CONSOLIDATED BALANCE SHEETS

Expressed in US $000's except share and per share amounts
(unaudited)

		Note			As at February 28, 2011

					(Note 2)
Assets
Current Assets
	Cash and cash equivalents	4	63,641			77,819
	Restricted cash	4	146			714
	Short term investments	4	16,145			11,181
	Trade receivables	5	9,598			11,579
	Inventory	6	32,014			28,204
	Other current assets	7	5,768			5,306
	Future income tax asset		538			553

			127,850			135,356
Long Term Assets
	Property and equipment	8	7,180			7,560
	Future income tax asset		813			808
	Intangible assets	9	14,656			14,929
	Goodwill		11,927			11,927

			34,576			35,224
Total Assets			162,426			170,580

Liabilities
Current Liabilities
	Accounts payable and accrued liabilities	10	16,525			15,967
	Deferred revenue		1,910			1,453
	Contingent royalty	15	644			622
	Contingent consideration	11	14,853			14,622

			33,932			32,664
Long Term Liabilities
	Contingent royalty	15	3,112			3,290
	Other long term liabilities	12	1,479			1,999

			4,591			5,289
Commitments		15
Shareholders' equity
	Capital stock	13	171,832			171,570
	Contributed surplus	13	3,050			2,642
	Deficit	13	(41,857	)		(31,967	)
	Accumulated other comprehensive loss	13	(9,623	)		(9,618	)

Total shareholder's equity			123,402			132,627
	Non-controlling interests	3	501			—

Total Equity			123,903			132,627
Total Liabilities and Equity			162,426			170,580

Shares issued & outstanding			35,471,677			35,421,893

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)

Expressed in US $000's except share and per share amounts
(unaudited)

				Three months ended May 31

		Note		2011			2010
							(Note 2)
REVENUE			18, 19		11,049			48,726
	Cost of sales		6		6,405			27,495

Gross profit					4,644			21,231

EXPENSES
	Research and development				6,597			4,631
	Selling and marketing				4,080			4,128
	General and administrative				3,632			2,561
	Government assistance		15		(350	)		—

					13,959			11,320

Income (loss) before amortization of intangible assets and other items					(9,315	)		9,911
	Amortization of intangible assets		9		(587	)		(82	)
	Accretion expense				(276	)		—
	Interest income				84			32
	Investment gain (loss)				39			(49	)
	Foreign exchange gain				120			117

Income (loss) before income taxes					(9,935	)		9,929
	Income tax expense				9			231

Net Income (loss)					(9,944	)		9,698
	Net Loss Attributable to Non-Controlling Interest				54			—

Net Income (Loss) applicable to shareholders					(9,890	)		9,698
	Foreign currency translation differences for foreign operations				5			—

Comprehensive Income (Loss) applicable to shareholders					(9,895	)		9,698
Income (loss) per share
	Basic		14		(0.28	)		0.26
	Diluted		14		(0.28	)		0.26
Weighted Average Shares Outstanding
	Basic		14		35,429,049			36,916,893
	Diluted		14		35,429,049			37,930,704

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Expressed in US $000's except common share amounts
(unaudited)

			Capital Stock			Contributed Surplus			Deficit			AOCL			Non-Controlling Interest			Shareholder's Equity

Balance at February 28, 2009	28,559,297		$	108,153		$	1,301		$	(60,075	)	$	(15,305	)	$	0		$	34,074
Equity financing	7,493,562		$	68,615			—			—			—			—		$	68,615
Stock-based compensation				—		$	952			—			—			—		$	952
Exercise of stock options	753,443		$	1,812		$	(692	)		—			—			—		$	1,120
Warrant exercises	114,594		$	379			—			—			—			—		$	379
Other comprehensive income	—		$	164			—			—		$	5,687			—		$	5,851
Other	14,021		$	51			—			—			—			—		$	51
Net earnings	—						—		$	27,804			—			—		$	27,804

Balance at February 28, 2010	36,934,917		$	179,174		$	1,561		$	(32,271	)	$	(9,618	)	$	0		$	138,846

Stock-based compensation	—			—		$	1,389			—			—			—		$	1,389
Exercise of stock options	311,254		$	1,126		$	(285	)		—			—			—		$	841
Share repurchase	(1,865,549	)	$	(9,035	)		—		$	(1,703	)		—			—		$	(10,738	)
Other	41,271		$	305		$	(23	)		—			—			—		$	282
Net Earnings	—			—			—		$	2,007			—			—		$	2,007

Balance at February 28, 2011 (Note 2)	35,421,893		$	171,570		$	2,642		$	(31,967	)	$	(9,618	)	$	0		$	132,627

Stock-based compensation	—			—		$	480			—			—			—		$	480
Exercise of stock options	40,346		$	190		$	(69	)		—			—			—		$	121
Other	9,438		$	72		$	(3	)		—			—			—		$	69
Other comprehensive loss	—			—			—			—		$	(5	)		—		$	(5	)
Equity contribution by non-controlling interest in DW-HFCL (Note 3)	—			—			—			—			—		$	555		$	555
Net Loss	—			—			—		$	(9,890	)		—		$	(54	)	$	(9,944	)

Balance at May 31, 2011	35,471,677		$	171,832		$	3,050		$	(41,857	)	$	(9,623	)	$	501		$	123,903

		Three months ended May 31

		2011			2010
					(Note 2)
Operating Activities
Net Income (Loss)			(9,944	)		9,698
Items not affecting cash
	Amortization of property and equipment		829			631
	Amortization of intangible assets		587			82
	Accretion expense		276			—
	Non cash royalty amortization		(201	)		—
	Stock-based compensation		492			287
	Unrealized foreign exchange loss		1			16
	Non cash future income tax expense		9			231
	Inventory impairment (recovery)		57			(57	)
	Unrealized loss (gain) on short term investments		(39	)		49
	Accrued interest on short term investments		(1	)		(7	)

			(7,934	)		10,930
Changes in non-cash working capital items			(1,284	)		(5,265	)

			(9,218	)		5,665

Investing Activities
	Acquisition of property and equipment		(449	)		(2,150	)
	Acquisition of intangible assets		(314	)		(75	)
	Purchase of short term investments		(22,432	)		(45,308	)
	Maturity of short term investments		17,508			8,074

			(5,687	)		(39,459	)

Financing Activities
	Share repurchase		—			(1,054	)
	Equity contribution by non-controlling interest in DW-HFCL		555			—
	Issuance of common shares net of issuance costs		178			147

			733			(907	)

Effect of foreign exchange on cash and cash equivalents			(6	)		(16	)
Net decrease in cash and cash equivalents			(14,178	)		(34,717	)
Cash and cash equivalents at beginning of period			77,819			105,276

Cash and cash equivalents at end of period			63,641			70,559

Cash paid during the period for interest			—			—

DragonWave Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Expressed in US $000's except share and per share amounts
(unaudited)

DragonWave Inc. [the "Company"], incorporated under the Canada Business Corporations Act in February 2000, is in the business of developing next-generation broadband wireless backhaul and pseudowire equipment.

The Company's common shares are traded on the Toronto Stock Exchange under the trading symbol DWI and on NASDAQ Global Market under the symbol DRWI.

These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, DragonWave Corp., incorporated in the state of Delaware, in the United States, DragonWave PTE Limited, incorporated in Singapore, 4472314 Canada Inc., incorporated in Canada, Axerra Networks Inc., incorporated in the state of Delaware, Axerra Networks Ltd., incorporated in Israel, Axerra GMBH, incorporated in Germany, Axerra Networks Asia Pacific Limited, incorporated in Hong Kong, and its majority owned subsidiary, DragonWave HFCL India Private Limited. All intercompany accounts and transactions have been eliminated.

The unaudited interim consolidated financial statements of the Company have been prepared in United States dollars following United States generally accepted accounting principles ["GAAP"] as further discussed in Note 2.

The unaudited interim consolidated financial statements do not include all the information and disclosures required in the annual financial statements. Accordingly, these unaudited consolidated financial statements should be read in conjunction with the February 28, 2011 audited consolidated financial statements.

In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments, which consist only of normal and recurring adjustments, necessary to present fairly the financial position at May 31, 2011 and the results of operations, cash flows and changes in equity for the three months ended May 31, 2011 and 2010.

In February 2008, the Canadian Accounting Standards Board confirmed the transition from Canadian GAAP to International Financial Reporting Standards ["IFRS"] for all publicly accountable entities no later than fiscal years commencing on or after January 1, 2011. As a result, management undertook a detailed review of the implications of the Company having to report under IFRS and also examined the alternative available to the Company, as a Foreign Private Issuer in the United States, of filing its primary financial statements in Canada using U.S. GAAP, as permitted by the Canadian Securities Administrators' National Instrument 51-102, "Continuous Disclosure Obligations".

As a result of this analysis, management determined that the Company would adopt U.S. GAAP as its primary basis of financial reporting commencing March 1, 2011 on a retrospective basis. All comparative financial information contained in the unaudited interim consolidated financial statements has been revised to reflect the Company's results as if they had been historically reported in accordance with U.S. GAAP.

The significant accounting policies of the Company are those described in Note 2 and 17 of its annual consolidated financial statements for the year ended February 28, 2011 except for "Stock-based compensation" and "Investment tax credits" for which the accounting policy is described in Note 24 and except for the changes in accounting policies adopted in the current fiscal year, as described below.

The adoption of U.S. GAAP did not have a material change on the Company's accounting policies or financial results. An adjustment of $154 was made to increase deficit as calculated by Canadian GAAP as at February 28, 2011 due to the adoption of U.S. GAAP. For further details on the reporting differences consult note 24 to the annual consolidated financial statements for the year ended February 28, 2011.

The Company adopted ASC 810-10-65, Non-controlling Interests in Consolidated Financial Statements, which governs the accounting for and reporting of (1) non-controlling interest in partially owned consolidated subsidiaries and (2) the loss of control of subsidiaries. Significant changes to the accounting for non-controlling interests include (a) the inclusion of non-controlling interests in the equity section of the controlling entity's consolidated balance sheets rather than in the mezzanine section and (b) the requirement that changes in the controlling entity's interest in the non-controlling interest, without a change in control, be recognized in the controlling entity's equity rather than being accounted for by the purchase method, which accounting under the purchase method would have given rise to goodwill.

Additionally, the adoption of ASC 810-10-65 requires that net income, as previously reported prior to the adoption of ASC 810-10-65, be adjusted to include the net income attributable to the non-controlling interest, and that a new separate caption for net income attributable to common shareholders of the Company be presented in the consolidated statements of operations. ASC 810-10-65 also requires similar disclosure regarding comprehensive income (loss). The Company has disclosed the consolidated balance sheets and consolidated statements of operations and comprehensive income in accordance with this ASC.

In November 2009, the FASB issued ASU 2009-13, which amends the guidance in ASC 605-25 on multiple element revenue arrangements. The amendment eliminates the residual method of allocation and requires that any arrangement consideration be allocated to all deliverables using the relative selling price method with any discounts allocated proportionally to each deliverable. The amendment also establishes a selling price hierarchy for determining the selling price of each deliverable. The selling price, formally referred to as fair value, will be based on vendor-specific objective evidence if available, third-party evidence if vendor specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. For the Company, this ASU is effective for revenue arrangements entered into or materially modified on or after March 1, 2011. This change did not have any material impact on the consolidated financial statements.

On December 17, 2010, the FASB issued ASU 2010-28, the new standard requires entities with a zero or negative carrying value to assess, considering qualitative factors such as those listed in ASC 350, whether it is more likely than not that a goodwill impairment exists. If an entity concludes that it is more likely than not that a goodwill impairment exists, the entity must perform step 2 of the goodwill impairment test. This change did not have any material impact on the consolidated financial statements.

In January 2010, the Financial Accounting Standards Board (the "FASB") issued authoritative guidance to improve disclosures about fair value measurements. This new authoritative guidance became effective for interim and annual periods beginning after December 15, 2009, except for the requirement to separately disclose purchases, sales, issuances, and settlements in the Level 3 reconciliation, which became effective for interim and annual periods beginning after December 15, 2010. The Company has adopted the authoritative guidance to improve disclosures about fair value measurements and the authoritative guidance requiring separate disclosure on purchases, sales, issuances, and settlements in the Level 3 reconciliation in the first quarter of fiscal 2012. The adoption did not have a material impact on the Company's results of operations, financial condition or the Company's disclosures.

In May 2011, the FASB, as a result of work performed with the International Accounting Standards Board ("IASB"), issued authoritative guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards ("IFRS"). The guidance is expected to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The guidance presents certain amendments to clarify existing fair value measurements and disclosure requirements such as clarifying the application of the highest and best use and valuation premise concepts, measuring the fair value of an instrument classified in a reporting entity's shareholders' equity and clarifying that a reporting entity should disclose quantitative information about the unobservable inputs used in a fair value measurements that is categorized within Level 3 of the fair value hierarchy. Furthermore, the guidance amends previous literature by requiring additional disclosures about fair value measurements, specifically requesting more information about the valuation processes used for fair value measurements categorized within Level 3 of the fair value hierarchy as well as presenting sensitivity of the fair value measurements to changes in unobservable inputs in Level 3 valuations. The guidance also amends previous literature around measuring the fair value of financial instruments that are managed within a portfolio as well as the application of premiums and discounts in a fair value measurement. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt the guidance in the first quarter of fiscal 2013 and is currently evaluating the impact that the adoption of this guidance will have on its results of operations, financial condition and disclosures.

On March 10, 2011, DragonWave and Himachal Futuristic Communications Ltd. (HFCL) finalized the incorporation of DragonWave HFCL India Private Limited (DW-HFCL). DragonWave invested $560 in return for 50.1% ownership of the newly formed company. The results of the newly formed subsidiary have been consolidated in the financial statements of the Company as of March 10, 2011. The Company is consolidating the results of DW-HFCL because they have majority control and hold substantive participating rights in the operations of DW-HFCL.

Non-controlling interest consists of the minority owned portion of DragonWave HFCL India Private Limited.

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Short term investments are classified as held for trading and are re-valued to market at the end of the period. Cost and fair value of short term investments, as at May 31, 2011, by contractual maturity were as follows:

The Company is exposed to credit risk with respect to accounts receivable in the event that its counterparties do not meet their obligations. The Company minimizes its credit risk with respect to accounts receivable by performing credit reviews for each of its customers.

The Company's allowance for doubtful accounts reflects the Company's assessment of collectability across its global customer base. The Company defines past due based on agreed upon terms with each individual customer.

As at May 31, 2011, nil customers exceeded 10% of the total receivable balance [February 28, 2011—two customers represented 31% of the accounts receivable balance].

Included in general and administrative expenses is ($1) related to bad debt expense for the three months ended May 31, 2011 [three months ended May 31, 2010—$66].

Cost of sales for the three months ended May 31, 2011 was $6,405 [three months ended May 31, 2010—$27,495], which included $5,990 [three months ended May 31, 2010—$24,660] of costs associated with inventory. The remaining costs of $415 [three months ended May 31, 2010—$2,835] related principally to freight, warranty and other direct costs of sales.

For the three month period ended May 31, 2011, the Company recognized an impairment loss (recovery) on inventory of $57 [three months ended May 31, 2010—($57)].

	May 31, 2011						February 28, 2011

	Cost		Accumulated Amortization		Net Book Value		Net Book Value
Test equipment		12,784		7,734		5,050		5,291
R&D equipment		2,256		1,684		572		594
Computer hardware		2,329		1,901		428		472
Production fixtures		1,065		590		475		520
Leasehold improvements		897		539		358		361
Furniture and fixtures		664		526		138		152
Communication equipment		251		173		78		84
Other		219		138		81		86

Total		20,465		13,285		7,180		7,560

Amortization expenses relating to the above property and equipment of $536, $32 and $261 were included in research and development, sales and marketing and general and administrative expenses respectively for the three months ended May 31, 2011 [three months ended May 31, 2010: R&D—$434; S&M—$8; G&A—$189].

For the three month period ended May 31, 2011, the Company recognized amortization of intangible assets of $587 [three months ended May 31, 2010—$82].

Within its accrued liabilities, the Company records a liability for future warranty costs based on management's best estimate of probable claims within the Company's product warranties. The accrual is based on the terms of the warranty which vary by customer, product, or service and historical experience. The Company regularly evaluates the appropriateness of the remaining accrual.

The following table details the changes in the warranty liability for the respective three months ended:

On October 13, 2010, the Company acquired all of the outstanding shares of Axerra Networks Inc. ("Axerra"), a leader in pseudowire technology, under a share purchase agreement dated October 13, 2010. The total potential purchase price was up to $25,000 which included $9,500 paid in cash on October 13, 2010 and a potential earn-out of $15,500, based on additional sales performance over the following 16 months, which can be paid-out in either cash, or the Company's shares at the Company's option. As at the purchase date, the Company recorded $23,770 for the purchase which included cash consideration of $9,500 and the potential earn-out of $15,500 discounted to $14,270 using a risk-free rate of return adjusted for a risk premium. The estimated liability for the earn-out arrangement established upon acquisition of $14,270 has been adjusted based on accretion of the discount and is now valued at $14,853. Any future adjustments to the estimated liability for the earn-out arrangement will be accounted for in the period in which the estimate is revised with a corresponding charge to the consolidated statement of operations and comprehensive income.

The Company has established the DragonWave Inc. Key Employee Stock Option/Stock Issuance Plan [the "Plan"] applicable to full-time employees, directors and consultants of the Company for purchase of common shares with 3,547,677 common shares reserved for issuance. Options are granted with an exercise price equal to the fair value of the common shares of the Company, and generally vest at a rate of 25% one year from the date of the option grant, and 1/36^th of the remaining 75% per additional month of full-time employment with the Company. Options expire in periods ranging from three to ten years, or upon termination of employment. The maximum number of Common Shares issuable under the Stock Option Plan is 10% of the Common Shares issued and outstanding.

The Company has recognized $492 for the three months ended May 31, 2011 as compensation expense for stock-based grants, with a corresponding credit to contributed surplus [three months ended May 31, 2010—$287].

The following are the weighted average values used in determining the fair value:

The 552,500 options granted during the three month period ended May 31, 2011 were determined to have a fair value of $2,083.

The following table summarizes the various exercise prices inherent in the Company's stock options outstanding and exercisable on May 31, 2011:

Exercise Price			Options Outstanding						Options Exercisable

Low (CAD)	High (CAD)		Quantity of Options		Weighted Average Remaining Contractual Life (yrs)		Weighted Average Exercise Price (CAD)		Quantity of Options		Weighted Average Exercise Price (CAD)
$ 1.34	$	2.00		410,745		2.44	$	1.37		209,963	$	1.36
$ 2.01	$	3.00		55,255		0.38	$	2.51		52,248	$	2.49
$ 3.01	$	4.00		185,980		2.38	$	3.38		93,393	$	3.38
$ 4.01	$	5.00		272,722		2.31	$	4.46		202,476	$	4.45
$ 5.01	$	6.00		68,616		2.53	$	5.59		35,616	$	5.61
$ 6.01	$	7.00		954,695		4.53	$	6.48		15,832	$	6.44
$ 7.01	$	8.00		385,000		4.55	$	7.83		890	$	7.23
$ 8.01	$	10.00		146,500		3.82	$	9.34		40,090	$	9.37
$10.01	$	13.74		138,970		3.57	$	12.45		47,503	$	12.30

				2,618,483		3.59	$	5.82		698,011	$	4.15

The Company launched an Employee Share Purchase Plan ["ESPP"] on October 20, 2008. The plan includes provisions to allow employees to purchase Common shares. The Company will match the employees' contribution at a rate of 25%. During the three months ended May 31, 2011 a total of 7,549 common shares were purchased respectively by employees at fair market value, while the Company issued 1,889 and common shares respectively as its matching contribution. The shares contributed by the Company will vest 12 months after issuance.

The Company records an expense equal to the fair value of shares granted pursuant to the employee share purchase plan over the period the shares vest. The total fair value of the shares earned during the three months ended May 31, 2011 was $7 [three months ended May 31, 2010—$1]. The fair value of the unearned ESPP shares as at May 31, 2011 was $49 [February 28, 2011—$42]. The number of shares held for release, and still restricted under the plan at May 31, 2011 was 7,240 [February 28, 2011—6,287].

On December 21, 2001, and as amended and restated on November 10, 2003, in connection with the issuance of the long-term debt, the Company issued to two parties the right to purchase $315 and $35 Series A-1 Preferred Shares of the Company. On April 19, 2007, a capital reorganization occurred pursuant to which all Preferred Shares were converted into common shares. As a result, and in accordance with the original terms of the agreement, the terms of the warrant were updated such that the holders are entitled to purchase an aggregate of 37,245 common shares at a purchase price of $9.40 per share. These warrants are still outstanding and carry a cashless conversion privilege, expire upon the later of: [a] the tenth anniversary of the grant of the right to purchase or [b] April 19, 2012.

Effective May 30, 2007, the Company granted a warrant to a party to purchase up to 126,250 common shares of the Company at a price of $3.56 CAD per share. The warrant expires 10 years after the date of issuance. The warrants vested based on the achievement of pre-determined business milestones and resulted in an issuance of 31,562 warrants. As at August 31, 2008, a revenue reduction provision in the amount of $64 was recognized with a corresponding increase in contributed surplus based on achievement. The provision was determined using the Black-Scholes Options Pricing Model using a volatility factor of 50%, risk free rate of 3.3% dividend yield of nil, and an expected life of 8.75 years.

The following table illustrates the dilutive impact on net income (loss) per share including the effect of outstanding options and warrants:

		Three Months Ended, May 31

		2011			2010
Basic Net Income (Loss) per share
	Net Income (Loss)		(9,944	)		9,698
	Weighted average number of shares outstanding		35,429,049			36,916,893

Net Income (Loss) per share		$	(0.28	)	$	0.26

Diluted Net Income (Loss) per share
	Net Income (Loss)		(9,944	)		9,690
	Weighted average number of shares outstanding		35,429,049			36,916,893
	Dilutive effect of warrants		—			21,405
	Dilutive effect of stock options		—			992,406

Adjusted weighted average number of shares outstanding			35,429,049			37,930,704

Net Income (Loss) per share		$	(0.28	)	$	0.26

As at May 31, 2011, 2,618,483 options, 68,807 warrants and 33,796 shares with regards to the Company's contingent consideration were excluded from the net income (loss) per share calculation as they were anti-dilutive.

Future minimum operating lease payments as at May 31, 2011 per fiscal year are as follows:

Under the research and development agreements of Axerra Networks Ltd., a subsidiary of DragonWave, the Company received and accrued participation payments from the Office of the Chief Scientist ("OCS") of the Ministry of Industry and Trade in Israel in the amount of $350 in the three months ended May 31, 2011. DragonWave is required to pay royalties at the rate of 3%—3.5% of sales of products developed with funds provided by the OCS, up to an amount equal to 100% of the OCS grants, bearing interest at the rate of LIBOR. The obligation to pay these royalties is contingent on actual sales of the products and in the absence of such sales, no payment is required.

The fair value represents the discounted, most probable obligation to the Company. After consideration of the liability currently recognized in the consolidated balance sheet of $3,756, the company has a maximum potential obligation of an additional $10,498.

The Company leases premises from a real estate company controlled by a member of the Board of Directors. During the three months ended May 31, 2011, the Company paid $447 [three months ended May 31, 2010—$306], relating to the rent, operating costs, and leasehold improvements associated with this real estate, and the value owing for net purchases at May 31, 2011 was $2 [February 28, 2011—$30]. These amounts have been allocated amongst various expense accounts, except for leasehold improvements which have been allocated to property and equipment.

All transactions are in the normal course of business and have been recorded at the exchange amount.

Financial instruments are classified into one of the following categories: held-for-trading, held-to-maturity, available-for-sale, receivables, or other liabilities.

The following table summarizes the carrying values of the Company's financial instruments:

Cash and cash equivalents, restricted cash, short term investments, trade receivables, other receivables, accounts payable and accrued liabilities are short term financial instruments whose fair value

approximates the carrying amount given that they will mature shortly. As at the consolidated balance sheet dates, there are no significant differences between the carrying value of these items and their estimated fair values. All financial instruments have been measured using Level 1 inputs.

Cash and cash equivalents and short term investments with fixed interest rates expose the Company to interest rate risk on these financial instruments. Interest income of $84 was recognized during the three months ended May 31, 2011 on the Company's cash, cash equivalents and short term investments [three months ended May 31, 2010—$32].

In addition to trade receivables and other receivables, the Company is exposed to credit risk on its cash and cash equivalents, restricted cash, and short term investments in the event that its counterparties do not meet their obligations. The Company does not use credit derivatives or similar instruments to mitigate this risk and, as such, the maximum exposure is the full carrying value or face value of the financial instrument. The Company minimizes credit risk on cash and cash equivalents and short term investments by transacting with only reputable financial institutions.

The following table summarizes the currency distribution of the Company's financial instruments in US dollars, As at May 31, 2011:

Foreign exchange risk arises because of fluctuations in exchange rates. The Company does not currently use derivative financial instruments to mitigate this risk.

If the US dollar had appreciated 1 percent against all foreign currencies at May 31, 2011, with all other variables held constant, the impact of this foreign currency change on the Company's foreign denominated financial instruments would have resulted in a decrease in after-tax net income of $69 for the three month period ended May 31, 2011 [three month period ended May 31, 2010—$85], with an equal and opposite effect if the US dollar had depreciated 1 percent against all foreign currencies at May 31, 2011.

A risk exists that the Company will not be able to meet its financial obligations as they become due. Based on the Company's recent performance, current revenue expectations and strong current ratio, management believes that liquidity risk is low.

The Company operates in one reportable segment—broadband wireless backhaul equipment. All significant assets held by the Company are located in Canada. The following table presents total revenues by geographic location:

The Company was dependent on two key customers with respect to revenue in the three months ended May 31, 2011. These customers represented approximately 15% and 11% of sales respectively for the three month period ended May 31, 2011 [three months ended May 31, 2010—one customer representing 78% of sales].

Maturity Date

September 1, 2011	4,937	4,940
October 31, 2012	9,119	9,153
November 29, 2013	2,059	2,052

Total Short Term Investments	16,115	16,145



Trade Receivables (gross)	9,688		11,670
Allowance for doubtful accounts	(90	)	(91	)

Trade Receivables (net)	9,598		11,579



Raw Materials		9,915	9,506
Work in Progress		1,222	851
Finished Goods		18,733	15,730

	Total Production Inventory	29,870	26,087
Inventory held for customer service/warranty		2,144	2,117

	Total Inventory	32,014	28,204



Deposits with suppliers	3,152	3,108
Prepaid expenses	1,223	786
Goods and services tax	344	652
Receivable from the Office of the Chief Scientist	640	275
Income Tax Receivable	227	221
Other & miscellaneous receivables	182	264

Total other current assets	5,768	5,306

	May 31, 2011						February 28, 2011

	Cost		Accumulated Amortization		Net Book Value		Net Book Value
Customer Relationships		8,257		151		8,106		8,215
Developed Technology		6,268		767		5,501		5,816
Computer Software		2,691		1,642		1,049		898

Total Intangible Assets		17,216		2,560		14,656		14,929



DragonWave Inc.		For the three months ended May 31 2011



Cash	63,641	70,388
Cash equivalents	—	7,431

Total Cash and cash equivalents	63,641	77,819
Restricted cash	146	714
Short term investments	16,145	11,181

Total Cash and cash equivalents, Restricted cash, and Short term investments	79,932	89,714



Trade payables	8,114	7,581
Accrued liabilities	4,010	5,714
Payroll related accruals	3,067	1,342
Warranty accrual	1,334	1,330

Total Accounts Payable and Accrued Liabilities	16,525	15,967

			Three months ended

			May 31, 2011			May 31, 2010
Balance at the beginning of the period				2,892			2,478
		Accruals		134			826
		Utilization		(456	)		(152	)
		Changes in estimates		(247	)		113

Ending Balance				2,323			3,265

	Short term Portion			1,334			1,425
	Long term Portion			989			1,840



Warranty accrual	989	1,562
Deferred Revenue	490	437

Total Other Long Term Liabilities	1,479	1,999

	Three months ended May 31, 2011					Year ended February 28, 2011

	Options			Weighted Average Price (CAD)		Options			Weighted Average Price (CAD)
Opening Balance		2,114,906		$	5.53		1,603,052		$	4.06
Granted		552,500		$	6.77		900,645		$	7.28
Exercised		(40,346	)	$	2.82		(311,254	)	$	2.73
Forfeited		(8,577	)	$	11.16		(77,537	)	$	6.62

Closing Balance		2,618,483		$	5.82		2,114,906		$	5.53

	Three months ended

	May 31, 2011		May 31, 2010
Volatility		70%		63%
Risk Free Rate		2.03%		1.02%
Dividend Yield		Nil		Nil
Average Expected Life		4 yrs		4 yrs


2012	$	1,693
2013	$	2,084
2014	$	1,943
2015	$	1,812
Thereafter	$	2,699

	$	10,231



Held-for-trading(1)	79,932	89,714
Receivables(2)	10,748	12,197
Other financial liabilities(3)	15,171	14,608

	May 31, 2011						February 28, 2011

	US Dollars		CDN Dollars		Other Currency		US Dollars		CDN Dollars		Other Currency
Held-for-trading		87%		10%		3%		87%		11%		2%
Receivables		83%		6%		11%		94%		1%		5%
Other financial liabilities		67%		19%		14%		70%		18%		12%


/s/ GERRY SPENCER Director		/s/ TOM MANLEY Director

	For the three months ended

	May 31, 2011				May 31, 2010
	Amount		%		Amount		%
Canada		2,589		23%		2,726		6%
North America (excluding Canada)		5,611		52%		40,190		82%
Europe, Middle East, and Africa		2,024		18%		5,448		11%
Other		825		7%		362		1%

Total Revenue		11,049		100%		48,726		100%