  COMPANY  SUCH
CERTIFICATIONS,  LEGAL  OPINIONS  OR OTHER  INFORMATION  AS  EITHER  OF THEM MAY
REASONABLY  REQUIRE TO CONFIRM THAT SUCH  TRANSFER IS BEING MADE  PURSUANT TO AN
EXEMPTION  FROM,  OR  IN  A  TRANSACTION   NOT  SUBJECT  TO,  THE   REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT. THE WARRANT  AGREEMENT  CONTAINS A PROVISION
REQUIRING  THE WARRANT  AGENT TO REFUSE TO REGISTER ANY TRANSFER OF THE WARRANTS
REPRESENTED BY THIS CERTIFICATE IN VIOLATION OF THE FOREGOING RESTRICTIONS.

          SECTION  2.3.  EXECUTION  AND  DELIVERY OF WARRANT  CERTIFICATES.  (a)
Warrant Certificates evidencing Warrants to be issued under the Agreement,  each
Warrant to purchase  initially  0.471756 Common Shares,  may be executed,  on or
after the date of this  Agreement,  by the Company and  delivered to the Warrant
Agent for  countersignature,  and the Warrant Agent shall thereupon  countersign
and  deliver  such  Warrant  Certificates  upon  the  order  and at the  written


                                       7
<PAGE>

direction of the Company  signed by its Chairman of the Board,  Vice Chairman of
the Board, President,  Chief Operating Officer, Chief Financial Officer or Chief
Executive Officer to the purchasers thereof on the date of issuance. The Warrant
Agent is hereby  authorized to countersign and deliver  Warrant  Certificates as
required by this Section 2.3,  Section 3.3, Article VI or Article VIII hereof or
Section 2.4 of the Existing Warrant Agreement.

          The Warrant Certificates shall be executed on behalf of the Company by
its  Chairman  of the  Board,  Vice  Chairman  of the  Board,  President,  Chief
Operating  Officer,  Chief Financial  Officer or Chief Executive  Officer either
manually or by facsimile  signature  printed thereon.  The Warrant  Certificates
shall be countersigned by manual signature of the Warrant Agent and shall not be
valid for any purpose unless so  countersigned.  In case any officer or director
of the Company  whose  signature  shall have been placed upon any of the Warrant
Certificates  shall cease to be such  officer or director of the Company  before
countersignature  by the Warrant  Agent and the issuance  and delivery  thereof,
such Warrant Certificates may nevertheless be countersigned by the Warrant Agent
and issued and  delivered  with the same force and effect as though  such person
had not ceased to be such officer or director of the Company.

          (b) On the  Closing  Date,  94,513  Warrants  shall be  issued  by the
Company and  registered  in the name of the  Purchaser  in  connection  with the
issuance and sale to the Purchaser of the Series E Unit.

          SECTION 2.4.  SPRINGING  WARRANTS.  In addition to the Warrants issued
to the  Purchaser  pursuant to the Purchase  Agreement and this  Agreement,  the
Purchaser may also be issued Springing Warrants under Section 2.4 of the Exising
Warrant Agreement unless certain conditions described therein are satisfied. Any
Springing  Warrants  that are issued to the Purchaser  shall be  "Warrants"  for
purposes of this  Agreement and shall be subject to the terms and  conditions of
this Agreement  and, upon any such  issuance,  shall no thereafter be subject to
the terms and conditions of the Existing Warrant Agreement.


                                   ARTICLE III

                     EXERCISE PRICE AND EXERCISE OF WARRANTS

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

          SECTION 3.2.  EXERCISE;  RESTRICTIONS  ON EXERCISE.  At any time after
February 4, 2000, and on or before the Expiration Date, any outstanding Warrants
may be exercised on any Business Day by the Holders thereof;  provided, that the


                                       8
<PAGE>

Warrant  Registration  Statement  is,  at the time of  exercise,  effective  and
available  for the exercise of the Warrants or the exercise of such  Warrants is
exempt  from  the  registration  requirements  of the  Securities  Act;  further
provided,  that  notwithstanding  anything to the  contrary  in this  Agreement,
neither any Holder nor any of its  permitted  transferees  (each,  a  "Regulated
Holder")  shall be entitled to exercise any Warrants,  unless in the  reasonable
judgment of such  Regulated  Holder,  such  exercise  would not violate the Bank
Holding  Company  Act of  1956,  as  amended,  and the  regulations  promulgated
thereunder.  Any Warrants not exercised by 5:00 p.m., New York City time, on the
Expiration  Date shall  expire and all  rights of the  Holders of such  Warrants
shall terminate. Additionally, pursuant to Section 4.1(j)(ii) hereof and subject
to the conditions set forth therein, the Warrants shall expire and all rights of
the Holders of such Warrants shall  terminate in the event the Company merges or
consolidates  with or sells all or substantially  all of its property and assets
to a Person  (other  than an  Affiliate  of the  Company)  if the  consideration
payable  to  holders  of Common  Stock in  exchange  for their  Common  Stock in
connection with such merger, consolidation or sale consists solely of cash or in
the event of the dissolution, liquidation or winding up of the Company.

          SECTION 3.3.  METHOD OF EXERCISE;  PAYMENT OF EXERCISE PRICE. In order
to exercise all or any of the Warrants represented by a Warrant Certificate, the
Holder  thereof  must  surrender  for exercise  the Warrant  Certificate  to the
Warrant  Agent at its corporate  trust office  address set forth in Section 11.5
hereof,  with the  Subscription  Form set forth on the  reverse  of the  Warrant
Certificate  duly executed,  together with payment in full of the Exercise Price
then in  effect  for each  Common  Share  (or other  securities)  issuable  upon
exercise of the Warrants as to which a Warrant is exercised; such payment may be
made  by  wire  transfer,  in  cash or by  certified  or  official  bank or bank
cashier's  check  payable to the order of the  Company  and shall be made to the
Warrant  Agent at its corporate  trust office  address set forth in Section 11.5
hereof  prior to the close of business on the date the  Warrant  Certificate  is
surrendered to the Warrant Agent for exercise. Notwithstanding the foregoing, if
the Common Shares (or other  securities)  issuable upon exercise of the Warrants
are  registered  under  the  Exchange  Act,  the  Exercise  Price may be paid by
surrendering additional Warrants to the Warrant Agent having an aggregate Spread
equal to the  aggregate  Exercise  Price of the Warrants  being  exercised.  All
payments received upon exercise of Warrants shall be delivered to the Company by
the Warrant Agent as instructed in writing by the Company.  If less than all the
Warrants  represented by a Warrant  Certificate are exercised or surrendered (in
connection  with  a  cashless  exercise),  such  Warrant  Certificate  shall  be
surrendered  and a new Warrant  Certificate of the same tenor and for the number
of Warrants  which were not  exercised or  surrendered  shall be executed by the
Company  and  delivered  to the  Warrant  Agent  and  the  Warrant  Agent  shall
countersign the new Warrant Certificate, registered in such name or names as may
be  directed  in  writing  by the  Holder,  and shall  deliver  the new  Warrant
Certificate  to the Person or Persons  entitled  to receive  the same.  Upon the
exercise of any Warrants  following  the surrender of a Warrant  Certificate  in
conformity with the foregoing  provisions,  the Warrant Agent shall instruct the
Company to transfer  promptly  to the Holder or,  upon the written  order of the
Holder of such  Warrant  Certificate,  appropriate  evidence of ownership of any
Common Shares or other security or property to which it is entitled,  registered
or  otherwise  placed in such name or names as may be directed in writing by the
Holder,  and to deliver  such  evidence  of  ownership  to the Person or Persons
entitled  to receive  the same and  fractional  shares,  if any, or an amount in


                                       9
<PAGE>

cash,  in lieu of any  fractional  shares,  as  provided  in Section 4.5 hereof;
provided that the Holder of such Warrant shall be responsible for the payment of
any  transfer  taxes  required as the result of any change in  ownership of such
Warrants or the issuance of such Common  Shares other than to the Holder of such
Warrants  and any such  transfer  shall  comply with  applicable  law.  Upon the
exercise of a Warrant or Warrants,  the Warrant Agent is hereby  authorized  and
directed to  requisition  from any transfer  agent of the Common Shares (and all
such transfer  agents are hereby  authorized  to comply with all such  requests)
certificates  (bearing  the  legend  set  forth  in  Section  11.10  hereof,  if
applicable, unless a registration statement relating to such Common Shares filed
with the  Commission  shall  then be in effect  or the  Company  and the  Holder
exercising such Warrant or Warrants otherwise agree) for the necessary number of
Common Shares to which said Holder may be entitled.  The Company shall enter, or
shall cause any transfer  agent of the Common  Shares to enter,  the name of the
Person  entitled to receive the Common Shares upon exercise of the Warrants into
the  Company's  register  of  shareholders  within 14 days of such  exercise.  A
Warrant shall be deemed to have been exercised immediately prior to the close of
business on the date of the surrender for exercise,  as provided  above,  of the
Warrant  Certificate  representing such Warrant together with payment in full of
the  Exercise  Price  (or  surrender  of  sufficient  Warrant   Certificates  in
connection with a cashless exercise) and, for all purposes under this Agreement,
the Person entitled to receive any Common Shares  deliverable upon such exercise
shall,  as between  such Person and the  Company,  be deemed to be the Holder of
such Common  Shares of record as of the close of business on such date and shall
be entitled to receive,  and the Warrant Agent shall deliver to such Person, any
Common Shares to which such Person would have been entitled had such Person been
the registered holder on such date.

                                   ARTICLE IV

                                   ADJUSTMENTS

          SECTION 4.1. ADJUSTMENTS.  The Exercise Price and the number of Common
Shares  issuable  upon  exercise of each Warrant  shall be subject to adjustment
from time to time as follows:

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


                                       10
<PAGE>

prior to the happening of such event or any record date with respect thereto. An
adjustment  made  pursuant  to  this  Section  4.1(a)  shall  become   effective
immediately  after the effective  date of such event  retroactive  to the record
date, if any, for such event.

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

          (c)  ISSUANCE OF COMMON  SHARES AT LOWER  VALUES.  In case the Company
shall sell and issue any Common Share or Right (as defined below) (excluding (i)
any Right issued in any of the  transactions  described in Section 4.1(a) or (b)
above,  (ii) Common Shares issued pursuant to (x) any Rights  outstanding on the
date of this  Agreement  or any Rights  issued in any  transaction  described in
Section  4.1(a)  or (b) above  and (y) a Right,  if on the date  such  Right was
issued, the exercise, conversion or exchange price per Common Share with respect
thereto was at least equal to the then Current  Market  Value per Common  Share,
(iii)  any  Common  Shares  or  Rights  issued  (A) as  consideration  when  any
corporation or business is acquired,  merged into or becomes part of the Company
or a subsidiary of the Company or (B) in good faith in connection with any other
acquisition of assets, in each case in an arm's-length  transaction  between the
Company and a Person  other than an  Affiliate  of the  Company,  (iv) grants or
exercises of Rights granted to or exercised by employees, directors, consultants
or advisors of the Company or any of its subsidiaries for issuances of shares of


                                       11
<PAGE>

Common  Stock to such Persons and (v)  exercises of Rights by former  employees,
former directors, former consultants or former advisors of the Company or any of
its  subsidiaries  for issuances of shares of Common Stock to such Persons) at a
price per Common Share  (determined  in the case of any such Right,  by dividing
(x) the total  consideration  receivable by the Company in  consideration of the
sale and  issuance of such Right,  plus the total  consideration  payable to the
Company upon exercise,  conversion or exchange thereof,  by (y) the total number
of Common  Shares  covered by such Right) that is lower than the Current  Market
Value per Common  Share in effect  immediately  prior to such sale or  issuance,
then the number of Common  Shares  thereafter  purchasable  upon the exercise of
each Warrant  shall be  determined  by  multiplying  the number of Common Shares
theretofore  purchasable  upon  exercise  of such  Warrant  by a  fraction,  the
numerator of which shall be the number of Common Shares outstanding  immediately
after such sale or issuance and the  denominator of which shall be the number of
Common Shares  outstanding  immediately  prior to such sale or issuance plus the
number of Common Shares which the aggregate  consideration  received (determined
as provided  below) for such sale or  issuance  would  purchase at such  Current
Market Value per Common Share.  For purposes of this Section 4.1(c),  the Common
Shares which the holder of any such Right shall be entitled to subscribe  for or
purchase  shall be deemed to be issued  and  outstanding  as of the date of such
sale and issuance and the  consideration  received by the Company therefor shall
be deemed to be the  consideration  received by the Company for such Right, plus
the  consideration  or  premiums  stated in such Right to be paid for the Common
Shares  covered  thereby.  In case the  Company  shall  sell and issue any Right
together  with one or more  other  securities  as part of a unit at a price  per
unit,  then in determining  the "price per Common Share" and the  "consideration
received by the  Company"  for  purposes of the first  sentence of this  Section
4.1(c),  the Board shall  determine,  in good faith, the fair value of the Right
then being sold as part of such unit. For purposes of this paragraph,  a "RIGHT"
shall mean any right,  option,  warrant or convertible or exchangeable  security
containing  the Right to  subscribe  for or acquire one or more  Common  Shares,
excluding the Warrants. This Section 4.1(c) shall not apply to: (i) the exercise
of Warrants,  or the conversion or exchange of other  securities  convertible or
exchangeable  for Common Shares;  or (ii) Common Shares issued upon the exercise
of Rights or warrants issued to all holders of Common Shares.

          (d) DISTRIBUTIONS OF DEBT, ASSETS,  SUBSCRIPTION RIGHTS OR CONVERTIBLE
SECURITIES.  In case the Company shall make a distribution to all holders of its
Common  Shares  of  evidences  of  its   indebtedness,   or  assets,   or  other
distributions  (excluding  distributions  in  connection  with the  dissolution,
liquidation  or  winding-up  of the  Company  which shall be governed by Section
4.1(j) and  distributions of securities  referred to in Section 4.1(a),  Section
4.1(b) or  Section  4.1(c)),  then,  in each case,  the number of Common  Shares
purchasable  after such record date upon the exercise of each  Warrant  shall be
determined  by  multiplying  the number of Common  Shares  purchasable  upon the
exercise of such  Warrant  immediately  prior to such record date by a fraction,
the  numerator  of which  shall be the  Current  Market  Value per Common  Share
immediately  prior to the record date for such  distribution and the denominator


                                       12
<PAGE>

of which shall be the Current Market Value per Common Share immediately prior to
the record date for such distribution less the then fair value (as determined in
good faith by the Board) of the  evidences of  indebtedness,  or assets or other
distributions so distributed  attributable to one Common Share.  Such adjustment
shall be made whenever any such distribution is made, and shall become effective
on the date of distribution retroactive to the record date for the determination
of shareholders entitled to receive such distribution.

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

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

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

          (ii) if the security is registered under the Exchange Act, the average
     of the daily market prices of the security for the 20  consecutive  trading
     days  immediately  preceding  such  date  or,  if  the  security  has  been
     registered under the Exchange Act for less than 20 consecutive trading days
     before such date,  then the average of the daily  market  prices for all of
     the  trading  days  before  such date for which  daily  market  prices  are
     available.  The market price for each such trading day shall be: (A) in the
     case of a security listed or admitted to trading on any national securities
     exchange,  the closing sales price, regular way, on such day, or if no sale
     takes place on such day, the average of the closing bid and asked prices on


                                       13
<PAGE>

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

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

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

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

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

          (h) DE  MINIMIS  ADJUSTMENTS.  No  adjustment  in the number of Common
Shares  purchasable  hereunder shall be required  unless such  adjustment  would
require an increase  or  decrease of at least one percent  (1%) in the number of
Common Shares purchasable upon the exercise of each Warrant; provided,  however,


                                       14
<PAGE>

that any adjustments  which by reason of this Section 4.1(h) are not required to
be made  shall be carried  forward  and taken  into  account  in any  subsequent
adjustment.  All calculations  shall be made to the nearest  one-thousandth of a
share.

          (i) ADJUSTMENT OF EXERCISE PRICE. Whenever the number of Common Shares
purchasable  upon the exercise of each Warrant is adjusted,  as herein provided,
the Exercise  Price per Common Share payable upon exercise of such Warrant shall
be adjusted  (calculated  to the nearest  $.01) so that it shall equal the price
determined  by  multiplying  such  Exercise  Price  immediately  prior  to  such
adjustment  by a fraction  the  numerator of which shall be the number of Common
Shares  purchasable upon the exercise of each Warrant  immediately prior to such
adjustment and the  denominator of which shall be the number of Common Shares so
purchasable  immediately  thereafter.  Following any  adjustment to the Exercise
Price pursuant to this Article IV, the amount payable,  when adjusted,  together
with the amount paid in connection  with the original  issuance of the Warrants,
shall  never be less  than the par value  per  Common  Share at the time of such
adjustment.

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

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

          (j)  CONSOLIDATION,  MERGER,  ETC.  (i) Subject to the  provisions  of
Subsection (ii) below of this Section 4.1(j),  in case of the  consolidation  of
the Company  with,  or merger of the Company with or into, or of the sale of all
or substantially all of the properties and assets of the Company to, any Person,
and in connection therewith consideration is payable to holders of Common Shares
(or other  securities  or property  purchasable  upon  exercise of  Warrants) in
exchange therefor, the Warrants shall remain subject to the terms and conditions
set forth in this  Agreement and each Warrant shall,  after such  consolidation,
merger or sale, entitle the Holder to receive upon exercise the number of shares
in the capital or other  securities or property  (including cash) of or from the
Person  resulting from such  consolidation  or surviving such merger or to which
such sale  shall be made or of the  parent of such  Person,  as the case may be,
that would have been distributable or payable on account of the Common Shares if
such  Holder's  Warrants had been  exercised  immediately  prior to such merger,
consolidation or sale (or, if applicable,  the record date therefor); and in any
such case the  provisions  of this  Agreement  with  respect  to the  rights and
interests thereafter of the Holders of Warrants shall be appropriately  adjusted
by the Board in good faith so as to be  applicable,  as nearly as may reasonably
be, to any shares,  other securities or any property  thereafter  deliverable on
the exercise of the Warrants.

          (ii)  Notwithstanding  the  foregoing,  (x) if the  Company  merges or
     consolidates  with, or sells all or  substantially  all of its property and


                                       15
<PAGE>

     assets to,  another  Person  (other than an  Affiliate  of the Company) and
     consideration  is payable to holders of Common Shares in exchange for their
     Common Shares in connection with such merger,  consolidation  or sale which
     consists  solely  of  cash,  or  (y)  in  the  event  of  the  dissolution,
     liquidation  or winding up of the  Company,  then the  Holders of  Warrants
     shall be entitled to receive  distributions on the date of such event on an
     equal basis with  holders of Common  Shares (or other  securities  issuable
     upon  exercise  of the  Warrants)  as if the  Warrants  had been  exercised
     immediately  prior to such event,  less the Exercise Price. Upon receipt of
     such payment,  if any, the rights of a Holder shall terminate and cease and
     such  Holder's   Warrants  shall  expire.  In  case  of  any  such  merger,
     consolidation or sale of assets,  the surviving or acquiring Person and, in
     the event of any dissolution, liquidation or winding up of the Company, the
     Company  shall deposit  promptly with the Warrant Agent the funds,  if any,
     necessary to pay the Holders of the Warrants. After receipt of such deposit
     from such Person or the Company and after  receipt of  surrendered  Warrant
     Certificates, the Warrant Agent shall make payment by delivering a check in
     such amount as is appropriate (or, in the case of consideration  other than
     cash, such other consideration as is appropriate) to such Person or Persons
     as it may be directed in writing by the Holder surrendering such Warrants.

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

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

          (i)  (A) grants to,  exercises  of Rights by, or  issuances  of equity
               securities to employees,  directors,  consultants  or advisors of


                                       16
<PAGE>

               the  Company  or any of its  subsidiaries  and (B)  exercises  of
               Rights by, or issuances of equity  securities in connection  with
               Rights previously  issued to former employees,  former directors,
               former  consultants or former  advisors of KMC Telecom,  Inc. (to
               the  extent  that all such  securities  do not have an  aggregate
               value in excess of 15% of the  equity  value of the  Company on a
               fully diluted basis, as determined in good faith by the Board);

          (ii) grants of  options,  warrants  or other  agreements  or rights to
               purchase  capital stock of the Company  entered into prior to the
               date of the  issuance of the  Warrants or any issuance of capital
               stock pursuant thereto or in connection therewith;

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

          (iv) future  options,  warrants  or other  rights  with an exercise or
               conversion  price at least equal to the fair market  value of the
               related shares on the date of grant,  as determined in good faith
               by the Company's Board of Directors;

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

          (vi) bona  fide  public  offerings  or  private   placements   through
               investment banks of national standing; and

          (vii) the issuance of Springing Warrants.

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

          SECTION  4.2.  NOTICE OF  ADJUSTMENT.  Whenever  the  number of Common
Shares  purchasable  upon the exercise of each Warrant or the Exercise  Price is
adjusted, as herein provided, the Company shall cause, so far as it is able, the
Warrant Agent  promptly to mail,  at the expense of the Company,  to each Holder
notice of such  adjustment or adjustments and shall deliver to the Warrant Agent
a  certificate  of the  Auditors  setting  forth the  number  of  Common  Shares
purchasable  upon the exercise of each Warrant and the Exercise Price after such
adjustment,  setting  forth  a  brief  statement  of the  facts  requiring  such
adjustment and setting forth the  computation by which such adjustment was made.
Such  certificate  shall  be  conclusive  evidence  of the  correctness  of such
adjustment  except in the case of manifest  error.  The  Warrant  Agent shall be
entitled  to  rely  on  such   certificate   and  shall  be  under  no  duty  or
responsibility with respect to any such certificate, except to exhibit the same,


                                       17
<PAGE>

from  time  to  time,  to any  Holder  desiring  an  inspection  thereof  during
reasonable business hours upon reasonable notice. The Warrant Agent shall not at
any time be under any duty or responsibility to any Holders to determine whether
any facts exist which may require any  adjustment  of the Exercise  Price or the
number of Common  Shares  purchasable  on exercise of the Warrants or any of the
other  adjustments  set forth in Section  4.1, or with  respect to the nature or
extent of any such  adjustment when made, or with respect to the method employed
in making such  adjustment,  or the validity or value (or the kind or amount) of
any Common  Shares which may be  purchasable  on exercise of the  Warrants.  The
Warrant  Agent shall not be  responsible  for any failure of the Company to make
any cash  payment or to issue,  transfer or deliver  any Common  Shares or share
certificates upon the exercise of any Warrant.

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

          SECTION 4.4. NOTICE OF CONSOLIDATION, MERGER, ETC. In case at any time
after  the date  hereof  and prior to 5:00  p.m.  (New  York  City  time) on the
Expiration  Date,  there shall be any (i)  consolidation or merger involving the
Company or sale,  transfer or other  disposition of all or substantially  all of
the  Company's  property,  assets  or  business  (except  (A) a merger  or other
reorganization  in which the  Company  shall be the  surviving  corporation  and
holders of Common Shares receive no consideration in respect of their shares and
(B) a merger of the Company into a wholly owned  subsidiary of the Company,  the
principal purpose of which, in the good faith  determination of the Board, is to
change the state of incorporation of the Company) or (ii) any other  transaction
contemplated by Section 4.1(j)(ii) above then, in any one or more of such cases,
the  Company  shall  cause to be mailed to the  Warrant  Agent and shall use its
reasonable  best  efforts  to cause  the  Warrant  Agent to mail,  at  Company's
expense, to each Holder of a Warrant, at the earliest  practicable time (and, in
any event,  not less than 20 days  before any date set for  definitive  action),
notice of the date on which such reorganization,  sale,  consolidation,  merger,
dissolution,  liquidation  or winding up shall take  place,  as the case may be.
Such notice shall also set forth such facts as shall indicate the effect of such
action (to the extent  such  effect may be known at the date of such  notice) on
the  Exercise  Price and the kind and  amount  of the  Common  Shares  and other
securities,  money and other property deliverable upon exercise of the Warrants.
Such notice shall also specify the date as of which the holders of record of the
Common  Shares or other  securities  or property  issuable  upon exercise of the
Warrants  shall be entitled to exchange  their shares for  securities,  money or
other  property  deliverable  upon  such  reorganization,  sale,  consolidation,
merger, dissolution, liquidation or winding up, as the case may be.

          SECTION 4.5. FRACTIONAL  INTERESTS.  If more than one Warrant shall be
presented  for exercise in full at the same time by the same Holder,  the number
of full Common Shares which shall be issuable  upon such exercise  thereof shall
be computed on the basis of the aggregate number of Common Shares purchasable on
exercise of the  Warrants  so  presented.  The Company  shall not be required to


                                       18
<PAGE>

issue fractional Common Shares upon the exercise of Warrants. If any fraction of
a Common Share would, except for the provisions of this Section 4.5, be issuable
on the exercise of any Warrant (or specified portion  thereof),  the Company may
pay an amount in cash  calculated  by it to be equal to the then Current  Market
Value per Common Share multiplied by such fraction computed to the nearest whole
cent.

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

          SECTION 4.7. INITIAL PUBLIC OFFERING.  Notwithstanding anything to the
contrary herein contained, if the Company conducts an initial public offering of
equity securities (other than nonconvertible preferred shares), the Company will
give the Holders the  opportunity  to convert (i) such Warrants into warrants to
purchase such equity securities (other than nonconvertible preferred shares) and
(ii) any Common Shares or other securities that have been previously received by
the Holders upon the  exercise of Warrants  into such equity  securities  (other
than nonconvertible  preferred shares).  Such conversion  opportunity will be on
terms  and  conditions  determined  to be  fair  and  reasonable  by the  Board.
Notwithstanding  the exercise date described in Section 3.2, in the event that a
Holder holds  Warrants that are not then  exercisable  under Section 3.2 and the
Holder of such  Warrants  would be entitled to  piggy-back  registration  rights
pursuant  to Section 2 of the  Warrant  Registration  Rights  Agreement  if such
Warrants were exercisable,  then such Warrants shall become exercisable,  at the
election of the Holder, to the extent necessary to permit such Holder to utilize
all of such registration rights.

                                    ARTICLE V

                           DECREASE IN EXERCISE PRICE

          The Board, in its sole  discretion,  shall have the right at any time,
or from time to time,  to decrease  the Exercise  Price of the  Warrants  and/or
increase the number of shares issuable upon the exercise of the Warrants.

                                   ARTICLE VI

                               LOSS OR MUTILATION

          Upon  receipt  by the  Company  and  the  Warrant  Agent  of  evidence
satisfactory  to them of the  ownership  and the  loss,  theft,  destruction  or
mutilation of any Warrant  Certificate and of indemnity or bond  satisfactory to
them and (in the case of mutilation)  upon surrender and  cancellation  thereof,


                                       19
<PAGE>

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

                                   ARTICLE VII

                          RESERVATION AND AUTHORIZATION
                                OF COMMON SHARES

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

                                  ARTICLE VIII

    WARRANT TRANSFER BOOKS; RESTRICTIONS ON TRANSFER; CERTAIN TRANSFER RIGHTS


          SECTION 8.1. TRANSFER AND EXCHANGE.  The Warrant Certificates shall be
issued in  registered  form only.  The Warrant  Agent shall keep at its office a
register for the registration of Warrant Certificates and transfers or exchanges
of  Warrant  Certificates  as  herein  provided  and other  appropriate  data as
determined by the Warrant Agent.  The Company shall,  upon reasonable  notice to
the Warrant  Agent,  have  access to such  register  during the Warrant  Agent's
regular business hours. All Warrant Certificates issued upon any registration of


                                       20
<PAGE>

transfer or exchange of Warrant  Certificates  shall be the valid obligations of
the Company, evidencing the same obligations,  and entitled to the same benefits
under  this  Agreement,  as  the  Warrant  Certificates   surrendered  for  such
registration of transfer or exchange.

          The Warrants  (other than any Springing  Warrants)  shall initially be
issued as part of the issuance of the Unit.  Prior to the Separation  Date, such
Warrants  may  not be  transferred  or  exchanged  separately  from,  but may be
transferred or exchanged only together with, the Series E Preferred Stock issued
as part of the Unit.

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

          SECTION 8.2. Intentionally Omitted.

          SECTION 8.3. SPECIAL  TRANSFER  PROVISIONS.  The following  provisions
shall apply:

          (a)  TRANSFERS  TO QIBS.  The  following  provisions  shall apply with
respect to the  registration of any proposed  transfer of Warrants to a QIB: the
Warrant Agent shall only register the transfer if such transfer is being made by
a  proposed  transferor  who has  checked  the box  provided  for on the form of
Warrant  Certificate  stating,  or has  otherwise  advised  the  Company and the
Warrant  Agent in writing,  that the sale has been made in  compliance  with the
provisions  of  Rule  144A to a  transferee  who has  signed  the  certification
provided  for on the  form of  Warrant  Certificate  stating,  or has  otherwise
advised the Company and the Warrant Agent in writing,  that it is purchasing the
Warrants  for its own account or an account  with  respect to which it exercises
sole investment  discretion and that it and any such account is a QIB within the
meaning of Rule 144A, and is aware that the sale to it is being made in reliance
on Rule 144A and acknowledges  that it has received such  information  regarding
the Company as it has requested  pursuant to Rule 144A or has  determined not to
request such  information  and that it is aware that the  transferor  is relying
upon  its  foregoing  representations  in  order to  claim  the  exemption  from
registration provided by Rule 144A.

                                       21
<PAGE>

          (b) TRANSFERS TO ANY OTHER PERSON. The following provision shall apply
with respect to the  registration  of any  proposed  transfer of Warrants to any
Person  not  specified  in  paragraph  (a) above  (including  any  Institutional
Accredited Investor which is not a QIB).

          (i) The Warrant Agent shall register any proposed transfer of Warrants
     to any such Person only if (x) the  transferor has delivered to the Warrant
     Agent and the Company a  certificate  substantially  in the form of Exhibit
     B-1 hereto and, if required by paragraph (d) thereof, an Opinion of Counsel
     to the  effect  set  forth  therein  and (y) the  proposed  transferee  has
     delivered to the Warrant Agent and the Company a certificate  substantially
     in the form of Exhibit B-2 hereto.

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

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

          (ii) The Warrant Agent shall retain,  in accordance with its customary
procedure,  copies of all  letters,  notices  and other  written  communications
received  pursuant to Section 8.2 hereof or this Section 8.3. The Company  shall
have the right to inspect and make copies of all such letters,  notices or other
written  communications  at any  reasonable  time upon the giving of  reasonable
written notice to the Warrant Agent.

                                       22
<PAGE>

          SECTION   8.4.   SURRENDER  OF  WARRANT   CERTIFICATES.   Any  Warrant
Certificate  surrendered for  registration of transfer,  exchange or exercise of
the Warrants  represented  thereby  shall,  if  surrendered  to the Company,  be
delivered to the Warrant Agent, and all Warrant  Certificates  surrendered or so
delivered to the Warrant Agent shall be promptly  cancelled by the Warrant Agent
and shall not be reissued by the Company and, except as provided in this Article
VIII in case of an exchange,  Article III hereof in case of the exercise of less
than all the Warrants  represented  thereby or Article VI in case of a mutilated
Warrant  Certificate,  no Warrant  Certificate shall be issued hereunder in lieu
thereof.  The Warrant  Agent shall  deliver to the Company  from time to time or
otherwise  dispose of such  cancelled  Warrant  Certificates  as the Company may
direct in writing.

          SECTION 8.5.  TAG-ALONG  RIGHT. (a) If any Principal Holder intends to
transfer to any Person  (other than another  Person that is included  within the
defined group of such Principal Holder,  provided that such transferee agrees in
writing to be bound by the terms of this Section 8.5 and new stock  certificates
containing a restrictive  legend referring to the transfer  restrictions of this
Section 8.5 are issued to such transferee) (the "TAG-ALONG  PURCHASER"),  in one
transaction or a series of related transactions  (excluding securities offerings
registered under the Securities Act), shares of Capital Stock  constituting,  in
the aggregate,  more than 20% of the total number of shares of Common Stock on a
Fully  Diluted  Basis  owned  by such  Principal  Holder  as of the date of this
Agreement,  then such  Principal  Holder  shall  permit  the  Purchaser,  at the
Purchaser's  option, to transfer,  for the same  consideration,  and on the same
terms and  conditions,  if any,  upon  which the  Principal  Holder  intends  to
transfer  such  shares,  a number of shares of Common  Stock  (including  shares
subject to then exercisable  Warrants and Warrants that will become  exercisable
as a result of such  transaction  or series of  transactions)  then owned by the
Purchaser  determined in  accordance  with this Section  8.5(a) (the  "TAG-ALONG
SHARES").  The Purchaser shall have the right,  pursuant to this Section 8.5(a),
to sell  pursuant to the offer by the Tag-Along  Purchaser,  a percentage of the
shares of Common Stock (including  shares subject to then exercisable  Warrants)
held by the Purchaser equal to the Applicable Percentage.

          (b)  For  purposes  hereof,  the  "APPLICABLE   PERCENTAGE"  shall  be
determined as follows:

          (i) if such transaction or series of related transactions  constitutes
the  first  instance  in which  the  rights  under  Section  8.5(a)  apply,  the
Applicable  Percentage  shall be  equal to the  percentage  of the  holdings  of
Capital Stock (on a Fully Diluted Basis) then owned by the applicable  Principal
Holder being  transferred in such transaction or series of related  transactions
by such Principal Holder (the "APPLICABLE HOLDER" for such transaction(s));

          (ii) if such  transaction or series of related  transactions  does not
constitute  the first  instance in which the rights under Section  8.5(a) apply,
the  Applicable  Percentage  shall be equal to the percentage of the holdings of
Capital Stock (on a Fully  Diluted  Basis) then owned by the  Applicable  Holder
being  transferred in such transaction or series of related  transactions by the
Applicable Holder;  provided that the Applicable Percentage shall be zero if the
percentage  of the  holdings of Capital  Stock (on a Fully  Diluted  Basis) then
owned by the Applicable  Holder being  transferred in such transaction or series
of  related  transactions  by the  Applicable  Holder is not  greater  than five
percent.

                                       23
<PAGE>

          (c) Not less than 15  Business  Days  prior to any  proposed  transfer
pursuant  to this  Section  8.5,  the  Principal  Holders  shall  deliver to the
Purchaser  written notice thereof (the "TAG-ALONG  NOTICE"),  which notice shall
set forth the consideration to be paid by the Tag-Along  Purchaser and the other
terms and conditions,  if any, of such  transaction.  If the Purchaser elects to
transfer some or all of the Tag-Along  Shares pursuant to this Section 8.5, then
(i) the Purchaser shall so notify the Principal  Holders within 10 Business Days
after the date of the Purchaser's  receipt of Tag-Along Notice, and, (ii) at the
Principal Holders' request not less than two Business Days prior to the proposed
transfer, the Purchaser shall deliver to counsel to the Principal Holders, to be
held in escrow,  certificates  representing  such Tag-Along Shares (and/or other
appropriate  documentation to permit the exercise of Warrants), duly endorsed or
with duly  completed  and  executed  stock powers  attached,  in proper form for
transfer,  together with a limited  power-of-attorney  authorizing the Principal
Holders  to  transfer  the  Tag-Along  Shares  to the  Tag-Along  Purchaser  (in
accordance with the terms and conditions set forth in the Tag-Along  Notice) and
to execute all other  documents  required to be executed in connection with such
transaction.

          (d) If,  within 30  Business  Days after the  Purchaser  notifies  the
Principal  Holder of the  Purchaser's  election to  transfer  some or all of its
Tag-Along  Shares,  no  transfer  of shares  held by the  Principal  Holders and
Tag-Along  Shares in  accordance  with the  provisions of this Section 8.5 shall
have  been  completed,  then the  Purchaser  shall  have  the  right at any time
thereafter to revoke its prior election relating to the Tag--Along Shares.  Upon
any such  revocation,  or earlier if the Principal Holder shall determine not to
proceed with such transfer,  then the Principal  Holder's counsel shall promptly
return to the  Purchaser,  in proper form,  all  certificates  representing  the
Tag-Along Shares and the limited  power-of-attorney  previously delivered by the
Purchaser  to the  Principal  Holders.  If,  within 30  Business  Days after the
Purchaser  notifies  the  Principal  Holder of the  Purchaser's  decision not to
transfer any Tag--Along  Shares (or, if no such notice is given,  the expiration
of the 10 Business  Day period for notice of an election to transfer  Tag--Along
Shares),  no transfer of shares held by the  Principal  Holders  shall have been
completed in accordance with the Tag--Along  Notice,  then the Principal Holders
must comply again with all of the  provisions  of this  Section  8.5,  including
without  limitation  a new  Tag--Along  Notice and another  opportunity  for the
Purchaser to elect to transfer Tag--Along Shares.

          (e)  Concurrently  with  the  consummation  of  the  transfer  of  the
Tag-Along Shares pursuant to this Section 8.5, the Principal Holders shall remit
or cause to be remitted to the Purchaser the  consideration  with respect to the
Tag-Along  Shares so  transferred  and shall furnish such other  evidence of the
completion of such transfer and the terms and conditions (if any) thereof as may
reasonably be requested by the Purchaser.

                                       24
<PAGE>

          (f) The  provisions  of this  Section  8.5  shall  remain  in  effect,
notwithstanding  any return to the  Purchaser  of  Tag-Along  Shares as provided
herein.

          (g) Notwithstanding the exercise date described in Section 3.2, in the
event that the  Purchaser  holds  Warrants that are not then  exercisable  under
Section 3.2 and the Purchaser would be entitled to tag-along  rights pursuant to
this Section 8.5 if such Warrants  were  exercisable,  then such Warrants  shall
become exercisable, at the election of the Purchaser, to the extent necessary to
permit the Purchaser to utilize all of such tag-along rights. Alternatively, the
Purchaser shall be entitled to transfer to the Tag-Along  Purchaser such portion
of its  Warrants  representing  the number of  Tag-Along  Shares  which would be
transferred  to the Tag-Along  Purchaser if such Warrants were  exercisable,  in
exchange  for the  consideration  which  would be payable  with  respect to such
Tag-Along Shares, less the Exercise Price for such Warrants.

          SECTION 8.6.  BRING ALONG RIGHT.  If the Company or one or more of the
Existing  Stockholders  receives a bona fide offer from a person or persons  not
then an Affiliate or Affiliates of the Company or such Existing  Stockholders (a
"Third Party Purchaser") to purchase Capital Stock representing more than 50% of
the total number of shares of Common Stock then  outstanding  on a Fully Diluted
Basis,  then the  Company  shall have the right to  deliver a written  notice (a
"Buyout Notice") to the Purchaser which shall state (i) that the Company or such
Existing  Stockholders  propose to effect such  transaction,  (ii) the  proposed
purchase  price  per  share  of  Capital  Stock  to be paid by the  Third  Party
Purchaser,  and (iii) the name or names of the Third Party Purchaser,  and which
attaches  a  copy  of  all  writings   between  the  Company  or  such  Existing
Stockholders  and the other parties to such  transaction  necessary to establish
the terms of such  transaction.  The  Purchaser  agrees that,  upon receipt of a
Buyout  Notice,  the  Purchaser  shall be obligated to sell a percentage  of its
shares of Common Stock equal to the Bring Along  Percentage  (as defined  below)
upon the  terms and  conditions  of such  transaction  (and  otherwise  take all
necessary action to cause consummation of the proposed  transaction);  provided,
however,  that the Purchaser  shall only be obligated as provided  above in this
Section 8.6 if (i) more than 50% of the total  number of shares of Common  Stock
then  outstanding  on a Fully Diluted Basis  actually is sold to the Third Party
Purchaser  pursuant  to the  terms  contained  in the  Buyout  Notice,  (ii) the
Purchaser receives the same per share (or per share equivalent) consideration as
the Company or such Existing  Stockholders  receive in the transaction and (iii)
the  consideration  received  by the  Purchaser  is in the  form  of  cash  or a
combination  of cash and  securities  that will  become  freely  tradable in the
public  securities  markets within 180 days of receipt of such  consideration by
the Purchaser.  The Bring Along  Percentage shall be the percentage of the total
number of shares of Common Stock  outstanding  an a Fully  Diluted Basis that is
actually sold to the Third Party  Purchaser  pursuant to the terms  contained in
the Buyout  Notice;  provided  that if,  after giving  effect to such sale,  the
Existing   Stockholders   would  own  not  more  than  twenty   percent  of  the
fully-diluted common equity interests in the Company, the Bring Along Percentage
shall be one hundred percent.


                                       25
<PAGE>

                                   ARTICLE IX

                                 WARRANT HOLDERS

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

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

                                    ARTICLE X

                                THE WARRANT AGENT

          SECTION 10.1. DUTIES AND LIABILITIES. The Warrant Agent hereby accepts
the agency established by this Agreement and agrees to perform the same upon the
terms and  conditions  herein set  forth,  by all of which the  Company  and the
Holders of Warrants,  by their acceptance  thereof,  shall be bound. The Warrant
Agent  shall not, by  countersigning  Warrant  Certificates  or by any other act
hereunder,  be  deemed  to  make  any  representations  as to  the  validity  or
authorization  of the  Warrants  or the Warrant  Certificates  (except as to its
countersignature  thereon) or of any Common  Shares  issued upon exercise of any
Warrant,  or as to the accuracy of the  computation of the Exercise Price or the
number or kind or  amount of Common  Shares  deliverable  upon  exercise  of any
Warrant or the  correctness  of the  representations  of the Company made in the
certificates  that the Warrant  Agent  receives.  The Warrant Agent shall not be
accountable  for the use or  application  by the Company of the  proceeds of the
exercise of any Warrant.  The Warrant Agent shall not have any duty to calculate


                                       26
<PAGE>

or determine any  adjustments  with respect to either the Exercise  Price or the
kind and amount of Common  Shares  receivable  by Holders  upon the  exercise of
Warrants  required from time to time and the Warrant Agent shall have no duty or
responsibility  in determining the accuracy or correctness of such  calculation.
The Warrant  Agent shall not be (a) liable for any recital or  statement of fact
contained  herein  or in the  Warrant  Certificates  or for  any  action  taken,
suffered  or  omitted  by it in  good  faith  in the  belief  that  any  Warrant
Certificate  or any other  documents or any  signatures  are genuine or properly
authorized, (b) responsible for any failure on the part of the Company to comply
with any of its covenants and obligations  contained in this Agreement or in the
Warrant  Certificates  or (c) liable for any act or omission in connection  with
this  Agreement  except  for its own  gross  negligence,  bad  faith or  willful
misconduct.  The Warrant Agent is hereby authorized to accept  instructions with
respect to the  performance  of its duties  hereunder  from the  Chairman of the
Board, the Vice Chairman of the Board, the President,  Chief Executive  Officer,
the Chief Operating Officer, the Chief Financial Officer, or any other executive
officer of the Company and to apply to any such officer for instructions  (which
instructions  will be promptly given in writing when  requested) and the Warrant
Agent shall not be liable for any action  taken or suffered to be taken by it in
good faith in accordance with the  instructions  of any such officer;  provided,
however, that, in its discretion, the Warrant Agent may, in lieu thereof, accept
other evidence of such or may require such further or additional  evidence as it
may deem reasonable.  The Warrant Agent shall not be liable for any action taken
with  respect  to any  matter in the  event it  requests  instructions  from the
Company  as to that  matter  and does not  receive  such  instructions  within a
reasonable period of time after the request therefor.

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

          The Company will perform, execute, acknowledge and deliver or cause to
be delivered all such further acts, instruments and assurances as are consistent
with this  Agreement  and as may  reasonably be required by the Warrant Agent in
order to enable it to carry out or perform its duties under this Agreement.

          The Warrant Agent shall act solely as agent of the Company  hereunder.
The  Warrant  Agent shall not be liable  except for the failure to perform  such
duties as are  specifically  set  forth  herein,  and no  implied  covenants  or
obligations shall be read into this Agreement  against the Warrant Agent,  whose
duties and  obligations  shall be  determined  solely by the express  provisions
hereof.

                                       27
<PAGE>

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

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

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

          SECTION 10.5.  DISCHARGE OR REMOVAL;  REPLACEMENT  WARRANT AGENT.  The
Warrant  Agent may resign from its position as such and be  discharged  from all
further duties and liabilities  hereunder  (except liability arising as a result
of the Warrant Agent's own gross negligence,  bad faith or willful  misconduct),
after giving one month's prior written notice to the Company. The Company may at
any time remove the Warrant Agent upon one month's written notice specifying the
date  when such  discharge  shall  take  effect,  and the  Warrant  Agent  shall
thereupon in like manner be discharged  from all further duties and  liabilities
hereunder, except as aforesaid. The Warrant Agent shall mail to each Holder of a
Warrant,  at the  Company's  expense,  a copy of said notice of  resignation  or
notice of  removal,  as the case may be.  Upon such  resignation  or removal the
Company shall appoint in writing a new warrant agent.  If the Company shall fail


                                       28
<PAGE>

to make such  appointment  within a period of 30 days after it has been notified
in writing of such  resignation  by the  resigning  Warrant  Agent or after such
removal,  then the  resigning  or  removed  Warrant  Agent or the  Holder of any
Warrant may apply to any court of competent  jurisdiction for the appointment of
a new warrant agent.  After 30 days from receipt of, or giving,  notice,  as the
case may be, and pending  appointment  of a successor  to the  original  Warrant
Agent, either by the Company or by such a court, the duties of the Warrant Agent
shall be carried out by the Company. Any new warrant agent, whether appointed by
the Company or by such a court,  shall be a bank or trust company doing business
under the laws of the United States or any state  thereof,  in good standing and
having a combined capital and surplus of not less than $25,000,000. The combined
capital  and  surplus of any such new  warrant  agent  shall be deemed to be the
combined  capital and surplus as set forth in the most recent  annual  report of
its condition published by such warrant agent prior to its appointment, provided
that such  reports are  published  at least  annually  pursuant to law or to the
requirements  of a federal or state  supervising or examining  authority.  After
acceptance in writing of such  appointment by the new warrant agent, it shall be
vested with the same powers,  rights,  duties and  responsibilities as if it had
been  originally  named  herein  as  the  Warrant  Agent,  without  any  further
assurance, conveyance, act or deed; however, the original Warrant Agent shall in
all events  deliver and  transfer to the  successor  Warrant  Agent all property
(including, without limitation,  documents and recorded information), if any, at
the time held  hereunder by the original  Warrant Agent and if for any reason it
shall be necessary  or  expedient to execute and deliver any further  assurance,
conveyance,  act or deed,  the same shall be done at the  expense of the Company
and shall be legally and validly  executed  and  delivered  by the  resigning or
removed  Warrant  Agent.   Not  later  than  the  effective  date  of  any  such
appointment, the Company shall file notice thereof with the resigning or removed
Warrant  Agent and shall use its  reasonable  best efforts to forthwith  cause a
copy of such notice to be mailed by the  successor  Warrant Agent to each Holder
of a Warrant.  Failure to give any notice  provided  for in this  Section  10.5,
however, or any defect therein, shall not affect the legality or validity of the
resignation of the Warrant Agent or the  appointment of a new warrant agent,  as
the case may be. No  Warrant  Agent  hereunder  shall be liable  for any acts or
omissions of any successor Warrant Agent.

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



                                       29
<PAGE>

                                   ARTICLE XI

                                  MISCELLANEOUS

          SECTION 11.1.  MONIES  DEPOSITED WITH THE WARRANT  AGENT.  The Warrant
Agent shall not be required to pay interest on any monies deposited  pursuant to
the provisions of this  Agreement  except such as it shall agree in writing with
the Company to pay thereon.  Any monies,  securities or other  property which at
any time shall be  deposited  by the  Company or on its behalf  with the Warrant
Agent pursuant to this Agreement shall be and are hereby  assigned,  transferred
and set over to the  Warrant  Agent in trust  for the  purpose  for  which  such
monies, securities or other property shall have been deposited; but such monies,
securities or other property need not be segregated from other funds, securities
or other property except to the extent  required by law. Any monies,  securities
or other property  deposited with the Warrant Agent for payment or  distribution
to the Holders  that remains  unclaimed  for one year after the date the monies,
securities  or other  property  was  deposited  with the Warrant  Agent shall be
delivered to the Company upon its request therefor.

          SECTION  11.2.  PAYMENT OF TAXES.  Subject  to Article VI hereof,  all
Common Shares  issuable upon the exercise of Warrants  shall be validly  issued,
fully paid and not subject to any calls for funds, and the Company shall pay any
taxes and other  governmental  charges that may be imposed under the laws of the
United  States of  America  or any  political  subdivision  or taxing  authority
thereof or therein in respect of the issue or delivery  thereof upon exercise of
Warrants (other than income taxes imposed on the Holders). The Company shall not
be required,  however, to pay any tax or other charge imposed in connection with
any  transfer  involved  in the  issue  of any  certificate  for  Common  Shares
(including  other  securities  or  property  issuable  upon the  exercise of the
Warrants)  or payment  of cash to any Person  other than the Holder of a Warrant
Certificate  surrendered  upon the  exercise  of a  Warrant  and in case of such
transfer or payment,  the Warrant Agent and the Company shall not be required to
issue any share  certificate  or pay any cash  until such tax or charge has been
paid or it has  been  established  to the  Warrant  Agent's  and  the  Company's
satisfaction that no such tax or charge is due.

          SECTION  11.3.  NO  MERGER,  CONSOLIDATION  OR SALE OF  ASSETS  OF THE
COMPANY. Except as otherwise provided herein, the Company will not merge into or
consolidate with any other Person,  or sell or otherwise  transfer its property,
assets and business  substantially as an entirety to a successor of the Company,
unless the Person resulting from such merger or consolidation, or such successor
of the Company,  shall expressly assume, by supplemental  agreement satisfactory
in form to the Warrant  agent and executed and  delivered to the Warrant  Agent,
the due and punctual  performance  and observance of each and every covenant and
condition of this  Agreement  or  contained in the Warrants to be performed  and
observed by the Company.

          SECTION  11.4.  REPORTS  TO  HOLDERS.  Whether  or not the  Company is
required to file reports with the  Commission,  the Company  shall file with the
Commission  all reports and other  information it would be required to file with
the  Commission  by Section  13(a) or 15(d)  under the  Exchange  Act if it were


                                       30
<PAGE>

subject  thereto.  The Company shall supply the Warrant Agent and each Holder or
shall supply to the Warrant Agent for  forwarding  to each such Holder,  without
cost to such Holder, copies of such reports and other information.  In addition,
at all times, upon the request of any Holder or any prospective purchaser of the
Warrants designated by a Holder, the Company shall supply to such Holder or such
prospective  purchaser  the  information  required  under  Rule  144A  under the
Securities Act.

          SECTION 11.5.  NOTICES;  PAYMENT.  (a) Except as otherwise provided in
Section  11.5(b)  hereof,  any  notice,  demand or delivery  authorized  by this
Agreement  shall be  sufficiently  given or made when  mailed,  if sent by first
class  mail,  postage  prepaid,  addressed  to any  Holder of a Warrant  at such
Holder's last known address appearing on the register of the Company  maintained
by the Warrant Agent and to the Company or the Warrant Agent as follows:

                  To the Company:

                  KMC Telecom Holdings, Inc.
                  1545 Route 206, Suite 300
                  Bedminster, NJ  07921
                  Attention:  James D. Glenfell
                  Chief Financial Officer



                                       31
<PAGE>



                  To the Purchaser:

                  First Union Investors, Inc.
                  1 First Union Center,
                  5th Floor
                  301 South College
                  Charlotte, NC  28288
                  Attn:    L. Watts Hamrick, III



                  To the Warrant Agent:

                  The Chase Manhattan Bank
                  450 West 33rd St., 15th Floor
                  New York, NY  10001-2697
                  Attention:  Capital Markets Fiduciary Services

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

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

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

          SECTION 11.6. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the Company and the Warrant  Agent and their  respective
successors  and  assigns,  and the  Holders  from time to time of the  Warrants.
Nothing in this  Agreement  is intended or shall be construed to confer upon any
Person,  other  than the  Company,  the  Warrant  Agent and the  Holders  of the
Warrants, any right, remedy or claim under or by reason of this Agreement or any
part hereof.

                                       32
<PAGE>

          SECTION 11.7. COUNTERPARTS. This Agreement may be executed manually or
by  facsimile  in any number of  counterparts,  each of which shall be deemed an
original, but all of which together constitute one and the same instrument.

          SECTION 11.8.  AMENDMENTS.  The Warrant Agent may, without the consent
or  concurrence  of the Holders of the Warrants,  by  supplemental  agreement or
otherwise,  join with the Company in making any changes or  corrections  in this
Agreement  that  (a) are  required  to cure  any  ambiguity  or to  correct  any
defective or inconsistent  provision or clerical omission or mistake or manifest
error herein contained or (b) add to the covenants and agreements of the Company
in this Agreement further covenants and agreements of the Company  thereafter to
be observed,  or surrender any rights or power reserved to or conferred upon the
Company  in this  Agreement;  provided  that in  either  case  such  changes  or
corrections  do not and will not adversely  affect,  alter or change the rights,
privileges or immunities  of the Holders of Warrants.  Upon the Warrant  Agent's
request, the Company shall promptly provide an Officer's Certificate and Opinion
of Counsel  which  provide  that all  conditions  precedent  to  adoption  of an
amendment have been satisfied.

          SECTION  11.9.  HEADINGS.  The  descriptive  headings  of the  several
Sections of this  Agreement  are  inserted  for  convenience  only and shall not
control or affect the meaning or construction of any of the provisions hereof.

          SECTION  11.10.  COMMON  SHARES  LEGEND.  Unless  and until the Common
Shares  issuable  upon the  exercise of the Warrants  are  registered  under the
Securities  Act,  or unless  otherwise  agreed  by the  Company  and the  Holder
thereof, such Common Shares will bear a legend to the following effect:

     THE COMMON SHARES  REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
     UNDER THE U.S.  SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES  ACT"),
     OR ANY STATE SECURITIES LAWS, AND  ACCORDINGLY,  MAY NOT BE OFFERED,  SOLD,
     PLEDGED  OR  OTHERWISE  TRANSFERRED  EXCEPT AS SET  FORTH IN THE  FOLLOWING
     SENTENCE.  BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT
     IS A  "QUALIFIED  INSTITUTIONAL  BUYER" (AS  DEFINED IN RULE 144A UNDER THE
     SECURITIES  ACT) OR (B) IT IS AN  INSTITUTIONAL  "ACCREDITED  INVESTOR" (AS
     DEFINED  IN RULE  501(a)(1),  (2),  (3) OR (7) OF  REGULATION  D UNDER  THE
     SECURITIES ACT) (AN "INSTITUTIONAL  ACCREDITED INVESTOR"),  (2) AGREES THAT
     IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) (TAKING INTO
     ACCOUNT  THE  PROVISIONS  OF RULE  144(d)  UNDER  THE  SECURITIES  ACT,  IF
     APPLICABLE),  AS IN  EFFECT  WITH  RESPECT  TO  SUCH  TRANSFER,  RESELL  OR
     OTHERWISE TRANSFER THE COMMON SHARES REPRESENTED BY THIS CERTIFICATE EXCEPT
     (A) TO  KMC  TELECOM  HOLDINGS,  INC.  (THE  "COMPANY")  OR ANY  SUBSIDIARY
     THEREOF,  (B) TO A QUALIFIED  INSTITUTIONAL  BUYER IN COMPLIANCE  WITH RULE


                                       33
<PAGE>

     144A UNDER THE SECURITIES ACT, (C) TO AN INSTITUTIONAL  ACCREDITED INVESTOR
     THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRANSFER AGENT AND REGISTRAR
     A SIGNED LETTER CONTAINING CERTAIN  REPRESENTATIONS AND AGREEMENTS RELATING
     TO THE  RESTRICTIONS  ON TRANSFER OF THE COMMON SHARES  REPRESENTED BY THIS
     CERTIFICATE  (THE FORM OF WHICH  LETTER CAN BE OBTAINED  FROM THE  TRANSFER
     AGENT AND REGISTRAR) AND AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE
     COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE  WITH THE  SECURITIES  ACT, (D)
     PURSUANT TO THE EXEMPTION FROM REGISTRATION  PROVIDED BY RULE 144 UNDER THE
     SECURITIES ACT (IF AVAILABLE) OR (E) PURSUANT TO AN EFFECTIVE  REGISTRATION
     STATEMENT  UNDER THE  SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO
     EACH PERSON TO WHOM THE COMMON SHARES  REPRESENTED BY THIS  CERTIFICATE ARE
     TRANSFERRED  A  NOTICE  SUBSTANTIALLY  TO THE  EFFECT  OF THIS  LEGEND.  IN
     CONNECTION  WITH ANY  TRANSFER  OF THE COMMON  SHARES  REPRESENTED  BY THIS
     CERTIFICATE WITHIN THE TIME PERIOD REFERRED TO ABOVE, THE HOLDER MUST CHECK
     THE  APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER
     OF SUCH  TRANSFER AND SUBMIT THIS  CERTIFICATE  TO THE  TRANSFER  AGENT AND
     REGISTRAR.  IF  THE  PROPOSED  TRANSFEREE  IS AN  INSTITUTIONAL  ACCREDITED
     INVESTOR,  THE HOLDER MUST, PRIOR TO SUCH TRANSFER,  FURNISH TO EACH OF THE
     TRANSFER  AGENT AND  REGISTRAR AND THE COMPANY SUCH  CERTIFICATIONS,  LEGAL
     OPINIONS OR OTHER  INFORMATION AS EITHER OF THEM MAY REASONABLY  REQUIRE TO
     CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION  FROM, OR
     IN A  TRANSACTION  NOT SUBJECT  TO, THE  REGISTRATION  REQUIREMENTS  OF THE
     SECURITIES ACT. THE WARRANT  AGREEMENT  CONTAINS A PROVISION  REQUIRING THE
     TRANSFER  AGENT AND  REGISTRAR  TO REFUSE TO REGISTER  ANY  TRANSFER OF THE
     SHARES OF COMMON STOCK  REPRESENTED BY THIS CERTIFICATE IN VIOLATION OF THE
     FOREGOING RESTRICTIONS.

          SECTION 11.11. THIRD PARTY  BENEFICIARIES.  The Holders shall be third
party beneficiaries to the agreements made hereunder between the Company, on the
one hand, and the Warrant  Agent,  on the other hand, and each Holder shall have
the right to  enforce  such  agreements  directly  to the  extent it deems  such
enforcement  necessary  or  advisable  to  protect  its  rights or the rights of


                                       34
<PAGE>

Holders hereunder.  By acquiring Warrants, each Holder agrees to be bound by the
obligations of Holders generally as set forth herein and as such obligations may
be applicable to such Holder.

          SECTION 11.12. TERMINATION. Except as otherwise specified herein, this
Agreement  shall  terminate at 5:00 p.m. (New York City time) on the  Expiration
Date.  Notwithstanding  the  foregoing,  this Agreement  shall  terminate on any
earlier date as of which all Warrants have been exercised.

          SECTION 11.13.  GOVERNING LAW. This Agreement shall be governed by the
laws of the State of New York.




                                       35
<PAGE>


          IN WITNESS WHEREOF,  the parties have caused this Agreement to be duly
executed, as of the day and year first above written.

                                      KMC TELECOM HOLDINGS, INC.


                                      By:   /s/ Michael A. Sternberg
                                         --------------------------------------
                                         Name:  Michael A. Sternberg
                                         Title: President



                                      THE CHASE MANHATTAN BANK, as Warrant Agent


                                      By:    /s/ Patricia Kelly
                                         --------------------------------------
                                          Name:  Patricia Kelly
                                          Title: Vice President



                                       FIRST UNION INVESTORS, INC.


                                      By:    /s/ Pearce Landry
                                         --------------------------------------
                                          Name:  Pearce A. Landry
                                          Title: Vice President


                                       NASSAU CAPITAL PARTNERS L. P.


                                      By:    /s/ John G. Quigley
                                         --------------------------------------
                                          Name:  John G. Quigley
                                          Title: Member


                                             /s/ Harold N. Kamine
                                          -------------------------------------
                                          HAROLD N. KAMINE



                                       36
<PAGE>

                                                                       EXHIBIT A
                           FORM OF WARRANT CERTIFICATE

                           KMC TELECOM HOLDINGS, INC.

                                                                 CUSIP No. _____

No. _____

                       WARRANTS TO PURCHASE COMMON SHARES

          This certifies that ______________,  or its registered assigns, is the
owner of ___________  Warrants,  each of which  represents the right to purchase
from KMC  TELECOM  HOLDINGS,  INC.,  a  Delaware  corporation  (the  "COMPANY"),
0.471756  shares of the Common Stock,  par value $0.01 per share, of the Company
(the "COMMON  SHARES") at an exercise price (the "EXERCISE  PRICE") of $0.01 per
Common  Share  (subject to  adjustment  as  provided  in the  Warrant  Agreement
hereinafter referred to below), upon surrender hereof at the office of The Chase
Manhattan  Bank,  or to its  successor,  as the warrant  agent under the Warrant
Agreement (any such warrant agent being herein called the "WARRANT AGENT"), with
the  Subscription  Form on the reverse  hereof  duly  executed,  with  signature
guaranteed  as  therein  specified  and  simultaneous  payment  in  full by wire
transfer,  in cash or by  certified  or official  bank or bank  cashier's  check
payable  to the order of the  Company.  Notwithstanding  the  foregoing,  if the
Common Shares (or other  securities)  issuable upon exercise of the Warrants are
registered   under  the  Exchange  Act,  the  Exercise  Price  may  be  paid  by
surrendering additional Warrants to the Warrant Agent having an aggregate Spread
equal to the aggregate  Exercise Price of the Warrants being  exercised.  At any
time  beginning one year after the Closing Date and on or before the  Expiration
Date, any  outstanding  Warrants may be exercised on any Business Day;  provided
that the Warrant Registration  Statement is, at the time of exercise,  effective
and  available  for the exercise of Warrants or the exercise of such Warrants is
exempt from the registration requirements of the Securities Act.

          This  Warrant  Certificate  is issued under and in  accordance  with a
Warrant  Agreement dated as of April 30, 1999 (the "WARRANT  AGREEMENT"),  among
The Chase  Manhattan  Bank,  as  Warrant  Agent,  the  Company  and First  Union
Investors,  Inc., and a Warrant  Registration Rights Agreement dated as of April
30, 1999 (the "WARRANT REGISTRATION RIGHTS AGREEMENT"),  between the Company and
First Union Investors,  Inc., and is subject to the Certificate of Incorporation
and Bylaws of the Company and to the terms and provisions  contained therein, to
all of which  terms  and  provisions  the  Holder  of this  Warrant  Certificate
consents  by  acceptance  hereof.  The terms of the  Warrant  Agreement  and the
Warrant   Registration  Rights  Agreement  are  hereby  incorporated  herein  by
reference  and made a part  hereof.  Reference  is  hereby  made to the  Warrant
Agreement and the Warrant  Registration  Rights Agreement for a full description
of the  rights,  limitations  of  rights,  obligations,  duties  and  immunities
thereunder  of the Company and the Holders of the  Warrants.  The summary of the
terms of the Warrant  Agreement and the Warrant  Registration  Rights  Agreement
contained  in this Warrant  Certificate  is qualified in its entirety by express


                                      A-1
<PAGE>

reference  to  the  Warrant  Agreement  and  the  Warrant   Registration  Rights
Agreement.  All terms used in this Warrant  Certificate  that are defined in the
Warrant Agreement and the Warrant  Registration  Rights Agreement shall have the
meanings assigned to them in such agreements.

          Copies of the Warrant  Agreement and the Warrant  Registration  Rights
Agreement  are on file at the office of the Warrant Agent and may be obtained by
writing to the Warrant Agent at the following address:

                  The Chase Manhattan Bank
                  450 West 33rd St., 15th Floor
                  New York, NY  10001-2697
                  Attention:  Capital Markets Fiduciary Services

          If the Company  merges or  consolidates  with or into, or sells all or
substantially  all of its  property  and  assets  to,  another  Person  and  the
consideration  received by holders of Common Shares consists solely of cash, the
Holders of Warrants  shall be entitled to receive  distributions  on the date of
such event on an equal basis with holders of Common Shares (or other  securities
issuable upon  exercise of the  Warrants) as if the Warrants had been  exercised
immediately prior to such event (less the Exercise Price).  Upon receipt of such
payment,  if any,  the  rights of a Holder  shall  terminate  and cease and such
Holder's Warrants shall expire.

          The number of Common  Shares  purchasable  upon the  exercise  of each
Warrant  and the price per share are  subject to  adjustment  as provided in the
Warrant Agreement.  Except as stated in the immediately preceding paragraph,  in
the event the Company merges or consolidates with, or sells all or substantially
all of its assets to, another Person, each Warrant will, upon exercise,  entitle
the Holder  thereof to  receive  the number of shares of capital  stock or other
securities  or the  amount  of money and other  property  which the  holder of a
Common  Share (or other  securities  or  property  issuable  upon  exercise of a
Warrant) is entitled to receive upon completion of such merger, consolidation or
sale.

          As to any final  fraction  of a share  which the same Holder of one or
more Warrant  Certificates would otherwise be entitled to purchase upon exercise
thereof in the same  transaction,  the  Company  may pay the cash value  thereof
determined as provided in the Warrant Agreement.

          Subject to  Article VI of the  Warrant  Agreement,  all Common  Shares
issuable by the Company upon the exercise of Warrants  shall be validly  issued,
fully paid and not subject to any calls for funds, and the Company shall pay any
taxes and other  governmental  charges that may be imposed under the laws of the
United  States of  America  or any  political  subdivision  or taxing  authority
thereof or therein in respect of the issue or delivery  thereof upon exercise of
Warrants (other than income taxes imposed on the Holders). The Company shall not
be required,  however, to pay any tax or other charge imposed in connection with
any  transfer  involved  in the  issue  of any  certificate  for  Common  Shares
(including  other  securities  or  property  issuable  upon the  exercise of the


                                       A-2
<PAGE>

Warrants)  or payment  of cash to any Person  other than the Holder of a Warrant
Certificate  surrendered  upon the  exercise  of a  Warrant  and in case of such
transfer or payment,  the Warrant Agent and the Company shall not be required to
issue any share  certificate  or pay any cash  until such tax or charge has been
paid or it has  been  established  to the  Warrant  Agent's  and  the  Company's
satisfaction that no such tax or charge is due.

          Subject to the restrictions on and conditions to transfer set forth in
Articles II and VIII of the Warrant Agreement,  this Warrant Certificate and all
rights hereunder are transferable by the registered  Holder hereof,  in whole or
in part, on the register of the Company maintained by the Warrant Agent for such
purpose at the Warrant  Agent's office in New York, New York,  upon surrender of
this Warrant  Certificate duly endorsed,  or accompanied by a written instrument
of transfer  in form  satisfactory  to the  Company  and the Warrant  Agent duly
executed,  with  signatures  guaranteed  as specified  in the  attached  Form of
Assignment,  by the registered  Holder hereof or his attorney duly authorized in
writing  and by  such  other  documentation  required  pursuant  to the  Warrant
Agreement and upon payment of any necessary  transfer tax or other  governmental
charge imposed upon such transfer.  Upon any partial transfer,  the Company will
sign and issue and the Warrant Agent will countersign and deliver to such Holder
a new Warrant  Certificate  or  Certificates  with respect to any portion not so
transferred.  Each taker and Holder of this Warrant  Certificate,  by taking and
holding the same, consents and agrees that prior to the registration of transfer
as  provided  in the Warrant  Agreement,  the Company and the Warrant  Agent may
treat the Person in whose name the Warrants are registered as the absolute owner
hereof  for any  purpose  and as the  Person  entitled  to  exercise  the rights
represented hereby, any notice to the contrary notwithstanding. Accordingly, the
Company  and/or the  Warrant  Agent  shall not,  except as ordered by a court of
competent  jurisdiction  as required by law, be bound to recognize any equitable
or other claim to or interest  in the  Warrants on the part of any Person  other
than such  registered  Holder,  whether  or not it shall  have  express or other
notice thereof.

          This Warrant Certificate may be exchanged at the office of the Warrant
Agent maintained for such purpose in New York, New York for Warrant Certificates
representing the same aggregate number of Warrants, each new Warrant Certificate
to represent such number of Warrants as the Holder hereof shall designate at the
time of such exchange.

          Prior to the valid exercise of the Warrants  represented  hereby,  the
Holder of this Warrant Certificate, as such, shall not be entitled to any rights
of a shareholder of the Company,  including,  without  limitation,  the right to
vote  or  to  consent  to  any  action  of  the  shareholders,  to  receive  any
distributions,  to exercise  any  pre-emptive  right or to receive any notice of
meetings of shareholders, and shall not be entitled to receive any notice of any
proceedings of the Company except as provided in the Warrant Agreement.

          This Warrant Certificate shall be void and all rights evidenced hereby
shall cease on February 1, 2009,  unless sooner  terminated by the  liquidation,
dissolution or winding-up of the Company or as otherwise provided in the Warrant


                                      A-3
<PAGE>

Agreement upon the  consolidation  or merger of the Company with, or sale of the
Company  to,  another  Person or unless such date is extended as provided in the
Warrant Agreement. [Balance of page intentionally left blank.]

          This Warrant  Certificate  shall not be valid for any purpose until it
shall have been countersigned by the Warrant Agent.

                                       KMC TELECOM HOLDINGS, INC.


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

Dated: April __, 1999


Countersigned:

THE CHASE MANHATTAN BANK,
   as Warrant Agent


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


                                      A-4
<PAGE>




                     FORM OF REVERSE OF WARRANT CERTIFICATE

                                SUBSCRIPTION FORM

                 (To be executed only upon exercise of Warrant)

To:      The Chase Manhattan Bank
      450 West 33rd St., 15th Floor
      New York, NY  10001-2697
      Attention:  Capital Markets Fiduciary Services

          The  undersigned   irrevocably  exercises  ________  of  the  Warrants
represented by this Warrant  Certificate and herewith makes payment of $ _______
(such payment being by wire  transfer,  in cash or by certified or official bank
or bank cashier's  check payable to the order or at the direction of KMC Telecom
Holdings,  Inc. or, if the Common  Shares (or other  securities)  issuable  upon
exercise of the Warrants  are  registered  under the Exchange  Act, the exercise
price may be paid by  surrendering  additional  Warrants  to the  Warrant  Agent
having an aggregate Spread equal to the aggregate exercise price of the Warrants
being  exercised)  all at the  exercise  price and on the  terms and  conditions
specified  in this  Warrant  Certificate  and in the Warrant  Agreement  and the
Warrant  Registration  Rights  Agreement  referred to herein and surrenders this
Warrant  Certificate  and all right,  title and interest  therein to and directs
that the  shares of Common  Stock,  par value  $.01 per  share,  of KMC  Telecom
Holdings,  Inc.  (the  "COMMON  SHARES")  deliverable  upon the exercise of such
Warrants be registered or placed in the name and at the address  specified below
and delivered thereto.

                                    CHECK ONE

                  |_|   Payment made by wire transfer,  in cash, or by certified
                        or official bank or bank cashier's check.

                                       OR

                  |_|   The Common  Shares (or other  securities)  issuable upon
                        exercise  of  the  Warrants  are  registered  under  the
                        Exchange  Act and payment is being made by  surrendering
                        Warrants  having  an  aggregate   Spread  equal  to  the
                        aggregate   Exercise   Price  of  the   Warrants   being
                        exercised.


Dated:                                      -------------------------------
                                            (Signature of Owner)

                                            -------------------------------
                                            (Street Address)

                                            -------------------------------
                                            (City)     (State)   (Zip Code)


                                      A-5
<PAGE>

                                            Signature Guaranteed By:


                                            -------------------------------

Securities and/or check or other property to be issued or delivered to:

Please insert social security or identifying number:

Name:

Street Address:

City, State and Zip Code:






                                      A-6
<PAGE>

                               FORM OF ASSIGNMENT

          In  consideration of monies or other valuable  consideration  received
from the  Assignee(s)  named below,  the undersigned  registered  Holder of this
Warrant  Certificate hereby sells,  assigns,  and transfers unto the Assignee(s)
named below (including the undersigned with respect to any Warrants constituting
a part of the Warrants evidenced by this Warrant  Certificate not being assigned
hereby) all of the right of the undersigned under this Warrant Certificate, with
respect to the number of Warrants set forth below:

Name(s) of Assignee(s):  ------------------------------------

Address:  ---------------------------------------------------

No. of Warrants: --------------------------------------------

Please insert social security or other identifying number of assignee(s):

and does hereby irrevocably constitute and appoint  ------------------------ the
undersigned's  attorney to make such transfer on the books of ------------------
maintained for the purposes, with full power of substitution in the premises.

[THE FOLLOWING PROVISION TO BE INCLUDED ON ALL CERTIFICATES]

                  In connection  with any transfer of Warrants,  the undersigned
confirms that without utilizing any general  solicitation or general advertising
that:

[Check One]

|_|      (a) these  Warrants are being  transferred  in compliance  with the
             exemption from registration under the U.S.  Securities Act of 1933,
             as amended, provided by Rule 144A thereunder.
                                       OR

|_|      (b) these Warrants are being  transferred  other than in accordance
             with (a) above and documents are being  furnished which comply with
             the  conditions  of transfer set forth in this Warrant  Certificate
             and the Warrant Agreement.

                                       OR

|_|      (c) these Warrants are being  transferred  pursuant to an effective
             registration  statement  under the U.S.  Securities Act of 1933, as
             amended.

If none of the  foregoing  boxes is  checked,  the  Warrant  Agent  shall not be
obligated  to register  the  Warrants  in the name of any Person  other than the
Holder  hereof  unless  and  until  the  conditions  to  any  such  transfer  of
registration set forth herein and in Article VIII of the Warrant Agreement shall
have been satisfied.

Dated:


                                      A-7
<PAGE>

                                           -------------------------
                                           (Signature of Owner)

                                           -------------------------
                                           (Street Address)

                                           -------------------------
                                           (City)   (State) (Zip Code)




                                           Signature Guaranteed By:

                                           ---------------------------

TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.

          The  undersigned  represents  and warrants that it is  purchasing  the
Warrant(s)  for its own account or an account with respect to which it exercises
sole  investment  discretion  and that it and any such  account is a  "qualified
institutional  buyer" within the meaning of Rule 144A under the U.S.  Securities
Act of  1933,  as  amended,  and is aware  that the sale to it is being  made in
reliance on Rule 144A and  acknowledges  that it has received  such  information
regarding KMC Telecom Holdings,  Inc. as the undersigned has requested  pursuant
to Rule 144A or has  determined not to request such  information  and that it is
aware  that  the  transferor  is  relying  upon  the   undersigned's   foregoing
representations  in order to claim the exemption from  registration  provided by
Rule 144A.

Dated:________________

                                        ----------------------------------------
[NOTE:  To be executed by an executive officer]



                                      A-8
<PAGE>




                                                                     EXHIBIT B-1



                            Form of Certificate to be
                   Delivered by Transferor in Connection with
                      Transfers to Persons Other Than QIBS
                      ------------------------------------

                                     [Date]

KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ  07921

The Chase Manhattan Bank
450 West 33rd St., 15th Floor
New York, NY  10001-2697
Attention:  Capital Markets Fiduciary Services

Re:      Warrants (the "Warrants") to Purchase
         Common Shares of KMC Telecom Holdings, Inc. (the "Company")

Ladies and Gentlemen:

          We hereby  certify that such transfer is being  effected in compliance
with the transfer  restrictions  applicable to the Warrants or interests therein
transferred  pursuant  to  and  in  accordance  with  the  Securities  Act,  and
accordingly we hereby further certify that (check one):

          (a) |_| such transfer is being effected  pursuant to and in accordance
with Rule 144 under the Securities Act; or

          (b) |_| such transfer is being effected to the Company or a subsidiary
thereof;

                                       or

         (c) |_|  such  transfer  is being  effected  pursuant  to an  effective
registration statement under the Securities Act;

                                       or

         (d) |_| such transfer is being  effected  pursuant to an exemption from
the registration requirements of the Securities Act other than Rule 144 and Rule


                                     B-1-1
<PAGE>

144, and we hereby further certify that such transfer complies with the transfer
restrictions  applicable  to the Warrants or interests  therein  transferred  to
persons other than QIBs and in accordance with the requirements of the exemption
claimed,  which  certification is supported by an Opinion of Counsel provided by
us or the  transferee (a copy of which we have attached to this  certification),
to the effect that such transfer is in compliance  with the Securities Act. Upon
consummation  of the  proposed  transfer  in  accordance  with the  terms of the
Warrant Agreement, the transferred Warrants or interests therein will be subject
to the  restrictions  on transfer  enumerated  in the Private  Placement  Legend
printed  on the  Certificated  Warrant  and in the  Warrant  Agreement  and  the
Securities Act.

                                       Very truly yours,

                                       [Name of Transferor]


                                       By:--------------------------------------
                                          Authorized Signatory


                                     B-1-2
<PAGE>

                                                                     EXHIBIT B-2

                            Form of Certificate to be
                   Delivered By Transferees in Connection with
                      Transfers to Persons Other Than QIBS
                      ------------------------------------


                                                              [Date]


KMC Telecom Holdings, Inc.
1545 Route 206, Suite 300
Bedminster, NJ  07921


The Chase Manhattan Bank
450 West 33rd St., 15th Floor
New York, NY  10001-2697
Attention:  Capital Markets Fiduciary Services

Re:     Warrants (the "WARRANTS") to Purchase
        Common Shares of
        KMC Telecom Holdings, Inc. (the "COMPANY")


Ladies and Gentlemen:

          In  connection  with our proposed  purchase of  ----------- aggregate
number of Warrants, we confirm that:

          1. We understand  that any  subsequent  transfer of the Warrants,  any
     interest therein or the Common Shares issuable upon exercise of any Warrant
     (the "WARRANT  SHARES") is subject to certain  restrictions  and conditions
     set forth in the Warrant  Agreement dated as of April ___, 1999 relating to
     the Warrants (the "WARRANT  AGREEMENT") and the Warrant Registration Rights
     Agreement  dated April ___,  1999  relating to the Warrants  (the  "WARRANT
     REGISTRATION  RIGHTS AGREEMENT") and the undersigned agrees to be bound by,
     and not to resell,  pledge or  otherwise  transfer  the Warrants or Warrant
     Shares except in compliance with, such  restrictions and conditions and the
     U.S. Securities Act of 1933, as amended (the "SECURITIES ACT").

          2. We  understand  that  the  Warrants  represented  by  this  Warrant
     Certificate  and, as of the date this Warrant  Certificate  was  originally
     issued,  the Warrant Shares have not been  registered  under the Securities
     Act,  and  accordingly  may not be  offered,  sold,  pledged  or  otherwise


                                     B-2-1
<PAGE>

     transferred except as set forth in the following sentence. We agree that we
     will  not,  within  the  time  period  referred  to in Rule  144(k)  of the
     Securities Act (taking into account the provisions of Rule 144(d) under the
     Securities Act, if applicable) under the Securities Act as in effect on the
     date of the  transfer of this  Warrant,  resell or  otherwise  transfer the
     Warrants  represented by this Warrant Certificate except (a) to KMC Telecom
     Holdings,  Inc. or any subsidiary thereof, (b) to a qualified institutional
     buyer in compliance  with Rule 144A under the Securities  Act, (c) pursuant
     to  the  exemption  from  registration  provided  by  Rule  144  under  the
     Securities Act (if available),  (d) to an institutional accredited investor
     that, prior to such transfer,  furnishes to you, to the Company and, in the
     case of the Warrant Shares, to the transfer agent and registrar therefor, a
     signed letter containing certain representations and agreements relating to
     the  restrictions  on transfer of the Warrants  represented by this Warrant
     Certificate  (the form of which  letter can be  obtained  from the  Warrant
     Agent) and an opinion of counsel  acceptable to KMC Telecom Holdings,  Inc.
     and its counsel that such transfer is in compliance with the Securities Act
     or (f) pursuant to an effective registration statement under the Securities
     Act and, in each case, in accordance with applicable state securities laws.

          3. We  understand  that, on any proposed  resale of any Warrants,  any
     interest  therein or Warrant Shares,  we will be required to furnish to you
     and the Company such  certifications,  legal opinions and other information
     as you and the Company may reasonably  require to confirm that the proposed
     sale complies with the foregoing  restrictions.  We further understand that
     the Warrants purchased by us will bear a legend to the foregoing effect.

          4. We are an institutional  "accredited  investor" (as defined in Rule
     501(a)(1),  (2), (3) or (7) of Regulation D under the  Securities  Act) and
     have such knowledge and experience in financial and business  matters as to
     be capable of  evaluating  the  merits and risks of our  investment  in the
     Warrants,  and we and any accounts for which we are acting are each able to
     bear the economic risk of our or its investment for an indefinite period of
     time.

          5. We are acquiring  the Warrants  purchased by us for our own account
     or for one or more accounts (each of which is an institutional  "accredited
     investor") as to each of which we exercise sole investment discretion.


                                     B-2-2
<PAGE>

          You, the Company and, if applicable,  the transfer agent and registrar
for the Warrant Shares are entitled to rely upon this letter and are irrevocably
authorized  to produce this letter or a copy hereof to any  interested  party in
any  administrative or legal proceedings or official inquiry with respect to the
matters covered hereby.

                                           Very truly yours,

                                           [Name of Transferee]


                                           By:----------------------------------
                                              Authorized Signature


                                     B-2-3
<PAGE>

                                   APPENDIX A

LIST OF FINANCIAL EXPERTS
-------------------------


Alex. Brown & Sons
Bear, Stearns & Co., Inc.
Dillon, Read & Co. Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman, Sachs & Co.
Lazard Freres & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. Incorporated
PaineWebber Incorporated
Prudential Securities Inc.
Salomon Brothers Inc
Lehman Brothers