BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

                                       ON

                                    FORM 10-K

                          YEAR ENDED DECEMBER 31, 1997

                                     PART I

ITEM 1.  BUSINESS

GENERAL

BroadBand Technologies, Inc. was organized in the state of North Carolina in
July 1988 and reincorporated in the state of Delaware in December 1988. As used
herein, the term "Company" refers to BroadBand Technologies, Inc. The Company's
executive offices are located at 4024 Stirrup Creek Drive, Durham, NC 27703. Its
telephone number is (919)544-0015.

The Company designs, manufactures, markets and supports a sophisticated
electronics and software platform for the telecommunications industry, focusing
primarily on operators of local exchange telephone networks in the United
States. The Company also markets its products in Canada, Europe, Asia/Pacific
and the Middle East markets. Its platform, which involves patented technology,
provides operators of fiber based distribution networks with an integrated
access solution that incorporates ATM switching, transport and xDSL technology
to deliver high speed data and voice services as well as digital video in a wide
array of advanced, interactive entertainment, information, communications,
transaction and other services ("Advanced Interactive Services") to residential
and business subscribers.

RECENT DEVELOPMENTS

NEW LUCENT RELATIONSHIP

On February 4, 1998, the Company entered into several agreements with Lucent
Technologies, Inc. ("Lucent") that establish a new nonexclusive relationship
which replaces the exclusive relationship between the Company and Lucent entered
into in 1995 with respect to the SDBAS joint product. The terms of these
agreements are summarized in greater detail in a Form 8-K filed by the Company
dated March 5, 1998 and include:

o        Mutual releases of liabilities

o        Replacement of the prior supply agreement for the joint SDBAS product
         and terms for continued supply by the Company of the FLX-2500 product
         for the joint SDBAS product

o        $21 million of development payments over a three year period by Lucent
         to the Company for planned development work whose results will be
         co-owned by the Company and Lucent, subject to certain restrictions on
         use by the Company

o        License of loop electronics technology from Lucent to the Company to
         enhance the Company's independent product efforts. The Company's use of
         the technology is subject to certain restrictions on use

o        An agreement by Lucent to supply to the Company on an OEM basis certain
         technology to enhance the Company's independent product efforts


<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT


ITEM 1.  BUSINESS (CONTINUED)

RECENT DEVELOPMENTS (CONTINUED)

NEW LUCENT RELATIONSHIP (CONTINUED)

o        An agreement by Lucent to provide the Company with contract
         manufacturing sufficient to absorb $18 million of manufacturing cost
         overhead of the Company over a three year period

o        An element manager software agreement valued at $2 million

o        Forgiveness by Lucent of the Company's obligations for $5 million of
         penalty payments previously recorded as liabilities by the Company and
         $6 million of hardware prepayments

COMPANY IS IN DISCUSSIONS WITH GLOBAL TELECOMMUNICATIONS
EQUIPMENT SUPPLIER FOR GLOBAL ACCESS DEVELOPMENT

The Company is in discussions with an international telecommunications equipment
supplier to develop a global access product that meets an emerging global access
standard known as FSAN, Full Service Access Network. The FSAN consortium is
developing the global standard and the group consists of 12 international and
domestic telephone companies representing over 300 million access lines and 11
leading international telecommunications equipment providers. The FSAN
architecture is a high bandwidth, asynchronous transmission, and passive optical
network similar to the international version of the FLX-2500 architecture, the
iFLX. The Company's management believes that the FLX-2500 is positioned to
evolve to meet the FSAN standard.


NEW BUSINESS STRATEGY

         The agreements with Lucent and the FSAN effort described above
represent two initiatives of the Company's new strategy to leverage its core
loop electronics and broadband competencies in local loop infrastructure and
improve the Company's financial position. The final initiative of the Company's
strategy is a plan to introduce a digital loop carrier access product into the
fast growing $2 billion loop access market which is driven by ever increasing
volumes of Internet and data traffic. Failure to implement any one or more of
the parts of the business strategy would have a material adverse effect on the
Company.

MANAGEMENT CHANGES

The Company recently reorganized its management team. Effective February 1,
1998, John R. Hutchins, III, became the new Chairman of the Board. Salim A.L.
Bhatia, a founder of the Company, departed from the Company effective January
31, 1998 and Larry McLernon, also a board member departed on January 26, 1998.
On March 2, 1998, David J. McLean was appointed Vice President of Engineering
from his previous role as Vice President of Technical Services for which he will
also maintain responsibility. Carl A. Kammire will depart from the company as
Vice President of Engineering effective April 30, 1998. Timothy K. Oakley, Chief
Financial Officer of the Company, also recently announced his intention to
depart from the Company. See "Executive Officers of Registrant" following Item 4
for a description of the foregoing and other recent management changes.


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                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

ITEM 1.  BUSINESS (CONTINUED)

RECENT DEVELOPMENTS (CONTINUED)

FLX-2500 CUSTOMER DEVELOPMENTS

The Company's new relationship with Lucent provides that Lucent will act as the
sole sales, marketing and technical interface with SDBAS customers. Deployment
by Lucent's customers has been delayed due to an unfavorable regulatory
environment, impact of prior product delays and the long evaluation and
implementation process that is typical of customers for major communications
infrastructure changes. However, steady progress has been made in the product
performance of SDBAS, which is now ready for field deployment. Bell Atlantic's
timing and degree of deployment of the SDBAS product is uncertain. Lucent's
customers, other than Bell Atlantic, have methodically moved forward with their
performance evaluations. Internationally, the Company continues to make progress
in the labs and is working toward initial field trials.

PRODUCTS

The mission of the Company is to provide products and services for network and
service providers to implement a robust, flexible and economical electronic
connection providing residential and business customers with advanced voice
services, high speed data and digital video capability, to communicate, access
on-line information, entertainment and other multi-media services. The Company
has announced three product development efforts including development for
Lucent's AnyMedia digital loop carrier, creation of its own digital loop carrier
product and an alliance to deliver a global access platform to meet the emerging
FSAN specifications. The Company's current product, the FLX-2500, is complete
for customer evaluation. However, prior product delays, continued regulatory
uncertainty and the announcement of new products and technology have resulted in
uncertainty as to the timing and volume of shipments.

On February 4, 1998, the Company and Lucent entered into a Research and
Development Agreement (the "R & D Agreement"), for the Company to develop
components for Lucent's new AnyMedia digital loop carrier product. Under the R &
D Agreement, Lucent has committed to pay the Company at least $21 million
payable in equal installments over a three-year period. The Company and Lucent
will co-own the technology developed by the Company under the R&D Agreement with
certain restrictions on its use, including restrictions against licensing third
parties and producing products that are plug compatible with the products of the
other party and limitations on use by the Company solely with the Company's
digital loop carrier products, which the Company is planning to develop.
Although specific components to be developed by the Company for Lucent have not
been identified, the parties agreed to identify specific development projects as
soon as practicable. Lucent also agreed that the components to be developed by
the Company and the configuration of such products would be selected with a view
toward maximizing the ability of the Company to utilize the developed technology
in the Company's own digital loop carrier products. The ability of the Company
to reuse technology developed for Lucent in the Company's products will depend
upon a number of factors, including the products Lucent wants the Company to
design, how alike the Company and Lucent products will be, and the design
schedules for Lucent and the Company's products.

The Company's new, stand-alone digital loop carrier product is aimed at the
opportunity created by the demand for higher speed Internet access and the
convergence of narrowband and broadband access products. The new development
will combine the Company's core technologies; ATM, xDSL and Optics, with
technology gained through the Lucent development and technology license
agreements discussed herein. The new digital loop carrier is being developed to
be complimentary to Lucent's product line and will position the Company for more
near-term market participation, which represents a significant change from the
prior efforts. The expected benefit is that the new product will allow the
Company to offer both narrowband and broadband services and allow the Company to
participate in the business sector


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                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

ITEM 1.  BUSINESS (CONTINUED)

PRODUCTS (CONTINUED)

where local service competition has begun to emerge. At the same time, the
Company will continue to position itself to benefit from the inevitable
competition for residential services, intended by the Telecom Act of 1996. There
can be no assurance as to the amount, if any, of development for Lucent's
products that will be reusable in the Company's digital loop carrier products.
If the Company is not able to reuse substantial amounts of the technology
developed for Lucent, the value of the R & D Agreement to the Company would be
decreased from the Company's expectations.

The Company and Lucent also entered into a Technology Transfer Agreement and
Element Manager Agreement on February 4, 1998 pursuant to which certain Lucent
technology is licensed to the Company. Under the Technology Transfer Agreement,
Lucent has granted the Company licenses to certain existing narrowband
technology with certain restrictions on its use, including restrictions against
licensing third parties and producing products that are plug compatible with the
products of the Lucent and limitations on use by the Company solely with the
Company's digital loop carrier products. The Company believes this narrowband
technology will enable the Company to increase the cost efficiency of its
digital loop carrier products and will save the Company substantial development
time and development cost. Under the Element Manager Agreement, the Company and
Lucent will evaluate whether the Company will obtain a license of Lucent's
element manager technology. Lucent will pay the Company $2 million to support
the development of its element manager. If the Company does not obtain an
element manager license from Lucent, the Company will seek a license from
another supplier or develop one internally.

The R & D Agreement and the Technology Transfer Agreement described above all
contain provisions that would enable Lucent to terminate the agreements,
including licenses and volume commitments, on certain conditions in a bankruptcy
of the Company, material breach by the Company or a "Change in Control" of the
Company. The Change in Control provision terminates February 4, 2003. Change in
Control is very broadly defined in the agreements and may cause the Company to
have to choose to forego the benefits of its agreements with Lucent to acquire
another company, sell itself to another company or enter into a strategic
alliance with another company, unless Lucent approves of the transaction. In
addition, the Company could lose the benefits of the agreements with Lucent if a
company acquires a control position in the Company stock through market
purchases without the Company's consent. If a change of control occurs, the
Company would have 18 months to redesign the parts of its digital loop carrier
product that include Lucent's intellectual property.

The Company is in discussions with an international telecommunications equipment
provider to develop a global access product that meets an emerging global access
standard known as FSAN, Full Service Access Network. The FSAN architecture is a
high bandwidth, asynchronous transmission, and passive optical network similar
to the FLX-2500 architecture. The Company's management believes that the
international version of the FLX-2500, the iFLX, is positioned to evolve to meet
the FSAN standard.



The Company's second-generation product, the FLX-2500, is a "global core"
platform that enables a Digital Loop Carrier (DLC) system, providing the
telephony interfaces, to easily interface with the Company's FLX-2500 System,
which provides broadband video and data interfaces and switching, as well as
transport technology. The FLX-2500 is a second-generation modular platform,
which leverages its patented technology to enable network operators to deploy
the platform in a variety of configurations. Telephony, data, video, and
interactive services can be deployed simultaneously or incrementally at the
network operator's choice. The Company believes the platform provides it with
the flexibility to partner with some of the world's most experienced
telecommunication equipment providers. In North America, the FLX-2500 System is
aligned with Lucent Technologies' high bandwidth digital loop access system. The
Company has distribution agreements with Bosch Telecom GmbH to provide a DLC
Access System in Germany and other selected

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<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

ITEM 1.       BUSINESS (CONTINUED)

PRODUCTS (CONTINUED)

areas around the globe. The Company also has distribution agreements with SAT,
(Groupe SAGEM) to provide a DLC Access System in France and Samsung Electronics
Company Ltd. and Samwoo Telecommunications Company Ltd. for a DLC Access System
in Korea.

FLX(R)-2500

The Company has completed the development of the telephony and data modules and
substantially completed the video portion of the FLX-2500, a second-generation
Fiber Loop Access (FLX) System. Units have been delivered for system
integration, testing, and is being trialed at SBC and RCN for telephony services
and Telus in Canada for data services. The FLX-2500 product consists of the
switched digital architecture which supports both broadband and telephony
elements of a local access system that have been designed to be integrated with
the telephony and analog video elements of other telecommunications systems
suppliers. The resulting single, integrated full service system is expected to
allow customers to build fiber-to-the-curb local distribution networks that
combine the improved switched digital broadband features of the Company's
platform with the telephony and analog video features of established
telecommunications systems suppliers. Prior product delays continued regulatory
uncertainty and the announcement of new products and technology have resulted in
uncertainty as to the timing and volume of FLX-2500 shipments.

The FLX-2500 consists of a Host Digital Terminal (HDT) and an Optical Network
Unit (ONU) that are installed at different points in a fiber-to-the-curb local
distribution network and that are operated by a sophisticated software program.
These elements provide a full range of switched telephony services as well as
broadcast and interactive video services and high speed Internet access. To
provide these services, the system interfaces to a digital headend, an analog
headend, a telephony system and an Internet service interface provided by other
suppliers. Interfaces to other broadband services can be provided.

The FLX-2500's HDT receives digital telephony signals from the telephony access
system (via fiber optics) and digital broadband signals (via fiber optics)
containing video and data signals from the broadband feeder system and
multiplexes these signals into a single high-speed data stream for transmission
over a pair of optical fibers to the ONU located near the end user. The HDT also
provides switching functions for the broadband signals.

The ONU converts the optical signals received from the HDT back into standard
electrical signals and connects directly with residences using copper wire for
both the telephony and digital broadband connections. Inside the residence, the
telephony signal is connected to a telephone or other appropriate telephony
equipment and the digital broadband signal connects to a set-top, PC, or other
home terminal device, which will be provided by other suppliers. The
architecture also transports an analog video signal directly from the analog
headend over a coax cable to the ONU and from the ONU directly to a television
set without requiring a set-top. The Company successfully completed an ethernet
modem, the NetFLX(TM), that interfaces with the FLX platform and is being
trialed in Canada.

The FLX-2500 provides software programs that operate broadband call processing,
service provisioning, network monitoring and testing functions needed for
broadband services and transport of narrowband services. The Company also
provides a network management capability called the Video Administration Module
(VAM) which interfaces between the FLX System and video billing and event
provisioning systems for digital video service. The VAM can be combined with the
network management systems of other suppliers. The VAM also provides the "video
gateway" that enables both independent programmers to access the network, and
the network operator to act as a common carrier for numerous providers of video
services.


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                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

ITEM 1.       BUSINESS (CONTINUED)

PRODUCTS (CONTINUED)

FLX(R)-1100

The Company's first generation product, the FLX-1100 System, consists of
software and multiple electronic modules installed at different points in a
fiber-to-the-curb local distribution network, which includes switched digital
video and telephony features. The Company continues to make the first generation
product, the FLX-1100, available to existing customers to maintain and support
existing projects. In December of 1997 the Company notified customers that the
product would be discontinued for new applications or growth of existing
projects. The Company expects this product will not represent a material portion
of revenues as customers migrate to new products.

The FLX-1100 System allows fiber optic cables to be used to extend the public
telecommunications network from the local telephone company's central office
switch to the individual home or business (the "Local Loop"). The FLX-1100
System consists of a HDT, an ONU, a Video Headend and sophisticated software
programs. The FLX-1100 System connects to set-tops and telephones which will be
provided by other suppliers. The Company's HDT can be installed either at the
local central office or at a remote terminal location. The HDT connects with the
switch at the local central office to provide telephony service.

The HDT also contains the broadband switching capability to implement
interactive video services for subscribers served via the FLX-1100 System. The
Company's ONU is installed at the curbside location and converts optical signals
received from the HDT back into standard electrical signals. The ONU connects
directly with residences using copper wire for the telephony connections and
coaxial cable for the video connection. The Company's Video Headend, located at
either the source of the video signals or at the telephone company's central
office, converts analog television signals to 45 Mb/s digital signals or
multiplexes existing digital video signals into the 45 Mb/s signals. The Video
Headend multiplexes the signals together for transmission by fiber to the
Company's HDT.

The Company's software operates broadband call processing, service provisioning,
network monitoring and testing functions that run in the HDT. In addition, the
Company provides a network management capability called the Video Administration
Module (VAM) which interfaces between the FLX-1100 System and video billing and
event provisioning systems. The Video Administration Module also provides the
"video gateway" that both enables independent programmers to access the network,
and the network operator to act as a common carrier for numerous providers of
video services.

MARKET

GENERAL

The Company's primary market is companies that operate, or have plans to
operate, local fiber optics to the curb or companies building distribution
networks to provide transmission services for both narrowband and broadband
services, including a broad range of Advanced Interactive Digital Services, to
residential and business customers. Most local exchange telephone companies and
Competitive Local Exchange Carriers (CLECs) are currently included in this
market or are potentially in this market. The Company initially devoted
substantially all its resources to configuring its products for, and marketing
to, the seven Regional Bell Operating Companies (RBOC's), GTE and the other
independent operators of local exchange telephone networks in the United States.

                                                                               6
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

ITEM 1.       BUSINESS (CONTINUED)

MARKET (CONTINUED)

GENERAL (CONTINUED)

Starting in 1994, the Company began development of and recently released to the
market its second-generation product, the FLX-2500 System, that operates as a
global core platform. The open design of the FLX-2500 enables the flexibility to
partner with some of the world's most experienced telecommunications equipment
providers. The Company is aligned with Lucent Technologies in North America to
integrate the FLX-2500 as part of Lucent Technologies' high bandwidth digital
loop carrier access system. The Company's success in the domestic market is
substantially dependent upon Lucent's attractiveness in the digital loop carrier
market with its current SDBAS offering and announced development of AnyMedia.
The Company's global core platform is also intended to be integrated with SAT
(Groupe SAGEM) Access Systems in France, Samsung Electronics Company Ltd. and
Samwoo Telecommunications Company Ltd. in Korea, and with Bosch Telecom GmbH in
Germany and other selected areas around the globe. In 1996 the Company also
began to market its platform to the emerging (CLECs), which will compete
directly with (RBOCs) in the United States.

TELEPHONE INDUSTRY EVALUATION AND PURCHASING PROCEDURES

The telephone industry generally evaluates new equipment and software through a
lengthy and multi-tiered process. Evaluation can take as little as a few months
for products that are only a small change from existing products in the
telephone network and can take as long as several years for complex products
based on completely new technologies. Products that facilitate the deployment of
fiber optic cable in the local distribution network, including the Company's FLX
System, are in the latter category. The process may vary to some extent
depending on the telephone company and the product being evaluated, the
priorities of the telephone companies, budgets and the efficiency with which
decisions are made about priorities and new products.

CUSTOMER STATUS

The new agreements between Lucent and the Company include a Settlement Agreement
and mutual releases by BroadBand and Lucent of all liabilities arising prior to
February 4, 1998. The Settlement Agreement terminates the SDV Supply Agreement
Contract No. LGC-A65-D between Lucent and the Company dated November 15, 1995,
as amended July 12, 1996 (the "Exclusive Agreement"), relating to the
development and sale of the joint Company/Lucent SDBAS product. Pursuant to a
new SDBAS Supply Agreement, the Company will continue to supply its FLX-2500 to
Lucent. Under the Settlement Agreement, the Company agrees to support Lucent's
decisions with customers such as Bell Atlantic and SBC with regard to the
marketing of SDBAS products and the appropriate transition to Lucent's
AnyMedia(TM) products. While Lucent will make all customer related decisions for
the joint SDBAS product, the Company is free to market its FLX-2500 product
independent of the joint SDBAS product either as a stand alone product or in
conjunction with the products of other digital loop carrier vendors.

The Company also signed a general purchase agreement with Bell Atlantic in June
of 1996 for certain elements of the FLX-2500. Prior to this contract award, the
Company operated under its first volume purchase agreement with Bell Atlantic
Network Services, Inc. for its first generation system, the FLX-1100. The supply
agreement for the FLX-1100 covered sales to affiliates of Bell Atlantic
Services. The previous supply agreement for the FLX-2500 with Lucent to provide
the SDBAS product to Bell Atlantic was an exclusive commitment with Lucent to
provide volume Switched

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<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT
ITEM 1.  BUSINESS (CONTINUED)

MARKET (CONTINUED)

CUSTOMER STATUS (CONTINUED)

Digital Broadband (SDB) purchases from the Company over a six and one half year
period. Prior product delays, continued regulatory uncertainty and the
announcement of new products and technology have resulted in uncertainty as to
the timing and volume of FLX-2500 shipments and there can be no assurances as to
the timing of the purchases over the six and one half-year period. The Company's
second-generation product, the FLX-2500, is also being field trialed in
Richardson, Texas as part of a 30,000 home evaluation. The FLX-2500 is also
being tested and evaluated in other Regional Bell Operating Companies (RBOCs),
Competitive Local Exchange Carriers (CLECs) such as RCN, and overseas telephone
companies.

Prior to delivery of the FLX-2500, the Company also delivered its first
generation FLX-1100 System to SBC, Inc. for the initial trial in Richardson,
Texas and has sold its FLX-1100 system and related products to other Regional
Bell Operating Companies, some independent companies, and overseas telephone
companies for field trial evaluation.

COMPETITION

The segment of the telecommunications industry in which the Company competes is
intensely competitive. Many of the Company's competitors have more extensive
engineering, manufacturing, and marketing capabilities and greater financial and
personnel resources than those of the Company. The Company's ability to compete
is dependent upon several factors, including partners' capabilities, product
features, innovation, quality, reliability, service, support and price.

The Company believes its competition may come from companies that have or are
developing products for a number of different types of technology. Included are
technologies that can be described as Switched Digital Broadband (SDB) with
fiber-to-the-curb, Hybrid-Fiber-Coax (HFC), Asynchronous Digital Subscriber Line
(ADSL), ADSL Lite (ADSL at speeds of less than one megabyte), a Very High Speed
Digital Subscriber Line (VDSL), Plain Old Telephone Service (POTS) over
fiber-to-the-curb and wireless broadband.

Companies that have announced plans to develop these technologies are Lucent
Technologies, ADC Communications, Alcatel, DSC, Fujitsu, Next Level
Communications (majority owned by General Instrument), Northern Telecom, Cisco
Systems, Raynet, Reliance (RelTec), Scientific Atlanta, Pairgain, Advanced Fibre
Communications and Westell. Some competitors are developing systems that combine
two or more of these different technologies to transmit different types of
services.

The Company expects price competition to be an important competitive factor for
both its existing FLX-2500 product and its planned digital loop carrier product,
together with other factors, including experience, product performance,
features, reliability and supplier strength. In two Request for Proposal (RFP)
decisions late in 1996 and early in 1997, the Company believes a new or
alternative supplier of switched digital broadband had underbid the Company.
Failure of the Company to meet its development goals could have a material
adverse effect on the Company. The Company believes that the other key criteria
for competition in the market for electronics and software for local
distribution networks will be cost competitiveness, flexibility, revenue
generation capability, compatibility with the existing telephone or cable
television networks and upgradeability, as well as customer support. The Company
believes that it competes favorably on these factors for those telephone
companies that consider the capability to transmit high performance Advanced
Interactive Services important, but there can be no assurance the Company will
continue to compete favorably on these factors.

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<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

ITEM 1.  BUSINESS (CONTINUED)

REGULATIONS

On February 8, 1996, President Clinton signed into law the Telecommunications
Reform Act, which intends to liberalize the regulations that govern the
telephone companies, which constitute the Company's primary market. In addition,
this law permits the entry of other network operators into the
telecommunications marketplace. The expectation of increased competition for
local residential narrowband and broadband services has failed to occur
resulting in, along with other factors, delayed deployment of the SDBAS product.

Telephone companies are subject to extensive regulation. Both the federal and
state governments regulate the provision of basic and other telecommunications
services. Prior to using the Company's network technology to provide video
programming in their service territories, telephone companies are required
either to obtain cable television franchises from the relevant local
governments, or comply with federal statutory and regulatory requirements
governing "open video system" operators. Telephone companies offer data services
today and require no special government approval to deliver such services other
than the normal state and federal regulations for basic and other
telecommunications services.

RESEARCH AND PRODUCT DEVELOPMENT

As discussed earlier, the Company's strategy entails three development efforts.
The first initiative is a Research and Development Agreement (the "R & D
Agreement") with Lucent, for the Company to develop products for Lucent's new
AnyMedia digital loop carrier product. Under the R &D Agreement, Lucent has
committed to pay the Company at least $21 million payable in equal installments
over a three-year period. The Company and Lucent will co-own the technology
developed by the Company subject to certain restrictions on use by the Company.
The second initiative involves the intent of the Company and an international
partner to develop a global access product that meets an emerging global access
standard known as FSAN, Full Service Access Network. The FSAN architecture is a
high bandwidth, asynchronous transmission, and passive optical network similar
to the FLX-2500 architecture, which will be used as the foundation for the new
product. Last, the Company plans to develop its own digital loop carrier which
will combine the Company's core technologies, ATM, xDSL and Optics, with
technology gained through the Company's AnyMedia development for Lucent and
technology license agreements discussed earlier. The new digital loop carrier is
being developed to be complimentary to the AnyMedia product line and will
position the Company for more near-term revenue opportunity based on current
telephone business models once the product is completed. This new product
approach represents a significant change from prior efforts, which were based on
the assumption that telephone companies would enter the video business using an
integrated platform. The AnyMedia, FSAN and independent digital loop carrier
products are early in the design process with market introductions expected
within 20 to 25 months. There can be no assurances as to the success of these
products or the achievement of these preliminary schedule estimates. (See
Products Section)

The Company has completed the development of the telephony and data modules and
substantially completed the video portion of the FLX-2500, a second-generation
Fiber Loop Access (FLX) System. Units have been delivered for system
integration, testing, and are being trialed at SBC and RCN for telephony
services and Telus in Canada for data services. The Company will support the
FLX-2500 product with sustaining engineering resources and is in the process of
reallocating engineering talent to support AnyMedia product development for
Lucent and the development of an independent digital loop carrier product as
well as analyzing the impact of the FSAN global access effort.


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<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

ITEM 1.  BUSINESS (CONTINUED)

RESEARCH AND PRODUCT DEVELOPMENT (CONTINUED)

The FLX-2500 is a second-generation modular platform, which enables network
operators to deploy the platform in a variety of configurations. Telephony,
data, video, and interactive services can be deployed simultaneously or
incrementally at the network operator's choice. The Company is engaging in
further development work on broadband video and data modules that enable the use
of longer and older drop cables in the customer's installed base, as well as
additional software features. Certain broadband capabilities are available today
with enhanced offerings expected to be available for deployment in late fourth
quarter of 1998 or early 1999, although there can be no assurance that
development can be completed on schedule.

The Company's products are expected to continue to evolve because, (1) advances
in technology and applications of its technology will result in cost and
reliability improvements, (2) constant evaluation and implementation of customer
application requirements in the form of new features and feature enhancements
and (3) development of spin-off products to support the SDB deployment or
deployment of the new products that could provide additional sources of revenue.
To further penetrate the market and expand into other areas of
telecommunications, the Company engages in a continuing program of research and
product development. The success of future development efforts will depend on,
among other factors, the Company's ability to attract and retain qualified
design and development personnel who are in great demand and limited supply.
There can be no assurance as to the success of the Company's research and
development effort, or the timing of such effort leading to products being
available for customer shipments.

The Company's research and product development costs charged to expense were
approximately $28,062,000, $22,785,000, and $19,434,000, for the years ended
December 31, 1997, 1996, and 1995, respectively. No software development costs
were capitalized in 1997, 1996, or 1995.

SALES, MARKETING AND CUSTOMER SUPPORT

The agreements reached with Lucent provide for Lucent to have complete control
over the sales, marketing and service of the SDBAS and AnyMedia products or any
other jointly developed products for Lucent's customers in the United States and
Canada. The Company will provide limited marketing resources to support Lucent
for these products. Also, internationally the Company has agreements in place
for its products to be marketed, sold, and serviced by SAT in France, Samsung
Electronics Company Ltd. and Samwoo Telecommunications Company Ltd. in Korea and
Bosch Telecom in Germany and other markets. The Company's sales and marketing
resources maintain contact with the telephone company personnel who have
responsibility for making and implementing the business, technical and
operational decisions relating to purchasing, evaluating and deploying fiber
optic systems for the local loop. The Company's sales personnel typically have
substantial prior experience marketing products to the Regional Bell Operating
Companies (RBOC), GTE, other major independent telephone companies and
Competitive Local Exchange Carriers. The Company also selectively utilizes local
sales representatives in the international market and marketing personnel
maintain contact with telephone companies in these markets. The Company believes
that the knowledge of its sales and marketing personnel about both the personnel
and the operating procedures of the telephone companies for which they have
responsibility are important factors in the Company's sales and marketing
efforts.

The primary function of the Company's customer support personnel is to provide
assistance to telephone company personnel in engineering, installing,
maintaining and operating the FLX System, future products for AnyMedia, the FSAN
effort and the Company's digital loop carrier product. This involves close
coordination with technical and operational personnel of the telephone
companies. Customer support personnel also assist the Company's marketing and


                                                                              10
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

ITEM 1.  BUSINESS (CONTINUED)

SALES, MARKETING AND CUSTOMER SUPPORT (CONTINUED)

research and development groups by conveying to both groups the needs of the
telephone companies that have been communicated by telephone company personnel.
In addition, customer support personnel provide documentation, training and
technical assistance to the Company's customers.

MANUFACTURING AND SUPPLIES

The Company depends on outside suppliers for the continued availability of
components and materials, including printed circuit board assemblies. In large
part, final assembly and testing are performed by the Company's personnel at the
Company's manufacturing facility. The Company tests its products extensively
prior to shipment to the customer using an automated testing system that
incorporates proprietary procedures. Testing may include both environmental
testing to ensure products can withstand severe thermal variations and the
electronic simulation of signal problems to test the effectiveness of devices in
the Company's products designed to alert customers of equipment malfunctions.

Many of the components used in the Company's FLX System are standard parts
available from multiple sources. However, certain ASICs and electro-optic
components used in the Company's FLX System are currently primarily available
only from single sources, and other components are available from only a limited
number of sources. Some of the Company's sole-source and limited-source
suppliers are new companies which may prove to be unreliable sources of supply.

To date, the Company has experienced minimal supply problems, all of which have
been managed positively. The Company expects to continue for the foreseeable
future its policy of having the FLX System's subsystems and components
manufactured by third parties.

On February 4, 1998 the Company and Lucent also executed a Manufacturing
Agreement, an agreement for Lucent to act as an OEM ("Original Equipment
Supplier") to the Company and an agreement for the Company to act as an OEM to
Lucent. The Manufacturing Agreement is the only agreement between the Company
and Lucent that contains guaranteed volumes or cash payments in lieu of volume.
The Agreement provides the Company with contract manufacturing of Lucent
products to absorb $18 million of the cost to the Company of maintaining its
manufacturing operations for three years. If Lucent fails to provide orders for
products in sufficient volume to absorb $18 million, Lucent will pay the Company
the amount that is not absorbed by Lucent's orders. As sales of the Company's
current product, the FLX-2500, are uncertain due to regulatory delay and
Lucent's transition to its AnyMedia product, the required absorption orders or
payments will enable the Company to maintain its manufacturing capabilities
while the Company develops new products. Under the OEM agreements, Lucent will
manufacture for the Company certain narrowband components utilizing Lucent
technology and the Company will continue to sell its FLX-2500 product to Lucent.
Neither product has any guaranteed volume commitments. In addition, the Company
and Lucent will from time to time evaluate whether to add additional products to
either or both OEM agreements. It is expected such decisions will depend upon a
number of factors, including price, quality and the availability of other
suppliers.

BACKLOG

The Company's backlog includes sales orders received by the Company that have a
scheduled delivery date prior to December 31, 1998. The aggregate sales price of
orders received and included in backlog was approximately $.9 million and $5.6
million on December 31, 1997 and December 31, 1996, respectively. The decrease
in backlog is due to the timing of the testing and evaluation process of the
joint SDBAS product by Lucent's customers, as well as to customer

                                                                              11
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

ITEM 1.       BUSINESS (CONTINUED)

BACKLOG (CONTINUED)

delays in moving into the video business and Lucent's transition to its AnyMedia
product. The Company believes that the orders included in the backlog are firm
orders and will be shipped prior to December 31, 1998. However, some orders may
be canceled by the customer without penalty where management believes it is in
the Company's best interest to do so.

PATENTS AND PROTECTION OF OTHER PROPRIETARY INFORMATION

The Company has been awarded patents in the United States. Additional patent
applications are pending in the United States and certain foreign countries.
There can be no assurance that any of these applications will result in the
award of a patent or that the Company would be successful in defending its
patent rights in any subsequent infringement actions.

In 1996 as competitors announced competing products, the Company began to focus
greater attention on assessing its intellectual property. The Company is
continuing such efforts and intends to protect its intellectual property in a
manner that maximizes its business opportunity. The Company believes that its
patents provide a competitive advantage over other providers of switched digital
broadband products. There can be no assurance, however, that the patents of the
Company will be enforceable or that competitors will not be able to develop
products that do not infringe upon the patents of the Company. The Company, on
March 18, 1997, brought an infringement action against General Instrument
Corporation. On March 19, 1997, Next Level Communications, a subsidiary of
General Instrument Corporation, commenced a legal action against the Company in
the U.S. District Court for the Northern District of California. (Next Level
Communications v. BroadBand Technologies, Inc., Civil Action No. C-97-0960),
seeking, among other things, to have the Company's U.S. Patent No. 5,457,560
("the 560 patent") declared invalid and unenforceable, alleging antitrust
violations based upon the suit against General Instrument, alleging that the
Company is infringing two patents of General Instrument Corporation relating to
the encoding and decoding of digital video and seeking an injunction against
further infringement. The Company on February 18, 1998, counterclaimed against
Next Level Communications for infringement of the 560 patent. (See Item 3 Legal
Proceedings).

The Company's patent portfolio covers the basic technology for implementing
switched digital broadband systems in the context of a fiber to the curb
architecture. The issued patents cover systems using a main site (HDT) and a
remote site (ONU) interconnected by fiber, providing downstream digital
broadband and video information to multiple subscriber locations in response to
upstream signals requesting a given channel. An approach for multicasting one
channel to multiple subscribers is also covered by a patent that was recently
issued to the Company as U.S. Patent No. 5,619,498.

Because of the existence of a large number of patents in the telecommunications
field and the rapid rate of issuance of new patents, some components of the
Company's products may be covered by existing patents, without the Company's
knowledge. If so, the Company believes that, based upon industry practices,
necessary licenses or rights under such patents may be obtained on terms, which
would not have a materially adverse financial effect on the Company.

The Company has received Notice of Publication for registration for "BBT", "FLX"
and "BroadBand Technologies" as trademarks for use in the United States.

In addition to the patent protection described above, the Company protects its
software through contractual arrangements with its customers and through
copyright protection procedures.


                                                                              12
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT


ITEM 1.    BUSINESS (CONTINUED)

PATENTS AND PROTECTION OF OTHER PROPRIETARY INFORMATION (CONTINUED)


The Company acquired ownership rights to a significant amount of its technology
from Siecor Corporation in July 1988. Under that agreement, Siecor Corporation
transferred exclusive ownership of the technology to the Company in return for
the right to receive royalties from the sale of products, incorporating the
transferred technology. Before December 31, 1998, the Company cannot transfer or
license the technology acquired from Siecor Corporation on an exclusive basis
without prior consent of Siecor Corporation. Siecor Corporation may not
unreasonably deny its consent. In 1996 the Company renegotiated the terms of the
royalty agreement which in effect reduced the royalty percentage.

EMPLOYEES

As of December 31, 1997, the Company had a total of 300 employees. The Company
is not a party to any collective bargaining agreement.

ENVIRONMENTAL AFFAIRS

The Company's manufacturing operations are subject to numerous federal, state,
and local laws and regulations designed to protect the environment. There are no
administrative or judicial proceedings pending, or threatened against the
Company alleging violations of such environmental laws or regulations.
Compliance with these laws and regulations has not had, and is not expected to
have, a material effect upon the capital expenditures, earnings, and competitive
position of the Company.

RISK FACTORS

In connection with the "Safe Harbor" provisions of the private Securities
Litigation Reform Act of 1995, readers of this document are advised that this
document contains both statements of historical facts and forward looking
statements. Such statements include communications about the Company's prior and
new relationships with Lucent, the Company's FLX-1100 and FLX-2500 products and
Lucent's DLC with which the FLX-2500 is paired, a new digital loop carrier
product the Company plans to develop, migration of the FLX-2500 to FSAN, the
expected action of customers, corporate partners, and competitors, and future
financial requirements. Forward looking statements herein, are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those indicated by the forward looking statements. These risks
include, but are not limited to the following:

Although management believes the relationship with Lucent offers certain
opportunities to the Company, the relationship includes certain risks as well.
As disclosed in prior filings, the relationship between the Company and Lucent
relating to SDBAS arising out of the November 1995 exclusive agreement did not
meet the Company's expectations and resulted in substantially lower than
expected sales volume. There can be no assurances the new relationship with
Lucent will not fail to meet the Company's expectations. The Company's
relationship with Lucent also may adversely affect the prospect for partnership
with others in the telecommunications industry, especially in light of certain
restrictions contained in the new Lucent agreements including change of control
requirements. Decisions by Lucent or rumors of a decision by Lucent that changes
Lucent's relationship with the Company may have an adverse effect on the market
price of the stock of the Company. In addition, Lucent is a vendor of digital
loop carrier products and the Company's product may compete with Lucent in some
circumstances. Such competition could adversely affect the ability of the
Company and Lucent to cooperate to the extent required under the new agreements.


                                                                              13

<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

ITEM 1.    BUSINESS (CONTINUED)

RISK FACTORS (CONTINUED)

To maximize the value of the new agreements with Lucent, the Company must
develop its own digital loop carrier product. Development of such a new digital
loop carrier product by the Company will be subject to significant technical and
other challenges and will require a substantial investment of money and time.
There can be no assurance that the Company will be able to develop a digital
loop carrier product or that any product it develops will be attractive to
customers and price competitive with the products of competitors, including
Lucent.

Given the current regulatory and customer environment as well as prior product
delays, sales volume for the Company's only current product, the FLX-2500, are
expected to remain low. Accordingly, except for development, contract
manufacturing and potential OEM revenues from the new agreements with Lucent,
the Company anticipates low product sales volume until its new digital loop
carrier products are introduced into the market in the next 20 to 25 months.

To remain competitive, the Company must continue to invest substantial resources
in research and development and to achieve development results in its current
products and future products, including the new digital loop carrier product the
Company is planning to develop, as well as upgrades to the Company's products
that meet the specific needs of customers, including product performance,
features, reliability and price competitiveness. Development efforts are in the
planning stage and many challenges exist to successful development. In
particular, the Company will need to attract additional engineers who have
hardware experience in digital loop carrier products. The Company will also be
managing multiple, concurrent projects that will require critical program
management expertise to efficiently allocate scarce engineering resources among
competing initiatives. There can be no assurance the Company will be successful
in such effort.

Failure of the Company to meet its development goals could have a material
adverse effect on the Company. Notwithstanding successful development by the
Company, competitors may develop competing technology and products that are more
attractive to customers than are the technologies and products of the Company
and may offer such products at materially lower prices. The Company expects
price competition to be an important competitive factor, together with other
factors, including experience, product performance, features, reliability,
partner performance and supplier strength.

Other factors include the possibility that telephone companies may not widely
deploy all or part of the Company's current or future products in their local
distribution networks or may require expensive upgrades to the Company's current
product. For example, during 1997 SBC decided to discontinue the video portion
of its trial in Richardson, Texas, which was attributed to federal regulatory
actions which force SBC to sell its wireline services and network to new
competitors at prices below actual cost (see Second Quarter 1997 10Q - Recent
Developments, SBC). Also, the Company's current and future products must meet
the industry standards established by Bell Communications Research and must be
compatible with the products of other telephone company suppliers, including
competitors of the Company. Additionally regulatory delays may continue to
impede competition in the local loop, which may delay the rollout of the
Company's new access products.

Sales of the joint BroadBand/Lucent SDBAS product in the United States and
Canada are substantially dependent on the competitiveness and performance of
Lucent's product capability. Under its new agreement with Lucent, the Company
has no active distribution role and is totally dependent upon Lucent for the
sales and marketing of the SDBAS product in the United States and Canada. If
customers require the Company to produce small volumes of its current FLX-2500
product or to upgrade its current FLX-2500 product without placing large volume
orders, the Company may incur expenses substantially in excess of revenues
generated. The Company's current contracts with Lucent are forward priced


                                                                              14
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

ITEM 1.    BUSINESS (CONTINUED)

RISK FACTORS (CONTINUED)

requiring the Company to deliver its FLX-2500 products at prices, and to invest
to upgrade its product, such that sales of the FLX-2500 products will be
profitable only at high volumes. Other than the manufacturing agreement, the
contracts with Lucent contain no minimum volume purchase commitment and
regulatory/market factors make it unlikely that high volume demand will develop
in the near term. In addition, although the Company will not be required to
market its planned digital loop carrier product through Lucent, successful
marketing of the Company's planned digital loop carrier product may be impacted
in part by market acceptance of Lucent's AnyMedia product.

As the Company or its partners announce new products to better meet the changing
requirements of customers, customers may delay orders of existing products until
the new products are available for shipment, or until small volumes of new
products are adequately field tested. Recent announcements by Lucent
Technologies of its new digital loop carrier product, AnyMedia, are currently
having this effect. The Company expects their adverse affect on sales of its
FLX-2500 product to continue or to increase.

In recent years, the purchasing behavior of the Company's large customers has
increasingly been characterized by the use of fewer, larger contracts. This
trend contributes to the variability of the Company's results and is expected to
intensify, accelerated by merger activity among the Company's major customers
and network operators. Such larger purchase contracts typically involve longer
negotiating cycles, require the dedication of substantial amounts of working
capital and other Company resources and in general, require investments, which
may substantially precede recognition of associated revenues. Moreover, in
return for larger, longer-term purchase commitments, customers often demand more
stringent acceptance criteria, which can also cause revenue recognition delays
and potential penalties for non-performance. For example, customers have
requested that products be priced based on volume estimates of customers' future
requirements, but the failure of such customers to take delivery of product
comparable to volume anticipated, could result in negative margins on product
sales. Certain multi-year contracts may relate to new technologies, which may
not have been previously deployed on a large-scale commercial basis. The Company
may incur significant initial cost overruns and losses on such contracts, which
would be recognized in the quarter in which they became ascertainable. Future
estimates on such contracts are revised periodically over the lives of the
contracts, and such revisions can have a significant impact on reported earnings
in any one-quarter.

The Company competes against many larger companies that have significantly
greater resources than the Company. The Company, which has an accumulated
deficit of approximately $173 million as of December 31, 1997, has never been
profitable and may never achieve profitability. The Company may require
additional capital and may not be able to raise such capital or may be able to
raise such capital only on unfavorable terms. In May 1996, the Company sold $115
million of 5% convertible five-year notes. Failure to pay principal and interest
when due in May 2001 would have a material adverse effect on the Company. If the
Company's new business strategy fails to generate the expectation of sufficient
revenues, or if expenses are greater than expected, the Company will require
additional financing to repay its debt. There can be no assurance additional
financing will be available to the Company.

Currently, the Company is dependent upon two of Lucent's primary customers in
North America, which if lost would deprive the Company of substantially all its
SDBAS revenue. These customers are subject to substantial government regulation,
which could affect their ability and desire to utilize the products of the
Company. It is expected that these customers are likely not to purchase material
quantities of the Company's current FLX-2500 product. As fewer large potential
customers dominate the Company's market, the Company may not have sufficient
bargaining power to sell its products on favorable terms. If the Company is
successful in expanding its sales, growth will place significant strain on

                                                                              15
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

ITEM 1.    BUSINESS (CONTINUED)

RISK FACTORS (CONTINUED)

its operational resources and systems. In some cases, the Company depends on
single source suppliers or parts, which are available only from a limited number
of sources. Delays in filling orders of the Company's customers resulting from
supplier delays may cause customer dissatisfaction.

The Company relies upon technology developed by third party suppliers to provide
key product enabling capability that allows the marketability of the Company's
broadband product to service providers with longer, older and more complex
copper "drop" cable networks. There can be no assurance that the Company can
obtain such technology from its suppliers, which would have a material adverse
affect on the Company's business and results from operations. If the "drop"
technology is not available from third parties, the Company has internal
resources and expertise that may be able to provide the necessary required
technology. However, internal development would further delay product's
availability (See also "Product Development").

The ability of the Company to complete development projects on schedule and to
otherwise compete effectively depends upon its ability to attract and retain
highly skilled engineering, manufacturing, marketing and managerial personnel,
which in the current environment are becoming increasingly difficult to recruit
and retain. This is true for new personnel the Company will require to implement
its plan to develop a digital loop carrier product. In addition, the Company's
inability to sell its current product has caused valuable employees to leave the
Company.

The patent and other proprietary rights of the Company may not prevent the
competitors of the Company from developing non-infringing technology and
products that are more attractive to customers than the technology and products
of the Company. The technology and products of the Company could be determined
to infringe the patents or other proprietary rights of others. Continued pursuit
of international markets exposes the Company to increased risks of currency
fluctuations and controls, political and social risks, trade barriers, new
competitors and other risks associated with international markets.

Until recently, Lucent Technologies had exclusive U.S. and Canadian market
rights to purchase the Company's SDB capability for digital loop carrier
applications. As such, the FLX-2500 product can interface only with Lucent's
digital loop carrier without further product development and interfaces would
have to be changed to partner with any other digital loop carrier supplier.
Development of its own digital loop carrier, designed to interface with the
FLX-2500, would be expected to take up to several years and there can be no
assurance either that the Company would have sufficient monetary and technical
resources to successfully, develop such a product or that the product, if
developed, would be competitive with other access products. Nor can there be any
assurance that the Company could partner with another digital loop carrier
supplier. Whether or not the Company participates with Lucent or another digital
loop carrier supplier for the next generation product or produces its own
product, customers may decide to delay orders for the current generation of
products, which could have a material adverse effect on the Company.

The market price of the Company's securities is affected by many factors other
than the Company's products and performance. For example, NASDAQ has maintenance
criteria that must be met in order to continue to be listed as a NASDAQ National
Market security. These criteria include a minimum number of shareholders,
minimum market value of equity float, minimum bid prices, and tangible net
tangible asset requirements (See Liquidity and Capital Resources). The Company
does not meet the minimum net tangible asset requirements of NASDAQ and its
continued listing on NASDAQ will depend upon meeting the minimum bid requirement
of $5.00 per share. In the event that the Company fails to meet the minimum bid
or other criteria, the Company's securities may no longer be traded on the
NASDAQ

                                                                              16
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

ITEM 1.    BUSINESS (CONTINUED)

RISK FACTORS (CONTINUED)

National Market. In this event, the Company will seek an exception to the
requirements. There can be no guarantee that the Company will be successful in
obtaining an exception and if such exception could not be obtained, the Company
would cease to trade on the NASDAQ National Market. In the event that the
Company's securities are no longer traded on the NASDAQ National Market, the
market value of the Company's securities could be materially adversely affected.

The market price of the Company's securities has been very volatile as a result
of many factors, some of which are outside the control of the Company,
including, but not limited to, quarterly variations in financial results,
announcements by the Company, its competitors, partners, customers, potential
customers or government agencies and predictions by industry analysts, as well
as general economic conditions. Sales by the Company's existing stockholders,
trading by short-sellers and other market factors may adversely affect the
market price of the Company's securities. Any or all these risks could have a
material adverse affect on the market price of the securities of the Company.

ITEM 2.       PROPERTIES

The Company leases approximately 96,000 square feet in an office park located
outside of Research Triangle Park, North Carolina. Substantially all the
business operations of the Company are conducted at this facility. The lease has
a term, which commenced in April 1993 and terminates in December 1998, with two
three-year renewal options. The Company is currently in negotiations for an
extended lease of the facility beyond December 1998, which is intended to be
completed and be finalized in the second quarter of 1998. The Company also
leases a sales and marketing facility in The Surrey Research Park located in
Surrey, England. The lease commenced in June 1994. The Company believes that the
above-described facilities are suitable and adequate to meet the Company's
requirements.

ITEM 3.       LEGAL PROCEEDINGS

On March 18, 1997, the Company commenced a legal action against General
Instrument Corp. in the U.S. District Court for the Eastern District of North
Carolina (BroadBand Technologies, Inc. vs. General Instrument Corp. and General
Instrument Corporation of Delaware Civil Action No. 5-97-CV-173-BR(2) for
infringement of the Company's United States Patent No. 5,457,560 (the "560
Patent") titled "Fiber Optic Telecommunication System Employing Continuous
Downlink, Burst Uplink Transmission Format and Preset Uplink Guardband." The
Complaint alleges, among other things, that General Instrument, has made, tested
and used a broadband access system that infringes the 560 Patent (the
"Infringing System"), has offered the Infringing System for sale, has contracted
to sell the Infringing System to NYNEX, and has induced others to infringe the
560 patent. The Company is seeking to enjoin General Instrument from further
acts infringing the 560 Patent and to recover compensatory damages and treble
damages. The discovery phase of the case is effectively completed, and both
parties have filed dispositive motions. The trial could commence as early as
June 1, 1998. On March 19, 1997, Next Level Communications, a subsidiary of
General Instrument Corporation, commenced a legal action against the Company in
the U.S. District Court for the Northern District of California (Next Level
Communications v. BroadBand Technologies, Inc., Civil Action No. C-97-0960 SI),
seeking, among other things, to have the Company's 560 Patent declared invalid
and unenforceable alleging antitrust violation based upon the suit against
General Instrument, alleging that the Company is infringing two patents of
General Instrument Corporation relating to the encoding and decoding of digital
video and seeking an injunction against further infringement. The Company on
February 2, 1998 counterclaimed against Next Level Communications for
infringement of the 560 Patent.

                                                                              17
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

ITEM 3.       LEGAL PROCEEDINGS (CONTINUED)

There can be no assurance as to success of the Company's infringement action or
the amount of damages recovered if the Company is successful. Nevertheless, the
Company has invested substantial amounts in developing its technology and
intends to protect its intellectual property in a manner that maximizes its
business opportunity.

The Company's operations are subject to numerous federal, state and local laws
and regulations, including those regarding employment discrimination, safety,
wages and environmental matters. The Company may also be subject to product
liability and breach of contract claims in civil actions. There are no material
administrative or judicial proceedings pending or threatened against the
Company. Compliance with applicable laws and regulations has not had, and is not
expected to have, a material effect upon the operations of the Company.

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

No matters were submitted to a vote of security holders during the fourth
quarter of 1997.

EXECUTIVE OFFICERS OF THE REGISTRANT

Executive Officers are elected annually and serve at the pleasure of the Board
of Directors. The current executive officers of the Company are as follows:

<TABLE>
<CAPTION>
               NAME                                       OFFICE                          OFFICER SINCE     AGE
               ----                                       ------                          -------------     ---

<S>                                 <C>                                                    <C>            <C>
John R. Hutchins, III               Chairman of the Board and Director                        1988           63
J. Richard Jones                    Executive Vice President,  Assistant  Secretary and       1988           50
                                    Director
Timothy K. Oakley                   Vice President,  Chief Financial Officer, Treasurer       1996           36
                                    and Secretary
David E. Orr                        President, Chief Executive Officer and Director           1997           46

</TABLE>

As of the end of 1997, the following people held these positions:

<TABLE>
<CAPTION>


               NAME                                       OFFICE                          OFFICER SINCE     AGE

<S>                                <C>                                                      <C>            <C>
Salim A.L. Bhatia                   Chairman of the Board and Director                        1988           47
James L. Chitkowski                 Vice President Sales and Marketing                        1997           51
Leonard D. Hayes                    Vice President Manufacturing                              1997           47
Carl A. Kammire                     Vice President Engineering                                1995           59
</TABLE>

Mr. Orr has served as President, Chief Executive Officer, and Director since he
joined the Company in April 1997. Prior to joining the Company, he was employed
at Alcatel Network Systems, Inc. as President and Chief Executive Officer since
August 1991. At Alcatel Network Systems, which designs, manufactures and markets
a full line of telecommunications systems products for the transport and
management of voice, data, and image traffic, he was responsible for operations
in Raleigh and Clinton, North Carolina; Longview, Texas; Nogales, Mexico;
Georgetown, Canada; and San Jose, California. Prior to joining Alcatel, he was
Vice President and General Manager of Rockwell International's Network
Transmission Systems Division. He held various other management positions at
Rockwell since joining the company in 1985. Prior to joining Rockwell, he held
various positions with GTE including Network Director for General Telephone
Company of Wisconsin.

                                                                              18
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)

EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)

Dr. Hutchins is a founder of the Company and has served as Chairman of the Board
(except for a period during 1997 and 1998 during which he was Chairman Emeritus)
and a Director of the Company since its formation in July 1988. Except for a
period during 1990 and 1991, he also served as the Company's Treasurer and
Secretary until November 1992. Prior to July 1988, Dr. Hutchins was Executive
Vice President at Siecor Corporation, which he joined in September 1985. Prior
to joining Siecor, Dr. Hutchins served as Senior Vice President, Vice President
and Director of Research and Development at Corning Incorporated for 12 of his
25 years there. Since March 1, 1991, the Company on a part-time basis has
employed Dr. Hutchins. On February 1, 1998, Dr. Hutchins replaced Mr. Bhatia as
Chairman of the Board of Directors.

Dr. Jones is a founder of the Company and has served as Executive Vice President
and a Director of the Company since its formation in July 1988. He is the chief
technical officer of the Company and is responsible for overseeing the
development of advanced technology. From February 1987 until July 1988, he
worked for Siecor Corporation where he held the position of Director of
Broadband Development. Prior to February 1987, Dr. Jones held management and
development-oriented positions at FiberLAN, Inc. (a Siecor-BellSouth joint
venture), Siecor Corporation, Harris Corp., a manufacturer of communications
systems for military and industrial markets, and Bell Laboratories.

Mr. Oakley has served as Vice President and Chief Financial Officer since he
joined the Company in April 1996. Prior to joining the Company, he was employed
at MCI Telecommunications as the Director of Finance, Management Reporting,
Control and Analysis for the consumer/small business marketing segment; and
Chief Financial Officer of the MCI-ASYNC Voice Messaging subsidiary. For the
years prior to joining MCI in 1990, he was employed by the auditing group of
Coopers and Lybrand; and by Domino's Pizza as Director of Finance for a
franchise with 46 stores. Mr. Oakley will depart from the company effective
April 18, 1998.

Mr. Bhatia was a founder of the Company and had served as President, Chief
Executive Officer and as a Director of the Company from July 1988 to March 1997.
Mr. Bhatia had served as Chairman of the Board and as a Director of the Company
from April 1997 to January 31, 1998 when he departed from the Company. Mr.
Bhatia was a Vice President at Siecor Corporation, a supplier of fiber optic
products to the telecommunications industry, from November 1984 to July 1988.
Between February 1981 and July 1988, Mr. Bhatia held various sales, marketing,
strategy and business development positions at Siecor. Prior to 1981, Mr. Bhatia
held various sales, engineering, operations and consulting positions at Corning,
Inc., Arthur D. Little, and Esso Petroleum Co. Ltd. (UK).

Mr. Chitkowski joined the Company in September 1996 as Vice President of Sales.
From March 1997, Mr. Chitkowski has served as Vice President of Sales and
Marketing of the FLX system to companies in North America and Puerto Rico. From
June 1992 to June 1993 he was Vice President of Marketing and Sales for
Telesciences Transmission Systems. From June 1993 to November 1995 he held the
position of Regional Vice President with DSC Communications Corp. From November
1995 to July 1996 he was Vice President of Sales for Tekelec. In July and August
of 1996 he consulted with Manchester International.

Mr. Hayes joined the Company in March 1992 as Director of Materials. From March
1997, Mr. Hayes has served as Vice President of Manufacturing and Quality and is
responsible for all manufacturing and procurement functions inclusive of all
contract construction and administration. In his twenty-three years in materials
and manufacturing operations, he has held executive materials, logistics, and
manufacturing positions at Commodore International Ltd., where he was
responsible for worldwide materials and logistics functions in support of a $1.1
billion revenue stream and senior managemnt positions in materials and
operations at Data General Corporation.

Mr. Kammire joined the Company in October 1990 as Director of Engineering. Mr.
Kammire served as Vice President of Engineering from November 1995 to April 1998
and during that time was responsible for the design and development of the FLX
System. From 1987 to 1990 he served as Director of the Advanced Product Group of
Timeplex. From 1978 to 1987 he served as Director of Software Development for
ITT Advanced Technology Ctr. Effective as April 30, 1998, Mr. Kammire will
depart from the Company.

Mr. McLean joined the Company in October 1996 as Director of Broadband Programs.
In June 1997 he was named Vice President of Technical Services. On March 2, 1998
David J. McLean was appointed Vice President of Engineering. Mr. McLean will be
responsible for introducing a digital loop carrier access product as well as
maintaining responsibility for Technical Services. From 1981 to 1996 he has held
several senior management positions in marketing, development, and manufacturing
at IBM Corporation.

<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT



                                     PART II

ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
          MATTERS

The Company's Common Stock, $.01 par value, is traded in the over-the-counter
market and is quoted on the NASDAQ National Market System under the symbol
"BBTK". The following tables set forth the high and low daily bid prices for
each quarter during the past two fiscal years as reported by NASDAQ. Such
quotations reflect inter-dealer prices without markup, markdown or commissions
and may not necessarily represent actual transactions.


1997                LOW          HIGH
----                ---          ----

First Quarter     $  9.12      $  16.75
Second Quarter       6.75         10.56
Third Quarter        7.37         11.00
Fourth Quarter       3.50          8.50

1996                LOW          HIGH
----                ---          ----

First Quarter     $ 15.75      $  28.25
Second Quarter      23.50         34.62
Third Quarter       20.00         35.00
Fourth Quarter      15.25         23.00


No cash dividends have been declared or paid by the Company and the Company has
no present intention of declaring a cash dividend.

As of March 10, 1998, there were approximately 10,000 holders of record and
beneficiary shareholders of the Company's Common Stock.

ITEM 6.       SELECTED FINANCIAL DATA

The following is a summary of certain condensed statement of income and balance
sheet information of the Company for the five years ended December 31, 1997.
This summary should be read in conjunction with the financial statements and
notes thereto appearing elsewhere in this report. All amounts except per share
amounts are presented in thousands. No cash dividends have been declared or paid
in any of the years presented.



                                                                              20
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

ITEM 6.       SELECTED FINANCIAL DATA (CONTINUED)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                  1997            1996            1995          1994          1993
------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>              <C>             <C>            <C>           <C>
STATEMENT OF INCOME DATA
Net Sales                                       $15,012          $23,144         $22,705        $27,012       $15,136
Cost of Products Sold                            12,297           21,744          23,917         27,908        19,453

Gross Profit                                      2,715            1,400          (1,212)          (896)       (4,317)
Expenses:
    Research and Development                     28,062           22,785          19,434         15,422         8,907
    Performance fees and Obsolete
     Equipment                                    1,841                0               0              0             0
    Selling and Administration                   13,725           11,648          11,627         11,284         6,965
                                                 ------           ------          ------         ------        ------
          Total expenses                         43,628           34,433          31,061         26,706        15,872
                                                 ------           ------          ------         ------        ------

Operating Loss                                  (40,913)         (33,033)        (32,273)       (27,602)      (20,189)
Other Income(Expense), Net:                       1,092            2,014           4,371          3,432         1,199
                                                  -----            -----           -----          -----         -----
Net Loss                                       ($39,821)        ($31,019)       ($27,902)      ($24,170)     ($18,990)
                                               =========       ==========      ==========     ==========     =========
Average Common Outstanding Shares

                             Supplemental*       13,278           13,200          13,092         13,030         9,968
                                                 ======           ======          ======         ======         =====
                             Historical          13,278           13,200          13,092         13,030         7,284
                                                 ======           ======          ======         ======         =====

Loss Per Share:
                             Supplemental *      ($3.00)         ($2.35)        ($2.13)        ($1.85)       ($1.89)
                                                 =======         =======        =======        =======       =======
                             Historical          ($3.00)         ($2.35)        ($2.13)        ($1.85)       ($2.59)
                                                 =======         =======        =======        =======       =======
BALANCE SHEET DATA (DEC. 31)
Cash, Cash Equivalents & Investments, including
restricted cash                                $117,152         $148,758         $65,351        $80,290      $107,400
Total Assets                                    135,918          171,347          85,958         96,371       125,298

Long-term debt                                  115,000          115,000              43            331           802
Total Stockholders' (Deficit) Equity           ($10,461)         $28,901         $58,868        $79,379      $103,273
                                               =========         =======         =======        =======      ========
</TABLE>

      * Supplemental disclosure is provided for periods presented in the
        Company's initial S-1 Registration Statement.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS:

 Net sales in 1997 were $15.0 million compared to $23.1 million in 1996 and
 $22.7 million in 1995. Net loss for 1997 was $39.8 million compared to a net
 loss of $31.0 million in 1996 and a net loss of $27.9 million in 1995. The
 Company's operating results continue to reflect an unfavorable regulatory
 environment, impact of prior product delays, the long evaluation and
 implementation process that is typical of customers of major communication
 infrastructure changes, as well as investment in the second generation product
 and market development of the FLX-2500 platform. Net losses also reflect the
 impact of lower net interest income and the expenses associated with the $115
 million convertible note offering in May 1996. The Company expects to continue
 to incur losses in future periods.


                                                                              21
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

GROSS MARGIN:

Cost of sales for 1997 was $12.3 million compared to $21.7 million in 1996 and
$23.9 million in 1995. Gross margin as a percent of net sales was a positive 18%
in 1997, a positive 6% in 1996 and a negative 5% in 1995. The improved gross
margin for 1997 is a result of a change in product mix and higher fee revenues
as compared to the prior years.

In two contract awards made late in 1996 and early in 1997, the Company believes
an alternative or new supplier had underbid the Company and expects price
competition to continue to be an important competitive factor, together with
other factors, including experience, product performance, features, reliability
and supplier strength. The Company has also forward priced certain contracts in
anticipation of large volumes, which may or may not occur. Consequently, the
Company expects that price competition could have an adverse impact on the
Company's margins. The Company's ability to continue to meet its cost reduction
goals could have a material effect on the Company's profitability. The Company's
margins are expected to fluctuate due to the uncertainty of shipments of the
existing and new products, as well as a higher mix of fee and software revenues
(See Item 1 Business: Risk Factors).

RESEARCH AND DEVELOPMENT EXPENSES:

Research and development expenses for 1997 were $28.1 million compared to $22.8
million in 1996 and $19.4 million in 1995. The increases in research and
development expenditures were primarily the result of additional resources
engaged in the development of the hardware and software for the Company's
Second-Generation platform, enhancements and support for its First Generation
product as well as competitive salary pressure for engineering resources. The
Company is in the process of aligning its resources with its new strategy
initiatives including the AnyMedia development for Lucent, the FSAN effort
planned with an international partner and its own digital loop carrier
development. Various elements of the Lucent agreement including development
revenues for AnyMedia, technology transfer, reusability of AnyMedia development,
manufacturing payments and prepayment forgiveness should reduce development
costs and accelerate the products introduction to the market. There can be no
assurances that such benefits will occur as expected. (See Item 1, Business:
Recent Developments and Risk Factors).

PERFORMANCE FEES AND OBSOLETE EQUIPMENT

Delays by Lucent and the Company in delivering the SDBAS product to Bell
Atlantic have caused the Company to pay approximately $1 million of performance
fees in 1997. An additional $5 million of performance fees were reserved in the
third quarter and subsequently released in the fourth quarter as a result of the
Company's new agreement with Lucent, which redefined their relationship. Under
the agreement terms, the $5 million of penalties accrued in the third quarter
were forgiven and the Company reversed these liabilities in the fourth quarter.
Additionally, the Company has taken a one-time charge of approximately $.9
million for the write-off of obsolete test equipment.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:

Selling, general and administrative expenses for 1997 were $13.7 million
compared to $11.6 million for 1996 and $11.6 million for 1995. These expenses
are a result of the Company's investment in resources that enable the Company to
support field service, sales and marketing efforts. The Company expects to
adjust its sales resources as necessary in light of its new alliance with Lucent
Technologies. The Company will continue to maintain a strong marketing
organization and appropriate sales resources to support its own digital loop
carrier product. Additionally in 1997, the Company incurred legal fees and
expenses related to its patent litigation, consulting fees for the Lucent
agreements and other actions as well as additional compensation expenses
associated with its appointment of a new Chief Executive Officer

                                                                              22
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (CONTINUED):

effective April 1, 1997. The patent legal expenses are expected to accelerate in
1998, (See Sales, Marketing, and Customer Support).

OTHER INCOME (EXPENSE), NET:

Other income (expense) consists primarily of interest income and interest
expense. The interest income (expense) category reflects net interest income
earned on cash, cash equivalents and both short and long-term investment
balances during 1997 of $1.1 million compared to net interest income of $2.0
million and $4.4 million in 1996 and 1995 respectively. Interest income is the
result of investing activities of the cash balances available during the period.
The increase in interest income for 1997 as compared to 1996 was the result of a
higher average cash balance than the prior year. The increase in interest
expense for 1997 and 1996 as compared to 1995 was the result of interest expense
on the convertible note offering in May of 1996. The Company expects net
interest expense to increase due to the continued reduction in the cash balance
resulting from expected losses.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents, which consist of investments in demand deposits,
commercial paper and U.S. Treasury Obligations with maturities of less than 90
days when purchased; short-term investments, which consist of commercial paper
and U.S. Treasury Obligations with maturities of less than 360 days; and
long-term investments with maturities greater than 360 days decreased $32
million during 1997 to $117 million at the end of 1997, compared to $148 million
at the end of 1996, and $65 million at the end of 1995.

The Company has an outstanding stand-by letter of credit in the amount of $3
million, which is collateralized by restricted cash of the same amount.

The Company has restricted cash of $4 million associated with executive
compensation for the new President and CEO, David Orr, who joined the Company on
April 1, 1997. Compensation expense of $4 million is being recognized on a
straight-line basis over the term of the employment agreement of five years.
Additionally, Mr. Orr is entitled to receive the interest income earned by the
$4 million. The compensation is payable on the fifth anniversary of Mr. Orr's
employment or based upon certain triggering events that are detailed in Mr.
Orr's employment contract with the Company.

During the first quarter of 1997, the Board of Directors authorized the
initiation of a stock repurchase program and entered into an agreement with an
investment banker that utilizes equity options for the purchase of up to 10% or
1.3 million shares of common stock outstanding. The actual number of shares to
be purchased and the timing of the purchase will be based on the Company's stock
price, general market conditions and additional factors. Whenever the Company's
stock price is below the put option price of $9.11, the Company is required to
reflect the differential as restricted cash on its balance sheet. The Company
has restricted cash in the amount of $6,032,807 at December 31, 1997 and
$3,771,000 at March 10, 1998, based upon a market value of the stock of $4.12
and $6.25, respectively, in connection with this agreement. If at April 17,
1999, the market value of the stock is below $9.11 (strike price), the Company
would be obligated to pay the option holder the difference between the strike
price and the lower market price at that time. The Company's maximum obligation
would not exceed $11.9 million under the terms of the option agreement.

                                                                              23
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

The Company issued on May 17, 1996, $115 million of 5% Convertible Subordinated
notes due May 15, 2001 that entitles Holders of Convertible Notes to convert
into shares of the Company's common stock. Interest is payable on May 15th and
November 15th of each year. Each $1,000 note is convertible into 24.1080 shares
of common stock of the Company at a conversion price $41.48 per share. The notes
are not redeemable by the Company prior to May 15, 1999. Thereafter, the Company
may redeem the notes initially at 102%, and at decreasing prices thereafter to
100% at maturity, in each case together with accrued interest. Costs associated
with this financing have been deferred and are being amortized on a
straight-line basis over the term of the debt.

During 1995, the Company received $7.0 million from Bell Atlantic for Warrants
that entitle Bell Atlantic to purchase one million shares of BroadBand
Technologies' Common Stock at an exercise price of $41.75 per share. Property
and equipment additions during 1995, plus cash required for research and
development and other operating activities represented the majority of the
decrease in the cash balance during 1995.

Management expects that cash on hand and cash equivalents at December 31, 1997
and cash generated from the sale of the Company's products and fees to be
received from Lucent will be adequate to fund operating requirements and
property and equipment expenditures in 1998 based on current projections of
operations. However, management recognizes the dynamic nature of the
telecommunications industry and the possibility that the Company's product
initiatives might increase working capital requirements. In such event, the
Company would consider appropriate financing alternatives.

(See Item 1, Business: Risk Factors)

                                                                              24
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                                  ANNUAL REPORT


ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


          BROADBAND TECHNOLOGIES, INC. -- INDEX TO FINANCIAL STATEMENTS


 A.       Financial Statements

          Report of Independent Auditors...................................27

          Statements of operations for the years ended
          December 31, 1997, 1996 and 1995.................................28

          Balance Sheets as of December 31, 1997 and 1996...............29-30

          Statements of Stockholders' (Deficit) Equity for the years
          ended December 31, 1997, 1996 and 1995...........................31

          Statements of Cash Flows for the years ended
          December 31, 1997, 1996 and 1995.................................32

          Notes to Financial Statements.................................33-43

 B.       Supplemental Financial Information -- Unaudited..................44



                                                                              25
<PAGE>



                         REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Stockholders
BroadBand Technologies, Inc.


We have audited the accompanying balance sheets of BroadBand Technologies, Inc.
as of December 31, 1997 and 1996, and the related statements of operations,
stockholders' (deficit) equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BroadBand Technologies, Inc. at
December 31, 1997 and 1996 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.





February 4, 1998
Raleigh, North Carolina


                                                                              26
<PAGE>



                          BROADBAND TECHNOLOGIES, INC.

                            STATEMENTS OF OPERATIONS




<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31
                                                               1997                   1996                   1995
                                                       --------------------------------------------------------------------
<S>                                                        <C>                   <C>                    <C>
Net sales                                                  $     15,012,117      $     23,144,003       $     22,705,311

Costs and expenses:
   Cost of sales                                                 12,296,689            21,744,255             23,917,118
   Research and development                                      28,062,349            22,784,948             19,433,536
   Performance fees and obsolete equipment                        1,841,258                     -                      -
   Selling, general and administrative                           13,725,044            11,647,386             11,627,305
                                                       --------------------------------------------------------------------
                                                                 55,925,340            56,176,589             54,977,959
                                                       --------------------------------------------------------------------

Loss from operations                                            (40,913,223)          (33,032,586)           (32,272,648)

Other income (expense):
   Interest expense                                              (6,508,486)           (4,063,372)               (65,417)
   Interest income                                                7,600,754             6,077,545              4,436,016
                                                       ====================================================================
Net loss                                               $       (39,820,955)  $        (31,018,413)  $        (27,902,049)
                                                       ====================================================================
                                                       ====================================================================

Net loss per share                                          $         (3.00) $            (2.35)    $             (2.13)
                                                       ====================================================================
Average  number  of  shares  used  in  per  share
   calculations                                                  13,277,735            13,200,312             13,091,958
                                                       ====================================================================
</TABLE>


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                                                              27
<PAGE>


 28

                          BROADBAND TECHNOLOGIES, INC.

                                 BALANCE SHEETS



<TABLE>
<CAPTION>
                                                                                     DECEMBER 31
                                                                              1997                  1996
                                                                    --------------------------------------------
<S>                                                                      <C>                     <C>
ASSETS
Current assets:
    Cash and cash equivalents                                            $ 47,464,129            $ 107,221,929
    Restricted cash (NOTE 2)                                                3,000,000                 451,042
    Short-term investments (NOTE 3)                                        41,327,242              22,359,232
    Accounts receivable, trade                                              2,371,133               6,284,217
    Inventories (NOTE 4)                                                    3,214,361               1,532,907
    Prepaid and other current assets                                        1,546,464                 954,288
                                                                    --------------------------------------------
Total current assets                                                       98,923,329             138,803,615

Long-term investments (NOTE 3)                                             15,328,088              18,725,698
Restricted cash (NOTE 2)                                                   10,032,807                       -

Furniture, fixtures and equipment:
    Equipment and software                                                 23,933,440              21,779,766
    Furniture and fixtures                                                    695,078                 655,487
    Leasehold improvements                                                  1,296,647               1,296,647
                                                                    --------------------------------------------
                                                                           25,925,165              23,731,900
Accumulated depreciation and amortization                                 (16,817,060)            (13,186,825)
                                                                    --------------------------------------------
Net furniture, fixtures and equipment                                       9,108,105              10,545,075

Deferred debt issuance costs, (net of accumulated amortization of
   $1,212,213 and $464,713) (NOTE 6)                                        2,525,287               3,272,787
                                                                    --------------------------------------------
Total assets                                                            $ 135,917,616           $ 171,347,175
                                                                    ============================================
</TABLE>


                                                                              28
<PAGE>

                          BROADBAND TECHNOLOGIES, INC.

                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                       DECEMBER 31
                                                                                1997                 1996
                                                                        ------------------------------------------
<S>                                                                     <C>                         <C>
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY Current liabilities:
   Accounts payable                                                     $        2,590,271          $ 3,564,317
   Accrued expenses                                                              5,953,541            6,814,276
   Deposits                                                                      3,263,134            3,258,316
   Accrued warranty reserve                                                      4,940,427            5,934,027
   Deferred revenue                                                              1,031,000            4,875,000
                                                                        ------------------------------------------
Total current liabilities                                                       17,778,373           24,445,936

Long-term:
   Deposits                                                                     13,000,000            3,000,000
   Convertible Debt  (NOTE 6)                                                  115,000,000          115,000,000
   Deferred Compensation  (NOTE 2)                                                 600,000                    -
                                                                        ------------------------------------------
Total long-term liabilities                                                    128,600,000          118,000,000

Commitments (NOTES 2, 5 AND 7)

Stockholders' (deficit) equity:
   Series A preferred stock, $ .01 par value; 100,000 shares authorized;
     no shares issued and outstanding                                                   -                    -
   Convertible preferred stock, $.01 par value;  7,500,000 shares
     authorized;  no shares issued and outstanding                                      -                    -
   Common stock, $.01 par value; 30,000,000 shares authorized;
     13,380,243 and 13,249,480 shares outstanding
                                                                                   133,802              132,495
    Additional paid-in capital                                                 163,285,281          161,977,629
    Deferred Compensation  (NOTE 2)                                               (850,000)                   -
    Accumulated deficit                                                       (173,029,840)        (133,208,885)
                                                                        ------------------------------------------
Total stockholders' (deficit) equity                                           (10,460,757)          28,901,239
                                                                        ------------------------------------------
Total liabilities and stockholders' (deficit) equity                    $      135,917,616        $ 171,347,175
                                                                        ==========================================
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                                                              29
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                  STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY


<TABLE>
<CAPTION>
                                  COMMON          ADDITIONAL
                                   STOCK            PAID-IN            DEFERRED       ACCUMULATED DEFICIT
                                 PAR VALUE          CAPITAL          COMPENSATION                               TOTAL
                              -----------------------------------------------------------------------------------------------
<S>                           <C>              <C>                <C>                 <C>                 <C>
 Balance at January 1, 1995   $    130,501     $   153,537,070    $            -      $   (74,288,423)    $     79,379,148
   Exercise of stock options
   for 94,564 shares                   946             234,855                 -                    -              235,801
   Issuance of 6,425 shares
   under 401(k) plan                    65             155,315                 -                    -              155,380
   Issuance of stock warrants            -           7,000,000                 -                    -            7,000,000
   Net loss for the year                 -                   -                 -          (27,902,049)         (27,902,049)
                              -----------------------------------------------------------------------------------------------
                              -----------------------------------------------------------------------------------------------
 Balance at December 31, 1995      131,512         160,927,240                 -         (102,190,472)          58,868,280
   Exercise of stock options
   for 89,225 shares                   892             846,929                 -                    -              847,821
   Issuance of 9,119 shares
   under 401(k) plan                    91             203,460                 -                    -              203,551
   Net loss for the year                 -                   -                 -          (31,018,413)         (31,018,413)
                              -----------------------------------------------------------------------------------------------
 Balance at December 31, 1996      132,495         161,977,629                 -         (133,208,885)          28,901,239
   Exercise of stock options
   for 25,097 shares                   251              73,840                 -                    -               74,091
   Issuance of 25,635 shares
   for 401(k) Plan                     256             234,612                 -                    -              234,868
   Restricted stock grant,
   80,000 shares                       800             999,200        (1,000,000)                   -                    -
   Amortization of
   restricted stock grant                -                   -           150,000                    -              150,000
   Net loss for the year                 -                   -                 -          (39,820,955)         (39,820,955)
                              -----------------------------------------------------------------------------------------------
Balance at December 31, 1997  $    133,802     $   163,285,281    $     (850,000)       $(173,029,840)      $  (10,460,757)
                              ===============================================================================================
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                                                              30
<PAGE>



                          BROADBAND TECHNOLOGIES, INC.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31
                                                                1997                1996                 1995
                                                          -------------------------------------------------------------
<S>                                                       <C>               <C>                   <C>
OPERATING ACTIVITIES
Net loss                                                  $   (39,820,955)  $     (31,018,413)    $     (27,902,049)
Adjustments to reconcile net loss to net cash used
   in operating activities:
     Depreciation                                               4,486,273           5,490,625             3,997,416
     Amortization of debt issuance costs                          747,500             464,713                     -
     Amortization of deferred compensation                        600,000                   -                     -
     Amortization of restricted stock grant                       150,000                   -                     -
     Increase in inventory reserve                                204,742           1,416,848               420,451
     Loss (gain) on disposal of equipment                         850,518            (377,918)                    -
Changes in operating assets and liabilities:
   Accounts receivable, trade                                   3,913,084          (1,970,752)             (216,793)
   Inventories                                                 (1,886,196)           (942,393)              871,278
   Prepaid and other current assets                              (592,176)           (262,117)               30,200
   Accounts payable and accrued expenses                       (1,834,782)            (57,254)            4,877,770
   Deposits                                                    10,004,818             839,540             1,043,215
   Accrued warranty reserve                                      (993,600)          3,175,284               419,412
   Deferred revenue                                            (3,844,000)         (3,318,970)            4,243,970
                                                          -------------------------------------------------------------
Net cash used in operating activities                         (28,014,774)        (26,560,807)          (12,215,130)

INVESTING ACTIVITIES
Acquisition of furniture, fixtures & equipment                 (3,921,420)         (4,388,284)           (9,628,687)
Disposals of furniture, fixtures & equipment                       21,600           2,325,000                     -
Net increase in investments                                   (15,570,400)        (22,982,752)           (5,976,519)
                                                          -------------------------------------------------------------
Net cash used in investing activities                         (19,470,220)        (25,046,036)          (15,605,206)

FINANCING ACTIVITIES
Issuance of common stock                                          308,959           1,051,372               391,181
Issuance of stock warrants                                              -                   -             7,000,000
Issuance of long-term debt                                              -         111,262,500                     -
Payments on capital lease obligations                                   -            (282,823)             (486,381)
 Restricted cash                                              (12,581,765)          2,255,306            (2,706,348)
                                                          -------------------------------------------------------------
Net cash provided by (used in) financing activities           (12,272,806)        114,286,355             4,198,452
                                                          -------------------------------------------------------------
Increase (decrease) in cash & cash equivalents                (59,757,800)         62,679,512           (23,621,884)
Cash and cash equivalents at beginning of year                107,221,929          44,542,417            68,164,301
                                                          -------------------------------------------------------------
Cash and cash equivalents at end of year                    $  47,464,129        $107,221,929     $      44,542,417
                                                          -------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest                                      $   5,747,746      $    3,598,659     $          65,417
                                                          =============================================================
</TABLE>

   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

                                                                              31
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                         NOTES TO FINANCIAL STATEMENTS

                               DECEMBER 31, 1997

1. SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the financial statements. These policies
are in conformity with generally accepted accounting principles and have been
applied consistently in all material respects. The Company is engaged
principally in the design, engineering, manufacturing and marketing of a
sophisticated electronics and software platform for operators of local exchange
telephone networks in the United States and, in recent years, has expanded its
marketing effort to include international markets. The Company's platform
enables operators of these local exchange telephone networks the capability to
transmit voice, video and data over fiber optics to provide a wide array of
interactive services, including entertainment, communications, information and
other interactive services. The Company's products are still in the early stages
of commercial deployment.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalents consist
principally of funds in demand deposit accounts, U. S. Treasury Obligations, and
commercial paper.

INVESTMENTS IN DEBT SECURITIES

Management determines the appropriate classification of its investments in debt
securities at the time of purchase. Debt securities for which the Company has
both the intent and ability to hold to maturity are classified as held to
maturity. These securities are carried at amortized cost. At December 31, 1997,
the Company had no investments that qualified as trading or available for sale.

ACCOUNTS RECEIVABLE

The Company's principal financial instrument subject to potential concentration
of credit risk is accounts receivable, which are unsecured. The Company's
exposure to credit loss in the event that payment from a customer is not
received for revenue recognized equals the net outstanding accounts receivable
balance from that customer.

INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) cost flow assumption.


                                                                             32
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FURNITURE, FIXTURES AND EQUIPMENT

Furniture, fixtures and equipment are stated at cost. Depreciation is determined
for financial reporting purposes using the straight-line method over the
estimated useful lives of the individual assets or, for leasehold improvements,
over the terms of the related leases if shorter. Straight-line and accelerated
methods of depreciation have been used for income tax purposes.

DEFERRED DEBT ISSUANCE COSTS

The Company capitalized certain costs relating to the issuance of debt. The
costs are amortized on a straight-line basis over the term of the debt.

REVENUE RECOGNITION

Generally, revenue is recognized when products are shipped. Deferred revenue
results from product licensing fees and from specific contractual terms for
certain sales agreements. Prepaid product (software) license fees are recorded
as deferred revenue when collected from customers and are recognized as revenue
in accordance with the terms of the related contract.

INCOME TAXES

Income taxes are accounted for using the liability method in accordance with
FASB Statement No. 109, Accounting for Income Taxes (see Note 12).

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are charged to operations when incurred.

STOCK OPTIONS

The Company accounts for its employee stock option plans in accordance with
Accounting Principle Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES ("APB 25"). Under APB 25, no compensation expense has been recognized
since the number of shares granted is fixed and the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant.

LOSS PER SHARE

In 1997, the Financial Accounting Standards Board issued Statement No. 128
Earnings per Share ("SFAS 128"). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, a basic earnings per share excludes any
dilutive effects of options, warrants and


                                                                              33
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


1.    SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LOSS PER SHARE (CONTINUED)

convertible securities. Diluted earnings per share is very similar to the
previously expected fully dilutive earnings per share. All loss per share
amounts for all periods have been presented to conform to SFAS 128. Due to the
net losses for each of the three periods presented, potential common shares are
considered antidilutive and therefore did not require restatement of prior
periods.


2.    EMPLOYMENT AGREEMENT AND RESTRICTED CASH

The Company has outstanding stand-by letters of credit in the amount of
$3,000,000 and $451,042 at December 31, 1997 and 1996, respectively. These
letters of credit are collateralized by restricted cash of the same amount.

The Company restricted cash of $4 million associated with executive compensation
for the new President and CEO, David E. Orr, who joined the Company on April 1,
1997. Compensation expense of $4 million is being recognized on a straight-line
basis over the term of the employment agreement of five years. Additionally, Mr.
Orr is entitled to receive the interest income earned by the $4 million. The
compensation is payable on the fifth anniversary of Mr. Orr's employment or
based upon certain triggering events that are detailed in Mr. Orr's employment
contract with the Company. Mr. Orr was also granted 80,000 shares of restricted
common stock valued at $1 million. Upon issuance of this stock, deferred
compensation equivalent to the market value at the date of grant, $1 million,
has been charged to shareholders' equity and is being amortized as compensation
expense over the employment period of five years.

During the first quarter of 1997, the Board of Directors authorized the
initiation of a stock repurchase program and entered into an agreement with an
investment banker that utilizes equity options for the purchase of up to 10% or
1.3 million shares of common stock outstanding. The actual number of shares to
be purchased and the timing of the purchase will be based on the Company's stock
price, general market conditions, and additional factors. In the event that the
Company's stock price falls below the put option price of $9.11, the Company is
required to reflect the differential as restricted cash on its balance sheet.
Given a stock price of $4.12 at December 31, 1997, the Company has restricted
cash in the amount of $6,032,807 in connection with this agreement. This amount
will fluctuate based upon the market value of the stock. If at April 17, 1999,
the market value of the stock is below $9.11 ("strike price"), the Company would
be obligated to pay the option holder the difference between the strike price
and the lower market price at that time. The Company's maximum obligation would
not exceed $11.9 million under the terms of the option agreement.

3.  INVESTMENT IN DEBT SECURITIES

At December 31, 1997, the Company's investments in debt securities were
classified as cash and cash equivalents and both short and long-term
investments. The Company maintains these balances principally in demand deposit
accounts, U. S.
Treasury Obligations, and commercial paper with various financial institutions.

These financial institutions are located in different areas of the U.S. and
Company policy is designed to limit exposure to any one institution, as well as
credit and maturity risks. The Company performs periodic evaluations of the
relative standing of those financial institutions that participate in the
Company's investment strategy.


                                                                              34
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.


                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3.  INVESTMENT IN DEBT SECURITIES (CONTINUED)

The following is a summary of cash and cash equivalents and short and long-term
investments by balance sheet classification at:

                                                      DECEMBER 31
                                             1997                    1996
                                   ---------------------------------------------
     Cash and cash equivalents:
        Demand deposit accounts    $         11,090,313     $         78,899,020
        Commercial paper                     17,225,114               25,332,655
        U.S. Treasury Obligations            19,148,702                2,990,254
                                   ---------------------------------------------
                                   $         47,464,129     $        107,221,929
                                   =============================================

                                                      DECEMBER 31
                                             1997                    1996
                                   ---------------------------------------------
     Short-term investments:
        Certificate of deposit          $     2,505,293         $             -
        Commercial paper                     34,800,200               20,293,691
        U.S. Treasury Obligations             4,021,749                2,065,541
                                   ---------------------------------------------
                                        $    41,327,242         $     22,359,232
                                   =============================================
     Long-term investments:
        Commercial paper                $    13,296,211         $      3,669,688
        U.S. Treasury Obligations             2,031,877                5,056,010
                                   ---------------------------------------------
                                        $    15,328,088         $     18,725,698
                                   =============================================

The majority of the long-term investments will mature by April 1999. The
estimated fair value of each investment approximates the amortized cost and,
therefore, there are no unrealized gains or losses as of December 31, 1997 and
1996.

4.  INVENTORIES

Inventories consist of the following:
                                                       DECEMBER 31
                                               1997                 1996
                                        ----------------------------------------

Electronic parts and other components   $      3,882,876       $   2,583,074
Work-in-process                                  626,008             603,601
Finished goods                                 2,245,958           1,681,971
                                        ----------------------------------------
                                        ----------------------------------------
                                               6,754,842           4,868,646
Inventory valuation reserve                   (3,540,481)         (3,335,739)
                                        ----------------------------------------
                                        ========================================
                                        $      3,214,361       $   1,532,907
                                        ========================================


                                                                              35
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4.  INVENTORIES (CONTINUED)

The Company has entered into a contract with a supplier for the production of
certain subassemblies used in the Company's products. Under the terms of the
contract, the Company had firm purchase commitments to purchase from the
supplier approximately $1,330,000 and $1,455,000 of these subassemblies at
December 31, 1997 and 1996, respectively.

5.  LEASES

In prior years, the Company entered into various capital lease arrangements
which had expired as of December 31, 1996. Amortization of assets under capital
leases is included with depreciation and amortization expense.

In February 1993, the Company entered into a non-cancelable operating lease for
the rental of new office facilities. The lease has a term that commenced in
April 1993 and terminates in December 1998 with an option for renewal. During
September 1993, the Company exercised an option to lease additional space. The
amended lease term commenced in January 1994 and terminates in December 1998
with an option for renewal. The total monthly commitment for the entire lease
approximates $72,000. The Company has also entered into various year to year
operating leases related to certain equipment.

Future minimum lease payments under the non-cancelable leases at December 31,
1997 are approximately $850,000. The Company is negotiating new lease terms on
its primary facility for which the current lease expires in December 1998.

Rent expense was approximately $1,500,000, $1,205,000, and $1,351,000 for the
years ended December 31, 1997, 1996, and 1995, respectively.

6.  LONG-TERM DEBT

The Company issued on May 17, 1996, $115 million of 5% convertible subordinated
notes due May 15, 2001, that entitles the holder to convert the notes into
shares of the Company's common stock. Interest is payable on May 15 and November
15 of each year. Each $1,000 note is convertible into 24.1080 shares of common
stock of the Company at a conversion price $41.48 per share. The notes are not
redeemable by the Company prior to May 15, 1999. Thereafter, the Company may
redeem the notes initially at 102%, and at decreasing prices thereafter to 100%
at maturity, in each case together with accrued interest. Costs associated with
this financing have been deferred and are being amortized on a straight-line
basis over the term of the notes. At December 31, 1997, the estimated fair value
of the term notes, determined by the average of the bid and ask prices on that
date, was approximately $76 million.

7.  COMMITMENTS AND CONTINGENCIES

The Company is party to a technology transfer agreement that obligates the
Company to pay a royalty of two percent (2%) of the selling price of any goods
or services provided by the Company that include intellectual property
transferred by the other party to the agreement after such sales exceed, in the
aggregate from inception, $50 million. The royalty will be reduced to one
percent (1%) after such sales, in the aggregate from inception, exceed $200
million. The Company recorded royalty expense under this agreement in 1997, 1996
and 1995 which is included in accrued expense. No royalties will be due and
payable after 1998. Under the agreement, prior to the end of 1998, the Company
may not

                                                                              36
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7.  COMMITMENTS AND CONTINGENCIES (CONTINUED)

transfer, assign, license or sell, on an exclusive basis, the technology without
written consent of the other party (the agreement includes terms which state
that such consent is not to be unreasonably withheld). In 1996 the Company
renegotiated the terms of the royalty agreement, which in effect reduced the
royalty percentage.

The Company commenced legal action in civil court in March 1997 against a
competitor claiming infringement of a patent the Company owns. The Company is
seeking to enjoin the competitor from further acts infringing the patent and to
recover damages. The competitor has countersued to have the Company's patent
declared invalid and unenforceable and, further, claims infringement by the
Company of two of its patents. The Company's legal action is expected to go to
trial in June 1998. There can be no assurance as to success of the Company's
infringement action or the amount of damages, if any, recovered if the Company
is successful. The Company will vigorously defend itself in the action filed by
its competitor and considers the claims to have no merit.

8.  STOCK OPTION PLANS

The Company has adopted an incentive stock option plan for employees, and a
non-qualified stock option plan for consultants and others, a non-qualified
stock option plan in connection with the CEO employment agreement, and a
directors stock option plan for Directors. Common shares available under the
four plans are 2,150,000, 650,000, 350,000 and 100,000 shares, respectively.
Information concerning outstanding stock options to purchase common stock
pursuant to the plans as of December 31, 1997 is summarized as follows:

<TABLE>
<CAPTION>
                                                                                                    AGGREGATE
                                                       PER SHARE EXERCISE    NUMBER OF SHARES       EXERCISE
                                                             PRICE                                    PRICE
                                                     ---------------------------------------------------------
<S>                                                  <C>                     <C>              <C>
Incentive and non-qualified stock options
   outstanding:
   Vested                                            $  .10 - $ 31.75              693,474    $      6,647,310
   Unvested                                          $ 3.63 - $ 31.75            1,876,666    $     15,848,505
                                                     ---------------------------------------------------------
Totals                                                                           2,570,140    $     22,495,815
                                                                            ==================================
</TABLE>

Options are granted at not less than fair market value at the date of grant as
determined by the Board of Directors and may be exercised upon terms approved by
the Board. During 1997, 1,463,835 options were granted under the incentive stock
option plan and 843,136 non-qualified options were granted. Certain
non-qualified grants include provisions, which prohibit exercise, until near the
option expiration date or until the end of the full vesting period or prior to
the Company attaining profitability. Vested options are exercisable at dates
ranging from six months to nine years and nine months from date of grant. Shares
not yet vested are not exercisable. All options granted expire between five and
one half and ten years from the grant date.


                                                                              37
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8.  STOCK OPTION PLANS (CONTINUED)

The following table summarizes stock option activity from January 1, 1995
through December 31, 1997:

<TABLE>
<CAPTION>
                                                NUMBER OF      RANGE OF EXERCISE       OPTION PRICE
                     DESCRIPTION                 SHARES        PRICES PER SHARES           TOTAL
---------------------------------------------------------------------------------------------------
<S>                                              <C>           <C>                     <C>
Options outstanding at December 31, 1994         972,248       $0.10 to $35.75         $12,466,123
Options exercisable at December 31, 1994.        147,811       $0.10 to $26.63            $751,877
Options granted during 1995                      210,840      $17.25 to $28.00          $4,916,025
Options canceled during 1995                      55,670       $2.70 to $35.75          $1,022,317
Options exercised during 1995                     93,651       $0.10 to $10.00            $207,954
Options outstanding at December 31, 1995       1,033,767       $0.10 to $35.75         $16,151,877
Options exercisable at December 31, 1995         535,153       $0.10 to $35.75          $6,407,088
Options granted during 1996                      571,428      $16.50 to $32.50         $11,440,944
Options canceled during 1996                      66,192       $2.70 to $35.75          $1,327,063
Options exercised during 1996                     89,225       $0.80 to $27.25            $847,821
Options outstanding at December 31, 1996       1,449,778       $0.10 to $35.75         $25,417,958
Options exercisable at December 31, 1996         731,231       $0.10 to $35.75         $10,489,122
OPTIONS GRANTED DURING 1997                    2,306,971       $3.63 TO $13.38         $19,503,623
OPTIONS CANCELED DURING 1997                   1,161,512       $3.16 TO $35.75         $22,351,674
OPTIONS EXERCISED DURING 1997                     25,097       $0.80 TO $09.75             $74,092
OPTIONS OUTSTANDING AT DECEMBER 31, 1997       2,570,140       $0.10 TO $31.75         $22,495,815
OPTIONS EXERCISABLE AT DECEMBER 31, 1997         693,474       $0.10 TO $31.75          $6,647,310
</TABLE>

On April 2, 1997, the Board of Directors approved the repricing of 807,253
outstanding incentive stock options. The options, which have been repriced, are
reflected as canceled in 1997 in the above table. The replacement options, which
were repriced at the market value on April 2, 1997, are reflected as 1997 option
grants. Since the repriced option price equals the market price of the
underlying stock on the date the repricing occurred, no compensation expense has
been recognized.

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") due to the fact that the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ("SFAS
123") requires the use of option valuation models that were not developed for
use in valuing employee stock options.

Pro forma information regarding net loss and loss per share is required by SFAS
123, and has been determined as if the Company accounted for its employee stock
options granted subsequent to December 31, 1994, under the fair value



                                                                              38
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8.  STOCK OPTION PLANS (CONTINUED)

method of SFAS 123. The fair value for these options was estimated at the date
of grant using a Black-Scholes option-pricing model with the following weighted
average assumptions for 1997 and 1996:

                                   1997               1996
                             --------------------------------------

   Risk free interest rate         5.50%               5.69%
   Dividends                        -                   -
   Volatility factor                .6105              .6784


The Black-Scholes option valuation model was developed for use in estimating in
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
changes in the subjective input assumption can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:

                                              DECEMBER 31
                                      1997                1996
                               ----------------------------------------

   Pro forma net loss              $44,284,810           $32,753,117
   Pro forma loss per share              $3.34                 $2.48

Exercise prices for options outstanding as of December 31, 1997 ranged from
$0.10 to $31.75. The weighted average remaining contractual life of those
options is 8.32 years. The weighted average exercisable price of outstanding
options at December 31, 1997 is $9.59.

9.  COMMON STOCK RESERVED FOR FUTURE ISSUANCE

At December 31, 1997, the Company had reserved a total of 3,852,714 of its
authorized 30,000,000 shares of common stock for future issuance. Of the total
shares reserved by the Board of Directors, 350,000 shares are subject to
shareholder approval at the May 19, 1998 shareholder meeting.

Outstanding stock options                                2,570,140
Outstanding warrants related to a lease line                 7,813
Outstanding warrants                                     1,225,000
Possible future issuance under 401(k) plan                  49,761
                                                  =====================
Total shares reserved                                    3,852,714
                                                  =====================


                                                                              39
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10.  WARRANTS

During 1995, the Company received $7 million for six-year Warrants that entitle
the purchaser of the warrants to acquire 1,000,000 shares of the Company's
Common Stock for $41.75 per share.

11.  CAPITAL STOCK

On November 19, 1996, the Board of Directors declared a dividend distribution of
one preferred share purchase right (Right) for each share of Common Stock
outstanding on December 23, 1996. The Rights becomes exercisable only if a
person or group acquires, or obtains the right to acquire, 15% or more of the
Company's Common Stock or commences a tender offer or exchange offer which, if
consummated, would result in that person or group owning at least 15% of the
Company's outstanding Common Stock.

In connection with the November 19, 1996 preferred share dividend distribution,
the Company restated its articles of incorporation, thereby creating a series of
Series A Preferred Stock. 100,000 shares of this series have been authorized,
which have a dividend rate of the greater of $10.00 per share or 1,000 times the
aggregate per share amount of Common Stock dividends. Each share is entitled to
one vote and shall have a liquidation preference of $1,000 per share, plus
accrued and unpaid dividends.

12.  INCOME TAXES

At December 31, 1997, the Company has net operating loss carryforwards and
research and development credits of $155.6 million and $3.4 million,
respectively, for income tax purposes that expire in years 2003 through 2011.
For financial reporting purposes, a valuation allowance of $73.1 million ($58.5
million in 1996) has been recognized to offset the deferred tax assets related
to those carryforwards at December 31, 1997. When, and if, realized, the tax
benefit for those items will be reflected in current operations as a reduction
of income tax expense. Significant components of the Company's deferred tax
liabilities and assets at December 31, 1997 are as follows:



                                                                              40
<PAGE>




                          BROADBAND TECHNOLOGIES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

12.  INCOME TAXES (CONTINUED)

<TABLE>
<CAPTION>
                                                                   DECEMBER 31
                                                           1997                  1996
                                                   ----------------------------------------
<S>                                                      <C>                    <C>
Deferred tax liabilities:
   Tax over-book depreciation                        $            -       $        281,000
Deferred tax assets:
   Net operating loss carryforwards                      62,233,000             51,641,000
   Research and experimental credit carryforwards         3,402,000              2,852,000
   Executive compensation                                   300,000                      -
   Deposits                                               2,800,000                      -
   Book over tax depreciation                               475,000                      -
   Deferred revenue                                         412,000                909,000
   Inventory reserve                                      1,416,000              1,151,000
   Warranty reserve                                       1,976,000              2,274,000
   Other                                                     59,000                      -
                                                   ----------------------------------------
Total deferred tax assets                                73,073,225             58,827,000
Valuation allowance for deferred tax assets             (73,073,225)           (58,546,000)
Net deferred tax assets                                           -                281,000
                                                   ========================================
Net deferred taxes                                   $            -       $              -
                                                   ========================================
</TABLE>

Based on the number of shares of common and preferred stock issued in 1992 and
1993, the Company exceeded the limits allowable under the Tax Reform Act of 1986
related to changes in ownership percentage governing future utilization of net
operating loss carryforwards. The effect of this occurrence limits the annual
utilization of the net operating loss carryforwards to an amount determined by
multiplying the fair market value of the Company immediately prior to the change
in ownership percentage by the federal long-term tax exempt interest rate at the
time of the change. As of December 31, 1997, future use of a portion of the net
operating loss carryforwards are limited to approximately $27 million of taxable
income per year. This limitation applies to all losses incurred through November
12, 1993 in the amount of $50.2 million, the remaining loss of $105.4 million is
not currently limited.


                                                                              41
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

13.  EMPLOYEE BENEFIT PLAN

The Company has a 401(k) Plan and Trust covering substantially all employees.
Employees at least 21 years of age are eligible for the Plan. The Company will
provide a matching contribution up to 50% of employee contributions to a maximum
employee contribution of 6% of the employee's wages. In addition, the Company
may make annual discretionary profit sharing contributions to the plan. The
Company's contributions are subject to a five-year vesting period. Contributions
are invested in one or more of eleven investment choices, including the
Company's common stock, at the discretion of the employee. The Company pays the
Plan expenses which totaled approximately $49,000, $24,000, and $32,000 in the
years 1997, 1996 and 1995. Company contributions to the plan for 1997, 1996 and
1995 totaled approximately $503,000, $412,000, and $350,000, respectively.

14.  BUSINESS SEGMENT INFORMATION

The Company is engaged in a single business segment consisting of the
development, manufacture, marketing and service of electronic equipment for the
telecommunications industry. Regional Bell Operating Companies ("RBOC's") and
independent telephone companies are the primary users of the Company's products.
During 1996, the Company entered into an agreement with Lucent Technologies,
Inc. ("Lucent"), which was granted the exclusive right to sell the Company's
primary products in the United States and Canada to RBOC's and other users.
Prior to 1996, the Company's sales were made directly to RBOC's. Company sales
to Lucent during 1997 were 43% of total sales and 27% of the Company's accounts
receivable at December 31, 1997 were due from this customer. Company sales to
Lucent during 1996 were 29% of total sales and 65% of the Company's accounts
receivable at December 31, 1996, were due from this customer. Direct RBOC sales
as a percentage of the Company's total revenues were 15%, 51%, and 76% for the
years ended December 31, 1997, 1996 and 1995 respectively. Of the 15% of sales
to the RBOC's in 1997, 97% were transacted with one Regional Bell Operating
Company and 21% of the Company's accounts receivable are from this customer. Of
the 51% of sales to the RBOC's in 1996, 50% were transacted with one Regional
Bell Operating Company and 17% of the Company's accounts receivables were due
from this customer.

On February 4, 1998, the Company entered into a new agreement with Lucent which
redefined the Lucent relationship. Under the agreement terms, certain penalties
due by the Company to Lucent were forgiven and the Company reversed these
previously recorded liabilities as of December 31, 1997. Also, deposits received
under the previous agreement which were recorded as liabilities by the Company
are to be applied against future performance milestones defined under the new
agreement.


                                                                              42
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.
                                QUARTERLY RESULTS
                      (In thousands, except per share data)

SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED)

                                                  1997
                      ----------------------------------------------------------
                          FOURTH         THIRD            SECOND      FIRST

Revenue                      $2,344        $2,125           $5,233      $5,310

Gross Margin                    264           248            1,190       1,013

Net Loss                   ($6,054)     ($16,510)         ($8,795)    ($8,462)
                           ========     =========         ========    ========

Net Loss per share          ($0.45)       ($1.25)          ($0.66)     ($0.64)


                                                  1996
                      ----------------------------------------------------------
                          FOURTH         THIRD            SECOND      FIRST

Revenue                      $7,926        $5,706           $5,515      $3,997

Gross Margin                    977           393              290       (260)

Net Loss                   ($8,470)      ($8,498)         ($6,509)    ($7,541)
                           ========      ========         ========    ========

Net Loss per share          ($0.64)       ($0.64)          ($0.49)     ($0.57)
                            =======       =======          =======     =======


                                                       1995
                      ----------------------------------------------------------
                           FOURTH        THIRD            SECOND      FIRST

Revenue                       $6,965       $7,065           $5,455      $3,221

Gross Margin                   (181)        (100)            (297)       (996)

Net Loss                    ($6,988)     ($6,385)         ($6,546)    ($7,983)
                            ========     ========         ========    ========

Net Loss per share           ($0.53)      ($0.49)          ($0.50)     ($0.61)
                             =======      =======          =======     =======


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

                  None

                                                                              43
<PAGE>



                          BROADBAND TECHNOLOGIES, INC.



                                    PART III




ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Company recently reorganized its management team. Effective February 1,
1998, John R. Hutchins, III, became the new Chairman of the Board. Salim A.L.
Bhatia, a founder of the Company, departed from the Company effective January
31, 1998 and Larry McLernon, also a board member departed on January 26, 1998.
On March 2, 1998, David L. McLean was appointed Vice President of Engineering
from his previous role as Vice President of Technical Services for which he will
also maintain responsibility. Carl A. Kammire will depart from the Company as
Vice President of Engineering effective April 30,1998. (See Part I of this
Report for information with respect to executive officers of the Company).
Pursuant to General Instruction G(3), reference is made to the information
contained under the captions "Election of Directors" and "Section 16(a)
Reporting" in the Company's definitive proxy statement for its 1998 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before April 30, 1998, which information is incorporated herein.

ITEM 11.      EXECUTIVE COMPENSATION

Pursuant to General Instruction G(3), reference is made to the information
contained under the caption "Executive Compensation" (except for the information
set forth under the sub caption "Report of Compensation Committee" which is not
incorporated herein) in the Company's definitive proxy statement for its 1998
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission on or before April 30, 1998, which information is incorporated
herein.


ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Pursuant to General Instruction G(3), reference is made to the information
contained under the caption "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive proxy statement for its 1998 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before April 30, 1998, which information is incorporated herein.


ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Pursuant to General Instruction G(3), reference is made to the information
contained in the last paragraph under the caption "Election of
Directors--Compensation of Directors" in the Company's definitive proxy
statement for its 1998 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission on or before April 30, 1998, which
information is incorporated herein.


                                                                              44
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.





                                     PART IV




ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A) The following financial statements are included in Part II, Item 8 of this
Form 10-K.

         1.       FINANCIAL STATEMENTS

         Report of Independent Auditors.

         Statements of Operations for the years ended December 31, 1997, 1996
         and 1995.

         Balance Sheets as of December 31, 1997 and 1996.

         Statements of Stockholders' (Deficit) Equity for the years ended
         December 31, 1997, 1996 and 1995.

         Statements of Cash Flows for the years ended December 31, 1997, 1996
         and 1995.

         Notes to Financial Statements.

         2.       FINANCIAL STATEMENT SCHEDULES

         All financial statement schedules have been omitted because they are
         not applicable, or the required information is included in the
         financial statements or notes thereto.


         3.    EXHIBITS

         See Exhibit Index and Exhibits attached to this report.

(B)      Reports on Form 8-K

         The Company filed a current report on Form 8-K, Commission File No.
         0-21766, dated March 5, 1998, to report the execution of several
         agreements with Lucent Technologies, Inc., dated as of February 4,
         1998, that establish a new nonexclusive relationship which replaces the
         exclusive relationship between the Company and Lucent entered into in
         1995 with respect to the SDBAS joint product.

(C)      See Exhibit Index and Exhibits attached to this report.

(D)      Financial Statement Schedules.


                                                                              45
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.


EXHIBIT INDEX AND EXHIBITS

<TABLE>
<CAPTION>
  EXHIBIT                                                                           PAGE
   NUMBER                            DESCRIPTION                                   NUMBER
   ------                            -----------                                   ------
<S>                                                                               <C>
     3.1     Amended and Restated Certificate of Incorporation. (1)
     3.2     Amended and Restated Bylaws (2)

     4.1     Amended and Restated Certificate of Incorporation (Included as
             Exhibit 3.1 to this Annual Report on Form 10-K)

     4.2     Amended and Restated Bylaws (Included as Exhibit 3.2 to this Annual
             Report on Form 10-K)

     4.3     Form of Common Stock Certificate (1)
     4.4     Warrant Agreement, dated
             as of March 30, 1995, by and between the Registrant and Bell
             Atlantic Corporation (4)

     4.5     Form of Warrant Certificate (Included as exhibit to Exhibit 4.4 to
             this Annual Report on Form 10-K)

     4.6     Rights Agreement, dated as of November 19, 1996, by and between the
             Registrant and First Union National Bank, as Rights Agent,
             including the form of Certificate of Designations, Preferences and
             Rights of Series A Preferred Stock as Exhibit A, the form of Rights
             Certificate as Exhibit B, and the Summary of Rights as Exhibit C
             (6)

     4.7     Form of 5% Subordinated Convertible Notes, due May 15, 2001 (8)

     4.8     Form of 5% Subordinated Convertible Notes, due May 15, 2001 (8)

     10.1    Technology Purchase Agreement dated as July 16, 1988, between and
             among the Registrant, Siecor Corporation and FiberLAN, Inc. (1)

     10.2    Equipment Lease Schedule VL-2 dated as of October 2, 1990, between
             the Registrant and Comdisco, Inc. (1)

     10.3    Master Equipment Lease Agreement between the Registrant and
             MMC/GATX Partnership No. 1 dated September 30, 1992. (1)

     10.4    Equipment Lease Schedule No. 1 dated as of September 30, 1992,
             between the Registrant and MMC/GATX Partnership No. 1. (1)

     10.5    Warrant Agreement dated as of September 30, 1992, between the
             Registrant and MMC/GATX Partnership No. 1. (1)

     10.6    Form of Investors' Rights Agreement dated as of November 13, 1992,
             between the Registrant and certain investors. (1)

     10.7    Standstill Agreement dated December 4, 1991, between the Registrant
             and AMP Incorporated. (1)

     10.8    Volume Purchase Agreement executed February 25, 1993, between the
             Registrant and Bell Atlantic Network Services, Inc., as amended by
             a Further Agreement and Amendment No. 1 dated as of May 3, 1993.
             (3)

     10.9    Further Agreement and Amendment No. 2, dated November 15, 1993 to
             Volume Purchase Agreement executed February 25, 1993 between the
             Registrant and Bell Atlantic Network Services, Inc. (4)
</TABLE>


                                                                              46
<PAGE>


                          BROADBAND TECHNOLOGIES, INC.


EXHIBIT INDEX AND EXHIBITS (CONTINUED)

<TABLE>
<CAPTION>
  EXHIBIT                                                                         PAGE
   NUMBER                              DESCRIPTION                               NUMBER
   ------                              -----------                               ------
<S>                                                                             <C>
     10.10   Office Lease dated February 25, 1993, between the Registrant and
             The Wachovia Real Estate Fund. (1)

     10.11   Amended and Restated 1988 Incentive Stock Option Plan (2)

     10.12   Amended and Restated 1992 Nonqualified Stock Option Plan (2)

     10.13   Directors' Stock Option Plan (2)

     10.14   1993 Flexible Benefits Plan (1)

     10.15   Amended 401 (k) Plan dated July 1, 1997 (14)                           51

     10.16   Warrant Agreement, dated as of March 30, 1995, by and between the
             Registrant and Bell Atlantic Corporation (4)

     10.17   Agreement Between BroadBand Technologies, Inc. and Lucent
             Technologies Executed November 15, 1995. (4) (9)

     10.18   Indenture, dated as of May 22, 1996, by and between the Registrant
             and Marine Midland Bank, as Trustee (5)

     10.18A  Cross Reference Sheet (8)

     10.19   Purchase Agreement, dated as of May 17, 1996, by and between the
             Registrant and Goldman, Sachs & Co., and Bear, Stearns & Co., Inc.
             (5)

     10.20   Registration Rights Agreement, dated as of May 17, 1996, by and
             between the Registrant and Goldman, Sachs & Co., and Bear, Stearns
             & Co., Inc. (5)

     10.21   Bell Atlantic Network Services, Inc. and BroadBand Technologies,
             Inc. Procurement Agreement, Contract No. BA 14494, dated July 1,
             1996 (7) (10)

     10.22   First Amendment to Agreement LGC-A65-D executed July 12, 1996,
             between the Registrant and Lucent Technologies, Inc. (7) (10)

     10.23   Rights Agreement, dated as of November 19, 1996, by and between the
             Registrant and First Union National Bank, as Rights Agent,
             including the form of Certificate of Designations, Preferences and
             Rights of Series A Preferred Stock as Exhibit A, the form of Rights
             Certificate as Exhibit B, and the Summary of Rights as Exhibit C
             (6)

     10.24   Employment Agreement between the Registrant and Salim A.L. Bhatia,
             dated as of March 5, 1997 (11)

     10.25   Employment Agreement between the Registrant and David E. Orr, dated
             as of March 10, 1997 (11)

     10.26   Umbrella Settlement Agreement dated as of February 4, 1998, between
             BroadBand Technologies, Inc. and Lucent Technologies, Inc. (13)
     10.27   Form of Release dated as of February 4, 1998, between BroadBand
             Technologies, Inc. and Lucent Technologies, Inc. (12)
     10.28   Form of Release dated as of February 4, 1998, between BroadBand
             Technologies, Inc. and Lucent Technologies, Inc. (12)
     10.29   Supply Agreement, dated as of February 4, 1998, between BroadBand
             Technologies, Inc. and Lucent Technologies, Inc. (13)
     10.30   Technology Transfer Agreement, dated as of February 4, 1998, between
             BroadBand Technologies, Inc. and Lucent Technologies, Inc. (13)
     10.31   Manufacturing Agreement, dated as of February 4, 1998, between
             BroadBand Technologies, Inc. and Lucent Technologies, Inc. (13)
     10.32   BBT OEM Agreement, dated as of February 4, 1998, between BroadBand
             Technologies, Inc. and Lucent Technologies, Inc. (13)
     10.33   Lucent OEM Agreement, dated as of February 4, 1998, between BroadBand
             Technologies, Inc. and Lucent Technologies, Inc. (13)
     10.34   Research and Development Agreement, dated as of February 4, 1998,
             between BroadBand Technologies, Inc. and Lucent Technologies, Inc.(13)
     10.35   Element Manager Software Letter Agreement, dated as of February 4,
             1998, between BroadBand Technologies, Inc. and Lucent Technologies,
             Inc. (12)

     10.36   Goldman Sachs & Co. and BroadBand Technologies, Inc. agreements,
             dated April 8, 1997. (14)                                           123

     24.1    Consent of Ernst & Young LLP. (14)                                     132
     27.0    Financial Data Schedule (This exhibit is required to be submitted
             electronically pursuant to the rules and regulations of the
             Security and Exchange Commission and shall not be deemed filed for
             purposes of Section 11 of the Securities Act of 1933 or Section 18
             of the Securities Exchange Act of 1934).
</TABLE>



                                                                              47
<PAGE>



                          BROADBAND TECHNOLOGIES, INC.


EXHIBIT INDEX AND EXHIBITS (CONTINUED)

(1)   (Incorporated by reference to exhibits filed with the Company's
      Registration Statement on Form S-1, No. 33-62754 declared effective on
      June 30, 1993.)

(2)   (Incorporated by reference to exhibit filed with the Company's Form 10-Q
      for the period ended June 30, 1994.)

(3)   (Confidential treatment was granted by the Securities and Exchange
      Commission on June 30, 1993.)

(4)   (Incorporated by reference to exhibit filed with Registrant's Current
      Report on Form 8-K, Commission File No. 0-21766, dated March 30, 1995.)

(5)   (Incorporated by reference to exhibit filed with Registrant's Current
      Report on Form 8-K, Commission File No. 0-21766, dated May 22, 1996)

(6)   (Incorporated by reference to exhibit filed with Registrant's Current
      Report on Form 8-K, Commission File No. 0-21766, dated November 19, 1996)

(7)   (Incorporated by reference to exhibit filed with Registrant's Quarterly
      Report, dated August 14, 1996, as amended by Amendment No. 1, dated
      November 26, 1996)

(8)   (Incorporated by reference to exhibit filed with Amendment No. 1 to the
      Registrant's Registration Statement on Form S-3, No. 333-09661, dated
      September 17, 1996)

(9)   (Confidential treatment was granted by the Securities and Exchange
      Commission on May 10, 1996)

(10)  (Confidential treatment was granted by the Securities and Exchange
      Commission on December 12, 1996)

(11)  (Incorporated by reference to exhibit filed with Registrant's Annual
      Report, dated March 31, 1997).

(12)  (Incorporated by reference to exhibit filed with Registrant's Current
      Report on Form 8-K, Commission File No. 0-21766, dated March 5, 1998).

(13)  (Incorporated by reference to exhibit filed with Registrant's current
      report on Form 8-K, Commission File No. O-21766, dated March 5, 1998
      Confidential treatment for certain portions of this agreement is being
      requested pursuant to Rule 24b-2 of the Securities Exchange Act of 1934,
      as amended.)




(14)  Attached exhibits.




                                                                              48
<PAGE>



                          BROADBAND TECHNOLOGIES, INC.


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

                                        BroadBand Technologies, Inc.

Dated March 20, 1998                    By:   /S/ Timothy K. Oakley
                                              ---------------------
                                              Timothy K. Oakley

                                        Title:   Vice President, Chief Financial
                                                 Officer, Secretary Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE                                          TITLE                                     DATE
---------                                          -----                                     ----

<S>                                         <C>                                             <C>
/S/ David E. Orr                            President, (Principal Executive                  March 20, 1998
David E. Orr                                Officer), and Director

/S/ Timothy K. Oakley                       Vice President, (Principal Financial             March 20, 1998
Timothy K. Oakley                           Officer and Principal Accounting
                                            Officer)
/S/ Dr. John R. Hutchins, III
Dr. John R. Hutchins, III                   Chairman of the Board                            March 20, 1998

/S/ Dr. J. Richard Jones
Dr. J. Richard Jones                        Director                                         March 20, 1998

/S/ Richard P. Clark
Richard P. Clark                            Director                                         March 20, 1998

/S/ Dr. Charles T. Lee
Dr. Charles T. Lee                          Director                                         March 20, 1998
</TABLE>


                                                                              49