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

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2002

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

For the transition period from to
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COMMISSION FILE NUMBER: 333-50475

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

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

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

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

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

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

CLASS OUTSTANDING
----- -----------
Common Stock, par value $0.01 861,145 shares,
per share. as of May 31, 2002

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KMC TELECOM HOLDINGS, INC.

INDEX

PART I. FINANCIAL INFORMATION PAGE NO.
- -------------------------------- --------

ITEM 1. Financial Statements

Unaudited Condensed Consolidated Balance Sheets, December 31, 2001
and March 31, 2002...........................................................2

Unaudited Condensed Consolidated Statements of Operations,
Three Months Ended March 31, 2001 and 2002...................................3

Unaudited Condensed Consolidated Statements of Cash Flows, Three
Months Ended March 31, 2001 and 2002.........................................4

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

ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................17

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.....................27

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

ITEM 1. Legal Proceedings..............................................................29

ITEM 2. Changes in Securities and Use of Proceeds......................................29

ITEM 3. Defaults Upon Senior Securities................................................29

ITEM 4. Submission of Matters to a Vote of Security Holders............................29

ITEM 5. Other Information..............................................................29

ITEM 6. Exhibits and Reports on Form 8-K...............................................30

SIGNATURES..............................................................................31

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

DECEMBER 31, MARCH 31,
2001 2002
------------ -----------

ASSETS
Current assets:
Cash and cash equivalents......................................... $ 96,228 $ 81,277
Restricted investments............................................ 38,616 60,636
Accounts receivable, net of allowance for doubtful accounts of
$13,832 and $6,832 in 2001 and 2002, respectively............... 61,518 41,357
Assets held for sale.............................................. 35,428 -
Prepaid expenses and other current assets......................... 7,888 14,133
----------- ----------
Total current assets................................................. 239,678 197,403
Long-term restricted investments..................................... 23,866 33,814
Networks, property and equipment, net................................ 1,032,625 978,826
Intangible assets, net............................................... 2,092 2,192
Deferred financing costs, net........................................ 33,995 30,559
Other assets......................................................... 1,516 1,520
----------- ----------
$ 1,333,772 $1,244,314
=========== ==========
LIABILITIES, REDEEMABLE AND NONREDEEMABLE EQUITY/(DEFICIENCY)
Current liabilities:
Accounts payable.................................................. $ 29,284 $ 20,412
Accrued expenses.................................................. 77,927 102,459
Debt maturing within one year..................................... 164,183 169,412
Deferred revenue - current........................................ 12,157 14,333
----------- ----------
Total current liabilities............................................ 283,551 306,616
Other liabilities.................................................... 31,364 25,832
Deferred revenue - long term......................................... 14,709 13,707
Notes payable........................................................ 1,138,675 1,094,989
Senior notes payable................................................. 275,000 275,000
Senior discount notes payable........................................ 241,994 199,246
----------- ----------
Total liabilities.................................................... 1,985,293 1,915,390

Commitments and contingencies

Redeemable equity:
Senior redeemable, exchangeable, PIK preferred stock, par value $.01 per
share; authorized: 630 shares in 2001 and 2002; shares issued and
outstanding:
Series E, 142 shares in 2001 and 147 shares in 2002 ($146,797
liquidation preference)...................................... 129,932 135,428
Redeemable cumulative convertible preferred stock, par value $.01
per share; 499 shares authorized; shares issued and outstanding:
Series A, 124 shares in 2001 and 2002 ($12,380 liquidation
preference).................................................. 12,380 12,380
Series C, 175 shares in 2001 and 2002 ($17,500 liquidation
preference).................................................. 17,500 17,500
Redeemable cumulative convertible preferred stock, par value $.01
per share; 2,500 shares authorized; shares issued and
outstanding:
Series G-1, 59 shares in 2001 and 2002 ($19,900 liquidation
preference)................................................... 19,594 19,634
Series G-2, 481 shares in 2001 and 2002 ($162,600 liquidation
preference)................................................... 161,321 161,495
Redeemable common stock, shares issued and outstanding, 224 in
2000 and 2001................................................... 21,611 21,569
Redeemable common stock warrants.................................. 22,390 23,722
----------- ----------
Total redeemable equity.............................................. 384,728 391,728
Nonredeemable equity/(deficiency):
Common stock, par value $.01 per share; 4,250 shares authorized;
issued and outstanding:
637 shares in 2001 and 2002........................................ 6 6
Additional paid-in capital........................................... 42,735 35,735
Unearned compensation................................................ (277) (277)
Accumulated other comprehensive loss ................................ (31,364) (25,832)
Accumulated deficit.................................................. (1,047,349) (1,072,436)
----------- ----------
Total nonredeemable equity/(deficiency).............................. (1,036,249) (1,062,804)
----------- ----------
$ 1,333,772 $1,244,314
=========== ==========

See accompanying notes.

KMC TELECOM HOLDINGS, INC.

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

THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2002
--------------------------

Revenue.......................................................... $ 96,826 $ 138,981
Operating expenses:
Network operating costs:
Non-cash stock compensation expense/(credit)........... (5,010) -
Other network operating costs.......................... 61,330 65,166
Selling, general and administrative:
Non-cash stock compensation expense/(credit)........... (58,414) -
Other selling, general and administrative costs........ 48,957 30,897
Restructuring charge........................................ - 12,296
Depreciation and amortization............................... 32,615 59,218
------------- ----------
Total operating expenses............................... 79,478 167,577
------------- ----------
Income/(loss) from operations.................................... 17,348 (28,596)
Other income..................................................... - 4,889
Interest income.................................................. 2,524 484
Interest expense................................................. (43,149) (48,132)
------------- ----------
Net loss before extraordinary item............................... (23,277) (71,355)
Extraordinary item............................................... - 46,267
------------- ----------
Net loss......................................................... (23,277) (25,088)
(Dividends and accretion)/reversal of accretion on redeemable
preferred stock............................................... 67,634 (9,696)
------------- ----------
Net income/(loss) applicable to common shareholders.............. $ 44,357 $ (34,784)
============ ===========
Net income/(loss) per common share before extraordinary item
-basic...................................................... $ 51.51 $ (94.12)
Extraordinary item............................................... - 53.73
------------ -----------
Net income/(loss) per common share - basic....................... $ 51.51 $ (40.39)
============ ===========
Net income per common share - diluted............................ $ 29.54 N/A
============ ===========

Weighted average number of common shares outstanding - basic..... 861,145 861,145
============ ===========
Weighted average number of common and common equivalent shares
outstanding - diluted....................................... 1,501,598 N/A
============ ===========

See accompanying notes.

KMC TELECOM HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2002
--------------------------

OPERATING ACTIVITIES
Net loss........................................................ $(23,277) $(25,088)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.............................. 32,615 59,218
Non-cash interest expense.................................. 21,695 7,842
Non-cash stock compensation expense/(credit)............... (63,424) -
Gain on repurchase of senior discount notes................ - (46,267)
Gain on sale of Tier III Markets........................... - (4,889)
Changes in assets and liabilities:
Accounts receivable...................................... 2,717 20,161
Prepaid expenses and other current assets................ (4,672) (6,245)
Other assets............................................. (6,673) (16,349)
Accounts payable......................................... (81,725) (8,871)
Accrued expenses......................................... (7,452) 15,251
Deferred revenue......................................... (3,610) 1,174
------------ -----------
Net cash used in operating activities........................... (133,806) (4,063)
------------ -----------

INVESTING ACTIVITIES
Construction of networks and purchases of equipment............. (174,038) (5,360)
Proceeds from sale of assets.................................... - 40,317
Acquisitions of franchises, authorizations and related assets... (112) (158)
------------ -----------
Net cash provided by/ (used in) investing activities............ (174,150) 34,799
------------ -----------

FINANCING ACTIVITIES
Proceeds from issuance of notes, net of issuance costs.......... 223,345 -
Repurchase of senior discount notes............................. - (2,384)
Purchase of options on senior notes............................. - (4,846)
Repayment of monetization debt.................................. - (38,457)
Proceeds from credit facilities, net of issuance costs.......... 105,823 -
------------ -----------
Net cash provided by/ (used in) financing activities............ 329,168 (45,687)
------------ -----------

Net increase/(decrease) in cash and cash equivalents............ 21,212 (14,951)
Cash and cash equivalents, beginning of period.................. 109,977 96,228
------------ -----------
Cash and cash equivalents, end of period........................ $131,189 $ 81,277
============ ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of amounts
capitalized.................................................. $ 21,454 $ 29,503
============ ===========

See accompanying notes.

KMC TELECOM HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2002

1. BASIS OF PRESENTATION AND ORGANIZATION

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

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

The unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting. Accordingly, they do not include certain information and
note disclosures required by generally accepted accounting principles for annual
financial reporting and should be read in conjunction with the financial
statements and notes thereto of KMC Telecom Holdings, Inc. as of and for the
year ended December 31, 2001.

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

The balance sheet of KMC Telecom Holdings, Inc. at December 31, 2001 was
derived from the audited consolidated balance sheet at that date.

Certain reclassifications have been made to the 2001 unaudited condensed
consolidated financial statements to conform with the 2002 presentation.

The Company had deficits in working capital and nonredeemable equity of
$109.2 million and $1.1 billion, respectively, at March 31, 2002. In an effort
to preserve liquidity, the Company began to implement a significant further
restructuring of its Tier III Markets business in the first quarter of 2002.
This restructuring is intended to centralize many of the general and
administrative activities that were previously performed in each city to fewer
locations, to reorganize its sales force to reduce the number of operating
personnel and to significantly reduce its Tier III Markets business capital
expenditures. The Company expects that this restructuring will result in a
headcount reduction of approximately 41% of its Tier III Markets business
workforce and elimination or sublease of underutilized facilities. Although the
Company expects that this restructuring will result in a reduction in revenue
growth as the result of lower capital expenditures, it also believes that,
through significant cost savings, adjusted EBITDA (consisting of earnings/(loss)
before net interest, income taxes, depreciation and amortization charges, stock
option compensation expense, other expense, impairment on long lived assets and
cumulative effect of change in accounting principle) from its Tier III Markets
business will increase. The Company anticipates that it will begin to realize
the cost savings effects of this plan in the second quarter of 2002. The
components of the restructuring charge, which were recorded in the first quarter
2002, are approximately $8.4 million for underutilized real estate and
approximately $3.9 million for severance and outplacement costs. In

addition, the Company will continue to look for efficiencies within the Tier III
Markets business to improve cash flow from operations.

As more fully described in Note 15, the Company further amended its
Amended Senior Secured Credit Facility in May 2002 to, among other things, waive
failures by the Company to comply with certain covenants, revise certain of the
financial covenants to be less restrictive and to defer payment of substantial
amounts of principal. This amendment also provides access to the proceeds of the
sale in February 2002 of two Tier III market networks. Through this amendment
and separate agreements with certain stockholders to defer interest payments on
senior notes held by such stockholders, the Company was able to improve its
short-term liquidity and to provide the financing required to support its
projected operating plan for 2002. The Company anticipates that it will be
necessary for the Company to discuss with its senior lenders a further extension
of both the principal and interest repayment terms to a level achievable by the
Company or to reduce the overall level of debt through either a recapitalization
of the Company, future sales of assets or a combination thereof.

The Company's Nationwide Data Platform business is concentrated, with
one customer, Qwest Communications International Inc., comprising approximately
98% of the DS-0 equivalents under contract for this business and 61% of the
Company's total revenue for the quarter ended March 31, 2002. Furthermore, the
Company is wholly dependent upon payment of monthly fees under the agreements
with this customer to fund the monthly debt service payments on the debt
incurred to finance the related equipment. In recent months, Qwest has reported
that continuing weakness in both the telecommunications industry and the economy
in its local service area has negatively impacted its operating results and
liquidity. In addition, Qwest has reported that it is under review by regulatory
authorities and others concerning certain of its accounting policies and
financial reporting practices. Further, in late May 2002, the credit rating
agencies reclassified Qwest's debt to below investment grade. Any failure by
this customer to make the contracted payments would have a material adverse
effect upon the Company and its operations.

The Company believes that its existing cash balances, marketable
securities, borrowings reasonably anticipated to be available under the Amended
Senior Secured Credit Facility and anticipated funds from operations will be
sufficient to meet the Company's liquidity needs to fund operations and capital
expenditure requirements under its current business plan into the second quarter
of 2003. The Company's ability to remain liquid into the second quarter of 2003
is predicated upon (i) continued access to available borrowings and cash
generated from the February 2002 sales of two of our Tier III market networks,
(ii) increased sales in its Tier III Markets business, combined with the
successful implementation of the cost controls and gross margin improvements
that are a part of the restructuring of its Tier III Markets business, (iii) its
ability to secure additional multi-year contracts with a variety of wholesale,
data and carrier customers for its Nationwide Data Platform business, which the
Company is currently pursuing with a number of potential customers and (iv) its
ability to finance new data services contracts or extensions of existing data
services contracts which the Company may be able to obtain. The Company can give
no assurance that it will be able to achieve any of the predicates listed above.

In addition, in the event that the Company's plans change, the
assumptions upon which its plans are based prove inaccurate, the Company expands
or accelerates its business plan or the Company determines to consummate
acquisitions, the foregoing sources of funds may prove insufficient and the
Company may be required to seek additional financing sooner than it currently
expects. Additional sources of financing may include public or private equity or
debt financings, leases and other financing arrangements. The Company can give
no assurance that additional financing will be available or, if available, that
it can be obtained on a timely basis and on acceptable terms.

2. SALE OF TWO TIER III MARKETS BUSINESSES

On February 28, 2002, the Company sold two of its 37 Tier III
fiber-optic networks and related assets for a gain of approximately $4.9
million. Such gain is reflected as other income in the accompanying condensed
consolidated statement of operations. These networks generated aggregate
revenues of $3.2 million before they were sold on February 28, 2002, which is
included in the Tier III Markets business operating results for the first
quarter of 2002.

3. NETWORKS, PROPERTY AND EQUIPMENT

Networks, property and equipment are comprised of the following:

DECEMBER 31, MARCH 31,
2001 2002
-----------------------------
(IN THOUSANDS)

Fiber optic systems................................$ 230,476 $ 235,227
Telecommunications equipment....................... 1,053,865 1,064,059
Furniture and other................................ 30,274 31,174
Construction-in-progress........................... 20,067 8,850
----------- -----------
1,334,682 1,339,310
Less accumulated depreciation...................... (302,057) (360,484)
----------- -----------
$ 1,032,625 $ 978,826
=========== ===========

Costs capitalized during the development of the Company's networks
include amounts incurred related to network engineering, design and construction
and capitalized interest. Capitalized interest related to the construction of
the networks for the three months ended March 31, 2001 amounted to $881,000. The
Company did not capitalize any interest related to the construction of networks
in 2002.

4. ACCRUED EXPENSES

Accrued expenses are comprised of the following:

DECEMBER 31, MARCH 31,
2001 2002
----------------------------------
(IN THOUSANDS)

Accrued compensation.................... $ 23,534 $ 10,682
Accrued telecommunications costs........ 15,011 21,616
Accrued interest payable................ 8,831 18,713
Accrued restructuring charges........... - 12,084
Other accrued expenses.................. 30,551 39,364
------------ ------------
$ 77,927 $ 102,459
============ ============

5. INFORMATION BY BUSINESS SEGMENT

The Company has two reportable segments as defined by FASB Statement No.
131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION": a
Tier III Markets segment and a Nationwide Data Platform segment. The Company
owns and operates robust fiber-based networks and switching equipment in all of
its 35 Tier III markets, which are predominantly located in the South,
Southeast, Midwest and Mid-Atlantic United States. The Nationwide Data Platform
segment provides local Internet access infrastructure and other enhanced data
services in over 820 markets nationwide.

The Company evaluates the performance of its operating segments based on
earnings/(loss) before interest, income taxes, depreciation and amortization,
non-cash stock compensation expense/(credit), other expense, impairment on long
lived assets and cumulative effect of change in accounting principle ("Adjusted
EBITDA"). There are no significant intersegment transactions.

THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS)

TIER III NATIONWIDE
MARKETS DATA PLATFORM CORPORATE TOTAL
------- ------------- --------- -----

Revenue.................... $ 52,304 $ 86,677 $ - $ 138,981

Adjusted EBITDA............ (26,884) 57,528 (22) 30,622
Depreciation and
amortization............. (20,925) (32,946) (5,347) (59,218)
Other income............... 4,877 - 12 4,889
Interest income............ 188 256 40 484
Interest expense........... (13,356) (12,878) (21,898) (48,132)
--------- ---------- ---------- -----------
Net income/(loss)
applicable to common
shareholders............. (56,100) 11,960 (27,215) (71,355)
Extraordinary item......... - - 46,267 46,267
Dividends and accretion on
redeemable preferred
stock.................... - - (9,696) (9,696)
--------- ---------- ---------- -----------
Net income/(loss)
applicable to common
shareholders............. $ (56,100) $ 11,960 $ 9,356 $ (34,784)
========= ========== ========== ===========
Total assets............... $ 682,365 $ 511,614 $ 50,335 $ 1,244,314
========= ========== ========== ===========
Capital expenditures....... $ 1,089 $ 3,538 $ - $ 4,627
========= ========== ========== ===========
Total principal repayment
of indebtedness......... $ - $ 38,457 $ - $ 38,457
========= ========== ========== ===========

THREE MONTHS ENDED MARCH 31, 2001
(IN THOUSANDS)

TIER III NATIONWIDE
MARKETS DATA PLATFORM CORPORATE TOTAL
------- ------------- --------- -----

Revenue.................... $ 50,599 $ 46,227 $ - $ 96,826

Adjusted EBITDA............ (27,673) 14,212 - (13,461)
Depreciation and
amortization............. (21,383) (5,123) (6,109) (32,615)
Stock compensation credit.. 1,903 634 60,887 63,424
Interest income............ 515 551 1,458 2,524
Interest expense........... (37,382) (4,215) (1,552) (43,149)
---------- ---------- ---------- ----------
Net income/(loss)
applicable
to common shareholders.. (84,020) 6,059 54,684 (23,277)
Dividends and reversal of
accretion on redeemable
preferred stock.......... - - 67,634 67,634
---------- ---------- ---------- ----------

Net income/(loss)
applicable to common
shareholders............. $ (84,020) $ 6,059 $ 122,318 $ 44,357
========== ========== ========== ==========
Total assets............... $ 934,009 $ 781,317 $ 163,330 $1,878,656
========= ========== ========== ==========
Capital expenditures....... $ 12,175 $ 205,075 $ - $ 217,250
========= ========== ========== ==========

SERVICE REVENUE

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

The Company's service revenue consists of the following:

THREE MONTHS ENDED
MARCH 31,
2001 2002
-----------------------
(IN THOUSANDS)

On-net............................................. $ 94,734 $136,750
Resale............................................. 2,092 2,231
-------- --------
Total.............................................. $ 96,826 $138,981
======== ========

6. COMMITMENTS AND CONTINGENCIES

PURCHASE COMMITMENTS

As of March 31, 2002, the Company has outstanding commitments
aggregating approximately $13.8 million related to purchases of
telecommunications equipment and fiber optic cable. The Company also has
obligations under its agreements with certain suppliers and service providers
under standard commercial terms.

REDEMPTION RIGHTS

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

The redeemable preferred stock, redeemable common stock and redeemable
common stock warrants, which are subject to the stockholders agreement, are
being accreted up to their fair market values from their respective issuance
dates to their earliest potential redemption date (October 22, 2003). At March
31, 2002, the aggregate redemption value of the redeemable equity was
approximately $215.1 million, reflecting per share redemption amounts of $100
for the Series A Preferred Stock, $100 for the

Series C Preferred Stock, $338 for the Series G Preferred Stock and $5 for the
redeemable common stock and redeemable common stock warrants.

7. NET INCOME/(LOSS) PER COMMON SHARE

The following table sets forth the computation of net income/(loss) per
common share-basic and diluted (in thousands, except share and per share
amounts):

THREE MONTHS ENDED
MARCH 31,
-----------------------
2001 2002
-----------------------
Numerator:
Net loss before extraordinary item............. $(23,277) $(71,355)
Extraordinary item............................. - 46,267
--------- --------
Net loss....................................... (23,277) (25,088)
(Dividends and accretion)/reversal of accretion
on redeemable preferred stock................ 67,634 (9,696)
--------- --------
Numerator for net income/(loss) applicable to
common shareholders.......................... $ 44,357 $(34,784)
========= ========
Denominator:
Denominator for basic net income/(loss) per
common share-weighted average number of
common shares outstanding.................... 861,145 861,145
Dilutive effect of options and warrants........ 640,453 N/A
--------- --------
Denominator for diluted net income/(loss) per
common share-weighted average number of
common and common equivalent shares
outstanding.................................. 1,501,598 N/A
========= ========
Net income/(loss) per common share before
cumulative effect of change in accounting
principle - basic.............................. $ 51.51 $ (94.12)
Extraordinary item................................ - 53.73
--------- --------
Net income/(loss) per common share - basic........ $ 51.51 $ (40.39)
========= ========
Net income per common share - diluted............. $ 29.54 N/A
========= ========

Options and warrants to purchase an aggregate of 1,065,059 shares of
common stock were outstanding as of March 31, 2002, but a computation of diluted
net loss per common share for such period has not been presented, as the effect
would be anti-dilutive.

8. CONTRACTS

In February 2002, the Company signed a Nationwide Data Platform contract
with a new carrier customer that is expected to generate approximately $24.0
million of revenues during 2002 and annual revenues ranging from $36.0 million
to $40.0 million for 2003 through 2005.

In March 2002, the Company terminated its data services contract with
Broadwing upon mutually acceptable terms. The agreement required the Company to
provide service through the end of April 2002. This contract generated revenues
of approximately $12.3 million in 2001. The Company recorded

a non-cash impairment charge of $7.9 million in 2001 to reduce the carrying
value of the equipment used to service this customer. This was the Company's
smallest Nationwide Data Platform contract.

9. NOTE REPURCHASES

During the first quarter of 2002, the Company used $4.2 million of cash
to purchase $98.9 million principal amount at maturity of Senior Discount Notes.
After giving effect to the transfer of $43.0 million principal amount at
maturity to certain Lenders under its Amended Senior Secured Credit Facility, as
described below, the Company recognized a net gain of approximately $46.3
million. In addition, the Company used $4.8 million to acquire options from
Dresdner Kleinwort Capital to repurchase $78.6 million principal amount of
Senior Notes. The Company exercised its option to repurchase the Senior Notes in
May 2002 for a nominal fee.

In connection with the May 2002 amendment of its Amended Senior Secured
Credit Facility (see Note 15), the Company agreed to transfer $43.0 million
principal amount at maturity of Senior Discount Notes held by the Company and
15% of any additional notes purchased by the Company to those Lenders who agree
to defer to June 30, 2003, the payment of principal under the facility scheduled
to occur April 1, 2003.

The repurchased notes and options (other than those transferred to
deferring Lenders as described above) are held by a subsidiary of the Company
and have been pledged as additional collateral to, and may be voted by, the
Lenders under the Amended Senior Secured Credit Facility. The pledge does not
constitute a reissuance of the pledged notes and does not obligate the Company
to make any of the scheduled payments of principal or interest on the pledged
notes. However, if there is a default under the Amended Senior Secured Credit
Facility and the Lenders have either (i) accelerated the amounts due under the
Amended Senior Secured Credit Facility or (ii) exercised their rights under the
pledge agreement, then any principal or interest payments thereafter due under
the pledged notes would be payable to the Lenders in accordance with the terms
of the pledged notes, to be applied against the Company's obligations under the
Amended Senior Secured Credit Facility. In accordance with an agreement with the
Lenders, the Company has a limited amount of cash available to repurchase
additional notes. As of May 2002, the Company and its affiliates own
approximately 64% of the original principal amount at maturity of the Senior
Discount Notes and 81% of the principal amount of the Senior Notes.

10. EQUITY TRANSACTIONS

LENDER WARRANTS

The Company failed to prepay an aggregate of $100.0 million under the
Amended Senior Secured Credit Facility on or before March 31, 2002. As a result,
warrants to purchase 166,542 shares of common stock at an exercise price of $.01
per share became issuable pro rata to the Lenders under the Amended Senior
Secured Credit Facility.

CHANGE IN FAIR VALUE OF COMMON STOCK

As a result of a decrease in the estimated fair value of the Company's
common stock in the first quarter of 2001 as compared to December 31, 2000, the
Company reversed $63.4 million of previously recognized stock compensation
expense during the quarter ended March 31, 2001. In addition, the decrease in
the estimated fair value of the Company's common stock also resulted in the
reversal of $67.6 million of previously recognized accretion on redeemable
equity instruments during the first quarter of 2001. Neither of these non-cash
items were directly generated by the Company's operating activities. In the
first quarter of 2002, the Company did not have a reversal of stock compensation
expense nor a reversal of accretion on redeemable equity.

11. RELATED PARTIES

Pursuant to an arrangement between the Company and KNT Network
Technologies, LLC ("KNT"), a company independently owned by Harold N. Kamine and
Nassau Capital, the principal stockholders of the Company, effective June 1,
2000, the Company transferred substantially all of the employees of its
construction division to KNT. KNT was initially funded via a contribution of
equity from Mr. Kamine and Nassau Capital to pursue third party networks
construction and related contracts. KNT provided construction and maintenance
services to the Company and was being reimbursed for all of the direct costs of
these activities. In addition, the Company funded substantially all of KNT's
general overhead and administrative costs at an amount not to exceed $15.0
million per annum.

In February 2002, the Company entered into a termination agreement with
KNT to terminate this arrangement. During the first quarter of 2002,
substantially all of KNT's employees were either terminated or transferred back
to the Company and the activities of KNT substantially ceased. Amounts paid to
KNT during the three months ended March 31, 2002 related to this arrangement
amounted to $5.9 million, of which $679,000 was for network related construction
and was capitalized into networks and equipment, $3.9 million was expensed as
general and administrative costs and $1.3 million was expensed as direct
maintenance costs.

Amounts paid to KNT during the three months ended March 31, 2001 related
to this arrangement amounted to $13.1 million, of which $7.0 million was for
network related construction and was capitalized into networks and equipment,
$4.3 million was expensed as general overhead and administrative costs and $1.8
million was expensed as direct maintenance costs.

In addition to services contracted with KNT, the Company also
contracted services from Pretel Network Services Corporation, a wholly owned
subsidiary of KNT and a former Company vendor prior to its acquisition by KNT in
June 2000. Amounts paid to Pretel during the three months ended March 31, 2002
were $587,000, of which $35,000 was capitalized as plant construction costs and
$552,000 was expensed as plant maintenance costs.

12. HEDGING ACTIVITIES

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

The Company has two interest rate swap agreements to hedge its interest
rate exposure, and the effect of applying Statement 133 as of January 1, 2001
resulted in the fair value of the swaps of $13.2 million being included as a
liability with a corresponding charge to other comprehensive income. For the
period from January 1, 2001 through March 31, 2001, the value of the swaps
decreased to a liability of $23.0 million, reflecting payments of $62,000 and
decreases in fair value of $9.8 million (included as a component of other
comprehensive loss). At December 31, 2001 the swaps were in a liability position
of $31.4 million. For the period from January 1, 2002 through March 31, 2002,
the value of the swaps changed to a liability of $25.8 million, reflecting
payments of $4.8 million and increases in fair value of $743,000 (included as a
component of other comprehensive loss). The amount included in other
comprehensive loss will be recognized as additional interest expense over the
term of the swap agreements.

13. COMPREHENSIVE LOSS

The Company has adopted Statement of Financial Accounting Standards No.
130, REPORTING COMPREHENSIVE INCOME, which establishes standards for the
reporting and disclosure of comprehensive income and its components in the
financial statements. The adoption of this Statement had no impact on the
Company's net income. Prior to the adoption of Statement 133 in the quarter
ended March 31, 2001 (see Note 12), the Company did not have any items that were
required to be disclosed in comprehensive income. The Company's comprehensive
loss for the three months ended March 31, 2001 and 2002 is set forth in the
following table:

THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2001 2002
---------------- ---------------
Net loss.................................... $ (23,277) $ (25,088)
Other comprehensive loss:
Reclassified to net loss............... 62 4,789
Change in fair value of the swaps...... (9,827) 743
--------------- ---------------
Comprehensive loss.......................... $ (33,042) $ (19,556)
=============== ===============

14. TIER III RESTRUCTURING

In an effort to preserve liquidity, the Company began to implement a
significant further restructuring of its Tier III Markets business in the first
quarter of 2002. This restructuring is intended to centralize many of the
general and administrative activities that were previously performed in each
city to fewer locations, to reorganize the Company's sales force, to reduce the
number of other operating personnel and to significantly reduce the Company's
Tier III Markets business capital expenditures. The Company expects that this
restructuring will result in a headcount reduction of approximately 41% of the
Company's Tier III Markets business workforce and the elimination or sublease of
underutilized facilities. Although the Company expects that this restructuring
will result in a reduction in revenue growth as the result of lower capital
expenditures, it also believes that, through significant cost savings, Adjusted
EBITDA from its Tier III markets will increase. The Company anticipates that it
will begin to realize the cost saving effects of this plan in the second quarter
of 2002. The components of the restructuring, substantially all of which are
cash charges, are approximately $8.4 million for underutilized facilities and
approximately $3.9 million for severance and outplacement costs. These charges
were recognized in March 2002.

15. SUBSEQUENT EVENTS

MAY 2002 AMENDMENT TO THE AMENDED SENIOR SECURED CREDIT FACILITY

The Amended Senior Secured Credit Facility includes a $175 million
reducing revolver facility (the "Revolver"), a $75 million term loan (the "Term
Loan") and a $450 million term loan facility (the "Term B Loan"). In May 2002,
the Company and certain requisite Lenders entered into a further amendment to
the Amended Senior Secured Credit Facility (the "May 2002 Amendment") which,
among other things, revised certain of the financial covenants to be less
restrictive and provided the Company with access to the proceeds of the sale in
February 2002 of two Tier III market networks. In connection with the May 2002
Amendment, certain Lenders deferred payment of substantial amounts of principal.
The discussions below incorporate the changes to the terms of the Amended Senior
Secured Credit Facility through the May 2002 Amendment. As of the effective date
of the May 2002 Amendment,

approximately $30.1 million of the Term B Loan is unfunded and $7.8 million of
the Revolver is unfunded.

The Revolver will mature on April 1, 2007. Proceeds from the Revolver
can be used to finance the purchase of certain equipment, transaction costs,
working capital and other general corporate purposes. The aggregate commitment
of the Lenders under the Revolver will be reduced on each quarterly payment date
beginning April 1, 2003. The initial quarterly commitment reduction is 5.0%,
reducing to 3.75% on July 1, 2003, then increasing to 6.25% on July 1, 2004, and
further increasing to
7.50% on July 1, 2006. Unless the requisite Revolver Lenders consent to the
contrary in writing, the Revolver commitment will be permanently reduced on July
1, 2003 by the lesser of (a) 50% of the unfunded Revolver commitment and (b) the
unfunded Revolver commitment multiplied by a fraction, the numerator of which is
the amount by which the Term B Loan commitment amount is reduced (as described
herein) and the denominator of which is the unfunded Term B Loan amount. The
Borrowers must pay an annual commitment fee on the unused portion of the
Revolver ranging from .75% to 1.25%.

The Term Loan is payable in 17 consecutive quarterly installments
beginning on April 1, 2003. The initial payment will equal 5.00% of the
outstanding principal balance of the Term Loan. The principal payment decreases
to 3.75% per quarter beginning July 1, 2003, increases to 6.25% on July 1, 2004
and further increases to 7.50% on July 1, 2006. Proceeds from the Term Loan can
be used to finance the purchase of certain equipment, transaction costs, working
capital and other general corporate purposes.

The Term B Loan provides for an aggregate commitment of up to $450
million. Proceeds from the Term B Loan can be used to purchase
telecommunications products, and for working capital and other corporate
purchases. The Term B Loan will mature on April 1, 2007 and requires quarterly
principal payments beginning on April 1, 2003 equal to 5.00% of the outstanding
balance, reducing to 3.75% on July 1, 2003, then increasing to 6.25% on July 1,
2004 and further increasing to 7.50% on July 1, 2006. In addition, unless the
Term B Loan Lenders consent to the contrary in writing prior to July 1, 2003,
the Term B Loan commitment will be permanently reduced on July 1, 2003 by the
lesser of 50% of the unfunded Term B Loan commitment and the unfunded Term B
Loan commitment less the amount of Term B Loan loans advanced after the
execution of the May 2002 Amendment; provided, however, the reduction will not
reduce the unused letter of credit subfacility. An annual commitment fee of
1.50% is payable for any unused portion of the Term B Loan.

Borrowings under the Amended Senior Secured Credit Facility bear
interest payable, at the Borrowers' option, at either (a) the "Applicable Base
Rate Margin" (which generally ranges from 3.25% to 4.25%) plus the greater of
(i) the administrative agent's prime rate or (ii) the overnight federal funds
rate plus .5% or (b) the "Applicable LIBOR Margin" (which generally ranges from
4.25% to 5.25%) plus LIBOR, as defined. Interest is payable monthly. Under the
Amended Senior Secured Credit Facility the Borrowers were being charged a
weighted average interest rate of 11.73% and 7.48% at March 31, 2001 and 2002,
respectively. If a payment default were to occur, the interest rate will be
increased by four percentage points. If any other event of default were to
occur, the interest rate will be increased by two percentage points.

The Revolver commitment will be further reduced, pro rata with the Term
Loan and Term B Loan, (i) by applying the net asset sale proceeds of certain
asset sales (both as defined in the Amended Senior Secured Credit Facility) in
an amount equal to (A) 85% of gross property, plant and equipment allocated to
the assets sold, plus (B) a make up of any shortfall on prior asset sales with
respect to all other asset sales made by the Borrowers and guarantors since
April 2001, plus (C) 50% of any proceeds in excess of the full gross property,
plant and equipment allocated to the assets sold after payment of the amounts in
(A) and (B), (ii) by 50% of the net securities proceeds (as defined) from the
future issuance of equity interests by KMC Holdings in excess of a cumulative
$200.0 million, (iii) by prepayment of 50%

of the excess operating cash flow for any fiscal year commencing in 2001 and
(iv) by any tax refunds in excess of $5 million.

KMC Holdings has unconditionally guaranteed the repayment of the Amended
Senior Secured Credit Facility when such repayment is due, whether at maturity,
upon acceleration, or otherwise. KMC Holdings has pledged the shares of each of
the Borrowers and granted a security interest in its assets to the Lenders to
collateralize its obligations under the guaranty. In addition, the Borrowers
have each pledged all of their assets to the Lenders.

KMC Holdings formed a subsidiary holding company, KMC Data Holdco LLC
("Data Holdco") to own all of the common stock of its operating subsidiaries
which are engaged in its Nationwide Data Platform business. KMC Holdings has
pledged the shares of Data Holdco as further collateral for KMC Holdings'
guaranty of the Amended Senior Secured Credit Facility.

The Amended Senior Secured Credit Facility contains a number of
affirmative and negative covenants, which restrict the ability of the Borrowers
to consolidate or merge with any person, sell or lease assets not in the
ordinary course of business, sell or enter into long term leases of dark fiber,
redeem stock, pay dividends or make any other payments (including payments of
principal or interest on loans) to KMC Holdings, create subsidiaries, transfer
any permits or licenses, or incur additional indebtedness or act as guarantor
for the debt of any person, subject to certain conditions. In addition, the
Borrowers must meet specific liquidity tests 14 days prior to each due date of
cash interest and dividend payments on the Company's senior discount notes,
senior notes and preferred stock.

The Company is required to use excess cash flows (as defined) from its
National Data Platform business and the net proceeds from any asset sale from
its National Data Platform business to be contributed to a Borrower, until such
time as the Borrowers are free cash flow positive and an aggregate of
approximately $65 million has been contributed to a Borrower.

The Borrowers are required to comply with certain financial tests,
including, among others, certain minimum core revenues, minimum EBITDA and
maximum capital expenditures.

Failure to satisfy any of the financial covenants will constitute an
event of default under the Amended Senior Secured Credit Facility permitting the
Lenders, after notice, to terminate the commitment and/or accelerate payment of
outstanding indebtedness thereunder. The Amended Senior Secured Credit Facility
also includes other customary events of default, including, without limitation,
a cross-default to other material indebtedness, material undischarged judgments,
bankruptcy, loss of a material franchise or material license, breach of
representations and warranties, a material adverse change and the occurrence of
a change of control of the Company.

In connection with the May 2002 Amendment, certain requisite Lenders
agreed to defer to June 30, 2003 the installments of principal of the Term Loan
and the Term B Loan scheduled to be paid on April 1, 2003 and any mandatory
prepayments of principal on the Revolver due on April 1, 2003. As of the
effective date of the May 2002 Amendment, assuming the Term B Loan and Revolver
were fully utilized, a minimum of $26.0 million of an aggregate $35.0 million of
principal payments otherwise due April 1, 2003, has been deferred until June 30,
2003. In addition, the Company agreed to provide to the Lenders who agree to
defer the April 1, 2003 payment, $43.0 million principal amount at maturity of
Senior Discount Notes held by the Company's subsidiary and 15% of any notes
purchased by the Company or its subsidiaries after the May 2002 Amendment.

Also in connection with the May 2002 Amendment, the Lenders waived
failures by the Borrowers to comply with certain covenants, the requirement for
prepayment of loans from net asset sale proceeds from the February 2002 sale of
two Tier III market networks and the restriction on Data

Holdco's ability to purchase notes issued pursuant to the indentures. The
requirement by the Borrowers to submit a proposal with respect to KNT was waived
until July 1, 2003. The Lenders also agreed to make available to the Borrowers
certain proceeds that resulted from the February 2002 sale of two Tier III
market networks so that the Borrowers can use such proceeds to purchase certain
telecommunications equipment, to pay transaction costs and for working capital
and other general corporate purposes, provided that the Borrowers meet certain
conditions.

NOTE REPURCHASES

In connection with the May 2002 Amendment, the Company agreed to
transfer $43.0 million principal amount at maturity of Senior Discount Notes
held by the Company and 15% of any additional notes purchased by the Company to
those Lenders who agree to defer to June 30, 2003, the payment of principal
under the Amended Senior Secured Credit Facility scheduled to occur April 1,
2003. During the second quarter of 2002, the Company used $5.4 million to
repurchase $67.2 million principal amount of Senior Notes, of which $10.1
million will be transferred to the deferring Lenders. In addition, in May 2002,
the Company exercised its option to repurchase $78.6 million principal amount of
Senior Notes. The Company expects to recognize an aggregate gain, in the second
quarter of 2002, of approximately $122.0 million on these Senior Note
repurchases. The cost of acquiring the $43.0 million of Senior Discount Notes to
be transferred to the deferring Lenders, approximately $1.8 million, will be
charged to expense in the second quarter of 2002.

RECIPROCAL COMPENSATION SETTLEMENT

On May 8, 2002, the Company executed a settlement agreement with Sprint
Corporation covering the states of Florida, North Carolina, Minnesota, Nevada,
and Tennessee. Under the agreement, Sprint will make a one-time payment to the
Company to resolve all claims for reciprocal compensation arising prior to
execution of the agreement. The Company agreed to move for dismissal of its
pending complaints for payment of past due reciprocal compensation in North
Carolina and Florida, and the parties agreed to form a negotiation team charged
with creating new interconnection agreements which address reciprocal
compensation for the states in which both the Company and Sprint operate.

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

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

o OUR FUTURE OPERATIONS AND PROSPECTS,

o OUR EXPECTED FINANCIAL POSITION,

o OUR FUNDING NEEDS AND POTENTIAL FINANCING SOURCES,

o OUR NETWORK DEVELOPMENT PLANS,

o OUR EXPECTED COST SAVINGS FROM RESTRUCTURINGS OF OUR TIER III
MARKETS BUSINESS,

o THE MARKETS IN WHICH OUR SERVICES ARE CURRENTLY OFFERED OR WILL
BE OFFERED IN THE FUTURE,

o THE SERVICES WHICH WE EXPECT TO OFFER IN THE FUTURE,

o OUR ANTICIPATED CAPITAL EXPENDITURES,

o REGULATORY REFORM,

o EXPECTED COMPETITION IN OUR MARKETS,

o OUR INTENT, BELIEFS, OR CURRENT EXPECTATIONS WITH RESPECT TO OUR
FUTURE FINANCIAL PERFORMANCE, AND

o THE FACTORS SET FORTH IN ITEM 7 OF OUR ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 2001 UNDER THE HEADING
"-CERTAIN FACTORS WHICH MAY AFFECT OUR FUTURE RESULTS."

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

IN THIS REPORT, "WE," "US" OR "OUR" REFERS TO KMC TELECOM HOLDINGS, INC.
AND ITS SUBSIDIARIES COLLECTIVELY, OR, IF THE CONTEXT SO REQUIRES, KMC TELECOM
HOLDINGS, INC., INDIVIDUALLY.

OVERVIEW

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

We currently provide a full suite of broadband communications services
in 35 Tier III markets, which we define as markets with a population between
100,000 and 750,000. We own and operate robust fiber-based networks and Class 5
switching equipment in all of our Tier III markets, which are predominantly
located in the South, Southeast, Midwest and Mid-Atlantic United States.

In February 2002, we sold our fiber-optic networks and related assets in
two of our Tier III markets for a net gain of approximately $4.9 million. As
permitted by the terms of Amendment No. 10,

dated as of May 6, 2002, to our Amended Senior Secured Credit Facility, we
intend to use these net proceeds for working capital and to fund operations.

We had deficits in working capital and nonredeemable equity of $109.2
million and $1.1 billion, respectively, at March 31, 2002. In an effort to
preserve liquidity, we began to implement a significant further restructuring of
our Tier III Markets business in the first quarter of 2002. This restructuring
is intended to centralize many of the general and administrative activities that
were previously performed in each city to fewer locations, to reorganize our
sales force, to reduce the number of other operating personnel and to
significantly reduce our Tier III Markets business capital expenditures. We
expect that this restructuring will result in a headcount reduction of
approximately 41% of our Tier III Markets business workforce and the elimination
or sublease of underutilized facilities. Although we expect that this
restructuring will result in a reduction in revenue growth as the result of
lower capital expenditures, we also believe that, through significant expected
cost savings, adjusted EBITDA (which consists of earnings/(loss) before net
interest, income taxes, depreciation and amortization, non-cash stock
compensation expense, other expense, impairment on long lived assets and
cumulative effect of change in accounting principle) from our Tier III markets
will increase. We anticipate that we will begin to realize the cost saving
effects of this plan in the second quarter of 2002.

We also provide nationwide data services under long-term fixed price
contracts, principally to one major carrier customer. Under these contracts, we
provide local Internet access infrastructure and other enhanced data services.
Currently, we have contracts representing approximately $280 million in
annualized revenues in approximately 820 markets. Approximately 75% of these
annualized revenues will be used to fund the debt service payments on the
equipment used to provide these services. We are deploying technology platforms
from Cisco, Nortel and Telica, which we believe will result in a cost-effective
and technologically superior solution for our customers.

We record impairment losses on long-lived assets used in operations or
expected to be disposed of when impairment indicators are present such that the
undiscounted cash flows expected to be derived from those assets are less than
the carrying amounts of those assets. An impairment loss is measured as the
amount by which the carrying amount of the asset exceeds the fair value of the
asset. Based upon our projected cash flows for our Tier III Markets business,
after giving effect to revenue and cost reductions expected to result from the
first quarter 2002 restructuring, we determined that certain of our Tier III
networks (principally comprised of fiber optic systems and related
telecommunications equipment) were impaired. As a result, we recorded a $98.6
million impairment charge in fiscal 2001 for our impaired Tier III networks. We
also recorded an additional $7.9 million impairment charge to reduce the
carrying value of equipment used in our Nationwide Data Platform business.

TIER III MARKETS. We have installed fiber-based SONET, or self-healing
synchronous optical networks, using a Class 5 switch, in all of our 35 markets.
Our fiber optic networks are initially designed and built to reach approximately
80% of the business access lines in each of our markets, typically requiring a
local fiber loop of about 30 to 40 miles.

As our switches have become operational, our operating margins have
improved. Our operating margins have also improved due to increased on-network
revenues relative to resale revenues. On-network revenues are revenues earned
from services provided on our network, including by direct connection to our
switch, unbundled network element or dedicated line. Resale revenues are
generated when traffic is carried completely on the incumbent local exchange
carriers' facilities. On-network revenues represent approximately 98% of our
revenues for the three months ended March 31, 2002.

NATIONWIDE DATA PLATFORM. We currently provide Internet access
infrastructure using remote access servers manufactured by Cisco, Nortel and
Telica, which we deployed in our 67 supernodes,

including 32 in our existing Tier III markets. Supernodes are concentration
points for high-speed connectivity to the Internet.

Under the terms of our existing long-term fixed price contracts, we
provide the routing and ancillary equipment for each supernode, as well as data
transport service from the incumbent local exchange carrier to our supernode
location. Our customers pay us a fixed price per port and compensate us for
certain expenses, including space, power and transport, that we may incur above
an agreed level. This structure provides highly predictable revenues and costs
over the life of each contract, the remaining terms of which currently range
from 11 to 54 months. These contracts began generating revenues during the third
quarter of 2000. Revenues continued to increase as the contracts were phased in
through the second half of 2001. These contracts started providing positive
margins beginning with the commencement of revenues in the third quarter of
2000.

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

RECIPROCAL COMPENSATION. We recognized reciprocal compensation revenue
of approximately, $4.0 million and $3.4 million, or 4% and 2% of our total
revenue, for the three months ended March 31, 2001 and 2002, respectively. In
May 2000, we reached a resolution of our claims for payment of certain
reciprocal compensation charges, previously disputed by BellSouth Corporation.
Under the agreement, BellSouth made a one-time payment that resolved all amounts
billed through March 31, 2000. In addition, we agreed with BellSouth on future
rates for reciprocal compensation, setting new contractual terms for payment.
Our prior agreement with BellSouth provided for a rate of $.009 per minute of
use for reciprocal compensation. Under the terms of the new agreement, the rates
for reciprocal compensation which apply to all local traffic, including
ISP-bound traffic, will decrease over time. The reduction will be phased in over
a three-year period beginning with a rate of $.002 per minute of use until March
31, 2001, $.00175 per minute of use from April 1, 2001 through March 31, 2002
and $.0015 per minute of use from April 1, 2002 through March 31, 2003.

During the third quarter of 2001, we reached an agreement with SBC
Telecommunications, Inc. ("SBC") with respect to our dispute regarding payment
of past due reciprocal compensation. We agreed to a cash settlement of the
disputed reciprocal compensation balance owed to us by SBC for usage on or
before May 31, 2001. A related agreement resolved our entitlement, and the rates
to be applied, to future reciprocal compensation from SBC through May of 2004.

On May 8, 2002, we executed a settlement agreement with Sprint
Corporation ("Sprint") covering the states of Florida, North Carolina,
Minnesota, Nevada, and Tennessee. Under the agreement, Sprint will make a
one-time payment to us to resolve all claims for reciprocal compensation arising
prior to execution of the agreement. We agreed to move for dismissal of our
pending complaints for payment of past due reciprocal compensation in North
Carolina and Florida, and the parties agreed to form a negotiation team charged
with creating new interconnection agreements which address reciprocal
compensation for the states in which both we and Sprint operate.

We are currently arbitrating or pursuing resolution of this issue with
other incumbent local exchange carriers. Our goal is to reach mutually
acceptable terms for both outstanding and future reciprocal compensation amounts
for all traffic. However, we can give no assurance that we will be successful in
recovering all outstanding amounts or in reaching new agreements with these
carriers on favorable terms.

As of March 31, 2002, we have reserves which we believe are sufficient
to cover any amounts which may not be collected, but we cannot assure you that
this will be the case. Our management will continue to consider the
circumstances surrounding this dispute periodically in determining whether
additional reserves against unpaid balances are warranted.

On April 27, 2001, the Federal Communications Commission released an
order addressing reciprocal compensation for ISP-bound traffic. The Federal
Communications Commission established a three year phase-down of compensation
for ISP-bound traffic for incumbent local exchange carriers that opt into the
Federal Communications Commission's plan. A rebuttable 3:1 ratio of terminating
to originating minutes was adopted as a proxy for identifying ISP-bound traffic.
State reciprocal compensation rates will apply to traffic exchanged within the
ratio. The rate cap on compensation for traffic above the ratio was set at
$0.0015 per minute of use for the first six months following the effective date
of the Federal Communications Commission's order, $0.0010 per minute of use for
the next eighteen months, and $0.0007 per minute of use through the thirty-sixth
month or until the Federal Communications Commission adopts a new mechanism,
whichever is later. In addition, a ten percent growth cap (applied on a per
interconnection agreement basis) applies to ISP-bound traffic eligible for
compensation. The order preserves the compensation mechanisms contained in
existing interconnection agreements, but permits the incumbent local exchange
carriers to invoke change-in-law provisions that may be contained in those
agreements. Numerous competitive local exchange carriers, including us,
petitioned for review of the Federal Communications Commission's decision. In a
decision released on May 3, 2002, the U.S. Court of Appeals for the District of
Columbia Circuit rejected the legal basis upon which the Federal Communications
Commission predicated its rules, and it remanded the proceeding to the Federal
Communication Commission for further deliberations. In doing so, the Court left
the rules in place pending further order of the Federal Communications
Commission. We are unable to predict the outcome of this remand proceeding.

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

INTEREST EXPENSE. Interest expense includes interest charges on our
Senior Notes, Senior Discount Notes, our Amended Senior Secured Credit Facility
and our Internet infrastructure equipment financings. Interest expense also
includes amortization of deferred financing costs.

EXTRAORDINARY ITEM -- NOTE REPURCHASES. During the first and second
quarters of 2002, we used $14.5 million of unrestricted cash to purchase
additional Senior Discount Notes and Senior Notes which we expect to result in
a net gain of approximately $173.0 million. See "- Liquidity and Capital
Resources" for further information regarding these note repurchases.

RESULTS OF OPERATIONS

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

THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO
THREE MONTHS ENDED MARCH 31, 2001

REVENUE. Revenue increased 44% from $96.8 million for the three months
ended March 31, 2001 (the "2001 First Quarter") to $139.0 million for the three
months ended March 31, 2002 (the "2002 First Quarter"). This increase is
principally attributable to the fact that our Nationwide Data Platform business
entered into two additional long-term fixed price contracts after the first
quarter of 2001 that are generating revenue in the 2002 First Quarter but which
did not generate revenue in the 2001 First Quarter. In addition, another
long-term fixed price contract was only partially implemented in the 2001 First
Quarter, but was fully implemented in the 2002 First Quarter. Revenue in our
Tier III Markets business increased only slightly in the 2002 First Quarter
compared to the 2001 First Quarter.

On-network local switched services, long distance services, Centrex-type
services, private line services, special access services and Internet access
infrastructure revenues ("On-network revenues") represented 98% of total revenue
in the 2001 and 2002 First Quarters while revenue derived from the resale of
switched services ("Resale revenue") represented 2% during those periods.
On-network revenues are revenues earned from services provided on our network,
including by direct connection to our switch, unbundled network element or
dedicated circuit. In addition, we recognized reciprocal compensation revenue of
$3.4 million, or 2% of our total revenues, during the 2002 First Quarter as
compared to $4.0 million, or 4% of our total revenues, during the 2001 First
Quarter.

NETWORK OPERATING COSTS. Network operating costs, excluding non-cash
stock compensation expense, increased 6% from $61.3 million for the 2001 First
Quarter to $65.2 million for the 2002 First Quarter. This increase of
approximately $3.9 million was due primarily to the increased costs in our
Nationwide Data Platform business in the 2002 First Quarter as compared to the
2001 First Quarter. The detailed components of the network operating costs
increase are $7.6 million in direct costs associated with providing on-network
services, resale services, leasing unbundled network element services and
operating lease payments, $500,000 in personnel costs and $200,000 in facility
costs, which were partially offset by decreases of $1.3 million in network
support services, $2.8 million in consulting and professional services costs and
$300,000 in telecommunications costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, excluding non-cash stock compensation expense,
decreased 37% from $49.0 million for the 2001 First Quarter to $30.9 million in
the 2002 First Quarter. This decrease of approximately $18.1 million consists of
the following detailed components: $3.3 million in personnel costs, $800,000 in
telecommunications costs, $700,000 in consulting and professional services
costs, $700,000 in travel and entertainment, $500,000 in facility costs and
$12.1 million in other selling, general and administrative costs.

STOCK COMPENSATION. Stock compensation, a non-cash item, increased from
an aggregate credit of $63.4 million in the 2001 First Quarter to zero for the
2002 First Quarter. There is no charge/(credit) to stock compensation expense in
the 2002 First Quarter even though there was a decrease in the stock price since
December 31, 2001 because the previously recognized compensation expense had
been fully reversed as of December 31, 2001.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 82% from $32.6 million for the 2001 First Quarter to $59.2 million for
the 2002 First Quarter. This increase is attributable to the fact that our
Nationwide Data Platform business entered into two long-term fixed price
contracts after the first quarter of 2001 that utilize equipment which is being
depreciated in the 2002 First Quarter but was not implemented during the 2001
First Quarter. In addition, another long-term fixed price contract was only
partially implemented during the 2001 First Quarter, but was implemented for
the entire 2002 First Quarter.

RESTRUCTURING CHARGE. In connection with the restructuring of our Tier
III Markets business in the 2002 First Quarter (see "-Overview" above), we
recorded a charge of approximately $12.3 million, substantially all of which is
comprised of cash items. The components of the restructuring charge are
approximately $8.4 million for underutilized real estate and approximately $3.9
million for severance and outplacement costs.

OTHER INCOME. In February 2002, we sold our fiber-optic networks and
related assets in two of our Tier III markets for a net gain of approximately
$4.9 million. As permitted by the terms of the May 2002 Amendment, we intend to
use these net proceeds for working capital and to fund operations.

INTEREST INCOME. Interest income decreased from $2.5 million in the 2001
First Quarter to $500,000 in the 2002 First Quarter. This decrease is due
primarily to smaller average cash, cash equivalents and restricted cash balances
during the 2002 First Quarter as compared to the 2001 First Quarter, as well as
lower interest rates during the 2002 First Quarter.

INTEREST EXPENSE. Interest expense increased from $43.1 million in the
2001 First Quarter to $48.1 million in the 2002 First Quarter. Of this increase,
$9.4 million was due to the financing of our Internet infrastructure equipment
for our Nationwide Data Platform business and $4.8 million was attributable to
unfavorable positions in our interest rate swap agreements. In addition, we
capitalized interest of $900,000 related to network construction projects during
the 2001 First Quarter versus no capitalized interest during the 2002 First
Quarter. These increases were partially offset by reductions in interest expense
of $6.2 million under the Amended Senior Secured Credit Facility as the result
of lower interest rates and $3.9 million on our Senior Discount Notes as a
result of the repurchase of a portion of those notes.

NET LOSS BEFORE EXTRAORDINARY ITEM. For the reasons stated above, net
loss before extraordinary item increased from $23.3 million for the 2001 First
Quarter to $71.4 million for the 2002 First Quarter.

CRITICAL ACCOUNTING POLICIES

Our Consolidated Financial Statements are prepared in accordance with
accounting principles generally accepted in the United States, which require us
to make estimates and assumptions. We believe that of our significant accounting
policies the following involve a higher degree of judgment and complexity, and
are therefore considered critical.

REVENUE RECOGNITION

We recognize revenue in the period the service is provided, except for
installation revenue which we record over the average contract period and
certain contracts for which revenue is recognized in accordance with specified
installation and acceptance provisions. We generally invoice customers one month
in advance for recurring services resulting in deferred revenue. However, some
services, such as reciprocal compensation, are not billed in advance resulting
in unbilled revenue included in accounts receivable.

ACCOUNTS RECEIVABLE

A considerable amount of judgment is required in assessing the ultimate
realization of our accounts receivable. We evaluate the collectibility of our
accounts receivable based on a combination of factors. We recognize allowances
for doubtful accounts based on the length of time the receivables are past due,
the current business environment and our historical experience. In circumstances
where we are aware of a specific customer's or carrier's inability to meet its
financial obligations to us, we record a specific allowance against amounts due,
to reduce the net recognized receivable to the amount we reasonably believe will
be collected. If the financial condition of our customers or carriers
deteriorate or if economic conditions worsen, additional allowances may be
required in the future. See the discussion in "-- Overview" above for additional
information regarding our policy on reciprocal compensation.

IMPAIRMENT OF LONG-LIVED ASSETS

OTHER MATTERS

We do not have any off balance sheet financial arrangements.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS ("Statement 144"), which supersedes both FASB Statement No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF ("Statement 121") and the accounting and reporting provisions of
APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS -- REPORTING THE EFFECTS
OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND
INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS ("Opinion 30"), for the disposal
of a segment of a business (as previously defined in that Opinion). Statement
144 retains the fundamental provisions in Statement 121 for recognizing and
measuring impairment losses on long-lived assets held for use and long-lived
assets to be disposed of by sale, while also resolving significant
implementation issues associated with Statement 121. For example, Statement 144
provides guidance on how a long-lived asset that is used as part of a group
should be evaluated for impairment, establishes criteria for when a long-lived
asset is held for sale, and prescribes the accounting for a long-lived asset
that will be disposed of other than by sale. Statement 144 retains the basic
provisions of Opinion 30 on how to present discontinued operations in the income
statement but broadens that presentation to include a component of an entity
(rather than a segment of a business). We have adopted Statement 144 beginning
with the quarter ending March 31, 2002. Our management does not expect the
adoption of Statement 144 for long-lived assets held for use to have a material
impact on our financial statements because the impairment assessment under
Statement 144 is largely unchanged from Statement 121.

CERTAIN RELATED PARTY TRANSACTIONS

Pursuant to an arrangement between us and KNT, a company independently
owned by Harold N. Kamine and Nassau Capital, two of our principal stockholders,
in June 2000, we transferred substantially all of the employees of our
construction division to KNT. KNT was initially funded via a contribution of
equity from Mr. Kamine and Nassau Capital to pursue third party network
construction and related contracts. KNT provided construction and maintenance
services to us and was being reimbursed for all

of the direct costs of these activities. In addition, we funded substantially
all of KNT's general overhead and administrative costs at an amount not to
exceed $15.0 million per annum.

In February 2002, we entered into a termination agreement with KNT to
terminate this arrangement. During the first quarter of 2002, substantially all
of KNT's employees were either terminated or transferred back to us and the
activities of KNT substantially ceased. Amounts paid to KNT during the three
months ended March 31, 2002 related to this arrangement amounted to $5.9
million, of which $679,000 was for network related construction and was
capitalized into networks and equipment, $3.9 million was expensed as general
and administrative costs and $1.3 million was expensed as direct maintenance
costs.

In addition to services contracted with KNT, we also contracted
services from Pretel Network Services Corporation, a wholly owned subsidiary of
KNT and a former vendor of ours prior to its acquisition by KNT in June 2000.
Amounts paid to Pretel during the three months ended March 31, 2002 were
$587,000, of which $35,000 was capitalized as plant construction costs and
$552,000 was expensed as plant maintenance costs.

LIQUIDITY AND CAPITAL RESOURCES

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

We had deficits in working capital and nonredeemable equity of $109.2
million and $1.1 billion, respectively, at March 31, 2002. In an effort to
preserve liquidity, we began to implement a significant further restructuring of
our Tier III Markets business in the first quarter of 2002. This restructuring
is intended to centralize many of the general and administrative activities that
were previously performed in each city to fewer locations, to reorganize our
sales force, to reduce the number of other operating personnel and to
significantly reduce our Tier III Markets business capital expenditures. We
expect that this restructuring will result in a headcount reduction of
approximately 41% of our Tier III Markets business workforce and the elimination
or sublease of underutilized facilities. Although we expect that this
restructuring will result in a reduction in revenue growth as the result of
lower capital expenditures, we also believe that, through significant cost
savings, adjusted EBITDA from our Tier III markets will increase. We anticipate
that we will begin to see the cost saving effects of this plan in the second
quarter of 2002. In addition, we will continue to look for efficiencies within
the Tier III Markets business to improve cash flow from operations.

In May 2002, we further amended the Amended Senior Secured Credit
Facility (the "May 2002 Amendment"). The aggregate amount of the facility
remains at $700.0 million. As of the effective date of the May 2002 Amendment,
approximately $37.9 million of the facility is unused, $35.1 million of which is
available for the purchase of telecommunications equipment and working capital
and $2.8 million of which is available for letter of credit obligations. In
connection with the May 2002 Amendment, the lenders also waived failures by the
borrowers to comply with certain covenants and amended certain financial
covenants to make them less restrictive. In addition, certain lenders have
agreed to defer payment of at least $26.0 million of the principal payment
otherwise due April 1, 2003 to June 30, 2003 in exchange for $43.0 million
principal amount at maturity of the Senior Discount Notes purchased by us and
15% of any additional Notes purchased by us and our subsidiaries. The May 2002
Amendment also provides us with access to the proceeds of the sale in February
2002 of two Tier III

market networks. We anticipate that on a longer term basis, it will be necessary
for us to discuss with our senior lenders a further extension of both the
principal and interest repayment terms to a level achievable by us or to reduce
our overall level of debt through either a recapitalization, future sales of
assets or a combination thereof.

Our Nationwide Data Platform business is concentrated, with Qwest
comprising approximately 98% of the DS-0 equivalents under contract for this
business segment and 61% of our total company revenue for the three months ended
March 31, 2002. Furthermore, we are wholly dependent upon payment of monthly
fees under the agreements with this customer to fund the monthly debt service
payments on the debt incurred to finance the related equipment, as discussed
below. In recent months, Qwest has reported that continuing weakness in both the
telecommunications industry and the economy in its local service area has
negatively impacted its operating results and liquidity. In addition, Qwest has
reported that it is under review by regulatory authorities and others concerning
certain of its accounting policies and financial reporting practices. Further,
in late May 2002, the credit rating agencies reclassified Qwest's debt to below
investment grade. Any failure by this customer to make the contracted payments
would have a material adverse effect upon us and our operations.

In February 2002, we signed a Nationwide Data Platform contract with a
new carrier customer that is expected to generate approximately $24.0 million of
revenues during 2002 and annual revenues ranging from $36.0 million to $40.0
million for 2003 through 2005.

In February 2002, we sold our fiber-optic networks and related assets in
two of our Tier III markets for a net gain of approximately $4.9 million. As
permitted by the terms of the May 2002 Amendment, we intend to use these net
proceeds for working capital and to fund operations.

In March 2002, we terminated our data services contract with Broadwing
on mutually acceptable terms. This contract generated revenues of approximately
$12.3 million in 2001. We recorded a non-cash impairment charge of $7.9 million
in 2001 to reduce the carrying value of the equipment used to service this
customer. This was our smallest Nationwide Data Platform contract.

As of May 13, 2002, we had $654.9 million of indebtedness outstanding
under the Amended Senior Secured Credit Facility and an aggregate of $583.8
million of indebtedness outstanding under the combined KMC Funding V
Monetization, KMC Funding Monetization, KMC Funding VIII Financing and KMC
Funding IX Monetization. The undrawn portion of our $700.0 million Amended
Senior Secured Credit Facility as of May 13, 2002 was $45.1 million. However,
$10.0 million is reserved for letter of credit obligations. The remaining
availability may be used for telecommunications products or other corporate
purposes. The KMC Funding V Monetization, KMC Funding Monetization, KMC Funding
VIII Financing and KMC Funding IX Monetization were all fully drawn at that
date.

Net cash used in financing and operating activities was $49.8 million
and our net cash provided by investing activities was $34.8 million for the
three months ended March 31, 2002.

We made capital expenditures of $217.3 million in the 2001 First Quarter
versus, $4.6 million in the 2002 First Quarter. Of the total capital
expenditures for the 2001 and 2002 First Quarters $12.2 million and $1.1
million, respectively, related to our Tier III Markets business segment and
$205.1 million and $3.5 million, respectively, related to our Nationwide Data
Platform business segment. As of March 31, 2002, we had outstanding purchase
commitments aggregating approximately $13.8 million related to the purchase of
fiber optic cable and telecommunications equipment as well as other obligations
under our agreements with certain suppliers and service providers. We currently
anticipate capital expenditures to be approximately $25.0 million for the Tier
III Markets business for 2002. It is our intention that capital expenditures for
the Nationwide Data Platform business will be financed separately and therefore
will not affect our current liquidity position. The majority of the Tier III
Market

expenditures are expected to be made for network expansion to facilitate the
offering of our services. We expect to continue to incur operating losses while
we expand our business and build our customer base. Actual capital expenditures
and operating losses will depend on numerous factors, including the nature of
future expansion and acquisition opportunities and factors beyond our control,
including economic conditions, competition, regulatory developments and the
availability of capital.

We believe that our existing cash balances, marketable securities,
borrowings reasonably anticipated to be available under the Amended Senior
Secured Credit Facility and anticipated funds from operations will be sufficient
to meet our liquidity needs to fund operations and capital expenditure
requirements under our current business plan into the second quarter of 2003.
Our ability to remain liquid into the second quarter of 2003 is predicated upon
(i) continued access to available borrowings and cash generated from the
February 2002 sales of two of our Tier III market networks, (ii) increased
sales in our Tier III Markets business, combined with the successful
implementation of the cost controls and gross margin improvements that are a
part of the restructuring of our Tier III Markets business discussed above,
(iii) our ability to secure additional multi-year contracts with a variety of
wholesale, data and carrier customers for our Nationwide Data Platform business,
which we are currently pursuing with a number of potential customers and (iv)
our ability to finance new data services contracts or extensions of existing
data services contracts which we may be able to obtain. We can give no assurance
that we will be able to achieve any of the predicates listed above.

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

During the first quarter of 2002, we used $4.2 million of cash to
purchase $98.9 million principal amount at maturity of Senior Discount Notes.
After giving effect to the transfer of $43.0 million principal amount at
maturity to certain lenders under the Amended Senior Secured Credit Facility, as
described below, we recognized a net gain of approximately $46.3 million. In
addition, we used $4.8 million to acquire options from Dresdner Kleinwort
Capital to repurchase $78.6 million principal amount of Senior Notes. We
exercised our option to repurchase the Senior Notes in the second quarter of
2002 for a nominal fee.

In connection with the May 2002 Amendment, we agreed to transfer $43.0
million principal amount at maturity of Senior Discount Notes held by us and 15%
of any additional notes purchased by us to those lenders who agree to defer to
June 30, 2003, the payment of principal under the Amended Senior Secured Credit
Facility scheduled to occur April 1, 2003. During the second quarter of 2002, we
used $5.4 million to repurchase $67.2 million principal amount of Senior Notes,
of which $10.1 million will be transferred to the deferring Lenders. We expect
to record an aggregate gain, in the second quarter of 2002, of approximately
$122.0 million on the Senior Note repurchases discussed above. The cost of
acquiring the $43.0 million of Senior Discount Notes to be transferred to the
deferring Lenders, approximately $1.8 million, will be charged to expense in the
second quarter of 2002.

The repurchased notes and options (other than those transferred to
deferring Lenders as described above) are held by one of our subsidiaries and
have been pledged as additional collateral to, and may be voted by, the lenders
under the Amended Senior Secured Credit Facility. The pledge does not constitute
a reissuance of the pledged notes and does not obligate us to make any of the
scheduled payments of principal or interest on the pledged notes. However, if
there is a default under the Amended Senior Secured Credit Facility and the
lenders have either (i) accelerated the amounts due under the Amended

Senior Secured Credit Facility or (ii) exercised their rights under the pledge
agreement, then any principal or interest payments thereafter due under the
pledged notes would be payable to the lenders in accordance with the terms of
the pledged notes, to be applied against our obligations under the Amended
Senior Secured Credit Facility. In accordance with an agreement with the
lenders, we have a limited amount of cash available to repurchase additional
notes. As of May 2002, we and our affiliates own approximately 64% of the
original principal amount at maturity of the Senior Discount Notes and 81% of
the principal amount of the Senior Notes.

We are aware that our outstanding Senior Discount Notes and our Senior
Notes are continuing to trade at substantial discounts to their accreted value
and face amounts, respectively. In order to reduce future cash interest
payments, as well as future amounts due at maturity, we or our affiliates
intend, from time to time, consistent with our agreement with the lenders under
the Amended Senior Secured Credit Facility, to purchase additional such
securities for cash, exchange them for common stock under the exemption provided
by Section 3(a)(9) of the Securities Act of 1933, or acquire such securities for
a combination of cash and common stock, in each case in open market purchases or
negotiated private transactions with institutional holders. We will evaluate any
such transactions in light of then existing market conditions, taking into
account our present liquidity and prospects for future access to capital. The
amounts involved in any such transactions, individually or in the aggregate, may
be material and may have a negative, short-term impact on our liquidity.
Nevertheless, we expect that these repurchases will have a positive impact on
our future long-term liquidity position due to the resulting material reduction
in funded indebtedness. As a result, we believe that the repurchase of Senior
Discount Notes and/or Senior Notes at a substantial discount is an appropriate
use for a limited portion of our current liquidity.

CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

The following summarizes our contractual obligations at March 31, 2002,
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods (in thousands):

PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------------
2005 and
Total 2002 2003 2004 beyond
-----------------------------------------------------------------------

Principal repayments of
debt obligations $1,734,265 $125,726 $262,038 $313,997 $1,032,504
Operating Leases 49,714 6,494 7,860 7,367 27,993
Standby letters of credit 7,225 7,225 - - -
---------- -------- -------- -------- ----------
$1,791,204 $139,445 $269,898 $321,364 $1,060,497
========== ======== ======== ======== ==========

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

Fair
Value on Future Principal Payments
March 31, -------------------------------------------------------
2002 2002 2003 2004 2005 2006 Thereafter Total
--------- ------ ------ ------ ------ ------ ------------ -------

Long-Term Debt:
Fixed Rate:
Senior Discount Notes,
interest payable at
12 1/2%, maturing 2008... $ 9.6 $ - $ - $ - $ - $ - $ 194.9 $ 194.9
Senior Notes, interest
payable at 13 1/2%,
maturing 2009......... 12.2 - - - - - 275.0 275.0
KMC Funding
Monetization, interest
payable at 7.34%,
maturing 2005......... 83.1 52.5 74.7 80.4 57.0 - - 264.6
KMC Funding V
Monetization, interest
payable at 6.77%,
maturing 2004......... 64.1 45.1 65.0 58.7 - - - 168.8
KMC Funding VIII
Financing, interest
payable at 6.19%,
maturing 2005......... 20.3 13.5 18.9 20.1 12.3 - - 64.8
KMC Funding IX
Monetization, interest
payable at 8.49%,
maturing 2006......... 28.0 14.5 21.5 23.9 26.7 24.7 - 111.3
Variable Rate:
Amended Senior Secured
Credit Facility,
interest variable
(7.48% at March 31,
2002)(a) ............. 654.9 - 81.9 131.0 163.7 180.1 98.2 654.9
------- ------- ------- ------- ------ ------ ------ --------
Interest Rate swaps:
Variable rate for fixed
rate.................. 25.8 - - - - - - -
------- ------- ------- ------- ------ ------ ------ --------
Total............... $ 898.0 $ 125.6 $ 262.0 $ 314.1 $259.7 $204.8 $568.1 $1,734.3
======= ======= ======= ======= ====== ====== ====== ========

- ----------------
(a) Interest is based on a variable rate, which at our option, is determined by
either a base rate or LIBOR, plus, in each case, a specified margin

PART II - OTHER INFORMATION

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

Not Applicable.

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

(a) Not Applicable.

(b) Not Applicable.

(c) On January 15, 2002, the Company granted options to purchase an
aggregate of 15,000 shares of common stock to an executive officer of
the Company under the 1998 Stock Purchase and Option Plan for Key
Employees of KMC Telecom Holdings, Inc. and Affiliates. No consideration
was received by the Company for the issuance of the options. The options
to purchase these shares are exercisable at an exercise price of $75 per
share. The issuance of the options was made in reliance upon the
exemption from the registration requirements of the Securities Act
provided by Section 4(2) of that Act, on the basis that the transaction
did not involve a public offering.

On March 31, 2002, the Company became obligated to issue warrants
to purchase an aggregate of 166,542 shares of common stock to the
lenders under the Company's Amended Senior Secured Credit Facility. No
consideration will be received by the Company for issuance of the
warrants. The warrants are exercisable at an exercise price of $0.01 per
share. The issuance of the warrants will be made in reliance upon the
exemption from the registration requirements of the Securities Act
provided by Section 4(2) of that Act, on the basis that the transaction
does not involve a public offering. The Warrant Agreement pursuant to
which the warrants will be issued imposes substantial restrictions upon
the transfer of the warrants and any shares of common stock which may be
issued upon exercise thereof and the certificates representing the
securities will be legended to that effect.

(d) Not Applicable.

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

Not Applicable.

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

Not Applicable.

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

Not Applicable.

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

(a) EXHIBITS

None

(b) REPORTS ON FORM 8-K

On March 3, 2002, the Company filed a Current Report on Form 8-K
reporting in Item 5 thereof certain information with respect to
certain recent developments in connection with the Company's
business.

SIGNATURES

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

Dated: June 3, 2002

KMC TELECOM HOLDINGS, INC.
(Registrant)

By: /S/ WILLIAM F. LENAHAN
------------------------------
William F. Lenahan
Chief Executive Officer
(Principal Executive Officer)

By: /S/ WILLIAM H. STEWART
------------------------------
William H. Stewart
Chief Financial Officer
(Principal Financial Officer)