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	57,927			77,819
	Restricted cash	4	132			714
	Short term investments	4	2,123			11,181
	Trade receivables	5	12,302			11,579
	Inventory	6	29,608			28,204
	Other current assets	7	5,866			5,306
	Deferred income tax asset		365			553

			108,323			135,356
Long Term Assets
	Property and equipment	8	5,990			7,560
	Deferred income tax asset		2,393			808
	Intangible assets	9	5,495			14,929
	Goodwill		11,927			11,927

			25,805			35,224
Total Assets			134,128			170,580

Liabilities
Current Liabilities
	Accounts payable and accrued liabilities	10	12,496			15,967
	Deferred revenue		1,233			1,453
	Contingent royalty	15	300			622
	Contingent consideration	11	2,470			14,622

			16,499			32,664
Long Term Liabilities
	Contingent royalty	15	1,431			3,290
	Other long term liabilities	12	1,184			1,999

			2,615			5,289
Commitments		15
Shareholders' equity
	Capital stock	13	172,189			171,570
	Contributed surplus	13	4,211			2,642
	Deficit	13	(52,080	)		(31,967	)
	Accumulated other comprehensive loss (AOCL)	13	(9,693	)		(9,618	)

Total Shareholder's equity			114,627			132,627
	Non-controlling interests	3	387			—

Total Equity			115,014			132,627
Total Liabilities and Shareholder's equity			134,128			170,580

Shares issued & outstanding			35,567,896			35,421,893
On behalf of the Board:

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)

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

				Three months ended November 30						Nine months ended November 30

		Note		2011			2010			2011			2010
							(Note 2)						(Note 2)
REVENUE			18, 19		11,830			27,008			36,506			102,905
	Cost of sales		6		6,992			14,049			21,249			56,763

Gross profit					4,838			12,959			15,257			46,142

EXPENSES
	Research and development				5,661			4,817			18,623			13,104
	Selling and marketing				3,793			4,735			11,722			13,339
	General and administrative				4,704			3,286			11,793			8,453
	Government assistance		15		(265	)		(246	)		(902	)		(246	)

					13,893			12,592			41,236			34,650

Income (loss) before amortization of intangible assets and other items					(9,055	)		367			(25,979	)		11,492
	Amortization of intangible assets		9		(404	)		(277	)		(1,613	)		(421	)
	Accretion expense				(60	)		(122	)		(612	)		(122	)
	Interest income				143			88			354			196
	Investment gain (loss)				1			155			21			168
	Impairment of intangible assets		9		—			—			(8,315	)		—
	Gain on change in estimate of contingent liabilities		11, 15		1,362			—			14,523			—
	Foreign exchange gain				(202	)		(44	)		(118	)		142

Income (loss) before income taxes					(8,215	)		167			(21,739	)		11,455
	Income tax expense (recovery)				(157	)		209			(1,458	)		566

Net Income (loss)					(8,058	)		(42	)		(20,281	)		10,889
	Net Loss Attributable to Non-Controlling Interest				41			—			168			—

Net Income (Loss) applicable to shareholders					(8,017	)		(42	)		(20,113	)		10,889
	Foreign currency translation differences for foreign operations				57			—			75			—

Net and Comprehensive Income (Loss) applicable to shareholders					(8,074	)		(42	)		(20,188	)		10,889
Income (loss) per share
	Basic		14		(0.23	)		(0.00	)		(0.57	)		0.30
	Diluted		14		(0.23	)		(0.00	)		(0.57	)		0.29
Weighted Average Shares Outstanding
	Basic		14		35,542,247			35,125,724			35,486,924			36,010,148
	Diluted		14		35,542,247			35,125,724			35,486,924			36,957,219

			Three months ended November 30						Nine months ended November 30

			2011			2010			2011			2010
						(Note 2)						(Note 2)
Operating Activities
Net Income (Loss)				(8,058	)		(42	)		(20,281	)		10,889
Items not affecting cash
		Amortization of property and equipment		839			761			2,513			2,126
		Amortization of intangible assets		404			277			1,613			421
		Accretion expense		60			122			612			122
		Non cash royalty amortization		(21	)		—			(423	)		—
		Impairment of intangible assets		—			—			8,315			—
		Gain on change in estimate of contingent liabilities		(1,362	)		—			(14,523	)		—
		Stock-based compensation		475			331			1,549			946
		Unrealized foreign exchange loss		56			100			130			290
		Non cash future income tax expense (recovery)		(157	)		92			(1,458	)		92
		Inventory impairment		29			538			190			1,188
		Unrealized gain on short term investments		11			74			(53	)		58
		Accrued interest on short term investments		(17	)		(46	)		(19	)		(86	)

				(7,741	)		2,207			(21,835	)		16,046
Changes in non-cash working capital items				(3,220	)		3,997			(6,551	)		(11,327	)

				(10,961	)		6,204			(28,386	)		4,719

Investing Activities
	Acquisition of property and equipment			(274	)		(402	)		(943	)		(3,208	)
	Acquisition of intangible assets			(91	)		(200	)		(494	)		(536	)
	Acquisition of Axerra Networks Inc., net of cash acquired			—			(8,700	)		—			(8,700	)
	Purchase of short term investments			—			—			(22,432	)		(115,225	)
	Maturity of short term investments			7,077			7,429			31,562			76,228

				6,712			(1,873	)		7,693			(51,441	)

Financing Activities
	Share repurchase			—			(415	)		—			(10,738	)
	Equity contribution by non-controlling interest in DW-HFCL			—			—			555			—
	Issuance of common shares net of issuance costs			106			142			450			353

				106			(273	)		1,005			(10,385	)

Effect of foreign exchange on cash and cash equivalents				(112	)		(100	)		(204	)		(290	)
Net increase (decrease) in cash and cash equivalents				(4,255	)		3,958			(19,892	)		(57,397	)
Cash and cash equivalents at beginning of period				62,182			43,921			77,819			105,276

Cash and cash equivalents at end of period				57,927			47,879			57,927			47,879

Cash paid during the period for interest				—			194			—			194

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

Stock-based compensation	—			—		$	569			—			—			—		$	569
Exercise of stock options	47,736		$	149		$	(28	)		—			—			—		$	121
Other	11,344		$	56		$	2			—			—			—		$	58
Other comprehensive loss	—			—			—			—		$	(13	)		—		$	(13	)
Net Loss	—			—			—		$	(2,206	)		—		$	(73	)	$	(2,279	)

Balance at August 31, 2011	35,530,757		$	172,037		$	3,593		$	(44,063	)	$	(9,636	)	$	428		$	122,359

Stock-based compensation	—			—		$	462			—			—			—		$	462
Exercise of stock options	20,444		$	90		$	(34	)		—			—			—		$	56
Stock option benefit	—			—		$	189			—			—			—		$	189
Other	16,695		$	62		$	1			—			—			—		$	63
Other comprehensive loss	—			—			—			—		$	(57	)		—		$	(57	)
Net Loss	—			—			—		$	(8,017	)		—		$	(41	)	$	(8,058	)

Balance at November 30, 2011	35,567,896		$	172,189		$	4,211		$	(52,080	)	$	(9,693	)	$	387		$	115,014

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, USA, DragonWave PTE Limited, incorporated in Singapore, 4472314 Canada Inc., incorporated in Canada, Axerra Networks Inc., incorporated in the state of Delaware, USA, 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 ["U.S. 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 audited consolidated financial statements for the year ended February 28, 2011.

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 November 30, 2011 and the results of operations, cash flows and changes in equity for the three and nine months ended November 30, 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 (loss) 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 August 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles—Goodwill and Other, which discusses the new Qualitative Assessment Option for testing goodwill impairment. Under this update, the Company may first assess qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. If the assessment resulted in more than 50% likelihood that the fair value of a reporting unit is less than the carrying amount, then the Company must continue to apply the two-step impairment test. If the fair value exceeds the carrying amount, then neither of the two steps in the current Goodwill impairment test is required. The company has decided to early adopt the standard, effective November 30, 2011. The impact of the adoption has been described in Note 9.

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 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.

4. CASH and CASH EQUIVALENTS, RESTRICTED CASH, and SHORT TERM INVESTMENTS (Continued)

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 November 30, 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 November 30, 2011, one customer exceeded 10% of the total receivable balance. This customer represented 18% of the trade receivables balance. [February 28, 2011—two customers represented 31% of the trade receivables balance].

Included in general and administrative expenses is $145 and $179 related to bad debt expense for the three and nine months ended November 30, 2011 respectively [three and nine months ended November 30, 2010—$20 and $169].

Cost of sales for the three and nine months ended November 30, 2011 was $6,992 and $21,249 respectively [three and nine months ended November 30, 2010—$14,049 and $56,763], which included $6,589 and $19,763 respectively [three and nine months ended November 30, 2010—$12,574 and $50,829 respectively] of costs associated with inventory. The remaining costs of $403 and $1,486 respectively [three and nine months ended November 30, 2010—$1,475 and $5,934 respectively] related principally to freight, warranty and other direct costs of sales.

For the three and nine month periods ended November 30, 2011, the Company recognized an impairment loss on inventory of $29 and $190 respectively [three and nine months ended November 30, 2010—$538 and $1,188 respectively].

	November 30, 2011						February 28, 2011

	Cost		Accumulated Amortization		Net Book Value		Net Book Value
Test equipment		13,024		8,746		4,278		5,291
R&D equipment		2,319		1,857		462		594
Computer hardware		2,377		2,110		267		472
Production fixtures		1,134		743		391		520
Leasehold improvements		900		591		309		361
Furniture and fixtures		665		551		114		152
Communication equipment		251		191		60		84
Other		295		186		109		86

Total		20,965		14,975		5,990		7,560

Amortization expenses relating to the above property and equipment of $571 and $1,652, $35 and $122, $233 and $739 was included in research and development, sales and marketing and general and administrative expenses respectively for the three and nine months ended November 30, 2011 [three and nine months ended November 30, 2010: R&D—$503 and $1,455; S&M—$14 and $34; G&A—$244 and $637].

For the three and nine month periods ended November 30, 2011, the Company recognized amortization of intangible assets of $404 and $1,613 respectively [three and nine months ended November 30, 2010—$277 and $421 respectively].

On August 31, 2011, the Company performed an analysis of its intangible assets in order to determine whether the carrying value of those assets exceeded the estimated future cash flows expected to result from the use or disposition of those assets. Based upon this analysis, management of the Company determined that the carrying value of the intangible assets were in excess of the estimated future cash flows expected to result from their use or disposition. In each case where the fair value of the asset was less than the carrying value, the Company wrote the asset down to its fair value and recorded a corresponding impairment

charge. As a result, the Company has recorded an impairment charge on intangible assets of $8,315 during the nine months ended November 30, 2011.

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 and nine 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. As at August 30, 2011, the estimated liability for the earn-out arrangement based on accretion of the discount was valued at $15,084. On August 31, 2011 the Company adjusted the liability to $3,773 based on a change in the estimated earn-out payment to be made on February 13, 2012. A corresponding entry of $11,311 was made to recognize the change in estimate in the consolidated statement of operations and comprehensive income in the three months ended August 31, 2011.

After accretion of the discount in the three months ended November 30, 2011 of $59, the estimated liability for the earn-out was valued at $3,832. On November 30, 2011 the Company adjusted the liability to $2,470 based on a change in the estimated earn-out payment to be made on February 13, 2012. A corresponding entry of $1,362 was made to recognize the change in estimate in the consolidated statement of operations and comprehensive income in the three months ended November 30, 2011.

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 3,556,790 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.

			Weighted Average Price (CAD)

Options outstanding at February 28, 2011	2,114,906		$	5.53

Granted	552,500		$	6.77
Exercised	(40,346	)	$	2.82
Forfeited	(8,577	)	$	11.16

Options outstanding at May 31, 2011	2,618,483		$	5.82

Granted	20,500		$	5.58
Exercised	(47,736	)	$	2.41
Forfeited	(84,109	)	$	4.28

Options outstanding at August 31, 2011	2,507,138		$	5.93

Granted	—		$	—
Exercised	(20,444	)	$	2.67
Forfeited	(53,265	)	$	3.25

Options outstanding at November 30, 2011	2,433,429		$	6.02

The Company has recognized $475 and $1,549 for the three and nine months ended November 30, 2011 as compensation expense for stock-based grants, with a corresponding credit to contributed surplus [three and nine months ended November 30, 2010—$331 and $946 respectively].

The 573,000 options granted during the nine month period ended November 30, 2011 were determined to have a fair value of $2,146.

The following table summarizes the various exercise prices inherent in the Company's stock options outstanding and exercisable on November 30, 2011:

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 and nine months ended November 30, 2011 a total of 13,354 and 29,973 common shares were purchased respectively by employees at fair market value, while the Company issued 3,341 and 7,504 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 and nine months ended November 30, 2011 was $14 and $30 respectively [three and nine months ended November 30, 2010—$4 and $7 respectively]. The fair value of the unearned ESPP shares as at November 30, 2011 was $49 [February 28, 2011—$42]. The number of shares held for release, and still restricted under the plan at November 30, 2011 was 9,038 [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 39,232 common shares at a purchase price of $8.92 per share. These

warrants are still outstanding, carry a cashless conversion privilege, and 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 November 30, 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:

		3 Months Ended, November 30						9 Months Ended, November 30

		2011			2010			2011			2010
Basic Net Income (Loss) per share
	Net Income (Loss)		(8,017	)		(42	)		(20,113	)		10,889
	Weighted average number of shares outstanding		35,542,247			35,125,724			35,486,924			36,010,148

Net Income (Loss) per share		$	(0.23	)	$	(0.00	)	$	(0.57	)	$	0.30

Diluted Net Income (Loss) per share
	Net Income (Loss)		(8,017	)		(42	)		(20,113	)		10,889
	Weighted average number of shares outstanding		35,542,247			35,125,724			35,486,924			36,010,148
	Dilutive effect of warrants		—			9,206			—			9,816
	Dilutive effect of stock options		—			1,035,110			—			937,255

Adjusted weighted average number of shares outstanding			35,542,247			36,170,040			35,486,924			36,957,219

Net Income (Loss) per share		$	(0.23	)	$	(0.00	)	$	(0.57	)	$	0.29

As at November 30, 2011, 2,433,429 options, 70,794 warrants and 363,091 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 November 30, 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 $265 and $902 in the three and nine months ended November 30, 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.

On August 31, 2011 the Company adjusted the contingent royalty liability to $1,750 based on a change in estimate. A corresponding charge of $1,850 was made to recognize the change in estimate in the consolidated statement of operations and comprehensive income in the nine months ended November 30, 2011. 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 $1,731, the company has a maximum potential obligation of an additional $13,770.

The Company leases premises from a real estate company controlled by a member of the Board of Directors. During the three and nine months ended November 30, 2011, the Company paid $335 and $1,200 respectively [three and nine months ended November 30, 2010—$335 and $1,074 respectively], relating to the rent, operating costs, and leasehold improvements associated with this real estate, and the value owing for net purchases at November 30, 2011 was $11 [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.

The Company also purchased services from a company controlled or significantly influenced by a Board member. Total net services purchased for the three and nine months ended November 30, 2011 was $119 [three and nine months ended November 30, 2010—nil]. These amounts have been allocated amongst various expense accounts and prepaid expenses.

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 values 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 $143 and $354 was recognized during the three and nine months ended November 30, 2011 on the Company's cash, cash equivalents and short term investments [three and nine months ended November 30, 2010—$88 and $196].

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 and customers.

The following table summarizes the currency distribution of the Company's financial instruments in US dollars, as at November 30, 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 November 30, 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 $59 for the three and nine month periods ended November 30, 2011 [three month period ended November 30, 2010—$39], with an equal and opposite effect if the US dollar had depreciated 1 percent against all foreign currencies at November 30, 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 November 30, 2011. These customers represented approximately 23% and 11% of sales for the three month period ended November 30, 2011 [three months ended November 30, 2010—two customer representing 52% and 13% of sales].

The Company was dependent on two key customers with respect to revenue in the nine months ended November 30, 2011. This customer represented approximately 18% and 12% of sales respectively for nine month period ended November 30, 2011 [nine months ended November 30, 2010—one customer representing 66% of sales].

On December 19, 2011, the Company eliminated 38 positions from its Israeli operations. The Company anticipates restructuring charges and cash usage in the fourth fiscal quarter, as a result of the elimination of these positions, to be approximately $300. The Company also expects to incur an additional cash usage of $300 in the fourth quarter due to compensation related expenses recognized in prior quarters.

Maturity Date

October 31, 2012	2,082	2,123

Total Short Term Investments	2,082	2,123



Trade Receivables (gross)	12,513		11,670
Allowance for doubtful accounts	(211	)	(91	)

Trade Receivables (net)	12,302		11,579



Raw Materials		8,444	9,506
Work in Progress		1,167	851
Finished Goods		17,850	15,730

	Total Production Inventory	27,461	26,087
Inventory held for customer service/warranty		2,147	2,117

	Total Inventory	29,608	28,204



Deposits with suppliers	3,330	3,108
Prepaid expenses	1,229	786
Goods and services tax	440	652
Receivable from the Office of the Chief Scientist	90	275
Income Tax Receivable	494	221
Other & miscellaneous receivables	283	264

Total other current assets	5,866	5,306

	November 30, 2011								February 28, 2011

	Cost		Accumulated Amortization		Impairment		Net Book Value		Net Book Value
Customer Relationships		8,257		290		5,938		2,029		8,215
Developed Technology		6,268		1,253		2,377		2,638		5,816
Computer Software		2,871		2,043		—		828		898

Total Intangible Assets		17,396		3,586		8,315		5,495		14,929



DragonWave Inc.		For the three and nine months ended November 30 2011



Cash	57,927	70,388
Cash equivalents	—	7,431

Total Cash and cash equivalents	57,927	77,819
Restricted cash	132	714
Short term investments	2,123	11,181

Total Cash and cash equivalents, Restricted cash, and Short term investments	60,182	89,714



Trade payables	5,641	7,581
Accrued liabilities	2,444	5,714
Payroll related accruals	3,356	1,342
Warranty accrual	1,055	1,330

Total Accounts Payable and Accrued Liabilities	12,496	15,967

			Three months ended						Nine months ended

			November 30, 2011			November 30, 2010			November 30, 2011			November 30, 2010
Balance at the beginning of the period				2,219			3,360			2,892			2,475
		Accruals		181			390			523			1,694
		Utilization		(457	)		(741	)		(1,268	)		(1,187	)
		Changes in estimates		(185	)		48			(389	)		75

Ending Balance				1,758			3,057			1,758			3,057

	Short term Portion			1,055			1,581			1,055			1,581
	Long term Portion			703			1,476			703			1,476



Warranty accrual	703	1,562
Deferred Revenue	481	437

Total Other Long Term Liabilities	1,184	1,999

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		356,850		2.12	$	1.35		243,786	$	1.35
$	2.01	$	3.00		7,240		1.68	$	2.68		6,004	$	2.65
$	3.01	$	4.00		138,455		1.94	$	3.38		106,295	$	3.38
$	4.01	$	5.00		256,853		1.84	$	4.46		211,723	$	4.46
$	5.01	$	6.00		85,116		2.53	$	5.59		43,919	$	5.61
$	6.01	$	7.00		921,945		4.03	$	6.48		145,417	$	6.10
$	7.01	$	8.00		385,000		4.05	$	7.83		2,123	$	7.24
$	8.01	$	10.00		144,000		3.33	$	9.34		57,238	$	9.36
$	10.01	$	13.74		137,970		3.06	$	12.44		64,333	$	12.33

					2,433,429		3.25	$	6.02		880,838	$	4.69


2012	$	584
2013	$	2,073
2014	$	1,929
2015	$	1,796
Thereafter	$	2,707

	$	9,089



Held-for-trading(1)	60,182	89,714
Receivables(2)	12,658	12,197
Other financial liabilities(3)	11,404	14,608

	November 30, 2011						February 28, 2011

	US Dollars		CDN Dollars		Other Currency		US Dollars		CDN Dollars		Other Currency
Held-for-trading		84%		12%		4%		87%		11%		2%
Receivables		87%		12%		1%		94%		1%		5%
Other financial liabilities		57%		25%		18%		70%		18%		12%

	For the three months ended								For the nine months ended

	November 30, 2011				November 30, 2010				November 30, 2011				November 30, 2010
	Amount		%		Amount		%		Amount		%		Amount		%
Canada		1,800		15%		2,179		8%		6,306		17%		6,154		6%
North America (excluding Canada)		6,360		54%		20,631		77%		21,831		60%		79,871		77%
Europe, Middle East, and Africa		3,318		28%		3,295		12%		6,990		19%		15,163		15%
Other		352		3%		903		3%		1,379		4%		1,717		2%

Total Revenue		11,830		100%		27,008		100%		36,506		100%		102,905		100%


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