<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549



                                   FORM 10-K

             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934


                   FOR THE FISCAL YEAR ENDED APRIL 30, 1998


                        Commission file number  1-13316

                        NEWBRIDGE NETWORKS CORPORATION
            (Exact name of registrant as specified in its charter)


              CANADA                                       98-0077506
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)     

600 MARCH ROAD, KANATA, ONTARIO, CANADA                     K2K 2E6
(Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code:    (613)  591-3600

          Securities registered pursuant to Section 12(b) of the Act:

  COMMON SHARES, NO PAR VALUE                     NEW YORK STOCK EXCHANGE
        (Title of class)             (Name of each exchange on which registered)

  The common shares are also listed on The Toronto Stock Exchange in Canada.

Securities registered pursuant to Section 12(g) of the Act:  NONE

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                    Yes  X          No 
                        ---            ---  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   [x]

At June 18, 1998 the aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately Cdn$4,262,000,000. The number of
common shares of the registrant outstanding as at June 18, 1998 was 175,961,132.

                        Exhibit index begins on Page 79

                                 Page 1 of 238

<PAGE>
 
                                EXCHANGE RATES

FINANCIAL INFORMATION HEREIN IS EXPRESSED IN CANADIAN DOLLARS ($ OR CDN$),
UNLESS EXPRESSLY STATED IN UNITED STATES DOLLARS (US$) OR OTHERWISE. The Company
maintains its financial data in Canadian dollars. The high and low exchange
rates (the highest and lowest rates at which Canadian dollars were sold), the
average exchange rate (the average of the exchange rates on the last day of each
month during the period), and the period end exchange rate of the Canadian
dollar in exchange for United States dollars in each of the five 12 month
periods ended April 30, 1998, as calculated from the exchange rates reported by
the Federal Reserve Bank of New York, are set forth below.

<TABLE>
<CAPTION>
                                12 Month Period Ended April 30,            
                      -----------------------------------------------------
                                                                           
                         1998       1997       1996       1995       1994     
                         ----       ----       ----       ----       ----    
<S>                   <C>        <C>        <C>        <C>        <C>      
High                  US$0.7317  US$0.7513  US$0.7527  US$0.7457  US$0.7933
Low                      0.6832     0.7145     0.7224     0.7023     0.7166
Average                  0.7099     0.7319     0.7345     0.7248     0.7536
Period End               0.6992     0.7158     0.7345     0.7355     0.7237
</TABLE>

On June 18, 1998, the noon buying rate in New York City for the Canadian dollar
as reported by the Federal Reserve Bank of New York was US$1.00 = Cdn$1.4690
(equivalent to US$0.6807 = Cdn$1.00).


                           _________________________


The following trademarks are mentioned in this Report on Form 10-K:
Newbridge(R), VIVID(R), MainStreetXpress(TM) and MainStreet(R) which are
trademarks of Newbridge Networks Corporation; and ACC(R), which is a trademark
of Advanced Computer Communications.

                                    Page 2
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION

                               TABLE OF CONTENTS

<TABLE>
<CAPTION> 
                                                                               Page
                                                                               ----
<S>                                                                            <C>
PART  I

  Item 1.  BUSINESS
            General.............................................................4
            Networking Industry.................................................4
            Business Strategy...................................................5
            Products............................................................6
            Research and Product Development....................................8
            Sales, Marketing and Distribution...................................9
            Customer Service and Support........................................9
            Manufacturing......................................................10
            Competition........................................................10
            Government Regulation..............................................11
            Proprietary Rights.................................................11
            Employees..........................................................12
  Item 2.  PROPERTIES..........................................................12
  Item 3.  LEGAL PROCEEDINGS...................................................12
  Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................13

PART  II

  Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY
            AND RELATED STOCKHOLDER MATTERS
            Common Share Price Range and Dividends.............................14
            Cautionary Statement Regarding Forward-Looking Information.........15
            Certain Tax Considerations.........................................20

  Item 6.  SELECTED FINANCIAL DATA.............................................21
  Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................23
  Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........33
  Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................35
  Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
            ON ACCOUNTING AND FINANCIAL DISCLOSURE.............................67

PART  III

  Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................68
  Item 11. EXECUTIVE COMPENSATION..............................................70
  Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
            AND MANAGEMENT.....................................................71
  Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................72

PART  IV

  Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
            AND REPORTS ON FORM 8-K............................................73

SIGNATURES.....................................................................76
</TABLE> 

                                    Page 3



<PAGE>
 
                                    PART  I

ITEM 1.  BUSINESS


GENERAL

Newbridge Networks Corporation (the "Company" or "Newbridge") is a world leader
in designing, manufacturing, marketing and servicing a comprehensive family of
networking solutions that enables customers in more than 100 countries to access
the power of multimedia communications. The Company was incorporated in June
1986 in Ontario under the Canada Business Corporations Act.

NETWORKING INDUSTRY

An increasing variety and volume of communications are transmitted across
communications networks in the form of voice, data, text, electronic mail,
graphics, video, imaging, facsimile, videoconferencing, online transaction
processing and others. Communications networks are built by telecommunications
service providers (carriers) and corporations for information networking across
long distances (wide area networks or WANs) and by corporations for
communication within a close proximity (local area networks or LANs). These
communications networks deploy various transmission, access and switching
technologies.

Networks are experiencing robust growth in size and capacity, driven by changing
business requirements and technology. With the trend towards globalization of
business, networks have become the electronic matrix through which vital
business information flows, as large and small organizations alike seek to
communicate more rapidly and efficiently with their key stakeholder groups
throughout the world, including branch offices, field force, telecommuters,
customers and suppliers.

The rapid change in computing, networking and telecommunications technology,
coupled with the exploding growth of the Internet, browser technology, and
Internet Protocol (IP) based enterprise networks (intranets and extranets),
pressures network managers to expand the size and traffic-handling capacity of
their networks.

In addition, the growth in bandwidth-intensive multimedia applications have
subjected networks to greater quality-of-service (QoS) and capacity pressures.
Multimedia is defined as the combination of multiple media forms for conveying
information. While formats vary and will continue to evolve, they typically
involve elements such as voice, text, image, video, audio and animated graphics.
Combinations of these media provide powerful communications tools, but they are
not tolerant of the quality impairing delays associated with the "best efforts"
IP networks based on legacy router technology. Such next-generation high-
bandwidth applications are driving the need for networks that deliver greater
performance, quality, reliability and scalability.

In order to improve efficiency and effectiveness, most businesses turn to
carriers to obtain a range of value-added services, such as Virtual Private
Networks (VPNs), wide area network support and Internet access. To meet the
growing customer demand for high-speed access to bandwidth-intensive
applications, worldwide and at anytime, carriers have deployed new technologies,
as they have become available, in a plenitude of special services networks. The
networking equipment for special services networks typically resides as part of
the carrier switching and transmission infrastructure, but separate from the
narrowband voice-oriented equipment of the public switched telephone network
(PSTN).

                                    Page 4
<PAGE>
 
Carriers also face a significant challenge stemming from deregulation and
increased competition. Internet service providers, competitive access providers,
cable television operators and wireless operators have entered the market and
provide both indirect competition through the offering of new services and
direct competition through the offering of lower cost traditional services. This
competitive challenge requires them to reduce costs and optimize network
resources, while the challenge of growing demand for new communications services
requires carriers to invest in new infrastructures.

In order to reconcile these conflicting needs, carriers are migrating the
disparate array of networks and services offered from these networks onto a
single, unifying, broadband infrastructure. The scalability and flexibility of
asynchronous transfer mode (ATM) switching technology make it well suited for
multiple traffic types, or services, enabling carriers to launch new higher
margin, value-added services. At the same time carriers can lower their up-front
and operating costs and improve the manageability of their overall network
infrastructure by consolidating their present networks onto one ATM-based
network.

BUSINESS STRATEGY

The Company's business strategy is to provide comprehensive, fully managed, end-
to-end networking solutions to carriers and corporate customers based on a broad
product family that cost effectively addresses their current and future
communications requirements. Newbridge products are designed in accordance with
a common, flexible architecture to provide customers with a seamless migration
and integration path across the product family. The full product family is
modular for flexibility and highly scalable to meet evolving customer
requirements. Products are software controlled and remotely manageable for
customer ease of use and efficiency. All Newbridge products are designed to
comply with industry standards throughout the world in order to deliver optimal
interoperability and performance in multiprotocol, multivendor networks.

The Company's architectural approach for ATM networks is directed towards
providing solutions to issues facing carriers in the core, edge and access
points of their networks, and solutions for corporate network managers. At the
core of the carrier network, the Company's strategy focuses on the accelerating
deployment of a new core infrastructure that is both robust and scalable and
equally capable of supporting traditional voice and IP traffic on a large scale.
The Company emphasizes versatility and high scalability at the edge of the core
of the carrier network, using ATM technology to collapse multiple carrier
services onto a single platform, including services for IP, with a focus on
scale, performance, QoS and VPN capabilities. The Company's product strategy
also includes remote access concentrator products to allow carriers to offer
multimedia-capable telecommuting and Internet/intranet access services, and a
broad range of fully-featured, low-cost access solutions from the customer
premise, including various DSL (Digital Subscriber Loop) technologies, broadband
wireless, wave division multiplexing, broadband satellite, hybrid fiber coax and
time division multiplexing (TDM) for integrated access. The Company's product
strategy for ATM networks enables carriers to compete successfully in the face
of increasing competition and deregulation by reducing capital and operational
costs associated with network infrastructure and creating differentiated service
offerings by provisioning multiple services on a single network.

In the enterprise network market, the Company focuses on the delivery of
significant performance improvements to address capacity constraints created by
growing demands for connectivity and the changing nature of network traffic
towards bandwidth-intensive multimedia applications. The Company's product
strategy includes the VIVID switched 

                                    Page 5
<PAGE>
 
routing system, which is designed to integrate networking capabilities for
video, voice, image and data based on the industry standard Multi-Protocol over
ATM (MPOA) architecture. The Company also addresses the enterprise network
market with various WAN access products based on ATM and TDM technologies and
supplements its network solutions offerings through strategic alliances and
other collaborative undertakings.

The Company extends its business strategy through various alliances and strong
relations with affiliated companies. In March 1996 Newbridge and Siemens formed
an alliance with the objective of delivering flexible, broadband ATM solutions
for carrier-class networks. The alliance encompasses collaborative research and
development activities, common branding under the MainStreetXpress banner and
joint sales, marketing and customer service activities. In January 1998 the
Company formed a strategic alliance with 3Com to collaborate in the enterprise
network market. In addition, Newbridge, Siemens and 3Com together announced the
Carrier Scale Internetworking ("CSI") initiative in October 1997. The CSI
network architecture is intended to deliver premium IP services that are
capability-rich, customizable and fully managed end to end. CSI should also
enable carriers to deliver VPN services to high volume enterprise clients.

Newbridge maintains other strategic alliances and also works with a family of
over 20 affiliated companies. The affiliated companies, in which Newbridge owns
an equity stake, generally address markets within the networking industry which
are complementary to the Newbridge product offering.

PRODUCTS

Newbridge has developed a broad family of digital networking products that are
effective in the core, edge and access points of the carrier network as well as
in corporate networks, for both WAN access and LAN applications. These products
operate under a scalable, center-weighted network management system, which is
advantageous for large bandwidth-intensive networks, and offer software
controlled end-to-end connectivity. Newbridge products employ a common
architecture that allows TDM, X.25, frame relay, ATM, SMDS and LAN
internetworking to coexist within the same network and provides a migration path
from narrowband to broadband networks.

The Newbridge family of ATM products includes high performance enterprise,
access, edge and core switches for corporate and carrier networks. Network
operators can build consolidated networks that deliver services for a variety of
applications, managed by a single, end-to-end network management system. This
approach enables operators to reduce infrastructure costs and differentiate
service offerings by provisioning multiple services on a single, unifying
network.

The MainStreetXpress 36170 Multiservices Switch is a high capacity platform,
designed to scale from 800 Mbit/s (millions of bits per second) to over 100
Gbit/s (billions of bits per second). It supports a broad array of services,
including native cell relay, frame relay, circuit emulation for advanced private
line services, LAN connectivity, managed IP services, SMDS services, switched
voice services, broadcast-quality video services, broadband wireless access and
other high-capacity access technologies such as DSL. The modular architecture of
the MainStreetXpress 36170 switch enables network operators to expand from a
single-shelf system to a large multi-shelf system in an as-needed fashion. The
high port density of the system translates into competitive per-port pricing.

                                    Page 6
<PAGE>
 
The Company's MainStreetXpress product line also includes the MainStreetXpress
36190 Core Services Switch, a high performance ATM backbone or core switch,
designed to scale beyond one terabit (trillion bits) per second, as well as the
MainStreetXpress 36150 Access Switch for premium video service, the
MainStreetXpress 36140 and 36144 ATM Multiservices Access Switches, the
MainStreetXpress 36030 and 36060 Modular LAN Service Units for LAN access and
the MainStreetXpress 36100 Access Concentrator.

TDM products from Newbridge, such as the 3600 and 3645 MainStreet Bandwidth
Managers, are leading platforms for private line services throughout the world
because of their wide range of voice and data interfaces, adherence to the full
range of domestic and international standards, quality and reliability, end-to-
end network manageability, and flexibility for seamless expansion and migration
as networks grow and applications evolve.

Based on the 3600 MainStreet Bandwidth Manager, the 36120 MainStreet Packet
Engine can be used to deploy frame relay or X.25 networks over a TDM circuit
switched network infrastructure. This product interworks with the Company's TDM
and ATM systems for seamless end-to-end, multiservice network solutions.

The VIVID switched routing system is an internetworking solution that optimally
supports high bandwidth, delay-sensitive applications such as desktop
videoconferencing, distance learning, telemedicine and collaborative work
sessions, while integrating seamlessly with existing LANs. VIVID uses standards-
based Multi-Protocol over ATM (MPOA) switching technology to combine the
performance and simplicity of switching with routing functionality. The VIVID
system can also generate significant operational cost savings through the
centralized automation of moves, adds and changes in campus networks.

Newbridge also addresses the access market segment with products that enable
carriers to deploy multiple services and permit access to those services for
customers with multiple applications. These products include a variety of WAN
access devices for connecting remote and small sites and devices to extend the
network to the end points of both circuit and packet switched connections.
Through its subsidiary Advanced Computer Communications (ACC), the Company has
also developed a range of bridge/routers for enterprise-wide remote access.
Newbridge and ACC jointly developed the Tigris remote access concentrator, an
integrated access platform that addresses an emerging high growth segment of the
networking market by delivering Internet access over both dial-in (modem and
ISDN) and dedicated (frame relay, SMDS, X.25, private line) services.

Newbridge complements products providing connectivity with an extensive suite of
network and service management software products ranging from configuration and
alarm monitoring to interfaces to umbrella management systems and customer
service management systems. The MainStreetXpress 46020 Network Manager provides
unified management of Newbridge, Siemens and third-party LANs and WANs across
multiple technologies, including circuit switching, packet switching, LAN
internetworking and ATM. It features a rich, object-oriented graphical user
interfaces (GUIs) for efficient user navigation, and a scalable client/server
architecture to provide simultaneous access for up to 128 operators and cost-
effective management for networks containing up to 5,000 nodes and 100,000
network paths.

Sales of networking products and related services accounted for 100% of the
Company's sales in fiscal 1998 and fiscal 1997 and 99% of the Company's sales in
fiscal 1996.

                                    Page 7
<PAGE>
 
RESEARCH AND PRODUCT DEVELOPMENT

The Company's research and product development activities apply the latest
technologies to the development of advanced functionality in networking hardware
and software. In its product development strategy, Newbridge employs an
"evergreen" approach in which new products and features are designed to
accommodate the architecture of existing products. This approach protects
customers' investment in their installed base of networking equipment. The
Company's research and development strategy also focuses on leveraging product
functionality developed for one market to products addressing other markets. For
example, common ATM hardware and software development undertaken by the Company
is shared by the VIVID switched routing system for the enterprise networking
market and the MainStreetXpress product line for wide area networks.

In addition to the ongoing evolution of product functionality, a significant
portion of the research and development effort is directed towards expanding the
breadth of network solutions for new value-added service capabilities and access
technologies, particularly on ATM platforms and network and service management
software in carrier and carrier access applications. In addition to the
Company's internal research and product development, the Newbridge development
strategy includes investments in affiliated companies developing technology
complementary to Newbridge and strategic partnering, such as joint research and
development programs with Siemens and 3Com.

The markets for Newbridge products are characterized by rapid technological
change. To maintain its leadership position in advanced networking technologies,
Newbridge is committed to research and development. The Company conducts the
majority of its research and development in a lower cost environment compared
with many competitors. Because of the Company's focus on and commitment to
research and development, coupled with the cost advantages, the Newbridge
strategy has been oriented towards in-house product development. This is in
contrast with some other networking vendors who devote proportionately fewer
resources to research and development and who have more often taken the approach
of obtaining technology and products through acquisitions of other companies.
Newbridge believes that its strategy results in a more cohesive product solution
set for delivering seamless end-to-end networking solutions.

Research and development project schedules for high technology products are
inherently difficult to predict, and there can be no assurance that the Company
will achieve its expected initial shipment dates of products in development.
Because timely availability of new and enhanced products is critical to the
success of the Company, delays in availability of these products, or lack of
market acceptance of such products, could adversely affect the Company.

The Company's ability to anticipate changes in technology, industry standards
and communications service provider offerings, and to develop and introduce new
and enhanced products on a timely basis that are successful in the market will
be a significant factor in the Company's competitive position and its prospects
for growth.

For additional discussion of the Company's research and development expenditures
in fiscal 1998, 1997 and 1996, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

                                    Page 8
<PAGE>
 
SALES, MARKETING AND DISTRIBUTION

Newbridge sells its products in more than 100 countries. The Company has
established direct sales forces throughout the world, as well as marketing and
distribution arrangements with telephone companies, original equipment
manufacturers (OEMs), distributors and dealers.

In March 1996, the Company formed an alliance with Siemens which includes common
branding under the MainStreetXpress name for ATM products and joint sales and
marketing efforts. Siemens sells the Company's circuit switched networking
products, ATM products and network and service management products, primarily to
carriers in Europe, Latin America, Asia and North America. Newbridge products
are also distributed throughout the world by Cable and Wireless, Lucent
Technologies, Alcatel, Nippon Telegraph and Telephone and other
telecommunications equipment suppliers as well as by global carriers and
consortia.

The Newbridge sales force in the United States and Canada sells directly to
carriers and other communications service providers such as AT&T, MCI and other
interexchange carriers, Regional Bell Operating Companies (RBOCs) and other
local exchange carriers, as well as various Internet Service Providers (ISPs).
Newbridge also sells to Fortune 1000 sized companies and institutions directly
and through distributors.

The product line is sold throughout Europe, the Middle East and Africa by a
direct sales force as well as through OEM partners and distributors. In Latin
America and the Asia Pacific area, networking products are sold primarily
through distributors, which are supported by local Newbridge sales and support
offices. In Latin America, the Company holds a majority equity interest in
certain of its distributors.

The Newbridge sales organization throughout the world receives support from
product line management and network solutions groups which provide product
strategy and consultation on industry trends and pricing, and which solicit
customer feedback for research and product development planning. The Company's
marketing activities are centrally coordinated and emphasize complete network
solutions for the carrier markets (incumbent service providers and alternate
service providers) and the enterprise network market.

The amount of sales, cost of sales and expenses, and operating contribution
attributable to the Company's geographically-based operating segments, the
amount of identifiable assets attributable to the Company's principal geographic
regions and the amount of export sales from the Company's operations in Canada
for each of the last three fiscal years are set forth in Note 21 to the
Consolidated Financial Statements. For additional discussion of the Company's
geographic segments, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

CUSTOMER SERVICE AND SUPPORT

Reliability, performance, up-time and average mean-time-to-repair are important
factors customers consider in developing long term relationships with potential
suppliers of networking systems. The increasing dependency of many domestic and
international customers upon information networks has generated a demand for a
very rapid problem response time. To satisfy this customer demand, the Company
offers 24-hour Network Technical Assistance Centers, complemented by the service
support organizations of the Company's distributors. Because of remote
diagnostic capabilities of the Company's products, support engineers can
immediately begin to diagnose field problems. When necessary, support engineers
are dispatched from the Company's sales and support offices or by third party
service providers. 

                                    Page 9
<PAGE>
 
The Company's standard product warranty covers defects in material and
workmanship and generally applies for 3 to 15 months after shipment.

MANUFACTURING

The principal steps in the manufacturing process are the purchase and management
of materials, assembly, testing and final inspection. Because Newbridge
manufactures and assembles virtually all of its products, the Company maintains
direct control over production, quality and product availability. The Company
purchases parts and components for assembly of its products from a large number
of suppliers through a worldwide sourcing program. Although the Company single
sources certain components, no single supplier has accounted for more than 10%
of the Company's total purchases in any of the past three fiscal years.
Newbridge has established strong relationships with key vendors to reduce the
risk of significant shortages or delays relating to availability of materials.
Shortages or delays in the supply of components, however, could adversely affect
the Company's ability to meet scheduled product shipments in any particular
fiscal quarter, which could materially affect the Company's operating results.

The Company currently has its principal manufacturing, logistics and warehousing
facilities in Canada. The Company also has logistics and warehousing facilities
in the United States, Ireland, the United Kingdom, France, Hong Kong and
Malaysia.

The Company schedules some production of its products based on internal sales
forecasts. The Company's manufacturing procedures are designed to assure rapid
response to customer orders, but may, in certain circumstances, create risk of
excess or inadequate inventory if orders do not match forecast. Because a
substantial portion of customer orders are filled within the fiscal quarter of
receipt, and because of the ability of customers to revise or cancel orders and
change delivery schedules without significant penalty, Management believes that
the Company's backlog as of any given date is not necessarily indicative of
actual revenues for any succeeding period.

COMPETITION

The market for the Company's products is characterized by rapid technological
change, convergence of technologies, evolving standards and regulatory
developments. Many of the Company's competitors and potential competitors have
greater financial, technological, manufacturing, marketing, and personnel
resources than the Company.

In the market for wide area network products, the Company's principal
competitors include Ascend Communications, Cisco Systems, Fore Systems and
Northern Telecom, as well as traditional circuit switched multiplexer vendors
such as Network Equipment Technologies and Tellabs. In addition, the Company's
enterprise networking products compete with product offerings from various
vendors including Bay Networks, Cabletron Systems and Cisco Systems.

Principal competitive factors are product line capabilities including
integration of multiple applications on to a single network, network management
capabilities, ability to offer complete end-to-end networking solutions, price,
reliability, adherence to standards, and market presence. Certain competitors,
including traditional carrier core switch suppliers such as Ericsson, Fujitsu,
Lucent Technologies and Northern Telecom have a very large installed base of
existing products in carrier and enterprise networks, some of which can be
upgraded to accommodate new technologies and features.

                                    Page 10
<PAGE>
 
The networking industry recently has been consolidating through strategic
alliances, mergers and acquisitions thereby creating companies with larger
market shares, customer bases, sales forces, product offerings and technology
and marketing expertise. Boundaries between different segments of the networking
industry are being blurred as competitors attempt to position their product
lines to address a broader spectrum of networking requirements.

GOVERNMENT REGULATION

The sale of networking products may be affected by governmental regulatory
policies, the imposition of carrier tariffs, and taxation of telecommunications
services, which may also affect the availability of high speed digital
transmission lines. These policies are under continuous review and are subject
to change.

In the United States, regulatory policies are likely to have a significant
impact on the competitive environment in which the Company operates. The
Telecommunications Act of 1996 and associated regulatory developments will
eliminate or modify many regulatory restrictions in the telecommunications
market. Deregulation enables local exchange telephone companies, RBOCs, long
distance carriers, and other communications service providers as well as cable
television operators and electric utilities to compete with each other in
offering local and long distance telephone and multimedia communications
services. In addition, the RBOCs are now permitted to manufacture and sell
telecommunications equipment under certain conditions. Given the substantial
resources and large customer base of the RBOCs, Newbridge could face competition
from these companies should they satisfy these conditions and elect to
manufacture networking products.

The regulatory environment in the European Union continues to increase
competition and to open markets for telecommunications equipment vendors. Member
States which have not already fully liberalized their telecommunications markets
by January 1, 1998 are required to have in place the regulatory and licensing
structures that will enable new operators to enter their markets.

Deregulation may also permit mergers among the RBOCs and other major
telecommunications companies throughout the world. Although the impact of
mergers that have been announced or are in the process of consummation cannot be
predicted, greater concentration in the market for telecommunications services
could adversely affect the market for networking products.

Governmental communications regulatory authorities have promulgated regulations
which, among other things, set installation and equipment standards for private
telecommunications systems and require that all newly installed hardware be
registered and meet certain governmental approval standards. Management believes
that the Company currently complies with, and expects to be able to continue to
comply with these requirements.

PROPRIETARY RIGHTS

The name Newbridge, the Company's corporate logo, and MainStreet are registered
trademarks of the Company in approximately 50 countries. A number of the
Company's other trademarks and service marks are registered in Canada as well as
in various other jurisdictions. The Company also claims rights to a number of
unregistered trademarks, including MainStreetXpress, and other intellectual
property rights. The Company protects its trademarks, inventions, trade secrets,
and other proprietary rights by contract, trademark registration, patent
registration and appropriate trademark and copyright markings, as well as with
internal security. The Company licenses certain intellectual property rights
from third parties. 

                                    Page 11
<PAGE>
 
Management believes that the Company's competitive success will depend
primarily on the innovative skills, technical competence and marketing abilities
of the Company's employees.

It may become necessary for the Company to enter into technology licenses with
other companies because of the existence of the large number of patents in the
networking field, the rapid rate of issuance of new patents, new standards that
may be issued, or to obtain important technology. Such licenses may impact the
Company's operating results.

EMPLOYEES

As of April 30, 1998, the Company had 6,336 employees. None of the Company's
employees is represented by a collective bargaining agreement nor has the
Company ever experienced any work stoppage. Management believes the Company's
relations with its employees are good.


ITEM 2.  PROPERTIES

The Company owns its corporate headquarters in Kanata, Ontario as well as
facilities for research and development, manufacturing, sales and marketing. The
Company also owns facilities in Newport, Wales for sales, marketing, network
services and logistics and warehousing.

Newbridge leases other facilities in Kanata primarily used for manufacturing
from companies owned by Mr. Terence H. Matthews, Chairman of the Board and Chief
Executive Officer of the Company and its largest single shareholder. In addition
to Kanata, Ontario, the Company also leases logistics and warehouse space in
Rennes, France; Shannon, Ireland; Ogdensburg, New York; Hong Kong and Kuala
Lumpur, Malaysia.

The Company conducts research and development in leased facilities in; Rennes,
France; Santa Barbara, California; metropolitan London, England; Herndon,
Virginia; Andover, Massachusetts; and Vancouver, British Columbia. The Company
also leases sales and support facilities throughout the United States and
Canada, and in over 40 locations throughout Europe, the Middle East and Africa,
in over 25 locations in Asia Pacific and Russia, and over 10 locations in Latin
America.


ITEM 3.  LEGAL PROCEEDINGS

In the fourth quarter of fiscal 1998 the Company reached an agreement in
principle to settle the class action lawsuit which was filed in United States
District Court in Washington, D.C. during the fiscal year ended April 30, 1995.
The lawsuit purported to be a class action on behalf of a class of persons who
purchased securities of the Company between March 29 and August 1, 1994 and
alleged that the Company made false and misleading statements in violation of
United States securities law and common law. The proposed settlement is subject
to review and approval by the Court on a schedule to be set by the Court. The
Company has recorded an expense of $2,642,000 in connection with the proposed
settlement, which represents Management's estimate of the direct costs which
will be incurred upon final approval by the Court.

Lucent Technologies Inc. ("Lucent Technologies") filed a complaint during the
fiscal year ended April 30, 1998 in United States District Court in Delaware
against the Company and its United States subsidiary, Newbridge Networks Inc.
Lucent Technologies manufactures and sells telecommunications systems, software
and products, and is both a distributor of the Company's products and a
competitor of the Company. The complaint alleges that the 

                                    Page 12
<PAGE>
 
Company's manufacture and sale in the United States of Newbridge frame relay and
ATM (asynchronous transfer mode) switch products infringe certain United States
patent rights claimed by Lucent Technologies, and requests actual and trebled
damages in an unspecified amount. Based upon its present understanding of the
laws in the United States and the facts, the Company believes it has meritorious
defenses to these claims. The Company has filed an answer to the complaint, as
well as a counterclaim alleging unfair competition by Lucent Technologies, and
intends to defend this action vigorously.


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

NONE.

                                    Page 13
<PAGE>
 
                                    PART II

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

COMMON SHARE PRICE RANGE AND DIVIDENDS

MARKET PRICE

The Common Shares are listed for trading on the New York Stock Exchange in the
United States under the symbol NN and are listed for trading on The Toronto
Stock Exchange in Canada under the symbol NNC. The following table sets forth
the range of high and low sale prices for the Company's Common Shares during the
current fiscal year through June 18, 1998 and the fiscal years ended April 30,
1998 and 1997. The reported sales prices have been adjusted to reflect the two
for one stock split effected in the form of a stock dividend, effective
September 30, 1996.

<TABLE>
<CAPTION>
                                     NEW YORK                            TORONTO
                                  STOCK EXCHANGE                     STOCK EXCHANGE
                                   PRICE RANGE                        PRICE RANGE
                            -----------------------------           -------------------- 
                            High                  Low                   High       Low
                            -----                 -------             ---------  ---------
<S>                         <C>                   <C>                 <C>        <C>
Fiscal year 1999:
  First quarter (through
     June 18, 1998)         US$32  /3/4/            US$21             Cdn$47.00  Cdn$31.00
                                              
Fiscal year 1998:                             
  Fourth quarter            US$30 /7/16/            US$18 /15/16/     Cdn$43.20  Cdn$27.00
  Third quarter                58  /7/8/               25   /7/8/         82.75      37.50
  Second quarter               69  /3/8/               42   /1/2/         95.00      58.90
  First quarter                52 /7/16/               31   /1/2/         72.20      43.80
                                                                  
Fiscal year 1997:                                                 
  Fourth quarter            US$35  /1/8/            US$27   /1/4/     Cdn$47.25  Cdn$38.25
  Third quarter                35  /1/4/               26   /1/2/         47.15      35.75
  Second quarter               36 /7/16/               20   /5/8/         50.00      28.25
  First quarter                37  /1/8/               20  /3/16/         51.00      27.75
 </TABLE>

At June 18, 1998 there were 1,286 shareholders of record of the Company.

Under the provisions of the Investment Canada Act, as amended (the "IC Act"),
the acquisition by non-Canadians, or by corporations in which non-Canadians have
a majority controlling interest, of control of a corporation incorporated in
Canada and carrying on business in Canada is subject to notification and may be
subject to review and approval in certain instances. Given the current value of
the gross assets of the Company, the IC Act requires a non-Canadian who makes an
investment to acquire control of the Company to file an application for review
and obtain an approval.

                                    Page 14
<PAGE>
 
DIVIDENDS

The Company has not paid cash dividends on its Common Shares, and it presently
intends to continue this policy for the foreseeable future in order to retain
earnings for the development of the Company's business.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

The Company cautions that certain statements in this Report and in the Company's
other periodic reports filed pursuant to the United States Securities Exchange
Act of 1934, as amended (the "Exchange Act"), in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere, may be
forward-looking statements within the meaning of Section 21E of the Exchange
Act, the "safe harbor" for forward-looking statements enacted in the Private
Securities Litigation Reform Act of 1995. The forward-looking statements that
may be contained in the Company's reports under the Exchange Act and in other
oral or written statements made by the Company or by its authorized
representatives involve a number of risks and uncertainties. As a consequence,
actual results might differ materially from results forecast or suggested in
these forward-looking statements. Some of these risks and uncertainties are
identified in the discussion to follow. Additional information regarding these
factors and other important factors that could cause actual results to differ
materially may be referred to as part of particular forward-looking statements.
The forward-looking statements made by the Company or on its behalf are
qualified in their entirety by reference to the important factors discussed
below and to those that may be discussed as part of particular forward-looking
statements.

The Company cautions that the following important factors, among others, could
cause actual results for the fiscal year ending May 2, 1999 and for subsequent
financial reporting periods to differ materially from those forecast or
suggested in any forward-looking statement made by the Company or on its behalf,
in this Report or otherwise. A number of these important factors have been
discussed in this Annual Report on Form 10-K for the fiscal year ended April 30,
1998 and its quarterly reports on Form 10-Q as previously filed with the United
States Securities and Exchange Commission.

POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS AND GROWTH RATE

A significant portion of the Company's sales are derived from products shipped
against orders received in each fiscal quarter and from products shipped against
firm purchase orders released in that fiscal quarter. As is prevalent in
emerging segments of the networking industry, a disproportionate amount of the
Company's shipments occur in the third month of each fiscal quarter. As a
result, the Company operates without significant backlog and schedules some
production and budgets expenses based on forecasts of sales, which are difficult
to predict. The Company's manufacturing procedures are designed to assure rapid
response to customer demand, but may, in certain circumstances, create risk of
excess or inadequate inventory if orders do not match forecast. Moreover,
shortages or delays in the supply of manufacturing components at acceptable
prices could adversely affect the Company's ability to meet scheduled product
shipments in any particular quarter, which could materially affect the Company's
operating results. Because a substantial portion of customer orders are filled
within the fiscal quarter of receipt, and because of the ability of customers to
revise or cancel orders and change delivery schedules without significant
penalty, quarter to quarter revenues and, to a greater degree, net earnings, may
be subject to greater variability. Quarterly operating results are consequently
difficult to predict, even towards the end of a given fiscal quarter. The
Company's ability to meet financial expectations may be adversely affected if
the non-linear pattern of shipments from month to month continues.

                                    Page 15
<PAGE>
 
In addition, the Company is subject to a degree of variation in quarterly sales
as a substantial portion of sales is derived from less mature markets outside of
North America and Western Europe. These markets can be more susceptible to
uncontrollable and changing factors including foreign currency exchange rates,
political or economic conditions in a specific country or region, trade
protection measures, government spending patterns, and other factors. In the
latter part of fiscal 1998, the Company's sales in the Asia Pacific region
declined. Sales in these less mature markets are also often subject to customer
financing, licensing or other import or foreign exchange controls, and other
pre-conditions that can result in requirements to ship orders only if all
components ordered are shipped at the same time ("ship-complete" requirements).
Delays in orders and the Company's ability to fulfill orders with ship-complete
requirements may cause quarter to quarter revenues and, to a greater degree, net
earnings, to be subject to greater variability and less predictability.

Unforeseen delays in product deliveries or closing large sales, introductions of
new products by the Company or its competitors, seasonal patterns of customer
capital expenditures or other conditions affecting the networking industry in
particular or the economy generally during any fiscal quarter could cause
quarterly revenue and, to a greater degree, net earnings, to vary greatly. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Manufacturing".

TECHNOLOGICAL CHANGES

The market for the Company's products is characterized by rapid technological
change, evolving industry standards, frequent product introductions and evolving
methods used by carriers and corporations in building and managing networks.
Such changes in the market for networking products may adversely affect the
Company's ability to sell its products. The Company's operating results will
depend in significant part upon its ability to maintain the competitiveness of
its product offerings while reducing unit manufacturing costs. In fiscal 1999,
the Company expects that the demand for networking products will continue the
trend toward ATM and other packet based technologies and away from circuit
switched networking products.

The Company cautions that its sales may grow at a slower rate in the future than
historical rates of sales growth. The growth of the Company's sales may be
subject to the rate at which carriers deploy service offerings based on newer
technologies such as ATM. Although most network equipment suppliers have
introduced ATM-based product offerings and many carriers have implemented or
announced intentions to implement ATM, the degree of commercial acceptance of
ATM switching technology has not been determined. A key element of the Company's
business strategy is utilizing ATM technology in its network solutions.
Accordingly, the Company's future sales growth and results of operations are
dependent on continued growth and market acceptance of ATM technology. In
addition, quarter to quarter revenues may be subject to greater variability due
to longer sales cycles often associated with the adoption of new technologies.

The Company's ability to anticipate changes in technology, industry standards
and the evolution in methods of building and managing networks, and to develop
and introduce new and enhanced products on a timely basis that are successful in
the market, will be significant factors in the Company's competitive position
and its prospects for growth. Moreover, if technologies or standards supported
by the Company's products or carrier service offerings based on the Company's
products become obsolete or fail to gain widespread commercial acceptance, the
Company's business may be adversely affected. As a result, Management 

                                    Page 16
<PAGE>
 
believes that continued significant expenditures for research and development
will be required in the future. Research and development project schedules for
high technology products are inherently difficult to predict, and there can be
no assurance that the Company will achieve its expected initial shipment dates
of products in development. Because timely availability of new and enhanced
products is critical to the success of the Company, delays in availability of
these products, or lack of market acceptance of such products, could adversely
affect the Company. See "Business".

COMPETITION AND STRATEGIC ALLIANCES

The market for the Company's products is also characterized by intense
competition. With the development of the worldwide communications market and the
growing demand for related equipment, numerous manufacturers such as the Company
have emerged to offer products for these markets in competition with traditional
communications equipment suppliers. Competition could further increase if new
companies enter the market or if existing competitors expand their product lines
or upgrade existing products to accommodate new technologies and features. The
Company competes for customers on the basis of product line capabilities
including integration of multiple applications on to a single network, network
management capabilities, ability to offer complete end-to-end networking
solutions, price, reliability, adherence to standards, and market presence. An
increase in competition could require increased spending by the Company on
research and development and sales and marketing and may otherwise adversely
affect the Company's business. Many of the Company's competitors and potential
competitors have greater financial, technological, manufacturing, marketing, and
personnel resources than the Company.

The networking industry recently has been consolidating through strategic
alliances, mergers and acquisitions thereby creating companies with larger
market shares, customer bases, sales forces, product offerings and technology
and marketing expertise. Boundaries between different segments of the networking
industry are being blurred as competitors attempt to position their product
lines to address a broader spectrum of networking requirements. Continued
consolidation of the networking industry could result in a strengthening of the
Company's competitors and may adversely affect the Company's competitive
position. See "Business--Competition".

The Company has a number strategic alliances with companies including Siemens
and 3Com. These alliances are formed to facilitate joint research and
development efforts, product compatibility, adoption of industry standards and
reseller arrangements. There can be no assurance that such alliances will lead
to standards acceptable to the market, or competitive products or marketing. In
addition, if these companies fail to perform, or if these relationships fail to
develop as planned, the Company's business and operating results could be
adversely affected.

ACQUISITIONS

The Company's strategy includes acquisitions to enhance its business, diversify
its marketing and distribution, and supplement its product development.
Acquisitions involve numerous risks, including difficulties in the integration
of the operations, technologies and products of the acquired enterprises with
those of the Company, the diversion of management and financial resources to the
task of integration of the respective businesses, the entry into markets in
which Newbridge has limited direct prior experience and where competitors have
stronger market positions, and the potential loss of key employees of the
acquired enterprises. In view of these challenges, if the Company is unable to
integrate acquired enterprises efficiently and 

                                    Page 17
<PAGE>
 
effectively, it may not obtain the anticipated benefits of acquisitions, and its
business and operating results could be adversely affected. For example, the
restructuring costs of $181,444,000 incurred in fiscal 1998 were attributable
largely to the operations of Ungermann-Bass Networks, Inc. acquired in fiscal
1997. In addition, acquisitions may affect financial results. For example, in
fiscal 1998 the Company acquired RadNet Ltd. and charged to net earnings
$52,762,000 related to the amortization of purchased research and development in
process.

DEPENDENCE ON KEY EMPLOYEES

The Company's success depends upon the continued contributions of its employees,
many of whom would be difficult to replace. Newbridge believes that its future
success will depend, in significant part, upon its ability to attract, retain
and motivate skilled and talented engineers, sales and marketing personnel, and
management. Competition for such personnel is intense. Failure to attract,
retain and motivate key employees could adversely affect the Company's business
and operating results.

During June 1998 the Company appointed a new President and Chief Operating
Officer. There are risks inherent in any reorganization, and the Company can
give no assurances that this appointment will meet its intended objectives.

MARKET PRICE VOLATILITY OF COMMON SHARES

The Company's Common Shares have been subject to substantial market price
volatility, some of which has occurred when there have been variations between
the Company's actual or anticipated financial results and the published
expectations of investment analysts and in the aftermath of public announcements
by the Company and its competitors. In addition, the stock market has
experienced extreme price and volume fluctuations from time to time which have
affected the market price of many technology companies in particular and which
have often been unrelated to the operating performance of these companies. These
broad market fluctuations, as well as general economic and political conditions,
may adversely affect the market price of the Company's Common Shares. Because of
the Company's reliance on stock options as an incentive to its employees,
changes in the market price of the Company's Common Shares could adversely
affect the Company's ability to attract and retain key employees.

REGULATION

The sale of networking products may be affected by governmental regulatory
policies, the imposition of carrier tariffs, and taxation of telecommunications
services, which may also affect the availability of high speed digital
transmission lines. These policies are under continuous review and are subject
to change. In the United States, regulatory policies are likely to have a
significant impact on the competitive environment in which the Company operates.
The Telecommunications Act of 1996 and associated regulatory developments will
eliminate or modify many regulatory restrictions in the telecommunications
market. Deregulation may facilitate the increasingly competitive offerings by
communications service providers. In addition, the RBOCs are now permitted to
manufacture and sell telecommunications equipment under certain conditions.
Given the substantial resources and large customer base of the RBOCs, Newbridge
could face competition from these companies should they satisfy these conditions
and elect to manufacture networking products. Notwithstanding the deregulatory
process in the United States and elsewhere, governmental communications
regulatory authorities have promulgated regulations which, among other things,
set installation and equipment standards for private telecommunications systems
and require that all newly installed hardware be registered and meet certain
governmental standards. Carriers also 

                                    Page 18
<PAGE>
 
establish standards for interconnection and integration of network equipment
with public switched telephone networks. Although the Company designs its
products to comply with international standards, to the extent those standards
are changed or if the Company is unable to manufacture standards compliant
products on a cost effective basis, the Company's business may be adversely
affected. See "Business -- Government Regulation" and "-- Networking Industry".

PROPRIETARY RIGHTS

The Company protects its trademarks, inventions, trade secrets, and other
proprietary rights by contract, trademark registration, patent registration and
appropriate trademark and copyright markings, as well as with internal security.
The Company licenses certain intellectual property rights from third parties.
There can be no assurance that the steps taken by the Company to protect its
intellectual property rights will be adequate to prevent misappropriation of its
technology or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. In addition, some foreign countries do not have or enforce laws that
protect the Company's intellectual property rights to the same extent as do the
laws of the United States and Canada.

The Company is subject to the risk of adverse claims and litigation alleging
infringement of the intellectual property rights of others. From time to time
the Company has received claims of infringement of other parties' proprietary
rights, and has been sued by Lucent Technologies as described in "Legal
Proceedings". There can be no assurance that third parties will not assert
infringement claims in the future with respect to the Company's current or
future products or that any such claims will not require the Company to enter
into license agreements or result in protracted and costly litigation,
regardless of the merits of such claims. No assurance can be given that any
necessary licenses will be available or that, if available, such licenses can be
obtained on commercially reasonable terms.

FOREIGN CURRENCY EXPOSURE AND CONCENTRATION OF CREDIT RISK

Because substantial portions of the Company's sales, cost of sales and other
expenses are denominated in U.S. dollars and Pounds Sterling, the Company's
results of operations are subject to change based on fluctuations in the rates
of exchange of those currencies for the Canadian dollar. The Company uses
financial instruments, principally forward exchange contracts, in its management
of foreign currency exposures. Realized and unrealized gains and losses on
foreign exchange contracts are recognized and offset foreign exchange gains and
losses on the underlying net asset or net liability position. These contracts
primarily require the Company to purchase and sell certain foreign currencies
with or for Canadian dollars at contractual rates. Several major financial
institutions are counterparties to the Company's financial instruments. It is
Company practice to monitor the financial standing of the counterparties and
limit the amount of exposure to any one institution. The Company may be exposed
to a credit loss in the event of nonperformance by the counterparties to these
contracts. With respect to accounts receivable, concentration of credit risk is
limited due to the diverse areas covered by the Company's operations. The
Company has credit evaluation, approval and monitoring processes intended to
mitigate potential credit risks. Anticipated bad debt loss has been provided for
in the allowance for doubtful accounts. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Quantitative and
Qualitative Disclosures About Market Risks".

                                    Page 19
<PAGE>
 
OTHER FACTORS

The Company further cautions that the factors referred to above and those
referred to as part of particular forward-looking statements may not be
exhaustive, and that new risk factors emerge from time to time in its rapidly
changing business. The Company does not undertake to update any forward-looking
statements it may make or has made on its behalf to reflect changes in its
expectations or assumptions or the risks and uncertainties referred to.

CERTAIN TAX CONSIDERATIONS

The following discussion outlines Canadian and United States federal income tax
consequences of ownership of the Company's Common Shares that could be relevant
for persons who are not residents of Canada.

GAINS ON DISPOSITION OF COMMON SHARES

Under the provisions of the 1980 Convention between Canada and the United States
with respect to Taxes on Income and on Capital, as amended by the 1983, 1984,
1995 and 1997 Protocols thereto (the "Convention"), United States corporations
or individual residents of the United States ("U.S. Shareholders") that do not,
and are not deemed to, use or hold the Common Shares in carrying on a business
in Canada ("Unconnected U.S. Shareholders") generally will not be subject to
Canadian federal income tax on any capital gain recognized upon the disposition
of their Common Shares, provided that the value of the Common Shares is not
derived principally from real property situated in Canada, as determined at the
time of their disposition. The Company is of the view that the Common Shares
currently do not derive their value principally from such real property.

For United States federal income tax purposes, an Unconnected U.S. Shareholder
generally will recognize a capital gain or loss on the disposition of Common
Shares in an amount equal to the difference between the amount realized upon the
disposition and the U.S. Shareholder's adjusted basis in the Common Shares.
Capital losses are deductible to the extent of capital gains and, in the case of
non-corporate U.S. Shareholders, may be used to offset up to US$3,000 of
ordinary income (US$1,500 in the case of married individuals filing separately).

TAXATION OF DIVIDENDS

Dividends paid to Unconnected U.S. Shareholders owning less than 10% of the
voting shares of the Company generally are subject to Canadian withholding tax
at the reduced rate of 15% under the Convention. In the case of a corporate
Unconnected U.S. Shareholder owning 10% or more of such shares, the withholding
tax rate generally is reduced to 5% under the Convention.

Unconnected U.S. Shareholders generally will treat the gross amount of dividends
paid by the Company, without reduction for Canadian withholding taxes, as
ordinary taxable income for United States federal income tax purposes. In
certain circumstances, however, Unconnected U.S. Shareholders may be eligible to
receive a foreign tax credit for such taxes and, in the case of a corporate
Unconnected U.S. Shareholder owning 10% or more of the voting shares of the
Company, for a portion of the Canadian taxes paid by the Company itself.
Dividends paid by the Company to United States corporations will not, however,
give rise to the dividends received deduction generally allowed those
corporations under United States federal income tax law.

                                    Page 20
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA

The income statement data of the Company presented below for each of the five
fiscal years ended April 30, 1998 and the balance sheet data as at April 30,
1998, 1997, 1996, 1995, and 1994 have been derived from the audited Consolidated
Financial Statements of the Company that are included as part of this Annual
Report on Form 10-K and the Company's Annual Reports on Form 10-K for the prior
three fiscal years.

The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Annual Report on Form 10-K.

<TABLE>
<CAPTION>
                                                                                  FISCAL YEAR ENDED APRIL 30,
                                                                 ----------------------------------------------------------------
                                                                     1998         1997         1996         1995         1994
                                                                  ----------   ----------   ----------    ---------    ---------
                                                                       (CANADIAN DOLLARS, IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                               <C>          <C>          <C>           <C>          <C>        
INCOME STATEMENT DATA:
 
Sales                                                             $1,620,620   $1,376,327   $  921,244    $ 800,523    $ 552,521
Cost of sales                                                        625,065      507,588      319,745      260,471      171,922
                                                                  ----------   ----------   ----------    ---------    ---------
Gross margin                                                         995,555      869,139      601,499      540,052      380,599
 
Expenses
  Selling, general and administrative                                491,787      346,106      231,060      196,073      115,670
  Research and development                                           258,879      155,330       97,205       66,066       38,578
  Purchased research and
    development in process /(1)/                                      52,762       96,940           --           --           --
  Restructuring costs /(2)/                                          181,444           --           --           --           --
  Settlement of litigation /(3)/                                       2,642           --           --           --           --
                                                                  ----------   ----------   ----------    ---------    ---------
 
Income from operations                                                 8,041      270,763      273,234      277,913      226,351
Interest income, net                                                   9,761       18,605       22,607       15,592        8,941
Gain on sale of long term investments                                 47,960           --       12,715           --           --
Other expenses                                                       (10,448)      (9,615)      (3,443)      (6,512)      (1,389)
                                                                  ----------   ----------   ----------    ---------    ---------
Earnings before income taxes
   and non-controlling interest                                       55,314      279,753      305,113      287,353      233,903
Provision for income taxes                                            73,001      117,718      100,779       96,944       76,092
Non-controlling interest                                                 631        5,118        1,470        2,019           --
                                                                  ----------   ----------   ----------    ---------    ---------
 
Net earnings (loss) /(4)/                                         $  (18,318)  $  156,917   $  202,864    $ 188,390    $ 157,811
                                                                  ==========   ==========   ==========    =========    =========
 
Earnings (loss) per share
   Basic                                                                 (10)c         92c       $1.22        $1.16           99c
   Fully diluted                                                         (10)c         91c       $1.19        $1.11           94c
 
Weighted average number of shares
   Basic                                                             174,617      170,510      165,842      162,891      159,427
   Fully diluted                                                     191,459      184,595      179,665      175,823      171,868
</TABLE> 
 
                                    Page 21
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                                      FISCAL YEAR ENDED APRIL 30,
                                                                    --------------------------------------------------------------
                                                                       1998         1997         1996         1995         1994
                                                                    ----------   ----------   ----------    ---------    ---------
                                                                      (Canadian dollars, in thousands, except per share data)
<S>                                                               <C>           <C>           <C>          <C>         <C>    
INCOME STATEMENT DATA (CONTINUED):
 
U.S. GAAP /(5)/
   Net earnings (loss)                                            $(18,318)     $156,917      $202,864     $188,390    $157,811
 
   Earnings (loss) per share                                           
     Basic                                                         $ (0.10)        $0.92         $1.22        $1.16      $ 0.99  
     Diluted                                                       $ (0.10)        $0.90         $1.19        $1.13      $ 0.94 
     Diluted-- US                                              $  US (0.07)     $ US0.66      $ US0.87     $ US0.82    $ US0.71
 
 
   Weighted average number of shares
     Basic                                                         174,617       170,510       165,842      162,891     159,427
     Diluted                                                       174,617       174,525       170,990      166,646     167,137
 
 
                                                                                           AS AT APRIL 30,
                                                                  ---------------------------------------------------------------
                                                                     1998         1997         1996         1995         1994
                                                                  ----------   ----------   ----------    ---------    ---------
                                                                                 (CANADIAN DOLLARS IN THOUSANDS)
<S>                                                               <C>          <C>          <C>           <C>          <C>         
BALANCE SHEET DATA:
 
Working capital                                                   $  945,892   $  638,392   $  658,087    $ 491,888    $ 351,458
Total assets                                                       1,966,825    1,496,703    1,093,417      827,163      584,764
 
Short term debt (including current
 portion of long term obligations)                                     4,136        7,353        2,302        2,562        7,272
Long term obligations                                                383,311       10,817          860        3,493        7,767
Shareholders' equity                                               1,233,620    1,126,499      902,686      674,645      473,572
</TABLE>

___________________

(1)  See Note 2 to the Consolidated Financial Statements.
(2)  See Note 17 to the Consolidated Financial Statements.
(3)  See Note 22 to the Consolidated Financial Statements.

(4) Pro forma net earnings per share for fiscal 1998, which exclude the non-
     recurring gain on sale of long term investments and non-recurring charges
     for purchased research and development in process, restructuring costs and
     settlement of litigation, were $171,337,000 or $0.98 per share basic and
     fully diluted under Canadian GAAP and $0.98 per share basic and $0.96 per
     share diluted under U.S. GAAP (US $0.69 per share diluted). Pro forma net
     earnings for fiscal 1997, which exclude the non-recurring charge related to
     purchased research and development in process, were $253,857,000 or $1.49
     per share basic and $1.44 fully diluted under Canadian GAAP and $1.49 per
     share basic and $1.45 per share diluted under U.S. GAAP (US$1.07 per share
     diluted). Pro forma net earnings for fiscal 1996, which exclude the non-
     recurring gain on sale of long term investments, were $194,346,000 or $1.17
     per share basic and $1.14 fully diluted under Canadian GAAP and $1.17 per
     share basic and $1.14 per share diluted under U.S. GAAP (US $0.83 per
     share diluted).

(5)  Financial information in this Annual Report on Form 10-K is presented in
     accordance with accounting principles generally accepted in Canada
     ("Canadian GAAP"), which also conform in all material respects with
     accounting principles generally accepted in the United States ("U.S.
     GAAP"), except for the disclosure of certain cash equivalents on the
     Consolidated Balance Sheets and investing activities on the Consolidated
     Statements of Cash Flows, as disclosed in Note 6, the write off of
     purchased research and development in process, as disclosed in Note 2, and
     the method of calculation of earnings per share, as disclosed in Note 19.
 
                                    Page 22
<PAGE>
 
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS

Certain parts of the following discussion and analysis may be forward-looking
statements that involve a number of risks and uncertainties. As a consequence,
actual results might differ materially from results forecast or suggested in any
forward-looking statements. See "Market for Registrant's Common Equity and
Related Stockholder Matters -- Cautionary Statement Regarding Forward-Looking
Information".

During the fiscal year ended April 30, 1997, the Company acquired a 100% equity
interest in Ungermann-Bass Networks, Inc. ("UB Networks"), a manufacturer of
local area network equipment based in Santa Clara, California, for cash
consideration of $146,590,000. The operating results of UB Networks have been
consolidated into the operating results of the Company commencing in the fourth
fiscal quarter ended April 30, 1997.

RESULTS OF OPERATIONS

The following table sets forth, for the fiscal years indicated, the percentage
of sales represented by certain items in the Company's Consolidated Statements
of Earnings.

<TABLE>
<CAPTION>
                                              Fiscal Year Ended April 30,
                                          ----------------------------------
                                             1998         1997        1996
                                          ----------   ----------   --------
<S>                                       <C>          <C>          <C>
  Sales                                        100.0%       100.0%     100.0%
  Cost of sales                                 38.6         36.9       34.7
                                          ----------   ----------   --------
  Gross margin                                  61.4         63.1       65.3
 
  Expenses
   Selling, general and administrative          30.3         25.1       25.1
   Research and development                     16.0         11.3       10.5
   Purchased research and
    development in process                       3.2          7.0         --
   Restructuring costs                          11.2           --         --
   Settlement of litigation                      0.2           --         --
                                          ----------   ----------   --------
 
 Income from operations                          0.5         19.7       29.7
 
 Interest income, net                            0.6          1.3        2.4
 Gain on sale of long term investments           3.0           --        1.4
 Other expenses                                 (0.7)        (0.7)      (0.4)
                                          ----------   ----------   --------
 
 Earnings before income taxes
   and non-controlling interest                  3.4         20.3       33.1
 
 Provision for income taxes                      4.5          8.5       10.9
 
 Non-controlling interest                        0.0          0.4        0.2
                                          ----------   ----------   --------
 
 Net earnings (loss)                           (1.1)%        11.4%      22.0%
                                          ==========   ==========   ========
</TABLE> 
 
                                   Page 23 
<PAGE>
 
SALES

<TABLE> 
<CAPTION> 
                                                Fiscal Year Ended April 30,
                                          ----------------------------------
                                             1998         1997        1996
                                          ----------   ----------   --------
                                             (Canadian dollars in thousands)
<S>                                       <C>          <C>          <C>     
  Sales                                   $1,620,620   $1,376,727   $921,244
                                          ==========   ==========   ========
 
  Increase over prior year                    18%          49%         15%
</TABLE>

Growth in sales in fiscal 1998 compared to fiscal 1997 and fiscal 1997 compared
to fiscal 1996 were due to an increase in sales of products based on packet
technologies for both wide area and local area network applications. The
proportion of product sales from products based on packet technologies for wide
area network applications was approximately 45% in fiscal 1998, approximately
30% in fiscal 1997 and approximately 25% in fiscal 1996. Product line
enhancements and new product lines introduced in fiscal 1997 and 1998 resulted
in increased sales, predominantly through increased acceptance and demand by
carriers throughout the world for the Company's asynchronous transfer mode (ATM)
products. The proportion of product sales from products based on packet
technologies for local area network (LAN) applications was approximately 15% in
fiscal 1998, approximately 10% in fiscal 1997 and was insignificant in fiscal
1996. This sales growth was derived from the acquisition of UB Networks in the
latter part of fiscal 1997 and from continued growth in sales of the Company's
ATM-based VIVID switched routing products.

Sales of circuit switched networking products in fiscal 1998 declined 17%
relative to sales in fiscal 1997. The decline was a reflection of a decrease in
sales of the Company's circuit switched networking products in Europe and Latin
America and declining business levels in Asia in the last half of fiscal 1998.
Sales of these networking products have been and are expected to be subject to
potential declines and quarterly variability as customers throughout the world
increasingly adopt packet technologies. In fiscal 1997, sales of circuit
switched networking products increased 20% compared to fiscal 1996 due to sales
increases in Asia, Latin America and Europe.

The Company expects the proportion of sales derived from products based on
packet technologies to continue to increase relative to sales derived from
circuit switched networking products in fiscal 1999 when compared to fiscal
1998. As a result, sales growth may be reduced due to longer sales cycles often
associated with the adoption of new technologies.

The Company's sales in fiscal 1998 to carriers for applications that provide a
range of value-added services, such as Virtual Private Networks (VPNs), wide
area network support and Internet access, and for resale to end users
represented 69% of total sales (66% in fiscal 1997 and 65% in fiscal 1996). The
number of networking switches and other products supplied by the Company
continued to increase in each of the last two fiscal years. Average selling
prices declined slightly in fiscal 1998 relative to fiscal 1997 and in fiscal
1997 relative to fiscal 1996, primarily due to discounts on certain large
contracts for products for more basic networking applications and the impact on
product pricing of increased competition, particularly in the market for
products based on packet technologies. Deliveries to original equipment
manufacturers (OEMs) for carrier customers and deliveries under certain large
contracts with carriers contributed significantly to sales in fiscal 1998,
fiscal 1997 and fiscal 1996. Sales to Siemens A.G. and subsidiaries, generally
under OEM arrangements for resale to end users, were 16% of total sales for
fiscal 1998 (18% in fiscal 1997 and less than 10% in fiscal 1996).

                                    Page 24
<PAGE>
 
The Company's sales and service functions are divided into three main geographic
regions: (1) the Americas Region (consisting of North and South America); (2)
the European Region (consisting of Europe, the Middle East and Africa); and (3)
the Asia Pacific Region (consisting of countries in the Asia Pacific region and
Russia). The percentage of consolidated sales derived by sales management in
each geographic region for fiscal 1998, 1997 and 1996 are set forth below.

<TABLE>
<CAPTION>
                                              Fiscal Year Ended April 30,
                                        -------------------------------------
                                        1998              1997            1996
                                        ----              ----            ----
<S>                                     <C>               <C>             <C>
  Americas Region                        51%               49%             55%
  European Region                        31%               33%             30%
  Asia Pacific Region                    18%               18%             15%
</TABLE>

The Company is subject to a degree of variation in quarterly sales as a
substantial proportion of sales is derived from less mature markets outside of
North America and Western Europe. For additional geographic segment information,
see Note 21 to the Consolidated Financial Statements.

A significant portion of the Company's sales are derived from products shipped
against orders received in each fiscal quarter and from products shipped against
firm purchase orders released in that fiscal quarter. As is prevalent in
emerging segments of the networking industry, a disproportionate amount of the
Company's shipments occur in the third month of each fiscal quarter. In
addition, customers have the ability to revise or cancel orders and change
delivery schedules without significant penalty. As a result, the Company
operates without significant backlog and schedules some production and budgets
expenses based on forecasts of sales, which are difficult to predict. Unforeseen
delays in product deliveries or closing large sales, introductions of new
products by the Company or its competitors, seasonal patterns of customer
capital expenditures or other conditions affecting the networking industry in
particular or the economy generally during any fiscal quarter could cause
quarterly revenue and, to a greater degree, net earnings, to vary greatly.
Quarterly operating results are consequently difficult to predict, even towards
the end of a given fiscal quarter.

Because substantial portions of the Company's sales, cost of sales and other
expenses are denominated in U.S. dollars and Pounds Sterling, the Company's
results of operations are subject to change based on fluctuations in the rates
of exchange of those currencies for the Canadian dollar. During fiscal 1998 and
fiscal 1997, the decrease in the value of the Canadian dollar against the Pound
Sterling and the U.S. dollar, relative to exchange rates prevailing in the
respective previous years, resulted in no material variance in reported sales,
gross margin or income from operations. For information related to the Company's
policies in its management of foreign exchange exposures, see "Quantitative and
Qualitative Disclosures About Market Risk" and Note 15 to the Consolidated
Financial Statements.

COST OF SALES AND GROSS MARGIN

<TABLE>
<CAPTION>
                                          Fiscal Year Ended April 30,
                                      ---------------------------------
 
                                        1998         1997       1996
                                      --------      --------   --------
                                       (Canadian dollars in thousands)
<S>                                   <C>            <C>        <C> 
 Gross margin                         $995,555      $869,139   $601,499
                                      ========      ========   ========
 
 As a percentage of sales                61%           63%        65%
</TABLE>


                                    Page 25
<PAGE>
 
Cost of sales consists of manufacturing costs, warranty expense and costs
associated with the provision of services. The decline in the gross margin as a
percentage of sales in fiscal 1998 relative to fiscal 1997 was primarily the
result of the decline in revenues from circuit switched networking products,
which carry gross margins above the average gross margins earned on the
Company's other products, and an increase in the proportion of sales derived
from service revenues, which carry gross margins below the average gross margins
earned by the Company.

The decline in the gross margin as a percentage of sales in fiscal 1997 relative
to fiscal 1996 was primarily the result of gross margins earned on product sales
and service revenues of UB Networks and other companies acquired during fiscal
1997, which have been below the average gross margins earned on the Company's
other products.

The declines in average selling prices in fiscal 1998 relative to fiscal 1997
and in fiscal 1997 relative to fiscal 1996 were generally offset by reductions
in per unit costs of manufacturing, resulting in no material impact on gross
margins. Many component prices are negotiated by the Company with its suppliers.
Component price decreases have been principally due to increases in volumes
purchased. Shortages of certain components can result in increased component
prices.

Management expects a continued decline in the proportion of revenues from
circuit switched networking products, which have carried gross margins above the
average gross margins earned on the Company's other products. In addition, the
Company believes the impact on product pricing of increased competition,
particularly in the market for products based on packet technologies, will
constrain the Company's ability to maintain gross margins with reductions in per
unit costs. As a result, the gross margin as a percentage of sales is expected
to decline in fiscal 1999 compared to fiscal 1998.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

<TABLE>
<CAPTION>
                                                  Fiscal Year Ended April 30,
                                               --------------------------------
                                                 1998       1997       1996
                                               --------   --------   --------
                                                (Canadian dollars in thousands)
<S>                                            <C>        <C>        <C>
 
Selling, general and administrative expenses    $491,787   $346,106   $231,060
                                                ========   ========   ========
 
As a percentage of sales                           30%        25%        25%
 
Increase over prior year                           42%        50%        18%
</TABLE>

Selling, general and administrative expenses increased in fiscal 1998 and in
fiscal 1997 primarily as a result of increases in sales and service personnel.
The majority of the increases in personnel in fiscal 1998 and in fiscal 1997
resulted from acquisitions made to enhance the Company's business and diversify
its marketing and distribution channels. Incremental hiring and spending during
fiscal 1998 and fiscal 1997 were directed at programs to strengthen the
Company's sales and support infrastructure throughout the world.

The increase in selling, general and administrative expenses as a percentage of
sales in fiscal 1998 over fiscal 1997 and 1996 reflects the higher cost
structure of companies acquired during fiscal 1997, most significantly the
former UB Networks which was acquired at the end of the third quarter of fiscal
1997, as well as the result of sequential sales declines in the first three

                                    Page 26
<PAGE>
 
quarters of fiscal 1998. Management anticipates that selling, general and
administrative expenses as a percentage of sales will decline in fiscal 1999
relative to fiscal 1998.

RESEARCH AND DEVELOPMENT

<TABLE>
<CAPTION>
                                                   Fiscal Year Ended April 30,
                                                 ------------------------------
                                                  1998       1997       1996
                                                 --------  --------   --------
                                                 (Canadian dollars in thousands)
<S>                                              <C>         <C>       <C>    
 Gross research and development expenditures     $305,357    $195,229  $130,851
 
 Investment tax credits                            34,971      26,400    21,974
 
 Customer, government and other funding             5,507       9,484     7,919
 
 Net deferral (amortization) of
   software development costs                       6,000       4,015     3,753
                                                  --------   --------  --------
 
 Net research and development expenses            $258,879   $155,330  $ 97,205
                                                  ========   ========  ========
 
 Gross expenditures as a percentage of sales         19%        14%       14%
 
 Recoveries as a percentage of gross expenditures    15%        20%       26%
 
 Net research and development
  expenses as a percentage of sales                  16%        11%       11%
</TABLE>

Research and development expenditures consist primarily of software and hardware
engineering personnel expenses, costs associated with equipment and facilities,
and subcontracted research and development costs. The increased costs in fiscal
1998 and fiscal 1997 reflect spending to expand the breadth of network solutions
for new value-added service capabilities and access technologies, particularly
on ATM platforms and network and service management software in carrier and
carrier access applications. The majority of the increase was the result of
increased engineering personnel.

Recoveries decreased as a percentage of gross expenditures in fiscal 1998
compared to fiscal 1997, and in fiscal 1997 compared to fiscal 1996, due to
declines in investment tax credits and in customer, government and other funding
as a proportion of gross research and development expenditures. Based on
Management's estimates of the proportion of fiscal 1999 gross research and
development expenditures eligible for investment tax credits, and current levels
of committed funding, Management expects the level of recoveries as a percentage
of gross research and development expenditures in fiscal 1999 to decline
relative to fiscal 1998.

The markets for the Company's products are characterized by continuing
technological change. The Company plans to increase net research and development
spending in absolute dollars in fiscal 1999 to address the requirements of
carriers as they invest in new infrastructures to meet the challenges of growing
demand for new communications services and increased competition.

PURCHASED RESEARCH AND DEVELOPMENT IN PROCESS

In November 1997 the Company acquired a 49.9% interest in RadNet Ltd., an
Israeli developer and manufacturer of access switches for ATM networks, for
$53,676,000. The majority of the purchase price ($52,762,000) was allocated to
purchased research and development in process, which was fully amortized over
its estimated useful life of six months during the fiscal year ended April 30,
1998.

                                    Page 27
<PAGE>
 
Purchased research and development in process of $96,940,000 in fiscal 1997
related to the acquisition of UB Networks and was capitalized upon the
acquisition. A review of the recoverability of the purchased research and
development in process was undertaken by the Company during the fourth quarter
of the fiscal 1997, and it was determined that the purchased research and
development in process no longer met all the criteria for deferral and
accordingly the balance was written off as a charge to net earnings for the
fourth quarter of fiscal 1997.

Under U.S. GAAP, research and development in process acquired by the Company on
the acquisition of RadNet and UB Networks was written off against net earnings
upon acquisition.

RESTRUCTURING COSTS

In November 1997, the Company decided to restructure its activities related to
its LAN business. The restructuring plan involves the formation of a strategic
alliance with a company strongly positioned in the LAN business, and the
reduction of the Company's direct participation, and related costs, in the LAN
business. The Company announced its alliance with 3Com Corporation in January
1998. In repositioning the way in which it addresses the LAN market, the
restructuring plan created impairment losses on assets associated with the
Company's LAN business and liabilities associated with restructuring activities.
Restructuring costs of $181,444,000 recorded in the third quarter of fiscal 1998
comprise the following:

<TABLE>
<S>                                                            <C>
Asset impairment losses
       Accounts receivable                                     $ 12,732
       Inventory                                                 54,851
       Property, plant and equipment                             11,936
       Goodwill - UB Networks                                    18,775
       Goodwill - Ouest Standard Telematique                     38,350
       Other current and non-current assets                       5,162
                                                               --------
                                                                141,806
                                                               --------

Provision for restructuring
       Reduction in work force                                   20,796
       Reduction in facilities                                    4,753
       Discontinued activities                                   13,577
       Other restructuring costs                                    512
                                                               --------
                                                                 39,638
                                                               --------
 
  Restructuring costs                                          $181,444
                                                               ========
</TABLE>

Asset impairment losses were recorded to the extent the net book value
(including related reserves) exceeded the fair value of any assets associated
with the Company's restructuring plan. The fair value was based on the estimated
net realizable value of the underlying assets affected by the restructuring. The
full net book value of goodwill associated with the acquisitions of UB Networks
(acquired in January 1997) and Ouest Standard Telematique (acquired in August
1996) were written off as restructuring costs. Both acquisitions related to the
Company increasing its direct presence and participation in the LAN market.

The provision for restructuring comprised termination benefits for approximately
400 employees, reductions in facilities, and a provision for discontinued
activities, including costs associated with fulfilling prior commitments related
to certain discontinued product lines and activities.

                                    Page 28
<PAGE>
 
SETTLEMENT OF LITIGATION

In the fourth quarter of fiscal 1998 the Company reached an agreement in
principle to settle the class action lawsuit which was filed in United States
District Court in Washington, D.C. during fiscal 1995. The suit purported to be
a class action on behalf of a class of persons who purchased securities of the
Company between March 29 and August 1, 1994 and alleged that the Company made
false and misleading statements in violation of United States securities law and
common law. The proposed settlement is subject to review and approval by the
Court on a schedule set by the Court. The Company has recorded an expense of
$2,642,000 in connection with the proposed settlement, which represents
Management's estimate of the direct costs which will be incurred upon final
approval by the Court.

INTEREST AND OTHER EXPENSES

<TABLE>
<CAPTION>
                                               Fiscal Year Ended April 30,
                                             -------------------------------
                                                  1998    1997     1996
                                                -------  -------  -------
                                             (Canadian dollars in thousands)
<S>                                             <C>      <C>      <C>
 Interest income                                $11,581  $19,956  $23,193
 Interest expense on long term obligations        1,820    1,351      586
 Other expenses                                  10,448    9,615    3,443
</TABLE>

Interest income earned in fiscal 1998 and in fiscal 1997 decreased as compared
to the respective previous fiscal years due to declines in the cash position
maintained by the Company and due to declines in interest rates earned on
investments. Interest expense on long term obligations increased in fiscal 1998
and fiscal 1997 due to the assumption of long term obligations of companies
acquired by the Company during fiscal 1997. Interest expense on long term
obligations will increase in fiscal 1999 due to the issuance of US$225,000,000
in Senior Notes due April 2003. The increased interest expense is expected to be
largely offset by increases in interest income earned on an anticipated higher
cash position. Other expenses represented less than 1% of sales in fiscal 1998,
fiscal 1997 and fiscal 1996.

GAIN ON SALE OF LONG TERM INVESTMENTS

In January 1998 the Company sold its minority interest in Broadband Networks
Inc., a Canadian wireless technology company, to Northern Telecom Limited
("Nortel") for proceeds of $66,672,000. The proceeds received included cash of
$23,775,000 and Nortel shares valued at $42,897,000. The Company recognized a
gain in fiscal 1998 of $47,960,000, representing the excess of the value of the
consideration received over the cost to the Company of its investment in the
Broadband Networks Inc. shares exchanged.

In fiscal 1996, the Company sold its minority equity interest in InSoft, Inc.
("InSoft"), a multimedia software company. The Company recognized a gain in
fiscal 1996 on the sale of its InSoft shares of $12,715,000, representing the
excess of the market value of the shares of the acquirer received over the cost
to the Company of the InSoft shares exchanged.

                                    Page 29
<PAGE>
 
INCOME TAXES

<TABLE>
<CAPTION>
                                        Fiscal Year Ended April 30,
                                    --------------------------------
                                       1998         1997      1996
                                       ----         ----      ----
<S>                                    <C>          <C>       <C>
 Income tax rate                       132%          42%       33%
 Income tax rate, excluding
  non-recurring gains and charges       30%          31%       33%
</TABLE>

The income tax rate for fiscal 1998 and fiscal 1997 differs from the income tax
rate, excluding non-recurring gains and charges, due to limits on the
deductibility of purchased research and development in process recorded in
fiscal 1998 and fiscal 1997, and certain elements of restructuring costs
recorded in fiscal 1998. The composite rates of income tax, excluding non-
recurring gains and charges, for fiscal 1998, 1997 and 1996 were reduced from
the statutory rate primarily as a result of the application of certain
deductions related to manufacturing and processing activities and to research
and development expenditures in Canada. Future changes in the composite rates of
income tax will be primarily due to the relative profitability of operations and
the national tax policies in each of the various countries in which the Company
operates. Management believes that the composite rate of income tax, excluding
non-recurring gains and charges, will remain lower than the statutory rate
because of the deductibility related to manufacturing and processing activities
and research and development expenditures in Canada as well as other tax
planning measures undertaken by the Company. See Note 18 to the Consolidated
Financial Statements.

NON-CONTROLLING INTEREST

The non-controlling interests' share of net earnings of $631,000 in fiscal 1998,
$5,118,000 in fiscal 1997 and $1,470,000 in fiscal 1996 was due primarily to net
earnings of Transistemas S.A., an Argentine systems integrator of networking
products. In fiscal 1998, net earnings of Transistemas S.A. were partially
offset by losses incurred by Acacia S.A., a holding company with controlling
interests in system integrators of networking products in Brazil, Costa Rica and
Argentina. The Company has 51% equity interests in each of Transistemas S.A. and
Acacia S.A.

                                    Page 30
<PAGE>
 
NET EARNINGS (LOSS)


<TABLE>
<CAPTION>
                                                         Fiscal Year Ended April 30,
                                                     -------------------------------------
                                                         1998         1997       1996
                                                       --------     --------   --------
                                                       (Canadian dollars in thousands)
<S>                                                    <C>          <C>        <C>
  Net earnings (loss)                                  $(18,318)    $156,917   $202,864
 
  Non-recurring gains and charges
     Purchased research and
      development in process                             52,762       96,940          -
     Restructuring costs                                181,444            -          -
     Settlement of litigation                             2,642            -          -
     Gain on sale of long term investments              (47,960)           -    (12,715)
     Provision for income taxes on
      non-recurring gains and charges                       767            -      4,197
                                                        --------    --------   --------
   Pro forma net earnings, excluding
   non-recurring gains and charges                     $171,337     $253,857   $194,346
                                                       ========     ========   ========
 
  Pro forma net earnings, excluding non-recurring
   gains and charges, as a percent of sales                  11%          18%        21%
 
  Pro forma net earnings, excluding non-recurring
   gains and charges, per share
     Canadian GAAP
       Basic                                              $0.98     $   1.49   $   1.17
       Fully diluted                                      $0.98     $   1.44   $   1.14
     U.S. GAAP
       Basic                                              $0.98     $   1.49   $   1.17
       Diluted                                            $0.96     $   1.45   $   1.14
       Diluted - US$                                   US $0.69     US$ 1.07    US$0.83
</TABLE>

The net loss in fiscal 1998 of $18,318,000 was principally due to non-recurring
charges incurred for restructuring and purchased research and development in
process, offset partially by a gain on sale of long term investments.

Net earnings for fiscal 1998 on a pro forma basis, excluding non-recurring gains
and charges, were $171,337,000 compared to pro forma net earnings of
$253,857,000 for fiscal 1997. The decline in pro forma net earnings, excluding
non-recurring gains and charges, was due to an increase in selling, general and
administrative expenses of $145,681,000, and an increase in research and
development expenses of $103,549,000, offset partially by an increase in sales
of 18% compared to fiscal 1997.

Net earnings for fiscal 1997 on a pro forma basis, excluding non-recurring gains
and charges, were $253,857,000, which would represent a 31% increase over pro
forma net earnings for fiscal 1996. Although sales increased 49% in fiscal 1997
over fiscal 1996, a decline in the gross margin and an increase in operating
expenses, both expressed as a percentage of sales, offset a portion of the
incremental profitability associated with the sales increase.

                                    Page 31
<PAGE>
 
RECONCILIATION OF FINANCIAL RESULTS TO UNITED STATES ACCOUNTING PRINCIPLES

The Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in Canada, which also conform in all
material respects with accounting principles generally accepted in the United
States, except for the write off of purchased research and development in
process, as disclosed in Note 2, the disclosure of certain cash equivalents on
the Consolidated Balance Sheets and investing activities on the Consolidated
Statements of Cash Flows, as disclosed in Note 6, and the method of calculation
of earnings per share, as disclosed in Note 19. Other than the accounting
treatment associated with any future acquisitions or mergers, Management expects
that the differences in future years will not be significant.


FINANCIAL CONDITION

During the fiscal year ended April 30, 1998 working capital increased from
$638,392,000 to $945,892,000. As at April 30, 1998 the Company had $499,278,000
of cash and cash equivalents, which represented an increase of $165,374,000
during fiscal 1998. Pro forma net earnings, excluding non-recurring gains and
charges, of $171,337,000 generated $101,525,000 of cash from operations, which
was supplemented by the issuance of $322,098,000 in Senior Notes in April 1998
and cash from stock option exercises of $89,430,000. These cash inflows were
partially offset by additions to property, plant and equipment of $276,778,000
and the acquisition of subsidiaries, including RadNet, of $58,936,000.

Two principal components of the Company's working capital are accounts
receivable and inventory. Accounts receivable as a proportion of revenue
increased during fiscal 1998 compared to the Company's historical levels. This
increase was caused by a decrease in revenue in the fourth quarter of fiscal
1998 compared to the fourth quarter of fiscal 1997, resulting in an increase in
the proportion of the accounts receivable balance represented by sales with
extended credit terms. The Company schedules some production of its products
based on forecasts of sales, which are difficult to predict. Orders in fiscal
1998 did not match forecasts as to quantities and product mix, contributing to
an increase in inventory of $36,790,000. Management believes that the payment
terms and conditions extended to the Company's customers, arrangements with the
Company's suppliers, and the levels of inventory the Company carries relative to
its levels of sales are consistent with practices generally prevailing in the
networking industry.

In April 1998 the Company issued US$225,000,000 Senior Notes due April 2003
bearing a coupon rate of 6.51%. The Senior Notes require semi-annual payments of
interest only, with the principal due at maturity. The Company's obligation
under the Senior Notes can be satisfied at any time prior to maturity subject to
a make whole provision. The Senior Notes are unsecured.

In January 1998 the Company entered into and received $50,000,000 under a long
term loan agreement. The loan agreement includes a term loan portion and a
demand loan portion, both due January 2003. The term loan bears interest at the
fixed rate of 5.46% and the demand loan bears interest at a floating rate equal
to the one month's bankers' acceptance rate. The term loan requires semi-annual
payments of interest only, with the principal due at maturity. The Company's
obligation under the term loan can be satisfied at any time prior to maturity
subject to a make whole provision. The term loan is secured by 545,976 Nortel
shares. The demand loan, which is unsecured, requires monthly payments of
interest only, with the principal due at maturity.

                                    Page 32
<PAGE>
 
Existing short term bank credit facilities consist of operating lines of credit
with certain banks in the aggregate amount of $177,486,000, primarily with banks
in Canada, the United Kingdom, the United States, Chile and Brazil. At April 30,
1998 $19,827,000 was being utilized under these credit facilities, of which
$19,424,000 was attributable to Coasin S.A. and Acacia S.A.

In November 1997 the Company acquired a 49.9% equity interest in RadNet Ltd., an
Israeli developer and manufacturer of access switches for ATM networks, by the
purchase of shares for cash consideration of $53,676,000.

Capital expenditures for fiscal 1998 exceeded those of fiscal 1997 as the
Company invested in new facilities in Canada, in land in the metropolitan area
of Washington, D.C., in research and development and manufacturing equipment and
in information systems. Management anticipates that the level of capital
expenditures for fiscal 1999 will approximate the level of capital expenditures
incurred in fiscal 1998. The Company may also increase its current investments
in subsidiaries and associated companies. The Company intends to fund capital
expenditures and investments with existing cash and cash expected to be
generated from operations during fiscal 1999, supplemented as appropriate by the
issuance of shares or debt. In addition, the Company may use a portion of its
cash resources to extend or enhance its business and diversify its marketing and
distribution channels through acquisitions of or investments in businesses,
products or technologies or through the formation of strategic partnerships with
other companies.

Management believes that the Company's liquidity in the form of existing cash
resources, its credit facilities, as well as cash generated from operations and
financing activities, will prove adequate to meet its operating and capital
expenditure requirements through the end of fiscal 1999 and into the foreseeable
future.

Management believes that inflation did not have a material effect on operations
during the fiscal year ended April 30, 1998.


YEAR 2000

Over a year ago, the Company commenced a program to address potential problems
associated with what is commonly known as the "Year 2000 issue". The Company's
program entails a comprehensive review of its supporting information systems,
products, and the Company's suppliers, to prepare for the Year 2000 date change.
Management believes that the costs of carrying out the program will not have a
significant impact on the results of operations. The Company cannot, however,
predict the effect on its operations and financial condition if key suppliers or
customers do not adequately prepare for the Year 2000 date change on a timely
basis. Additional information regarding product line compliance with Year 2000
issues is available on the Company's worldwide web site at
http://www.newbridge.com.


ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company conducts business in several major international currencies through
its worldwide operations. The Company uses financial instruments, principally
forward exchange contracts, in its management of foreign currency exposures. The
Company does not enter into forward exchange contracts for trading purposes. The
Company's management of foreign currency exposures is based upon estimates of
the net asset or net liability position of various 

                                    Page 33
<PAGE>
 
currencies, and to the extent that these estimates are over or understated
during periods of currency volatility, the Company could experience
unanticipated currency gains or losses. Realized and unrealized gains and losses
on foreign exchange contracts are recognized and offset foreign exchange gains
and losses on the underlying net asset or net liability position. The net
foreign currency gains and losses, if any, are recognized in the Consolidated
Statements of Earnings as "Other expenses".

The forward exchange contracts primarily require the Company to purchase and
sell certain foreign currencies with or for Canadian dollars at contractual
rates. The table that follows presents a summary of the value of forward
exchange rate contracts outstanding at April 30, 1998 for each currency in which
the Company has hedged a foreign currency exposure. The term of all forward
exchange contracts outstanding at April 30, 1998 was less than one year. The
values shown are the Canadian dollar values of the agreed upon amounts for each
foreign currency that will be delivered to a third party on the agreed upon
date.

<TABLE>
<CAPTION>
                                                                           Average
     Currency                                                           Contract Rate      Value
     --------                                                           -------------  -------------
                                                                                      (Canadian dollars
                                                                                       in thousands)
<S>                                                                     <C>           <C>
  Forward contracts to sell foreign currencies for Canadian Dollars:
 
     French Franc                                                              0.2361      $ 44,726
     Japanese Yen                                                              0.0112        20,640
     German Mark                                                               0.7929         7,770
     British Pound                                                             2.4025         4,812
     Danish Krone                                                              0.2081         3,121
     Australian Dollar                                                         0.9552         2,474
     Singapore Dollar                                                          0.8721         2,339
     Other currencies                                                                           382
                                                                                           --------
                                                                                             86,264
                                                                                           --------
  Forward contracts to sell Canadian Dollars for foreign currencies:
 
     British Pound                                                             2.3949        83,820
                                                                                           --------
 
  Total forward exchange contracts
       outstanding at April 30, 1998                                                       $170,084
                                                                                           ========
</TABLE>

The unrealized gains or losses on these contracts represent hedges of foreign
exchange gains and losses on the Company's underlying net asset or net liability
position of the various currencies. As a result, Management does not expect
future gains or losses on these contracts to have a material impact on the
Company's financial results.

The Company maintains an investment portfolio consisting of debt securities of
various issuers, types and maturities. The securities that are classified as
held to maturity are recorded on the balance sheet at amortized cost. The
Company also has a minority equity investment in a publicly traded company which
is classified as available for sale but is not held for trading purposes, and
the value of which is subject to market price volatility. Due to the average
maturities and conservative nature of the investment portfolio, a sudden change
in interest rates would not have a material effect on the value of the
portfolio.

In January 1998 the Company entered into a Forward Share Price Hedge Agreement
with a major bank in order to fix the value of 545,976 Nortel shares pledged as
security against a term loan. The terms of the Forward Share Price Hedge
Agreement provide the Company with the option of delivering 545,976 Nortel
shares in January 2003 for proceeds of $41,570,000 or the 

                                    Page 34
<PAGE>
 
present value of $41,570,000 if terminated prior to January 2003, or delivering
the cash equivalent of the market value of 545,976 Nortel shares at January 2003
or at the date of early termination.

In April 1998 the Company issued US$225,000,000 Senior Notes due April 2003
bearing a coupon rate of 6.51%. Prior to the closing of the Senior Notes the
Company entered into a swap transaction with a major bank under which the
effective coupon rate on US$200,000,000 of the Senior Notes was fixed at 6.678%.

In January 1998 the Company entered into and received $50,000,000 under a loan
agreement which includes a term loan portion and a demand loan portion. The term
loan bears interest at a fixed rate of 5.46% and the demand loan bears interest
at a floating rate equal to one month's bankers acceptance rate. The demand loan
portion of the loan agreement was approximately $15,000,000 at April 30, 1998.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements and supplementary data are filed as part of
this Annual Report on Form 10-K:

      FINANCIAL STATEMENTS

          Auditors' Report to the Shareholders
          Consolidated Statements of Earnings and Retained Earnings
           for the years ended April 30, 1998, 1997 and 1996
          Consolidated Balance Sheets as at April 30, 1998 and 1997
          Consolidated Statements of Cash Flows for the
           years ended April 30, 1998, 1997 and 1996
          Consolidated Statements of Shareholders' Equity for the
           years ended April 30, 1998, 1997 and 1996
          Notes to the Consolidated Financial Statements

      SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

                                    Page 35
<PAGE>
 
AUDITORS' REPORT

To the Shareholders of Newbridge Networks Corporation:

We have audited the consolidated balance sheets of Newbridge Networks
Corporation as at April 30, 1998 and 1997 and the consolidated statements of
earnings, shareholders' equity and cash flows for the years ended April 30,
1998, 1997 and 1996. 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 an audit to obtain
reasonable assurance 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.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at April 30, 1998
and 1997 and the results of its operations and the changes in its financial
position for the years ended April 30, 1998, 1997 and 1996 in accordance with
accounting principles generally accepted in Canada which, except as disclosed in
Note 2, Note 6 and Note 19 to the consolidated financial statements, also
conform in all material respects with accounting principles generally accepted
in the United States.


/s/ Deloitte and Touche


Chartered Accountants
Ottawa, Canada
June 2, 1998

                                    Page 36
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION

                      CONSOLIDATED STATEMENTS OF EARNINGS

        (Canadian dollars, amounts in thousands except per share data)

<TABLE>
<CAPTION>
                                                             Years Ended April 30,
                                                  ---------------------------------------
                                                       1998         1997       1996
<S>                                               <C>           <C>          <C>  
Sales                                              $1,620,620   $1,376,727   $921,244
 
Cost of sales                                         625,065      507,588    319,745
                                                   ----------   ----------   --------
Gross margin                                          995,555      869,139    601,499
 
Expenses
  Selling, general and administrative                 491,787      346,106    231,060
  Research and development                            258,879      155,330     97,205
  Purchased research and
     development in process (Note 2)                   52,762       96,940         --
  Restructuring costs (Note 17)                       181,444           --         --
  Settlement of litigation (Note 22)                    2,642           --         --
                                                   ----------   ----------   --------
Income from operations                                  8,041      270,763    273,234
 
Interest income                                        11,581       19,956     23,193
Interest expense on long term obligations              (1,820)      (1,351)      (586)
Gain on sale of long term investments (Note 12)        47,960           --     12,715
Other expenses                                        (10,448)      (9,615)    (3,443)
                                                   ----------   ----------   --------
Earnings before income taxes
  and non-controlling interest                         55,314      279,753    305,113
 
Provision for income taxes (Note 18)                   73,001      117,718    100,779
 
Non-controlling interest                                  631        5,118      1,470
                                                   ----------   ----------   --------
 
Net earnings (loss)                                $  (18,318)  $  156,917   $202,864
                                                   ==========   ==========   ========
 
Earnings (loss) per share (Note 19)
  Basic                                                $(0.10)       $0.92      $1.22
  Fully diluted                                        $(0.10)       $0.91      $1.19
 
Weighted average number of shares
  Basic                                               174,617      170,510    165,842
  Fully diluted                                       191,459      184,595    179,665
</TABLE>

        See accompanying Notes to the Consolidated Financial Statements.

                                    Page 37
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION

                          CONSOLIDATED BALANCE SHEETS

                        (Canadian dollars in thousands)

<TABLE>
<CAPTION>
                                                             April 30,   April 30,
                                                                1998        1997
<S>                                                          <C>         <C>
ASSETS
 
Cash and cash equivalents (Note 6)                           $  499,278  $  333,904
Accounts receivable, net of provision for returns and
  doubtful accounts of $13,067 (April 30, 1997 - $10,572)       428,527     387,338
Inventories (Note 7)                                            196,285     159,495
Prepaid expenses and other current assets                        77,600      64,191
                                                             ----------  ----------
                                                              1,201,690     944,928
 
Property, plant and equipment (Note 8)                          450,735     294,939
Goodwill (Note 9)                                                72,719     125,565
Software development costs (Note 10)                             28,299      22,299
Future tax benefits                                              50,443      37,393
Other assets (Note 11)                                          162,939      71,579
                                                             ----------  ----------
                                                             $1,966,825  $1,496,703
                                                             ==========  ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
 
Current liabilities
  Accounts payable                                           $  127,040  $  105,884
  Accrued liabilities                                           113,478      95,804
  Provision for restructuring (Notes 4, 17)                       5,293      35,944
  Income taxes                                                    5,851      61,551
  Current portion of long term obligations                        4,136       7,353
                                                             ----------  ----------
                                                                255,798     306,536
Long term obligations (Note 14)                                 383,311      10,817
Future tax obligations                                           71,197      32,439
Non-controlling interest                                         22,899      20,412
                                                             ----------  ----------
                                                                733,205     370,204
                                                             ----------  ----------
Share capital (Note 16)
  Common shares - 175,686,083 outstanding
     (April 30, 1997 - 171,858,984 outstanding)                 456,510     351,388
Accumulated foreign currency translation adjustment              27,280       6,963
Retained earnings                                               749,830     768,148
                                                             ----------  ----------
                                                              1,233,620   1,126,499
                                                             ----------  ----------
                                                             $1,966,825  $1,496,703
                                                             ==========  ==========
</TABLE>

       See accompanying Notes to the Consolidated Financial Statements.

                                    Page 38
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                        (Canadian dollars in thousands)

<TABLE>
<CAPTION>
                                                             Years Ended April 30,
                                                       ----------------------------------
                                                          1998        1997        1996
<S>                                                    <C>         <C>         <C>
OPERATING ACTIVITIES
Net earnings (loss)                                    $ (18,318)  $ 156,917   $ 202,864
 
Items not affecting cash
  Amortization                                           125,429      82,987      58,189
  Future income tax benefits and obligations              27,158      22,989       4,046
  Non-controlling interest                                (1,390)      5,118       1,470
  Purchased research and development in process           52,762      96,940          --
  Gain on sale of long term investments                  (47,960)         --     (12,715)
  Restructuring costs                                    181,444          --          --
  Other                                                    4,836       7,002      (1,857)
 
Cash effect of changes in:
  Accounts receivable                                    (32,931)    (87,976)    (63,392)
  Inventories                                            (86,288)    (20,767)    (40,785)
  Prepaid expenses and other current assets              (13,004)    (13,668)       (627)
  Accounts payable and accrued liabilities               (50,766)    (34,615)     20,840
  Income taxes                                           (39,447)      8,447      23,757
                                                       ---------   ---------   ---------
                                                         101,525     223,374     191,790
                                                       ---------   ---------   ---------
INVESTING ACTIVITIES
 
Additions to property, plant and equipment              (276,778)   (131,641)    (96,235)
Proceeds on sale of long term investments (Note 12)       66,672          --      18,364
Acquisitions of subsidiaries, excluding
   cash acquired (Note 2)                                (58,936)   (220,645)     (1,622)
Capitalized software development costs                   (16,069)    (12,457)    (10,476)
Additions to other assets                               (124,576)    (34,858)    (14,983)
                                                       ---------   ---------   ---------
                                                        (409,687)   (399,601)   (104,952)
FINANCING ACTIVITIES
 
Issue of common shares                                    89,430      54,096      50,068
Purchase of common shares                                     --          --     (28,209)
Increase in long term obligations                        378,628       1,515          --
Repayment of long term obligations                       (12,316)     (6,733)     (2,765)
                                                       ---------   ---------   ---------
                                                         455,742      48,878      19,094
                                                       ---------   ---------   ---------
 
Increase (decrease) in cash and cash equivalents         147,580    (127,349)    105,932
Effect of foreign currency translation on cash            15,919      (2,585)      2,186
Cash from acquisition of subsidiaries                      1,875       8,089        (526)
                                                       ---------   ---------   ---------
                                                         165,374    (121,845)    107,592
Cash and cash equivalents, beginning of the year         333,904     455,749     348,157
                                                       ---------   ---------   ---------
Cash and cash equivalents, end of the year             $ 499,278   $ 333,904   $ 455,749
                                                       =========   =========   =========
</TABLE>

       See accompanying Notes to the Consolidated Financial Statements.

                                    Page 39
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                        (Canadian dollars in thousands)

<TABLE>
<CAPTION>
                                                                   Accumulated
                                               Common Shares        Foreign   Retained   Shareholders'
                                          -----------------------
                                             Number      Amount    Currency   Earnings       Equity
<S>                                       <C>           <C>        <C>        <C>        <C>
At April 30, 1995                         164,514,616   $262,446    $ 3,832   $408,367      $  674,645
 
Exercise of employees' and
  directors' options                        5,161,664     50,068                                50,068
 
Purchase of the Company's shares           (1,000,000)   (28,209)                              (28,209)
 
Income tax benefit related
  to stock options                                         5,865                                 5,865
 
Effect of foreign currency translation                               (2,547)                    (2,547)
 
Net earnings                                                                   202,864         202,864
                                          -----------   --------   --------   --------   -------------
At April 30, 1996                         168,676,280    290,170      1,285    611,231         902,686
 
Exercise of employees' and
  directors' options                        3,182,704     54,096                                54,096
 
Income tax benefit related
  to stock options                                         7,122                                 7,122
 
Effect of foreign currency translation                                5,678                      5,678
 
Net earnings                                                                   156,917         156,917
                                          -----------   --------   --------   --------   -------------
At April 30, 1997                         171,858,984    351,388      6,963    768,148       1,126,499
 
Exercise of employees' and
  directors' options                        3,827,101     89,430                                89,430
 
Income tax benefit related
  to stock options                                        15,692                                15,692
 
Effect of foreign currency translation                               20,317                     20,317
 
Net earnings (loss)                                                            (18,318)        (18,318)
                                          -----------   --------   --------   --------   -------------
At April 30, 1998                         175,686,085   $456,510    $27,280   $749,830      $1,233,620
                                          ===========   ========   ========   ========   =============
</TABLE>

       See accompanying Notes to the Consolidated Financial Statements.

                                    Page 40
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                         APRIL 30, 1998, 1997 AND 1996
    (Canadian dollars, tabular amounts in thousands except per share data)

1.  SIGNIFICANT ACCOUNTING POLICIES

The Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in Canada ("Canadian GAAP"). These
principles are also generally accepted in the United States ("U.S. GAAP") in all
material respects except for the write off of purchased in process research and
development, as disclosed in Note 2, the disclosure of certain cash equivalents
on the Consolidated Balance Sheets and investing activities on the Consolidated
Statements of Cash Flows, as disclosed in Note 6, and the method of calculation
of earnings per share, as disclosed in Note 19.

BASIS OF CONSOLIDATION

The Consolidated Financial Statements include the accounts of the Company and
its subsidiaries. Investments in companies in which the Company has significant
influence are accounted for by the equity method. Investments in which the
Company does not control or have significant influence over the investee are
accounted for by the cost method.

FISCAL YEAR
 
In fiscal 1998 and years prior the Company's fiscal quarters were 13 weeks long
and closed on a Sunday, except the fourth quarter which closed on April 30.
Commencing in fiscal 1999 the Company will adopt the policy of closing its
fiscal years on the Sunday closest to April 30. Accordingly, fiscal years will
be 52 weeks long and interim fiscal quarters will close on a Sunday and will be
13 weeks long. Occasionally fiscal years will be 53 weeks long, the first
occurrence of which will be for the fiscal year ending May 2, 2004.

REVENUE RECOGNITION AND WARRANTIES

Revenue from product sales is generally recorded on shipment, with a provision
for estimated returns recorded at that time. In addition, a provision for
potential warranty claims is provided for at the time of sale, based on warranty
terms and prior claims experience. Service revenue is recognized when the
service is performed, or, in the case of maintenance contracts, is recognized as
costs are incurred to secure and fulfill the contract.

GOVERNMENT INCENTIVES AND INVESTMENT TAX CREDITS

Government incentives and investment tax credits are recorded as a reduction of
the expense or the cost of the asset acquired to which the incentive applies.
The benefits are recognized when the Company has complied with the terms and
conditions of the approved grant program or the applicable tax legislation.

SOFTWARE DEVELOPMENT COSTS

Certain applications and systems software development costs are capitalized once
technical feasibility has been established for the product, the Company has
identified a market for the product and intends to market the developed product.
No other development costs are capitalized. Such capitalized costs are amortized
over the expected life of the related product.

                                    Page 41   
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                         APRIL 30, 1998, 1997 AND 1996
    (Canadian dollars, tabular amounts in thousands except per share data)

INVENTORIES

Finished goods are valued at the lower of cost (first in, first out) and net
realizable value. Work in process and raw materials are valued at the lower of
cost and replacement cost.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Buildings and equipment are
generally amortized on a declining balance basis at rates calculated to amortize
the cost of the assets over their estimated useful lives. Leasehold improvements
are amortized using a straight line basis over the term of the lease.

GOODWILL

Goodwill is stated at the difference between the Company's cost of the
investments less its proportionate share of the fair value of the net assets of
the subsidiaries. Goodwill is amortized on a straight line basis over the
estimated useful life of the goodwill, generally between ten and twenty years.
The recoverability of such costs is reviewed on an ongoing basis.

FOREIGN CURRENCY TRANSLATION

The Consolidated Financial Statements are prepared using Canadian dollars. All
operations whose principal economic activities are undertaken in currencies
other than Canadian dollars have been determined to be self-sustaining.

The assets and liabilities of non-Canadian operations are translated at fiscal
year end exchange rates and the resulting unrealized exchange gains or losses
are accumulated as a separate component of shareholders' equity described in the
Consolidated Balance Sheets as "Accumulated foreign currency translation
adjustment". The statements of earnings of such operations are translated at
exchange rates prevailing during the fiscal year.

Other monetary assets and liabilities, which are denominated in currencies
foreign to the local currency of any one operation, are translated to the local
currency at fiscal year end exchange rates, and transactions included in
earnings are translated at rates prevailing during the fiscal year. Exchange
gains and losses resulting from the translation of these amounts are included in
the Consolidated Statements of Earnings.

USE OF ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as at the date of the Consolidated Financial Statements and the
reported amounts of sales and expenses during the reporting periods presented.
Actual results could differ from the estimates made by Management.

                                    Page 42
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                         APRIL 30, 1998, 1997 AND 1996
     (Canadian dollars, tabular amounts in thousands except per share data)

RECENT ACCOUNTING PRONOUNCEMENTS

In the Consolidated Financial Statements, the Company has adopted the following
financial pronouncements:

     Segmented Information - Canadian Institute of Chartered Accountants
          ("CICA") Handbook Section 1701 and United States Financial Accounting
          Standards Board ("FASB") Statement of Accounting Standard No. 131
          ("SFAS 131");

     Income Taxes - CICA Handbook Section 3465;

     Calculation of Earnings per Share - Statement of Accounting Standard No.
          128 ("SFAS 128").

In June 1997, FASB issued Statement No. 130 ("SFAS 130"), Reporting
Comprehensive Income. The Company is required to adopt this pronouncement
commencing in fiscal 2000. Adoption of SFAS 130 is expected to have no impact on
the Company's reported consolidated financial position, results of operations or
cash flows.

2.  ACQUISITION OF SUBSIDIARIES

The cash utilized in acquiring controlling or joint interests in subsidiaries is
summarized as follows.

<TABLE>
<CAPTION>
                                               1998      1997     1996
                                              -------  --------  ------
 <S>                                          <C>      <C>       <C>
 Acquisition of subsidiaries
   excluding cash acquired
 
     RadNet Ltd. (Note 3)                     $53,676  $     --  $   --
     Ungermann-Bass Networks Inc. (Note 4)         --   146,590      --
     Coasin Chile S.A.                             --    14,129      --
     Danring A/S                                   --    11,144      --
     Ouest Standard Telematique S.A.               --    34,231      --
     Acacia S.A.                                   --     9,714      --
     Other                                      5,260     4,837   1,622
                                              -------  --------  ------
                                              $58,936  $220,645  $1,622
                                              =======  ========  ======
</TABLE>

All acquisitions have been accounted for under the purchase method of
accounting. Within the acquisitions of each of Ungermann-Bass Networks Inc. ("UB
Networks") and RadNet Ltd. ("RadNet"), a portion of the consideration paid was
ascribed to purchased research and development in process based on the fair
value at the time the technology was acquired. The amount allocated to purchased
research and development in process was determined through valuation techniques
common in the high technology industry. Under Canadian GAAP the purchased
research and development is amortized over its estimated useful life. Asset
recoverability is reviewed on an ongoing basis. Under U.S. GAAP, purchased in
process research and development acquired by the Company through the
acquisitions of RadNet and UB Networks would be written off at the time of
acquisition.

                                    Page 43
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                         APRIL 30, 1998, 1997 AND 1996
    (Canadian dollars, tabular amounts in thousands except per share data)

Under Canadian GAAP, the $52,762,000 of purchased research and development in
process acquired by the Company on the acquisition of RadNet in the fiscal year
ended April 30, 1998 was amortized over its estimated useful life of six months.
The purchased research and development in process was fully amortized at April
30, 1998. Under U.S. GAAP, research and development in process acquired by the
Company on the acquisition of RadNet was written off against net earnings upon
acquisition.

Under Canadian GAAP, the $96,940,000 of research and development in process
acquired by the Company on the acquisition of UB Networks was capitalized upon
acquisition and disclosed on the Consolidated Balance Sheet at January 26, 1997.
Upon review of the recoverability of the research and development in process,
undertaken during the fourth quarter of the fiscal year ended April 30, 1997,
the Company determined that the purchased research and development in process no
longer met all the criteria for deferral and accordingly the balance was written
off as a charge to earnings for the fourth fiscal quarter of 1997. The Company
significantly altered product plans associated with the research and development
projects and concluded that recoverability could not be reasonably regarded as
assured. Under U.S. GAAP, research and development in process acquired by the
Company on the acquisition of UB Networks in fiscal 1997 was written off against
net earnings upon acquisition.

3.  ACQUISITION OF RADNET LTD.

In November 1997 the Company acquired a 49.9% interest in RadNet Ltd., an
Israeli developer and manufacturer of access switches for asynchronous transfer
mode ("ATM") networks, for $53,676,000. The acquisition has been accounted for
under the purchase method of accounting. The majority of the purchase price
($52,762,000) has been allocated to purchased research and development in
process, which was fully amortized in the fiscal year ended April 30, 1998.
Because the Company jointly controls RadNet, the financial results of RadNet
have been proportionately consolidated under Canadian GAAP since the acquisition
date. Under U.S. GAAP the Company would account for RadNet under the equity
method, the results of which would not differ materially from the application of
Canadian GAAP.

4.  ACQUISITION OF UNGERMANN-BASS NETWORKS INC.

On January 17, 1997, the Company acquired a 100% equity interest in Ungermann-
Bass Networks, Inc. ("UB Networks"), a manufacturer of local area network
("LAN") equipment based in Santa Clara, California, by the purchase of shares
for cash consideration of $146,590,000. The purchase price included professional
fees and other direct costs of the acquisition. Goodwill was being amortized on
a straight line basis over a ten year period, commencing in the fiscal period
following that in which the investment was made. In November 1997, the Company
decided to restructure its activities related to its LAN business, which
effectively eliminated any future value associated with the goodwill acquired,
and accordingly the Company charged the unamortized balance of the goodwill
($18,775,000) to earnings in the third quarter of fiscal 1998 as part of the
restructuring costs (Note 17). The allocation of Company's investment in UB
Networks at the time of acquisition is summarized below.

                                    Page 44
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                         APRIL 30, 1998, 1997 AND 1996
    (Canadian dollars, tabular amounts in thousands except per share data)

<TABLE>
  <S>                                              <C>
  Non-cash current assets                          $  64,985
  Property, plant and equipment                       24,708
  Future income tax benefits                          36,769
  Purchased research and development in process       96,940
  Goodwill                                             7,331
  Other long term assets                               8,290
                                                   ---------
  Non-cash assets acquired                           239,023
                                                   ---------
 
  Provision for restructuring                        (53,979)
  Other current liabilities                          (64,419)
  Long term obligations assumed                         (836)
  Non-controlling interest                            (1,060)
                                                   ---------
  Liabilities acquired                              (120,294)
 
  Net non-cash assets acquired                       118,729
  Cash acquired                                       11,981
                                                   ---------
                                                     130,710
  Goodwill upon acquisition                           15,880
                                                   ---------
  Total consideration paid                         $ 146,590
                                                   =========
</TABLE>

At the time of the acquisition of UB Networks, a provision for restructuring of
$53,979,000 was recorded related to programs instituted by the Company to
integrate the operations of UB Networks with the Company and to eliminate
redundant functions. These programs were substantially completed in the third
quarter of fiscal 1998. The amount remaining at the end of the third quarter of
fiscal 1998 in the restructuring provision of $2,737,000 was related to planned
facilities closures. The Company plans to complete these actions as part of the
restructuring plan associated with its LAN business (Note 17). The components of
the provision for restructuring and related spending to April 30, 1998 are as
follows.

                                    Page 45
<PAGE>
 
                         NEWBRIDGE NETWORKS CORPORATION

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                         April 30, 1998, 1997 and 1996
     (Canadian dollars, tabular amounts in thousands except per share data)

<TABLE>
<CAPTION>
                                 Reduction in     Reduction     Discontinued       Other
                                  Work Force    in Facilities    Activities    Restructuring     Total
                                 -------------  --------------  -------------  --------------  ---------
<S>                              <C>            <C>             <C>            <C>             <C>
  Provision upon
     acquisition                     $ 26,153         $11,582        $ 9,787         $ 6,457   $ 53,979
 
  Incurred to
     April 30, 1997                    (9,496)           (970)        (4,478)         (3,091)   (18,035)
                                        -----         -------          -----           -----     ------
 
  Provision at April 30, 1997          16,657          10,612          5,309           3,366     35,944
 
  Incurred in the fiscal
     year ended
     April 30, 1998                   (16,657)         (7,875)        (5,309)         (3,366)   (33,207)
 
  Transferred to fiscal
     1998 restructuring
     provision (Note 17)                   --          (2,737)            --              --     (2,737)
                                        -----         -------          -----           -----     ------
 
  Provision at April 30, 1998        $     --         $    --        $    --         $    --   $     --
                                        =====         =======          =====           =====     ======
</TABLE>

The provision for reduction in work force included severance, related medical
and other benefits, relocation costs and other obligations to employees. The
provision included termination benefits for approximately 300 employees. The
work force reductions were in all functions and in all regions in which UB
Networks operates. The provision for reduction in facilities comprised primarily
lease payments and fixed costs associated with plans to close sales, support and
administrative facilities in the Americas, Europe and Asia Pacific geographic
areas. The provision for discontinued activities included costs associated with
the disposition of assets and fulfilling prior commitments related to certain
discontinued product lines and activities. The provision for other restructuring
costs comprised various direct incremental costs associated with the integration
of operations of UB Networks with the Company.

The operating results of UB Networks were consolidated into the operating
results of the Company commencing in the fourth fiscal quarter of the year
ended April 30, 1997.

                                    Page 46
<PAGE>
 
                         NEWBRIDGE NETWORKS CORPORATION

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                         April 30, 1998, 1997 and 1996
     (Canadian dollars, tabular amounts in thousands except per share data)

5.  ACQUISITIONS OF COASIN CHILE S.A., DANRING A/S, OUEST STANDARD TELEMATIQUE,
     ACACIA S.A.

During fiscal 1997 the Company acquired controlling interests in Coasin Chile
S.A. ("Coasin"), a Chilean systems integrator of networking products; Danring
A/S ("Danring"), a Danish systems integrator of networking products; Ouest
Standard Telematique S.A. ("OST"), a manufacturer of local area network
equipment based in France; and Acacia S.A. ("Acacia"), a holding company with
controlling interests in systems integrators of networking products in Brazil,
Costa Rica and Argentina. The investments are summarized as follows.

<TABLE>
<CAPTION>
                                            Coasin     Danring      OST      Acacia
                                           ---------  ---------  ---------  ---------
<S>                                        <C>        <C>        <C>        <C>
  Month of acquisition                     Nov 1996   Jan 1997   Aug 1996   Apr 1997
  Equity interest acquired                       51%       100%       100%        51%
  Purchase price                           $ 14,129    $11,144   $ 34,231    $ 9,714
  Maximum incremental
     contingent payments                   US$2,595         --         --   US$1,640
  Period over which
     contingent payment
     may be made                            2 years         --         --    2 years
  Acquisition accounting method            Purchase   Purchase   Purchase   Purchase
  Goodwill amortization period             20 years   20 years   20 years   20 years
 
  Investment summary:
     Non-cash current assets               $ 26,138    $ 6,649   $  9,984    $ 7,217
     Property, plant, equipment               3,842        119      6,157        805
     Other long term assets                   1,393         --        490      3,950
                                           --------    -------   --------    -------
     Non-cash assets acquired                31,373      6,768     16,631     11,972
 
     Current liabilities                     (8,960)    (6,877)   (27,017)    (9,928)
     Long term obligations assumed           (3,428)        --     (6,313)    (1,838)
                                           --------    -------   --------    -------
     Net non-cash assets acquired            18,985       (109)   (16,699)       206
 
     Cash (bank indebtedness) acquired      (11,320)     3,062      6,165     (1,799)
                                            --------   -------   --------    -------
                                              7,665      2,953    (10,534)    (1,593)
     Non-controlling interest
      upon acquisition                       (3,755)        --         --        780
                                           --------    -------   --------    -------
     Company's share of assets acquired       3,910      2,953    (10,534)      (813)
     Goodwill upon acquisition               10,219      8,191     44,765     10,527
                                           --------    -------   --------    -------
 
     Total consideration paid              $ 14,129    $11,144   $ 34,231    $ 9,714
                                           ========    =======   ========    =======
</TABLE>

The acquisition of OST was completed to increase the Company's direct presence
and participation in the LAN market. The Company charged the unamortized balance
of goodwill ($38,350,000) to earnings in the third quarter of fiscal 1998 as
part of restructuring costs (Note 17).

                                    Page 47
<PAGE>
 
                         NEWBRIDGE NETWORKS CORPORATION

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                         April 30, 1998, 1997 and 1996
     (Canadian dollars, tabular amounts in thousands except per share data)


6. CASH AND CASH EQUIVALENTS

Components of cash and cash equivalents are:

<TABLE>
<CAPTION>
                                                 April 30, 1998       April 30, 1997
                                               -------------------  -------------------
                                               Amortized   Market   Amortized   Market
                                                 Cost      Value      Cost      Value
                                               ---------  --------  ---------  --------
<S>                                            <C>        <C>       <C>        <C>
     Cash                                       $467,464  $467,464   $197,007  $197,007
 
     Held to maturity marketable securities
       Maturing within one year:
         Corporate debt securities                22,447    22,447    136,278   136,322
 
     Available for sale marketable securities
         Equity securities                         9,367     9,367        619       619
                                               ---------  --------  ---------  --------

                                                $499,278  $499,278   $333,904  $333,948
                                               =========  ========  =========  ========
</TABLE>

Held to maturity marketable securities are investments with original maturities
of three months or more. Available for sale securities are common shares of
publicly traded companies, which have certain resale restrictions, principally
acquired upon the Company's disposition of its minority interest in Broadband
Networks Inc. and InSoft, Inc. (Note 12). Under U.S. GAAP held to maturity and
available for sale marketable securities would be disclosed as a separate
caption on the Consolidated Balance Sheets.

Held to maturity marketable securities are carried at amortized cost. The
unrealized gains and losses are not included in the Consolidated Statements of
Earnings as these gains and losses are unlikely to be realized due to the
Company's intent to hold the underlying securities to maturity. Available for
sale securities are carried at the lower of cost and market. Gains and losses on
marketable securities were as follows.

<TABLE>
<CAPTION>
                                            1998         1997
                                            -----       -----
<S>                                         <C>         <C> 
Held to maturity marketable securities
     Unrealized gains                       $  --       $  44
     Unrealized losses                         --          --
     Realized gains                           573          --
     Realized losses                           --          --
 
Available for sale marketable securities
     Unrealized gains                          --          --
     Unrealized losses                         --          --
     Realized gains                            --          --
     Realized losses                           --         866
</TABLE>

If the Consolidated Statements of Cash Flows were prepared under U.S. GAAP,
purchases, maturities and sales of marketable securities would be disclosed as
an investing activity.

                                    Page 48
<PAGE>
 
                         NEWBRIDGE NETWORKS CORPORATION

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                         April 30, 1998, 1997 and 1996
     (Canadian dollars, tabular amounts in thousands except per share data)


Disclosure in the Consolidated Statements of Cash Flows prepared under U.S. GAAP
would be as follows.

<TABLE>
<CAPTION>
                                             1998        1997        1996
                                          ----------  ----------  ----------
<S>                                       <C>         <C>         <C>
     Investing activities in short
      term marketable securities:
         Held to maturity securities
          Maturities                      $ 185,958   $ 508,890   $ 343,000
          Purchases                         (72,126)   (475,092)   (397,140)
                                          ---------   ---------   ---------
                                            113,832      33,798     (54,140)
         Available for sale securities
          Sales                                 569          --          --
          Purchases                          (9,317)         --          --
                                          ---------   ---------   ---------
                                            105,084      33,798     (54,140)
     Investing activities, as reported     (409,687)   (399,601)   (104,925)
                                          ---------   ---------   ---------
 
     Investing activities, U.S. GAAP      $(304,603)  $(365,803)  $(159,092)
                                          =========   =========   =========

     Increase (decrease) in cash and
      cash equivalents, as reported       $ 165,374   $(121,845)  $ 107,592
     Non-cash investing activities
         Available for sale
          securities (Note 12)                   --          --     (18,415)
     Investing activities in short
      term marketable securities            105,084      33,798     (54,140)
                                          ---------   ---------   ---------
     Increase (decrease) in cash and
      cash equivalents, U.S. GAAP         $ 270,458   $ (88,047)  $  35,037
                                          =========   =========   =========
 
</TABLE>

7. INVENTORIES

<TABLE>
<CAPTION>
                                          April 30,   April 30,
                                            1998        1997
                                          ---------   ---------
<S>                                       <C>         <C>
     Finished goods                       $129,850    $100,405
     Work in process                        18,178      20,938
     Raw materials                          48,257      38,152
                                          --------    --------
 
                                          $196,285    $159,495
                                          ========    ========
</TABLE>

                                    Page 49
<PAGE>
 
                         NEWBRIDGE NETWORKS CORPORATION

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                         April 30, 1998, 1997 and 1996
     (Canadian dollars, tabular amounts in thousands except per share data)


8. PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
                                        Amortization   April 30,   April 30,
                                            Rate          1998        1997
                                        -------------  ----------  ----------
     <S>                                <C>            <C>         <C>
     Land                                       --     $  14,763   $   5,571
     Buildings                             2.5%--5%       88,189      72,779
     Equipment                             10%--50%      705,744     500,602
     Furniture and fixtures                     20%       45,067      34,485
     Leasehold improvements              Lease term       27,797       9,512
                                                       ---------   ---------
 
                                                         881,560     622,949
                                                         
     Accumulated amortization                           (430,825)   (328,010)
                                                        --------    --------
                                                        $450,735   $ 294,939
                                                        ========   =========
 
     Capital leases included above                     $   6,606   $   6,918
                                                       =========   =========
 
 
                                              1998       1997        1996
                                            --------   ---------   ---------
 
      Amortization on property,         
       plant and equipment                  $112,175   $  73,364   $  48,662
                                            ========   =========   =========
                                        
      Amortization on property, plant and
       equipment under capital leases       $  2,035   $   1,523   $   1,627
                                            ========   =========   =========
 
</TABLE> 
 
9.  GOODWILL

<TABLE> 
<CAPTION> 
                                                        April 30,  April 30,
                                                          1998       1997
                                                       ---------   ---------
     <S>                                               <C>         <C>  
     Goodwill                                          $  83,817   $ 133,854
     Accumulated amortization                            (11,098)     (8,289)
                                                       ---------   ---------
 
                                                       $  72,719   $ 125,565
                                                       =========   =========
</TABLE>

During the third quarter ended February 1, 1998, goodwill of $65,218,000 and
accumulated amortization of $8,093,000 (net book value $57,125,000) were written
off as part of the restructuring plan in the LAN business (Note 17).

                                    Page 50
<PAGE>
 
                         NEWBRIDGE NETWORKS CORPORATION

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                         April 30, 1998, 1997 and 1996
     (Canadian dollars, tabular amounts in thousands except per share data)

10.  SOFTWARE DEVELOPMENT COSTS

<TABLE>
<CAPTION>
                                             April 30,   April 30, 
                                                1998        1997   
                                             ----------  ----------
     <S>                                     <C>         <C>       
     Balance, beginning of the year           $ 22,299     $18,285 
     Amount capitalized                         15,627      12,457 
     Amortization                               (9,627)     (8,443)
                                              --------     ------- 
                                                                   
     Balance, end of the year                 $ 28,299     $22,299 
                                              ========     =======  
</TABLE> 
 
 
11.  OTHER ASSETS

<TABLE> 
<CAPTION> 
                                             April 30,    April 30,
                                               1998         1997  
                                             --------     -------  
     <S>                                     <C>          <C>      
     Long term investments                                         
        Accounted for by the equity method   $ 30,163     $19,663  
        Accounted for by the cost method      103,980      32,931  
                                             --------     -------  
                                              134,143      52,594  
     Other assets                              28,796      18,985  
                                             --------     -------  
                                                                   
                                             $162,939     $71,579  
                                             ========     =======  
</TABLE>

Investments in associated companies over which the Company has significant
influence are accounted for by the equity method and as a result the carrying
value equals the Company's proportionate share of the shareholders' equity of
the investee company. Investees which the Company does not control or have
significant influence over are accounted for by the cost method. In accordance
with Canadian and U.S. GAAP, the carrying value of long term investments in
common shares that are publicly traded or privately held are not adjusted to
reflect increases in fair value.

                                    Page 51
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                         APRIL 30, 1998, 1997 AND 1996
    (Canadian dollars, tabular amounts in thousands except per share data)


12.  GAIN ON SALE OF LONG TERM INVESTMENTS

In January 1998 the Company sold its minority interest in Broadband Networks
Inc. ("BNI"), a Canadian wireless technology company, to Northern Telecom
Limited ("Nortel") for proceeds of $66,672,000. The proceeds received included
cash of $23,775,000 and Nortel shares valued at $42,897,000. A portion of the
Nortel shares received as proceeds have been classified as available for sale
marketable securities, valued at $9,316,000, which represents a discount to the
publicly traded market value to reflect certain resale restrictions (Note 6).
The remaining Nortel shares received in exchange for the BNI shares, which are
not subject to resale restrictions, have been classified as Other Assets on the
Consolidated Balance Sheets and valued based on a forward share price hedge
agreement entered into by the Company. The Nortel shares not subject to resale
restrictions have been pledged as security under a loan agreement (Note 14). The
Company recognized a gain in the fiscal year ended April 30, 1998 of
$47,960,000, representing the excess of the value of the consideration received
over the cost to the Company of its investment in the BNI shares exchanged.

In April 1996, the Company sold its minority equity interest in InSoft, Inc.
("InSoft"), a multimedia software company. The Company recognized a gain in
fiscal 1996 on the sale of its InSoft shares of $12,715,000, representing the
excess of the market value of the shares of the acquirer received over the cost
to the Company of the InSoft shares exchanged.


13.  BANK CREDIT FACILITIES

At April 30, 1998 short term bank credit facilities consisted of operating lines
of credit in the aggregate amount of $177,486,000, primarily with banks in
Canada, the United Kingdom, the United States, Chile and Brazil. At April 30,
1998 $19,827,000 was being utilized under these credit facilities, of which
$19,424,000 was attributable to Coasin S.A. and Acacia S.A. The Company's
primary facility with a Canadian bank in the amount of $100,000,000 is
unsecured. Certain of the other bank facilities are secured by the accounts
receivable and other assets of the borrowing subsidiary. The Company complies
with all covenants and restrictions contained in the credit facilities
agreements.

                                    Page 52
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                         APRIL 30, 1998, 1997 and 1996
    (Canadian dollars, tabular amounts in thousands except per share data)

14.  LONG TERM OBLIGATIONS

<TABLE> 
<CAPTION> 
                                                       April 30,       April 30,    
                                                         1998            1997       
                                                      ----------      ----------    
          <S>                                         <C>             <C>           
                                                                                    
          6.51% Senior Notes, due 2003                 $322,098       $    --       
          Loan agreement, due 2003                       50,000            --       
          Term loans                                     11,033        15,487       
          Mortgage                                           --           283       
          Capital lease obligations                       4,316         2,400       
                                                       --------       -------       
                                                        387,447        18,170       
                                                                                    
          Current portion of long term obligations       (4,136)       (7,353)      
                                                       --------       -------       
           Long term obligations                       $383,311       $10,817       
                                                       ========       =======        
</TABLE>

In April 1998 the Company issued US$225,000,000 Senior Notes due April 2003
bearing a coupon rate of 6.51%. Costs associated with the issue, totaled
US$1,303,000. Prior to the closing of the Senior Notes the Company entered into
a swap transaction with a major bank under which the effective coupon rate on
US$200,000,000 of the Senior Notes was fixed at 6.678%. The Senior Notes require
semi-annual payments of interest only, with the principal due at maturity. The
Company's obligation under the Senior Notes can be satisfied at any time prior
to maturity subject to a make whole provision. The Senior Notes are unsecured.
The Company complies with all covenants and restrictions contained in the Senior
Notes.


In January 1998 the Company entered into and received $50,000,000 under a loan
agreement which includes a term loan portion and a demand loan portion, both due
January 2003. The term loan bears interest at the fixed rate of 5.46% and the
demand loan bears interest at a floating rate equal to the one month's bankers'
acceptance rate. The term loan requires semi-annual payments of interest only,
with the principal due at maturity. The Company's obligation under the term loan
can be satisfied at any time prior to maturity subject to a make whole
provision. The demand loan requires monthly payments of interest only, with the
principal due at maturity. The term loan is secured by 545,976 Nortel shares.
The demand loan is unsecured. The Company complies with all covenants and
restrictions contained in the long term loan agreement.

                                    Page 53
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                         APRIL 30, 1998, 1997 and 1996
    (Canadian dollars, tabular amounts in thousands except per share data)


Future payments under long term obligations and operating leases at April 30,
1998 are as follows.

<TABLE>
<CAPTION>
                                    Principal Amount     Minimum
                                      on Mortgages    Capital Lease   Operating
                                     and Term Loans      Payments       Leases
                                     --------------      --------       ------
     <S>                            <C>               <C>             <C> 
     Fiscal 1999                        $  2,804          $1,606       $ 43,039
     Fiscal 2000                           2,287           1,878         32,620
     Fiscal 2001                             771           1,161         26,093
     Fiscal 2002                             942             162         14,396
     Fiscal 2003                         373,229               8         12,861
     Thereafter                            3,098              --         68,237
                                        --------          ------       --------
                                                                    
                                        $383,131           4,815       $197,246
                                        ========                       ========
     Less imputed interest at 9%                            (499)   
                                                          ------    
                                                                    
                                                          $4,316    
                                                          ======    
</TABLE>                                                            
                                                                           
Interest paid on capital leases was $401,000 (fiscal 1997 -- $266,00 fiscal
1996 -- $218,000).                                                   
                                                                     
15.  FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK          
                                                                             
The Company uses financial instruments, principally forward exchange contracts,
in its management of foreign currency exposures. Realized and unrealized gains
and losses on foreign exchange contracts are recognized and offset foreign
exchange gains and losses on the underlying net asset or net liability position.
These contracts primarily require the Company to purchase and sell certain
foreign currencies with or for Canadian dollars at contractual rates. At April
30, 1998 the Company had $170,084,000 in outstanding foreign exchange contracts
(April 30, 1997 - $293,414,000).

In January 1998 the Company entered into a Forward Share Price Hedge Agreement
with a major bank in order to fix the value of the Nortel shares pledged as
security against a term loan (see Note 14). The terms of the Forward Share Price
Hedge Agreement provide the Company with the option of delivering 545,976 Nortel
shares in January 2003 for proceeds of $41,570,000 or the present value of
$41,570,000 if terminated prior to January 2003, or delivering the cash
equivalent of the market value of 545,976 Nortel shares at January 2003 or at
the date of early termination.

Several major financial institutions are counterparties to the Company's
financial instruments. It is Company practice to monitor the financial standing
of the counterparties and limit the amount of exposure to any one institution.
The Company may be exposed to a credit loss in the event of nonperformance by
the counterparties to these contracts, but does not anticipate such
nonperformance.

                                    Page 54
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION
                                        
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                        
                         APRIL 30, 1998, 1997 AND 1996
    (Canadian dollars, tabular amounts in thousands except per share data)


With respect to accounts receivable, concentration of credit risk is limited due
to the diverse areas covered by the Company's operations. The Company has credit
evaluation, approval and monitoring processes intended to mitigate potential
credit risks. Anticipated bad debt loss and product returns have been provided
for in the allowance for returns and doubtful accounts. Net additions to the
provision for returns and doubtful accounts (fiscal 1998 -- $2,495,000; fiscal
1997 -- $3,921,000) primarily relate to product returns and have been charged to
sales. The carrying amounts for cash, marketable securities, accounts
receivable, accounts payable and accrued liabilities approximate fair value
because of the short maturity of these instruments.


16.  SHARE CAPITAL

AUTHORIZED

An unlimited number of Common Shares.

An unlimited number of participating preferred shares, ranking in priority upon
distribution of assets over Common Shares, may be issued in series with
additional provisions as fixed by the Board of Directors.

EMPLOYEE STOCK OPTION PLANS

The Company has established the Newbridge Networks Corporation Consolidated Key
Employee Stock Option Plan (the "Plan") applicable to full-time employees,
directors and consultants of the Company and its subsidiaries. The options under
the Plan are granted at the then-current fair market value of the Common Shares
of the Company and generally may be exercised in equal proportions during the
years following the first, second, third and fourth anniversary of the date of
grant, and expire on the fifth anniversary or upon termination of employment.
Options granted under the Plan prior to August 1, 1996 generally may be
exercised in equal proportions during the years following the first, second and
third anniversary of the date of grant, and expire on the fourth anniversary or
upon termination of employment. In addition to the number of options outstanding
as at April 30, 1998, the aggregate number of options which may be granted under
the Plan and under a new plan to be submitted to the shareholders for approval
is 13,600,409. Amendments to the Plan related to the number of shares reserved
for issuance and a new plan have been approved by the Board of Directors and are
subject to shareholder approval.

                                    Page 55
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION
                                        
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                        
                         APRIL 30, 1998, 1997 AND 1996
    (Canadian dollars, tabular amounts in thousands except per share data)

  Activity in the stock option plan is summarized below.

<TABLE>
<CAPTION>
                                                                               Option Price                       
                                                                         ------------------------                
                                                                                         Weighted                
                                                            Options       Low     High   Average                 
                                                          -----------    ------  ------  --------                
<S>                                                       <C>            <C>     <C>      <C>                     
Options outstanding April 30, 1995                        13,792,072     $ 1.68  $43.74    $16.46                
                                                                                                                 
  Granted during fiscal 1996                               5,193,100     $19.47  $34.73    $26.94                
  Cancelled and expired                                     (699,804)    $ 1.68  $34.23    $24.41                
  Exercised                                               (5,161,664)    $ 1.68  $26.89    $ 9.98                 
                                                          ----------                                             
                                                                                                                 
Options outstanding April 30, 1996                        13,123,704     $ 4.73  $43.74    $22.73                
                                                                                                                 
  Granted during fiscal 1997                               7,098,800     $30.18  $46.33    $38.89                
  Cancelled and expired                                     (785,073)    $ 4.76  $44.31    $25.74                
  Exercised                                               (3,182,704)    $ 4.73  $34.23    $17.23                
                                                          ----------                                             
                                                                                                                 
Options outstanding April 30, 1997                        16,254,727     $19.47  $46.33    $30.72                
                                                                                                                 
  Granted during fiscal 1998                               9,817,645     $38.86  $64.96    $44.75                
  Cancelled and expired                                   (1,779,067)    $19.63  $64.31    $42.46                
  Exercised                                               (3,827,102)    $19.47  $43.74    $23.92                
                                                          ----------                                             
                                                                                                                 
Options outstanding April 30, 1998                        20,466,203     $19.47  $64.96    $37.70                
                                                          ==========                                             
                                                                                                                 
<CAPTION>                                                                                                        
                                                                               Option Price                      
                                                                         ------------------------                
                                                                                         Weighted                
                                                           Options        Low     High   Average                 
                                                          ----------     ------  ------  -------                 
<S>                                                       <C>            <C>     <C>     <C>                     
Options outstanding April 30, 1997                                                                               
  Vested                                                   4,867,116     $19.47  $43.74    $23.99                 
  Unvested                                                11,387,611     $19.47  $46.33    $30.72                 
                                                          ----------                                              
                                                          16,254,727     $19.47  $46.33    $30.72                  
                                                          ==========                                    
  Weighted average remaining                                                                            
     contractual life                                     2.14 years                                    
                                                          ==========                                    
                                                                                                        
Options outstanding April 30, 1998                                                                      
  Vested                                                   5,979,342     $19.47  $46.33    $28.26       
  Unvested                                                14,486,861     $19.47  $64.96    $41.59       
                                                          ----------                                    
                                                          20,466,203     $19.47  $64.96    $37.70        
                                                          ==========
  Weighted average remaining
     contractual life                                     2.83 years
                                                          ==========
</TABLE>

                                    Page 56
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION
                                        
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                        
                         APRIL 30, 1998, 1997 AND 1996
    (Canadian dollars, tabular amounts in thousands except per share data)


STOCK BASED COMPENSATION

The Company applies APB 25 and related interpretations in accounting for its
Consolidated Key Employee Stock Option Plan. Accordingly, no compensation
expense has been recognized for its stock based compensation plan. Had
compensation costs for the Company's Consolidated Key Employee Stock Option Plan
been determined based on the fair value at the grant date for awards under the
Plan, consistent with the methodology prescribed under SFAS 123, the Company's
net earnings (loss) and earnings (loss) per share would have been decreased to
the following pro forma amounts.

<TABLE>
<CAPTION>
                                               1998               1997                 1996   
                                             --------           --------             -------- 
<S>                                          <C>                <C>                  <C>      
Net earnings (loss), as reported             $(18,318)          $156,917             $202,864 
                                                                                              
Estimated stock based compensation costs      (75,164)           (35,085)             (12,061)
                                             --------           --------             -------- 
                                                                                              
Pro forma net earnings (loss)                $(93,482)          $121,832             $190,803 
                                             ========           ========             ========  
 
Basic pro forma earnings (loss) per share         (54) cents          71 cents       $   1.15
                                             ========           ========             ========
 
Fully diluted pro forma
      earnings (loss) per share                   (54) cents          71 cents       $   1.12
                                             ========           ========             ========
</TABLE>

The weighted average fair value of all options granted during fiscal 1998, 1997
and 1996 was estimated as of the date of grant using the Black-Scholes option
pricing model with the following and weighted average results and assumptions.

<TABLE>
<CAPTION>
                                               1998       1997      1996
                                             --------   --------  --------
<S>                                          <C>        <C>       <C>
Weighted average fair value of
   of options issued                         $25.32     $18.65    $11.36
Expected option life, in years                  4.5        4.3       3.5
Volatility                                    63.98%     50.18%    50.23%
Risk free interest rate                         5.9%       6.4%      5.5%
Dividend yield                                  nil        nil       nil
</TABLE>

The Black-Scholes model used by the Company to calculate option values, as well
as other currently accepted option valuation models, were developed to estimate
the fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require highly subjective assumptions, including future stock
price volatility and expected time until exercise, which greatly affect the
calculated values. Accordingly, Management believes that this model does not
necessarily provide a reliable single measure of the fair value of the Company's
stock option awards.

                                    Page 57
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION
                                        
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                        
                         APRIL 30, 1998, 1997 AND 1996
    (Canadian dollars, tabular amounts in thousands except per share data)


EMPLOYEE SHARE PURCHASE PLAN

The Board of Directors approved an Employee Stock Purchase Plan ("ESPP") in June
1998, which is subject to the approval of shareholders and regulatory
authorities. The ESPP, if approved, will be effective January 1999 and will
allow eligible employees to authorize payroll deductions up to 10% of their
salary to purchase Common Shares of the Company at a price of 85% of the then
current stock price (as defined in the ESPP). Employees purchasing shares under
the ESPP must hold the shares for a minimum of one year. The Company has
reserved 500,000 Common Shares for issuance under the ESPP, subject to
shareholder and regulatory approval.


17.  RESTRUCTURING COSTS

In November 1997, the Company decided to restructure its activities related to
its LAN business. The restructuring plan involves the formation of a strategic
alliance with a company strongly positioned in the LAN business, and the
reduction of the Company's direct participation, and related costs, in the LAN
business. In repositioning the way in which it addresses the LAN market, the
restructuring plan created impairment losses on assets associated with the
Company's LAN business and liabilities associated with restructuring activities.
Restructuring costs of $181,444,000 comprised the following:

<TABLE>
<S>                                                            <C>
    Asset impairment losses
       Accounts receivable                                     $ 12,732
       Inventory                                                 54,851
       Property, plant and equipment                             11,936
       Goodwill - UB Networks                                    18,775
       Goodwill - Ouest Standard Telematique                     38,350
       Other current and non-current assets                       5,162
                                                               --------
                                                                141,806
                                                               --------

    Provision for restructuring
       Reduction in work force                                   20,796
       Reduction in facilities                                    4,753
       Discontinued activities                                   13,577
       Other restructuring costs                                    512
                                                               --------
                                                                 39,638
                                                               --------
 
    Restructuring costs                                        $181,444
                                                               ========
</TABLE>

Asset impairment losses were recorded to the extent the net book value
(including related reserves) exceeded the fair value of any assets associated
with the Company's restructuring plan. The fair value was based on the estimated
net realizable value of the underlying assets affected by the restructuring. The
full net book value of goodwill associated with the acquisitions of UB Networks
(acquired in January 1997) and Ouest Standard Telematique (acquired in August
1996) were written off as restructuring costs. Both acquisitions related to the
Company increasing its direct presence and participation in the LAN market.

                                    Page 58
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION
                                        
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                        
                         APRIL 30, 1998, 1997 AND 1996
    (Canadian dollars, tabular amounts in thousands except per share data)


The provision for restructuring relates to programs instituted by the Company to
reduce its direct participation in the LAN market. The provision for
restructuring and the spending to the end of the fourth quarter of fiscal 1998
comprises the following components.

<TABLE>
<CAPTION>
                              Reduction in   Reduction     Discontinued    Other  
                              Work Force   in Facilities   Activities   Restructuring     Total  
                              -----------  --------------  -----------  --------------  ---------
<S>                           <C>          <C>             <C>          <C>             <C>       
Provision upon
    completion of
    defining the
    restructuring plan        $ 20,796     $ 4,753         $ 13,577     $ 512           $ 39,638
 
Facilities reduction
    accrued in January
    1997 restructuring
    (Note 4)                        --       2,737               --        --              2,737
 
Incurred in the fiscal
    year ended
    April 30, 1998             (19,614)     (6,939)         (10,017)     (512)           (37,082)
                              ----------   -----------     ----------   -----------     ---------
Provision at
    April 30, 1998            $  1,182     $   551         $  3,560     $  --           $  5,293
                              ==========   ===========     ==========   ===========     =========
</TABLE>

The provision for reduction in work force includes severance, related medical
and other benefits, relocation costs and other obligations to employees. The
provision includes termination benefits for approximately 400 employees. The
work force reductions are in substantially all functions and in all regions in
which the Company operates. The Company anticipates that these work force
reductions will be substantially completed in the first half of fiscal 1999.

The provision for reduction in facilities comprises primarily lease payments and
fixed costs associated with plans to close sales, support and administrative
facilities in the Americas, Europe and Asia Pacific geographic areas. Certain
facilities closures planned as part of the restructuring plan formulated upon
the acquisition of UB Networks were also part of the restructuring plan defined
in November 1997. Remaining facilities closures are expected to be completed in
fiscal 1999.

The provision for discontinued activities includes costs associated with
fulfilling prior commitments related to certain discontinued product lines and
activities. The Company anticipates that these activities will be substantially
completed in the second half of fiscal 1999.

The provision for other restructuring costs comprises professional fees and
other various direct incremental costs associated with the restructuring plan.

                                    Page 59
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION
                                        
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                        
                         APRIL 30, 1998, 1997 AND 1996
    (Canadian dollars, tabular amounts in thousands except per share data)


18.  INCOME TAXES

In fiscal 1998 the Company implemented the recommendations of CICA Handbook
Section 3465, Accounting for Income Taxes. Under the new recommendations, the
liability method of tax allocation is used in accounting for income taxes. Under
this method, future tax benefits and obligations are determined based on
differences between the financial reporting and tax bases of assets and
liabilities, and measured using the substantially enacted tax rates and laws
that will be in effect when differences are expected to reverse. Prior to the
adoption of the new recommendations, income tax expense was determined using the
deferral method of tax allocation. Deferred tax expense was based on items of
income and expense that were reported in different years in the financial
statements and tax returns and measured at the rate in effect in the year the
difference originated. There is no material impact on the financial statements
resulting from this change either in the current year or in the prior years
presented.

The components of the provision for income taxes are as follows:

<TABLE>
<CAPTION>
                                                   1998     1997      1996   
                                                 -------  --------  --------
<S>                                              <C>      <C>       <C>     
                                                                            
     Current                                     $45,843  $ 94,729  $ 96,180
     Future                                       27,158    22,989     4,599
                                                 -------  --------  --------
                                                                            
                                                 $73,001  $117,718  $100,779
                                                 =======  ========  ======== 
</TABLE>

The provision for income taxes reported differs from the amount computed by
applying the Canadian statutory rate to income before income taxes for the
following reasons.

<TABLE>
<CAPTION>
                                                    1998        1997       1996
                                                 ----------  ----------  ---------
<S>                                              <C>         <C>         <C>
     Earnings before income taxes:
       Domestic                                  $ 222,597    $182,745   $155,901
       Foreign                                    (167,283)     97,009    149,212
                                                 ---------    --------   --------
 
                                                 $  55,314    $279,754   $305,113
                                                 =========    ========   ========
 
     Statutory income tax rate (Canada)               43.5%       43.5%      43.5%
                                                 =========    ========   ========
 
     Expected provision for income tax           $  24,062    $121,693   $132,724
     Canadian rate adjustment for research
      and development activities                    (6,166)     (5,062)    (4,318)
     Canadian rate adjustment for
      manufacturing and processing activities      (19,032)    (15,625)   (13,407)
     Loss carryforwards utilized                        --      (7,262)        --
     Foreign tax differential                      (13,865)    (39,539)   (21,686)
     Purchased research and
      development in process                        22,952      42,169         --
     Goodwill written off                           26,677          --         --
     Non-deductible reserves and surtaxes           38,373      21,344      7,466
                                                 ---------    --------   --------
     Reported income tax provision               $  73,001    $117,718   $100,779
                                                 =========    ========   ========
</TABLE>

                                    Page 60
<PAGE>
 
                         NEWBRIDGE NETWORKS CORPORATION
                                        
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                        
                         April 30, 1998, 1997 and 1996
     (Canadian dollars, tabular amounts in thousands except per share data)


The components of the annual temporary differences giving rise to the related
future tax provision are as follows:
<TABLE>
<CAPTION>
                                                          1998        1997        1996 
                                                        --------    --------    --------
<S>                                                     <C>         <C>         <C>    
Tax depreciation in excess of                                                          
       accounting amortization                          $ 7,163     $ 4,530     $ 5,560
     Accounting provisions not deductible                 6,804       3,570      (5,096)
     Research and development expenses                                                 
       deducted for tax purposes in excess                                             
       of accounting                                        677       2,530       3,440
     Restructuring charges                               10,909      13,127          --
     Losses available to offset future                                                 
       income taxes                                       1,605        (768)        695
                                                        -------     -------     -------
     Future income tax expense                          $27,158     $22,989     $ 4,599
                                                        =======     =======     ======= 
</TABLE>

The components of the future tax benefit (obligation) classified by the source
of temporary differences that gave rise to the benefit (obligation) are as
follows:

<TABLE>
<CAPTION>
                                            Future Tax Benefit     Future Tax Obligation
                                          ----------------------  -----------------------
                                          April 30,   April 30,    April 30,   April 30,
                                             1998        1997        1998         1997
                                          ----------  ----------  -----------  ----------
<S>                                       <C>         <C>         <C>          <C>
   Accounting depreciation in excess
     of (less than) tax depreciation        $13,853     $ 6,764     $(45,561)   $(31,309)
  Accounting provisions not deductible       22,409       5,539      (14,372)        299
  Research and development expenses
     deducted for tax purposes less
     than (in excess of) accounting              --          --      (11,684)     (1,807)
  Net operating losses and
     restructuring charges related to
     acquisition of UB Networks               9,360      31,102           --          --
  Enterprise restructuring                   12,052          --           --          --
  Other                                          --          --          420         378
  Valuation allowance                        (7,231)     (6,012)          --          --
                                            -------     -------     --------    --------
                                            $50,443     $37,393     $(71,197)   $(32,439)
                                            =======     =======     ========    ========
</TABLE>

The Company recorded a future tax benefit for net operating loss carryovers
associated with the acquisition of UB Networks. These losses will expire at
various dates through the year 2012.

The components of the future tax benefit (obligation) classified by the source
of timing difference that gave rise to the credit are not materially different
from the temporary differences as calculated under the application of U.S. GAAP.

                                    Page 61
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION
                                        
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                        
                         APRIL 30, 1998, 1997 AND 1996
    (Canadian dollars, tabular amounts in thousands except per share data)


At April 30, 1998, the Company had available investment tax credits of
approximately $46,828,000 for the reduction of future years Canadian federal
income tax liability. These credits, which are subject to customary review
procedures by Revenue Canada, expire during the years 2006 to 2008. Of this
amount $10,913,000 has been applied to reduce the future tax obligation. No
recognition has been given in these financial statements to the potential tax
benefits associated with the remaining balance of investment tax credits.

19.  EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share has been calculated on the basis of net earnings
(loss) for the period divided by the daily weighted average number of Common
Shares outstanding during the fiscal year.

The calculation of fully diluted earnings per share assumes that, if a dilutive
effect is produced, all outstanding options had been exercised at the later of
the beginning of the fiscal period and the option issue date, and includes an
allowance for imputed earnings of $18,521,000 (fiscal 1997 -- $11,589,000;
fiscal 1996 -- $10,469,000) derived from the investment of funds which would
have been received at an after tax rate of 3.0% (fiscal 1997 -- 3.1%; fiscal
1996 -- 4.0%).

Under SFAS 128 issued by FASB in February 1997, the method for calculating U.S.
GAAP primary earnings per share has been replaced by basic earnings per share,
the calculation of which, given the Company's capital structure, is the same as
the calculation of basic earnings per share under Canadian GAAP. The calculation
of fully diluted earnings per share under U.S. GAAP has been replaced by diluted
earnings per share, the calculation of which uses the treasury stock method,
and, given the Company's capital structure, is the same as the former
calculation of primary earnings per share under U.S. GAAP. The Company
implemented SFAS 128 in fiscal 1998 and restated all prior period earnings per
share, which did not result in material changes to earnings per share as
previously disclosed. Earnings per share in U.S. dollars is disclosed for the
convenience of the reader. The exchange rates used for translation are based on
the average of the daily noon buying rates for Canadian dollars in U.S. dollars
as reported by the Federal Reserve Bank of New York. The calculation of earnings
per share under U.S. GAAP is as follows.

<TABLE>
<CAPTION>
                                                         1998      1997     1996
                                                        -------  -------  --------
<S>                                                     <C>      <C>      <C>
     Earnings (loss) per share
       Basic                                              $0.10   $0.92   $   1.22
       Diluted                                            $0.10   $0.90   $   1.19
 
     Earnings (loss) per share - in U.S. dollars
       Basic                                              $0.07   $0.68   $   0.90
       Diluted                                            $0.07   $0.66   $   0.87
 
     Weighted average number of shares
       Basic                                            174,617  170,510   165,842
       Diluted                                          174,617  174,525   170,990
</TABLE>

                                    Page 62
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION
                                        
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                        
                         APRIL 30, 1998, 1997 AND 1996
    (Canadian dollars, tabular amounts in thousands except per share data)


20.  RELATED PARTY TRANSACTIONS

The Company leases facilities in Canada from companies controlled by Terence H.
Matthews, Chairman of the Board of Directors, Chief Executive Officer and the
largest shareholder of the Company, under terms and conditions reflecting
prevailing market conditions at the time the leases were entered into.
Approximately 350,000 square feet has been leased for various terms expiring
between January 1999 and May 2002 at rates between $9.25 and $14.00 per square
foot (approximately $3,350,000 per year). The Company also purchased $1,053,000
of services from these companies throughout fiscal 1998 (fiscal 1997 --
$434,000). During the fiscal year ended April 30, 1998 the Company purchased
approximately $2,533,000 (fiscal 1997 -- $3,393,000) of equipment under usual
terms and conditions from a corporation in which the Company has no equity
interest, but which is controlled by Terence H. Matthews.

The Company accounts for its equity interests in certain associated companies
using the equity method of accounting. The Company is represented on the Boards
of Directors of these companies. During the fiscal year ended April 30, 1998,
the Company paid $2,448,000 for research and development services from these
associated companies under usual trade terms and conditions (fiscal 1997 --
$2,621,000). The Company also purchased $10,126,000 of equipment and software
under usual trade terms and conditions, generally for resale (fiscal 1997 --
$6,342,000) and sold $13,846,000 of equipment and software to these companies
under usual trade terms and conditions, generally for resale (fiscal 1997 --
$17,255,000).

The Company accounts for its equity interests in certain associated companies
using the cost method of accounting. The Company is represented on the Boards of
Directors of these companies. During the fiscal year ended April 30, 1998 the
Company purchased $7,226,000 of equipment and software from these associated
companies, under usual trade terms and conditions, generally for resale (fiscal
1997 -- $2,255,000). The Company sold $6,100,000 of equipment and software to
these associated companies under usual trade terms and conditions, generally for
resale (fiscal 1997 -- $3,304,000).

The Company pays a net royalty between 2% and 10%, depending on the level of
cumulative royalties paid, on all sales of products developed as a result of
subcontracted research and development previously performed under agreements
between the Company and corporations controlled by three directors of the
Company. Royalty payments under these agreements were $294,000 (fiscal 1997 --
$174,000).

                                    Page 63
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION
                                        
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                        
                         APRIL 30, 1998, 1997 AND 1996
    (Canadian dollars, tabular amounts in thousands except per share data)

21.  BUSINESS SEGMENT INFORMATION

Management organizes the Company into four principal operating segments for
making operating decisions and assessing performance. The four operating
segments comprise three sales and support organizations (North and South
America, Europe Middle East and Africa, and Asia Pacific) and one Corporate
resource group which develops and manufactures products, provides marketing and
operational support and makes strategic investments. Revenues generated by the
Corporate group are predominantly derived from the consolidation of non-wholly
owned subsidiaries. Cost of sales for the three sales and support organizations
is stated at the cost to manufacture and does not include any mark ups. Expenses
include Selling, General and Administrative expenses directly incurred by the
three sales and support organizations.

<TABLE>
<CAPTION>
                                        1998          1997         1996
                                     -----------  ------------  ----------
<S>                                  <C>          <C>           <C>
  NORTH AND SOUTH AMERICA
     Sales                           $  649,388    $  561,784   $ 460,835
     Cost of sales and expenses         413,339       336,756     221,893
                                     ----------    ----------   ---------
     Operating contribution             236,049       225,028     238,942
                                     ----------    ----------   ---------
 
  EUROPE, MIDDLE EAST AND AFRICA
     Sales                           $  511,444    $  432,885   $ 267,882
     Cost of sales and expenses         300,508       226,875     109,394
                                     ----------    ----------   ---------
     Operating contribution             210,936       206,010     158,488
                                     ----------    ----------   ---------
 
  ASIA PACIFIC
     Sales                           $  273,581    $  231,625   $ 136,583
     Cost of sales and expenses         149,547       110,200      49,477
                                     ----------    ----------   ---------
     Operating contribution             124,034       121,425      87,106
                                     ----------    ----------   ---------
 
  CORPORATE
     Sales                           $  186,207    $  150,433   $  55,944
     Cost of sales and expenses         512,337       335,193     267,245
                                     ----------    ----------   ---------
     Operating contribution            (326,130)     (184,760)   (211,301)
                                     ----------    ----------   ---------
 
  TOTAL
     Sales                           $1,620,620    $1,376,727   $ 921,244
     Cost of sales and expenses       1,375,731     1,009.024     648,010
                                     ----------    ----------   ---------
     Operating contribution             244,889       367,703     273,234
 
     Restructuring costs               (181,444)           --          --
     Purchased research
       and development in process       (52,762)      (96,940)         --
     Settlement of litigation            (2,642)           --          --
                                     ----------    ----------   ---------
     Income from operations               8,041       270,763     273,234
     Non-operating income                47,273         8,990      31,879
     Provision for income taxes         (73,001)     (117,718)   (100,779)
     Non-controlling interest              (631)       (5,118)     (1,470)
                                     ----------    ----------   ---------
     Net earnings (loss)             $  (18,318)   $  156,917   $ 202,864
                                     ==========    ==========   =========
</TABLE>

                                    Page 64



<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION
                                        
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                        
                         APRIL 30, 1998, 1997 AND 1996
    (Canadian dollars, tabular amounts in thousands except per share data)



The Company manages its assets by geographic region, rather than through the
operating segments. Decision making and performance assessment with regard to
assets is done on a geographic basis because the operating segments may share
assets and accountability by operating segment would be less readily
determinable.

<TABLE>
<CAPTION>
                                           1998        1997        1996
                                           ----        ----        ----
     <S>                               <C>         <C>         <C>
     Identifiable Assets               $  685,315  $  405,126  $  607,969
     Canada                               480,148     397,808     184,746
     United States                        499,361     370,875     131,885
     Europe                               183,507     218,015     130,075
     Asia Pacific                         118,494     104,879      38,742
     Latin America                     ----------  ----------  ----------
                                                                         
                                       $1,966,825  $1,496,703  $1,093,417
                                       ==========  ==========  ========== 
</TABLE>

Export sales from operations in Canada (excluding inter-subsidiary sales) were
as follows.

<TABLE>
<CAPTION>
 
                                           1998        1997        1996  
                                         --------    --------    --------
<S>                                      <C>         <C>         <C>     
     Latin America                       $171,245    $169,377    $119,385
     Asia Pacific                           8,010      49,166      32,902
                                         --------    --------    --------
                                                                         
                                         $219,255    $218,543    $152,287
                                         ========    ========    ======== 
</TABLE>

Sales to Siemens A.G. and subsidiaries, generally under OEM arrangements for
resale to end users, were 16% of total sales for fiscal 1998 and were 18% of
total sales in fiscal 1997.

22.  LITIGATION

In the fourth quarter of fiscal 1998 the Company reached an agreement in
principle to settle the class action lawsuit which was filed in United States
District Court in Washington, D.C. during the fiscal year ended April 30, 1995.
The lawsuit purported to be a class action on behalf of a class of persons who
purchased securities of the Company between March 29 and August 1, 1994 and
alleged that the Company made false and misleading statements in violation of
United States securities law and common law. The proposed settlement is subject
to review and approval by the Court on a schedule to be set by the Court. The
Company has recorded an expense of $2,642,000 in connection with the proposed
settlement, which represents Management's estimate of the direct costs which
will be incurred upon final approval by the Court.

                                    Page 65
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION
                                        
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                        
                         APRIL 30, 1998, 1997 AND 1996
    (Canadian dollars, tabular amounts in thousands except per share data)

Lucent Technologies Inc. ("Lucent Technologies") filed a complaint during the
fiscal year ended April 30, 1998 in United States District Court in Delaware
against the Company and its United States subsidiary, Newbridge Networks Inc.
Lucent Technologies manufactures and sells telecommunications systems, software
and products, and is both a distributor of the Company's products and a
competitor of the Company. The complaint alleges that the Company's manufacture
and sale in the United States of Newbridge frame relay and ATM (asynchronous
transfer mode) switch products infringe certain United States patent rights
claimed by Lucent Technologies, and requests actual and trebled damages in an
unspecified amount. Based upon its present understanding of the laws in the
United States and the facts, the Company believes it has meritorious defenses to
these claims. The Company has filed an answer to the complaint, as well as a
counterclaim alleging unfair competition by Lucent Technologies, and intends to
defend this action vigorously. Because the outcome of the action is not certain
at this time, no provision for any liability that may result upon adjudication
has been made in these Consolidated Financial Statements.

                                    Page 66
<PAGE>
 
                       SELECTED QUARTERLY FINANCIAL DATA

The quarterly financial data for the fiscal years ended April 30, 1998 and 1997
are derived from unaudited consolidated financial statements of the Company
which include, in the opinion of Management, all normal and recurring
adjustments considered necessary for a fair statement of results for such
periods. The selected quarterly financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this Annual Report on Form 10-K.

<TABLE> 
<CAPTION> 
                                       Fiscal 1997 Quarters Ended                  Fiscal 1998 Quarters Ended
                               ---------------------------------------      ---------------------------------------
                               Jul 28,    Oct 27,    Jan 26,    Apr 30,     Aug 3,     Nov 2,     Feb 1,    Apr 30,
                                 1996       1996       1997       1997      1997       1997       1998       1998
                                 ----       ----       ----       ----      ----       ----       ----       ----
                                          (Canadian dollars, amounts in thousands except per share data)
<S>                            <C>        <C>        <C>        <C>         <C>        <C>        <C>       <C>            
Income Statement Data:

Sales                          $286,037   $316,082   $333,267   $441,341   $434,738   $432,169   $358,520   $395,193
Gross margin                    185,294    203,897    213,261    266,687    274,008    272,368    213,707    235,472

Net earnings (loss)(1)           60,801     62,781     63,031   (29,696)     64,354     57,993   (144,283)     3,618

Earnings (loss) per share
     Basic                     $   0.36   $   0.37   $   0.37   $ (0.17)   $   0.37   $   0.33   $  (0.82)  $   0.02       
     Fully diluted                 0.35       0.36       0.36     (0.17)       0.36       0.33      (0.82)      0.02

Weighted average number of shares
     Basic                      169,228    170,232    170,941    171,701    172,964    174,733    175,376    175,598
     Fully diluted              181,710    184,131    185,037    187,456    189,082    190,516    175,376    175,598

U.S. GAAP
     Net earnings (loss)(1)    $ 60,801   $ 62,781   $(33,909)  $ 67,244   $ 64,354   $ 57,993  $(170,664)  $ 29,999

     Earnings (loss) per share(2)
         Basic                 $   0.36   $   0.37   $  (0.20)  $   0.39   $   0.37   $   0.33   $  (0.97)  $   0.17       
         Diluted                   0.35       0.36      (0.20)      0.38       0.36       0.32      (0.97)      0.17
         Diluted - US$         $US 0.25   $US 0.26   $US(0.15)  $US 0.28   $US 0.26   $US 0.23   $US(0.68)  $US 0.12               

     Weighted average number of shares
         Basic                   169,228    170,232    170,941    171,701    172,964    174,733    175,376    175,598
         Diluted                 174,930    174,747    170,941    176,554    179,821    182,728    175,376    177,052
</TABLE> 

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

(1)  Net earnings (loss) includes net non-recurring charges of $96,940,000 in
     the fourth quarter of fiscal 1997 (U.S. GAAP - third quarter of fiscal
     1997), $161,412,000 in the third quarter of fiscal 1998 (U.S. GAAP -
     $187,793,000) and $28,243,000 in the fourth quarter of fiscal 1998 (U.S.
     GAAP - $1,862,000). The non-recurring gains and charges relate to the gain
     on sale of long term investments (see Note 12 to the Consolidated Financial
     Statements), purchased research and development in process (see Note 2 to
     the Consolidated Financial Statements), restructuring costs (see Note 17 to
     the Consolidated Financial Statements), and settlement of litigation (see
     Note 22 to the Consolidated Financial Statements).

(2)  See Note 19 to the Consolidated Financial Statements.


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

None.

                                    Page 67
<PAGE>
 
                                   PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The directors and executive officers of the Company and their ages at June 18,
1998 are:

<TABLE> 
<CAPTION> 
Name and Municipality of Residence                Age                 Position
----------------------------------                ---                 --------
<S>                                               <C>          <C>  
Terence H. Matthews                               55           Chairman of the Board, Chief Executive
Kanata, Ontario, Canada                                         Officer and Director
                                                        
Peter D. Charbonneau                              44           Vice Chairman of the Board
Ottawa, Ontario, Canada                                         and Director
                                                        
Alan G. Lutz                                      52           President, Chief Operating Officer
The Woodlands, Texas, USA                                       and Director
                                                        
John D. Everard                                   49           Executive Vice President and General 
Chepstow, Wales                                                 Manager, European Region                                
                                                        
Conrad W. Lewis                                   45           Executive Vice President, Marketing and
Stittsville, Ontario, Canada                                    Product Management
                                                        
Constantin S. Loudiadis                           49           Executive Vice President and General 
Ottawa, Ontario, Canada                                         Manager, Asia Pacific Region                            
                                                        
Scott W. Marshall                                 44           Executive Vice President, Research and 
Kanata, Ontario, Canada                                         Development                                           
                                                        
Dr. Donald Mills                                  64           Vice President, Administration
Kanata, Ontario, Canada                                         and Director
                                                        
Peter A. Nadeau                                   42           Vice President, Legal Services
Ottawa, Ontario, Canada                                 
                                                        
F. Michael Pascoe                                 46           Executive Vice President and General 
Great Falls, Virginia, USA                                      Manager, Americas Region                              
                                                        
Bruce W. Rodgers                                  43           Executive Vice President, Operations
Richmond, Ontario, Canada                               
                                                        
Kenneth B. Wigglesworth                           34           Vice President, Finance and
Kanata, Ontario, Canada                                         Chief Financial Officer
</TABLE> 

All of the above mentioned executive officers, with the exception of Alan G.
Lutz and Constantin S. Loudiadis, have been employed by the Company in various
capacities during the past five years.

Alan G. Lutz joined the Company in June 1998 as President, Chief Operating
Officer and a Director of the Company. Prior to joining the Company, Mr. Lutz
was Senior Vice President and Group General Manager, Communication Products
Group for Compaq Computer, a worldwide information technology company and
supplier of personal computers, since November 1996. He also served as Executive
Vice President, Unisys Corporation and President, Computer Systems Group from
May 1994 to October 1996 and in various senior management roles at Northern
Telecom since 1991, most recently as Senior Vice President, President, Switching
Networks.

                                    Page 68
<PAGE>
 
Prior to joining the Company in January 1997, Mr. Loudiadis held a variety of
senior management positions within the telecommunications group of Bell Canada
since 1970, most recently as Vice President, Corporate Development of BCE Mobile
Communications Inc.

<TABLE> 
<CAPTION> 
NAME AND MUNICIPALITY OF RESIDENCE                   AGE                        POSITION
-----------------------------------                  ---                        --------
<S>                                                  <C>                        <C>  
Dr. Denzil J. Doyle                                   66                        Director
Kanata, Ontario, Canada

Alan D. Horn                                          46                        Director
Toronto, Ontario, Canada

Trevor G. Jones                                       59                        Director
Willowdale, Ontario, Canada

Graham C. C. Miller                                   67                        Director
Cotuit, Massachusetts, USA

Kent H. E. Plumley                                    61                        Director
Kanata, Ontario, Canada

Dr. John C. J. Thynne                                 66                        Director
London, England
</TABLE> 

Terence H. Matthews founded the Company in June 1986 and has served as Chairman
of the Board, Chief Executive Officer and a Director of the Company since that
time. From the inception of the Company to June 1993 Mr. Matthews also served as
President.

Peter D. Charbonneau has been Vice Chairman of the Board of the Company since
June , 1998 and a Director of the Company since December 1996. Mr. Charbonneau
was President and Chief Operating Officer of the Company from December 1996 to
June 1998. From January 1987 to December 1996, Mr. Charbonneau held a variety of
positions with the Company, most recently as Executive Vice President and Chief
Financial Officer.

Dr. Denzil J. Doyle has been a Director of the Company since September 1987. Dr.
Doyle has been Chairman of Capital Alliance Ventures Inc., a venture capital
company specializing in investments in high technology companies since November
1995, and President of Doyletech Corporation, a consulting corporation
specializing in new business ventures, since November 1982. He is also a
director of International Datacasting Corporation, a manufacturer of satellite
data broadcasting equipment. Dr. Doyle is a member of the Employee Compensation
Committee and the Directors' Affairs Committee of the Board of Directors of the
Company.

Alan D. Horn has been a Director of the Company since July 1991. Mr. Horn has
been Vice President, Finance and Chief Financial Officer of Rogers
Communications Inc., a communications company, since October 1996. From April
1990 to October 1996 he was President and Chief Operating Officer of Rogers
Telecommunications Limited, an investment holding company. He is Chairman of the
Audit Committee and a member of the Directors' Affairs Committee of the Board of
Directors of the Company.

Trevor G. Jones has been a Director of the Company since June 1991. Mr. Jones 
has been President of JWA Associates, a business consulting company, since 
April 1991. Mr. Jones is Chairman of the Directors' Affairs Committee and a 
member of the Audit Committee of the Board of Directors of the Company.

                                    Page 69
<PAGE>
 
Graham C. C. Miller has been a Director of the Company since September 1987. Mr.
Miller has been Chairman of the Board of LTX Corporation, a manufacturer of
semiconductor testing equipment, since 1976, and was President and Chief
Executive Officer until February 1994. He is a member of the Audit Committee and
the Directors' Affairs Committee of the Board of Directors of the Company.

Dr. Donald Mills has been Vice President, Administration of the Company since
April 1989. Dr. Mills has been a Director of the Company since September 1988.

Kent H. E. Plumley has been a Director of the Company since June 1986. Mr.
Plumley has been a partner of Osler, Hoskin & Harcourt, Barristers & Solicitors,
since May 1990. Mr. Plumley is the Chairman of the Employee Compensation
Committee of the Board of Directors of the Company.

Dr. John C. J. Thynne has been a Director of the Company since April 1992. Dr.
Thynne has been Director General of the Electronic Components Industry
Federation (United Kingdom) and Managing Director of Camrose Consultancy
Services since January 1991. Dr. Thynne is a member of the Audit Committee of
the Board of Directors of the Company.

All directors of the Company hold office until the next annual meeting of
shareholders or until the election and qualification of their successors.
Executive officers of the Company are appointed by and serve at the discretion
of the Board of Directors.


ITEM 11.  EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to
Exhibit 99 to this Annual Report on Form 10-K, "Statement of Executive
Compensation" as set forth in the form of the Company's proxy circular for the
annual and special meeting of shareholders to be held on September 23, 1998.
Such incorporation by reference shall not be deemed to specifically incorporate
by reference the information contained under the sub-captions "Report on
Executive Compensation" and "Performance Graph".

                                    Page 70
<PAGE>
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the ownership of
the Company's Common Shares as at June 18, 1998 (i) by each person known by the
Company to own beneficially more than 5% of the Company's Common Shares, (ii) by
each of the Company's directors and (iii) by all directors and executive
officers of the Company as a group. The information as to beneficial ownership
is presented in accordance with the rules and regulations under the United
States Securities Exchange Act of 1934 and consequently may differ from similar
information that appears in the Company's proxy circular prepared in accordance
with the Canada Business Corporations Act for the annual and special meeting of
shareholders to be held on September 23, 1998.

<TABLE>
<CAPTION>
                                                       Shares Issuable
                                                       Within 60 Days           Total Shares
                              Shares Currently         Upon Exercise            Beneficially  % of
Name and Address              Directly Owned           of Options/(1)/          Owned               Class
----------------------------------------------------------------------------------------------------------
<S>                           <C>                      <C>                      <C>                 <C>
Terence H. Matthews           40,313,808                  nil                   40,329,808/(2)/     22.92%
  Kanata, Ontario
 
Donald Mills                     772,516                8,583                      797,099/(3)/        *
 
Kent H. E. Plumley               300,052               26,833                      375,064/(4)/        *
 
Peter D. Charbonneau                 nil               80,500                      304,200/(5)/        *
 
John C. J. Thynne                 24,000               21,000                       45,000             *
 
Denzil J. Doyle                   26,000               11,833                       41,833/(6)/        *
 
Graham C. C. Miller               35,616                5,833                       41,449/(7)/        *
 
Alan D. Horn                         nil               24,667                       28,667             *
 
Trevor G. Jones                   10,402                7,001                       17,403             *
 
Alan G. Lutz                         nil                  nil                          nil             *

All directors and executive
 officers as a group 
 (18 persons)                 41,859,824              396,775                   42,660,708/(8)/     24.24%
</TABLE>
_______________

* Less than 1%

(1) Shares issuable upon exercise of stock options that are exercisable within
    60 days of June 18, 1998.
(2) Includes 4,974,000 shares owned directly; 16,000 shares beneficially owned
    through his wife, as to which shares he disclaims beneficial ownership;
    32,379,153 shares beneficially owned through control of Kanata Research Park
    Corporation; 1,197,900 shares beneficially owned through control of 3090-
    8081 Quebec Inc.; 16,835 shares beneficially owned through 2985314 Canada
    Inc., and 1,745,920 shares beneficially owned through 2874814 Canada Inc.
(3) Includes 16,000 shares beneficially owned through his wife, as to which
    shares he disclaims beneficial ownership.

                                    Page 71
<PAGE>
 
(4) Includes 42,872 shares and 5,307 shares issuable within 60 days upon the
    exercise of options beneficially owned through his wife, as to which shares
    and shares issuable upon the exercise of options he disclaims beneficial
    ownership.
(5) Includes 223,700 shares beneficially owned through his wife, as to which
    shares he disclaims beneficial ownership.
(6) Includes 4,000 shares beneficially owned through his wife, as to which
    shares he disclaims beneficial ownership.
(7) Includes 35,616 shares owned jointly with his wife.
(8) Includes, in the aggregate, 335,722 shares and 7,139 shares issuable within
    60 days of June 18, 1998 upon the exercise of options beneficially owned
    through spouses and children, as to which shares and shares issuable upon
    the exercise of options they disclaim beneficial ownership.

Except as otherwise indicated, the persons in the table have sole voting and
investment powers with respect to all Common Shares beneficially owned by them
subject to community property laws where applicable and the information
contained in the footnotes to the table.

Statements contained in the table as to shares beneficially owned by directors
and executive officers or over which they exercise control or direction are, in
each instance, based upon information obtained from such directors and executive
officers. The Company is not aware of any person except the holder set forth
above who beneficially owns or exercises control or direction over shares
carrying more than 5% of the votes attached to such shares of the Company as at
June 18, 1998.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference to
Exhibit 99 to this Annual Report on Form 10-K, "Statement of Executive
Compensation" as set forth in the form of the Company's proxy circular for the
annual and special meeting of shareholders to be held on September 23, 1998.
Such incorporation by reference shall not be deemed to specifically incorporate
by reference the information contained under the sub-captions "Report on
Executive Compensation" and "Performance Graph".


                                    Page 72
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
                             FORM 8-K
 
     (a)  (1)  The following financial statements and supplementary data are
               filed as part of this Report under Item 8:
<TABLE>
<CAPTION>
                                                                                                                        Page
                                                                                                                        ---- 
<S>                                                                                                                     <C>
  FINANCIAL STATEMENTS
 
   Auditors' Report to the Shareholders                                                                                 36
   Consolidated Statements of Earnings and Retained Earnings for the years ended April 30, 1998, 1997 and 1996          37
   Consolidated Balance Sheets as at April 30, 1998 and 1997                                                            38
   Consolidated Statements of Cash Flows for the years ended April 30, 1998, 1997 and 1996                              39
   Consolidated Statements of Shareholders' Equity for the years ended April 30, 1998, 1997 and 1996                    40
   Notes to the Consolidated Financial Statements                                                                       41
 
  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)                                                                         67
</TABLE>

     (b)  The Registrant filed no reports on Form 8-K during the fourth quarter
          of the fiscal year ended April 30, 1998.

     (c)  The following exhibits are filed or incorporated by reference as part
          of this Report (Exhibit 10.1 is a compensatory plan or arrangement):
<TABLE>
<CAPTION>
 
<S>              <C>
          3.1    Articles of Amalgamation./(1)/
 
          3.2    By-Law No. 3./(2)/
</TABLE>

          10.1  Newbridge Networks Corporation Consolidated Key Employee Stock
               Option Plan, as amended.
//
          10.2  Newbridge Networks Corporation 1999 Key Employee Stock Option
               Plan.

          10.3--
          10.7  [Reserved]

          10.8  Credit Facilities Letter dated December 19, 1997 between
               Newbridge Networks Corporation and Royal Bank of Canada./(3)/

          10.9  Loan Agreement dated January 30, 1998 between Newbridge Networks
               Corporation and Citibank Canada.

          10.10  Note Purchase Agreement dated April 28, 1998 between Newbridge
               Networks Corporation and the Purchasers named therein.

          10.11--
          10.13  [Reserved]

                                    Page 73
<PAGE>
 
          10.14  License Agreement effective May 1, 1994 between 2880016 Canada
                 Inc. and Newbridge Networks Corporation; Development Agreement
                 effective May 1, 1994 between 2880016 Canada Inc. and Newbridge
                 Networks Corporation. /(4)/

          10.15  License Agreement effective May 1, 1994 between 3015955 Canada
                 Inc. and Newbridge Networks Corporation; Development Agreement
                 effective May 1, 1994 between 3015955 Canada Inc. and Newbridge
                 Networks Corporation. /(4)/

          10.16  License Agreement effective May 1, 1994 between 3028623 Canada
                 Inc. and Newbridge Networks Corporation; Development Agreement
                 effective May 1, 1994 between 3028623 Canada Inc. and Newbridge
                 Networks Corporation. /(4)/

          10.17  Lease dated May 29, 1997 for 76,230.65 square feet at 359 Terry
                 Fox Drive, Kanata, Ontario./(2)/

          10.18  Agreement and Purchase and Sale dated February 16, 1996 for
                 approximately 25,000 square feet at Langstone Business Park,
                 Langstone, Newport, Wales./(5)/

          10.19  Reserved

          10.20  Lease dated May 1, 1995 for 1,882 square feet, more or less, at
                 362 Terry Fox Drive, Kanata, Ontario./(4)/

          10.21  Lease dated April 1, 1995 for 13,106 square feet, more or less,
                 at 50+Sandhill Road, Kanata, Ontario./(4)/

          10.22  Lease dated April 23, 1997 for 242,856.67 square feet, more or
                 less, at 349 Terry Fox Drive, Kanata, Ontario./(2)/

          10.23  Sublease dated October 1, 1996 for 20,718 square feet, more or
                 less, at 350 Terry Fox Drive, Kanata, Ontario./(2)/

          10.23a Letter Agreement dated March 12, 1998 amending Sublease
                 referred to in Exhibit 10.23.

          10.24  Non-Competition Agreement between Terence Matthews and
                 Newbridge Networks Corporation dated October 14, 1987. /(6)/

          10.25  Employment Agreement between Alan G. Lutz and Newbridge
                 Networks Corporation dated May 21, 1998.

          11.1   Computation of earnings per share under accounting principles
                 generally accepted in Canada.

          11.2   Computation of earnings per share under accounting principles
                 generally accepted in the United States.

          21     Subsidiaries of the Registrant.

          23     Consent of Independent Accountants.

          27     Financial Data Schedule.

          99     "Statement of Executive Compensation" as set forth in the form
                 of the Company's proxy circular for the annual and special
                 meeting of shareholders to be held on September 23, 1998,
                 incorporated by reference in Items 11 and 13 of this Annual
                 Report on Form 10-K, to the extent set

                                    Page 74
<PAGE>
 
                 forth therein. This exhibit shall not be deemed to be
                 "soliciting material" or to be "filed" with the United States
                 Securities and Exchange Commission for purposes of Section 14
                 of the United States Securities Exchange Act of 1934, nor shall
                 it be deemed to be a "management proxy circular" for the
                 purposes of soliciting proxies under the Canada Business
                 Corporations Act.
 
_________________

/(1)/  Incorporated by reference to the Company's Quarterly Report on Form 10-Q
       (File No. 0-17865) for the fiscal quarter ended July 30, 1994.

/(2)/  Incorporated by reference to the Company's Annual Report on Form 10-K
       (File No. 1-13316) for the fiscal year ended April 30, 1997.

/(3)/  Incorporated by reference to the Company's Quarterly Report on Form 10-Q
       (File No. 1-13316) for the fiscal quarter ended February 1, 1998.

/(4)/  Incorporated by reference to the Company's Annual Report on Form 10-K
       (File No. 1-13316) for the fiscal year ended April 30, 1995.

/(5)/  Incorporated by reference to the Company's Annual Report on Form 10-K
       (File No. 1-13316) for the fiscal year ended April 30, 1996.

/(6)/  Incorporated by reference to the Company's Registration Statement on Form
       S-1 (File No. 33-29187) filed on June 8, 1989, as amended.

                                    Page 75
<PAGE>
 
                                   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.


                                  NEWBRIDGE NETWORKS CORPORATION




  Date: June 26, 1998                   By: /s/ Terence H. Matthews
                                            ------------------------------
                                            Terence H. Matthews,
                                            Chairman of the Board of
                                            Directors and Chief
                                            Executive Officer

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



  Date: June 26, 1998                   By: /s/ Terence H. Matthews
                                            ------------------------------
                                            Terence H. Matthews,
                                            Chairman of the Board, Chief   
                                            Executive Officer and Director 
                                            (Principal Executive Officer)



  Date: June 26, 1998                   By: /s/ Kenneth B. Wigglesworth
                                            ------------------------------
                                            Kenneth B. Wigglesworth,
                                            Vice President
                                            and Chief Financial Officer
                                            (Principal Financial and Accounting
                                              Officer)



  Date: June 26, 1998                   By: /s/ Alan G. Lutz
                                            ------------------------------
                                            Alan G. Lutz,
                                            President, Chief Operating Officer
                                            and Director

                                    Page 76
<PAGE>
 
  Date: June 26, 1998              By: /s/ Peter D. Charbonneau
                                       -------------------------------
                                       Peter D. Charbonneau,
                                       Vice Chairman of the Board
                                       and Director



  Date: June 26, 1998              By: /s/ Dr. Denzil J. Doyle
                                       -------------------------------
                                       Dr. Denzil J. Doyle,
                                       Director



  Date: June 26, 1998              By: /s/ Alan D. Horn
                                       -------------------------------
                                       Alan D. Horn,
                                       Director



  Date: June 26, 1998              By: /s/ Trevor G. Jones
                                       ------------------------------- 
                                       Trevor G. Jones,
                                       Director



  Date: June 26, 1998              By: /s/ Graham C. C. Miller
                                       -------------------------------
                                       Graham C. C. Miller,
                                       Director



  Date: June 26, 1998              By: /s/ Dr. Donald Mills
                                       -------------------------------
                                       Dr. Donald Mills,
                                       Vice President and Director



  Date: June 26, 1998              By: /s/ Kent H. E. Plumley
                                       -------------------------------
                                       Kent H. E. Plumley,
                                       Director

                                    Page 77

<PAGE>
 
  Date: June 26, 1998              By: /s/ Dr. John C. J. Thynne
                                       -----------------------------
                                       Dr. John C. J. Thynne,
                                       Director

                                    Page 78
<PAGE>
 
                                 EXHIBIT INDEX

<TABLE> 
<CAPTION> 
Exhibit
No.                                                                                       Page
-------                                                                                   ----
<S>                                                                                       <C> 
3.1      Articles of Amalgamation./(1)/

3.2      By-Law No. 3./(2)/
 
10.1     Newbridge Networks Corporation Consolidated Key Employee Stock Option 
         Plan, as amended.............................................................      82--95
 
10.2     Newbridge Networks Corporation 1999 Key Employee Stock Option Plan...........     96--108
 
10.3--
10.7     [Reserved]
 
10.8     Credit Facilities Letter dated December 19, 1997 between Newbridge 
         Networks Corporation and Royal Bank of Canada./(3)/
 
10.9     Loan Agreement dated January 30, 1998 between Newbridge Networks 
         Corporation and Citibank Canada..............................................    109--139
                             
10.10    Note Purchase Agreement dated April 28, 1998 between Newbridge 
         Networks Corporation and the Purchasers named therein........................    140--201
                             
10.11--
10.13    [Reserved]

10.14    License Agreement effective May 1, 1994 between 2880016 Canada Inc. and
         Newbridge Networks Corporation; Development Agreement effective May 1, 1994
         between 2880016 Canada Inc. and Newbridge Networks Corporation./(4)/

10.15    License Agreement effective May 1, 1994 between 3015955 Canada Inc. and
         Newbridge Networks Corporation; Development Agreement effective May 1, 1994
         between 3015955 Canada Inc. and Newbridge Networks Corporation./(4)/

10.16    License Agreement effective May 1, 1994 between 3028623 Canada Inc. and
         Newbridge Networks Corporation; Development Agreement effective May 1, 1994
         between 3028623 Canada Inc. and Newbridge Networks Corporation./(4)/

10.17    Lease dated May 29, 1997 for 76,230.65 square feet at 359 Terry Fox
         Drive, Kanata, Ontario./(2)/
</TABLE> 

                                    Page 79
<PAGE>
 
<TABLE> 
<CAPTION> 
Exhibit
No.                                                                                                 Page
-------                                                                                             ----
<S>                                                                                                 <C> 
10.18    Agreement and Purchase and Sale dated February 16, 1996 for approximately
         25,000 square feet at Langstone Business Park, Langstone, Newport, Wales./(5)/

10.19    Reserved

10.20    Lease dated May 1, 1995 for 1,882 square feet, more or less, at 362 Terry
         Fox Drive, Kanata, Ontario./(4)/

10.21    Lease dated April 1, 1995 for 13,106 square feet, more or less, at 50
         Sandhill Road, Kanata, Ontario. /(4)/

10.22    Lease dated April 23, 1997 for 242,856.67 square feet, more or less, at
         349 Terry Fox Drive, Kanata, Ontario./(2)/

10.23    Sublease dated October 1, 1996 for 20,718 square feet, more or less, at
         350 Terry Fox Drive, Kanata, Ontario./(2)/

10.23a   Letter Agreement dated March 12, 1998 amending Sublease referred to in
         Exhibit 10.23..........................................................................    202--206

10.24    Non-Competition Agreement between Terence Matthews and Newbridge Networks
         Corporation dated October 14, 1987. /(6)/

10.25    Employment Agreement between Alan G. Lutz and Newbridge Networks 
         Corporation dated May 21, 1998.........................................................    207--226

11.1     Computation of earnings per share under accounting principles generally 
         accepted in Canada..........................................................................    227
 
11.2     Computation of earnings per share under accounting principles generally 
         accepted in the United States...............................................................    228
 
21       Subsidiaries of the Registrant..............................................................    229
 
23       Consent of Independent Accountants..........................................................    230
 
27       Financial Data Schedule.....................................................................    231

99       "Statement of Executive Compensation" as set forth in the form of the
         Company's proxy circular for the annual and special meeting of shareholders 
         to be held on September 23, 1998, incorporated by reference in Items 11 and 
         13 of this Annual Report on Form 10-K, to the extent set forth therein. This 
         exhibit shall not be deemed to be "soliciting material" or to be "filed" with 
         the United States Securities and Exchange Commission for purposes of Section 14 
         of the United States Securities Exchange Act of 1934, nor shall it be 
</TABLE> 

                                    Page 80
<PAGE>
 
<TABLE> 
         <S>                                                                                        <C> 
         deemed to be a "management proxy circular" for the purposes of soliciting 
         proxies under the Canada Business Corporations Act.....................................    232--238
</TABLE> 

______________

/(1)/  Incorporated by reference to the Company's Quarterly Report on Form 10-Q
       (File No. 0-17865) for the fiscal quarter ended July 30, 1994.

/(2)/  Incorporated by reference to the Company's Annual Report on Form 10-K
       (File No. 1-13316) for the fiscal year ended April 30, 1997.

/(3)/  Incorporated by reference to the Company's Quarterly Report on Form 10-Q
       (File No. 1-13316) for the fiscal quarter ended February 1, 1998.

/(4)/  Incorporated by reference to the Company's Annual Report on Form 10-K
       (File No. 1-13316) for the fiscal year ended April 30, 1995.

/(5)/  Incorporated by reference to the Company's Annual Report on Form 10-K
       (File No. 1-13316) for the fiscal year ended April 30, 1996.

/(6)/  Incorporated by reference to the Company's Registration Statement on Form
       S-1 (File No. 33-29187) filed on June 8, 1989, as amended.

                                    Page 81
<PAGE>
 
                                 EXHIBIT 10.1

                                    Page 82
<PAGE>
 
                              [LOGO OF NEWBRIDGE]

                        NEWBRIDGE NETWORKS CORPORATION
                  CONSOLIDATED KEY EMPLOYEE STOCK OPTION PLAN


1.   PURPOSE OF THE PLAN

     The purpose of the Newbridge Networks Corporation Consolidated Key Employee
     Stock Option Plan is to develop the interest of and provide an incentive to
     eligible employees, directors and consultants of Newbridge Networks
     Corporation (the "Corporation") and its subsidiaries in the Corporation's
     growth and development by granting to eligible employees, directors and
     consultants from time to time options to purchase Common Shares of the
     Corporation, thereby advancing the interests of the Corporation and its
     shareholders.

2.   DEFINITIONS

     In this Plan:

     (a)  "Associates" has the meaning assigned by the Ontario Securities Act;

     (b)  "Board of Directors" means the board of directors of the Corporation;

     (c)  "Committee" means:

          (i)  with respect to Participants, the Employee Compensation Committee
          of three or more members appointed by the Board of Directors to
          administer the Plan and the Board of Directors if no Employee
          Compensation Committee has been appointed; and

          (ii) with respect to Director Participants, the Board of Directors;

     (d)  "Common Shares" means the common shares of the Corporation;

     (e)  "Corporations Act" means the Canada Business Corporations Act, as
          amended, and the regulations promulgated thereunder.

     (f)  "Date of Grant" means, for any Option, the date upon which the Option
          was granted;

                                    Page 83
<PAGE>
 
     (g)  "Director Participant" means a director of the Corporation who is not
          an employee of the Corporation;

     (h)  "Disability" means permanent and total disability as determined under
          policies established by the Committee for the purposes of the Plan;

     (i)  "Exercise Period" means, with respect to any Option Shares, the period
          during which an Optionee may purchase such Option Shares;

     (j)  "Insider" means an insider of the Corporation as defined in the
          "Employee Stock Option and Stock Purchase Plans, Options for Service
          and Related Matters" section  of The Toronto Stock Exchange Company
          Manual;

     (k)  "Ontario Securities Act" means the Securities Act, RSO 1990, c.s 5, as
          amended;

     (l)  "Option" means a non-assignable and non-transferable option to
          purchase Common Shares granted pursuant to the Plan;

     (m)  "Optionee" means a Participant or a Director Participant who has been
          granted one or more Options;

     (n)  "Option Shares" means Common Shares which are subject to purchase upon
          the exercise of outstanding Options;

     (o)  "Participant" means a current or former full-time permanent employee
          of the Corporation or any of its Subsidiaries or a director (other
          than a Director Participant) of any Subsidiary of the Corporation, or
          a person (other than a Director Participant) or corporation or other
          entity providing consulting or similar services to the Corporation or
          any of its Subsidiaries;

     (p)  "Plan" means the Newbridge Networks Corporation Consolidated Key
          Employee Stock Option Plan as set out herein;

     (q)  "Plan Shares" means that number of Common Shares reserved for issuance
          pursuant to the exercise of stock options in accordance with the terms
          of the Plan;

     (r)  "Retirement" means retirement from active employment with the
          Corporation or a Subsidiary in accordance with the Corporation's or
          Subsidiary's policies from time to time relating to mandatory or early
          retirement of employees, or with the consent for purposes of the Plan
          of such officer of the Corporation as may be designated by the
          Committee, at or after such earlier age and upon the completion of
          such years of service as the Committee may specify; and

                                    Page 84
<PAGE>
 
     (s)  "Subsidiary" means any corporation in which the Corporation, directly
          or through one or more corporations which are themselves Subsidiaries
          of the Corporation, owns 50% or more of the shares eligible to vote at
          meetings of the shareholders.

3.   ELIGIBILITY

     All Participants and Director Participants shall be eligible to participate
     in the Plan.  Eligibility to participate shall not confer upon any
     Participant any right to be granted Options pursuant to the Plan.  The
     extent to which any Participant shall be entitled to be granted Options
     pursuant to the Plan shall be determined in the sole and absolute
     discretion of the Committee.

     Provided however that:

          (i)   The number of Common Shares reserved for issuance to any one
                person pursuant to Options shall not exceed 5% of the
                outstanding issue; and

          (ii)  The number of Common Shares reserved for issuance pursuant to
                Options granted to Insiders shall not exceed 10% of the
                outstanding issue;

          (iii) The number of Common Shares issued to Insiders within a one year
                period pursuant to the Plan shall not exceed 10% of the
                outstanding issue; and

          (iv)  The number of Common Shares issued to any one Insider and such
                Insider's Associates within a one-year period shall not exceed
                5% of the outstanding issue.

     For purposes of the meaning of "outstanding issue" in (iii) and (iv) above,
     this shall be determined on the basis of the number of Common Shares that
     are outstanding immediately prior to the share issuance in question,
     excluding shares issued pursuant to the Plan over the preceding one-year
     period.

4.   NUMBER OF OPTION SHARES AVAILABLE FOR GRANTS

     The Plan Shares shall not exceed (             ) Common Shares, subject to
     the adjustment of such number pursuant to paragraph 18.

     No Option may be granted by the Committee which would have the effect of
     causing the total number of all Option Shares to exceed the number of Plan
     Shares unless the exercise of any Option granted in circumstances where the
     number of Option Shares exceeds the number of Plan Shares is expressly made
     subject to the condition that The Toronto Stock Exchange and the
     shareholders of the Corporation approve prior to the exercise of any such
     Option an increase in the number of Plan Shares sufficient to accommodate
     the exercise of such Option.

                                    Page 85
<PAGE>
 
     Upon the expiration, cancellation or termination, in whole or in part, of
     an unexercised Option, the Option Shares subject to such Option shall be
     available for other Options to be granted from time to time.

5.   GRANTING OF OPTIONS

     The Committee may from time to time grant Options to Participants to
     purchase a specified number of Common Shares at a specified exercise price
     per share.  The number of Option Shares to be granted, the exercise price,
     the Date of Grant, and such other terms and conditions of the Option shall
     be as determined by the Committee.

     The Committee shall grant Options to Director Participants upon the
     occurrence of the events set forth in Schedule I to the Plan.  For all such
     Options, the Date of Grant, exercise price and number of Option Shares
     shall, subject to the adjustment of the number of Option Shares pursuant to
     paragraph 18, be as set forth in Schedule I, and such other terms and
     conditions of the Option as determined by the Committee.

6.   EXERCISE PRICE
 
     The exercise price per Common Share purchasable under an Option shall not
     be lower than the average of the average of the daily high and low board
     lot trading prices on the Toronto Stock Exchange for the five days
     preceding the Date of Grant, rounded to the next highest cent.

7.   EXERCISE PERIOD

     Unless otherwise specified by the Committee at the time of granting an
     Option, and except as otherwise provided in the Plan, each Option shall be
     exercisable in the following installments:

                                    Page 86
<PAGE>
 
     Percentage of Total Number
     of Option Shares Which
     May Be Purchased                   Exercise Period
     -----------------------------      -------------------------------

     25%                                From the first anniversary of the
                                        Date of Grant to and including the 
                                        fifth anniversary of the Date of Grant

     25%                                From the second anniversary of the
                                        Date of Grant to and including the
                                        fifth anniversary of the Date of Grant

     25%                                From the third anniversary of the
                                        Date of Grant to and including the
                                        fifth anniversary of the Date of Grant
 
     25%                                From the fourth anniversary of the
                                        Date of Grant to and including the
                                        fifth anniversary of the Date of Grant
 

     Once an installment becomes exercisable it shall remain exercisable until
     expiration or termination of the Option, unless otherwise specified by the
     Committee.  Each Option or installment may be exercised at any time or from
     time to time, in whole or in part, for up to the total number of Common
     Shares with respect to which it is then exercisable.  The Committee shall
     have the right to accelerate the date upon which any installment of any
     Option is exercisable.

8.   TERM OF OPTIONS

     Subject to accelerated termination as provided for in the Plan, each Option
     shall, unless otherwise specified by the Committee, expire on the fifth
     anniversary of the Date of Grant, provided, however, that no Option may be
     exercised after the tenth anniversary of the Date of Grant.

9.   EXERCISE OF OPTIONS

     An Optionee or the transferee of an Option pursuant to paragraph 14 may, at
     any time within the Exercise Period elect to purchase all or a portion of
     the Option Shares which the Optionee is then entitled to purchase by
     delivering to the Corporation a completed notice of exercise, specifying
     the Date of Grant of the Option being exercised, the exercise price of the
     Option and the number of Option Shares the Optionee desires to purchase.
     The notice of exercise shall be accompanied by payment in full of the
     purchase price for such Option Shares.  

                                    Page 87
<PAGE>
 
     Payment can be made by cash, certified cheque, bank draft, money order or
     the equivalent payable to the order of the Corporation.

10.  WITHHOLDING OF TAX

     If the Corporation determines that under the requirements of applicable
     taxation laws it is obliged to withhold for remittance to a taxing
     authority any amount upon exercise of an Option, the Corporation may, prior
     to and as a condition of issuing the Option Shares, require the Optionee or
     the transferee of an Option pursuant to paragraph 14 exercising the Option
     to pay to the Corporation, in addition to and in the same manner as the
     purchase price for the Option Shares, such amount as the Corporation is
     obliged to remit to such taxing authority in respect of the exercise of the
     Option.  Any such additional payment shall, in any event, be due no later
     than the date as of which the applicable amount must be remitted by the
     Corporation to the appropriate taxing authority.

11.  SHARE CERTIFICATES

     Upon exercise of an Option and payment in full of the purchase price and
     any applicable tax withholdings, the Corporation shall cause to be issued
     and delivered to the Optionee within a reasonable period of time a
     certificate or certificates in the name of or as directed by the Optionee
     representing the number of Common Shares the Optionee has purchased.

12.  TERMINATION OF EMPLOYMENT OR SERVICES

     Unless otherwise determined by the Committee, if an Optionee's employment
     or services as a director or consultant terminate for any reason other than
     death, Disability or Retirement, any Option held by such Optionee shall
     expire and be cancelled upon the earlier of the 60th day following the
     conclusion of the notice period following such termination or the
     expiration of the stated term of such Option.

     Options shall not be affected by any change of employment within or among
     the Corporation or its Subsidiaries or by termination of services as a
     director, unless otherwise determined by the Committee, so long as the
     Participant continues to be an employee of or consultant to the Corporation
     or a Subsidiary or a director of the Corporation or a Subsidiary.

13.  TERMINATION BY REASON OF DISABILITY OR RETIREMENT

     Unless otherwise determined by the Committee, if an Optionee's employment
     or services as a director or consultant terminate by reason of Disability
     or Retirement, any Option held by such Optionee shall continue to be
     exercisable by the Optionee in accordance with the terms of this Plan and
     shall expire on the stated term of such option.

                                    Page 88
<PAGE>
 
14.  TERMINATION BY REASON OF DEATH

     Unless otherwise determined by the Committee, if an Optionee dies, any
     Options held by such Optionee that are not exercisable shall become
     exercisable immediately upon the Optionee's death ("Accelerated Vesting
     Date"). All Options held by the Optionee at the time of death shall
     continue to be exercisable for a period of one year following the
     Accelerated Vesting Date, after which period all Options shall expire and
     be cancelled.

15.  TRANSFER AND ASSIGNMENT

     Options granted under the Plan are not assignable or transferable by the
     Optionee or the Optionee's personal representative or subject to any other
     alienation, sale, pledge or encumbrance by such Optionee except by will or
     by the laws of intestacy.  During the Optionee's lifetime Options shall be
     exercisable only by the Optionee or the Optionee's personal
     representatives.  The obligations of each Optionee shall be binding on his
     heirs, executors and administrators.

16.  NO RIGHT TO EMPLOYMENT

     The granting of an Option to a Participant under the Plan does not confer
     upon the Participant any right to expectation of employment by, or to
     continue in the employment of, the Corporation or any Subsidiary, or to be
     retained as a consultant by the Corporation or any Subsidiary.

17.  RIGHTS AS SHAREHOLDERS

     The Optionee or the transferee of an Option pursuant to paragraph 14 shall
     not have any rights as a shareholder with respect to Option Shares until
     the Common Shares have been duly purchased and paid for in accordance with
     the terms of the Plan.

18.  ADMINISTRATION OF THE PLAN

     The Plan shall be administered by the Committee.  No member of the
     Committee, while a member, shall be eligible to participate in the Plan
     other than with respect to Options granted as set forth in Schedule I to
     the Plan.  Subject to the terms of the Plan, the Committee shall have the
     authority to:

     (a)  determine the individuals and entities (from among the class of
          individuals and entities eligible to receive Options) to whom Options
          may be granted;

     (b)  determine the number of Common Shares to be subject to each Option;

     (c)  determine the terms and conditions of any grant of Option, including
          but not limited to

                                    Page 89
<PAGE>
 
          (i)   the time or times at which Options may be granted;

          (ii)  the exercise price at which Option Shares may be purchased;

          (iii) the time or times when each Option shall become exercisable and
                the duration of the Exercise Period;

          (iv)  whether restrictions or limitations are to be imposed on Option
                Shares, and the nature of such restrictions or limitations, if
                any; and

          (v)   any acceleration of exercisability or waiver of termination
                regarding any Option, based on such factors as the Committee may
                determine;

     (d)  interpret the Plan and prescribe and rescind rules and regulations
          relating to the Plan.

     The interpretation and construction by the Committee or the Board of
     Directors of any provisions of the Plan or of any Option granted under it
     shall be final and binding on all persons.  No member of the Committee or
     the Board of Directors shall be liable for any action or determination made
     in good faith with respect to the Plan or any Option granted under it.  The
     day-to-day administration of the Plan may be delegated to such officers and
     employees of the Corporation or any Subsidiary as the Committee shall
     determine.

19.  RECAPITALIZATION AND REORGANIZATION

     The number of Plan Shares, the number of Option Shares subject to each
     outstanding and unexercised Option and the exercise price for such Option
     Shares, as well as the number of Option Shares for Director Participants
     set out in Schedule 1, shall be appropriately adjusted for any change in
     the Common Shares or in the number of Common Shares outstanding by reason
     of any stock split, stock dividend on the Common Shares payable in Common
     Shares other than pursuant to any optional stock dividend program,
     subdivision, combination, reclassification, amalgamation, arrangement,
     consolidation, rights or warrant offering to purchase Common Shares at or
     below market price, or any other relevant change or event affecting the
     Common Shares.  Each adjustment to the exercise price for Option Shares
     pursuant to this provision shall be calculated and rounded to the nearest
     higher cent. Any fractional shares which might otherwise become subject to
     an Option as a result of an adjustment pursuant to this paragraph shall be
     eliminated without any payment therefor.

20.  CONDITIONS OF EXERCISE

     The Plan and each Option shall be subject to the requirement that, if at
     any time the Committee determines that the listing, registration or
     qualification of the 

                                    Page 90
<PAGE>
 
     Common Shares subject to such Option upon any securities exchange or under
     any provincial, state or federal law, or the consent or approval of any
     governmental body, securities exchange, or the holders of the Common Shares
     generally, is necessary or desirable, as a condition of, or in connection
     with, the granting of such Option or the issue or purchase of Common Shares
     thereunder, no such Option may be granted or exercised in whole or in part
     unless such listing, registration, qualification, consent or approval shall
     have been effected or obtained free of any conditions not acceptable to the
     Committee.

21.  LOANS

     The Board of Directors may, in its discretion, but subject always to
     section 44 of the Corporations Act, grant loans, on such terms as are
     permitted by law and the Board of Directors may determine, to Optionees,
     who are employees of the Corporation or its subsidiaries, to enable them to
     purchase Option Shares, provided that all Common Shares purchased with the
     proceeds of such loans shall be held by a trustee until the Corporation has
     been repaid in full.

22.  NOTICES

     All written notices to be given by the Optionee to the Corporation shall be
     delivered personally or by registered mail, postage prepaid, addressed as
     follows:

     Newbridge Networks Corporation
     600 March Road
     Kanata, Ontario
     K2K 2E6
     Attention:  Secretary

     Any notice given by the Optionee pursuant to the terms of an Option shall
     not be effective until actually received by the Corporation at the above
     address.

23.  CORPORATE ACTION

     Nothing contained in the Plan or in an Option shall be construed so as to
     prevent the Corporation or any Subsidiary of the Corporation from taking
     corporate action which is deemed by the Corporation or the Subsidiary to be
     appropriate or in its best interest, whether or not such action would have
     an adverse effect on the Plan or any Option.

24.  AMENDMENTS

     The Board of Directors shall have the right, in its sole discretion,
     subject to the prior approval of The Toronto Stock Exchange and, if
     required, of the holders of Common Shares of the Corporation, to alter,
     amend, modify or terminate the Plan or any Option granted under the Plan at
     any time without notice.  The Board of Directors shall not, however, alter,
     amend or modify Schedule I more 

                                    Page 91
<PAGE>
 
     often than once every six months other than to comport with changes to
     applicable tax and employee benefit laws and the respective rules and
     regulations thereunder. No such amendment, however, may, without the
     consent of the Optionee or the transferee of an Option pursuant to
     paragraph 14, alter or impair any rights or increase any obligations with
     respect to an Option previously granted under the Plan.

25.  AMENDMENT AND CONSOLIDATION OF PRIOR PLANS

     This Plan amends, consolidates and restates each of the Newbridge Networks
     Corporation 1989-1994 Stock Option Plan for United States Subsidiaries, the
     Newbridge Networks Corporation Canadian Key Employee Stock Option Plan and
     the Newbridge Networks Corporation United Kingdom Key Employee Stock Option
     Plan (together, the "Prior Plans"), and the terms and provisions of this
     Plan shall be deemed to supersede and replace the terms and provisions of
     each of the Prior Plans.  No provision of this Plan, however, may, without
     the consent of the Optionee, alter or impair any rights or increase any
     obligations with respect to an option granted under the Prior Plans prior
     to the effective date of this Plan.

26.  CHANGE IN CONTROL

     In the event of a "Change in Control", as defined below, unless otherwise
     determined by the Committee or the Board of Directors prior to the
     occurrence of such Change in Control, any Options outstanding as of the
     date such Change in Control is determined to have occurred and not then
     exercisable shall become fully exercisable effective one day prior to the
     date of such Change of Control.   In addition, the value of all outstanding
     Options shall, unless otherwise determined by the Committee or the Board of
     Directors at or after the Date of Grant, be cashed out on the basis of the
     "Change in Control Price", as defined below, as of the date such Change in
     Control is determined to have occurred or such other date as the Committee
     or the Board of Directors may determine prior to the Change in Control.
     Outstanding options as of the date of such Change of Control may be cashed
     out only if the Change in Control Price is higher than the Exercise Price
     of such outstanding options. Further, the Committee or the Board of
     Directors shall have the right to provide for the conversion or exchange of
     any outstanding Options into or for options, rights or other securities in
     any entity participating in, or resulting from, the Change in Control.

     For purposes of the Plan, a "Change in Control" means the happening of any
     of the following:

     (a)  When any "person", together with any "affiliate" or "associate" of
          such person, as such terms are defined by the Corporations Act (other
          than the Corporation, a Subsidiary or a Corporation employee benefit
          plan, including any trustee of such plan acting as trustee), or a
          group of persons acting jointly or in concert with one another,
          hereafter acquires the

                                    Page 92
<PAGE>
 
          "beneficial ownership", as defined in the Corporations Act, of, or
          control or direction over, directly or indirectly, securities of the
          Corporation representing 20 percent or more of the combined voting
          power of the Corporation's then outstanding securities; or

     (b)  The occurrence of a transaction requiring shareholder approval
          involving the acquisition of the Corporation by an entity other than
          the Corporation or a Subsidiary through purchase of assets, by
          amalgamation or otherwise.

     For purposes of the Plan, "Change in Control Price" means the highest price
     per Common Share paid in any transaction reported on The Toronto Stock
     Exchange or paid or offered in any bona fide transaction related to a
     potential or actual change in control of the Corporation at any time during
     the preceding 60-day period as determined by the Committee or the Board of
     Directors.

27.  TERMINATION OF PLAN

     Except as otherwise provided herein, Options may be granted only within the
     ten year period from the date the Plan has been adopted by the Board of
     Directors.  The termination of the Plan shall have no effect on outstanding
     Options, which shall continue in effect in accordance with their terms and
     conditions and the terms and conditions of the Plan, provided that no
     Option may be exercised after the tenth anniversary of its Date of Grant.

28.  FURTHER ASSURANCES

     Each Participant or Director Participant shall, when requested to do so by
     the Corporation, sign and deliver all such documents relating to the
     granting or exercise of Options deemed necessary or desirable by the
     Corporation.

                                    Page 93
<PAGE>
 
29.  GOVERNING LAW

     The Plan is established under the laws of the Province of Ontario, and the
     rights of all parties and the construction and effect of each provision of
     the Plan shall be according to the laws of the Province of Ontario.

DATED the 21st day of October, 1991, as amended the 13th day of September, 1993,
the 6th day of June, 1995, the 5th day of July, 1996, the 3rd day of June, 1997,
the 25th day of November 1997 and the 2nd day of June, 1998.

NEWBRIDGE NETWORKS CORPORATION

/s/ Terence H. Matthews
------------------------------------
Chairman


/s/ John A. Farmer
------------------------------------
Secretary

                                    Page 94
<PAGE>
 
                                  SCHEDULE I

<TABLE> 
<CAPTION> 
REASON FOR GRANT              DATE OF GRANT                               OPTION GRANT
----------------              -------------                               ------------
<S>                           <C>                                     <C> 
Annual service on             Date of each annual meeting of          10,000 Option Shares
Board of Directors            shareholders at which the
                              Director Participant is elected to
                              the Board of Directors by the
                              shareholders
 
Annual service as member      Date of each annual meeting of          2,000 Option Shares
of a Standing Committee       shareholders following which
(other than as Chair)         the Director Participants is
                              appointed as a member of a
                              Standing Committee by the
                              Board of Directors

Annual service as Chair of    Date of each annual meeting of          4,000 Option Shares
a Standing Committee          Shareholders following which
                              the Director Participant is
                              appointed as Chair of a Standing
                              Committee by the Board of
                              Directors
</TABLE> 

Notes:

1.   A Director Participant must be a member of the Board of Directors or a
     Standing Committee of the Board of Directors, as the case may be, as of the
     Date of Grant.

2.   The exercise price of Options granted to Director Participants shall not be
     lower than the average of the average of the daily high and low board lot
     trading prices of the Common Shares on The Toronto Stock Exchange for the
     five days preceding the Date of Grant, rounded to the next highest cent.

3.   "Standing Committee" of the Board of Directors means a committee formed by
     the board to meet on a regular basis over an extended period of time, and
     which is declared by the Board of Directors to be a Standing Committee, and
     includes the Audit Committee, the Employee Compensation Committee and the
     Directors' Affairs Committee.

                                    Page 95
<PAGE>
 
                                  EXHIBIT 10.2

                                    Page 96
<PAGE>
 
                                    [LOGO]

                        NEWBRIDGE NETWORKS CORPORATION
                      1999 KEY EMPLOYEE STOCK OPTION PLAN


1.   PURPOSE OF THE PLAN

     The purpose of the Newbridge Networks Corporation Consolidated Key Employee
     Stock Option Plan is to develop the interest of and provide an incentive to
     eligible employees, directors and consultants of Newbridge Networks
     Corporation (the "Corporation") and its subsidiaries in the Corporation's
     growth and development by granting to eligible employees, directors and
     consultants from time to time options to purchase Common Shares of the
     Corporation, thereby advancing the interests of the Corporation and its
     shareholders.

2.   DEFINITIONS

     In this Plan:

     (a)  "Associates" has the meaning assigned by the Ontario Securities Act;

     (b)  "Board of Directors" means the board of directors of the Corporation;

     (c)  "Committee" means:

          (i)  with respect to Participants, the Employee Compensation Committee
          of three or more members appointed by the Board of Directors to
          administer the Plan and the Board of Directors if no Employee
          Compensation Committee has been appointed; and

          (ii) with respect to Director Participants, the Board of Directors;

     (d)  "Common Shares" means the common shares of the Corporation;

     (e)  "Corporations Act" means the Canada Business Corporations Act, as
          amended, and the regulations promulgated thereunder.

     (f)  "Date of Grant" means, for any Option, the date upon which the Option
          was granted;

                                    Page 97
<PAGE>
 
     (g)  "Director Participant" means a director of the Corporation who is not
          an employee of the Corporation;

     (h)  "Disability" means permanent and total disability as determined under
          policies established by the Committee for the purposes of the Plan;

     (i)  "Exercise Period" means, with respect to any Option Shares, the period
          during which an Optionee may purchase such Option Shares;

     (j)  "Insider" means an insider of the Corporation as defined in the
          "Employee Stock Option and Stock Purchase Plans, Options for Service
          and Related Matters" section  of The Toronto Stock Exchange Company
          Manual;

     (k)  "Ontario Securities Act" means the Securities Act, RSO 1990, c.s 5, as
          amended;

     (l)  "Option" means a non-assignable and non-transferable option to
          purchase Common Shares granted pursuant to the Plan;

     (m)  "Optionee" means a Participant or a Director Participant who has
          been granted one or more Options;

     (n)  "Option Shares" means Common Shares which are subject to purchase upon
          the exercise of outstanding Options;

     (o)  "Participant" means a current or former full-time permanent employee
          of the Corporation or any of its Subsidiaries or a director (other
          than a Director Participant) of any Subsidiary of the Corporation, or
          a person (other than a Director Participant) or corporation or other
          entity providing consulting or similar services to the Corporation or
          any of its Subsidiaries;

     (p)  "Plan" means the Newbridge Networks Corporation 1999 Key Employee
          Stock Option Plan as set out herein;

     (q)  "Plan Shares" means that number of Common Shares reserved for issuance
          pursuant to the exercise of stock options in accordance with the terms
          of the Plan;;

     (r)  "Retirement" means retirement from active employment with the
          Corporation or a Subsidiary in accordance with the Corporation's or
          Subsidiary's policies from time to time relating to mandatory or early
          retirement of employees, or with the consent for purposes of the Plan
          of such officer of the Corporation as may be designated by the
          Committee, at or after such earlier age and upon the completion of
          such years of service as the Committee may specify; and

                                    Page 98
<PAGE>
 
     (s)  "Subsidiary" means any corporation in which the Corporation, directly
          or through one or more corporations which are themselves Subsidiaries
          of the Corporation, owns 50% or more of the shares eligible to vote at
          meetings of the shareholders.

3.   ELIGIBILITY

     All Participants and Director Participants shall be eligible to participate
     in the Plan.  Eligibility to participate shall not confer upon any
     Participant any right to be granted Options pursuant to the Plan.  The
     extent to which any Participant shall be entitled to be granted Options
     pursuant to the Plan shall be determined in the sole and absolute
     discretion of the Committee.

     Provided however that:

       (i)     The number of Common Shares reserved for issuance to any one
               person pursuant to Options shall not exceed 5% of the outstanding
               issue; and

       (ii)    The number of Common Shares reserved for issuance pursuant to
               Options granted to Insiders shall not exceed 10% of the
               outstanding issue;

       (iii)   The number of Common Shares issued to Insiders within a one year
               period pursuant to the Plan shall not exceed 10% of the
               outstanding issue; and

       (iv)    The number of Common Shares issued to any one Insider and such
               Insider's Associates within a one-year period shall not exceed 5%
               of the outstanding issue.

     For purposes of the meaning of "outstanding issue" in (iii) and (iv) above,
     this shall be determined on the basis of the number of Common Shares that
     are outstanding immediately prior to the share issuance in question,
     excluding shares issued pursuant to the Plan over the preceding one-year
     period.

4.   NUMBER OF OPTION SHARES AVAILABLE FOR GRANTS

     The Plan Shares shall not exceed 10,000,000 Common Shares, subject to the
     adjustment of such number pursuant to paragraph 18.

     No Option may be granted by the Committee which would have the effect of
     causing the total number of all Option Shares to exceed the number of Plan
     Shares unless the exercise of any Option granted in circumstances where the
     number of Option Shares exceeds the number of Plan Shares is expressly made
     subject to the condition that The Toronto Stock Exchange and the
     shareholders of the Corporation approve prior to the exercise of any such
     Option an increase in the number of Plan Shares sufficient to accommodate
     the exercise of such Option.

                                    Page 99
<PAGE>
 
     Upon the expiration, cancellation or termination, in whole or in part, of
     an unexercised Option, the Option Shares subject to such Option shall be
     available for other Options to be granted from time to time.

5.   GRANTING OF OPTIONS

     The Committee may from time to time grant Options to Participants to
     purchase a specified number of Common Shares at a specified exercise price
     per share. The number of Option Shares to be granted, the exercise price,
     the Date of Grant, and such other terms and conditions of the Option shall
     be as determined by the Committee.

     The Committee shall grant Options to Director Participants upon the
     occurrence of the events set forth in Schedule I to the Plan.  For all such
     Options, the Date of Grant, exercise price and number of Option Shares
     shall, subject to the adjustment of the number of Option Shares pursuant to
     paragraph 18, be as set forth in Schedule I, and such other terms and
     conditions of the Option as determined by the Committee.

6.   EXERCISE PRICE
 
     The exercise price per Common Share purchasable under an Option shall not
     be lower than the average of the average of the daily high and low board
     lot trading prices on the Toronto Stock Exchange for the five days
     preceding the Date of Grant, rounded to the next highest cent.

7.   EXERCISE PERIOD

     Unless otherwise specified by the Committee at the time of granting an
     Option, and except as otherwise provided in the Plan, each Option shall be
     exercisable in the following installments:

                                   Page 100
<PAGE>
 
     Percentage of Total Number
     of Option Shares Which
     May Be Purchased                 Exercise Period
     -------------------------        ------------------------------------ 

     25%                              From the first anniversary of the
                                      Date of Grant to and including the
                                      fifth anniversary of the Date of Grant
     

     25%                              From the second anniversary of the
                                      Date of Grant to and including the   
                                      fifth anniversary of the Date of Grant
     

     25%                              From the third anniversary of the
                                      Date of Grant to and including the
                                      fifth anniversary of the Date of Grant
 
     25%                              From the fourth anniversary of the 
                                      Date of Grant to and including the 
                                      fifth anniversary of the Date of Grant
                                      
     Once an installment becomes exercisable it shall remain exercisable until
     expiration or termination of the Option, unless otherwise specified by the
     Committee. Each Option or installment may be exercised at any time or from
     time to time, in whole or in part, for up to the total number of Common
     Shares with respect to which it is then exercisable. The Committee shall
     have the right to accelerate the date upon which any installment of any
     Option is exercisable.

8.   TERM OF OPTIONS

     Subject to accelerated termination as provided for in the Plan, each Option
     shall, unless otherwise specified by the Committee, expire on the fifth
     anniversary of the Date of Grant, provided, however, that no Option may be
     exercised after the tenth anniversary of the Date of Grant.

9.   EXERCISE OF OPTIONS

     An Optionee or the transferee of an Option pursuant to paragraph 14 may, at
     any time within the Exercise Period elect to purchase all or a portion of
     the Option Shares which the Optionee is then entitled to purchase by
     delivering to the Corporation a completed notice of exercise, specifying
     the Date of Grant of the Option being exercised, the exercise price of the
     Option and the number of Option Shares the Optionee desires to purchase.
     The notice of exercise shall be accompanied by payment in full of the
     purchase price for such Option Shares. 

                                   Page 101
<PAGE>
 
     Payment can be made by cash, certified cheque, bank draft, money order or
     the equivalent payable to the order of the Corporation.

10.  WITHHOLDING OF TAX

     If the Corporation determines that under the requirements of applicable
     taxation laws it is obliged to withhold for remittance to a taxing
     authority any amount upon exercise of an Option, the Corporation may, prior
     to and as a condition of issuing the Option Shares, require the Optionee or
     the transferee of an Option pursuant to paragraph 14 exercising the Option
     to pay to the Corporation, in addition to and in the same manner as the
     purchase price for the Option Shares, such amount as the Corporation is
     obliged to remit to such taxing authority in respect of the exercise of the
     Option. Any such additional payment shall, in any event, be due no later
     than the date as of which the applicable amount must be remitted by the
     Corporation to the appropriate taxing authority.

11.  SHARE CERTIFICATES

     Upon exercise of an Option and payment in full of the purchase price and
     any applicable tax withholdings, the Corporation shall cause to be issued
     and delivered to the Optionee within a reasonable period of time a
     certificate or certificates in the name of or as directed by the Optionee
     representing the number of Common Shares the Optionee has purchased.

12.  TERMINATION OF EMPLOYMENT OR SERVICES

          Unless otherwise determined by the Committee, if an Optionee's
     employment or services as a director or consultant terminate for any reason
     other than death, Disability or Retirement, any Option held by such
     Optionee shall expire and be cancelled upon the earlier of the 60th day
     following the conclusion of the notice period following such termination or
     the expiration of the stated term of such Option.

     Options shall not be affected by any change of employment within or among
     the Corporation or its Subsidiaries or by termination of services as a
     director, unless otherwise determined by the Committee, so long as the
     Participant continues to be an employee of or consultant to the Corporation
     or a Subsidiary or a director of the Corporation or a Subsidiary.

13.  TERMINATION BY REASON OF DISABILITY OR RETIREMENT

     Unless otherwise determined by the Committee, if an Optionee's employment
     or services as a director or consultant terminate by reason of Disability
     or Retirement, any Option held by such Optionee shall continue to be
     exercisable by the Optionee in accordance with the terms of this Plan and
     shall expire on the stated term of such option.

                                   Page 102
<PAGE>
 
14.  TERMINATION BY REASON OF DEATH

     Unless otherwise determined by the Committee, if an Optionee dies, any
     Options held by such Optionee that are not exercisable shall become
     exercisable immediately upon the Optionee's death ("Accelerated Vesting
     Date"). All Options held by the Optionee at the time of death shall
     continue to be exercisable for a period of one year following the
     Accelerated Vesting Date, after which period all Options shall expire and
     be cancelled.

15.  TRANSFER AND ASSIGNMENT

     Options granted under the Plan are not assignable or transferable by the
     Optionee or the Optionee's personal representative or subject to any other
     alienation, sale, pledge or encumbrance by such Optionee except by will or
     by the laws of intestacy.  During the Optionee's lifetime Options shall be
     exercisable only by the Optionee or the Optionee's personal
     representatives.  The obligations of each Optionee shall be binding on his
     heirs, executors and administrators.

16.  NO RIGHT TO EMPLOYMENT

     The granting of an Option to a Participant under the Plan does not confer
     upon the Participant any right to expectation of employment by, or to
     continue in the employment of, the Corporation or any Subsidiary, or to be
     retained as a consultant by the Corporation or any Subsidiary.

17.  RIGHTS AS SHAREHOLDERS

     The Optionee or the transferee of an Option pursuant to paragraph 14 shall
     not have any rights as a shareholder with respect to Option Shares until
     the Common Shares have been duly purchased and paid for in accordance with
     the terms of the Plan.

18.  ADMINISTRATION OF THE PLAN


     The Plan shall be administered by the Committee.  No member of the
     Committee, while a member, shall be eligible to participate in the Plan
     other than with respect to Options granted as set forth in Schedule I to
     the Plan.  Subject to the terms of the Plan, the Committee shall have the
     authority to:

     (a)  determine the individuals and entities (from among the class of
          individuals and entities eligible to receive Options) to whom Options
          may be granted;

     (b)  determine the number of Common Shares to be subject to each Option;

     (c)  determine the terms and conditions of any grant of Option, including
          but not limited to

                                   Page 103
<PAGE>
 
          (i)    the time or times at which Options may be granted;

          (ii)   the exercise price at which Option Shares may be purchased;

          (iii)  the time or times when each Option shall become exercisable and
                 the duration of the Exercise Period;

          (iv)   whether restrictions or limitations are to be imposed on Option
                 Shares, and the nature of such restrictions or limitations, if
                 any; and

          (v)    any acceleration of exercisability or waiver of termination
                 regarding any Option, based on such factors as the Committee
                 may determine;

     (d)  interpret the Plan and prescribe and rescind rules and regulations
          relating to the Plan.

     The interpretation and construction by the Committee or the Board of
     Directors of any provisions of the Plan or of any Option granted under it
     shall be final and binding on all persons. No member of the Committee or
     the Board of Directors shall be liable for any action or determination made
     in good faith with respect to the Plan or any Option granted under it. The
     day-to-day administration of the Plan may be delegated to such officers and
     employees of the Corporation or any Subsidiary as the Committee shall
     determine.

19.  RECAPITALIZATION AND REORGANIZATION

     The number of Plan Shares, the number of Option Shares subject to each
     outstanding and unexercised Option and the exercise price for such Option
     Shares, as well as the number of Option Shares for Director Participants
     set out in Schedule 1, shall be appropriately adjusted for any change in
     the Common Shares or in the number of Common Shares outstanding by reason
     of any stock split, stock dividend on the Common Shares payable in Common
     Shares other than pursuant to any optional stock dividend program,
     subdivision, combination, reclassification, amalgamation, arrangement,
     consolidation, rights or warrant offering to purchase Common Shares at or
     below market price, or any other relevant change or event affecting the
     Common Shares.  Each adjustment to the exercise price for Option Shares
     pursuant to this provision shall be calculated and rounded to the nearest
     higher cent. Any fractional shares which might otherwise become subject to
     an Option as a result of an adjustment pursuant to this paragraph shall be
     eliminated without any payment therefor.

20.  CONDITIONS OF EXERCISE

     The Plan and each Option shall be subject to the requirement that, if at
     any time the Committee determines that the listing, registration or
     qualification of the 

                                   Page 104
<PAGE>
 
     Common Shares subject to such Option upon any securities exchange or under
     any provincial, state or federal law, or the consent or approval of any
     governmental body, securities exchange, or the holders of the Common Shares
     generally, is necessary or desirable, as a condition of, or in connection
     with, the granting of such Option or the issue or purchase of Common Shares
     thereunder, no such Option may be granted or exercised in whole or in part
     unless such listing, registration, qualification, consent or approval shall
     have been effected or obtained free of any conditions not acceptable to the
               - 
     Committee.

21.  LOANS

     The Board of Directors may, in its discretion, but subject always to
     section 44 of the Corporations Act, grant loans, on such terms as are
     permitted by law and the Board of Directors may determine, to Optionees,
     who are employees of the Corporation or its subsidiaries, to enable them to
     purchase Option Shares, provided that all Common Shares purchased with the
     proceeds of such loans shall be held by a trustee until the Corporation has
     been repaid in full.

22.  NOTICES

     All written notices to be given by the Optionee to the Corporation shall be
     delivered personally or by registered mail, postage prepaid, addressed as
     follows:

     Newbridge Networks Corporation
     600 March Road
     Kanata, Ontario
     K2K 2E6
     Attention:  Secretary

     Any notice given by the Optionee pursuant to the terms of an Option shall
     not be effective until actually received by the Corporation at the above
     address.

23.  CORPORATE ACTION

     Nothing contained in the Plan or in an Option shall be construed so as to
     prevent the Corporation or any Subsidiary of the Corporation from taking
     corporate action which is deemed by the Corporation or the Subsidiary to be
     appropriate or in its best interest, whether or not such action would have
     an adverse effect on the Plan or any Option.

24.  AMENDMENTS

     The Board of Directors shall have the right, in its sole discretion,
     subject to the prior approval of The Toronto Stock Exchange and, if
     required, of the holders of Common Shares of the Corporation, to alter,
     amend, modify or terminate the Plan or any Option granted under the Plan at
     any time without notice.  The Board of Directors shall not, however, alter,
     amend or modify Schedule I more 

                                   Page 105
<PAGE>
 
     often than once every six months other than to comport with changes to
     applicable tax and employee benefit laws and the respective rules and
     regulations thereunder. No such amendment, however, may, without the
     consent of the Optionee or the transferee of an Option pursuant to
     paragraph 14, alter or impair any rights or increase any obligations with
     respect to an Option previously granted under the Plan.

25.  AMENDMENT AND CONSOLIDATION OF PRIOR PLANS

     This Plan amends, consolidates and restates each of the Newbridge Networks
     Corporation 1989-1994 Stock Option Plan for United States Subsidiaries, the
     Newbridge Networks Corporation Canadian Key Employee Stock Option Plan and
     the Newbridge Networks Corporation United Kingdom Key Employee Stock Option
     Plan (together, the "Prior Plans"), and the terms and provisions of this
     Plan shall be deemed to supersede and replace the terms and provisions of
     each of the Prior Plans.  No provision of this Plan, however, may, without
     the consent of the Optionee, alter or impair any rights or increase any
     obligations with respect to an option granted under the Prior Plans prior
     to the effective date of this Plan.

26.  CHANGE IN CONTROL

     In the event of a "Change in Control", as defined below, unless otherwise
     determined by the Committee or the Board of Directors prior to the
     occurrence of such Change in Control, any Options outstanding as of the
     date such Change in Control is determined to have occurred and not then
     exercisable shall become fully exercisable effective one day prior to the
     date of such Change of Control. In addition, the value of all outstanding
     Options shall, unless otherwise determined by the Committee or the Board of
     Directors at or after the Date of Grant, be cashed out on the basis of the
     "Change in Control Price", as defined below, as of the date such Change in
     Control is determined to have occurred or such other date as the Committee
     or the Board of Directors may determine prior to the Change in Control.
     Outstanding options as of the date of such Change of Control may be cashed
     out only if the Change in Control Price is higher than the Exercise Price
     of such outstanding options. Further, the Committee or the Board of
     Directors shall have the right to provide for the conversion or exchange of
     any outstanding Options into or for options, rights or other securities in
     any entity participating in, or resulting from, the Change in Control.

     For purposes of the Plan, a "Change in Control" means the happening of any
     of the following:

     (a)  When any "person", together with any "affiliate" or "associate" of
          such person, as such terms are defined by the Corporations Act (other
          than the Corporation, a Subsidiary or a Corporation employee benefit
          plan, including any trustee of such plan acting as trustee), or a
          group of persons acting jointly or in concert with one another,
          hereafter acquires the

                                   Page 106
<PAGE>
 
          "beneficial ownership", as defined in the Corporations Act, of, or
          control or direction over, directly or indirectly, securities of the
          Corporation representing 20 percent or more of the combined voting
          power of the Corporation's then outstanding securities; or

     (b)  The occurrence of a transaction requiring shareholder approval
          involving the acquisition of the Corporation by an entity other than
          the Corporation or a Subsidiary through purchase of assets, by
          amalgamation or otherwise.

     For purposes of the Plan, "Change in Control Price" means the highest price
     per Common Share paid in any transaction reported on The Toronto Stock
     Exchange or paid or offered in any bona fide transaction related to a
     potential or actual change in control of the Corporation at any time during
     the preceding 60-day period as determined by the Committee or the Board of
     Directors.

27.  TERMINATION OF PLAN

     Except as otherwise provided herein, Options may be granted only within the
     ten year period from the date the Plan has been adopted by the Board of
     Directors.  The termination of the Plan shall have no effect on outstanding
     Options, which shall continue in effect in accordance with their terms and
     conditions and the terms and conditions of the Plan, provided that no
     Option may be exercised after the tenth anniversary of its Date of Grant.

28.  FURTHER ASSURANCES

     Each Participant or Director Participant shall, when requested to do so by
     the Corporation, sign and deliver all such documents relating to the
     granting or exercise of Options deemed necessary or desirable by the
     Corporation.

29.  GOVERNING LAW

     The Plan is established under the laws of the Province of Ontario, and the
     rights of all parties and the construction and effect of each provision of
     the Plan shall be according to the laws of the Province of Ontario.

DATED the 2nd day of June,

NEWBRIDGE NETWORKS CORPORATION

/s/ TERENCE H. MATTHEWS
-----------------------
Chairman

/s/ JOHN A. FARMER
------------------
Secretary

                                   Page 107
<PAGE>
 
                                           SCHEDULE I


<TABLE> 
<CAPTION> 
REASON FOR GRANT                        DATE OF GRANT                                   OPTION GRANT
----------------                        -------------                                   ------------
<S>                                     <C>                                      <C>           
Annual service on Board of              Date of each annual meeting of           10,000 Option Shares
Directors                               shareholders at which the
                                        Director Participant is elected to
                                        the Board of Directors by the
                                        shareholders

Annual service as member                Date of each annual meeting of            2,000 Option Shares
of a Standing Committee                 shareholders following which
(other than as Chair)                   the Director Participants is
                                        appointed as a member of a
                                        Standing Committee by the
                                        Board of Directors

Annual service as Chair of              Date of each annual meeting of            4,000 Option Shares
a Standing Committee                    Shareholders following which
                                        the Director Participant is
                                        appointed as Chair of a Standing
                                        Committee by the Board of
                                        Directors
</TABLE> 

Notes:

1.       A Director Participant must be a member of the Board of Directors or a
         Standing Committee of the Board of Directors, as the case may be, as of
         the Date of Grant.

2.       The exercise price of Options granted to Director Participants shall
         not be lower than the average of the average of the daily high and low
         board lot trading prices of the Common Shares on The Toronto Stock
         Exchange for the five days preceding the Date of Grant, rounded to the
         next highest cent.

3.       "Standing Committee" of the Board of Directors means a committee formed
         by the board to meet on a regular basis over an extended period of
         time, and which is declared by the Board of Directors to be a Standing
         Committee, and includes the Audit Committee, the Employee Compensation
         Committee and the Directors' Affairs Committee.

                                   Page 108
<PAGE>
 
                                 EXHIBIT 10.9

                                    Page 109
<PAGE>
 
                                LOAN AGREEMENT

          THIS AGREEMENT is made as of the 30th day of January, 1998.

BETWEEN:

                                    NEWBRIDGE NETWORKS CORPORATION

                                         (the "Borrower")

                                         - and -

                                         CITIBANK CANADA AND SUCH OTHER
                                         PARTIES AS MAY FROM TIME TO TIME
                                         BECOME LENDERS HEREUNDER

                                         (collectively, the "LENDERS")

          NOW THEREFORE THIS AGREEMENT WITNESSES that, in consideration of the
covenants and agreements herein contained, the parties hereto agree as follows:

                                   ARTICLE 1
                                INTERPRETATION

1.1       DEFINITIONS.

          For the purposes of this Agreement:

"ADVANCE DATE" means each date on which an Advance will be made in accordance
with, and subject to, the provisions hereof;

"ADVANCES" means advances made by the Lenders under this Agreement and "Advance"
means any one of such Advances. The Advances will be denominated in Canadian
Dollars;

"AGREEMENT" means this agreement and all schedules attached to this Agreement,
in each case as they may be amended, supplemented or restated from time to time;
the expressions "hereof', "herein", "hereto", "hereunder", "hereby" and similar
expressions refer to this Agreement as a whole and not to any particular
article, section, schedule or other portion hereof.,

"BORROWER" means Newbridge Networks Corporation, its successors and permitted
assigns;

"BRANCH OF ACCOUNT" means the Citibank branch specified in Schedule A, or such
other bank or branch thereof as the Lenders may designate in writing to the
Borrower;

"BUSINESS DAY" means a day other than a Saturday or Sunday on which Lenders are
generally open for business in the place or places specified in Toronto,
Ontario;

"CANADIAN DOLLARS" and "$" each mean lawful money of Canada;

                                    Page 110
<PAGE>
 
"CITIBANK" means Citibank Canada, its successors and assigns;

"COLLATERAL" means: (1) (a) the Pledged Securities; (b) all securities,
instruments, negotiable documents of title and other personal property of any
kind which may hereafter be acquired by the Borrower in renewal of or
substitution for, as owner of, or as a result of the exercise of any rights
relating to, any of the property described in this definition; (c) all
dividends, income or other distributions, whether paid or distributed in cash,
securities or other property, in respect of any of the property described in
this definition; (d) all intangibles now or hereafter relating in any way to any
of the property described in this definition; and (e) all proceeds of any of the
property described in this definition; all in accordance with and to the extent
provided in the Pledge Agreement; and (2) all right, title and interest of the
Borrower in and to the Hedge Agreement and all benefits to be derived
thereunder, all in accordance with and to the extent provided in the Specific
Assignment;

"DEFAULT" means any event which, but for the lapse of time, giving of notice or
both, would constitute an Event of Default;

"DEMAND" has the meaning attributed to such term in section 9.1;

"DEMAND LOAN" means the demand loan in the principal amount of $15,578,670 to be
advanced by the Lenders to the Borrower pursuant to section 2.1, as such amount
may be reduced in accordance with sections 2.3 and 2.5;

"DEMAND LOAN INTEREST RATE" means the rate of interest per annurn equal to the
discount rate expressed as an annual percentage, at which Citibank on any
particular Business Day would be prepared to accept Canadian dollar bankers'
acceptances having a term of 30 days;

"DISCOUNT RATE" means, as at any given date with respect to any prepayment of
the Term Loan, or any portion thereof, the rate of interest per annum then
quoted by Citibank as the fixed rate equivalent to Canadian dollar bankers'
acceptances having a term equal to the remaining term to maturity of the Term
Loan determined at such date. For purposes hereof, term to maturity is the
period from such date to the Due Date;

"DUE DATE" means the date specified in Schedule A, or such earlier date as the
entire balance of the Demand Loan and/or the Term Loan may become due hereunder,
whether by acceleration or otherwise;

"ESCROW AGENT" means Montreal Trust Company of Canada, its successors and
permitted assigns;

"ESCROW AGREEMENT" means the escrow agreement made as of the date hereof among
the Borrower, the Lenders and the Escrow Agent, as such agreement may be
amended, supplemented or restated from time to time;

"EVENT OF DEFAULT" has the meaning attributed to such term in section 10. 1;

"EXCLUDED TAXES" means (a) any Taxes, including capital taxes, now or hereafter
imposed, levied, collected, withheld or assessed on any of the Lenders by any
jurisdiction (other than Canada and any jurisdiction within Canada) in which
such Lender is subject to Tax as a result of such Lender (i) carrying on a trade
or business in such jurisdiction or being deemed to do so, or having a permanent
establishment in such jurisdiction; (ii) being organized under the laws of such
jurisdiction; (iii) being 

                                    Page 111
<PAGE>
 
resident or deemed to be resident in such jurisdiction; or (iv) not dealing at
arm's length with the Borrower; and (b) any Taxes imposed, levied, collected,
withheld or assessed on the overall net income of such Lender by Canada or any
jurisdiction within Canada; but does not include any sales, goods or services
Tax payable under the laws of any jurisdiction with respect to any goods or
services made available by such Lender to the Borrower under this Agreement or
any withholding tax payable under the laws of Canada;

"GOVERNMENTAL BODY" means any government, parliament, legislature, or any
regulatory authority, agency, commission or board of any government, parliament
or legislature, or any court or (without limitation to the foregoing) any other
law, regulation or rule-making entity (including, without limitation, any
central bank, fiscal or monetary authority or authority regulating banks),
having or purporting to have jurisdiction in the relevant circumstances, or any
Person acting or purporting to act under the authority of any of the foregoing
(including, without limitation, any arbitrator);

"HEDGE AGREEMENT" means the future stock price hedge agreement between the
Borrower and Citibank made as of the date hereof, which agreement is designed to
protect the Borrower against or manage exposure to fluctuations in the share
price of the Pledged Securities, as such agreement may be amended, supplemented
or restated from time to time;

"INTEREST PAYMENT DATES" has the meaning specified in Schedule A, and "INTEREST
PAYMENT DATE" means any one of them, as applicable;

'KEEP WHOLE AMOUNT" means with respect to each prepayment of the Term Loan,
whether in whole or in part, the amount, which shall not be less than zero,
equal to the amount, if any, by which: (a) the aggregate present value as of the
date of such prepayment of each dollar of principal, assuming the principal is
paid at the Due Date, and the amount of interest that would have been payable
between the date of such prepayment and the Due Date if such payment had not
been made less a proportionate amount of the incremental Advances, determined by
discounting such amounts at the Discount Rate from the respective dates on which
they would have been payable, exceeds (b) the principal amount of such
prepayment;

"LENDERS" means, collectively, Citibank and such other parties as may from time
to time become lenders hereunder, their respective successors and assigns;

"LIEN" means any mortgage, lien, pledge, assignment, charge, security interest
or other encumbrance and includes any contractual restriction which, if
contravened, may give rise to an encumbrance;

"LOAN" means, collectively, the Demand Loan and the Term Loan;

"LOAN DOCUMENTS" means this Agreement and the agreements, instruments and
documents delivered from time to time (both before and after the date of this
Agreement) to the Lenders by the Borrower as contemplated by the provisions
hereof and "LOAN DOCUMENT" means any one of such Loan Documents;

"MATERIAL ADVERSE EFFECT" means a material adverse effect (or a series of
adverse effects, none of which is material in of itself but which, cumulatively,
result in a material adverse effect) on: (i) the business, operations, assets,
financial condition or prospects of the Borrower, measured as a whole; or (ii)
the ability of the Borrower to pay or perform any of the Obligations; or (iii)
the ability of the Lenders to enforce any of the Obligations;

                                    Page 112
<PAGE>
 
"OBLIGATIONS" means all indebtedness, liabilities and other obligations of the
Borrower to the Lenders hereunder or under any other Loan Document, whether
actual or contingent, direct or indirect, matured or not, now existing or
arising hereafter;

"OFFICERS' CERTIFICATE" means a certificate signed by any two officers of the
Borrower;

"PERSON" means any individual, partnership, limited partnership, joint venture,
syndicate, sole proprietorship, company or corporation with or without share
capital, unincorporated association, trust, trustee, executor, administrator or
other legal personal representative, government or Governmental Body, authority
or entity however designated or constituted;

"PLEDGE AGREEMENT" means the securities pledge agreement made as of the date
hereof by the Borrower in favour of the Lenders, pursuant to which the Borrower
has granted to the Lenders a security interest in, inter alia, the Pledged
Securities, as such agreement may be amended, supplemented or restated from time
to time;

"PLEDGED SECURITIES" means, collectively, the securities specified in Schedule
A;

"PRIME RATE" means, at any time, the annual rate of interest which Citibank
establishes at its principal office in Toronto as the reference rate of interest
to determine interest rates it will charge at such time for term loans in
Canadian Dollars made to its customers in Canada and which it refers to as its
"prime rate of interest", such rate to be adjusted automatically and without the
necessity of any notice to the Borrower upon each change to such rate;

"PRO RATA SHARE" means, at any time, with respect to a Lender, the amount of
each Advance which such Lender is required to make hereunder, expressed as a
percentage and set out in Schedule A;

"SECURITY DOCUMENTS" means, collectively, the Pledge Agreement and the Specific
Assignment;

"SPECIFIC ASSIGNMENT" means the specific assignment of agreement made as of the
date hereof by the Borrower in favour of the Lenders, pursuant to which the
Borrower has assigned its right, title and interest in and to the Hedge
Agreement and all benefits to be derived thereunder to the Lenders, as such
agreement may be amended, supplemented or restated from time to time;

"TAXES" means all taxes of any kind or nature whatsoever, including (without
limitation) income taxes, sales or value-added taxes, levies, stamp taxes,
royalties, duties, and all fees, deductions, compulsory loans and withholdings
imposed, levied, collected, withheld or assessed as of the date hereof or at any
time in the future, by any Governmental Body of or within Canada or any other
jurisdiction whatsoever having power to tax, together with penalties, fines,
additions to tax and interest thereon;

"TERM LOAN" means the term loan in the original principal amount of $34,421,330,
together with all subsequent Advances, in each case to be advanced by the
Lenders to the Borrower pursuant to section 2.2, as such loan may be reduced in
accordance with sections 2.4 and 2.5, and

"TERM LOAN INTEREST RATE" means 5.46% per annum.

1.2       GENDER AND NUMBER.

                                    Page 113
<PAGE>
 
          Words importing the singular include the plural and vice versa and
words importing gender include all genders.

1.3       INTEREST ACT (CANADA).

          For purposes of the Interest Act (Canada), where in any Loan Document
an annual rate of interest is to be calculated during a leap year, the yearly
rate of interest to which such rate is equivalent is such rate multiplied by 366
and divided by 365.

1.4       INVALIDITY, ETC.

          Each of the provisions contained in any Loan Document is distinct and
severable and a declaration of invalidity, illegality or unenforceability of any
such provision or part thereof by a court of competent jurisdiction shall not
affect the validity or enforceability of any other provision of such Loan
Document or of any other Loan Document. Without limiting the generality of the
foregoing, if any amounts on account of interest or fees or otherwise payable by
the Borrower to the Lenders hereunder exceed the maximum amount recoverable
under applicable law, the amounts so payable hereunder shall be reduced to the
maximum amount recoverable under applicable law.

1.5       HEADINGS, ETC.

          The division of a Loan Document into articles and sections, the
inclusion of a table of contents and the insertion of headings are for
convenience of reference only and shall not affect the construction or
interpretation of such Loan Document.

1.6       GOVERNING LAW.

          Except as otherwise specifically provided, the Loan Documents shall be
governed by and construed in accordance with the laws of the Province of Ontario
and the laws of Canada applicable therein.

1.7       SUBMISSION.

          The parties irrevocably submit and agree to be bound by the non-
exclusive jurisdiction of the courts of the Province of Ontario for all matters
arising out of or in connection with the Loan Documents.

1.8       REFERENCES.

Except as otherwise specifically provided, reference in any Loan Document to any
contract, agreement or any other instrument shall be deemed to include
references to the same as varied, amended, supplemented, restated or replaced
from time to time.

1.9       THIS AGREEMENT TO GOVERN.

          If there is any inconsistency between the terms of this Agreement and
the terms of any other Loan Document, the provisions hereof shall prevail to the
extent of the inconsistency, but the foregoing shall not apply to limit or
restrict in any way the rights and remedies of the Lenders under the terms of
the Loan Documents after the Liens thereby constituted shall have 

                                    Page 114
<PAGE>
 
become enforceable.

1.10      GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

          Except as otherwise specifically provided herein, all accounting terms
shall be applied and construed in accordance with generally accepted accounting
principles consistently applied. References herein to "generally accepted
accounting principles" mean, for all principles stated from time to time in the
Handbook of the Canadian Institute of Chartered Accountants, such principles so
stated.

1.11      ACTIONS ON DAYS OTHER THAN BUSINESS DAYS.

          Except as otherwise specifically provided herein, where any payment is
required to be made or any other action is required to be taken on a particular
day and such day is not a Business Day and, as a result, such payment cannot be
made or action cannot be taken on such day, then this Agreement shall be deemed
to provide that such payment shall be made or such action shall be taken on the
first Business Day after such day and interest shall be calculated accordingly.

                                   ARTICLE 2
                                   THE LOAN

2.1       THE DEMAND LOAN.

     (a)  Subject to the terms and conditions of this Agreement, each Lender
          hereby agrees to lend to the Borrower, on a non-revolving basis, by
          way of a single Advance its Pro Rata Share of the Demand Loan, upon
          satisfaction of the conditions set out in Article 8 applicable to the
          Demand Loan.

     (b)  The Advance under the Demand Loan shall be made on notice (the "Demand
          Loan Advance Notice") given by the Borrower to the Lenders on the date
          of the Advance. The Demand Loan Advance Notice shall be in
          substantially the form of Schedule B and shall specify (i) the
          requested Advance Date, and (ii) the amount of the Advance.

2.2       THE TERM LOAN.

     (a)  Subject to the terms and conditions of this Agreement, each Lender
          hereby agrees to lend to the Borrower, on a non-revolving basis, its
          Pro Rata Share of each Advance under the Term Loan, on the dates
          specified below:

<TABLE>
<CAPTION>
               --------------------------------------------------------
                 ADVANCE DATE                       ADVANCE           
               --------------------------------------------------------
               <S>                                  <C> 
                 January 30, 1998                   $34,421,330       
               --------------------------------------------------------
                 July 30, 1998                          655,726       
               --------------------------------------------------------
                 January 30, 1999                       668,218        
               --------------------------------------------------------
                 July 30, 1999                          680,947        
               --------------------------------------------------------
                 January 30, 2000                       693,920        
               --------------------------------------------------------
                 July 30, 2000                          707,139        
               --------------------------------------------------------
                 January 30, 2001                       720,610        
               --------------------------------------------------------
                 July 30, 2001                          734,337        
               --------------------------------------------------------
                 January 30, 2002                       748,326        
               --------------------------------------------------------
</TABLE>                                                                  
                                                                          

                                    Page 115
<PAGE>
 
<TABLE> 
               <S>                                      <C>  
               ------------------------------------------------------------
                 July 30, 2002                          762,582        
               ------------------------------------------------------------
</TABLE>

          in each case upon satisfaction of the conditions set out in Article 8.

     (b)  Each of the Advances under the Term Loan shall be made on notice (the
          "Term Loan Advance Notice") given by the Borrower to the Lenders not
          later than 10:00 am (Toronto time) at least one Business Days prior to
          the date of the proposed Advance. Notwithstanding the foregoing, the
          Borrower shall be permitted to deliver a Term Loan Advance Notice in
          respect of the initial Advance under the Term Loan on the requested
          Advance Date of such initial Advance. Each Term Loan Advance Notice
          shall be in substantially the form of Schedule C and shall specify (i)
          the requested Advance Date, and (ii) the amount of such Advance.

2.3       REPAYMENTS AND REDUCTIONS OF THE DEMAND LOAN.

     (a)  Unless Demand is earlier made by the Lenders, the Borrower shall
          repay, and there shall become due and payable, the following amounts
          of principal outstanding in respect of the Demand Loan on the dates
          specified below:

<TABLE>
<CAPTION>
               ------------------------------------------------------------ 
                 REPAYMENT DATE                     AMOUNT OF REPAYMENT       
               ------------------------------------------------------------
               <S>                                  <C>                      
                 July 30, 1998                      $  655,726               
               ------------------------------------------------------------
                 January 30, 1999                   $  668,218               
               ------------------------------------------------------------
                 July 30, 1999                      $  680,947               
               ------------------------------------------------------------
                 January 30, 2000                   $  693,920               
               ------------------------------------------------------------
                 July 30, 2000                      $  707,139               
               ------------------------------------------------------------
                 January 30, 2001                   $  720,610               
               ------------------------------------------------------------
                 July 30, 2001                      $  734,337               
               ------------------------------------------------------------
                 January 30, 2002                   $  748,326               
               ------------------------------------------------------------
                 July 30, 2002                      $  762,582               
               ------------------------------------------------------------ 
                 Due Date                           $9,206,865               
               ------------------------------------------------------------ 
</TABLE>

          The amounts so repaid as set forth above shall not be reborrowed and
          shall permanently reduce the amount of the Demand Loan.

     (b)  Notwithstanding the provisions of section 2.3(a), on the earlier of
          (i) the Due Date, and (ii) a Demand by the Lenders, the principal
          amount of the Demand Loan then outstanding, together with all accrued
          and unpaid interest and other amounts payable under this Agreement in
          respect of the Demand Loan. shall be due and payable in full by the
          Borrower.

2.4       REPAYMENTS OF THE TERM LOAN.

          On the Due Date, the principal amount of the Term Loan then
outstanding, together with all accrued and unpaid interest and other amounts
payable under this Agreement in respect of the Term Loan, shall be due and
payable in full by the Borrower.

2.5       OPTIONAL PREPAYMENT.

     (a)  The Borrower may, subject to the provisions of this Agreement, prepay
          the Demand Loan, in whole or in part, without penalty or premium but
          subject, where

                                    Page 116
<PAGE>
 
          applicable, to unwinding or redeployment costs to be charged for the
          account of the Borrower and upon at least five Business Days' prior
          notice to the Lenders, stating the proposed date of such prepayment
          and the aggregate principal amount of such prepayment. If such notice
          is given, the Borrower shall pay in accordance with such notice the
          amount of such prepayment, plus all interest on the amount of such
          prepayment accrued to the date of such prepayment, plus, where
          applicable, any unwinding or redeployment costs to be charged for the
          account of the Borrower in respect of such prepayment. Each partial
          prepayment shall be in a minimum aggregate principal amount of
          $100,000. Any amount prepaid shall not be reborrowed and shall
          permanently reduce the amount of the Demand Loan. All amounts prepaid
          or repaid shall be applied firstly in reduction of the accrued unpaid
          interest then outstanding (whether or not due and owing), and
          thereafter in reduction of the principal amount of the Demand Loan
          then outstanding.

     (b)  The Borrower may, subject to the provisions of this Agreement, prepay
          the Term Loan, in whole or in part, upon payment of the Keep Whole
          Amount in respect of such prepayment and upon at least five Business
          Days' prior notice to the Lenders, stating the proposed date of such
          prepayment and the aggregate principal amount of such prepayment. If
          such notice is given, the Borrower shall pay in accordance with such
          notice the amount of such prepayment, plus all interest on the amount
          of such prepayment accrued to the date of such prepayment, plus the
          Keep Whole Amount in respect of such prepayment. Each partial
          prepayment shall be in a minimum aggregate principal amount of
          $100,000. Any amounts prepaid shall not be reborrowed and shall
          permanently reduce the amount of the Term Loan. All amounts prepaid or
          repaid shall be applied firstly in reduction of the accrued and unpaid
          interest then outstanding (whether or not due and owing) and
          thereafter in reduction of the principal amount of the Term Loan then
          outstanding.

2.6       USE OF PROCEEDS.

          The Borrower shall use the Loan solely for general corporate purposes.

2.7       EVIDENCE OF DEBT

          The Advances shall be evidenced by a promissory notes to be executed
by the Borrower in favour of the Lenders, in form and substance satisfactory to
the Lenders, and the indebtedness of the Borrower in respect of all Advances
hereunder shall be, absent manifest error, conclusively evidenced by the account
records maintained by the Lenders. The failure of any of the Lenders to
correctly record any amount or date shall not, however, affect the obligation of
the Borrower to pay amounts due hereunder to any of the Lenders in accordance
with this Agreement.

                                   ARTICLE 3
                          INTEREST, EXPENSES AND FEES

3.1       INTEREST ON THE LOAN.

          Interest shall accrue on the outstanding principal amount of (a) the
Demand Loan at the Demand Loan Interest Rate, and (b) the Term Loan at the Term
Loan Interest Rate. Interest on the Demand Loan and the Term Loan shall accrue
from day to day, shall be calculated on the basis of the actual number of days
elapsed and on the 

                                    Page 117
<PAGE>
 
basis of a year of 365 days or 366 days in the case of a leap year and shall be
compounded and payable to the Lenders in arrears on each Interest Payment Date
in the manner stipulated in section 4. 1.

3.2       INTEREST ON OVERDUE AMOUNTS.

          The Borrower acknowledges that if any Obligations are not paid when
due, the Lenders nevertheless will have entered into commitments relating to the
funding obtained by the Lenders for such overdue Obligations. Therefore, all
overdue amounts owing or deemed to be owing under this Agreement shall bear
interest at a rate per annum determined on a daily basis that is equal to the
Prime Rate plus 2% per annum, calculated on the basis of the actual number of
days elapsed in a year of 365 days or 366 days in the case of a leap year. Such
interest on overdue amounts shall accrue from day to day, be payable in arrears
on demand and shall be compounded monthly on the last Business Day of each
calendar month.

3.3       INCREASED COSTS.

          If, in the reasonable opinion of the Lenders, the Lenders are now or
hereafter become subject to, or there is a change in:

     (a)  any reserve, special deposit, deposit insurance or similar requirement
          against assets of, or deposits in or for the account of, or credit
          extended by, or any acquisition of funds by, the Lenders;

     (b)  any reserve, special deposit or similar requirement with respect to
          all or any of the Obligations;

     (c)  Taxes (other than Excluded Taxes);

     (d)  any requirement relating to capital adequacy; or

     (c)  any other condition imposed by applicable law or any interpretation of
          applicable law by an entity charged with the administration thereof in
          respect of any matter listed in paragraphs (a) through (d) above or
          similar thereto or any other condition with which financial
          institutions operating in Canada are accustomed to comply or have
          generally complied, whether or not having the force of law in respect
          of any matter listed in paragraphs (a) through (d) above or similar
          thereto,

and the result of any of the foregoing, in the sole determination of the
Lenders, is to increase the cost to, or to reduce any amount received or
receivable by, the Lenders hereunder, or to reduce the Lenders' effective return
hereunder or on its capital to a level below that which the Lenders could have
otherwise achieved (using any reasonable averaging and attribution method), the
Lenders shall determine that amount of money which shall compensate it for such
increase in cost, or reduction in income, or reduction in rate of return on the
Lenders' capital, and the Borrower shall pay such amount of money to the Lenders
upon demand by the Lenders. The Lenders' determination of such increased cost or
reduction shall be conclusive absent manifest error.

                                    Page 118
<PAGE>
 
3.4       COSTS AND EXPENSES.

     (a)  The Borrower on the one hand, and the Lenders on the other hand, shall
          pay their own costs and expenses in connection with the preparation of
          the Loan Documents and the initial execution, filing and registration
          thereof.

     (b)  The Lenders shall also pay (i) their own costs and expenses incurred
          in connection with monitoring and administering the Loan and
          monitoring compliance by the Borrower of its obligations under the
          Loan Documents, including (without limitation) the costs and expenses
          incurred by the Lenders pursuant to sections 5.3 and 7.1(1) and 11.9,
          and (ii) subject to the following proviso and section 3.4(c), the out-
          of-pocket costs and expenses incurred by the Borrower in complying
          with the provisions of sections 5.3 and 11.9 at the request of the
          Lenders; provided that notwithstanding the provisions of this section
          3.4(b), all such costs and expenses incurred by the Lenders after the
          occurrence of any Material Adverse Effect in the opinion of the
          Lenders shall be borne equally by the Lenders and the Borrower.

     (c)  Notwithstanding sections 3.4(a) and 3.4(b), the Borrower shall pay to
          the Lenders on demand all reasonable costs and expenses (including all
          sales and value-added taxes) of the Lenders, their outside counsel (on
          a solicitor and their own client basis), their agents, officers and
          employees and any receiver or receiver-manager appointed by them or by
          a court in connection with the protection, enforcement and defence of
          any of the rights or remedies of the Lenders under any of the Loan
          Documents, including (without limitation) all costs and expenses of
          establishing the validity and enforceability of, or of collection of
          amounts owing under, any of the Loan Documents or of any enforcement
          of the Collateral or of entering into transactions to protect the
          value or sale price of the Collateral.

3.5       INDEMNITY.

     (a)  The Borrower shall indemnify each of the Lenders and its officers,
          directors, employees, agents and other representatives (collectively,
          in this section 3.5, the "Indemnified Parties") from and against any
          and all liabilities and damages paid, incurred or suffered by the
          Indemnified Parties, or any of them, and any and all claims, demands,
          actions, causes of action, suits, losses, costs (including all
          documentary, recording, filing, mortgage or stamp taxes or duties),
          charges and expenses in connection therewith (irrespective of whether
          such Indemnified Party is a party to the action for which such
          indemnification hereunder is sought), and including reasonable legal
          fees and disbursements paid, incurred or suffered by, or asserted
          against, the Indemnified Parties, or any of them, with respect to, or
          as direct or indirect result of (i) any transaction financed or to be
          financed in whole or in part, directly or indirectly, with the
          proceeds of any Advances obtained hereunder; or (ii) the execution,
          delivery or performance of this Agreement or any Loan Document, except
          for such Indemnified Liabilities that a court of competent
          jurisdiction determines or rules on account of the relevant
          Indemnified Party's gross negligence or wilful misconduct.

     (b)  The Borrower shall indemnify each of the Indemnified Parties from and
          against all losses, costs, damages and liabilities and reasonable
          expenses (including, without limitation, any costs or expenses
          sustained by the Lenders in hedging their 

                                    Page 119
<PAGE>
 
          exposure with respect to the Collateral) which the Indemnified Parties
          or any of them sustain or incur as a consequence of an Event of
          Default or a Demand, including (without limitation) the Keep Whole
          Amount in respect of any prepayment of the Term Loan, or any portion
          thereof, made as a result of such Event of Default. A certificate of
          the Lenders setting forth the amounts necessary to indemnify the
          Indemnified Parties, or any of them, in respect of such losses, costs,
          expenses, damages or liabilities shall be, absent manifest error,
          conclusive evidence of the amounts owing under this section 3.5(b).

                                   ARTICLE 4
                                   PAYMENTS

4.1       GENERALLY.

          All payments in respect of the Loan by the Borrower to the Lenders
shall be made no later than 12:00 p.m. (Toronto time) on the due date thereof to
the account specified therefor in writing by the Lenders at the Branch of
Account or to such other account as may be specified by the Lenders to the
Borrower from time to time. Any payments received after such time shall be
considered for all purposes as having been made on the next following Business
Day unless the Lenders otherwise agree in writing. All payments shall be made by
way of certified cheque, bank draft, wire transfer or other immediately
available funds.

4.2       NO DEDUCTION.

          All payments made by the Borrower to the Lenders shall be made in
full, without set-off or counterclaim, and free of and without deduction or
withholding for or on account of any present or future Taxes. If the Borrower
shall be required by law to make any such deduction or withholding, the payment
shall be increased as may be necessary so that after making all required
deductions or withholdings (including deductions or withholdings applicable to
additional amounts paid under this section 4.2), the Lenders receive an amount
equal to the sum they would have received if no deduction or withholding had
been made.

                                   ARTICLE 5
                                   SECURITY

5.1       SECURITY.

          As security for, inter alia, the due and punctual payment of all
Obligations of the Borrower (other than the indebtedness of the Borrower in
respect of the Demand Loan), the Borrower shall execute and deliver to the
Lenders the Pledge Agreement and the Specific Assignment and such other security
as may be mutually agreed upon by the Lenders and the Borrower from time to
time.

5.2       NO MERGER.

          The Liens created by the Loan Documents shall not merge in any other
security. No judgment obtained by the Lenders shall in any way affect any of the
provisions of any of the Loan Documents. For greater certainty, no judgment
obtained by the Lenders shall in any way affect the obligation of the Borrower
to pay interest at the rates, times and in the manner provided in this
Agreement.

                                    Page 120
<PAGE>
 
5.3       FURTHER ASSURANCES - SECURITY.

          The Borrower shall take such action and execute and deliver to the
Lenders such agreements, conveyances, deeds and other documents and instruments
as the Lenders shall reasonably request, and, in the event the Lenders are
unable to do so in a proper and timely manner, register, file or record the same
(or a notice or financing statement in respect thereof) in all offices where
such registration, filing or recording is, in the opinion of the Lenders or
Lenders' counsel, necessary or advisable to constitute, perfect and maintain the
Liens created by the Loan Documents in all jurisdictions reasonably required by
the Lenders, in each case within a reasonable time after the request therefor by
the Lenders, and in each case in form and substance satisfactory to the Lenders
and Lenders' counsel.

5.4       NON-RECOURSE.

          Notwithstanding anything herein provided, the Lenders agree that their
remedies hereunder against the Borrower with respect to the Obligations in
respect of the Term Loan, including (without limitation) the principal amount
owing in respect thereof, all accrued interest thereon and all costs and
expenses relating thereto contemplated in sections 3.4(b) and 3.4(c) shall be
limited solely to the Collateral, and to the Termination Costs, if any. For
purposes hereof, Termination Costs means the positive value, if any, of the
difference between (i) the present value of the Obligations in respect of the
Term Loan net of future Advances remaining in respect of the Term Loan, and (ii)
the present value of the Forward Price (as such term is defined in the Hedge
Agreement), discounted at the fixed equivalent of Canadian dollar banker's
acceptances plus zero as calculated in good faith by the Lenders.

                                   ARTICLE 6
                        REPRESENTATIONS AND WARRANTIES

6.1       REPRESENTATIONS AND WARRANTIES.

          To induce each of the Lenders to make Advances available hereunder,
the Borrower represents and warrants to the Lenders as follows:

     (a)  the Borrower is duly incorporated and validly existing under the laws
          of its jurisdiction of incorporation;

     (b)  the Borrower has the corporate power and capacity to enter into the
          Loan Documents, to own, sell and grant a security interest in the
          Collateral and to perform its obligations under the Loan Documents.

     (c)  the Borrower has taken all necessary corporate action to
          authorize the execution, delivery and performance of each of the
          Loan Documents;

     (d)  there is no unanimous shareholder agreement which restricts, in
          whole or in part, the powers of the directors of the Borrower to
          manage or supervise the business and affairs of the Borrower;

     (e)  the execution and delivery of this Agreement and the other Loan
          Documents and the performance by the Borrower of its obligations
          hereunder and thereunder: (i) 


                                   Page 121
<PAGE>
 
          does not and will not contravene, breach or result in any default
          under the articles, by-laws, constating documents or other
          organizational documents of the Borrower or under any agreement or
          other instrument or applicable law to which the Borrower is a party or
          by which the Borrower or any of its properties or assets may be bound;
          (ii) will not oblige the Borrower to grant any Lien to any Person on
          the Collateral (other than the Lenders); and (iii) will not result in
          or permit the acceleration of the maturity of any indebtedness,
          liability or obligation of the Borrower under any agreement or other
          instrument to which the Borrower is a party or by which the Borrower
          or any of its properties or assets may be bound;

     (f)  no Default or Event of Default has occurred and is continuing nor
          shall there be any Default or Event of Default after giving effect to
          any Advance made hereunder;

     (g)  since the date of this Agreement, no event, condition or circumstance
          has arisen, or is likely to arise, which could have a Material Adverse
          Effect;

     (h)  no authorization, consent or approval of, or filing with or notice to,
          any Person (including any Governmental Body) is required in connection
          with the execution, delivery or performance of any of the Loan
          Documents by the Borrower;

     (i)  each of the Loan Documents constitutes, or upon execution and delivery
          will constitute, a valid and binding obligation of the Borrower
          enforceable against it in accordance with its terms, subject only to
          applicable bankruptcy, insolvency, arrangement and other laws
          affecting the enforcement of creditors' rights generally and to the
          fact that the availability of equitable remedies is subject to the
          discretion of a court of competent jurisdiction;

     (j)  the Borrower is the sole legal and beneficial owner of the Collateral
          with good and marketable title to the Collateral, free and clear of
          any Liens, other than Liens in favour of the Lenders under the Pledge
          Agreement. There are no agreements or restrictions which in any way
          limit or restrict the transfer of the Collateral. The Pledge
          Securities are freely tradable, are not subject to any hold periods
          and do not, together with any additional securities issued by the
          issuer of the Pledged Securities held by any combination of Persons
          including the Borrower, constitute either 20% of the voting securities
          of that issuer or a sufficient number of any securities of that issuer
          to affect materially the control of that issuer. The Borrower is not
          an insider of the issuer of the Pledged Securities within the meaning
          of Ontario securities legislation;

     (k)  the Borrower, in entering into the transactions contemplated by this
          Agreement and the other Loan Documents and the Hedge Agreement, does
          not have knowledge of a material fact or material change with respect
          to the issuer of the Pledged Securities that has not been generally
          disclosed;

     (l)  there is no investigation or litigation, regulatory, arbitration or
          other proceedings commenced, or to the knowledge of the Borrower,
          pending or threatened against the Borrower, which, if adversely
          determined, could (i) have a Material Adverse Effect, or (ii) affect
          the legality, validity or enforceability of this Agreement, any other
          Loan Document or the Hedge Agreement;


                                   Page 122
<PAGE>
 
     (m)  the audited annual financial statements of the Borrower for its most
          recently completed fiscal year and the unaudited quarterly financial
          statements of the Borrower for its most recently completed fiscal
          quarter, in the form delivered by the Borrower to the Lenders, have
          been prepared in accordance with generally accepted accounting
          principles and fairly, completely and accurately present the financial
          condition of the Borrower and the financial information presented
          therein for the period and as at the date thereof. The notes to such
          financial statements do not contain any misstatement of a material
          fact nor do they omit to state a material fact required to make any
          statement contained therein not untrue or misleading. Since the date
          of the audited annual financial statements of the Borrower for its
          most recently completed fiscal year, no event, condition or
          circumstance has arisen, or is likely to arise, which could have a
          Material Adverse Effect; and

     (n)  the Borrower has provided to the Lenders all material information
          relating to the financial condition, business and prospects of the
          Borrower and all such information is true, accurate and complete in
          all material respects and omits no material fact necessary to make
          such information not misleading.

6.2       SURVIVAL OF REPRESENTATIONS AND WARRANTIES.

          The Borrower covenants that the representations and warranties made by
it in this Article 6 shall be true and correct on each day that any of the Loan
Documents remains in force and effect, with the same effect as if such
representations and warranties had been made and given on and as of such day,
notwithstanding any investigation made at any time by or on behalf of the
Lenders, or any of them; except that if any such representation and warranty is
specifically given in respect of a particular date or particular period of time
and relates only to such date or period of time, then such representation and
warranty shall continue to be given as at such date or for such period of time.

6.3       NO REPRESENTATIONS BY LENDERS

          No representation, warranty or other statement made by any Lender in
respect of any Advances made hereunder shall be binding on such Lender, unless
made by it in writing as a specific amendment to this Agreement.

                                   ARTICLE 7
                                   COVENANTS

7.1       AFFIRMATIVE COVENANTS.

          So long as any Obligations remain outstanding, and unless the Lenders
otherwise consent in writing, the Borrower shall:
 
     (a)  pay all amounts of principal, interest, fees, costs and expenses owing
          hereunder by the Borrower on the dates, at the times and at the places
          specified in this Agreement or under any other Loan Document;

     (b)  do or cause to be done all things necessary or desirable to maintain
          its corporate 


                                   Page 123
<PAGE>
 
          existence in its jurisdiction of incorporation, to maintain its
          corporate power and capacity to own its properties, including (without
          limitation) the Collateral, and to carry on its business in a
          commercially reasonable manner in accordance with normal industry
          standards;

     (c)  comply with the requirements of all applicable law (including, without
          limitation, all securities laws, regulations, rules, policies,
          guidelines and directives applicable to its ownership of the
          Collateral), and all obligations which, if contravened, could give
          rise to a Lien on the Collateral, and agreements or other instruments
          to which it or its properties are bound, non-compliance with which
          could have a Material Adverse Effect;

     (d)  maintain a system of accounting which is established and administered
          in accordance with generally accepted accounting principles, keep
          adequate records and books of account in which accurate and complete
          entries shall be made in accordance with such accounting principles
          reflecting all transactions required to be reflected by such
          accounting principles and keep accurate and complete records of any
          property owned by it;

     (e)  as soon as practicable after it shall become aware of the same, give
          notice to the Lenders of the following events with respect to the
          Borrower:

          (i)    the commencement of any investigation or litigation,
          regulatory, arbitration or other proceeding against or in any other
          way relating to the Borrower or any of its properties or assets which,
          if adversely determined, could have a Material Adverse Effect or could
          affect its ability to perform its obligations under any Loan Document
          or Hedge Agreement;

          (ii)   any amendment of its articles, by-laws, constating documents or
            other organizational documents;

          (iii)  any other event, condition or circumstance which could affect
          its ability to perform its obligations under any Loan Document or
          Hedge Agreement;

          (iv)   the Collateral becoming subject to any agreement or restriction
          limiting or restricting the transfer of the Collateral in any way,
          other than pursuant to the Pledge Agreement;

          (v)    if the Borrower shall become an insider of the issuer of the
          Pledged Securities within the meaning of Ontario securities
          legislation;

          (vi)   if the Borrower changes its chief executive office within the
          meaning of the Personal Property Security Act (Ontario) or its
          residency for tax purposes; and

          (vii)  any (A) Default or Event of Default, or (B) the occurrence or
          nonoccurrence of any event which constitutes, or which with the
          passage of time or giving of notice or both could reasonably be
          expected to constitute or result in, a material default of $25,000,000
          or more under any agreement or other instrument to which the Borrower
          is a party or by which the Borrower or any of its properties or assets
          may be bound and, in the case of both clauses (A) and (B) above,


                                   Page 124
<PAGE>
 
          specifying the relevant particulars and the period of existence
          thereof and the action taken or proposed to be taken by the Borrower
          with respect thereto;

     (f)  as soon as practicable and in any event within 45 days after the end
          of each of the first three quarters of each fiscal year and unless not
          otherwise readily available to and accessible by the Lenders over the
          internet within such 45-day period, deliver to the Lenders its audited
          and unaudited quarterly financial statements, including in each case a
          balance sheet, statement of profit and loss, a statement of changes in
          financial position and a statement of retained earnings, together with
          comparative figures for the previous quarter;
     
     (g)  as soon as practicable and in any event within 90 days after the end
          of each fiscal year and unless not otherwise readily available to and
          accessible by the Lenders over the internet within such 90-day period,
          deliver to the Lenders its audited annual financial statements,
          including in each case a balance sheet, statement of profit and loss,
          a statement of changes in financial position and a statement of
          retained earnings, together with comparative figures for the previous
          fiscal year;

     (h)  within five days after the end of each period of two consecutive
          fiscal quarters of each fiscal year, deliver to the Lenders, at their
          request (which request shall be applicable only in respect of such
          period of two consecutive fiscal quarters) an Officers' Certificate
          certifying (i) that no event, condition or circumstance has arisen or
          is likely to arise which could have a Material Adverse Effect, and
          that no Default or Event of Default has occurred hereunder;

     (i)  ensure that the Hedge Agreement and the Loan Documents remain in
          effect throughout the term of this Agreement, and the Borrower shall
          immediately advise the Lenders of the occurrence or non-occurrence of
          any event which with the passage of time or giving of notice or both
          would constitute, a default under the Hedge Agreement or any of the
          Loan Documents;

     (j)  immediately advise the Lenders of the occurrence or non-occurrence of
          any event which could reasonably be expected to have a Material
          Adverse Effect;

     (k)  at all times, supply the Lenders with all information reasonably
          necessary to create, maintain, perfect, protect and preserve the Liens
          provided for under the Security Documents and confer upon the Lenders
          the security interest intended to be created thereby and take all
          necessary action in connection therewith in the event the Lenders are
          unable to do so in a proper and timely manner; and

     (l)  at any reasonable time or times after the occurrence of any event or
          circumstance which in the opinion of the Lenders could reasonably be
          expected to lead or resullt in a Material Adverse Effect whether with
          the passage of time or the giving of notice or otherwise, and upon
          reasonable prior notice given to the Borrower by the Lenders, permit
          any of the Lenders or any of its authorized representatives full and
          reasonable access to the premises of the Borrower and use its best
          efforts to obtain any consents and waivers from any Person necessary,
          in the reasonable opinion of such Lender, to ensure such access, and
          to all pertinent business and financial records of the Borrower which
          might, in the reasonable opinion of such Lender, be considered to be
          relevant to any of the terms and conditions of any of 


                                   Page 125
<PAGE>
 
          the Loan Documents, and to take copies of such records, and to discuss
          the pertinent business, finances and accounts of, and the compliance
          with the terms of this Agreement by, the Borrower with the management
          and auditors thereof.

7.2       LENDERS ENTITLED TO PERFORM COVENANTS.

          If the Borrower fails to perform any covenant contained in section
7.1, or in any other provision of any Loan Document which in the reasonable
opinion of the Lenders is material, the Lenders may, in their discretion,
perform any such covenant capable of being performed by them and, if any such
covenant requires the payment of money, the Lenders may make such payments. All
sums so expended by the Lenders shall be deemed to bear interest at a rate per
annum determined on a daily basis that is equal to the Prime Rate plus 2% per
annum, calculated on the basis of the actual number of days elapsed in a year of
365 days or 366 days in the case of a leap year. Such interest shall accrue from
day to day, be payable in arrears on demand and shall be compounded monthly on
the last Business Day of each calendar month.

7.3       NEGATIVE COVENANTS.

          So long as any Obligations remain outstanding and unless the Lenders
otherwise consent in writing, the Borrower shall not:

     (a)  sell, transfer or otherwise dispose of the Collateral or create,
          grant, assume or suffer to exist any Lien upon the Collateral (other
          than in accordance with the Pledge Agreement and the Specific
          Assignment) or enter into any agreement or arrangement which would
          restrict or limit the Pledged Securities from being freely tradeable
          or would otherwise restrict or limit the transferability thereof
          (other than the Pledge Agreement and the Escrow Agreement);

     (b)  acquire or invest in any additional securities issued by the issuer of
          the Pledged Securities or enter into any agreement or arrangement with
          any Person or combination of Persons such that the Borrower, or any
          combination of such Persons including the Borrower, hold either 20% of
          the voting securities of that issuer or a sufficient number of any
          securities of that issuer to affect materially the control of that
          issuer;

     (c)  enter into any transaction (including by way of reorganization,
          consolidation, amalgamation, liquidation, transfer, sale or otherwise)
          whereby all or any material portion or significant operating division
          of the undertaking, property and assets of the Borrower would become
          the property of any other Person or, in the case of any such
          amalgamation, of the continuing corporation resulting unless (i) such
          transaction is on such terms and is carried out in such a manner as to
          preserve and not to impair any of the rights and powers of the Lenders
          hereunder or pursuant to the Security Documents, (ii) such transaction
          does not result in the occurrence of a Default or an Event of Default,
          and (iii) the continuing corporation, if applicable, resulting
          therefrom remains indebted and obligated to the Lenders hereunder and
          under the other Loan Documents and shall have assumed all the
          covenants and obligations of the Borrower under this Agreement and the
          other Loan Documents and is a corporation with limited liability and
          incorporated or amalgamated in Canada; or


                                   Page 126
<PAGE>
 
     (d)  make any change in the charter documents or by-laws delivered to the
          Lenders on or prior to the date of the initial Advance contemplated
          hereunder which would be detrimental to the rights or interests of the
          Lenders under any of the Loan Documents.

                                   ARTICLE 8
                             CONDITIONS PRECEDENT

8.1       CONDITIONS PRECEDENT TO ADVANCE.

          The obligation of the Lenders to make the initial Advance under each
Loan is subject to the following conditions applicable to such Loan, as the case
may be, to be fulfilled or performed at or prior to the time of making the
initial Advance under such Loan, which conditions are for the exclusive benefit
of the Lenders and may be waived in whole or in part by the Lenders, in their
sole discretion:

     (a)  Deliveries. The Lenders shall have received, at or prior to the time
          ----------                                                          
          of making the initial Advance under such Loan, the following, each
          dated such day, in form and substance satisfactory to the Lenders and
          the Lenders' counsel, each acting reasonably:

          (i) a copy of the audited consolidated financial statements of the
          Borrower for its most recently completed fiscal year and the unaudited
          financial statements of the Borrower for its most recently completed
          financial quarter;

          (ii)      certified copies of:

                    (A)   the charter documents and by-laws of the Borrower;

                    (B)   the resolutions of the board of directors, or any duly
                          authorized committee thereof, of the Borrower
                          approving the entering into of the Loan Documents and
                          the Hedge Agreement and the completion of all
                          transactions contemplated thereby; and

                    (C)   all other instruments evidencing necessary corporate
                          action of the Borrower with respect to such matters;

          (iii)     a certificate of the secretary or the assistant secretary of
          the Borrower certifying the names and true signatures of its officers
          authorized to sign the Loan Documents;

          (iv)      a certificate of status or compliance with respect to the
          Borrower issued by the appropriate government agency of the
          jurisdiction of its incorporation;

          (v)       a legal opinion of counsel to the Borrower confirming the
          due authorization, execution, validity and enforceability of the Loan
          Documents and the Hedge Agreement, the creation of a security interest
          pursuant to the Security Documents and that the execution, delivery
          and performance by the Borrower of the Loan Documents and the Hedge
          Agreement does not conflict with or breach its constating documents,
          any applicable law or any agreement to which it is a party;


                                   Page 127
<PAGE>
 
          (vi)      the Security Documents;

          (vii)     evidence of the registration and perfection of the Security
          Documents at all offices where such registration, filing or reporting
          is necessary or desirable to protect any rights or remedies of the
          Lenders thereunder;

          (viii)    the Escrow Agreement;

          (ix)      a receipt executed by the Escrow Agent confirming that it
          has received the Pledged Securities to be held by it in accordance
          with the provisions of the Escrow Agreement;

          (x)       written confirmation from the transfer agent which
          administers to the securities of the issuer of the Pledged Securities,
          confirming that it has received notice that the Pledged Securities
          have been pledged to the Lenders and that the Pledged Securities are
          not to be transferred (nor is any record of any purported transfer to
          be entered) without the prior written consent of the Lenders;

          (xi)      a certified copy of the Hedge Agreement; and

          (xii)     such other certificates and documentation as the Lenders may
          reasonably request to give effect to this Agreement.

     (b)  Proceedings. All proceedings to be taken in connection with the
          ------------                                                   
          transactions contemplated by the Loan Documents and the Hedge
          Agreement shall be satisfactory in form and substance to the Lenders,
          acting reasonably, and the Lenders shall have received copies of all
          such instruments and other evidence as it may reasonably request in
          order to establish the consummation of such transactions and the
          taking of all proceedings in connection therewith.

     (c)  No Material Adverse Effect. The Lenders shall have received evidence,
          ---------------------------                                          
          satisfactory to them in their sole discretion, that no event,
          condition or circumstance has arisen or is likely to arise which could
          have a Material Adverse Effect.

     (d)  Other Conditions. The conditions set forth in Section 8.2 shall have
          ----------------                                                    
          been fulfilled or performed.

8.2       CONDITIONS TO ALL ADVANCES.

          At any time, the obligation of the Lenders to make an Advance under
either Loan shall be subject to the following conditions applicable to such
Loan, as the case may be, which conditions are for the exclusive benefit of the
Lenders and may be waived in whole or in part by the Lenders, in their sole
discretion, that on any such Advance Date, and after giving effect to such
Advance and to the application of proceeds therefrom:

     (a)  Truth of Representations and Warranties. The representations and
          ---------------------------------------                         
          warranties of the Borrower contained in this Agreement and the other
          Loan Documents and the Hedge Agreement shall be true and correct as of
          such date with the same force 

                                   Page 128
<PAGE>
 
          and effect as such representations and warranties had been made on and
          as of such time.

     (b)  Form of Covenants by the Borrower. The Borrower shall have fulfilled
          ---------------------------------                                   
          or complied with all covenants herein contained or contained in any
          Loan Document to be performed or caused to be performed by it at or
          prior to such time.

     (c)  No Default or Event of Default. No Default or Event of Default has
          ------------------------------                                    
          occurred and is continuing or would occur as a result of such Advance.

     (d)  Consents and Authorizations. All authorizations shall have been
          ---------------------------                                    
          obtained on terms acceptable to the Lenders in order to permit an
          Advance to be made on the terms and conditions set out in this
          Agreement without adversely affecting the Collateral or resulting in
          the violation or a breach of or a default under any termination,
          cancellation, amendment or acceleration of any material obligation
          under any licence, permit, lease or contract relating to the
          Collateral or the Borrower's business.

     (e)  No Change in Laws. No law, proposed law, any change in any law, or the
          -----------------                                                     
          interpretation or enforcement of any law shall have been introduced,
          enacted or announced, the effect of which will be to prohibit the
          Lenders from making such Advance or to increase materially the cost
          thereof to the Lenders.

     (f)  Demand Loan. Concurrently with each additional Advance under the Term
          -----------                                                          
          Loan, the Borrower shall have repaid to the Lenders the portion of the
          Demand Loan in accordance with the repayment schedule set forth in
          section 2.3.

                                   ARTICLE 9
                      DEMAND FOR REPAYMENT OF DEMAND LOAN

9.1       DEMAND FOR REPAYMENT OF DEMAND LOAN.

          The Lenders may at any time, by written notice to the Borrower and,
for greater certainty, without the necessity of the occurrence of an Event of
Default, demand repayment of all indebtedness hereunder of the Borrower to the
Lenders in respect of the Demand Loan (the "Demand"), whereupon the Lenders may:
(i) declare all Obligations in respect of the Demand Loan, including (without
limitation) all accrued and unpaid interest thereon and all costs and expenses
relating thereto to be immediately due and payable; and (ii) take such actions
and commence such proceedings as may be permitted at law or in equity (whether
or not provided for herein or in the Loan Documents) at such times and in such
manner as the Lenders in their sole discretion may consider expedient; all
without, except as may be required by applicable law, any additional notice,
presentment, protest, notice of protest, dishonour or any other action. The
rights and remedies of the Lenders hereunder are cumulative and are in addition
to and not in substitution for any other rights or remedies provided by
applicable or by any of the Loan Documents.

                                   Page 129
<PAGE>
 
                                  ARTICLE 10
                        EVENTS OF DEFAULT AND REMEDIES

10.1      EVENTS OF DEFAULT.

          The occurrence of any of the following events shall constitute an
"Event of Default":

     (a)  the failure by the Borrower to pay any portion of (i) the principal or
          interest due hereunder in respect of the Term Loan when due, or (ii)
          any fees or other amounts due hereunder in respect of the Term Loan
          within 30 days after the date on which such payment was due;

     (b)  the failure by the Borrower to perform or observe any other covenant
          or condition contained in any Loan Document applicable to the Term
          Loan, unless such default is remedied within five Business Days after
          written notice thereof by the Lenders to the Borrower;

     (c)  any representation or warranty made by the Borrower hereunder, in any
          Officers' Certificate, any Loan Document or in any other document
          delivered to the Lenders in connection with any Loan Document
          applicable to the Term Loan shall prove to have been false or
          incorrect in any way when made or deemed to have been made except to
          the extent that circumstances giving rise to this Event of Default are
          cured within five Business Days after the Borrower has knowledge of
          the occurrence thereof,

     (d)  the Lenders shall make demand for payment of any principal, interest
          or other amount owing by the Borrower in respect of the Demand Loan,
          and the Lenders shall have exercised any recourse available against
          the Borrower in respect thereof;

     (e)  with respect to any indebtedness of the Borrower (other than the
          Obligations) under any one or more agreements, the Borrower shall fail
          to pay to any Person any indebtedness in an amount of not less than
          $25,000,000 when due (whether at scheduled maturity or by required
          prepayment, acceleration, demand or otherwise) or any breach, default
          or event of default shall occur, or any other event shall occur or
          condition shall exist, under any instrument, agreement or indenture
          pertaining thereto, and any such failure, breach, default or other
          event continues unremedied after any applicable grace period, and the
          effect thereof, in any case is to accelerate, or permit the holder(s)
          of such indebtedness to accelerate, the maturity of any such
          indebtedness or payment of any amount in respect of such indebtedness
          or any such indebtedness shall be declared to be due and payable or
          required to be prepaid or redeemed;

     (f)  the Borrower admits its inability to pay its debts generally as they
          become due or otherwise acknowledges its insolvency;

     (g)  the Borrower institutes any proceeding or takes any corporate action
          or executes any agreement to authorize its participation in or
          commencement of any proceeding:

                                   Page 130
<PAGE>
 
          (i)    seeking to adjudicate it a bankrupt or insolvent; or

          (ii)   seeking liquidation, dissolution, winding up, reorganization,
          arrangement, protection, relief or composition of it or any of its
          property or debt or making a proposal with respect to it under any law
          relating to bankruptcy, insolvency, reorganization or compromise of
          debts or other similar laws (including, without limitation, any
          application under the Companies' Creditors Arrangement Act (Canada) or
          any reorganization, arrangement or compromise of debt under the laws
          of its jurisdiction of incorporation);

     (h)  any proceeding is commenced against or affecting the Borrower:

          (i)    seeking to adjudicate it a bankrupt or insolvent; or

          (ii)   seeking liquidation, dissolution, winding up, reorganization,
          arrangement, protection, relief or composition of it or any of its
          property or debt or making a proposal with respect to it under any law
          relating to bankruptcy, insolvency, reorganization or compromise of
          debts or other similar laws (including, without limitation, any
          application under the Companies' Creditors Arrangement Act (Canada) or
          any reorganization, arrangement or compromise of debt under the laws
          of its jurisdiction of incorporation); or

          (iii)  seeking appointment of a receiver, trustee, agent, custodian or
          other similar official for it or for any substantial part of its
          properties and assets, including the Collateral or any part thereof.

     (i)  any creditor of the Borrower or any other Person shall privately
          appoint a receiver, trustee or similar official for any substantial
          part of the properties and assets of the Borrower, including the
          Collateral or any part thereof,

     (j)  if any execution, distress or other enforcement process, whether by
          court order or otherwise, becomes enforceable against any substantial
          property or assets of the Borrower, including the Collateral or any
          part thereof;

     (k)  if any event or proceeding is taken with respect to any part of the
          Collateral in any jurisdiction outside Canada which has an effect
          equivalent or similar to any of the events described in (g), (h), (I)
          or (j) above;

     (l)  a Material Adverse Effect shall have occurred in the opinion of the
          Lenders, acting reasonably;

     (m)  any Loan Document applicable to the Term Loan or the Hedge Agreement
          ceases to be in full force and effect or is declared by a court or
          tribunal of competent jurisdiction to be null and void or the validity
          or enforceability thereof is contested by the Borrower or the Borrower
          denies in writing that it has any or further liability or obligations
          under the Hedge Agreement or any Loan Document applicable to the Term
          Loan;

     (n)  if any Lien intended to be created by any of the Security Documents is
          not or 

                                   Page 131
<PAGE>
 
          ceases to be a valid and perfected Lien having the ranking or priority
          contemplated thereby;

     (o)  a breach or default by the Borrower of any of its obligations under
          the Hedge Agreement which continues unremedied beyond the grace
          periods provided for therein;

     (p)  any one or more material judgements or orders shall be rendered
          against the Borrower and either enforcement proceedings shall have
          been commenced by any creditor upon any such judgement or order, or
          there shall be a period of ten consecutive days during which a stay of
          enforcement proceedings of any such judgement or order by reason of a
          pending appeal or otherwise shall not be in effect; and

     (q)  the Pledged Securities, or any of them, shall cease to be freely
          tradeable or shall become subject to any restriction or limitation,
          contractual or otherwise (other than pursuant to the Pledge Agreement
          and the Escrow Agreement) which limits or otherwise restricts the
          transferability thereof.

10.2      REMEDIES UPON DEFAULT.

          Upon the occurrence of any Event of Default, the Lenders may: (i)
declare all Obligations in respect of the Term Loan, including (without
limitation) all accrued and unpaid interest thereon and all costs and expenses
relating thereto to be immediately due and payable; (ii) realize upon all or
part of the Collateral; and (iii) take such actions and commence such
proceedings as may be permitted at law or in equity (whether or not provided for
herein or in the Loan Documents applicable to the Term Loan) at such times and
in such manner as the Lenders in their sole discretion may consider expedient;
all without, except as may be required by applicable law, any additional notice,
presentment, demand, protest, notice of protest, dishonour or any other action.
The rights and remedies of the Lenders hereunder are cumulative and are in
addition to and not in substitution for any other rights or remedies provided by
applicable law or by any of the Loan Documents applicable to the Term Loan.

                                  ARTICLE 11
                                    GENERAL

11.1      RELIANCE AND NON-MERGER.

          All covenants, agreements, representations and warranties of the
Borrower made in any Loan Document or in any other document signed by the
Borrower and delivered in connection with the making of the Loan shall be deemed
to have been relied upon by the Lenders notwithstanding any investigation made
by or on behalf of the Lenders and shall survive the execution and delivery of
this Agreement and the other Loan Documents until the Borrower shall have
satisfied and performed all of its Obligations.

11.2      AMENDMENT AND WAIVER.

          No amendment or waiver of any provision of any Loan Document or
consent to any departure by the Borrower from any provision thereof is effective
unless it is in writing and signed by an officer of each of the Lenders. Such
amendment, waiver or consent shall be 

                                   Page 132
<PAGE>
 
effective only in the specific instance and for the specific purpose for which
it is given.

11.3      CREDIT INFORMATION

          The Lenders shall be entitled from time to time to obtain, provide and
exchange credit information relating to the Borrower, directly or indirectly,
from, to and with any credit reporting agency, credit bureau or any Person with
whom the Borrower has or may have financial relations, and the Lenders shall not
be liable to the Borrower by reason of any act or omission of the Lenders or any
other Person in obtaining, providing and exchanging such credit information or
declining or failing to do so.

11.4      NO SET-OFF BY THE BORROWER.

          The amounts payable by the Borrower hereunder shall not be subject to
any deduction, withholding, set-off or counterclaim by the Borrower for any
reason whatsoever.

11.1      SET-OFF BY THE LENDERS.

          Upon the making of a Demand or the occurrence and during the
continuance of any Default or Event of Default, the Lenders are hereby
authorized at any time and from time to time, to the fullest extent permitted by
law, to combine, set-off and apply any and all deposits at any time held and
other indebtedness at anytime owing by the Lenders to or for the credit or for
the account of the Borrower with or against any and all of the Obligations.

11.6      RELIANCE BY THE LENDERS.

          The Lenders shall be entitled to rely upon any schedule, certificate,
statement, report, notice or other document or written communication (including
any telecopy or other means of electronic communication) believed by them to be
genuine and correct.

11.7      NOTICES.

          Any notice or other communication given hereunder shall be in writing
and shall be sufficiently given or served: (i) if delivered by hand and shall be
deemed to have been given on the date it is delivered if such date is a Business
Day and such delivery was made during normal business hours of the recipient;
otherwise, it shall be deemed to have been validly and effectively given on the
Business Day next following such date of delivery; or (ii) if sent by facsimile
transmission and shall be deemed to have been given on the date that the
transmission is made if such date is a Business Day and such transmission was
made during normal business hours of the recipient; otherwise it shall be deemed
to have been validly and effectively given on the Business Day next following
such date of transmission. Notices and communications shall be addressed as
specified in Schedule A.

11.8      TIME.

          Time is of the essence of the Loan Documents.

11.9      FURTHER ASSURANCES.

          After the making of a Demand or the occurrence of a Default or an
Event of 

                                   Page 133
<PAGE>
 
Default, the Borrower shall at its own expense do, make, execute or deliver, or
cause to be done, made, executed or delivered by it or by other Persons, all
such further acts, documents and things in connection with the Loan and the Loan
Documents as the Lenders may reasonably require from time to time for the
purpose of giving effect to the Loan Documents, including (without limitation)
for the purpose of facilitating the enforcement of the Security Documents, all
immediately upon the request of the Lenders. Prior to the making of a Demand or
the occurrence of a Default or an Event of Default, the Borrower shall only be
obligated to do or make or cause to be done or made all of the acts and things
contemplated above in the event the Lenders are unable to do so in a proper and
timely manner (provided that the Borrower shall continue to be obligated to
execute such further documents contemplated above), in each case within a
reasonable time after a request therefor by the Lenders and all of the costs and
expenses incurred by the Lenders in connection therewith shall be payable in
accordance with the provisions of Section 3.4.

11.10     BINDING NATURE.

          This Agreement shall be binding upon and enure to the benefit of the
parties and their respective successors and permitted assigns.

11.11     ASSIGNMENT.

     (a)  Except as provided in this section 11.11, none of the rights or
          obligations hereunder shall be assignable or transferable by any party
          without the prior written consent of the other parties.

     (b)  Each of the Lenders may, without the consent of the Borrower:

          (i)   grant participations in all or any part of the Demand Loan
          and/or the Term Loan to one or more Persons (each a "Participant");

          (ii)  assign all or any part of their respective interests in the
          Demand Loan andlor the Term Loan to one or more Persons (each an
          "Assignee"); provided that prior to the making of a Demand or the
          occurrence of a Default or Event of Default, no assignment shall be
          made to any Person without the prior written consent of the. Borrower.
          which consent shall not be unreasonably withheld or delayed; and

          (iii) grant participations in or assign all or any part of the Demand
          Loan and/or the Term Loan to one or more affiliates (as such term is
          defined in the Business Corporations Act (Ontario)) of such Lender.

          However, if, prior to the making of a Demand or the occurrence of a
          Default or an Event of Default, the Borrower shall not have provided
          its prior written consent to the entitlement of a Participant or
          Assignee to the benefits of section 4.2, such Participant or Assignee
          shall only have the benefit of section 4.2 to the extent that, after
          giving effect to such participation or assignment, the aggregate
          payments the Borrower is required to make pursuant to section 4.2 to
          such Participant or Assignee in respect of the Demand Loan and/or the
          Term Loan so participated or assigned do not exceed the aggregate
          payments that the Borrower would have been required to make pursuant
          to section 4.2 to the Lenders granting such 

                                   Page 134
<PAGE>
 
          participation or making such assignment in respect of the Demand Loan
          and/or the Term Loan so participated or assigned before giving effect
          to such participation or assignment other than as a result of a change
          in applicable law.

     (c)  The Lenders may deliver a copy of any financial statement or any other
          information relating to the prospects, business, property or condition
          (financial or otherwise) of the Borrower which may be furnished to it
          under this Agreement or otherwise to any Participant or Assignee or
          any prospective Participant or Assignee; provided that each such
          delivery is made on the understanding that the information contained
          therein is confidential in nature.

     (d)  Without limitation of its obligations hereunder, the Borrower shall
          give such certificates, acknowledgements and further assurances in
          respect of this Agreement and the Demand Loan and/or the Term Loan, as
          the case may be, as the Lenders may require in connection with any
          participation or assignment pursuant to this section 11.11.

     (e)  Except in the case of an Assignee which has delivered an assumption
          agreement pursuant to section 11.11(f), prior to the occurrence of a
          Default or an Event of Default, a Lender granting a participation or
          making an assignment shall act on behalf of all of its Participants
          and Assignees in all dealings with the Borrower in respect of the
          Demand Loan and/or the Term Loan, as the case may be.

     (f)  Any Lender may, but shall not be bound to, deliver to the Borrower an
          agreement by which any Assignee of such Lender assumes the obligations
          and agrees to be bound by all the terms and conditions of this
          Agreement, all as if such Assignee has been an original party hereto.
          Upon any such assignment and such assumption of the obligations of a
          Lender by an Assignee, the assigning Lender and the Borrower shall be
          mutually released from their respective obligations to each other
          hereunder to the extent of such assignment and assumption and shall
          thenceforth have no liability or obligations to each other to such
          extent, except in respect of matters which shall have arisen prior to
          such assignment.

     (g)  Prior to the making of a Demand or the occurrence of a Default or
          Event of Default, each of the Lenders shall notify the Borrower of any
          participation granted or assignment made in all or any part of the
          Demand Loan and/or the Term Loan within a reasonable period after the
          occurrence thereof.

11.12     ENTIRE AGREEMENT.

          The Loan Documents constitute the entire agreement between the parties
and supersede and replace any prior understandings or arrangements between the
parties pertaining to the Loan. There are no warranties, representations or
agreements between the parties in connection with such matters except as
specifically provided in the Loan Documents.

11.13     COUNTERPARTS.

          This Agreement may be signed in any number of counterparts, each of
which shall be deemed to be an original, but all such separate counterparts
shall together constitute one and the same instrument.

                                   Page 135
<PAGE>
 
          IN WITNESS WHEREOF this Agreement has been executed by the parties
hereto on the date first written above.

                                   NEWBRIDGE NETWORKS CORPORATION

                                        Per:   /s/ KENNETH B. WIGGLESWORTH
                                             ---------------------------------
                                             (Authorized Signing Officer)
                                              VP Finance, CFO


                                        Per:   /s/ DOUGLAS K. MCCARTHY
                                             ---------------------------------
                                             (Authorized Signing Officer)
                                              VP Finance and Treasurer



                                        CITIBANK CANADA

                                        Per:   /s/ JEFFREY DRUMMOND
                                             ---------------------------------
                                             Vice President, Citibank Canada
                                             (Authorized Signing Officer)


                                        Per: _________________________________
                                             (Authorized Signing Officer)

                                   Page 136
<PAGE>
 
                                  SCHEDULE A

For the purposes of the Agreement, the following.terms shall have the following
meanings:

Branch of Account:                  Citibank Canada
                                    Toronto, Ontario
                                    Via IIPS CITICATT

Due Date:                           January 29, 2003

Interest Payment Dates:             Demand Loan - On the last day of each
                                    month, commencing on March 2, 1998.

                                    Term Loan - The last day of January and
                                    July until and including the Due Date,
                                    commencing on July 30, 1998.

Pro Rata Shares:                    Citibank Canada - 100%

Notices:                            If to the Borrower:

                                    Newbridge Networks Corporation
                                    600 March Road
                                    Kanata, Ontario
                                    K2K 3E6

                                    Attention: Ken Bellows
                                    Fax: (613) 591-1100

                                    If to the Lenders:

                                    Citibank Canada
                                    630 Blvd. Rene Levesque West
                                    Suite 2450
                                    Montreal, Quebec
                                    H3B IS6

                                    Attention:  Jeffrey Drummond
                                    Fax: (514) 393-7545

                                    And to:

                                    Citibank Canada
                                    123 Front Street West
                                    Toronto, Ontario
                                    M5J 2M3

                                    Attention:  Ammar AI-Joundi
                                    Fax: (416) 947-5642

Pledged Securities:                 545,976 common shares of Northern
                                    Telecom Limited, as evidenced by share
                                    certificate no. NM 139073.

                                   Page 137
<PAGE>
 
                                  SCHEDULE B
                      FORM OF DEMAND LOAN ADVANCE NOTICE

JANUARY 30, 1998

Citibank Canada
630 Blvd. Rene Levesque West
Suite 2450
Montreal, Quebec H3B 1S6

Attention:   Jeffrey Drummond

Dear Sirs:

     The undersigned, Newbridge Networks Corporation (the "Borrower"), refers to
the Loan Agreement dated as of the 30th day of January, 1998 (the "Loan
Agreement", the terms defined therein being used herein as therein defined)
among the Borrower, Citibank Canada and such other parties as are lenders
thereto, and hereby gives you notice pursuant to section 2.1(b) of the Loan
Agreement that the Borrower hereby requests the Advance under the Demand Loan,
and in that connection sets forth the information relating to such Advance as
required by section 2.1(b) of the Loan Agreement:

(a)  The Advance Date is January 30, 1998.

(b)  The aggregate amount of the Advance is $15,578,670.

The undersigned certifies that:

(a)  the representations and warranties of the Borrower contained in the Loan
     Agreement are true and correct as of the date hereof with the same force
     and effect as if such representations and warranties had been made on and
     as of the date hereof;

(b)  the Borrower has fulfilled and complied with all covenants contained in the
     Loan Agreement to be performed or caused to be performed by it at or prior
     to the date hereof; and

(c)  no Default or Event of Default has occurred.--

                                        Yours very truly,

                                        NEWBRIDGE NETWORKS CORPORATION

                                        BY: _________________________________
                                        TITLE:

                                   Page 138
<PAGE>
 
                                  SCHEDULE C
                       FORM OF TERM LOAN ADVANCE NOTICE

January 30, 1998

Citibank Canada
630 Blvd. Rene Levesque West
Suite 2450
Montreal, Quebec H3B IS6

Attention:  Jeffrey Drummond

Dear Sirs.

     The undersigned, Newbridge Networks Corporation (the "Borrower"), refers to
the Loan Agreement dated as of the 30th day of January, 1998 (the "Loan
Agreement", the terms defined therein being used herein as therein defined)
among the Borrower, Citibank Canada and such other parties as are lenders
thereto, and hereby gives you notice pursuant to section 2.2(b) of the Loan
Agreement that the Borrower hereby requests an Advance under the Term Loan, and
in that connection sets forth the information relating to such Advance (the
"Proposed Advance") as required by section 2.2(b) of the Loan Agreement:

(a)  The Advance Date of the Proposed Advance is  ,  .

(b)  The aggregate amount of the Proposed Advance is $  .

The undersigned certifies that:

(a)  the representations and warranties of the Borrower contained in the Loan
     Agreement are true and correct as of the date hereof with the same force
     and effect as if such representations and warranties had been made on and
     as of the date hereof,

(b)  the Borrower has fulfilled and complied with all covenants contained in the
     Loan Agreement to be performed or caused to be performed by it at or prior
     to the date hereof, and

(c)  no Default or Event of Default has occurred.

                                        Yours very truly,

                                        NEWBRIDGE NETWORKS CORPORATION

                                        BY: _________________________________
                                        TITLE:

                                   Page 139
<PAGE>
 
                                 EXHIBIT 10.10

                                   Page 140
<PAGE>
 
                        Newbridge Networks Corporation
                                600 March Road
                                Kanata, Ontario
                                Canada K2K 2E6



                          6.51% Senior Notes due 2003



                                                            As of April 28, 1998


TO THE PURCHASERS WHOSE NAMES
     APPEAR IN THE ACCEPTANCE
     FORM AT END HEREOF:

Ladies and Gentlemen:


          NEWBRIDGE NETWORKS CORPORATION, a company incorporated under the laws
of Canada (the "COMPANY"), agrees with each of the purchasers whose names appear
in the acceptance form at the end hereof (each, a "PURCHASER" and, collectively,
the "PURCHASERS") as follows:

AUTHORIZATION OF NOTES.

          The Company will authorize the issue and sale of U.S.$225,000,000
aggregate principal amount of its 6.51% Senior Notes due 2003 (the "NOTES", such
term to include any such notes issued in substitution therefor pursuant to
Section 14). The Notes shall be substantially in the form set out in Exhibit 1,
with such changes therefrom, if any, as may be approved by each Purchaser and
the Company.  Certain capitalized terms used in this Agreement are defined in
Schedule B; references to a "Schedule" or an "Exhibit" are, unless otherwise
specified, to a Schedule or an Exhibit attached to this Agreement.

SALE AND PURCHASE OF NOTES.

          Subject to the terms and conditions of this Agreement, the Company
will issue and sell to each Purchaser and each Purchaser will purchase from the
Company, at the Closing provided for in Section 3, Notes in the principal amount
specified opposite such Purchaser's name in Schedule A at the purchase price of
100% of the principal amount thereof.  The Purchasers' obligations hereunder are
several and not joint obligations and no Purchaser shall have any liability to
any Person for the performance or non-performance of any obligation by any other
Purchaser hereunder.

                                    Page 146
<PAGE>
 
CLOSING.

          The sale and purchase of the Notes to be purchased by each Purchaser
shall occur at the offices of Milbank, Tweed, Hadley & McCloy, One Chase
Manhattan Plaza, New York, New York 10005, at 10:00 a.m., New York City time, at
a closing (the "CLOSING") on April 28, 1998 or on such other Business Day
thereafter on or prior to April 30, 1998 as may be agreed upon by the Company
and the Purchasers.  At the Closing the Company will deliver to each Purchaser
the Notes to be purchased by such Purchaser in the form of a single Note (or
such greater number of Notes in denominations of at least U.S.$100,000 as such
Purchaser may request) dated the date of the Closing and registered in such
Purchaser's name (or in the name of such Purchaser's nominee), against delivery
by such Purchaser to the Company or its order of immediately available funds to
The Chase Manhattan Bank, New York, New York, ABA No. 021000021, Intermediary
Bank Code ROYCCAT2, for further credit to Royal Bank of Canada, 90 Sparks
Street, Ottawa, Ontario, Canada, Transit No. 00006 for credit to the account of
the Company, Account No. 00006 4023255.  If at the Closing the Company shall
fail to tender such Notes to any Purchaser as provided above in this Section 3,
or any of the conditions specified in Section 4 shall not have been fulfilled to
such Purchaser's satisfaction, such Purchaser shall, at such Purchaser's
election, be relieved of all further obligations under this Agreement, without
thereby waiving any rights such Purchaser may have by reason of such failure or
such nonfulfillment.

CONDITIONS TO CLOSING.

          Each Purchaser's obligation to purchase and pay for the Notes to be
sold to such Purchaser at the Closing is subject to the fulfillment to such
Purchaser's satisfaction, prior to or at the Closing, of the following
conditions:

REPRESENTATIONS AND WARRANTIES.

          The representations and warranties of the Company in this Agreement
shall be correct when made and at the time of the Closing.

PERFORMANCE; NO DEFAULT.


          The Company shall have performed and complied with all agreements and
conditions contained in this Agreement required to be performed or complied with
by it prior to or at the Closing and after giving effect to the issue and sale
of the Notes (and the application of the proceeds thereof as contemplated by
Section 5.14) no Default or Event of Default shall have occurred and be
continuing.

4.3. COMPLIANCE CERTIFICATES.

          (a)  Officer's Certificate.  The Company shall have delivered to such
               ---------------------                                           
Purchaser an Officer's Certificate, dated the date of the Closing, certifying
that the conditions specified in Sections 4.1, 4.2 and 4.9 have been fulfilled.

          (b)  Secretary's Certificate.  The Company and each Subsidiary
               -----------------------         
Guarantor shall have delivered to such Purchaser a certificate certifying as to
the resolutions attached thereto and other corporate proceedings relating to the
authorization, execution and delivery of the Notes, this Agreement and the
Subsidiary Guarantees, as applicable.

                                    Page 147
<PAGE>
 
OPINIONS OF COUNSEL.

          Such Purchaser shall have received opinions in form and substance
satisfactory to such Purchaser, dated the date of the Closing (a) from (i)
                                                               -        - 
Hunton & Williams, U.S. counsel for the Company, and (ii) Osler, Hoskin &
                                                      --                 
Harcourt, Canadian counsel for the Company, covering the matters set forth in
Exhibits 4.4(a)(i) and 4.4(a)(ii), respectively, and covering such other matters
incident to the transactions contemplated hereby as such Purchaser or the
Purchasers' counsel may reasonably request (and the Company hereby instructs its
counsel to deliver such opinions to the Purchasers) and (b) from Milbank, Tweed,
                                                         -                      
Hadley & McCloy, the Purchasers' special New York counsel in connection with
such transactions, substantially in the form set forth in Exhibit 4.4(b) and
covering such other matters incident to such transactions as such Purchaser may
reasonably request.

PURCHASE PERMITTED BY APPLICABLE LAW, ETC.

          On the date of the Closing such Purchaser's purchase of Notes shall
(i) be permitted by the laws and regulations of each jurisdiction to which such
 -                                                                             
Purchaser is subject, without recourse to provisions (such as Section 1405(a)(8)
of the New York Insurance Law) permitting limited investments by insurance
companies without restriction as to the character of the particular investment,
(ii) not violate any applicable law or regulation (including, without
 --                                                                  
limitation, Regulation U, T or X of the Board of Governors of the Federal
Reserve System) and (iii) not subject such Purchaser to any tax, penalty or
                     ---                                                   
liability under or pursuant to any applicable law or regulation, which law or
regulation was not in effect on the date hereof.  If requested by such
Purchaser, such Purchaser shall have received an Officer's Certificate
certifying as to such matters of fact as such Purchaser may reasonably specify
to enable such Purchaser to determine whether such purchase is so permitted.

SALE OF OTHER NOTES.

          Contemporaneously with the Closing the Company shall sell to each
other Purchaser and each other Purchaser shall purchase the Notes to be
purchased by it at the Closing as specified in Schedule A.

PAYMENT OF SPECIAL COUNSEL FEES.

          Without limiting the provisions of Section 16.1, the Company shall
have paid on or before the Closing the fees, charges and disbursements of the
Purchasers' special counsel referred to in Section 4.4 to the extent reflected
in a statement of such counsel rendered to the Company at least one Business Day
prior to the Closing.

PRIVATE PLACEMENT NUMBER.

          A Private Placement number issued by Standard & Poor's CUSIP Service
Bureau (in cooperation with the Securities Valuation Office of the National
Association of Insurance Commissioners) shall have been obtained for the Notes.

CHANGES IN CORPORATE STRUCTURE.

          Except as specified in Schedule 4.9, the Company shall not have
changed its jurisdiction of incorporation or been a party to any merger or
consolidation and shall 

                                    Page 148
<PAGE>
 
not have succeeded to all or any substantial part of the liabilities of any
other entity, at any time following the date of the most recent financial
statements referred to in Schedule 5.5.

EVIDENCE OF CONSENT TO RECEIVE SERVICE OF PROCESS.

          Such Purchaser shall have received, in form and substance satisfactory
to such Purchaser, evidence of the consent of Newbridge Networks Inc. to the
appointment and designation provided for by Section 23 hereof for the period
from the date of Closing through April 30, 2004.

SUBSIDIARY GUARANTEES.

          You shall have received a true and complete copy of a Subsidiary
Guarantee duly executed and delivered by each Subsidiary Guarantor identified in
Schedule 5.4, and each of such Subsidiary Guarantees shall be in full force and
effect, and the representations and warranties of the Subsidiary Guarantor in
such Subsidiary Guarantee shall be correct when made and at the time of the
Closing.

PROCEEDINGS AND DOCUMENTS.

          All corporate and other proceedings in connection with the
transactions contemplated by this Agreement and all documents and instruments
incident to such transactions shall be satisfactory to such Purchaser and the
Purchasers' special counsel, and such Purchaser and such special counsel shall
have received all such counterpart originals or certified or other copies of
such documents as such Purchaser or such special counsel may reasonably request.

REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

          The Company represents and warrants to each Purchaser that:

ORGANIZATION; POWER AND AUTHORITY.

          The Company has been duly organized and is validly existing as a
corporation under the Canada Business Corporations Act, and is duly qualified as
a foreign corporation and, if applicable, is in good standing in each
jurisdiction in which such qualification is required by law, other than those
jurisdictions as to which the failure to be so qualified or in good standing
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.  The Company has the corporate power and authority to
own or hold under lease the properties it purports to own or hold under lease,
to transact the business it transacts and proposes to transact, to execute and
deliver this Agreement and the Notes and to perform the provisions hereof and
thereof.

AUTHORIZATION, ETC.

          This Agreement and the Notes have been duly authorized by all
necessary corporate action on the part of the Company, and this Agreement
constitutes, and upon execution and delivery thereof each Note will constitute,
a legal, valid and binding obligation of the Company enforceable against the
Company in accordance with its terms, except as such enforceability may be
limited by (i) applicable bankruptcy, 
            -  

                                    Page 149
<PAGE>
 
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and (ii) general principles of equity
                                                --
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).

DISCLOSURE.

          The Company, through its agent, BancAmerica Robertson Stephens, has
delivered to each Purchaser a copy of a Placement Memorandum, dated March, 1998
(the "MEMORANDUM"), relating to the transactions contemplated hereby. Except as
disclosed in Schedule 5.3, this Agreement, the Memorandum, the documents,
certificates or other writings identified in Schedule 5.3 and the financial
statements listed in Schedule 5.5, taken as a whole, do not contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein not misleading in light of the circumstances under
which they were made. Except as disclosed in the Memorandum or as expressly
described in Schedule 5.3, or in one of the documents, certificates or other
writings identified therein, or in the financial statements listed in Schedule
5.5, since April 30, 1997, there has been no change in the financial condition,
operations, business or properties of the Company or any of its Subsidiaries
except changes that individually or in the aggregate would not reasonably be
expected to have a Material Adverse Effect.

ORGANIZATION AND OWNERSHIP OF SHARES OF SUBSIDIARIES.

          (a)  Schedule 5.4 is (except as noted therein) a complete and correct
list of the Company's Material Subsidiaries, showing, as to each such
Subsidiary, the correct name thereof, the jurisdiction of its organization, the
percentage of shares of each class of its capital stock or similar equity
interests outstanding owned by the Company and each other Subsidiary and whether
as of the date of the Closing such Subsidiary will be a Subsidiary Guarantor.

          (b)  All of the outstanding shares of capital stock or similar equity
interests of each Subsidiary shown in Schedule 5.4 as being owned by the Company
and its Subsidiaries have been validly issued, are fully paid and nonassessable
and are owned by the Company or another Subsidiary free and clear of any Lien
(except as otherwise disclosed in Schedule 5.4).

          (c)  Each Subsidiary identified in Schedule 5.4 is a corporation or
other legal entity duly organized, validly existing and, if applicable, in good
standing under the laws of its jurisdiction of organization, and is duly
qualified as a foreign corporation or other legal entity and, if applicable, is
in good standing in each jurisdiction in which such qualification is required by
law, other than those jurisdictions as to which the failure to be so qualified
or in good standing would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect. Each such Subsidiary has the
corporate or other power and authority to own or hold under lease the properties
it purports to own or hold under lease and to transact the business it transacts
and proposes to transact.

          (d)  As of the date hereof, the group comprised of the Company and its
Material Subsidiaries accounts for not less than 95% of Consolidated Total
Assets and 95% of Consolidated Net Income.

                                    Page 150
<PAGE>
 
FINANCIAL STATEMENTS.

          The Company has delivered to each Purchaser copies of the financial
statements of the Company and its Subsidiaries listed on Schedule 5.5.  All of
said financial statements (including in each case the related schedules and
notes) fairly present in all material respects the consolidated financial
position of the Company and its Subsidiaries as of the respective dates
specified in such Schedule and the consolidated results of their operations and
changes in financial position for the respective periods so specified and have
been prepared in accordance with Canadian GAAP consistently applied throughout
the periods involved except as set forth in the notes thereto (subject, in the
case of any interim financial statements, to normal year-end adjustments).

COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC.

          The execution, delivery and performance by the Company of this
Agreement and the Notes and by each Subsidiary Guarantor of each Subsidiary
Guarantee will not (i) contravene, result in any breach of, or constitute a
                    -                                                      
default under, or result in the creation of any Lien in respect of any property
of the Company or any Material Subsidiary under, any indenture, mortgage, deed
of trust, loan, purchase or credit agreement, lease, or any other Material
agreement or instrument to which the Company or any Material Subsidiary is bound
or by which the Company or any Material Subsidiary or any of their respective
properties may be bound or affected, (ii) conflict with or result in a breach of
                                      --                                        
any of the terms, conditions or provisions of any order, judgment, decree, or
ruling of any court, arbitrator or Governmental Authority applicable to the
Company or any Material Subsidiary or (iii) violate any provision of the
                                       ---                              
corporate charter or by-laws of the Company or any Material Subsidiary or any
statute or other rule or regulation of any Governmental Authority applicable to
the Company or any Material Subsidiary.

GOVERNMENTAL AUTHORIZATIONS, ETC.

          Except as disclosed in Schedule 5.7, no consent, approval or
authorization of, or registration, filing or declaration with, any Governmental
Authority is required in connection with the execution, delivery or performance
by the Company of this Agreement or the Notes or by any Subsidiary Guarantor of
any Subsidiary Guarantee including, without limitation, any thereof required in
connection with the obtaining of U.S. Dollars to make payments under this
Agreement, the Notes and the Subsidiary Guarantees and the payment of such U.S.
Dollars to Persons resident in the United States of America.  It is not
necessary to ensure the legality, validity, enforceability or admissibility into
evidence in Canada of this Agreement or the Notes that any thereof or any other
document be filed, recorded or enrolled with any Governmental Authority, or that
any such agreement or document be stamped with any stamp, registration or
similar transaction tax.

LITIGATION; OBSERVANCE OF STATUTES AND ORDERS.

          (a)  Except as disclosed in Schedule 5.8, there are no actions, suits
or proceedings pending or, to the knowledge of the Company, threatened against
or affecting the Company or any Subsidiary or any property of the Company or any
Subsidiary in any court or 

                                    Page 151
<PAGE>
 
before any arbitrator of any kind or before or by any Governmental Authority
that, individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect.

          (b)  Neither the Company nor any Subsidiary is in default under any
order, judgment, decree or ruling of any court, arbitrator or Governmental
Authority or is in violation of any applicable law, ordinance, rule or
regulation (including without limitation Environmental Laws) of any Governmental
Authority, which default or violation, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect.

TAXES; FOREIGN TAXES.

          (a)  The Company and each of its Material Subsidiaries have filed all
income tax returns that are required to have been filed in any jurisdiction, and
have paid all taxes shown to be due and payable on such returns and all other
taxes and assessments payable by them, to the extent such taxes and assessments
have become due and payable and before they have become delinquent, except for
any tax return or any taxes and assessments (i) the amount of which (or, in the
                                             - 
case of any tax return, such failure to file) is not individually or in the
aggregate Material or (ii) in the case of any such tax or assessment, the
                       --
amount, applicability or validity of which is currently being contested in good
faith by appropriate proceedings and with respect to which the Company or a
Material Subsidiary, as the case may be, has established adequate reserves in
accordance with Canadian GAAP.

          (b)  No liability for any tax (whether income, documentary, sales,
stamp, registration, issue, capital, property, excise or otherwise), duty, levy,
impost, fee, charge or withholding (each a "TAX" and collectively "TAXES"),
directly or indirectly, imposed, assessed, levied or collected by or for the
account of any Governmental Authority of or in Canada or any political
subdivision thereof or therein (an "APPLICABLE TAXING AUTHORITY") will be
incurred by the Company or any holder of a Note as a result of the execution or
delivery of this Agreement or the Notes and, based on present law, no deduction
or withholding in respect of Taxes imposed by or for the account of any
Applicable Taxing Authority or any jurisdiction (other than the United States of
America) by or through which payments with respect to the Notes are made by or
for the Company is required to be made from any payment by the Company under
this Agreement or the Notes except for any such withholding or deduction arising
out of the conditions described in the proviso to Section 13(a).

TITLE TO PROPERTY; LEASES.

          The Company and its Subsidiaries have good and sufficient title to
their respective Material properties, including all such properties reflected in
the most recent audited balance sheet referred to in Section 5.5 or purported to
have been acquired by the Company or any Subsidiary after said date (except as
sold or otherwise disposed of in the ordinary course of business), in each case
free and clear of Liens prohibited by this Agreement, except for those defects
in title and Liens that, individually or in the aggregate, would not have a
Material Adverse Effect.  All Material leases to which the Company or any
Subsidiary is a party as lessee are valid and subsisting and are in full force
and effect in all material respects.

LICENSES, PERMITS, ETC.

          Except as disclosed in Schedule 5.11, the Company and its Subsidiaries
own or possess all licenses, permits, franchises, authorizations, patents,
copyrights, service marks, trademarks and trade names, or rights thereto, that
are Material, without 

                                    Page 152
<PAGE>
 
known conflict with the rights of others, except for those conflicts that,
individually or in the aggregate, would not have a Material Adverse Effect.

COMPLIANCE WITH ERISA.

          (a)  The Company and each ERISA Affiliate have operated and
administered each Plan in compliance with all applicable laws except for such
instances of noncompliance as have not resulted in and could not reasonably be
expected to result in a Material Adverse Effect. Neither the Company nor any
ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or
the penalty or excise tax provisions of the Code relating to employee benefit
plans (as defined in Section 3 of ERISA), and no event, transaction or condition
has occurred or exists that would reasonably be expected to result in the
incurrence of any such liability by the Company or any ERISA Affiliate, or in
the imposition of any Lien on any of the rights, properties or assets of the
Company or any ERISA Affiliate, in either case pursuant to Title I or IV of
ERISA or to such penalty or excise tax provisions or to Section 401(a)(29) or
412 of the Code, other than such liabilities or Liens as would not be
individually or in the aggregate Material.

          (b)  Neither the Company nor any ERISA Affiliate maintains or
administers (or has maintained or administered during the past five years) any
pension plan subject to Title IV of ERISA.

          (c)  The Company and its ERISA Affiliates have not incurred withdrawal
liabilities (and are not subject to contingent withdrawal liabilities) under
section 4201 or 4204 of ERISA in respect of Multiemployer Plans.

          (d)  The expected postretirement benefit obligation (determined as of
the last day of the Company's most recently ended fiscal year in accordance with
Financial Accounting Standards Board Statement No. 106, without regard to
liabilities attributable to continuation coverage mandated by section 4980B of
the Code) of the Company and its Subsidiaries is not Material.

          (e)  The execution and delivery of this Agreement and the issuance and
sale of the Notes hereunder will not involve any transaction that is subject to
the prohibitions of section 406 of ERISA or in connection with which a tax could
be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation
by the Company in the first sentence of this Section 5.12(e) is made in reliance
upon and subject to the accuracy of the Purchasers' representations in Section
6.2 as to the sources of the funds to be used to pay the purchase price of the
Notes to be purchased by the Purchasers.

          (f)  Each Foreign Pension Plan has been maintained in compliance with
its terms and with the requirements of any and all applicable laws, statutes,
rules, regulations and court orders except for such instances of noncompliance
as have not resulted in and could not reasonably be expected to result in a
Material Adverse Effect. For purposes of this paragraph,

          FOREIGN PENSION PLAN" means any plan, fund (including, without
limitation, any superannuation fund) or other similar program established or
maintained outside the United States of America by the Company or any Subsidiary
primarily for the benefit of employees residing outside the United States of
America of the Company or such Subsidiary which plan, fund or other similar
program provides for retirement income for such employees, results in a deferral
of income for such employees in contemplation of retirement or provides for
payments to be made to such employees upon termination of employment, and which
plan is not subject to ERISA or the Code.

                                    Page 153
<PAGE>
 
PRIVATE OFFERING BY THE COMPANY.

          Neither the Company nor anyone acting on its behalf has offered the
Notes or any similar securities for sale to, or solicited any offer to buy any
of the same from, or otherwise approached or negotiated in respect thereof with,
any person other than the Purchasers and not more than 70 other Institutional
Investors, each of which has been offered the Notes at a private sale for
investment.  Neither the Company nor anyone acting on its behalf has taken, or
will take, any action that would subject the issuance or sale of the Notes to
the registration requirements of Section 5 of the Securities Act.

USE OF PROCEEDS; MARGIN REGULATIONS.

          The Company will apply the proceeds of the sale of the Notes for
general corporate purposes.  No part of the proceeds from the sale of the Notes
hereunder will be used, directly or indirectly, for the purpose of buying or
carrying any margin stock within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System (12 CFR 221), or for the purpose of
buying or carrying or trading in any securities under such circumstances as to
involve the Company in a violation of Regulation X of said Board (12 CFR 224) or
to involve any broker or dealer in a violation of Regulation T of said Board (12
CFR 220).  Margin stock does not constitute more than 10% of the value of the
consolidated assets of the Company and its Subsidiaries and the Company does not
have any present intention that margin stock will constitute more than 10% of
the value of such assets.  As used in this Section, the terms "MARGIN STOCK" and
"PURPOSE OF BUYING OR CARRYING" shall have the meanings assigned to them in said
Regulation U.

EXISTING INDEBTEDNESS.

          Except as described therein, Schedule 5.15 sets forth a complete and
correct list of all outstanding Indebtedness of the Company and its Subsidiaries
as of February 1, 1998, since which date there has been no Material change in
the amounts, interest rates, sinking funds, installment payments or maturities
of the Indebtedness of the Company or its Subsidiaries.  Neither the Company nor
any Subsidiary is in default and no waiver of default is currently in effect, in
the payment of any principal or interest on any Indebtedness of the Company or
such Subsidiary and no event or condition exists with respect to any
Indebtedness of the Company or any Subsidiary the outstanding principal amount
of which exceeds C$25,000,000 (or the equivalent thereof, as of any date of
determination, in any other currency) that would permit (or that with notice or
the lapse of time, or both, would permit) one or more Persons to cause such
Indebtedness to become due and payable before its stated maturity or before its
regularly scheduled dates of payment.

FOREIGN ASSETS CONTROL REGULATIONS, ETC.

          Neither the sale of the Notes by the Company hereunder nor its use of
the proceeds thereof will violate the United States Trading with the Enemy Act,
as amended, or any of the foreign assets control regulations of the United
States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any
enabling legislation or executive order relating thereto.

                                    Page 154
<PAGE>
 
STATUS UNDER CERTAIN STATUTES.

          Neither the Company nor any Subsidiary is subject to regulation under
the United States Investment Company Act of 1940, as amended, the United States
Public Utility Holding Company Act of 1935, as amended, the United States
Interstate Commerce Act, as amended, or the United States Federal Power Act, as
amended.

RANKING.

          All liabilities of the Company under the Notes constitute direct,
unconditional and general obligations of the Company and rank in right of
payment either pari passu or senior to all other Indebtedness of the Company,
               ---- -----                                                    
except for such Indebtedness which is preferred as a result of being secured
(but then only to the extent of such security).

REPRESENTATIONS OF SUBSIDIARY GUARANTORS.

          The representations and warranties of each Subsidiary Guarantor
contained in the Subsidiary Guarantee of such Subsidiary Guarantor are true and
correct as of the date they are made.

REPRESENTATIONS OF THE PURCHASER.

PURCHASE FOR INVESTMENT.

          Each Purchaser represents that such Purchaser is purchasing the Notes
for its own account or for one or more separate accounts maintained by it or for
the account of one or more pension or trust funds and not with a view to the
distribution thereof, provided that the disposition of such Purchaser's or their
                      --------                                                  
property shall at all times be within such Purchaser's or their control.  Each
Purchaser understands that the Notes have not been registered under the
Securities Act or registered or qualified under any other applicable securities
laws and may be resold only if registered pursuant to the provisions of the
Securities Act or if an exemption from registration is available, except under
circumstances where neither such registration nor such an exemption is required
by law, and that the Company is not required to register the Notes.

SOURCE OF FUNDS.


          Each Purchaser represents that at least one of the following
statements is an accurate representation as to each source of funds (a "Source")
to be used by such Purchaser to pay the purchase price of the Notes to be
purchased by such Purchaser hereunder:

          (a)  the Source is an "insurance company general account" (as the term
     is defined in PTE 95-60 (issued July 12, 1995)) in respect of which the
     reserves and liabilities (as defined by the annual statement for life
     insurance companies approved by the National Association of Insurance
     Commissioners (the "NAIC ANNUAL STATEMENT")) for the general account
     contract(s) held by or on behalf of any employee benefit plan together with
     the amount of the reserves and liabilities for the general account
     contract(s) held by or on behalf of any other employee benefit plans
     maintained by the same employer (or affiliate thereof as defined in PTE 95-
     60) or by the same employee organization in the general account do not
     exceed 10% of the total reserves and liabilities

                                    Page 155
<PAGE>
 
     of the general account (exclusive of separate account liabilities) plus
     surplus as set forth in the NAIC Annual Statement filed with such
     Purchaser's state of domicile; or

          (b)  the Source is a separate account that is maintained solely in
     connection with such Purchaser's fixed contractual obligations under which
     the amounts payable, or credited, to any employee benefit plan (or its
     related trust) that has any interest in such separate account (or to any
     participant or beneficiary of such plan (including any annuitant)) are not
     affected in any manner by the investment performance of the separate
     account; or

          (c)  the Source is either (i) an insurance company pooled separate
     account, within the meaning of PTE 90-1 (issued January 29, 1990), or (ii)
     a bank collective investment fund, within the meaning of the PTE 91-38
     (issued July 12, 1991) and, except as disclosed by such Purchaser to the
     Company in writing pursuant to this paragraph (c), no employee benefit plan
     or group of plans maintained by the same employer or employee organization
     beneficially owns more than 10% of all assets allocated to such pooled
     separate account or collective investment fund; or

          (d)  the Source constitutes assets of an "investment fund" (within the
     meaning of Part V of the QPAM Exemption) managed by a "qualified
     professional asset manager" or "QPAM" (within the meaning of Part V of the
     QPAM Exemption), no employee benefit plan's assets that are included in
     such investment fund, when combined with the assets of all other employee
     benefit plans established or maintained by the same employer or by an
     affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of
     such employer or by the same employee organization and managed by such
     QPAM, exceed 20% of the total client assets managed by such QPAM, the
     conditions of Part I(c) and (g) of the QPAM Exemption are satisfied,
     neither the QPAM nor a person controlling or controlled by the QPAM
     (applying the definition of "control" in Section V(e) of the QPAM
     Exemption) owns a 5% or more interest in the Company and (i) the identity
                                                               -              
     of such QPAM and (ii) the names of all employee benefit plans whose assets
                       --                                                      
     are included in such investment fund have been disclosed to the Company in
     writing pursuant to this paragraph (d); or

          (e)  the Source is a governmental plan; or

          (f)  the Source is one or more employee benefit plans, or a separate
     account or trust fund comprised of one or more employee benefit plans, each
     of which has been identified to the Company in writing pursuant to this
     paragraph (f); or

          (g)  the Source does not include assets of any employee benefit plan,
     other than a plan exempt from the coverage of ERISA.

As used in this Section 6.2, the terms "EMPLOYEE BENEFIT PLAN", "GOVERNMENTAL
PLAN", "PARTY IN INTEREST" and "SEPARATE ACCOUNT" shall have the respective
meanings assigned to such terms in Section 3 of ERISA.

RESALE IN CANADA.

          Each Purchaser represents that it will not resell the Notes in any
province of Canada or to a resident of any province of Canada until 90 days have
elapsed from the date of the Closing.

                                    Page 156
<PAGE>
 
INFORMATION AS TO COMPANY.

FINANCIAL AND BUSINESS INFORMATION.


          The Company shall deliver to each holder of Notes that is an
Institutional Investor:

          (a)  Quarterly Statements -- within 60 days after the end of each
               --------------------                                        
     quarterly fiscal period in each fiscal year of the Company (other than the
     last quarterly fiscal period of each such fiscal year), duplicate copies
     of,

               (i)  a consolidated balance sheet of the Company and its
          Subsidiaries as at the end of such quarter, and

               (ii) consolidated statements of earnings and cash flows of the
          Company and its Subsidiaries, for such quarter and (in the case of the
          second and third quarters) for the portion of the fiscal year ending
          with such quarter,

     setting forth in each case in comparative form the figures for the
     corresponding periods in the previous fiscal year, all in reasonable
     detail, prepared in accordance with Canadian GAAP applicable to quarterly
     financial statements generally, and certified by a Senior Financial Officer
     as fairly presenting, in all material respects, the financial position of
     the companies being reported on and their results of operations and changes
     in financial position, subject to changes resulting from year-end
     adjustments, provided that delivery within the time period specified above
                  --------                                                     
     of copies of the Company's Quarterly Report on Form 10-Q prepared in
     compliance with the requirements therefor and filed with the United States
     Securities and Exchange Commission shall be deemed to satisfy the
     requirements of this Section 7.1(a);

          (b)  Annual Statements -- within 120 days after the end of each fiscal
               -----------------                                                
     year of the Company, duplicate copies of,

               (i)  a consolidated balance sheet of the Company and its
          Subsidiaries, as at the end of such year, and

               (ii) consolidated statements of earnings, shareholders' equity
          and cash flows of the Company and its Subsidiaries, for such year,

     setting forth in each case in comparative form the figures for the previous
     fiscal year, all in reasonable detail, prepared in accordance with Canadian
     GAAP, and accompanied by an opinion thereon of independent chartered
     accountants of recognized international standing, which opinion shall state
     that such financial statements present fairly, in all material respects,
     the financial position of the companies being reported upon and their
     results of operations and changes in financial position in accordance with
     Canadian GAAP, and that the examination of such accountants in connection
     with such financial statements has been conducted in accordance with
     generally accepted auditing standards, and that 

                                    Page 157
<PAGE>
 
     such audit provides a reasonable assurance that the financial statements
     are free of material misstatement, provided that the delivery within the
                                        --------    
     time period specified above of the Company's Annual Report on Form 10-K for
     such fiscal year prepared in accordance with the requirements therefor and
     filed with the United States Securities and Exchange Commission shall be
     deemed to satisfy the requirements of this Section 7.1(b);

          (c)  Other Reports -- promptly upon their becoming available, one copy
               -------------     
     of (i) each financial statement, report, notice or proxy statement sent by
         - 
     the Company or any Subsidiary to public securities holders generally, and
     (ii) each regular or periodic report, each registration statement that
      -- 
     shall have become effective (without exhibits except as expressly requested
     by such holder), and each final prospectus and all amendments thereto filed
     by the Company or any Subsidiary with The New York Stock Exchange, The
     Toronto Stock Exchange or any other stock exchange or the United States
     Securities and Exchange Commission (other than any such registration
     statement on Form S-8 and any related prospectuses and amendments thereto);

          (d)  Notice of Default or Event of Default -- promptly, and in any
               -------------------------------------  
     event within five Business Days after a Responsible Officer becoming aware
     of the existence of any Default or Event of Default, a written notice
     specifying the nature and period of existence thereof and what action the
     Company is taking or proposes to take with respect thereto;

          (e)  ERISA Matters -- promptly, and in any event within 20 days after
               -------------
     a Responsible Officer becoming aware of any of the following, a written
     notice setting forth the nature thereof and the action, if any, that the
     Company or an ERISA Affiliate proposes to take with respect thereto:

               (i)   with respect to any Plan, any reportable event, as defined
          in section 4043(b) of ERISA and the regulations thereunder, for which
          notice thereof has not been waived pursuant to such regulations as in
          effect on the date hereof; or

               (ii)  the taking by the PBGC of steps to institute, or the
          threatening by the PBGC of the institution of, proceedings under
          section 4042 of ERISA for the termination of, or the appointment of a
          trustee to administer, any Plan, or the receipt by the Company or any
          ERISA Affiliate of a notice from a Multiemployer Plan that such action
          has been taken by the PBGC with respect to such Multiemployer Plan; or

               (iii) any event, transaction or condition that could result in
          the incurrence of any liability by the Company or any ERISA Affiliate
          pursuant to Title I or IV of ERISA or the penalty or excise tax
          provisions of the Code relating to employee benefit plans, or in the
          imposition of any Lien on any of the rights, properties or assets of
          the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA
          or such penalty or excise tax provisions, if such liability or Lien,
          taken together with any other such liabilities or Liens then existing,
          would reasonably be expected to have a Material Adverse Effect;

                                    Page 158
<PAGE>
 
          (f)  144A Information - at any time when the Company is subject
               ----------------     
     neither to Section 13 nor Section 15(d) of the Exchange Act, with
     reasonable promptness, upon the request of any holder of a Note, provide
     such holder, and any "qualified institutional buyer" (as defined in Rule
     144A under the Securities Act) designated by such holder, such financial
     and other information in respect of the Company as is necessary in order to
     permit compliance with the information requirements of Rule 144A under the
     Securities Act in connection with the resale of any Note; and

          (g)  Requested Information -- with reasonable promptness, such other
               ---------------------
     data and information relating to the business, operations, affairs,
     financial condition, assets or properties of the Company or any of its
     Subsidiaries or relating to the ability of the Company to perform its
     obligations hereunder and under the Notes as from time to time may be
     reasonably requested by any such holder of Notes.

OFFICER'S CERTIFICATE.

          Each set of financial statements delivered to a holder of Notes
pursuant to Section 7.1(a) or Section 7.1(b) hereof shall be accompanied by a
certificate of a Senior Financial Officer setting forth:

          (a)  Covenant Compliance -- the information (including detailed
               -------------------                                       
     calculations) required in order to establish whether the Company was in
     compliance with the requirements of Sections 10.3 through 10.6, inclusive,
     Section 10.7(n) and Section 10.8(c), during the quarterly or annual period
     covered by the statements then being furnished (including with respect to
     each such Section, where applicable, the calculations of the maximum or
     minimum amount, ratio or percentage, as the case may be, permissible under
     the terms of such Sections, and the calculation of the amount, ratio or
     percentage then in existence); and

          (b)  Event of Default -- a statement that such officer has reviewed
               ----------------  
     the relevant terms hereof and has made, or caused to be made, under his or
     her supervision, a review of the transactions and conditions of the Company
     and its Subsidiaries from the beginning of the quarterly or annual period
     covered by the statements then being furnished to the date of the
     certificate and that such review shall not have disclosed the existence
     during such period of any condition or event that constitutes a Default or
     an Event of Default or, if any such condition or event existed or exists
     (including, without limitation, any such event or condition resulting from
     the failure of the Company or any Subsidiary to comply with any
     Environmental Law), specifying the nature and period of existence thereof
     and what action the Company shall have taken or proposes to take with
     respect thereto.

INSPECTION.

          The Company shall permit the representatives of each holder of Notes
that is an Institutional Investor:

          (a)  No Default -- if no Default or Event of Default then exists, at
               ----------      
     the expense of such holder and upon reasonable prior written notice to the
     Company, to visit the principal executive office of the Company, to discuss
     the affairs, finances and accounts of the Company and its Subsidiaries with
     the Company's officers, and, with the consent of the Company (which consent
     will not be unreasonably withheld) to visit the other offices 

                                    Page 159
<PAGE>
 
     and properties of the Company and each Material Subsidiary, all at such
     reasonable times and as often as may be reasonably requested in writing;
     and

          (b)  Default -- if a Default or Event of Default then exists, at the
               -------                                                        
     expense of the Company to visit and inspect any of the offices or
     properties of the Company or any Material Subsidiary, to examine all their
     respective books of account, records, reports and other papers, to make
     copies and extracts therefrom, and to discuss their respective affairs,
     finances and accounts with their respective officers and independent
     chartered accountants (and by this provision the Company authorizes said
     accountants to discuss the affairs, finances and accounts of the Company
     and its Material Subsidiaries), all at such reasonable times and as often
     as may be reasonably requested.

PREPAYMENT OF THE NOTES.

MATURITY.

          As provided therein, the entire unpaid principal amount of the Notes
shall be due and payable on April 30, 2003.

OPTIONAL PREPAYMENTS WITH MAKE-WHOLE AMOUNT.

          The Company may, at its option, upon notice as provided in Section
8.4, prepay at any time all, or from time to time any part of, the Notes, in an
amount not less than 5% of the aggregate principal amount of the Notes then
outstanding in the case of a partial prepayment, at 100% of the principal amount
so prepaid, plus the applicable Make-Whole Amount determined for the prepayment
date with respect to such principal amount.

PREPAYMENT IN CONNECTION WITH A PAYMENT UNDER SECTION 13.

          (a)  Subject to Subsection (b) below, if, as a result of the
occurrence of any Tax Event, the Company on any date shall have (i) made a
payment under Section 13 with respect to any Note or become obligated to make a
payment under Section 13 (in any such case, a "TAX PAYMENT") with respect to any
Note on the next date on which a tax payment of interest is scheduled to be made
(in either case, any such Note being herein referred to as an "AFFECTED NOTE")
and (ii) furnished to each holder of any Affected Note a notice from a
Responsible Officer setting forth in reasonable detail the nature of such Tax
Event and an explanation of the basis on which the Company is then so obligated
to make payment under Section 13 (together with an opinion of counsel of
recognized international standing to the effect that a Tax Event has occurred
and a Tax Payment was or would be required to be made as provided above), the
Company may, upon notice given as provided in Section 8.4, prepay the Affected
Notes in whole (and not in part) at a price equal to the unpaid principal amount
of such Notes, together with interest accrued thereon to the date fixed for such
prepayment plus the applicable Make-Whole Amount determined for such prepayment
date with respect to such principal amount.

          (b)  Notwithstanding Subsection (a) above, no Affected Note shall be
prepaid pursuant to this Section 8.3 if the holder thereof, at least five
Business Days prior to the prepayment date under this Section 8.3, shall have
delivered a notice to the Company stating that such holder waives any right to
any future Tax Payment under Section 13 in respect of the specific Tax Event
that shall have given rise to the Company's prepayment right under this Section
8.3; provided that
     --------     

                                    Page 160
<PAGE>
 
          (1)  no such waiver shall (x) be deemed to constitute a waiver of any
     right to receive a Tax Payment in full under Section 13 in respect of any
     other Tax Event that shall have given rise to the Company's prepayment
     right under this Section 8.3 or (y) preclude the Company from exercising
     any such right of prepayment in respect of such other Tax Event; and

          (2)  if on any date the amount of any Tax Payment that a holder of a
     Note would be entitled to receive under Section 13 shall increase (in
     proportion to the total amount in respect of which the amount payable under
     Section 13 is determined),

               (x)  the occurrence of any such increase shall be deemed to be a
          new Tax Event giving rise to a prepayment right under this Section
          8.3, and

               (y)  such holder thereafter shall be entitled to receive the full
          amount of any future Tax Payment provided under Section 13,
          notwithstanding any waiver previously delivered pursuant to this
          Section 8.3, unless such holder shall have delivered a notice under
          Section 8.3(b) in respect of any such prepayment.

          In addition, no prepayment of any Note shall be permitted pursuant to
Section 8.3(a) if the underlying Tax Payment under Section 13 arises as a result
of the failure of the Company to make any request specified in Section
13(a)(ii).

NOTICES, ETC.

          The Company will give each holder of Notes written notice of each
optional prepayment under Section 8.2 and each holder of any Affected Note
written notice of each prepayment under Section 8.3, in each case not less than
30 days and not more than 60 days prior to the date fixed for such prepayment.
Each such notice shall specify such date, the aggregate principal amount of the
Notes or Affected Notes, as the case may be, to be prepaid on such date, the
principal amount of each Note or Affected Note, as the case may be, held by such
holder to be prepaid, and the interest to be paid on the prepayment date with
respect to such principal amount being prepaid.  Each such notice shall be
accompanied by a certificate of a Senior Financial Officer as to the estimated
applicable Make-Whole Amount due in connection with such prepayment (calculated
as if the date of such notice were the date of the prepayment), setting forth
the details of such computation, and two Business Days prior to such prepayment,
the Company shall deliver to each holder of Notes a certificate of a Senior
Financial Officer specifying the calculation of such Make-Whole Amount as of the
specified prepayment date.

ALLOCATION OF PARTIAL PREPAYMENTS.

          In the case of each partial prepayment of the Notes pursuant to
Section 8.2, the principal amount of the Notes to be prepaid shall be allocated
among all of the Notes at the time outstanding in proportion, as nearly as
practicable, to the respective unpaid principal amounts thereof not theretofore
called for prepayment.

MATURITY; SURRENDER, ETC.

                                    Page 161
<PAGE>
 
          In the case of each prepayment of Notes pursuant to this Section 8,
the principal amount of each Note to be prepaid shall mature and become due and
payable on the date fixed for such prepayment, together with interest on such
principal amount accrued to such date and the applicable Make-Whole Amount, if
any.  From and after such date, unless the Company shall fail to pay such
principal amount when so due and payable, together with the interest and Make-
Whole Amount, if any, as aforesaid, interest on such principal amount shall
cease to accrue.  Any Note paid or prepaid in full shall be surrendered to the
Company and cancelled and shall not be reissued, and no Note shall be issued in
lieu of any prepaid principal amount of any Note.

PURCHASE OF NOTES.

          The Company will not and will not permit any Affiliate to purchase,
redeem, prepay or otherwise acquire, directly or indirectly, any of the
outstanding Notes except (a) upon the payment or prepayment of the Notes in
                          -                                                
accordance with the terms of this Agreement and the Notes or (b) pursuant to an
                                                              -                
offer to purchase made by the Company or an Affiliate pro rata to the holders of
all Notes at the time outstanding upon the same terms and conditions.  Any such
offer shall provide each holder with sufficient information to enable it to make
an informed decision with respect to such offer, and shall remain open for at
least ten Business Days.  If the holders of more than 50% of the principal
amount of the Notes then outstanding accept such offer, the Company shall
promptly notify the remaining holders of such fact and the expiration date for
the acceptance by holders of Notes of such offer shall be extended by the number
of days necessary to give each such remaining holder at least five Business Days
from its receipt of such notice to accept such offer.  The Company will promptly
cancel all Notes acquired by it or any Affiliate pursuant to any payment,
prepayment or purchase of Notes pursuant to any provision of this Agreement and
no Notes may be issued in substitution or exchange for any such Notes.

MAKE-WHOLE AMOUNT.

          The term "MAKE-WHOLE AMOUNT" means, with respect to any Note, an
amount equal to the excess, if any, of the Discounted Value of the Remaining
Scheduled Payments with respect to the Called Principal of such Note over the
amount of such Called Principal, provided that the Make-Whole Amount may in no
                                 --------                                     
event be less than zero.  For the purposes of determining the Make-Whole Amount,
the following terms have the following meanings:

          "CALLED PRINCIPAL" means, with respect to any Note, the principal of
such Note that is to be prepaid pursuant to Section 8.2 or 8.3 or has become or
is declared to be immediately due and payable pursuant to Section 12.1, as the
context requires.

          "DISCOUNTED VALUE" means, with respect to the Called Principal of any
Note, the amount obtained by discounting all Remaining Scheduled Payments with
respect to such Called Principal from their respective scheduled due dates to
the Settlement Date with respect to such Called Principal, in accordance with
accepted financial practice and at a discount factor (applied on the same
periodic basis as that on which interest on the Notes is payable) equal to the
Reinvestment Yield with respect to such Called Principal.

                                   Page 162
<PAGE>
 
          "REINVESTMENT YIELD" means, with respect to the Called Principal of
any Note, the sum of (x)(i) if such Called Principal is to be prepaid pursuant
                      -  -                                                    
to Section 8.3, 0.75% or (ii) if such Called Principal is to be prepaid pursuant
                          --                                                    
to Section 8.2 or has become or is declared to be immediately due and payable
pursuant to Section 12.1, 0.50% plus (y) the yield to maturity implied by (i)
                                ----  -                                    - 
the yields reported, as of 10:00 A.M. (New York City time) on the second
Business Day preceding the Settlement Date with respect to such Called
Principal, on the display designated as "Page 678" on the Dow Jones Markets
Service (or such other display as may replace Page 678 on Dow Jones Markets
Service) for actively traded U.S. Treasury securities having a maturity equal to
the remaining term of the Notes as of such Settlement Date, or (ii) if such
                                                                --         
yields are not reported as of such time or the yields reported as of such time
are not ascertainable, the Treasury Constant Maturity Series Yields reported,
for the latest day for which such yields have been so reported as of the second
Business Day preceding the Settlement Date with respect to such Called
Principal, in U.S. Federal Reserve Statistical Release H.15 (519) (or any
comparable successor publication) for actively traded U.S. Treasury securities
having a constant maturity equal to the remaining term of the Notes as of such
Settlement Date.  Such implied yield will be determined, if necessary, by (a)
                                                                           - 
converting U.S. Treasury bill quotations to bond-equivalent yields in accordance
with accepted financial practice and (b) interpolating linearly between (1) the
                                      -                                  -     
actively traded U.S. Treasury security with the maturity closest to and greater
than the remaining term of the Notes and (2) the actively traded U.S. Treasury
                                          -                                   
security with the maturity closest to and less than the remaining term of the
Notes.

          "REMAINING SCHEDULED PAYMENTS" means, with respect to the Called
Principal of any Note, all payments of such Called Principal and interest
thereon that would be due after the Settlement Date with respect to such Called
Principal if no payment of such Called Principal were made prior to its
scheduled due date, provided that if such Settlement Date is not a date on which
                    --------                                                    
interest payments are due to be made under the terms of the Notes, then the
amount of the next succeeding scheduled interest payment will be reduced by the
amount of interest accrued to such Settlement Date and required to be paid on
such Settlement Date pursuant to Section 8.2, 8.3 or 12.1.

          "SETTLEMENT DATE" means, with respect to the Called Principal of any
Note, the date on which such Called Principal is to be prepaid pursuant to
Section 8.2 or 8.3 or has become or is declared to be immediately due and
payable pursuant to Section 12.1, as the context requires.

AFFIRMATIVE COVENANTS.

          The Company covenants that so long as any of the Notes are
outstanding:

COMPLIANCE WITH LAW.

          The Company will and will cause each of its Subsidiaries to comply
with all laws, ordinances or governmental rules or regulations to which each of
them is subject, including, without limitation, Environmental Laws, and will
obtain and maintain in effect all licenses, certificates, permits, franchises
and other governmental authorizations necessary to the ownership of their
respective properties or to the conduct of their respective businesses, in each
case to the extent necessary to ensure that 

                                   Page 163
<PAGE>
 
non-compliance with such laws, ordinances or governmental rules or regulations
or failures to obtain or maintain in effect such licenses, certificates,
permits, franchises and other governmental authorizations would not reasonably
be expected, individually or in the aggregate, to have a materially adverse
effect on the business, operations, affairs, financial condition, properties or
assets of the Company and its Subsidiaries taken as a whole.

INSURANCE.

          The Company will and will cause each of its Subsidiaries to maintain,
with financially sound and reputable insurers, insurance with respect to their
respective properties and businesses against such casualties and contingencies,
of such types, on such terms and in such amounts (including deductibles, co-
insurance and self-insurance, if adequate reserves are maintained with respect
thereto) as is customary in the case of entities of established reputations
engaged in the same or a similar business and similarly situated.

MAINTENANCE OF PROPERTIES.

          The Company will and will cause each of its Subsidiaries to maintain
and keep, or cause to be maintained and kept, their respective properties in
good repair, working order and condition (other than ordinary wear and tear), so
that the business carried on in connection therewith may be properly conducted
at all times, provided that this Section shall not prevent the Company or any
              --------                                                       
Subsidiary from discontinuing the operation and the maintenance of any of its
properties if such discontinuance is desirable in the conduct of its business
and the Company has concluded that such discontinuance would not, individually
or in the aggregate, have a materially adverse effect on the business,
operations, affairs, financial condition, properties or assets of the Company
and its Subsidiaries taken as a whole.

PAYMENT OF TAXES.

          The Company will and will cause each of its Material Subsidiaries to
file all income tax or similar tax returns required to be filed in any
jurisdiction and to pay and discharge all taxes shown to be due and payable on
such returns and all other taxes, assessments, governmental charges, or levies
payable by any of them, to the extent such taxes and assessments have become due
and payable and before they have become delinquent, provided that neither the
                                                    --------                 
Company nor any such Subsidiary need file any such return or pay any such tax or
assessment if (i) in the case of the failure to pay any such tax, assessment or
               -                                                               
claim, the amount, applicability or validity thereof is contested by the Company
or such Subsidiary on a timely basis in good faith and in appropriate
proceedings, and the Company or a Subsidiary has established adequate reserves
therefor in accordance with Canadian GAAP on the books of the Company or such
Subsidiary or (ii) in any case, the failure to file any such returns and the
               --                                                           
nonpayment of all such taxes and assessments in the aggregate would not
reasonably be expected to have a materially adverse effect on the business,
operations, affairs, financial condition, properties or assets of the Company
and its Subsidiaries taken as a whole.

CORPORATE EXISTENCE, ETC.

                                   Page 164
<PAGE>
 
          Subject to Sections 10.2 and 10.8, the Company will at all times
preserve and keep in full force and effect its corporate existence, and the
Company will at all times preserve and keep in full force and effect the
corporate existence of each of its Material Subsidiaries (unless merged into the
Company or a Subsidiary) and all rights and franchises of the Company and its
Material Subsidiaries unless, in the good faith judgment of the Company, the
termination of or failure to preserve and keep in full force and effect the
corporate existence of any Material Subsidiary or any such right or franchise
would not, individually or in the aggregate, have a materially adverse effect on
the business, operations, affairs, financial condition, properties or assets of
the Company and its Subsidiaries taken as a whole.

RANKING.

          The Company will ensure that, at all times, all liabilities of the
Company under the Notes will rank in right of payment either pari passu or
                                                             ---- -----   
senior to all other Indebtedness of the Company except for Indebtedness which is
preferred as a result of being secured (but then only to the extent of such
security).

SUBSIDIARY GUARANTORS.

          (a) The Company will ensure that each Subsidiary that has outstanding
a Guaranty with respect to any Indebtedness of the Company, or is otherwise a 
co-obligor or jointly liable with the Company with respect to any Indebtedness,
is a Subsidiary Guarantor.

          (b) Upon notice by the Company to each holder of a Note, a Subsidiary
Guarantor shall cease to be a Subsidiary Guarantor and shall be released from
its obligations under its Subsidiary Guarantee if such Subsidiary Guarantor (i)
                                                                             - 
shall not have outstanding any Guaranty with respect to any Indebtedness of the
Company and shall not otherwise be a co-obligor or jointly liable with the
Company with respect to any Indebtedness, or (ii) shall otherwise not be a
                                              --                          
Subsidiary of the Company.

NEGATIVE COVENANTS.

          The Company covenants that so long as any of the Notes are
outstanding:

TRANSACTIONS WITH AFFILIATES.

          The Company will not and will not permit any Subsidiary to enter into
directly or indirectly any Material transaction or Material group of related
transactions (including without limitation the purchase, lease, sale or exchange
of properties of any kind or the rendering of any service) with any Affiliate
(other than the Company or another Subsidiary), except pursuant to the
reasonable requirements of the Company's or such Subsidiary's business and upon
fair and reasonable terms no less favorable to the Company or such Subsidiary
than would be obtainable in a comparable arm's-length transaction with a Person
not an Affiliate.

MERGER, CONSOLIDATION, ETC.

          The Company shall not consolidate or amalgamate with or merge with any
other corporation or convey, transfer or lease substantially all of its assets
in a single transaction or series of transactions to any Person unless:

                                   Page 165
<PAGE>
 
               (a) the successor formed by such consolidation or amalgamation or
     the survivor of such merger or the Person that acquires by conveyance,
     transfer or lease substantially all of the assets of the Company as an
     entirety, as the case may be (in any case, the "SUCCESSOR"), shall be a
     solvent corporation organized and existing under the laws of Canada or any
     Province thereof or the United States of America or any State thereof
     (including the District of Columbia), and, if the Company is not the
     Successor, the Successor shall have executed and delivered to each holder
     of any Notes its assumption of the due and punctual performance and
     observance of each covenant and condition of this Agreement and the Notes;

               (b) as of the last day of the most recently ended fiscal quarter
     of the Company, the Successor would have been in compliance with the
     provisions of Sections 10.3 and 10.4 (after giving effect to such
     transaction); and

               (c) immediately after giving effect to such transaction, (x)
                                                                         - 
     Adjusted Consolidated Net Worth of the Successor shall not be less than
     C$1,000,000,000 and (y) no Default or Event of Default shall have occurred
                          -                                                    
     and be continuing.

No such conveyance, transfer or lease of substantially all of the assets of the
Company shall have the effect of releasing the Company or any successor
corporation that shall theretofore have become such in the manner prescribed in
this Section 10.2 from its liability under this Agreement or the Notes.

DEBT RATIO.

          The Company will not, as of the last day of any fiscal quarter of the
Company, permit the ratio of Consolidated Debt to Consolidated Capital to be
greater than 35%.

EBITDA RATIO.

          The Company will not, as of the last day of any fiscal quarter of the
Company, permit the ratio of EBITDA to Consolidated Interest Expense for the
four fiscal quarters of the Company ended on such date to be less than 5.0 to
1.0.

SUBSIDIARY INDEBTEDNESS.

          The Company will not permit any Subsidiary to create, assume, incur,
guarantee or otherwise become liable in respect of any Indebtedness, except (i)
                                                                             - 
Permitted Subsidiary Indebtedness and (ii) other Indebtedness, provided that,
                                       --                      --------      
upon the incurrence thereof and immediately after giving effect thereto, the sum
(without duplication) of (x) the aggregate unpaid principal amount of
                          -                                          
Indebtedness of the Company and its Subsidiaries secured by Liens (other than
Liens permitted by Section 10.7(a) through (m), inclusive) plus (y) the
                                                           ----  -     
aggregate unpaid principal amount of all Indebtedness of Subsidiaries (other
than Permitted Subsidiary Indebtedness) shall not exceed 10% of Consolidated
Total Assets.  For purposes of this Section 10.5, any Indebtedness of a Person
existing at the time such Person becomes a Subsidiary shall be deemed to have
been incurred at that time.

NET WORTH.

                                   Page 166
<PAGE>
 
     The Company will not, as of the last day of any fiscal quarter of the
     Company, permit Adjusted Consolidated Net Worth to be less than
     C$1,000,000,000.

LIENS.

     The Company will not, and will not permit any of its Subsidiaries to,
     directly or indirectly create, incur, assume or permit to exist (upon the
     happening of a contingency or otherwise) any Lien on or with respect to any
     property or asset of the Company or any such Subsidiary, whether now owned
     or held or hereafter acquired, or any income or profits therefrom, except:

               (a) Liens for taxes, assessments or other governmental charges
     which are not yet due and payable or the payment of which is not at the
     time required by Section 9.4;

               (b) statutory Liens of landlords and Liens of carriers,
     warehousemen, mechanics, materialmen and other similar Liens, in each case
     (i) incurred in the ordinary course of business for sums not yet due and
      -                                                                      
     payable, (ii) the payment of which is not at the time required by Section
               --                                                             
     9.1 or (iii) which are being contested in good faith by appropriate
             ---                                                        
     proceedings and for which the Company or such Subsidiary has established
     adequate reserves in accordance with Canadian GAAP;

               (c) Liens (other than any Lien imposed by ERISA) incurred or
     deposits made in the ordinary course of business (i) in connection with
                                                       -                    
     workers' compensation, unemployment insurance and other types of social
     security or retirement benefits, or (ii) to secure (or to obtain letters of
                                          --                                    
     credit that secure) the performance of tenders, statutory obligations,
     surety bonds, appeal bonds, bids, leases (other than Capital Leases),
     performance bonds, purchase, construction or sales contracts and other
     similar obligations, in each case not incurred or made in connection with
     the incurrence of Indebtedness;

               (d) any attachment or judgment Lien, unless the judgment it
     secures shall not, within 60 days after the entry thereof, have been
     discharged or execution thereof stayed pending appeal, or shall not have
     been discharged or further stayed within 60 days after the expiration of
     any such stay;

               (e) leases or subleases granted to others, easements, rights-of-
     way, restrictions and other similar charges or encumbrances, or title
     defects or irregularities that are of a minor nature, in each case
     incidental to, and not interfering with, the ordinary conduct of the
     business of the Company or any of its Subsidiaries;

               (f) Liens on property or assets of any Subsidiary of the Company
     securing Indebtedness owing to the Company or to a Wholly-Owned Subsidiary;

               (g) Liens existing on the date of this Agreement and securing
     Indebtedness of the Company and its Subsidiaries specified on Schedule
     5.15;

               (h) any Lien created to secure all or any part of the purchase
     price, or to secure Indebtedness incurred or assumed to pay all or any part
     of the purchase price or cost of construction or improvement, of property
     acquired or constructed or shares of capital stock acquired (including
     acquisition through consolidation or amalgamation or 

                                   Page 167
<PAGE>
 
     merger) by the Company or a Subsidiary after the date of the Closing,
     provided that (i) such Lien is limited to the property so acquired or
     --------       -
     constructed or the shares so acquired, (ii) the principal amount of
                                             --  
     Indebtedness secured by such Lien shall not exceed the fair market value of
     such property (or improvement thereon) or such shares at the time of such
     acquisition or construction (or, if the principal amount of such
     Indebtedness does exceed such value, such Lien shall be permitted under
     this paragraph (h) and the amount of such excess Indebtedness shall be
     deemed to be outstanding for purposes of paragraph (n) of this Section 10.7
     and for purposes of Section 10.5(ii)(x)) and (iii) such Lien shall be
                                                   ---
     created contemporaneously with, or within 180 days after, the acquisition,
     completion of construction or commencement of full operation of such
     property or within 180 days after the acquisition of such shares;

               (i) (x) any Lien existing on property of a Person immediately
                    -                                                       
     prior to its being consolidated or amalgamated with or merged into the
     Company or a Subsidiary or its becoming a Subsidiary, or (y) any Lien
                                                               -          
     (including any Lien securing liabilities in respect of Capital Leases)
     existing on any property acquired by the Company or any Subsidiary at the
     time such property is so acquired (whether or not the Indebtedness secured
     thereby shall have been assumed), provided that in the case of (x) and (y)
                                       --------                                
     above, such Lien shall not have been created or assumed in contemplation of
     such consolidation or amalgamation or merger or such Person's becoming a
     Subsidiary or such acquisition and such Lien shall not extend to any other
     item of property owned by the Company or such Subsidiary, as the case may
     be;

               (j) any Lien renewing, extending or refunding any Lien permitted
     by paragraphs (g), (h) and (i) of this Section 10.7, provided that (i) the
                                                          --------       -     
     principal amount of Indebtedness secured by such Lien immediately prior to
     such extension, renewal or refunding is not increased, (ii) such Lien is
                                                             --              
     limited to the property (including improvements thereon) that secured the
     Lien so renewed, extended or refunded, and (iii) immediately after such
                                                 ---                        
     extension, renewal or refunding no Default or Event of Default would exist;

               (k) the right reserved to or vested in any municipality or
     governmental or other public authority by the terms of any lease, license,
     franchise, grant or permit acquired by the Company or any Subsidiary or by
     any statutory provision, to terminate any such lease, license, franchise,
     grant or permit, or to require annual or other payments as a condition to
     the continuance thereof; and security given in the ordinary course of
     business to a public utility or any municipality or governmental or other
     public authority when required by such utility or other authority in
     connection with the operations of the Company or any Subsidiary;

               (l) the reservations, limitation, provisos and conditions, if
     any, expressed in any original grants from the Crown or in comparable
     grants, if any, in jurisdictions other than Canada; and applicable
     municipal and other governmental restrictions affecting the use of land or
     the nature of any structures which may be erected thereon, provided such
     restrictions have been complied with and will not materially impair the use
     of the property for the purpose for which it is held;

               (m) Liens on assets of any Subsidiary (or on the equity interests
     of the Company or any Subsidiary in such Subsidiary) securing Indebtedness
     of such Subsidiary incurred pursuant to clause (iii) of the definition of
     Permitted Subsidiary Indebtedness; and

                                   Page 168
<PAGE>
 
               (n) any other Lien not otherwise permitted by paragraphs (a)
     through (m) of this Section 10.7, provided that, upon the incurrence
                                       --------                          
     thereof and immediately after giving effect thereto, the sum (without
     duplication) of (i) the aggregate unpaid principal amount of Indebtedness
                      -                                                       
     of the Company and its Subsidiaries secured by Liens (other than Liens
     permitted by paragraphs (a) through (m) of this Section 10.7) plus (ii) the
                                                                   ----  --     
     aggregate unpaid principal amount of all Indebtedness of Subsidiaries
     (other than Permitted Subsidiary Indebtedness) shall not exceed 10% of
     Consolidated Total Assets.

SALE OF ASSETS.

     The Company will not, and will not permit any Subsidiary to, directly or
     indirectly, sell, lease, transfer or otherwise dispose of (collectively a
     "DISPOSITION") any of its properties or assets unless, after giving effect
     to such proposed Disposition, the aggregate net book value of all assets
     that were the subject of a Disposition during the period commencing on the
     first day of the then current fiscal year of the Company and ending on the
     date of such proposed Disposition (the "DISPOSITION DATE") does not exceed
     15% of Consolidated Total Assets as at the end of the quarterly fiscal
     period of the Company ended immediately prior to the Disposition Date. Any
     Disposition of shares of stock of any Subsidiary shall, for purposes of
     this Section, be valued at an amount that bears the same proportion to the
     total assets of such Subsidiary as the number of such shares bears to the
     total number of shares of stock of such Subsidiary. Notwithstanding the
     foregoing, the following Dispositions shall not be taken into account under
     this Section 10.8:

          (a)  any Disposition of inventory, equipment, fixtures, supplies or
materials in the ordinary course of business;

          (b)  any Disposition of accounts receivable through factoring or other
arm's length transactions with a financial institution for cash or cash
equivalents (such cash equivalents to be of a type that would be reflected as
such on a consolidated balance sheet of the Company and its Subsidiaries
prepared at such time in accordance with Canadian GAAP); and

          (c)  any Disposition the net proceeds of which are applied within 365
days of the related Disposition Date to (x) the repayment of unsubordinated
Funded Indebtedness of the Company or Funded Indebtedness of such Subsidiary or
(y) the acquisition of assets to be used in the ordinary course of business of
the Company or such Subsidiary or the acquisition of the assets or capital stock
of any Person engaged in an industrial technologies, electronics, networking or
telecommunications equipment business or another business similar (or reasonably
related) to that of the Company or any of its Subsidiaries.

EVENTS OF DEFAULT.

          An "EVENT OF DEFAULT" shall exist if any of the following conditions
or events shall occur and be continuing:

          (a)  the Company defaults in the payment of any principal or Make-
      Whole Amount, if any, on any Note when the same becomes due and payable,
      whether at maturity or at a date fixed for prepayment or by declaration or
      otherwise; or

                                   Page 169
<PAGE>
 
          (b) the Company defaults in the payment of any interest on any Note or
      any amount due pursuant to Section 13 for more than five Business Days
      after the same becomes due and payable; or

          (c) the Company defaults in the performance of or compliance with any
      term contained in Section 7.1(d) or Sections 10.2 through 10.8, inclusive;
      or

          (d) the Company defaults in the performance of or compliance with any
      term contained herein (other than those referred to in paragraphs (a), (b)
      and (c) of this Section 11) and such default is not remedied within 45
      days after the earlier of (i) a Responsible Officer obtaining actual
                                 -                                        
      knowledge of such default and (ii) the Company receiving written notice of
                                     --                                         
      such default from any holder of a Note (any such written notice to be
      identified as a "notice of default" and to refer specifically to this
      paragraph (d) of Section 11); or

          (e) any representation or warranty made in writing by or on behalf of
      the Company or by any officer of the Company in this Agreement, in writing
      by or on behalf of any Subsidiary Guarantor or by any officer of any
      Subsidiary Guarantor in any Subsidiary Guarantee, or in any writing
      furnished in connection with the transactions contemplated hereby proves
      to have been false or incorrect in any material respect on the date as of
      which made; or

          (f) (i) the Company or any Subsidiary is in default (as principal or
               -                                                              
      as guarantor or other surety) in the payment of any principal of or
      premium or make-whole amount or interest on any Indebtedness that is
      outstanding in an aggregate principal amount of at least C$25,000,000 (or
      the equivalent thereof, as of any date of determination, in any other
      currency) beyond any period of grace provided with respect thereto, or
      (ii) the Company or any Subsidiary is in default in the performance of or
       --                                                                      
      compliance with any term of any evidence of any Indebtedness in an
      aggregate outstanding principal amount of at least C$25,000,000 (or the
      equivalent thereof, as of any date of determination, in any other
      currency) or of any mortgage, indenture or other agreement relating
      thereto or any other condition exists, and as a consequence of such
      default or condition such Indebtedness has become, or has been declared,
      due and payable before its stated maturity or before its regularly
      scheduled dates of payment; or

          (g) the Company or any Material Subsidiary (i) is generally not
                                                      -                  
      paying, or admits in writing its inability to pay, its debts as they
      become due, (ii) files, or consents by answer or otherwise to the filing
                   --                                                         
      against it of, a petition for relief or reorganization or arrangement or
      any other petition in bankruptcy, for liquidation or to take advantage of
      any bankruptcy, insolvency, reorganization, moratorium or other similar
      law of any jurisdiction, (iii) makes an assignment for the benefit of its
                                ---                                            
      creditors, (iv) consents to the appointment of a custodian, receiver,
                  --                                                       
      liquidator, trustee or other officer with similar powers with respect to
      it or with respect to any substantial part of its property, (v) is
                                                                   -    
      adjudicated as insolvent or to be liquidated, or (vi) takes corporate
                                                        --                 
      action for the purpose of any of the foregoing; or

          (h) a court or governmental authority of competent jurisdiction enters
      an order appointing, without consent by the Company or any of its Material
      Subsidiaries, a custodian, receiver, liquidator, trustee or other officer
      with similar powers with respect to it or with respect to any substantial
      part of its property, or constituting an order for relief or approving a
      petition for relief or reorganization or any other petition in 

                                   Page 170
<PAGE>
 
      bankruptcy or for liquidation or to take advantage of any bankruptcy or
      insolvency law of any jurisdiction, or ordering the dissolution, winding-
      up or liquidation of the Company or any of its Material Subsidiaries, or
      any such petition shall be filed against the Company or any of its
      Material Subsidiaries and such petition shall not be dismissed within 60
      days; or

          (i) a final judgment or judgments for the payment of money aggregating
      in excess of C$25,000,000 (or the equivalent thereof, as of any date of
      determination, in any other currency) are rendered against one or more of
      the Company and its Subsidiaries and which judgments are not, within 60
      days after entry thereof, bonded, discharged or stayed pending appeal, or
      are not discharged within 60 days after the expiration of such stay; or

          (j) if (i) any Plan shall fail to satisfy the minimum funding
                  -                                                    
      standards of ERISA or the Code for any plan year or part thereof or a
      waiver of such standards or extension of any amortization period is sought
      or granted under section 412 of the Code, (ii) a notice of intent to
                                                 --                       
      terminate any Plan shall have been or is reasonably expected to be filed
      with the PBGC or the PBGC shall have instituted proceedings under ERISA
      section 4042 to terminate or appoint a trustee to administer any Plan or
      the PBGC shall have notified the Company or any ERISA Affiliate that a
      Plan may become a subject of any such proceedings, (iii) the aggregate
                                                          ---               
      "amount of unfunded benefit liabilities" (within the meaning of section
      4001(a)(18) of ERISA) under all Plans, determined in accordance with Title
      IV of ERISA, shall exceed C$25,000,000, (iv) the Company or any ERISA
                                               --                          
      Affiliate shall have incurred or is reasonably expected to incur any
      liability pursuant to Title I or IV of ERISA or the penalty or excise tax
      provisions of the Code relating to employee benefit plans, (v) the Company
                                                                  -             
      or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the
                                                                        --     
      Company or any Subsidiary establishes or amends any employee welfare
      benefit plan that provides post-employment welfare benefits in a manner
      that would increase the liability of the Company or any Subsidiary
      thereunder; and any such event or events described in clauses (i) through
      (vi) above, either individually or together with any other such event or
      events, would reasonably be expected to have a Material Adverse Effect.

As used in Section 11(j), the terms "EMPLOYEE BENEFIT PLAN" and "EMPLOYEE
WELFARE BENEFIT PLAN" shall have the respective meanings assigned to such terms
in Section 3 of ERISA.

REMEDIES ON DEFAULT, ETC.

ACCELERATION.

          (a) If an Event of Default with respect to the Company described in
paragraph (g) or (h) of Section 11 (other than an Event of Default described in
clause (i) of paragraph (g) or described in clause (vi) of paragraph (g) by
virtue of the fact that such clause encompasses clause (i) of paragraph (g)) has
occurred, all the Notes then outstanding shall automatically become immediately
due and payable.

          (b) If any other Event of Default has occurred and is continuing, the
Required Holders may at any time at their option, by notice or notices to the
Company, declare all the Notes then outstanding to be immediately due and
payable.

                                   Page 171
<PAGE>
 
          (c) If any Event of Default described in paragraph (a) or (b) of
Section 11 has occurred and is continuing, any holder or holders of Notes at the
time outstanding affected by such Event of Default may at any time, at its or
their option, by notice or notices to the Company, declare all the Notes held by
it or them to be immediately due and payable.

          Upon any Notes becoming due and payable under this Section 12.1,
whether automatically or by declaration, such Notes will forthwith mature and
the entire unpaid principal amount of such Notes, plus (x) all accrued and
                                                        -                 
unpaid interest thereon and (y) the Make-Whole Amount determined in respect of
                             -                                                
such principal amount (to the full extent permitted by applicable law), shall
all be immediately due and payable, in each and every case without presentment,
demand, protest or further notice, all of which are hereby waived.  The Company
acknowledges, and the parties hereto agree, that each holder of a Note has the
right to maintain its investment in the Notes free from repayment by the Company
(except as herein specifically provided for) and that the provision for payment
of a Make-Whole Amount by the Company in the event that the Notes are prepaid or
are accelerated as a result of an Event of Default, is intended to provide
compensation for the deprivation of such right under such circumstances.

OTHER REMEDIES.

          If any Default or Event of Default has occurred and is continuing, and
irrespective of whether any Notes have become or have been declared immediately
due and payable under Section 12.1, the holder of any Note at the time
outstanding may proceed to protect and enforce the rights of such holder by an
action at law, suit in equity or other appropriate proceeding, whether for the
specific performance of any agreement contained herein or in any Note, or for an
injunction against a violation of any of the terms hereof or thereof, or in aid
of the exercise of any power granted hereby or thereby or by law or otherwise.

RESCISSION.

          At any time after any Notes have been declared due and payable
pursuant to clause (b) or (c) of Section 12.1, the Required Holders, by written
notice to the Company, may rescind and annul any such declaration and its
consequences if (a) the Company has paid all overdue interest on the Notes, all
                 -                                                             
principal of and Make-Whole Amount, if any, on any Notes that are due and
payable and are unpaid other than by reason of such declaration, and all
interest on such overdue principal and Make-Whole Amount, if any, and (to the
extent permitted by applicable law) any overdue interest in respect of the
Notes, at the Default Rate, (b) all Events of Default and Defaults, other than
                             -                                                
non-payment of amounts that have become due solely by reason of such
declaration, have been cured or have been waived pursuant to Section 18, and (c)
                                                                              - 
no judgment or decree has been entered for the payment of any monies due
pursuant hereto or to the Notes.  No rescission and annulment under this Section
12.3 will extend to or affect any subsequent Event of Default or Default or
impair any right consequent thereon.

NO WAIVERS OR ELECTION OF REMEDIES, EXPENSES, ETC.

                                   Page 172
<PAGE>
 
          No course of dealing and no delay on the part of any holder of any
Note in exercising any right, power or remedy shall operate as a waiver thereof
or otherwise prejudice such holder's rights, powers or remedies.  No right,
power or remedy conferred by this Agreement or by any Note upon any holder
thereof shall be exclusive of any other right, power or remedy referred to
herein or therein or now or hereafter available at law, in equity, by statute or
otherwise.  Without limiting the obligations of the Company under Section 16,
the Company will pay to the holder of each Note on demand such further amount as
shall be sufficient to cover all costs and expenses of such holder incurred in
any enforcement or collection under this Section 12, including, without
limitation, reasonable attorneys' fees, expenses and disbursements.

TAX INDEMNIFICATION.

          (a)  In the event of the imposition by or for the account of any
Applicable Taxing Authority or of any Governmental Authority of any jurisdiction
in which the Company resides for tax purposes or any jurisdiction from or
through which the Company is making any payment in respect of any Note, other
than any Governmental Authority of or in the United States of America or any
political subdivision thereof or therein, of any requirement to make any
deduction or withholding of any Tax upon or with respect to any payments made by
or on behalf of the Company in respect of any Note, the Company hereby agrees to
pay forthwith from time to time in connection with each payment on the Notes to
each holder of a Note such amounts as shall be required so that every payment
received by such holder in respect of the Notes and every payment received by
such holder under this Agreement will not, after such withholding or deduction
or other payment for or on account of such Tax and any interest or penalties
relating thereto, be less than the amount due and payable to such holder in
respect of such Note or under this Agreement before the assessment of such Tax;
provided, however, that the Company shall not be obliged to pay such amounts to
--------                                                                       
any holder of a Note in respect of Taxes to the extent such Taxes exceed the
Taxes that would have been payable:

               (i)  had such holder not been a resident of Canada within the
          meaning of the Canadian Income Tax Act or not used or held, and not
          been considered to have used or held, such Note in the course of
          carrying on a business in Canada within the meaning of the Canadian
          Income Tax Act; or

               (ii) but for the delay or failure by such holder (following a
          written request by the Company, which shall be accompanied by the
          below-mentioned Forms) in the filing with an appropriate Governmental
          Authority or otherwise of forms, certificates, documents, applications
          or other reasonably required evidence (collectively "FORMS"), that are
          required to be filed by such holder to avoid or reduce such Taxes and
          that in the case of any of the foregoing would not result in any
          confidential or proprietary income tax return information being
          revealed, either directly or indirectly, to any Person and such delay
          or failure could have been lawfully avoided by such holder, provided
          that such holder shall be deemed to have satisfied the requirements of
          this clause (ii) upon the good faith completion and submission of such
          Forms as may be specified in a written request of the Company no later
          than 45 days after receipt by such holder of such written request.

                                   Page 173
<PAGE>
 
          (b) Within 60 days after the date of any payment by the Company of any
Tax in respect of any payment under the Notes or this Section 13, the Company
shall furnish to each holder of a Note the original tax receipt for the payment
of such Tax (or if such original tax receipt is not available, a duly certified
copy of the original tax receipt), together with such other documentary evidence
with respect to such payments as may be reasonably requested from time to time
by any holder of a Note.

          (c) The obligations of the Company under this Section 13 shall survive
the transfer or payment of any Note.

REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.

REGISTRATION OF NOTES.

          The Company shall keep at its principal executive office a register
for the registration and registration of transfers of Notes.  The name and
address of each holder of one or more Notes, each transfer thereof and the name
and address of each transferee of one or more Notes shall be registered in such
register.  Prior to due presentment for registration of transfer, the Person in
whose name any Note shall be registered shall be deemed and treated as the owner
and holder thereof for all purposes hereof, and the Company shall not be
affected by any notice or knowledge to the contrary.  The Company shall give to
any holder of a Note that is an Institutional Investor promptly upon request
therefor, a complete and correct copy of the names and addresses of all
registered holders of Notes.

TRANSFER AND EXCHANGE OF NOTES.

          Upon surrender of any Note at the principal executive office of the
Company for registration of transfer or exchange (and in the case of a surrender
for registration of transfer, duly endorsed or accompanied by a written
instrument of transfer duly executed by the registered holder of such Note or
his attorney duly authorized in writing and accompanied by the address for
notices of each transferee of such Note or part thereof), the Company shall
execute and deliver, at the Company's expense (except as provided below), one or
more new Notes (as requested by the holder thereof) in exchange therefor, in an
aggregate principal amount equal to the unpaid principal amount of the
surrendered Note.  Each such new Note shall be payable to such Person as such
holder may request and shall be substantially in the form of Exhibit 1.  Each
such new Note shall be dated and bear interest from the date to which interest
shall have been paid on the surrendered Note or dated the date of the
surrendered Note if no interest shall have been paid thereon.  The Company may
require payment of a sum sufficient to cover any stamp tax or governmental
charge imposed in respect of any such transfer of Notes.  Notes shall not be
transferred in denominations of less than U.S.$1,000,000, provided that if
                                                          --------        
necessary to enable the registration of transfer by a holder of its entire
holding of Notes, one Note may be in a denomination of less than U.S.$1,000,000.
Any transferee, by its acceptance of a Note registered in its name (or the name
of its nominee), shall be deemed to have made the representation set forth in
Section 6.2.

REPLACEMENT OF NOTES.

                                   Page 174
<PAGE>
 
          Upon receipt by the Company of evidence reasonably satisfactory to it
of the ownership of and the loss, theft, destruction or mutilation of any Note
(which evidence shall be, in the case of an Institutional Investor, notice from
such Institutional Investor of such ownership and such loss, theft, destruction
or mutilation), and

          (a) in the case of loss, theft or destruction, of indemnity reasonably
     satisfactory to it (provided that if the holder of such Note is, or is a
                         --------                                            
     nominee for, an original Purchaser or another holder of a Note with a
     minimum net worth of at least U.S.$25,000,000, such Person's own unsecured
     agreement of indemnity shall be deemed to be satisfactory), or

          (b) in the case of mutilation, upon surrender and cancellation
     thereof,

the Company at its own expense shall execute and deliver, in lieu thereof, a new
Note, dated and bearing interest from the date to which interest shall have been
paid on such lost, stolen, destroyed or mutilated Note or dated the date of such
lost, stolen, destroyed or mutilated Note if no interest shall have been paid
thereon.

PAYMENTS ON NOTES.

PLACE OF PAYMENT.

          Subject to Section 15.2, payments of principal, Make-Whole Amount, if
any, and interest becoming due and payable on the Notes shall be made in New
York, New York at the principal office of Royal Bank of Canada in such
jurisdiction.  The Company may at any time, by notice to each holder of a Note,
change the place of payment of the Notes so long as such place of payment shall
be either the principal office of the Company in such jurisdiction or the
principal office of a bank or trust company in such jurisdiction.

HOME OFFICE PAYMENT.

          So long as any Purchaser or any nominee of such Purchaser shall be the
holder of any Note, and notwithstanding anything contained in Section 15.1 or in
such Note to the contrary, the Company will pay all sums becoming due on such
Note for principal, Make-Whole Amount, if any, and interest by 12:00 noon at the
place of payment by the method and at the address specified for such purpose
below such Purchaser's name in Schedule A, or by such other method or at such
other address as such Purchaser shall have from time to time specified to the
Company in writing for such purpose, without the presentation or surrender of
such Note or the making of any notation thereon, except that upon written
request of the Company made concurrently with or reasonably promptly after
payment or prepayment in full of any Note, such Purchaser shall surrender such
Note for cancellation, reasonably promptly after any such request, to the
Company at its principal executive office or at the place of payment most
recently designated by the Company pursuant to Section 15.1.  Prior to any sale
or other disposition of any Note held by any Purchaser or any nominee of such
Purchaser, such Purchaser will, at its election, either endorse thereon the
amount of principal paid thereon and the last date to which interest has been
paid thereon or surrender such Note to the Company in exchange for a new Note or
Notes pursuant to Section 14.2.  The Company will afford the benefits of this
Section 15.2 to any Institutional Investor 

                                   Page 175
<PAGE>
 
that is the direct or indirect transferee of any Note purchased by any Purchaser
under this Agreement and that has made the same agreement relating to such Note
as the Purchasers have made in this Section 15.2.

EXPENSES, ETC.

TRANSACTION EXPENSES.

          Whether or not the transactions contemplated hereby are consummated,
the Company will pay all costs and expenses (including reasonable attorneys'
fees of a special counsel and, if reasonably required, local or other counsel)
incurred by the Purchasers and each other holder of a Note in connection with
such transactions and in connection with any amendments, waivers or consents
under or in respect of this Agreement or the Notes (whether or not such
amendment, waiver or consent becomes effective), including, without limitation:
(a) the costs and expenses incurred in enforcing or defending (or determining
 -                                                                           
whether or how to enforce or defend) any rights under this Agreement or the
Notes or in responding to any subpoena or other legal process or informal
investigative demand issued in connection with this Agreement or the Notes, or
by reason of being a holder of any Note, and (b) the costs and expenses,
                                              -                         
including financial advisors' fees, incurred in connection with the insolvency
or bankruptcy of the Company or any Subsidiary or in connection with any work-
out or restructuring of the transactions contemplated hereby and by the Notes.
The Company will pay, and will save each Purchaser and each other holder of a
Note harmless from, all claims in respect of any fees, costs or expenses if any,
of brokers and finders (other than those retained by such Purchaser or other
holder).

TAXES.

          The Company will pay all stamp, documentary or similar taxes which may
be payable in respect of the execution and delivery of this Agreement or any
Subsidiary Guarantee or of the original execution and delivery of any of the
Notes or of any amendment of, or waiver or consent under or with respect to,
this Agreement, any Subsidiary Guarantee or of any of the Notes and will save
each holder of a Note harmless against any loss or liability resulting from
nonpayment or delay in payment of any such tax required to be paid by the
Company hereunder or under any Subsidiary Guarantee.

SURVIVAL.

          The obligations of the Company under this Section 16 will survive the
payment or transfer of any Note, the enforcement, amendment or waiver of any
provision of this Agreement or the Notes, and the termination of this Agreement.

SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.

          All representations and warranties contained herein shall survive the
execution and delivery of this Agreement and the Notes, the purchase or transfer
by each Purchaser of any Note or portion thereof or interest therein and the
payment of any Note, and may be relied upon by any subsequent holder of a Note,
regardless of any investigation made at any time by or on behalf of any
Purchaser or any other holder of a Note.  All statements contained in any
certificate or other instrument 

                                   Page 176
<PAGE>
 
delivered by or on behalf of the Company pursuant to this Agreement shall be
deemed representations and warranties of the Company under this Agreement.
Subject to the preceding sentence, this Agreement and the Notes embody the
entire agreement and understanding between the Purchasers and the Company and
supersede all prior agreements and understandings relating to the subject matter
hereof.

AMENDMENT AND WAIVER.

REQUIREMENTS.


          This Agreement and the Notes may be amended, and the observance of any
term hereof or of the Notes may be waived (either retroactively or
prospectively), with (and only with) the written consent of the Company and the
Required Holders, except that (a) no amendment or waiver of any of the
                               -                                      
provisions of Section 1, 2, 3, 4, 5, 6 or 22 hereof, or any defined term (as it
is used therein), will be effective as to any Purchaser unless consented to by
such Purchaser in writing, and (b) no such amendment or waiver may, without the
                                -                                              
written consent of the holder of each Note at the time outstanding affected
thereby, (i) subject to the provisions of Section 12 relating to acceleration or
          -                                                                     
rescission, change the amount or time of any prepayment or payment of principal
of, or reduce the rate or change the time of payment or method of computation of
interest or of the Make-Whole Amount on, the Notes, (ii) change the percentage
                                                     --                       
of the principal amount of the Notes the holders of which are required to
consent to any such amendment or waiver, or (iii) amend any of Sections 8,
                                             ---                          
11(a), 11(b), 12, 13, 18, 21 or 24.

SOLICITATION OF HOLDERS OF NOTES.

     (a) Solicitation.  The Company will provide each holder of the Notes
         ------------                                                    
(irrespective of the amount of Notes then owned by it) with sufficient
information, sufficiently far in advance of the date a decision is required, to
enable such holder to make an informed and considered decision with respect to
any proposed amendment, waiver or consent in respect of any of the provisions
hereof or of the Notes.  The Company will deliver executed or true and correct
copies of each amendment, waiver or consent effected pursuant to the provisions
of this Section 18 to each holder of outstanding Notes promptly following the
date on which it is executed and delivered by, or receives the consent or
approval of, the requisite holders of Notes.

    (b)  Payment. The Company will not directly or indirectly pay or cause to be
         -------  
paid any remuneration, whether by way of supplemental or additional interest,
fee or otherwise, or grant any security, to any holder of Notes as consideration
for or as an inducement to the entering into by any holder of Notes or any
waiver or amendment of any of the terms and provisions hereof unless such
remuneration is concurrently paid, or security is concurrently granted, on the
same terms, ratably to each holder of Notes then outstanding even if such holder
did not consent to such waiver or amendment.

BINDING EFFECT, ETC.

          Any amendment or waiver consented to as provided in this Section 18
applies equally to all holders of Notes and is binding upon them and upon each
future holder of any Note and upon the Company without regard to whether such
Note has been marked to indicate such amendment or waiver. No such amendment or
waiver will extend to or affect any obligation, covenant, agreement, Default or
Event of Default

                                   Page 177
<PAGE>
 
not expressly amended or waived or impair any right consequent thereon. No
course of dealing between the Company and the holder of any Note nor any delay
in exercising any rights hereunder or under any Note shall operate as a waiver
of any rights of any holder of such Note. As used herein, the term "THIS
AGREEMENT" and references thereto shall mean this Agreement as it may from time
to time be amended or supplemented.

NOTES HELD BY COMPANY, ETC.

          Solely for the purpose of determining whether the holders of the
requisite percentage of the aggregate principal amount of Notes then outstanding
approved or consented to any amendment, waiver or consent to be given under this
Agreement or the Notes, or have directed the taking of any action provided
herein or in the Notes to be taken upon the direction of the holders of a
specified percentage of the aggregate principal amount of Notes then
outstanding, Notes directly or indirectly owned by the Company or any of its
Affiliates shall be deemed not to be outstanding.

NOTICES

          All notices and communications provided for hereunder shall be in
writing and sent (a) by telecopy if the sender on the same day sends a
                  -                                                   
confirming copy of such notice by a recognized overnight delivery service
(charges prepaid), or (b) by registered or certified mail with return receipt
                       -                                                     
requested (postage prepaid), or (c) by a recognized overnight delivery service
                                 -                                            
(with charges prepaid).  Any such notice must be sent:

          (i)   if to any Purchaser or its nominee, to such Purchaser or nominee
     at the address specified for such communications in Schedule A, or at such
     other address as such Purchaser or nominee shall have specified to the
     Company in writing,

          (ii)  if to any other holder of any Note, to such holder at such
     address as such other holder shall have specified to the Company in
     writing, or

          (iii) if to the Company, to the Company at its address set forth at
     the beginning hereof to the attention of the Treasurer (with a copy to the
     Legal Department), or at such other address as the Company shall have
     specified to the holder of each Note in writing.

Notices under this Section 19 will be deemed given only when actually received.

REPRODUCTION OF DOCUMENTS.

          This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications that may hereafter be
             -                                                           
executed, (b) documents received by any Purchaser at the Closing (except the
           -                                                                
Notes themselves), and (c) financial statements, certificates and other
                        -                                              
information previously or hereafter furnished to any Purchaser, may be
reproduced by such Purchaser by any photographic, photostatic, microfilm,
microcard, miniature photographic or other similar process and such Purchaser
may destroy any original document so reproduced.  The 

                                   Page 178
<PAGE>
 
Company agrees and stipulates that, to the extent permitted by applicable law,
any such reproduction shall be admissible in evidence as the original itself in
any judicial or administrative proceeding (whether or not the original is in
existence and whether or not such reproduction was made by such Purchaser in the
regular course of business) and any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence. This
Section 20 shall not prohibit the Company or any other holder of Notes from
contesting any such reproduction to the same extent that it could contest the
original, or from introducing evidence to demonstrate the inaccuracy of any such
reproduction.

CONFIDENTIAL INFORMATION.

          For the purposes of this Section 21, "CONFIDENTIAL INFORMATION" means
information delivered to any Purchaser by or on behalf of the Company or any
Subsidiary in connection with the transactions contemplated by or otherwise
pursuant to this Agreement that is proprietary in nature and that was clearly
marked or labeled or otherwise adequately identified when received by such
Purchaser as being confidential information of the Company or such Subsidiary,
provided that such term does not include information that (a) was publicly known
--------                                                   -                    
or otherwise known to such Purchaser prior to the time of such disclosure, (b)
                                                                            - 
subsequently becomes publicly known through no act or omission by such Purchaser
or any person acting on such Purchaser's behalf, (c) otherwise becomes known to
                                                  -                            
such Purchaser other than through disclosure by the Company or any Subsidiary or
(d) constitutes financial statements delivered to such Purchaser under Section
 -                                                                            
7.1 that are otherwise publicly available.  Each Purchaser will maintain the
confidentiality of such Confidential Information in accordance with procedures
adopted by such Purchaser in good faith to protect confidential information of
third parties delivered to such Purchaser, provided that such Purchaser may
                                           --------                        
deliver or disclose Confidential Information to (i) such Purchaser's directors,
                                                 -                             
officers, employees, agents, attorneys and affiliates (to the extent such
disclosure reasonably relates to the administration of the investment
represented by such Purchaser's Notes), (ii) such Purchaser's financial advisors
                                         --                                     
and other professional advisors who agree to hold confidential the Confidential
Information substantially in accordance with the terms of this Section 21, (iii)
                                                                            --- 
any other holder of any Note, (iv) any Institutional Investor to which such
                               --                                          
Purchaser sells or offers to sell such Note or any part thereof or any
participation therein (if such Person has agreed in writing prior to its receipt
of such Confidential Information to be bound by the provisions of this Section
21), (v) any Person from which such Purchaser offers to purchase any security of
      -                                                                         
the Company (if such Person has agreed in writing prior to its receipt of such
Confidential Information to be bound by the provisions of this Section 21), (vi)
                                                                             -- 
any federal or state regulatory authority having jurisdiction over such
Purchaser, (vii) the National Association of Insurance Commissioners or any
            ---                                                            
similar organization, or any nationally recognized rating agency that requires
access to information about such Purchaser's investment portfolio or (viii) any
                                                                      ----     
other Person to which such delivery or disclosure may be necessary or
appropriate (w) to effect compliance with any law, rule, regulation or order
             -                                                              
applicable to such Purchaser, (x) in response to any subpoena or other legal
                               -                                            
process, (y) in connection with any litigation to which such Purchaser is a
          -                                                                
party or (z) if an Event of Default has occurred and is continuing, to the
          -                                                               
extent such Purchaser may reasonably determine such delivery and disclosure to
be necessary or 

                                   Page 179
<PAGE>
 
appropriate in the enforcement or for the protection of the rights and remedies
under such Purchaser's Notes or this Agreement. Each holder of a Note, by its
acceptance of a Note, will be deemed to have agreed to be bound by and to be
entitled to the benefits of this Section 21 as though it were a party to this
Agreement. On reasonable request by the Company in connection with the delivery
to any holder of a Note of information required to be delivered to such holder
under this Agreement or requested by such holder (other than a holder that is a
party to this Agreement or its nominee), such holder will enter into an
agreement with the Company embodying the provisions of this Section 21.

SUBSTITUTION OF PURCHASER.

          Each Purchaser shall have the right to substitute any one of such
Purchaser's Affiliates as the purchaser of the Notes that such Purchaser has
agreed to purchase hereunder, by written notice to the Company, which notice
shall be signed by both such Purchaser and such Affiliate, shall contain such
Affiliate's agreement to be bound by this Agreement and shall contain a
confirmation by such Affiliate of the accuracy with respect to it of the
representations set forth in Section 6.  Upon receipt of such notice, any
reference to such Purchaser in this Agreement (other than in this Section 22)
shall be deemed to refer to such Affiliate in lieu of such original Purchaser.
In the event that such Affiliate is so substituted as a purchaser hereunder and
such Affiliate thereafter transfers to such original Purchaser all of the Notes
then held by such Affiliate, upon receipt by the Company of notice of such
transfer, any reference to such Affiliate as a "Purchaser" in this Agreement
(other than in this Section 22) shall no longer be deemed to refer to such
Affiliate, but shall refer to such original Purchaser, and such original
Purchaser shall again have all the rights of an original holder of the Notes
under this Agreement.

JURISDICTION AND PROCESS.

THE COMPANY AGREES THAT ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE NOTES OR ANY OTHER DOCUMENT EXECUTED IN
CONNECTION HEREWITH, OR ANY LEGAL ACTION OR PROCEEDING TO EXECUTE OR OTHERWISE
ENFORCE ANY JUDGMENT OBTAINED AGAINST THE COMPANY FOR BREACH HEREOF OR THEREOF,
OR AGAINST ANY OF ITS PROPERTIES, MAY BE BROUGHT IN THE COURTS OF THE STATE OF
NEW YORK OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW
YORK BY ANY PURCHASER OR ON ANY PURCHASER'S BEHALF OR BY OR ON BEHALF OF ANY
HOLDER OF A NOTE, AS ANY PURCHASER OR SUCH HOLDER MAY ELECT, AND THE COMPANY
HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION
OF SUCH COURTS FOR PURPOSES OF ANY SUCH LEGAL ACTION OR PROCEEDING.  THE COMPANY
HEREBY IRREVOCABLY APPOINTS AND DESIGNATES NEWBRIDGE NETWORKS INC., WHOSE
ADDRESS IS 593 HERNDON PARKWAY, HERNDON, VA 22070, OR ANY OTHER PERSON HAVING
AND MAINTAINING A PLACE OF BUSINESS IN THE CONTINENTAL UNITED STATES WHOM THE
COMPANY MAY FROM TIME TO TIME HEREAFTER DESIGNATE (HAVING GIVEN 30 DAYS' NOTICE
THEREOF TO EACH HOLDER OF A NOTE THEN OUTSTANDING), AS THE TRUE AND LAWFUL
ATTORNEY AND 

                                   Page 180
<PAGE>
 
DULY AUTHORIZED AGENT FOR ACCEPTANCE OF SERVICE OF LEGAL PROCESS OF THE COMPANY.
THE COMPANY HEREBY AGREES THAT SERVICE OF PROCESS IN ANY SUCH PROCEEDING MAY BE
EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY
SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO IT AT ITS ADDRESS
SPECIFIED IN SECTION 19 OR AT SUCH OTHER ADDRESS OF WHICH EACH HOLDER OF A NOTE
SHALL HAVE BEEN NOTIFIED PURSUANT THERETO. IN ADDITION, THE COMPANY HEREBY
IRREVOCABLY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH
IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTES OR ANY OTHER
DOCUMENT EXECUTED IN CONNECTION HEREWITH BROUGHT IN THE COURTS OF THE STATE OF
NEW YORK OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW
YORK, AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH
COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

OBLIGATION TO MAKE PAYMENTS IN U.S. DOLLARS.

          This is an international financing transaction in accordance with
which the specification of U.S. Dollars is of the essence, and U.S. Dollars
shall be the currency of account in the case of all obligations under this
Agreement.  The payment obligations of the Company under this Agreement shall
not be discharged by an amount paid in a currency or in a place other than that
specified with respect to such obligations, whether pursuant to a judgment or
otherwise, to the extent that the amount so paid on prompt conversion to U.S.
Dollars and transfer to the specified place of payment under normal banking
procedures does not yield the amount of U.S. Dollars, in such place, due under
this Agreement.  In the event that any payment, whether pursuant to a judgment
or otherwise, upon conversion and transfer does not result in payment of such
amount of U.S. Dollars in the specified place of payment, the obligee of such
payment shall have a separate cause of action against the Company for the
additional amount necessary to yield the amount due and owing under this
Agreement.  If, for the purpose of obtaining a judgment in any court with
respect to any obligation of the Company under this Agreement, it shall be
necessary to convert to any other currency any amount in U.S. Dollars due
hereunder and a change shall occur between the rate of exchange applied in
making such conversion and the rate of exchange prevailing on the date of
payment of such judgment, the Company agrees to pay such additional amounts (if
any) as may be necessary to ensure that the amount paid on the date of payment
is the amount in such other currency which, when converted into U.S. Dollars and
transferred to New York, New York in accordance with normal banking procedures,
will result in the amount then due under this Agreement in U.S. Dollars.  Any
amount due from the Company shall be due as a separate debt and shall not be
affected by or merged into any judgment being obtained for any other sum due
under or in respect of this Agreement.  In no event, however, shall the Company
be required to pay a larger amount in such other currency at the rate of
exchange in effect on the date of payment than the amount of U.S. Dollars stated
to be due under this Agreement, so that in any event the obligations of the
Company under this Agreement will be effectively maintained as U.S. Dollar
obligations.

                                   Page 181
<PAGE>
 
MISCELLANEOUS.

SUCCESSORS AND ASSIGNS.

          All covenants and other agreements contained in this Agreement by or
on behalf of any of the parties hereto bind and inure to the benefit of their
respective successors and assigns (including, without limitation, any subsequent
holder of a Note) whether so expressed or not.

PAYMENTS DUE ON NON-BUSINESS DAYS.

          Anything in this Agreement or the Notes to the contrary
notwithstanding, any payment of principal of or Make-Whole Amount or interest on
any Note that is due on a date other than a Business Day shall be made on the
next succeeding Business Day without including the additional days elapsed in
the computation of the interest payable on such next succeeding Business Day.

SEVERABILITY.

          Any provision of this Agreement that is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall (to the full extent permitted by law) not invalidate or
render unenforceable such provision in any other jurisdiction.

CONSTRUCTION.

          Each covenant contained herein shall be construed (absent express
provision to the contrary) as being independent of each other covenant contained
herein, so that compliance with any one covenant shall not (absent such an
express contrary provision) be deemed to excuse compliance with any other
covenant.  Where any provision herein refers to action to be taken by any
Person, or which such Person is prohibited from taking, such provision shall be
applicable whether such action is taken directly or indirectly by such Person.

COUNTERPARTS.

          This Agreement may be executed in any number of counterparts, each of
which shall be an original but all of which together shall constitute one
instrument.  Each counterpart may consist of a number of copies hereof, each
signed by less than all, but together signed by all, of the parties hereto.

GOVERNING LAW.

          This Agreement shall be construed and enforced in accordance with, and
the rights of the parties shall be governed by, the law of the State of New York
excluding choice-of-law principles of the law of such State that would require
the application of the laws of a jurisdiction other than such State.

                             *    *    *    *    *

                                   Page 182
<PAGE>
 
          If you are in agreement with the foregoing, please sign the form of
agreement on the accompanying counterpart of this Agreement and return it to the
Company, whereupon the foregoing shall become a binding agreement between you
and the Company.

                              Very truly yours,

                              NEWBRIDGE NETWORKS CORPORATION



                              By /s/ Peter Nadeau
                                 ----------------------------------------
                                 Title: Vice President, Legal Services


                              By /s/ Douglas McCarthy
                                 ----------------------------------------
_____________________

                                 Title: Vice President Finance and Treasurer


The foregoing is hereby
agreed to as of the
date thereof.

TEACHERS INSURANCE AND
 ANNUITY ASSOCIATION OF AMERICA


By /s/ Charles C. Thompson, III
   --------------------------------------  
   Title: Managing Director

PACIFIC LIFE INSURANCE
 COMPANY


By /s/ Cathy Schwartz                       By /s/ Jane M. Guon
   --------------------------------------      --------------------------
   Title: Assistant Vice President             Title: Assistant Corporate
                                                      Secretary

                                   Page 183
<PAGE>
 
PRINCIPAL MUTUAL LIFE
 INSURANCE COMPANY


By /s/ James C. Fifield
   -------------------------------------
   Title: Counsel

By /s/ Clint Woods
   -------------------------------------
   Title: Counsel

NIPPON LIFE INSURANCE COMPANY
 OF AMERICA


By /s/ Clint Woods                          By /s/ Sarah J. Pitts
   -------------------------------------       ------------------------------
   Title: Counsel                              Title: Counsel

THE NORTHWESTERN MUTUAL
 LIFE INSURANCE COMPANY


By /s/ J. Thomas Christofferson
   --------------------------------------
   Title: its authorized representative

ALLSTATE LIFE INSURANCE
 COMPANY


By /s/ Charles D. Mires
   ---------------------------------------

By /s/ Daniel C. Leimbach
   ---------------------------------------
   Authorized Signatories

                                   Page 184
<PAGE>
 
ALLSTATE INSURANCE
 COMPANY

By /s/ Charles D. Mires
   ---------------------------------------


By /s/ Daniel C. Leimbach
   ---------------------------------------
   Authorized Signatories

SUN LIFE INSURANCE
 COMPANY OF CANADA


By /s/ John N. Whelihan
   --------------------------------------
   Title: Vice President, U.S. Private Placements - for President


By /s/ Jeffery J. Skerry
   ----------------------------------------
   Title: Senior Associate Counsel - for Secretary

SUN LIFE INSURANCE
 COMPANY OF CANADA (U.S.)


By /s/ John N. Whelihan
   --------------------------------------
   Title: Vice President, U.S. Private Placements - for President

By /s/ Jeffery J. Skerry
   ----------------------------------------
   Title: Senior Associate Counsel - for Secretary

NATIONWIDE LIFE INSURANCE
 COMPANY


By /s/ James W. Pruden
   -------------------------------------
   Title: Vice President - Municipal Securities

                                   Page 185
<PAGE>
 
HARTFORD LIFE INSURANCE
 COMPANY
 By Hartford Investment Services, Inc
 Its Agent and Attorney-in-Fact


By /s/ Betsy Roberts
   -------------------------------------
   Title: Senior Vice President

HARTFORD ACCIDENT AND
 INDEMNITY COMPANY
 By Hartford Investment Services, Inc
 Its Agent and Attorney-in-Fact

By /s/ Betsy Roberts
   -------------------------------------
   Title: Senior Vice President

KEMPER INVESTORS LIFE
INSURANCE COMPANY


By /s/ G.W. Fridley
   ------------------------------------
   Title: CIO

By /s/ R. Daniel 
   ------------------------------------
   Title: Controller

FEDERAL KEMPER LIFE
 ASSURANCE COMPANY


By /s/ G.W. Fridley
   ------------------------------------
   Title: CIO

By /s/ R. Daniel
   ------------------------------------
   Title: Controller



FIDELITY LIFE ASSOCIATION

                                   Page 186
<PAGE>
 
By /s/ G.W. Fridley
   ------------------------------------
   Title: CIO

By /s/ R. Daniel
   ------------------------------------ 
   Title: Controller

ZURICH LIFE INSURANCE
 COMPANY OF AMERICA


By /s/ G.W. Fridley
   ------------------------------------
Title: CIO

By /s/ R. Daniel
   ------------------------------------
  Title: Controller

AMERICAN GENERAL ANNUITY
 INSURANCE COMPANY


By /s/ Richard W. Scott
   -------------------------------------
   Title: Vice Chairman and Chief Investment Officer

AMERICAN GENERAL LIFE
 INSURANCE COMPANY
          and
 AMERICAN GENERAL LIFE AND
 ACCIDENT INSURANCE COMPANY


By /s/ Julia S. Tucker
   ---------------------------------------
   Title: Investment Officer

                                   Page 187
<PAGE>
 
AID ASSOCIATION FOR LUTHERANS


By /s/ James Abitz
   -------------------------------------
   Title: Vice President - Investments

WOODMEN OF THE WORLD LIFE
 INSURANCE SOCIETY


By /s/ John G. Bookout
   --------------------------------------
   Title: President


By /s/ James L. Monroe
   --------------------------------------
   Title: Secretary

                                   Page 188
<PAGE>
 
                                                                      Schedule A
                                                                      ----------


                      INFORMATION RELATING TO PURCHASERS

                                                   Principal Amount 
of

Name of Purchaser                                  Notes to be 
-----------------                                  -----------
Purchased
---------

[NAME OF PURCHASER]                                U.S.$

(1)  All payments by wire transfer of immediately 
     available funds to:

     with sufficient information to identify the 
     source and application of such funds.

(2)  All notices of payments and written 
     confirmations of such wire transfers:

(3)  All other communications:

(4)  Tax I.D. No.:

                                   Page 189
<PAGE>
 
                                                                      Schedule B
                                                                      ----------

                                 DEFINED TERMS
                                 -------------

          As used herein, the following terms have the respective meanings set
forth below or set forth in the Section hereof following such term:

          "ADJUSTED CONSOLIDATED NET WORTH" means Consolidated Net Worth
adjusted to add back the after-tax effects of accelerated amortization, write-
offs and write-downs of  research and development in process and other
intangible assets related to acquisitions taking place subsequent to the date of
the Closing.

          "AFFECTED NOTE" is defined in Section 8.3.

          "AFFILIATE" means, at any time, and with respect to any Person, any
other Person that at such time directly or indirectly through one or more
intermediaries Controls, or is Controlled by, or is under common Control with,
such first Person.  As used in this definition, "CONTROL" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise. Unless the context otherwise clearly
requires, any reference to an "Affiliate" is a reference to an Affiliate of the
Company.

          "APPLICABLE TAXING AUTHORITY" is defined in Section 5.9(b).

          "BUSINESS DAY" means (a) for the purposes of Section 8.8 only, any day
                                -                                               
other than a Saturday, a Sunday or a day on which commercial banks in New York
City are required or authorized to be closed, and (b) for the purposes of any
                                                   -                         
other provision of this Agreement, any day other than a Saturday, a Sunday or a
day on which commercial banks in New York, New York or Toronto, Ontario, Canada
are required or authorized to be closed.

          "CANADIAN DOLLAR" and "C$" means lawful money of Canada.

          "CANADIAN GAAP" means generally accepted accounting principles as in
effect from time to time in Canada.

          "CAPITAL LEASE" means, at any time, a lease with respect to which the
lessee is required concurrently to recognize the acquisition of an asset and the
incurrence of a liability in accordance with Canadian GAAP.

          "CLOSING" is defined in Section 3.

          "CODE" means the United States Internal Revenue Code of 1986, as
amended from time to time, and the rules and regulations promulgated thereunder
from time to time.

                                   Page 190
<PAGE>
 
          "COMPANY" means Newbridge Networks Corporation, a company incorporated
under the laws of Canada, or any successor thereto that shall have become such
in the manner prescribed in Section 10.2.

          "CONFIDENTIAL INFORMATION"  is defined in Section 21.

          "CONSOLIDATED CAPITAL" means, as of any date of determination, the sum
of Consolidated Debt and Consolidated Net Worth.

          "CONSOLIDATED DEBT" means, as of any date of determination, all
Indebtedness of the Company and its Subsidiaries on such date that would, in
accordance with Canadian GAAP, be classified on a consolidated balance sheet of
the Company and its Subsidiaries at such time as long-term obligations and
short-term debt (including the current portion of long-term obligations).

          "CONSOLIDATED INTEREST EXPENSE" means, as of any date of
determination, interest on Consolidated Debt.

          "CONSOLIDATED NET INCOME" means, as of any date of determination, the
net earnings of the Company and its Subsidiaries for the four fiscal quarters of
the Company ending on or immediately prior to such date (taken as a cumulative
whole) that would, in accordance with Canadian GAAP, be classified on a
consolidated statement of earnings of the Company and its Subsidiaries at such
time as net earnings (provided, that if the cumulative net earnings for such
                      --------                                              
four fiscal quarters is a negative number, "Consolidated Net Income" will be
determined by reference to the most recent four consecutive fiscal quarters of
the Company for which net earnings of the Company and its Subsidiaries were
positive).

          "CONSOLIDATED NET WORTH" means, as of any date of determination, the
aggregate of the amounts that would, in accordance with Canadian GAAP, be
classified on the consolidated balance sheet of the Company and its Subsidiaries
at such time as issued share capital, contributed surplus, retained earnings and
currency translation adjustments.

          "CONSOLIDATED TOTAL ASSETS" means, as of any date of determination,
the total assets of the Company and its Subsidiaries which would be shown as
assets on a consolidated balance sheet of the Company and its Subsidiaries as of
such time prepared in accordance with Canadian GAAP, after eliminating all
amounts properly attributable to minority interests, if any, in the stock and
surplus of Subsidiaries.

          "DEFAULT" means an event or condition the occurrence or existence of
which would, with the lapse of time or the giving of notice or both, become an
Event of Default.

          "DEFAULT RATE" means that rate of interest that is the greater of (i)
                                                                             - 
2% per annum above the rate of interest stated in clause (a) of the first
paragraph of the Notes or (ii) 2% over the rate of interest publicly announced
                           --                                                 
by Bank of America in San Francisco, California as its "base" or "prime" rate.

                                   Page 191
<PAGE>
 
          "EBITDA" means, as of any date of determination, the sum (without
duplication) of (i) net earnings of the Company and its Subsidiaries (excluding
                 -                                                             
any extraordinary gains and losses) for the four fiscal quarters ending on such
date plus (to the extent deducted in the computation of such net earnings) (ii)
     ----                                                                   -- 
Consolidated Interest Expense plus (iii) income taxes of the Company and its
                              ----  ---                                     
Subsidiaries for such four fiscal quarters plus (iv) depreciation and
                                           ----                      
amortization of the Company and its Subsidiaries (including accelerated
amortization, write-offs and write-downs of intangible assets) for such four
fiscal quarters, all as would be reflected on a consolidated statement of
earnings of the Company and its Subsidiaries prepared in accordance with
Canadian GAAP for such period and adjusted to give effect to any acquisition or
divestiture made during such four fiscal quarters if the relevant entity being
acquired or divested, as the case may be, as EBITDA (determined as aforesaid)
for such four fiscal quarters of greater than C$2,500,000 or less than negative
C$2,500,000 by adding or subtracting, as appropriate, such historic EBITDA (and
without giving effect to any related synergies or unusual gains or losses in
connection with such acquisition or divestiture).  EBITDA for the fiscal quarter
ended February 1, 1998 shall be adjusted by adding back the C$181,444,000
restructuring charge associated with the Company's local area network business
and subtracting the C$47,960,000 gain on the sale of the Company's investment in
Broadband Networks Inc.

          "ENVIRONMENTAL LAWS" means any and all Federal, state, local, and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or
governmental restrictions relating to pollution and the protection of the
environment or the release of any materials into the environment, including but
not limited to those related to hazardous substances or wastes, air emissions
and discharges to waste or public systems.

          "ERISA" means the United States Employee Retirement Income Security
Act of 1974, as amended from time to time, and the rules and regulations
promulgated thereunder from time to time in effect.

          "ERISA AFFILIATE" means any trade or business (whether or not
incorporated) that is treated as a single employer together with the Company
under section 414 of the Code.

          "EVENT OF DEFAULT" is defined in Section 11.

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

          "FORMS" is defined in Section 13(a)(ii).

          "FUNDED INDEBTEDNESS" means, with respect to any Person, all
Indebtedness of such Person which by its terms or by the terms of any instrument
or agreement relating thereto matures, or which is otherwise payable or unpaid,
one year or more from, or is directly or indirectly renewable or extendible at
the option of the obligor in respect thereof to a date one year or more
(including, without limitation, 

                                   Page 192
<PAGE>
 
under a revolving or similar agreement obligating the lender or lenders to
extend credit over a period of one year or more) from, the date of creation
thereof.

          "GOVERNMENTAL AUTHORITY" means

(a)  the government of

               (i)  Canada, the United States of America or any Province, State
          or other political subdivision of either thereof, or(ii) any other
          jurisdiction in which the Company or any Subsidiary conducts all or
          any part of its business, or which asserts jurisdiction over any
          properties of the Company or any Subsidiary, or

          (b)  any entity exercising executive, legislative, judicial,
     regulatory or administrative functions of, or pertaining to, any such
     government.

          "GUARANTY" means, with respect to any Person, any obligation (except
the endorsement in the ordinary course of business of negotiable instruments for
deposit or collection) of such Person guaranteeing or in effect guaranteeing any
indebtedness, dividend or other obligation of any other Person in any manner,
whether directly or indirectly, including (without limitation) obligations
incurred through an agreement, contingent or otherwise, by such Person:

          (a)  to purchase such indebtedness or obligation or any property
     constituting security therefor;

          (b)  to advance or supply funds (i) for the purchase or payment of 
                                           - 
     such indebtedness or obligation, or (ii) to maintain any working capital or
                                          --                                    
     other balance sheet condition or any income statement condition of any
     other Person or otherwise to advance or make available funds for the
     purchase or payment of such indebtedness or obligation;

          (c)  to lease properties or to purchase properties or services
     primarily for the purpose of assuring the owner of such indebtedness or
     obligation of the ability of any other Person to make payment of the
     indebtedness or obligation; or

          (d)  otherwise to assure the owner of such indebtedness or obligation
     against loss in respect thereof.

In any computation of the indebtedness or other liabilities of the obligor under
any Guaranty, the indebtedness or other obligations that are the subject of such
Guaranty shall be assumed to be direct obligations of such obligor.

          "HOLDER" means, with respect to any Note, the Person in whose name
such Note is registered in the register maintained by the Company pursuant to
Section 14.1.

          "INDEBTEDNESS" with respect to any Person means, at any time, without
duplication,

                                   Page 193
<PAGE>
 
          (a)  its liabilities for borrowed money and its redemption obligations
     in respect of mandatorily redeemable Preferred Stock;

          (b)  its liabilities for the deferred purchase price of property
     acquired by such Person (excluding accounts payable arising in the ordinary
     course of business and any earn-out payments based on the future
     performance of any entity acquired by such Person but including all
     liabilities created or arising under any conditional sale or other title
     retention agreement with respect to any such property);

          (c)  all liabilities appearing on its balance sheet in accordance with
     Canadian GAAP in respect of Capital Leases;

          (d)  all liabilities for borrowed money secured by any Lien with
     respect to any property owned by such Person (whether or not it has assumed
     or otherwise become liable for such liabilities); and

          (e)  any Guaranty of such Person with respect to liabilities of a type
     described in any of clauses (a) through (d) hereof, to the extent not
     offset by appropriate credit insurance.

          "INSTITUTIONAL INVESTOR" means (a) any original purchaser of a Note,
                                          -                                   
(b) any holder of a Note holding more than 5% of the aggregate principal amount
 -                                                                             
of the Notes then outstanding, and (c) any bank, trust company, savings and loan
                                    -                                           
association or other financial institution, any pension plan, any investment
company, any insurance company, any broker or dealer, or any other similar
financial institution or entity, regardless of legal form.

          "LIEN" means, with respect to any Person, any mortgage, lien, pledge,
charge, security interest or other encumbrance, or any interest or title of any
vendor, lessor, lender or other secured party to or of such Person under any
conditional sale or other title retention agreement or Capital Lease, upon or
with respect to any property or asset of such Person (including in the case of
stock, stockholder agreements, voting trust agreements and all similar
arrangements).

          "MAKE-WHOLE AMOUNT" is defined in Section 8.8.

          "MATERIAL" means material in relation to the business, operations,
affairs, financial condition, assets, or properties of the Company and its
Subsidiaries taken as a whole.

          "MATERIAL ADVERSE EFFECT" means a materially adverse effect on (a) the
                                                                          -     
business, operations, affairs, financial condition, assets or properties of the
Company and its Subsidiaries taken as a whole, or (b) the ability of the Company
                                                   -                            
to perform its obligations under this Agreement and the Notes, or (c) the
                                                                   -     
validity or enforceability of this Agreement or the Notes.

          "MATERIAL SUBSIDIARY" means (i) any Subsidiary listed on Schedule 5.4
                                       -                                       
and (ii) any Subsidiary Guarantor, provided that, if at any time the group
     --                            --------                               
comprised of the 

                                   Page 194
<PAGE>
 
Company and its Material Subsidiaries accounts for less than 95% of Consolidated
Total Assets or 95% of Consolidated Net Income, the term "MATERIAL SUBSIDIARY"
shall include such other Subsidiaries (starting with the Subsidiary having the
greatest amount of assets or net income, as the case may be, and then including
additional Subsidiaries as needed in descending order) such that the group
comprised of the Company and its Material Subsidiaries accounts for not less
than 95% of Consolidated Total Assets or 95% of Consolidated Net Income, as the
case may be.

          "MEMORANDUM" is defined in Section 5.3.

          "MULTIEMPLOYER PLAN" means any Plan that is a "multiemployer plan" (as
such term is defined in section 4001(a)(3) of ERISA).

          "NOTES" is defined in Section 1.

          "OFFICER'S CERTIFICATE" means a certificate of a Senior Financial
Officer or of any other officer of the Company whose responsibilities extend to
the subject matter of such certificate.

          "PBGC" means the Pension Benefit Guaranty Corporation referred to and
defined in ERISA or any successor thereto.

          "PERSON" means an individual, partnership, corporation, limited
liability company, association, trust, unincorporated organization, or a
government or agency or political subdivision thereof.

          "PERMITTED SUBSIDIARY INDEBTEDNESS" means Indebtedness of any
Subsidiary (i) specified on Schedule 5.15 or any refunding, refinancing or
            -                                                             
renewal thereof (provided that the principal amount thereof is not increased),
(ii) owing to the Company or to any Wholly-Owned Subsidiary, (iii) consisting of
 --                                                           ---               
any Guaranty of Indebtedness of the Company (provided that such Subsidiary has
executed and delivered a Subsidiary Guarantee as required by Section 9.7) or
(iv) secured by a Lien permitted by Section 10.7(h) or (i) (or any renewal,
 --                                                                        
extension or refunding thereof permitted by Section 10.7(j)).

          "PLAN" means an "employee benefit plan" (as defined in section 3(3) of
ERISA) that is or, within the preceding five years, has been established or
maintained, or to which contributions are or, within the preceding five years,
have been made or required to be made, by the Company or any ERISA Affiliate or
with respect to which the Company or any ERISA Affiliate may have any liability.

          "PREFERRED STOCK" means any class of capital stock of a corporation
that is preferred over any other class of capital stock of such corporation as
to the payment of dividends or the payment of any amount upon liquidation or
dissolution of such corporation.

          "PROPERTY" or "PROPERTIES" means, unless otherwise specifically
limited, real or personal property of any kind, tangible or intangible, choate
or inchoate.

                                   Page 195
<PAGE>
 
          "PTE" means a Prohibited Transaction Exemption issued by the
Department of Labor.

          "PURCHASER" is defined in the first paragraph of this Agreement.

          "QPAM EXEMPTION" means Prohibited Transaction Class Exemption 84-14
issued by the United States Department of Labor.

          "REQUIRED HOLDERS" means, at any time, the holders of at least 51% in
principal amount of the Notes at the time outstanding (exclusive of Notes then
owned by the Company or any of its Affiliates).

          "RESPONSIBLE OFFICER" means any Senior Financial Officer and any other
officer of the Company with responsibility for the administration of the
relevant portion of this agreement.

          "SECURITIES ACT" means the United States Securities Act of 1933, as
amended from time to time.

          "SENIOR FINANCIAL OFFICER" means the chief financial officer,
principal accounting officer, treasurer or comptroller of the Company.

          "SUBSIDIARY" means, as to any Person, any corporation, association or
other business entity in which such Person or one or more of its Subsidiaries or
such Person and one or more of its Subsidiaries owns sufficient equity or voting
interests to enable it or them (as a group) ordinarily, in the absence of
contingencies, to elect a majority of the directors (or Persons performing
similar functions) of such entity, and any partnership or joint venture if more
than a 50% interest in the profits or capital thereof is owned by such Person or
one or more of its Subsidiaries or such Person and one or more of its
Subsidiaries (unless such partnership or joint venture can and does ordinarily
take major business actions without the prior approval of such Person or one or
more of its Subsidiaries).  Unless the context otherwise clearly requires, any
reference to a "Subsidiary" is a reference to a Subsidiary of the Company.

          "SUBSIDIARY GUARANTEE" means a guarantee of a Subsidiary Guarantor of
the obligations of the Company under this Agreement and the Notes, substantially
in the form of Exhibit 2.

          "SUBSIDIARY GUARANTOR" means, on and prior to the date of the Closing,
each Subsidiary identified as such on Schedule 5.4 and, thereafter, each
Subsidiary that enters into a Subsidiary Guarantee as required by Section
9.7(a), provided that any such Subsidiary has not been released from its
        --------                                                        
obligations as provided in Section 9.7(b).

          "TAX" is defined in Section 5.9(b).

          "TAX EVENT" means any amendment to, or change after the date of the
Closing in, the laws, regulations or published tax rulings (including tax
treaties and regulations with respect to such treaties) of any Applicable Taxing
Authority, or any 

                                   Page 196
<PAGE>
 
amendment to or change after the date of the Closing in the official
administration, interpretation or application of such laws, regulations, or
rulings.

          "TAX PAYMENT" is defined in Section 8.3(a).

          "U.S. DOLLAR" or "U.S.$" means lawful money of the United States of
America.

          "WHOLLY-OWNED SUBSIDIARY" means, at any time, any Subsidiary one
hundred percent (100%) of all of the equity interests (except directors'
qualifying shares) and voting interests of which are owned by any one or more of
the Company and the Company's other Wholly-Owned Subsidiaries at such time.

                                   Page 197
<PAGE>
 
     EXHIBIT 1

                                [FORM OF NOTE]


                         NEWBRIDGE NETWORKS CORPORATION

                           6.51% SENIOR NOTE DUE 2003

No. [_____]                                                              [Date]
U.S. $[_______]                                                 PPN 650901 A* 2

          FOR VALUE RECEIVED, the undersigned, NEWBRIDGE NETWORKS CORPORATION
(herein called the "Company"), a corporation organized and existing under the
laws of Canada, hereby promises to pay to [___________________________], or
registered assigns, the principal sum of [___________________________] U.S.
DOLLARS (or so much thereof as shall not have been prepaid) on April 30, 2003,
with interest (computed on the basis of a 360-day year of twelve 30-day months)
(a) on the unpaid balance thereof at the rate of 6.51% per annum from the date
 -                                                                            
hereof, payable semiannually, on the last day of April and October in each year,
commencing with October 31, 1998, until the principal hereof shall have become
due and payable, and (b) to the extent permitted by law on any overdue payment
                      -                                                       
(including any overdue prepayment) of principal, any overdue payment of interest
and any overdue payment of any Make-Whole Amount (as defined in the Note
Purchase Agreement referred to below), payable semiannually as aforesaid (or, at
the option of the registered holder hereof, on demand), at a rate per annum from
time to time equal to the greater of (i) 8.51% or (ii) 2% over the rate of
                                      -            --                     
interest publicly announced by Bank of America from time to time in San
Francisco, California as its "base" or "prime" rate.

          Payments of principal of, interest on and any Make-Whole Amount with
respect to this Note are to be made in lawful money of the United States of
America at the principal office of Royal Bank of Canada in New York, New York or
at such other place as the Company shall have designated by written notice to
the holder of this Note as provided in the Note Purchase Agreement referred to
below.

          This Note is one of a series of Senior Notes (herein called the
"Notes") issued pursuant to the Note Purchase Agreement, dated as of April 28,
1998 (as from time to time amended, the "Note Purchase Agreement"), between the
Company and the respective Purchasers named therein and is entitled to the
benefits thereof.  Each holder of this Note will be deemed, by its acceptance
hereof, (i) to have agreed to the confidentiality provisions set forth in
         -                                                               
Section 21 of the Note Purchase Agreement and (ii) to have made the
                                               --                  
representation set forth in Section 6.2 of the Note Purchase Agreement.

          This Note is a registered Note and, as provided in the Note Purchase
Agreement, upon surrender of this Note for registration of transfer, duly
endorsed, or accompanied by a written instrument of transfer duly executed, by
the registered holder hereof or such holder's attorney duly authorized in
writing, a new Note for a 

                                   Page 198
<PAGE>
 
like principal amount will be issued to, and registered in the name of, the
transferee. Prior to due presentment for registration of transfer, the Company
may treat the person in whose name this Note is registered as the owner hereof
for the purpose of receiving payment and for all other purposes, and the Company
will not be affected by any notice to the contrary.

          This Note is subject to optional prepayment, in whole or from time to
time in part, at the times and on the terms specified in the Note Purchase
Agreement, but not otherwise.

          If an Event of Default, as defined in the Note Purchase Agreement,
occurs and is continuing, the principal of this Note may be declared or
otherwise become due and payable in the manner, at the price (including any
applicable Make-Whole Amount) and with the effect provided in the Note Purchase
Agreement.

          This Note shall be construed and enforced in accordance with the laws
of the State of New York.


                              NEWBRIDGE NETWORKS CORPORATION


                              By___________________________________
                                Title:


                              By___________________________________
                                Title:

                                   Page 199
<PAGE>
 
                                                          EXHIBIT 4.4(a)(i)/(ii)

                            Matters To Be Covered In
                       Opinions of Counsel To the Company
                       ----------------------------------


                                   Page 200
<PAGE>
 
                                                                  EXHIBIT 4.4(b)

                       FORM OF OPINION OF SPECIAL COUNSEL
                               TO THE PURCHASERS



                                [TO BE PROVIDED]

                                   Page 201
<PAGE>
 
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
Section                                                            Page
-------                                                            ----
<S>                                                                <C>
1.  AUTHORIZATION OF NOTES.......................................   141

2.  SALE AND PURCHASE OF NOTES...................................   141

3.  CLOSING......................................................   142

4.  CONDITIONS TO CLOSING........................................   142

    4.1.  Representations and Warranties.........................   142
    4.2.  Performance; No Default................................   143
    4.3.  Compliance Certificates................................   143
    4.4.  Opinions of Counsel....................................   143
    4.5.  Purchase Permitted By Applicable Law, etc..............   143
    4.6.  Sale of Other Notes....................................   144
    4.7.  Payment of Special Counsel Fees........................   144
    4.8.  Private Placement Number...............................   144
    4.9.  Changes in Corporate Structure.........................   144
    4.10. Evidence of Consent to Receive Service of Process......   144
    4.11. Subsidiary Guarantees..................................   144
    4.12. Proceedings and Documents..............................   145

5.  REPRESENTATIONS AND WARRANTIES OF THE COMPANY................   145

    5.1.  Organization; Power and Authority......................   145
    5.2.  Authorization, etc.....................................   145
    5.3.  Disclosure.............................................   146
    5.4.  Organization and Ownership of Shares of Subsidiaries...   146
    5.5.  Financial Statements...................................   147
    5.6.  Compliance with Laws, Other Instruments, etc...........   147
    5.7.  Governmental Authorizations, etc.......................   147
    5.8.  Litigation; Observance of Statutes and Orders..........   148
    5.9.  Taxes; Foreign Taxes...................................   148
    5.10. Title to Property; Leases..............................   149
    5.11. Licenses, Permits, etc.................................   149
    5.12. Compliance with ERISA..................................   149
    5.13. Private Offering by the Company........................   150
    5.14. Use of Proceeds; Margin Regulations....................   151
    5.15. Existing Indebtedness..................................   151
    5.16. Foreign Assets Control Regulations, etc................   151
    5.17. Status under Certain Statutes..........................   152
    5.18. Ranking................................................   152
    5.19. Representations of Subsidiary Guarantors...............   152
</TABLE>

                                   Page 142
<PAGE>
 
<TABLE>
<S>                                                                    <C>
6.  REPRESENTATIONS OF THE PURCHASER.................................  152

    6.1.  Purchase for Investment....................................  152
    6.2.  Source of Funds............................................  153

7.  INFORMATION AS TO COMPANY........................................  154

    7.1.  Financial and Business Information.........................  154
    7.2.  Officer's Certificate......................................  156
    7.3.  Inspection.................................................  157

8.  PREPAYMENT OF THE NOTES..........................................  157

    8.1.  Maturity...................................................  157
    8.2.  Optional Prepayments with Make-Whole Amount................  158
    8.3.  Prepayment in Connection with a Payment under Section 13...  158
    8.4.  Notices, Etc...............................................  159
    8.5.  Allocation of Partial Prepayments..........................  159
    8.6.  Maturity; Surrender, etc...................................  159
    8.7.  Purchase of Notes..........................................  160
    8.8.  Make-Whole Amount..........................................  160

9.  AFFIRMATIVE COVENANTS............................................  161

    9.1.  Compliance with Law........................................  161
    9.2.  Insurance..................................................  162
    9.3.  Maintenance of Properties..................................  162
    9.4.  Payment of Taxes...........................................  162
    9.5.  Corporate Existence, etc...................................  163
    9.6.  Ranking....................................................  163
    9.7.  Subsidiary Guarantors......................................  163

10. NEGATIVE COVENANTS...............................................  163

    10.1.  Transactions with Affiliates..............................  164
    10.2.  Merger, Consolidation, etc................................  164
    10.3.  Debt Ratio................................................  165
    10.4.  EBITDA Ratio..............................................  165
    10.5.  Subsidiary Indebtedness...................................  165
    10.6.  Net Worth.................................................  165
    10.7.  Liens.....................................................  165
    10.8.  Sale of Assets............................................  167

11. EVENTS OF DEFAULT................................................  168

12. REMEDIES ON DEFAULT, ETC.........................................  170

    12.1.  Acceleration..............................................  170
    12.2.  Other Remedies............................................  171
    12.3.  Rescission................................................  171
    12.4.  No Waivers or Election of Remedies, Expenses, etc.........  171

13. TAX INDEMNIFICATION..............................................  172
</TABLE>

                                   Page 143
<PAGE>
 
<TABLE>
<S>                                                             <C>           
14.   REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES............. 173

      14.1. Registration of Notes............................... 173
      14.2. Transfer and Exchange of Notes...................... 173
      14.3. Replacement of Notes................................ 174

15.   PAYMENTS ON NOTES......................................... 174

      15.1. Place of Payment.................................... 174
      15.2. Home Office Payment................................. 174

16.   EXPENSES, ETC............................................. 175

      16.1. Transaction Expenses................................ 175
      16.2. Taxes............................................... 175
      16.3. Survival............................................ 176

17.   SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE
      AGREEMENT................................................. 176

18.   AMENDMENT AND WAIVER...................................... 176

      18.1. Requirements........................................ 176
      18.2. Solicitation of Holders of Notes.................... 177
      18.3. Binding Effect, etc................................. 177
      18.4. Notes held by Company, etc.......................... 178

19.   NOTICES................................................... 178

20.   REPRODUCTION OF DOCUMENTS................................. 178

21.   CONFIDENTIAL INFORMATION.................................. 179

22.   SUBSTITUTION OF PURCHASER................................. 180

23.   JURISDICTION AND PROCESS.................................. 180

24.   OBLIGATION TO MAKE PAYMENTS IN U.S. DOLLARS............... 181

25.   MISCELLANEOUS............................................. 182
      25.1.  Successors and Assigns............................. 182
      25.2.  Payments Due on Non-Business Days.................. 182
      25.3.  Severability....................................... 182
      25.4.  Construction....................................... 182
      25.5.  Counterparts....................................... 183
      25.6.  Governing Law...................................... 183
</TABLE> 

   SCHEDULE A        --     INFORMATION RELATING TO PURCHASERS
 
   SCHEDULE B        --     DEFINED TERMS
 
   SCHEDULE 4.9      --     Changes in Corporate Structure


                                   Page 144
 
<PAGE>
 
   SCHEDULE 5.3       --    Disclosure Materials
                        
   SCHEDULE 5.4       --    Material Subsidiaries of the Company and
                            Ownership of Subsidiary Stock
                        
   SCHEDULE 5.5       --    Financial Statements
                        
   SCHEDULE 5.7       --    Governmental Authorizations
                        
   SCHEDULE 5.8       --    Certain Litigation
                        
   SCHEDULE 5.11      --    Patents, etc.
                        
   SCHEDULE 5.15      --    Existing Indebtedness
                        
   EXHIBIT 1          --    Form of 6.51% Senior Note due 2003
                        
   EXHIBIT 2          --    Form of Subsidiary Guarantee
                        
   EXHIBIT 4.4(a)(i)  --    Form of Opinion of U.S. Counsel for the
                            Company
                        
   EXHIBIT 4.4(a)(ii) --    Form of Opinion of Canadian Counsel
                            for the Company
                        
   EXHIBIT 4.4(b)     --    Form of Opinion of Special Counsel for the
                            Purchasers

                                   Page 145
<PAGE>
 
                                                            CONFORMED COPY



                                        
================================================================================
                         NEWBRIDGE NETWORKS CORPORATION


                               U.S.$225,000,000


                          6.51% Senior Notes due 2003


                                   ________

                            NOTE PURCHASE AGREEMENT

                                   ________


                           Dated as of April 28, 1998

================================================================================

[Exhibit 2 is a photocopy of the Subsidiary Guarantee as executed and delivered.
Exhibit 4.4(a)(i) is a photocopy of the Opinion of United States Counsel for the
Company as executed and delivered.  Exhibit 4.4(a)(ii) is a photocopy of the
Opinion of Canadian Counsel for the Company as executed and delivered.  Exhibit
4.4(b) is the Opinion of Special New York Counsel to the Purchasers as executed
and delivered.]


                                   Page 141
<PAGE>
 
                                EXHIBIT 10.23A

                                   Page 202
<PAGE>
 
          THIS AGREEMENT made the 12th day of March, 1998


B E T W E E N :


          CROSSKEYS SYSTEMS CORPORATION


          (Hereinafter called the "Sublandlord")


                                                            OF THE FIRST PART


AND:



          NEWBRIDGE NETWORKS CORPORATION


          (Hereinafter called the "Subtenant")


                                                              OF THE SECOND PART


AND:



          KANATA RESEARCH PARK CORPORATION


          (Hereinafter called the "Landlord")


                                                            OF THE THIRD PART



                               AMENDMENT TO LEASE


     WHEREAS pursuant to a written Sublease dated the 1st day of October, l996
(the "Sublease") the Subtenant leased Twenty Thousand Seven Hundred and Eighteen
(20,718) usable square feet (the "Leased Premises") [Twenty-Two Thousand One
Hundred and Forty-Nine (22,149) rentable square feet] of space on the third
(3rd) floor of the building known municipally as 350 Terry Fox Drive (the
"building") from the Sublandlord.


     AND WHEREAS the Subtenant renewed its Sublease the 1st day of October, 1997
for a term of one (1) year.


     AND WHEREAS the Subtenant wishes to release part of the area of the Sub-
leased Premises and the Sublandlord and Landlord are in agreement therewith.

                                   Page 203
<PAGE>
 
     THEREFORE in consideration of the rents covenants and conditions contained
herein, the Sublandlord and Subtenant agree as follows:


1.   Effective January 31, 1998 Four Thousand Five Hundred (4,500) usable [Four
     Thousand Eight Hundred and Fifteen (4,815) rentable] square feet shall be
     released by the Subtenant back to the Sublandlord.


2.    The Sublease shall be amended effective January 31, 1998 as follows:


     a)   The reference to "Twenty Thousand Seven Hundred and Eighteen (20,718)
     usable [Twenty-Two Thousand One Hundred and Forty-Nine (22,149) rentable]"
     shall be replaced with "Sixteen Thousand Two Hundred and Eighteen (16,218)
     usable [Seventeen Thousand Three Hundred and Thirty-Four (17,334)
     rentable]".


     b)   Paragraph 1 (b) shall be amended by deleting the table contained
     therein and replacing same with the following:


<TABLE>
<CAPTION>
                    RENTAL RATE PER SQ. FT.        FOR LEASED       COMMON       TOTAL PER 
TERM                     PER ANNUM                  PREMISES         AREA          ANNUM
--------            -----------------------        -----------      ------       ---------
<S>                 <C>                            <C>              <C>          <C>
    1                       $11.25                 $182,452.50      $12,555.00   $195,007.50
</TABLE>

     c)   Paragraph 3 shall be amended by deleting the reference to "Twenty-Four
     point Zero Eight percent (24.08%)" and replacing same with "Eighteen point
     Two Eight (18.28%)".

     d)   Schedule "A" shall be deleted and replaced with Schedule "A" attached
     hereto.

3.   Notwithstanding the release of the Four Thousand Five Hundred (4,500)
     usable square feet of space by the Subtenant to the Sublandlord the
     Subtenant shall be responsible for any year end Additional Rent adjustments
     for such space up to January 31, 1998.

     SAVE AND EXCEPT as set out herein all other terms and conditions of the
Sublease shall remain unchanged and all capitalized terms used herein shall have
the same meaning as in the Sublease.

                                   Page 204
<PAGE>
 
     IN WITNESS WHEREOF the parties hereto have affixed their corporate seals
duly attested to by the hands of their authorized signing officers.

SIGNED, SEALED AND DELIVERED
  In the Presence of:
                              )  KANATA RESEARCH PARK
                              )      CORPORATION
                              )
                              )
                              )                                 c/s
                              ) Per: /s/ BRONWEN A. HEINS         
                                    -----------------------------          
                              ) Name:    Bronwen A. Heins
                              ) Title:   Corporate Secretary
                              )  I have the authority to bind the corporation.
                              )
                              ) NEWBRIDGE NETWORKS
                              )  CORPORATION
                              )
                              )
                              )
                              ) Per: /s/ DONALD MILLS        
                                    -----------------------------         
                              ) Name:    Donald Mills
                              ) Title:   Vice President Administration
                              )                                 c/s
                              ) Per: /s/            
                                    -----------------------------            
                              ) Name:
                              ) Title:
                              )  I/We have the authority to bind the
                                 corporation.
                              )
                              ) CROSSKEYS SYSTEMS CORPORATION
                              )
                              )
                              ) Per: /s/ JOHN SELWYN         
                                    -----------------------------          
                              ) Name:    Chief Executive Officer
                              ) Title:
                              )                                 c/s
                              ) Per: /s/           
                                    -----------------------------            
                              ) Name:
                              ) Title:
                              )  I/We have the authority to bind the 
                                 corporation.
                                   
                                   Page 205
<PAGE>
 
                                 SCHEDULE "A"

                                  FLOOR PLAN
                                  ----------

                                   Page 206
<PAGE>
 
                                 EXHIBIT 10.25

                                   Page 207
<PAGE>
 
     THIS EMPLOYMENT AGREEMENT made this twenty-first day of May, 1998.
 
BETWEEN:                          ALAN G. LUTZ
                 of the City of  Houston, in the State of Texas

                  (hereinafter referred to as the "Executive")
                               OF THE FIRST PART

                                      and

                         NEWBRIDGE NETWORKS CORPORATION
              a corporation incorporated under the laws of Canada

                 (hereinafter referred to as the "Corporation")
                               OF THE SECOND PART

The Corporation wishes to employ the Executive as President and Chief Operating
Officer and the Executive wishes to be employed by the Corporation in that
capacity, upon the terms and conditions specified herein:

AND whereas the Corporation and the Executive desire to enter into a written
agreement which contains the agreed upon terms and conditions.

Now therefore, in consideration of the mutual covenants and agreements
hereinafter contained, and for other good and valuable consideration the receipt
and sufficiency of which is expressly acknowledged, the parties hereto mutually
covenant and agree as follows:

1.0  DEFINITIONS
     -----------

(a)  "Affiliated Corporations" shall mean all affiliated corporations of
     Newbridge Networks Corporation from time to time;

(b)  "Base Salary, performance incentives and stock options" shall be as defined
     in Appendix "A";

(c)  "Business of the Company" shall mean and include the business of Newbridge
     Networks Corporation and its related subsidiaries, related corporations and
     affiliated corporations from time to time;

                                   Page 208
<PAGE>
 
(d)  "Competing Business" shall mean any business which is the same or
     essentially the same as or competes with any part of the Business of the
     Corporation and shall include but not be restricted to the following
     companies and their successors: Cisco, Bay Networks, 3 Com, Nortel, Ascend,
     Lucent and Alcatel.

(e)  "Confidential Information" shall mean all trade secrets, customer lists,
     product development and management information, sales and marketing
     information, customer account records, training and operations material and
     memoranda, personnel records, technical specifications and standards,
     pricing information, and financial information concerning or relating to
     the business, accounts, customers, employees and affairs of the Corporation
     and its related subsidiaries, related corporations and affiliated
     corporations obtained by or furnished, disclosed or disseminated to the
     Executive, or obtained, assembled or compiled by the Executive directly or
     under his supervision during the course of his employment by the
     Corporation, and all physical embodiments of the foregoing, all of which
     are hereby agreed to be the property of and confidential to the
     Corporation, but Confidential Information shall not include any of the
     foregoing to the extent the same is or becomes publicly known through no
     fault or breach of this Agreement by the Executive.

2.0  TERMS & DUTIES OF EMPLOYMENT
     ----------------------------

2.1  TERM
     ----

     Subject to the provisions of this Agreement, this Agreement and the
     employment of the Executive hereunder shall continue for a period of three
     (3) years from the date of execution of this Agreement (the Initial Term).
     Thereafter this Agreement will be automatically renewed for successive
     three (3) year terms unless terminated by either of the parties or upon
     mutual consent of the parties.

2.2  PRESIDENT AND CHIEF OPERATING OFFICER
     -------------------------------------

     Subject to the provisions of this agreement, the Executive shall serve the
     Corporation in the capacity as President and Chief Operating Officer to
     perform such duties and exercise such powers as may be reasonably required
     of him or be vested in him by the Board of Directors or the Chairman and
     Chief Executive 

                                   Page 209
<PAGE>
 
     Officer of the Corporation. During his employment hereunder, the Executive
     shall devote his full time and attention and exert his best efforts,
     knowledge, skill and energy to his employment hereunder and will not,
     without the written consent of the Chairman and Chief Executive Officer
     assume other employment or engage in any other business which impacts on
     the Executive's ability to fulfil his duties to the Corporation.

2.3  PLACE OF EMPLOYMENT
     -------------------

     The Executive shall perform his duties for the Corporation at its Corporate
     Headquarters in Kanata, Ontario and at such other locations as the
     Corporation may require from time to time and made known to him.

2.4  OFFICER OF THE COMPANY
     ----------------------

     So long as the Board of Directors and the Chairman and Chief Executive
     Officer, in their sole discretion desire, the Executive shall serve as an
     officer of the Corporation or any of its related subsidiaries, affiliated
     corporations or related corporations designated in a specific manner,
     without any additional remuneration to the Executive.

3.0  COMPENSATION
     ------------

3.1  During the term of this agreement, the Executive shall receive a base
     salary, performance incentives and stock options. These shall be paid in
     accordance with their terms, as set out in Appendix "A".

3.2  During the term of this Agreement, the  Corporation shall make available to
     the Executive the standard benefits which it makes available to other
     Officers of the Corporation, all subject to the eligibility requirements
     and other terms, conditions, restrictions and limitations of the applicable
     plan, documents and insurance agreements as summarized in Appendix "B".
     Nothing in this Agreement shall preclude the Corporation from amending or
     terminating any such benefits or plans, as long as the amendment or
     termination is applicable to the Corporation's executives generally.

3.3  All references herein to compensation to be paid to the Executive are to
     the gross amounts which are due hereunder.  The Corporation shall have the
     right to 

                                   Page 210
<PAGE>
 
     deduct from such gross amounts all taxes which may be required to be
     deducted or withheld under any provision of the law now in effect or which
     may become effective at any time during the term of this Agreement.

3.4  VACATION
     --------

     The Executive shall be entitled to four (4) weeks vacation per year.  Such
     vacation shall be scheduled at the mutual convenience of the parties having
     regard to the operations of the Corporation.

3.5  EXPENSES
     --------

     The Executive shall be entitled to be reimbursed in accordance with the
     policies of the Corporation, as adopted and amended from time to time, for
     all reasonable, ordinary and necessary expenses incurred by him in the
     discharge and performance of his duties, provided Executive shall as a
     condition of such reimbursement, submit verification of the nature and
     amount of such expenses in accordance with the reimbursement policies from
     time to time adopted by the Corporation.

3.6  RELOCATION COSTS
     ----------------

     The Executive will be reimbursed for all reasonable costs of relocating
     from Houston, Texas to Herndon, Virginia in accordance with the terms of
     the policy set out in Appendix "C". Additionally, reimbursement for
     expenses incurred in transporting personal goods from Houston to Kanata
     will be made.

                                   Page 211
<PAGE>
 
4.0    EXECUTIVE'S COVENANTS
       ---------------------

4.1    SERVICE
       -------

       The Executive shall devote the whole of his time, attention and ability
       and exert his best efforts, knowledge skill and energy to his employment
       hereunder and to the business of the Corporation and shall well and
       faithfully serve the Corporation and shall use his best efforts to
       promote the interests of the Corporation and its subsidiaries, affiliated
       and related Corporations. The Executive will not without the prior
       written consent of the Chairman and Chief Executive Officer and the Board
       of Directors assume other employment or engage in any other business
       which impacts on the Executive's ability to fulfil his duties to the
       Corporation.

4.2    NON-DISCLOSURE OF CONFIDENTIAL INFORMATION
       ------------------------------------------

       The Executive acknowledges that in the course of carrying out, performing
       and fulfilling his duties under this Agreement he will have access to and
       will be entrusted with Confidential Information and trade secrets
       concerning the business of the Corporation and its subsidiaries, related
       corporations and affiliated corporations including licensing strategies,
       customer information, product development and management information,
       business, marketing strategies and other confidential information of the
       Corporation.

4.2.1  The Executive hereby agrees that he shall not, either during the term of
       his employment or at any time thereafter or under any circumstances,
       without the prior written consent of the Board of Directors or Chairman
       and Chief Executive Officer of the Company or except as expressly
       permitted hereunder or as required by law, directly or indirectly
       communicate or disclose to any person or persons, firm, partnership,
       association, company or corporation or its subsidiaries or affiliates or
       a duly authorised representative thereof any Confidential Information,
       trade secret, proprietary knowledge, business or marketing strategies or
       knowledge whatsoever acquired by the Executive relating to or concerning
       but not limited to the technology, trade secrets, customers, products,
       developments, marketing techniques, systems or other confidential
       information regarding the operations, property, business strategy and
       affairs of the Company or any of its subsidiaries or affiliates, nor
       shall the Executive utilize or make available any such Confidential
       Information, directly

                                   Page 212
<PAGE>
 
       or indirectly in connection with the solicitation or acceptance of
       employment with any competitor of the Company, its subsidiaries, related
       corporations and affiliates provided that nothing herein shall prevent
       disclosure of information which is in the public domain or is publicly
       available at the time of disclosure or use or which is required to be
       disclosed under appropriate statutes, rules of law or legal process.

4.2.2  Neither during the term of his employment nor at any time thereafter will
       the Executive make use of such Confidential Information for his personal
       benefit or for the benefit of any other person or persons, firm,
       partnership, association, company or corporation other than the
       Corporation and its affiliates or assist others in doing so.


4.2.3  The Executive shall not at any time remove any proprietary information or
       Confidential Information from the premises of the Corporation, its
       subsidiaries, affiliates, related Corporations and/or their customers
       except as required in the discharge of his duties. The Executive further
       agrees to exercise a high degree of care and prudence in safeguarding and
       dealing with any proprietary and Confidential Information. Any
       information, documents, copies, tapes or other materials shall be
       returned to the Corporation forthwith and shall remain the property of
       the Corporation at all times.

4.2.4  The Executive acknowledges and agrees that disclosure of any Confidential
       Information to competitors of the Corporation or to the general public
       would be highly detrimental to the business interests of the Corporation.

4.2.5  The Executive further acknowledges that in performing the duties and
       responsibilities of employment hereunder, he will occupy a position of
       fiduciary trust and confidence with respect to the Corporation and while
       employed by the Corporation he will not act in a manner which is
       inconsistent with such position of fiduciary trust and confidence.
       Nothing contained in this Agreement shall limit in any way or restrict
       such fiduciary duties and obligations.

4.2.6  The Executive acknowledges and agrees that the right of the Corporation
       to maintain such Confidential Information as confidential constitutes a
       proprietary right which the Corporation is entitled to protect.

                                   Page 213
<PAGE>
 
4.2.7  The Executive shall keep in strictest confidence the private affairs,
       business and financial affairs of all of the Corporation's employees and
       customers, both during the term of his employment and thereafter.

5.0    NON-COMPETITION
       ---------------

5.1    The Executive covenants and agrees that he will not, either at any time
       during the term of his employment or within a period of one (1) year
       following the termination of this Agreement and his employment for any
       reason whatsoever, without the prior written consent of the Board of
       Directors or the Chairman and Chief Executive Officer of the Corporation,
       either individually or in partnership or jointly or in conjunction with
       any other person or persons, firm, partnership, corporation,
       unincorporated syndicate, unincorporated organization, trust, trustee,
       executor, administrator or other legal representative (except the
       Corporation or any of its subsidiaries, related corporations or
       affiliated corporations) whether as employee, principal, agent,
       shareholder or in any other capacity whatsoever:

a.     carry on or be engaged in, or be concerned with or be interested in or
       advise, lend money to, guarantee the debts for obligations of, or permit
       his name or any part thereof to be used or employed by any person or
       persons, firm, partnership, association, company, corporation or any
       other entity engaged in or concerned with or interested in any animation
       or business which is or may be competitive with the Corporation in any of
       its principal geographic markets;

b.     attempt to solicit any business from the company or any of its
       subsidiaries, related corporations or affiliated corporations; or

c.     take any action that may impair the relations between the Corporation or
       any of its subsidiaries, related corporations or affiliated corporations
       and their respective suppliers, customers, employees or others or that
       may otherwise be detrimental to the business of the Corporation and its
       subsidiaries, related corporations or affiliated corporations.

5.2    The Executive hereby acknowledges and agrees that all covenants,
       provisions and restrictions contained in Sections 4, 5, 6, 7 and 8 hereof
       are reasonable and valid and all defences to the strict enforcement
       thereof by the Company are

                                   Page 214
<PAGE>
 
     hereby waived by the Executive.

5.3  The Executive further acknowledges and agrees that in the event of a
     violation of any of the covenants, provisions and restrictions contained in
     Sections 4, 5, 6, 7 and 8 hereof, the Corporation shall be authorised and
     entitled to obtain from any court of competent jurisdiction, interim,
     interlocutory and permanent injunctive relief and an accounting of all
     profits and benefits arising out of such violation which rights and
     remedies shall be cumulative and in addition to any other rights or
     remedies to which the Corporation may be entitled.

6.0  OWNERSHIP OF MATERIALS
     ----------------------

6.1  Any and all materials, ideas, inventions, including patentable inventions,
     trade names, trade marks, designs or other creative or literary property
     and adaptations thereof, created or developed by the Executive during his
     employment (the "Materials") shall belong solely and completely to the
     Corporation, as the Corporation may decide, for any use it may thereafter
     see fit in any manner or media throughout the world in perpetuity. The
     Executive hereby waives his moral rights in the Materials and hereby
     assigns and transfers to the Corporation, all of his right, title and
     interest in and to such Materials and any patent, trademark, copyright and
     industrial designs thereto and any extensions and renewals of such all
     other rights he may have in the Materials.

7.0  NON-SOLICITATION OF CUSTOMERS
     -----------------------------

7.1  The Executive agrees that during his employment by the Corporation, and for
     a period of one (1) year following the date of the notice given by the
     Corporation or the Executive as set forth in section 8 herein below of the
     termination of such employment, he will not, without the prior written
     consent of the Board of Directors or the Chairman and Chief Executive
     Officer of the Corporation, either directly or indirectly, on his own
     behalf or in the service or on behalf of others solicit, divert or
     appropriate, or attempt to solicit, divert or appropriate, to any competing
     business or to any persons or entity whose account with the Corporation
     generated revenues which, during the fiscal quarter immediately preceding
     the notice of termination of such employment, constituted one percent (1%)
     or greater of the total revenues of the Corporation (such persons and

                                   Page 215
<PAGE>
 
     entities being hereinafter referred to as "Significant Clients"). The
     Corporation agrees to provide to the Executive, within fourteen (14) days
     following receipt of a written request from the Executive, a list of all
     Significant Clients.

7.2  NON-SOLICITATION OF EMPLOYEES
     -----------------------------

     The Executive agrees that in the course of carrying out, performing and
     fulfilling his duties under this agreement, and for a period of one (1)
     year following the date of notice given by the Corporation or the Executive
     as set forth in Section 8 herein of the termination of such employment, he
     will not, either directly or indirectly, on his own behalf or in the
     service or on behalf of others, knowingly, after due inquiry, solicit,
     divert or hire away, or attempt to solicit, divert or hire away, to any
     Competing Business (i) any person previously employed by the Corporation or
     (ii) any other person who, at any time during the ninety (90) days prior to
     the notice of termination as described in this section, has been employed
     on a full-time basis by the Corporation.

8.0  TERMINATION
     ------------

8.1  CORPORATION'S NOTICE
     --------------------

     Notwithstanding any other provision of this Agreement, the Corporation may
     give to the Executive twenty-four (24) months notice in writing of its
     intention to terminate this Agreement and on the expiration of this notice
     period, the employment relationship shall be wholly terminated.  However,
     the Corporation may terminate the employment of the Executive at any time
     and for any reason upon paying the Executive twenty-four (24) months base
     salary in lieu of notice in which event the employment relationship shall
     be wholly terminated on the date such payment in lieu of notice is made.

8.2  EXECUTIVE'S NOTICE
     ------------------

     The Executive shall give to the Corporation three (3) months notice in
     writing of his resignation and termination of this Agreement. The
     Corporation may waive the Executive's obligation to perform his duties
     during this three (3) month notice period and terminate his employment
     immediately without any further compensatory obligations.

                                   Page 216
<PAGE>
 
8.3  DISCHARGE FOR CAUSE
     -------------------

     (a)    The Corporation may forthwith terminate the Executive's employment
            at any time for just cause. The following shall be considered just
            cause to terminate the Executive's employment:

     (i)   any material breach of the provisions of this Agreement;
     (ii)  any material course of conduct of the Executive which in the opinion
           of the Board of Directors and the Chairman and Chief Executive
           Officer, acting reasonably, brings the Corporation into disrepute and
           is material to the Corporation; and
     (iii) any other reason which at common law would constitute cause.

     (b)   In the event of termination for just cause, the Executive shall be
           entitled to his salary and other entitlements, rights or benefits to
           the last day of his employment together with any accrued and unused
           vacation pay; all salary, entitlements, rights or benefits set out in
           Appendix "A" shall cease effective as of such termination.

     However the occurrences in paragraphs (i), (ii) and (iii), if remediable,
     shall not constitute "cause" in the first instance in which they occur,
     until the Corporation has provided the Executive thirty (30) days' notice
     of the objectionable conduct and the Executive has failed to remedy the
     same or, if such conduct is not remediable by diligent efforts within such
     thirty day period, the Executive has commenced and diligently pursued
     remediation in the thirty day period and successfully concludes the same
     within a reasonable period thereafter.  In the event the Executive is
     discharged for cause, the Corporation shall have no further obligations or
     liabilities hereunder after the date of such discharge.


8.4  The Executive acknowledges that upon termination of the Agreement and the
     Executive's employment pursuant to Clauses 8.1, 8.2 and 8.3 is deemed
     conclusively to be reasonable and sufficient pay in lieu of notice and the
     Executive is not entitled to any additional notice or pay.  The Executive
     shall have no further claims against the Corporation including claims for
     damages for failure to give reasonable notice, pay in lieu of notice or
     severance pay, whether by statute or common law.

                                   Page 217 

 
<PAGE>
 
8.5  DISABILITY
     ----------

     (a)  If the Executive becomes disabled and unable to perform the essential
          functions of his position, with or without reasonable accommodation,
          the Corporation will continue the payment of the Executive's Base
          Salary at its then current rate (less any sums received by him under
          any disability insurance policy provided by the Corporation) for a
          period of twenty-six (26) weeks following the date the Executive is
          first disabled.  Thereafter, the Corporation shall have no obligation
          for Base Salary during the continuance of such disability other than
          such as may be available under any disability policy or other benefit
          plan in which the Executive is a beneficiary or participant.

     (b)  If the Executive becomes disabled for a period of twenty-six (26)
          consecutive weeks or for a cumulative period of twenty-six (26) weeks
          during any twelve month period, the Corporation shall have the right
          to terminate this Agreement thereafter, without prior notice.  In such
          event the Corporation shall have no further obligations or liabilities
          hereunder after the date of such termination (including, without
          limitation, any claim for severance pay) other than (i) such as may be
          available under any disability policy or other benefit plan in which
          the Executive is a beneficiary or participant.  The Corporation shall
          pay the Executive a prorata portion of the Performance Incentive (if
          any) the Executive would have received for the then current fiscal
          year had the Executive continued to be actively employed during the
          period, at the same time that Incentive would have been paid under
          paragraph (b) above, prorated based upon the number of days the
          Executive was actively employed during the fiscal year (and for this
          purpose periods of disability and other leaves of absence shall not be
          considered active employment).  The Executive acknowledges that given
          the business of the Corporation and the responsibilities the Executive
          is expected to carry, it would be an undue hardship for the
          Corporation to continue to hold the Executive's position open for more
          than twenty-six (26) weeks in the event the Executive is so disabled.

     (c)  For purposes of this Clause 8.5, the term disabled or disability shall
          have the same meaning as such term is given in the disability policy
          of the Corporation as to which the Executive is a beneficiary.

                                   Page 218
<PAGE>
 
8.6  DEATH
     -----

     If the Executive dies, all payments hereunder shall cease at the end of the
     month in which the Executive's death shall occur and the Corporation shall
     have no further obligations or liabilities hereunder to the Executive's
     estate or legal representative or otherwise, except that the Corporation
     shall pay to the Executive's estate or legal representative a prorata
     portion of the Performance Incentive (if any) the Executive would have
     received for the fiscal year in which the Executive's death occurs, at the
     same time that Incentive would have been paid under Appendix "A", prorated
     based upon the number of days the Executive was actively employed during
     the fiscal year (for this purpose periods of disability and other leaves of
     absence shall not be considered active employment).

8.7  It is understood that while no new Corporation stock options will be
     granted to the Executive after the date of termination, the Executive will
     for stock option purposes be treated in accordance with the policies of the
     Corporation and those options which had previously been granted to the
     Executive will vest and be exercisable by the Executive in accordance with
     the applicable provisions of the Newbridge Networks Corporation
     Consolidated Key Employee Stock Option Plan.

8.8  RETURN OF PROPERTY
     ------------------

     Upon termination of this Agreement the Executive shall at once deliver or
     cause to be delivered to the Corporation all books, documents, effects,
     money, securities or other property belonging to the Corporation or for
     which the Corporation is liable to others, which are in the possession,
     charge, control or custody of the Executive.

9.0  GENERAL
     -------

9.1  ENTIRE AGREEMENT
     ----------------

     The parties hereto agree that this Agreement contains the whole agreement
and understanding of the parties and supersedes and replaces all oral or written
contracts or representations and that this Agreement cannot be amended, modified
or supplemented in any respect except by subsequent written agreement signed by
both 


                                   Page 219
<PAGE>
 
parties hereto.

     The Executive acknowledges that he has read and understands the contents of
this Agreement and that the Corporation has advised him that this Agreement
substantially   alters and supersedes his common law rights.

     The Executive acknowledges that the Corporation has referred specifically
to paragraphs 4.2 to 4.2.7, 5.1, 5.2, 5.3  herein and that he has had sufficient
opportunity to obtain independent legal advice prior to executing this
Agreement.


9.2  AMENDMENTS AND WAIVERS
     ----------------------

     No waiver of any breach of any provision of this Agreement shall be
     effective or binding unless made in writing and signed by the party
     purporting to give the same and, unless otherwise provided in the written
     waiver, shall be limited to the specific breach waived.

9.3  SEVERABILITY
     ------------

     If any provision of this Agreement is determined to be invalid or
     unenforceable in whole or in part, such invalidity or unenforceability
     shall attach only to such provision or part thereof and the remaining part
     of such provision and all other provisions hereof shall continue in full
     force and effect.

9.4  GOVERNING LAW
     -------------

     This Agreement shall be governed by and construed in accordance with the
     laws of the Province of Ontario. For the purpose of all legal proceedings
     this Agreement shall be deemed to have been performed in the Province of
     Ontario and the courts of the Province of Ontario shall have sole and
     exclusive jurisdiction to entertain any action arising under this
     Agreement.

9.5  FURTHER ASSURANCES
     ------------------

     The parties hereto shall do such things and sign such documents as may be
     necessary and desirable to give full effect and force to this agreement.

                                   Page 220
<PAGE>
 
9.6  ENUREMENT
     ---------

     This Agreement shall enure to the benefit of and be binding upon the
     parties hereto and upon the heirs, executors, administrators and legal
     personal representatives of the Executive and the successor and assigns of
     the Corporation.

9.7  INTERPRETATION OF AGREEMENT
     ---------------------------

     Any issues arising out of the application, interpretation or administration
     of this Agreement shall be determined by final and binding arbitration
     pursuant to the Arbitration Act. The arbitrator shall be appointed in
                     ---------------                                      
     accordance with the Arbitration Act, and the arbitrator shall have the
                         ---------------                                   
     power to award compensation, or damages in case of breach of the terms of
     this Agreement.  However, the arbitrator shall not have the power to order
     reinstatement of the Executive nor shall he/she have the power to amend or
     alter in any way the terms of this Agreement


IN WITNESS WHEREOF the parties have executed this Agreement.

 
                      )       NEWBRIDGE NETWORKS CORPORATION
                      )
                      )
                      )
/s/ Michael Williams          )    PER: /s/ TERENCE H. MATTHEWS
----------------------             ------------------------------
Witness               )       Chairman of the Board,
                      )       Chief Executive Officer
                      )
/s/ Dianne Lutz       )       /s/ ALAN G. LUTZ
----------------------        ------------------------------
Witness               )       (Executive)

                                   Page 221
<PAGE>
 
                                                                     Appendix  A


                COMPENSATION FOR NEWBRIDGE NETWORKS CORPORATION
                      PRESIDENT & CHIEF OPERATING OFFICER


The total compensation package will include:
 .  Stock option grants
 .  Cash compensation including:
   -    base salary
   -    annual incentive
   -    long-term incentive
 .  Benefits
All compensation dollars quoted are in US currency.

STOCK OPTIONS

1.  There will be an initial grant of 500,000 options to purchase Newbridge
    shares provided as of the start of employment.
2.  The options will be provided under the conditions specified in Newbridge
    Networks Corporation Consolidated Key Employee Stock Option Plan.

CASH COMPENSATION


1.  Base salary will be $750,000 per year for the first three years of
    employment.
2.  An annual incentive of $275,000 on condition of meeting the following annual
    performance  targets:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
     PERFORMANCE MEASURES FOR PAY OUT OF                             TARGET
              ANNUAL INCENTIVE
-----------------------------------------------------------------------------------------
<S>                                                                  <C> 
i.    50% of the annual incentive will be
    based on Corporate revenues
-----------------------------------------------------------------------------------------
ii.   50% of the annual incentive will be
    based on Corporate earnings per   share
-----------------------------------------------------------------------------------------
</TABLE>

3.  Payments of this incentive will be made semi-annually, based on performance
    to date against the annual targets. Payments of the incentive will begin on
    achievement of 90% of the target, with 100% of the incentive being paid out
    on achievement of 100% of the target. Payment for performance over 100% will
    be based on a ratio of one to one (1:1; incentive : target).
4.  Additionally, on successful achievement of the above annual targets, a pre-
    tax cash allocation of $275,000 will be provided, the post-tax income of
    which is to be used for the purchase of Newbridge shares, from the open
    market, on a date chosen by 

                                   Page 222
<PAGE>
 
    the incumbent, but within three months of the end of the year. These shares
    must be held for a minimum of one year before they can be sold.
5.  For the first year of employment only, Newbridge Networks Corporation will
    guarantee to pay at least 50% of both the above elements of annual
    incentive, in equal proportions, should the actual performance against the
    above stated targets be less than 90%.
6.  A long term incentive of $250,000 will be paid at the completion of the
    second year and $500,000 on completion of the third year, on condition of
    meeting the following performance targets:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
           PERFORMANCE MEASURES FOR                                 TARGET
        PAY OUT OF LONG TERM INCENTIVE
-----------------------------------------------------------------------------------------------
<S>                                                      <C> 
i.   50% of the long term incentive will be              Targets to be finalized
     based on market capitalization
-----------------------------------------------------------------------------------------------
ii.  50% of the long term incentive will be              Targets set based on existing 5 year 
     based on market share                               business plan
-----------------------------------------------------------------------------------------------
</TABLE>

6.  The following table summarizes the value of the components of cash
    compensation for the first three years.

<TABLE>
<CAPTION>
 
                                       YEAR 1          YEAR 2          YEAR 3
                                 ------------------------------------------------
<S>                              <C>                   <C>             <C>
Base Pay                               $  750,000      $  750,000      $  750,000
Annual Incentive                       $  275,000      $  275,000      $  275,000
Long term incentive (LTI)              $        0      $  250,000      $  500,000
Total annual cash compensation         $1,025,000      $1,275,000      $1,525,000
Cash allocation to purchase            $  275,000      $  275,000      $  275,000
 shares
Earnings                               $1,300,000      $1,550,000      $1,800,000
LTI earnings held for one year         $  250,000      $  250,000      $        0
---------------------------------------------------------------------------------
</TABLE>

                                   Page 223
<PAGE>
 
                                                                      Appendix C


                               RELOCATION COSTS


Newbridge Networks Corporation will reimburse the following costs associated
with your relocation within the United States:

1.  House hunting trip to Herndon for you and your spouse including airfares and
    up to five nights accommodation.
2.  Reimbursement of all reasonable out bound costs associated with the packing,
    insuring and shipment of your personal effects, furnishings and household
    goods to Herndon.
3.  Reimbursement of actual travel expenses associated with you and your spouse
    relocating to Herndon.
4.  An allowance of $25,000 US as a lump sum disbursement for incidental
    expenses, subject to relevant tax regulations.
5.  Reimbursement of the difference between the actual sale price and a
    guaranteed price of your home. The guaranteed price will be the average of
    three quotes from certified appraisers. Newbridge will appoint two; you may
    appoint one.
6.  Real-estate fees and disbursement associated with the sale of your current
    home and the purchase of your new home.
7.  Reasonable and actual legal fees on sale and purchase of new home, including
    retiring old mortgage and arranging a new one.
8.  Mortgage repayment penalty charges for up to three months.



In the event that you leave the Company for any reason, except termination
without cause, within the first two years of employment, you will be liable for
repayment of the above stated relocation expenses, on a pro-rata basis, as
follows:



Up to and including first year of employment                100%
From 13 months to 23 months                       92% to 9% in 8% decrements
24 months and over                                            0%

                                   Page 224
<PAGE>
 
                        NEWBRIDGE NETWORKS CORPORATION
                  EMPLOYEE AGREEMENT AS TO CONFIDENTIALITY OF
               INFORMATION AND OWNERSHIP OF PROPRIETARY PROPERTY
IN CONSIDERATION OF EMPLOYMENT WITH NEWBRIDGE NETWORKS CORPORATION ("COMPANY")
THE UNDERSIGNED ("EMPLOYEE") ACKNOWLEDGES AND AGREES THAT:


1.   Employment with Company will give Employee access to proprietary and
confidential information belonging to Company, its customers, its suppliers and
others (which proprietary and confidential information is collectively referred
to in this agreement as "Confidential Information"); and

2.   Employee may in the course of employment with Company develop tangible and
intangible property including without limitation, software, hardware, know-how,
designs, techniques, documentation and other material regardless of the form or
media on which such is stored, some or all of which property may be protected by
patents, copyrights, trade secrets, trade marks, industrial designs or mask
works (which tangible and intangible property is collectively referred to in
this agreement as "Proprietary Property").

3.   Employee, both during and after employment with the Company, shall keep all
Confidential Information confidential and shall not use any Proprietary Property
or Confidential Information except in the course of carrying out authorized
activities on behalf of the Company or except as expressly authorized by Company
in writing.

4.   Employee shall not make any unauthorized use of any trade secrets or
proprietary property of a third party during the course of employment with
Company.

5.   All Proprietary Property which Employee may develop in the course of
employment with Company, whether alone or jointly with others, shall be the
exclusive property of Company and Employee shall have no rights in any such
Proprietary Property.  At the request and expense of Company, Employee agrees to
do all acts necessary and sign all documentation necessary in order to assign
all rights in the Proprietary Property to Company and to enable Company to
register patents, copyrights, trade marks, mask works, industrial designs and
such other protections as Company deems advisable anywhere in the world.

6.   If during the course of employment with the Company Employee develops any
work which is protected by copyright, Employee hereby waives unconditionally any
"moral rights" Employee may have in such work.

7.   Employee, both during and after employment with the Company, shall not make
any unauthorized use of the Company's computer systems, communications networks,
databases or files.  Employee shall adhere to all Company policies regarding the
use of such computer systems communication networks, databases or files.

8.   Employee shall not use unauthorized software on Company equipment during
the course of employment with the Company.

9.   Employee's employment with Company is and will continue to be subject to
the terms and conditions of this agreement.

                                   Page 225
<PAGE>
 
IN WITNESS WHEREOF EMPLOYEE has executed this Agreement this  day of     , 199
 .

 
_____________________________       _________________________________
Witness                                           Employee Signature


_________________________________             ____________________
Employee Name (Please Print)                      Employee Number

                                   Page 226
<PAGE>
 
                                                                    EXHIBIT 11.1

                        NEWBRIDGE NETWORKS CORPORATION


                       COMPUTATION OF EARNINGS PER SHARE


             (Accounting principles generally accepted in Canada)
        (Canadian dollars, amounts in thousands except per share data)

<TABLE> 
<CAPTION> 
                                                         FOR THE FISCAL QUARTER ENDED          FOR THE FISCAL YEAR ENDED       
                                                         ----------------------------          -------------------------       
                                                                                                                               
                                                     Aug 3,    Nov 2,    Feb 1,    Apr 30,    Apr 30,    Apr 30,    Apr 30,     
                                                      1997     1997      1998       1998       1998       1997       1996       
                                                      ----     ----      ----       ----       ----       ----       ----       
<S>                                                <C>       <C>       <C>         <C>       <C>        <C>       <C>           
BASIC EARNINGS PER SHARE                                                                                                       
 Net earnings (loss)                               $ 64,354  $ 57,993  $(144,283)  $  3,618  $(18,318)  $156,917  $202,864     
                                                   ========  ========  =========   ========  ========   ========  ========     
                                                                                                                               
 Common Shares outstanding                                                                                                     
  at the beginning of the period                    171,859   174,245    175,305    175,434   171,859    168,676   164,515     
 Weighted average number of Common                                                                                             
   Shares issued during the period                    1,105       488         71        164     2,758      1,834     1,327     
                                                   --------  --------  ---------   --------  --------   --------  --------     
                                                                                                                               
 Weighted average number of Common                                                                                             
   Shares outstanding at the end                                                                                               
   of the period                                    172,964   174,733    175,376    175,598   174,617    170,510   165,842     
                                                   ========  ========  =========   ========  ========   ========  ========     
                                                                                                                               
 Basic earnings (loss) per share                      $0.37     $0.33     $(0.82)     $0.02    $(0.10)     $0.92     $1.22
                                                   ========  ========  =========   ========  ========   ========  ========     
                                                                                                                               
FULLY DILUTED EARNINGS PER SHARE                                                                                               
                                                                                                                               
 Earnings before imputed earnings                 $ 64,354  $ 57,993  $(144,283)  $  3,618  $(18,318)  $156,917  $202,864      
 After tax imputed earnings from the                                                                                           
   investment of funds received                                                                                                
   through dilution                                  3,979     4,363         --         --        --     11,589    10,470      
                                                  --------  --------  ---------   --------  --------   --------  --------      
 Adjusted net earnings                            $ 68,333  $ 62,356  $(144,283)  $  3,618  $(18,318)  $168,506  $213,334      
                                                  ========  ========  =========   ========  ========   ========  ========      
                                                                                                                               
 Weighted average number of                                                                                                    
   Common Shares outstanding                                                                                                   
   at the end of the period                        172,964   174,733    175,376    175,598   174,617    170,510   165,842      
                                                                                                                               
                                                                                                                               
   equivalents based on conversion of                                                                                          
   outstanding stock options                        16,118    15,783         --         --        --     14,085    13,823      
                                                  --------  --------  ---------   --------  --------   --------  --------      
                                                                                                                               
 Weighted average number of Common                                                                                             
  Shares and equivalents outstanding                                                                                           
   at the end of the period                        189,082   190,516    175,376    175,598   174,617    184,595   179,665      
                                                  ========  ========  =========   ========  ========   ========  ========      
                                                                                                                               
 Fully diluted earnings per share                    $0.36     $0.33     $(0.82)     $0.02    $(0.10)     $0.91     $1.19
                                                  ========  ========  =========   ========  ========   ========  ========       
 
EARNINGS PER SHARE EXPRESSED IN U.S. DOLLARS

Daily average exchange rate of a Canadian
   dollar for U.S. dollars as reported by the
   Federal Reserve Bank of New York                $0.7242   $0.7205    $0.7006    $0.7011   $0.7116    $0.7344   $0.7345
 
 Basic earnings (loss) per share, in U.S. dollars    $0.27     $0.24     $(0.58)     $0.01    $(0.07)     $0.68     $0.90 
 
 Fully diluted earnings (loss) per
   share, in U.S. dollars                            $0.26     $0.24     $(0.58)     $0.01    $(0.07)     $0.67     $0.87 
</TABLE>

                                   Page 227
<PAGE>
 
                                                                    EXHIBIT 11.2

                                                                                
                        NEWBRIDGE NETWORKS CORPORATION

                       COMPUTATION OF EARNINGS PER SHARE


        (Accounting principles generally accepted in the United States)
        (Canadian dollars, amounts in thousands except per share data)

<TABLE> 
<CAPTION> 
                                                         FOR THE FISCAL QUARTER ENDED         FOR THE FISCAL YEAR ENDED     
                                                         ----------------------------         -------------------------     
                                                                                                                            
                                                     Aug 3,    Nov 2,     Feb 1,    Apr 30,    Apr 30,   Apr 30,   Apr 30,  
                                                      1997      1997       1998       1998      1998       1997      1996   
                                                    --------  --------  ----------  --------  ---------  --------  -------- 
<S>                                                 <C>       <C>       <C>         <C>       <C>        <C>       <C>      
EARNINGS PER SHARE  (U.S. GAAP - BASIC)                                                                                     
                                                                                                                            
 Net earnings (loss)                                $ 64,354  $ 57,993  $(170,664)  $ 29,999  $(18,318)  $156,917  $202,864 
                                                    ========  ========  =========   ========  ========   ========  ======== 
                                                                                                                            
 Weighted average number of Common                                                                                          
   Shares outstanding at the end                                                                                            
   of the period                                     172,964   174,733    175,376    175,598   174,617    170,510   165,842 
                                                    ========  ========  =========   ========  ========   ========  ======== 
                                                                                                                            
 Earnings per share (U.S. GAAP)                     $   0.37  $   0.33  $   (0.97)  $   0.17  $  (0.10)  $   0.92  $   1.22 
                                                    ========  ========  =========   ========  ========   ========  ========  
 
EARNINGS PER SHARE  (U.S. GAAP - DILUTED)

 Net earnings (loss)                                $ 64,354  $ 57,993  $(170,664)  $ 29,999  $(18,318)  $156,917  $202,864
                                                    ========  ========  =========   ========  ========   ========  ========
 
 Weighted average number of
   Common Shares outstanding
   at the end of the period                          172,964   174,733    175,376    175,598   174,617    170,510   165,842
 
 Net effect of dilutive stock options and shares
   to be issued in settlement of litigation,
   based on the treasury stock method                  6,857     7,995         --      1,454        --      4,015     5,148
                                                    --------  --------  ---------   --------  --------   --------  --------
 
 Weighted average number of Common
   Shares outstanding at the end of the
   period as adjusted                                179,821   182,728    175,376    177,052   174,617    174,525   170,990
                                                    ========  ========  =========   ========  ========   ========  ========
 
 Earnings per share (U.S. GAAP)                     $   0.36  $   0.32  $   (0.97)  $   0.17  $  (0.10)  $   0.90  $   1.19
                                                    ========  ========  =========   ========  ========   ========  ========
 
EARNINGS PER SHARE EXPRESSED IN U.S. DOLLARS

Daily average exchange rate of a Canadian
   dollar for U.S. dollars as reported by the
   Federal Reserve Bank of New York                  $0.7242   $0.7205    $0.7006    $0.7011   $0.7116    $0.7344   $0.7345
 
 Basic earnings (loss) per share, in U.S. dollars    $0.27     $0.24      $(0.68)    $0.12     $(0.07)    $0.68     $0.90
 
 Diluted earnings (loss) per
     share, in U.S. dollars                          $0.26     $0.23      $(0.68)    $0.12     $(0.07)    $0.66     $0.87
</TABLE>

                                   Page 228
<PAGE>
 
                                                                      EXHIBIT 21


                SUBSIDIARIES OF NEWBRIDGE NETWORKS CORPORATION


The names of certain other subsidiaries, which considered in the aggregate would
not constitute a significant subsidiary, have been omitted.

<TABLE> 
<CAPTION> 
                                              Jurisdiction
Name of                                       of Incorporation
Subsidiary                                    or Organization
----------                                    ---------------
<S>                                           <C> 
Newbridge Networks Inc.                        Delaware
Newbridge Networks Limited                     England and Wales
Newbridge Networks (Asia) Limited              Hong Kong
Advanced Computer Communications               California
Transistemas S.A.                              Argentina
Newbridge Networks Telecomunicacoes Ltda.      Brazil
Newbridge Networks de Mexico, S.A. de C.V.     Mexico
Newbridge Networks S.A.                        France
Ouest Standard Telematique, S.A.               France
Newbridge Networks (Middle East) WLL           Bahrain
Newbridge Networks Japan KK                    Japan
Newbridge Networks Australia (Pty.) Limited    Australia
Newbridge Networks Korea Ltd.                  Korea
Newbridge Networks Venezuela, S.A.             Venezuela
Newbridge Networks GmbH                        Germany
Newbridge Networks Ireland Ltd.                Ireland
Newbridge Networks (Pty) Ltd                   South Africa
Newbridge Networks International Corporation   Barbados
Newbridge (Barbados) Corporation               Barbados
Newbridge Networks S.p.A.                      Italy
Newbridge Networks GmbH (Austria)              Austria
Coasin Chile S.A.                              Chile
Acacia Limited                                 Barbados
Newbridge Networks (APL) L. BHD                Malaysia
Danring A/S  Denmark
</TABLE> 

                                   Page 229
<PAGE>
 
                                                                      EXHIBIT 23


                      CONSENT OF INDEPENDENT ACCOUNTANTS


We consent to the incorporation by reference in the registration statements of
Newbridge Networks Corporation (the "Company") on Form S-8 (File Nos. 33-51538,
33-55964, 33-68710, 33-78276, 33-89624, 33-97472, 333-2446, and 333-30777) of
our report dated June 2, 1998, included herein, on our audit of the consolidated
financial statements of the Company, which are included in this Annual Report on
Form 10-K dated June 26, 1998, as included in Item 8 herein.



/s/ Deloitte and Touche


Deloitte & Touche
Chartered Accountants

June 26, 1998

Ottawa, Canada

                                   Page 230
<PAGE>
 
                                  EXHIBIT 99

                                   Page 232
<PAGE>
 
                      STATEMENT OF EXECUTIVE COMPENSATION


COMPOSITION OF THE EMPLOYEE COMPENSATION COMMITTEE

The Employee Compensation Committee of the Board of Directors (the "Committee")
is currently comprised of two directors of the Corporation who are neither
officers nor employees of the Corporation or its subsidiaries. The members of
the Committee are Mr. Kent Plumley, the Chairman of the Committee and Dr. Denzil
Doyle.  There is currently one vacancy on the Committee which arose as a result
of the resignation of a former director of the Corporation.

As established by the Board of Directors, the terms of reference for the
Committee include overall review of current compensation policies and processes
to ensure that (i) the Chief Executive Officer and the other executive officers
are fairly and competitively compensated; (ii) human resources development,
succession planning and performance evaluation programs are established and
operating effectively throughout the Corporation and (iii) the Corporation's
Consolidated Key Employee Stock Option Plan (the "Consolidated Plan") and the
Corporation's 1999 Key Employee Stock Option Plan (the "1999 Plan") are properly
administered.

REPORT ON EXECUTIVE COMPENSATION

The establishment of salary levels for the executive officers of the Corporation
is the responsibility of the Chairman and Chief Executive Officer, together with
the President and Chief Operating Officer in the case of those executive
officers reporting to him; all are subject to review by the Committee. Salaries
are reviewed annually and are based on individual performance against specific
goals or overall accomplishment, the extent of individual responsibility and
comparisons with salaries paid in the industry. On occasion a bonus may be
awarded to an individual executive officer in recognition of a specific
achievement.

STOCK OPTION PLAN

A significant component of executive compensation consists of grants of stock
options under the Consolidated Plan and the 1999 Plan. Options are granted
primarily based on the extent of individual responsibility and performance and
on occasion are granted to attract new executives and to recognize job
promotions. While the cash compensation of executives is generally believed to
be below industry norms in relation to the size and profitability of the
Corporation, stock options provide a substantial connection between the total
long term remuneration of executive officers and corporate performance as
reflected in the market value of the Corporation's Common Shares, as well as to
directly align the interests of executive officers with those of the
shareholders.

Under both the Consolidated Plan and the 1999 Plan, each option granted will
vest as to 25% on each of the first, second, third and fourth anniversaries of
the date of grant and expire on the fifth anniversary of the date of grant
unless otherwise determined by the Committee. The exercise price is equal to the
average of the average of the daily high and low board lot trading prices on The
Toronto Stock Exchange (the "TSE") for the five days preceding the date of
grant.  The value of the options granted to executive officers depends on the
market price of the Common Shares of the Corporation.  Options are not
transferable and may be exercised only for so long as the optionholder remains
an employee subject to certain exceptions such as death, disability or
retirement or as the Committee may otherwise determine. When an option is
exercised, the Common Shares must be paid for in full.

NEWBRIDGE GROUP RETIREMENT SAVINGS PLAN

The Corporation implemented the Newbridge Group Retirement Savings Plan/Deferred
Profit Sharing Plan effective January 1, 1997 (the "Group Plan").  Full-time and
permanent part-time employees of the Corporation in Canada are eligible to
participate in the Group Plan. Employees may contribute a percentage of annual
earnings (within the limits prescribed by current Canadian income tax
legislation) and the Corporation will, on a matching basis, contribute an amount
equal to 50% of the employees 

                                   Page 233
<PAGE>
 
contribution, up to a maximum amount equal to 5% of annual salary, into a
deferred profit sharing plan. The Group Plan requires two years of membership
from the date of enrollment before the contributions made by the Corporation
vest to an employee.

CHIEF EXECUTIVE OFFICER

The Board of Directors established the level of compensation to be paid to the
Chairman and Chief Executive Officer (the "CEO") in 1991 at an amount considered
to be reasonable, fair and equitable.  Although the compensation of the CEO has
been reviewed since that time, the CEO has declined to receive any increase in
his annual compensation or stock options under either the Consolidated Plan or
its predecessor or successor plans.

The foregoing has been furnished by the members of the Employee Compensation
Committee of the Board of Directors: Mr. Kent Plumley (Chairman) and Dr. Denzil
Doyle.


SUMMARY COMPENSATION TABLE

The following table states the compensation paid for each of the Corporation's
three most recently completed financial years to the Chief Executive Officer and
the next four most highly compensated Executive Officers (the "Named Executive
Officers") during  the fiscal year ended April 30, 1998.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                                                 LONG TERM
                                    ANNUAL COMPENSATION                         COMPENSATION           ALL
                                    -------------------                     --------------------
NAME AND PRINCIPAL          FISCAL                       ALL OTHER            SECURITIES UNDER        OTHER
POSITION                      YEAR  SALARY    BONUS   COMPENSATION/(1)/     OPTIONS GRANTED/(2)/   COMPENSATION
----------------------------------------------------------------------------------------------------------------------
<S>                         <C>     <C>       <C>     <C>                   <C>                    <C>
Terence H. Matthews/(3)/    1998    $200,000    -                -                    -                    -                
Chairman of the Board       1997    $175,790    -          $22,584                    -                    -                
& CEO                       1996    $149,791    -          $47,105                    -                    -                
                                                                                                                                 
F. Michael Pascoe           1998    $247,038    -          $18,782               52,500              $ 6,733/(5)/                
Executive Vice President    1997    $231,880    -          $13,525               20,000              $31,814/(5)/                
and General Manager         1996    $231,438    -          $ 9,400               42,000              $16,869/(5)/                
Americas Region                                                                                                                  
                                                                                                                                 
John Everard                1998    $302,328    -          $40,909               52,500              $24,186/(4)/                
Executive Vice President    1997    $258,875    -          $29,860               40,000              $20,710/(4)/                
and General Manager         1996    $237,574    -          $27,902               12,000              $19,006/(4)/                
European  Region                                                                                                                 
                                                                                                                                 
Conrad Lewis                1998    $210,549    -          $ 6,526               62,000              $ 4,498/(6)/                
Executive Vice President    1997    $193,435    -          $ 7,326               40,000                    -                
Marketing & Business        1996    $175,718    -                -               90,000                    -                
Units                                                                                                                            
                                                                                                                                 
Bruce Rodgers               1998    $220,647    -                -               18,000                    -                
Executive Vice President    1997    $175,600    -                -               40,000                    -                
Operations                  1996    $175,573    -                -               26,000                    -                 
----------------------------------------------------------------------------------------------------------------------
</TABLE>

                                   Page 234
<PAGE>
 
(1)  Except as specifically disclosed, the value of each Named Executive
     Officer's perquisites and other benefits was less than the lesser of (i)
     $50,000 and (ii) 10% of such officer's total annual salary and bonus. The
     amounts paid under "All Other Compensation" to Mr. Matthews, Mr. Lewis, Mr.
     Pascoe, and Mr. Everard principally represent payments for automobile
     leases unless otherwise indicated.

(2)  During the fiscal year ended on April 30, 1997, the Board of Directors
     declared a two-for-one stock split effected in the form of a 100% stock
     dividend. The numbers shown in the table for previous years have been
     adjusted to reflect the stock split. Each option entitles the holder to
     acquire the indicated number of Common Shares. Particulars of stock options
     are provided under the heading "Stock Options".

(3)  Terence H. Matthews' compensation is paid by means of a management fee to a
     company which is controlled by Mr. Matthews.

(4)  Amounts paid to Mr. Everard under "All Other Compensation" represent
     contributions paid into a Retirement Benefit Plan on Mr. Everard's behalf,
     which Plan is available to all employees of the Corporation's United
     Kingdom subsidiary. Under the Plan the employer contributed 8% of the
     Executive Officer's pensionable earnings. Benefits payable upon retirement
     under the Plan are derived from a pension annuity policy purchased from an
     insurance company. Mr. Everard's compensation is paid in pounds sterling
     and has been converted to Canadian dollars on the basis of (Pounds)2.34.

(5)  Amounts paid to Mr. Pascoe under "All Other Compensation" represent, in
     part, the Corporation's share of contributions paid into a 401(k)
     retirement benefit plan on Mr. Pascoe's behalf, which plan is available to
     all employees of the Corporation's United States subsidiary. Under the
     plan, the employer contributed 50% of the first 6% of the employees base
     salary contributed to the plan. The balance of the amount disclosed under
     "All Other Compensation" represents employer contributions paid for health
     and disability insurance. Mr. Pascoe's compensation is paid in US dollars
     and has been converted to Canadian dollars on the basis of 1.4200.

(6)  Amounts paid to Mr. Lewis under "All Other Compensation" represent
     contributions paid into the Newbridge Group Retirement Savings
     Plan/Deferred Profit Sharing Plan on Mr. Lewis's behalf, which Plan is
     available to all full time and permanent part time employees of the
     Corporation in Canada. Under the Plan, employees may contribute a
     percentage of annual earnings (within the limits prescribed by current
     Canadian income tax legislation) and the Corporation will, on a matching
     basis, contribute an amount equal to 50% of the employees contribution, up
     to a maximum amount equal to 5% of annual salary, into a deferred profit
     sharing plan. The Group Plan requires two years of membership from the date
     of enrollment before the contributions made by the Corporation vest to an
     employee.

                                   Page 235
<PAGE>
 
STOCK OPTIONS

The following table provides details of grants of options to purchase Common
Shares of the Corporation to each of the Named Executive Officers during the
fiscal year ended April 30, 1998:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
                       SECURITIES     % OF TOTAL     EXERCISE  MARKET VALUE   EXPIRATION
NAME                     UNDER     OPTIONS GRANTED    PRICE    OF SECURITIES     DATE
                        OPTIONS    TO EMPLOYEES IN     PER      UNDERLYING
                        GRANTED     FINANCIAL YEAR   SECURITY   OPTIONS ON
                                                               DATE OF GRANT

-----------------------------------------------------------------------------------------------
<S>                    <C>         <C>               <C>       <C>            <C>
Terence H. Matthews          -            -               -             -                 -                    
                                                                                                               
F. Michael Pascoe       15,000         0.15%         $55.92        $55.92        June 13/02                    
                        37,500         0.38%         $33.82        $33.82         Mar 06/03                    
                                                                                                               
John Everard            15,000         0.15%         $55.92        $55.92        June 13/02                    
                        37,500         0.38%         $33.82        $33.82         Mar 06/03                    
                                                                                                               
Conrad Lewis            20,000         0.20%         $55.92        $55.92        June 13/02                    
                        42,000         0.43%         $33.82        $33.82         Mar 06/03                      
                                                                                                    
Bruce Rodgers           10,000         0.10%         $50.89        $50.89         Dec 17/02                     
                         8,000         0.08%         $33.82        $33.82         Mar 06/03                      
-----------------------------------------------------------------------------------------------
</TABLE>

The following table provides details of exercises of stock options by each of
the Named Executive Officers during the fiscal year ended April 30, 1998 and the
fiscal year end value of unexercised stock options based on the closing price of
$41.90 per Common Share on April 30, 1998:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                              SECURITIES       AGGREGATE          UNEXERCISED            VALUE OF         
                               ACQUIRED          VALUE              OPTIONS            UNEXERCISED      
NAME                         ON EXERCISE       REALIZED           EXERCISABLE(E)       IN-THE-MONEY     
                                                                UNEXERCISABLE(U)         OPTIONS        
                                                                                       EXERCISABLE [E]  
                                                                                      UNEXERCISABLE [U]  
---------------------------------------------------------------------------------------------------------
<S>                          <C>               <C>              <C>                   <C>              
Terence H. Matthews                  -                  -                     -                     -                        
                                                                                                                           
                                                                                                                           
F. Michael Pascoe               20,000         $1,315,000          [E]   46,667          [E] $919,257
                                                                   [U]   79,833          [U] $559,183
                                                                                                     
John Everard                    18,668         $  828,152          [E]    5,336          [E] $105,549
                                                                   [U]   83,166          [U] $494,046
                                                                                                     
Conrad Lewis                    41,998         $2,063,369          [E]   18,337          [E] $117,513
                                                                   [U]  120,333          [U] $732,701
                                                                                                     
Bruce Rodgers                   20,000         $  989,940          [E]   24,167          [E] $289,355
                                                                   [U]   55,833          [U] $259,545
---------------------------------------------------------------------------------------------------------
</TABLE>

COMPENSATION OF DIRECTORS

Non-employee directors of the Corporation ("Director Participants") receive an
option to purchase 10,000 Common Shares under the 1999 Plan on the date of each
annual meeting of shareholders at which such 

                                   Page 236
<PAGE>
 
director is elected to the Board of Directors. A Director Participant who is
appointed to the Audit Committee, the Employee Compensation Committee, the
Directors' Affairs Committee or any future committee established by the Board of
Directors and declared by the Board of Directors to be a standing committee
("Standing Committee"), other than as Chair of such Standing Committee, receives
an option to purchase 2,000 Common Shares upon annual appointment to a Standing
Committee. A Director Participant who is appointed Chair of a Standing Committee
receives an option to purchase 4,000 Common Shares upon annual appointment as
Chair. Directors are entitled to reimbursement of all expenses for attendance at
Board and Standing Committee meetings. Directors do not receive a fee for
attendance at meetings of the Board of Directors or Committees thereof. During
the fiscal year ended April 30, 1998, Director Participants as a group received
options to purchase 108,000 Common Shares at a weighted average exercise price
of $64.96 per share. During the fiscal year ended April 30, 1998, Director
Participants as a group exercised options to purchase 166,501 Common Shares. The
aggregate market value of these Common Shares as at the respective dates of
purchase, less the exercise price, was $4,821,199. As at June 18, 1998, Director
Participants held options to purchase 322,169 Common Shares.

DIRECTORS' AND OFFICERS' LIABILITY INSURANCE

The Corporation maintains Directors' and Officers' Liability Insurance in the
amount of US$15,000,000 for the benefit of the directors and officers of the
Corporation and its subsidiaries.  During the fiscal year ended April 30, 1997,
the amount of premium paid under the policy was US$1,041,021 which covers a 3
year period from November 1, 1996 to November 1, 1999.  No portion of the
premium was paid during the fiscal year ended April 30, 1998. No portion of the
premium was paid by the directors and officers of the Corporation.  The policy
provides for a retention of US$1 million for each loss claimed by the
Corporation.  The by-laws of the Corporation generally provide that the
Corporation shall indemnify a director or officer of the Corporation against
liability incurred in such capacity including acting at the Corporation's
request as director or officer of another corporation, to the extent permitted
or required by the CBCA.


PERFORMANCE GRAPH

The following graph compares the cumulative return on $100 invested in Common
Shares of the Corporation with selected indices, assuming reinvestment of all
dividends. The Corporation's management consistently cautions that the stock
price performance shown in the graph below should not be considered indicative
of potential future share price performance.

COMPARISON OF CUMULATIVE TOTAL RETURN AMONG NEWBRIDGE, NYSE COMPOSITE INDEX,
PACIFIC STOCK EXCHANGE TECHNOLOGY INDEX AND TSE 300 INDEX FOR THE PERIOD MAY 1,
1993 TO APRIL 30, 1998


                             [GRAPH APPEARS HERE]

                                   Page 237
<PAGE>
 
INTEREST OF INSIDERS IN MATERIAL TRANSACTIONS

The Corporation leases facilities in Canada from companies controlled by Terence
H. Matthews, Chairman of the Board of Directors, Chief Executive Officer and the
largest shareholder of the Corporation, under terms and conditions reflecting
prevailing market conditions at the time the leases were entered into.
Approximately 350,000 square feet has been leased for various terms expiring
between January 1999 and May 2002 at rates between $9.25 and $14.00 per square
foot (approximately $3,350,000 per year). The Corporation also purchased
$1,053,000 of services from these companies throughout fiscal 1998 (fiscal 1997
-- $434,000). During the fiscal year ended April 30, 1998 the Corporation
purchased approximately $2,533,000 (fiscal 1997 -- $3,393,000) of equipment
under usual terms and conditions from a corporation in which the Corporation has
no equity interest, but which is controlled by Terence H. Matthews.

The Corporation accounts for its equity interests in certain associated
companies using the equity method of accounting. The Corporation is represented
on the Boards of Directors of these companies. During the fiscal year ended
April 30, 1998, the Corporation paid $2,448,000 for research and development
services from these associated companies under usual trade terms and conditions
(fiscal 1997 -- $2,621,000). The Corporation also purchased $10,126,000 of
equipment and software under usual trade terms and conditions, generally for
resale (fiscal 1997 -- $6,342,000) and sold $13,846,000 of equipment and
software to these companies under usual trade terms and conditions, generally
for resale (fiscal 1997 -- $17,255,000).

The Corporation accounts for its equity interests in certain associated
companies using the cost method of accounting. The Corporation is represented on
the Boards of Directors of these companies. During the fiscal year ended April
30, 1998 the Corporation purchased $7,226,000 of equipment and software from
these associated companies, under usual trade terms and conditions, generally
for resale (fiscal 1997 -- $2,255,000). The Corporation sold $6,100,000 of
equipment and software to these associated companies under usual trade terms and
conditions, generally for resale (fiscal 1997 -- $3,304,000).

The Corporation pays a net royalty between 2% and 10%, depending on the level of
cumulative royalties paid, on all sales of products developed as a result of
subcontracted research and development previously performed under agreements
between the Corporation and corporations controlled by three directors of the
Corporation. Royalty payments under these agreements were $294,000 (fiscal 1997
-- $174,000)

Certain officers and directors of the Corporation and members of their immediate
families own Common Shares in entities in which the Corporation also owns Common
Shares.

The Corporation has a policy that all transactions between the Corporation and
its officers, directors, principal shareholders or their affiliates, including
the extension of any credit, will be on terms no less favourable to the
Corporation than could be obtained from unrelated third parties and will be
approved by a majority of the Board of Directors and a majority of the
Corporation's disinterested directors.


                            APPOINTMENT OF AUDITORS

At the Meeting, shareholders will be asked to appoint Deloitte & Touche, the
present auditors of the Corporation, as auditors of the Corporation to hold
office until the close of the next annual meeting of shareholders and to
authorize the directors to fix their remuneration.

                                   Page 238