		Note

Assets
Current Assets
	Cash and cash equivalents	4	43,586		52,798
	Restricted cash	4	393		177
	Trade receivables	5	32,328		9,850
	Inventory	6	31,116		27,043
	Other current assets	7	10,640		5,501
	Contingent receivable	3	8,041		—
	Deferred tax asset		179		69

			126,283		95,438
Long Term Assets
	Property and equipment	8	9,944		5,184
	Deferred tax asset		1,818		1,308
	Deferred financing cost	11	447		—
	Intangible assets	9	13,680		6,264
	Goodwill	9	11,927		11,927

			37,816		24,683
Total Assets			164,099		120,121

Liabilities
Current Liabilities
	Accounts payable and accrued liabilities	10	45,843		12,720
	Deferred revenue		1,177		723
	Capital lease obligation	3	3,970		—
	Contingent royalty	15	—		372
	Contingent consideration		—		1,884

			50,990		15,699
Long Term Liabilities
	Debt facility	11	15,000		—
	Capital lease obligation	3	1,492		—
	Other long term liabilities	12	588		1,063
	Contingent royalty	15	—		1,292

			17,080		2,355
Commitments		15
Shareholders' equity
	Capital stock	13	179,373		172,264
	Contributed surplus	13	5,330		4,606
	Deficit	13	(79,149	)	(65,448	)
	Accumulated other comprehensive loss	13	(9,689	)	(9,658	)

Total Shareholder's equity			95,865		101,764
	Non-controlling interests	3	164		303

Total Equity			96,029		102,067
Total Liabilities and Shareholder's equity			164,099		120,121

Shares issued & outstanding		13	38,025,305		35,586,206
On behalf of the Board:

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)

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

				Three months ended						Six months ended

		Note		August 31, 2012			August 31, 2011			August 31, 2012			August 31, 2011
REVENUE			19		44,157			13,627			57,131			24,676
	Cost of sales		6		37,414			7,852			46,255			14,257

Gross profit					6,743			5,775			10,876			10,419

EXPENSES
	Research and development				12,139			6,105			16,538			12,371
	Selling and marketing				4,357			3,849			8,015			7,929
	General and administrative				8,513			3,717			13,783			7,680
	Government assistance		15		—			(287	)		—			(637	)

					25,009			13,384			38,336			27,343

Income (loss) before amortization of intangible assets and other items					(18,266	)		(7,609	)		(27,460	)		(16,924	)
	Amortization of intangible assets		9		(1,199	)		(622	)		(1,741	)		(1,209	)
	Accretion expense				(30	)		(276	)		(52	)		(552	)
	Restructuring expense		20		—			—			(798	)		—
	Interest income (expense)				(740	)		127			(711	)		211
	Investment gain (loss)				—			(19	)		—			20
	Impairment of intangible assets		9		(1,148	)		(8,315	)		(4,017	)		(8,315	)
	Gain on change in estimate of contingent liabilities		15		352			13,161			1,542			13,161
	Gain on purchase of business				19,397			—			19,397			—
	Foreign exchange gain (loss)				462			(36	)		(541	)		84

Income (loss) before income taxes					(1,172	)		(3,589	)		(14,381	)		(13,524	)
	Income tax expense (recovery)				—			(1,310	)		(572	)		(1,301	)

Net Income (loss)					(1,172	)		(2,279	)		(13,809	)		(12,223	)
	Net Loss Attributable to Non-Controlling Interest				50			73			108			127

Net Income (loss) applicable to shareholders					(1,122	)		(2,206	)		(13,701	)		(12,096	)
	Foreign currency translation differences for foreign operations				(6	)		7			62			10

Comprehensive Income (Loss)					(1,166	)		(2,286	)		(13,871	)		(12,233	)
	Comprehensive Income (Loss) applicable to Non-Controlling Interest				53			67			77			119

Comprehensive Income (Loss) applicable to shareholders					(1,119	)		(2,212	)		(13,732	)		(12,104	)
Income (loss) per share
	Basic		14		(0.03	)		(0.06	)		(0.37	)		(0.34	)
	Diluted		14		(0.03	)		(0.06	)		(0.37	)		(0.34	)
Weighted Average Shares Outstanding
	Basic		14		37,992,859			35,494,976			36,962,103			35,462,012
	Diluted		14		37,992,859			35,494,976			36,962,103			35,462,012

			Three months ended						Six months ended

			August 31, 2012			August 31, 2011			August 31, 2012			August 31, 2011
Operating Activities
Net Income (Loss)				(1,172	)		(2,279	)		(13,809	)		(12,223	)
Items not affecting cash
		Amortization of property and equipment		1,724			845			2,478			1,674
		Amortization of intangible assets		1,199			622			1,741			1,209
		Accretion expense		30			276			52			552
		Royalty amortization		(58	)		(201	)		(151	)		(402	)
		Interest expense		211			—			211			—
		Rental expense		957			—			957			—
		Impairment of intangible assets		1,148			8,315			4,017			8,315
		Gain on change in estimate of contingent liabilities		(352	)		(13,161	)		(1,542	)		(13,161	)
		Stock-based compensation		388			582			792			1,074
		Gain on purchase of business		(19,397	)		—			(19,397	)		—
		Unrealized foreign exchange loss		(467	)		72			649			73
		Future income tax recovery		—			(1,310	)		(572	)		(1,301	)
		Inventory impairment		2,639			104			2,673			161

				(13,150	)		(6,135	)		(21,901	)		(14,029	)
Changes in non-cash working capital items				13,606			(2,072	)		14,069			(3,396	)

				456			(8,207	)		(7,832	)		(17,425	)

Investing Activities
	Acquisition of property and equipment			(903	)		(220	)		(1,123	)		(669	)
	Acquisition of intangible assets			(163	)		(89	)		(629	)		(403	)
	Acquisition of business			(12,730	)		—			(12,730	)		—
	Purchase of short term investments			—			—			—			(22,432	)
	Maturity of short term investments			—			6,977			—			24,485

				(13,796	)		6,668			(14,482	)		981

Financing Activities
	Initial formation contribution by non-controlling interest in DW-HFCL			—			—			—			555
	Debt facility			15,000			—			15,000			—
	Deferred financing cost			(757	)		—			(1,192	)		—
	Issuance of common shares net of issuance costs			60			166			103			344

				14,303			166			13,911			899

Effect of foreign exchange on cash and cash equivalents				375			(86	)		(809	)		(92	)
Net increase (decrease) in cash and cash equivalents				1,338			(1,459	)		(9,212	)		(15,637	)
Cash and cash equivalents at beginning of period				42,248			63,641			52,798			77,819

Cash and cash equivalents at end of period				43,586			62,182			43,586			62,182

Cash paid during the period for interest				13			—			13			—

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Expressed in US $000's except common share amounts

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

Balance at February 28, 2011	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	)		—			—			—		$	120
Other	9,438	$	72	$	(3	)		—			—			—		$	69
Other comprehensive loss	—		—		—			—		$	(3	)	$	(2	)	$	(5	)
Initial formation contribution by non-controlling interest in DW-HFCL	—		—		—			—			—		$	555		$	555
Net Loss	—		—		—		$	(9,890	)		—		$	(54	)	$	(9,944	)

Balance at May 31, 2011	35,471,677	$	171,832	$	3,050		$	(41,857	)	$	(9,621	)	$	499		$	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	—		—		—			—		$	(7	)	$	(6	)	$	(13	)
Net Loss	—		—		—		$	(2,206	)		—		$	(73	)	$	(2,279	)

Balance at August 31, 2011	35,530,757	$	172,037	$	3,593		$	(44,063	)	$	(9,628	)	$	420		$	122,359

Stock-based compensation	—		—	$	462			—			—			—		$	462
Exercise of stock options	20,444	$	90	$	(34	)		—			—			—		$	56
Stock option benefit	—		—	$	189			—			—			—			—
Other	16,695	$	62	$	1			—			—			—		$	63
Other comprehensive loss	—		—		—			—		$	(29	)	$	(28	)	$	(57	)
Net Loss	—		—		—		$	(8,017	)		—		$	(41	)	$	(8,752	)

Balance at November 30, 2011	35,567,896	$	172,189	$	4,211		$	(52,080	)	$	(9,657	)	$	351		$	115,014

Stock-based compensation	—		—	$	403			—			—			—		$	403
Exercise of stock options	5,414	$	23	$	(10	)		—			—			—		$	13
Stock option benefit	—		—		—			—			—			—			—
Other	12,896	$	52	$	2			—			—			—		$	54
Other comprehensive loss	—		—		—			—		$	(1	)	$	(1	)	$	(2	)
Net Loss	—		—		—		$	(13,368	)		—		$	(47	)	$	(13,415	)

Balance at February 29, 2012	35,586,206	$	172,264	$	4,606		$	(65,448	)	$	(9,658	)	$	303		$	102,067

Stock-based compensation	—		—	$	392			—			—			—		$	392
Settlement of contingent consideration	400,983	$	1,758		—			—			—			—		$	1,758
Other	13,878	$	54	$	1			—			—			—		$	55
Other comprehensive loss	—		—		—			—		$	(34	)	$	(34	)	$	(68	)
Net Loss	—		—		—		$	(12,579	)		—		$	(58	)	$	(12,637	)

Balance at May 31, 2012	36,001,067	$	174,076	$	4,999		$	(78,027	)	$	(9,692	)	$	211		$	91,567

Stock-based compensation	—		—	$	378			—			—			—		$	378
Exercise of stock options	16,444	$	91	$	(52	)		—			—			—		$	39
Issued in connection with business acquisition	2,000,978	$	5,180		—			—			—			—		$	5,180
Other	6,816	$	26	$	5			—			—			—		$	31
Other comprehensive gain (loss)	—		—		—			—		$	3		$	3		$	6
Net Loss	—		—		—		$	(1,122	)		—		$	(50	)	$	(1,172	)

Balance at August 31, 2012	38,025,305	$	179,373	$	5,330		$	(79,149	)	$	(9,689	)	$	164		$	96,029

DragonWave Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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, DragonWave Networks Ltd., incorporated in Israel, DragonWave S.r.l, incorporated in Italy, DragonWave S.A.R.L., incorporated in Luxembourg, DragonWave LTDA, incorporated in Brazil, DragonWave Mexico S.A. de C.V., incorporated in Mexico, DragonWave Telecommunications Ltd., incorporated in China, 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 upon consolidation.

The consolidated financial statements of the Company have been prepared in United States dollars following United States Generally Accepted Accounting Principles ["U.S. GAAP"].

In the opinion of management, the consolidated financial statements reflect all adjustments, which consist only of normal and recurring adjustments, necessary to present fairly the financial position as at August 31, 2012 and August 31, 2011 and the results of operations, cash flows and changes in equity for the three and six months ended August 31, 2012 and August 31, 2011.

The Company adopted Accounting Standard Update ["ASU"] 2011-05, which revised the manner in which entities present comprehensive income in their financial statements. The new guidance removed the presentation options in ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The ASU does not change the items that must be reported in other comprehensive income.

The Company adopted ASU No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS", which amended Accounting Standards Codification 820, Fair Value Measurements. ASU 2011-04 eliminates certain differences that existed between U.S. and international fair value accounting concepts, and also clarifies existing guidance under GAAP. Additionally, among other disclosures, this ASU requires certain new quantitative and qualitative disclosures regarding unobservable fair value measurements. The adoption did not have an impact on our consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, which creates new disclosure requirements about the nature of an entity's rights of offset and related arrangements associated with its financial instruments and derivative instruments. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein, with retrospective application required. The new disclosures are designed to make financial statements that are prepared under U.S. Generally Accepted Accounting Principles more comparable to those prepared under International Financial Reporting Standards. We are evaluating the impact of ASU 2011-11 on our Consolidated Financial Statements.

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 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.

On June 1, 2012 the Company announced the closing of the acquisition of Nokia Siemens Networks' microwave transport business, including its associated operational support system (OSS) and related support functions. The acquisition was effected pursuant to the Amended and Restated Master Acquisition Agreement between DragonWave Inc., its wholly-owned subsidiary DragonWave S.A.R.L. and Nokia Siemens Networks dated May 3, 2012.

Nokia Siemens Networks retains responsibility for its existing solution sales and associated services for microwave transport, while the Company is responsible for the microwave transport product line, including R&D, product management and operations functions. Nokia Siemens Networks will continue to provide R&D and other support to the business through a services arrangement.

As part of the acquisition, the Company is now the preferred strategic supplier of packet microwave and related products to Nokia Siemens Networks and the two companies will jointly coordinate technology development activities. Under the terms of the agreement, the Company will continue the support and development of the acquired products, which will be sold via Nokia Siemens Networks through its existing channels as part of its end-to-end mobile broadband solution set and directly through the Company's existing channels.

Consideration paid on closing by DragonWave S.A R.L., a wholly owned subsidiary of the Company, was $12,730 in cash and 2,000,978 common shares with market value of $5,279. The cash payment was made in Euros.

The fair values of the assets acquired and liabilities assumed in the acquisition are as follows:



Tangible Assets
	Cash	—
	Accounts receivable	—
	Inventory	11,378
	Lease holiday	2,093
	Other current assets	2,564
	Capital assets	6,115

Tangible Assets Acquired		22,150
Tangible Liabilities
	Accounts payable	—
	Accrued liabilities	2,484
	Capital lease obligation	4,162

Tangible Liabilities Acquired		6,646

Fair Value of net tangible assets		15,504
Intangible Assets
	Customer relationships	1,745
	Developed technology	10,800

Intangible Assets Acquired		12,545
Goodwill		—
Gain on purchase of business		(19,397	)

Purchase Price		8,652
Purchase Price
	Cash	12,730
	Common shares of DragonWave	5,279
	Other consideration	1,205
	Contingent receivable	(10,562	)

		8,652

The Purchase Price consists of the following components: a) cash delivered on closing; b) 2,000,978 common shares delivered on closing with a fair value of $5,279 which reflects that Nokia Siemens Networks is subject to a lock-up provision restricting sale or disposition of the shares, subject to customary exceptions; c) other consideration deferred for specific tangible assets; d) a contingent receivable based on business performance in the twelve months following closing.

The Company allocated $12,545 to intangible assets, including customer relationships and developed technology based on their fair values at the date of purchase. These intangible assets are being amortized over their estimated useful lives of three, and six years, respectively. The useful lives of the intangible assets were determined as the period of time over which the assets are anticipated to contribute to the Company's future cash flows. None of the intangible assets are deductible for tax purposes.

The company recognized a one-time gain in the three and six months ended August 31, 2012 due to the difference between the cumulative tangible and intangible net assets and the purchase price.

The primary reason for the acquisition, relates to the strategic position with Nokia Siemens Networks which positions DragonWave for future growth as well as the acquisition of a technology suite backed by service and support, and further bolsters the Company's ability to participate in the growth in LTE networks worldwide. Management believes that the Company recognized a gain on the purchase of a business as a result of: a) its existing relationship with Nokia Siemens Networks which positioned the Company more strategically to the seller than other potential acquirers; b) access to the liquidity necessary to complete the acquisition; and c) the prevailing economic and market environment.

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

The restricted cash is related to security for one of the Company's rental agreements, a standby letter of credit and a blocking certificate with regards to the incorporation of one of the Company's wholly owned subsidiary.

The Company is exposed to credit risk with respect to trade receivables in the event that its counterparties do not meet their obligations. The Company minimizes its credit risk with respect to trade receivables 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 August 31, 2012, one customer exceeded 10% of the total receivable balance. That customer represented 68% of the trade receivables balance. [February 29, 2012—two customers represented 37% of the trade receivables balance].

Included in general and administrative expenses is $34 and $69 related to bad debt expense for the three and six months ended August 31, 2012 respectively [three and six months ended August 31, 2011—$35 and $34)].

Cost of sales for the three and six months ended August 31, 2012 was $37,414 and $46,255 respectively [three and six months ended August 31, 2011—$7,852 and $14,257 respectively], which included $36,276 and $44,703 respectively [three and six months ended August 31, 2011—$7,179 and $13,169 respectively] of costs associated with inventory. The remaining costs of $1,138 and $1,552 respectively [three and six months ended August 31, 2011—$673 and $1,088 respectively] related principally to freight, warranty and other direct costs of sales.

For the three and six months ended August 31, 2012, the Company recognized an impairment loss on inventory of $2,639 and $2,673 respectively [three and six months ended August 31, 2011—$104 and $161 respectively].

Amortization expenses relating to the above property and equipment of $1,413 and $1,847, $43 and $87, $268 and $544 was included in research and development, sales and marketing and general and administrative expenses respectively for the three and six months ended August 31, 2012 [three and six months ended August 31, 2011: R&D—$545 and $1,081; S&M—$55 and $87; G&A—$245 and $506]. Accumulated amortization was $15,825 as at February 29, 2012.

For the three and six months ended August 31, 2012, the Company recognized amortization of intangible assets of $1,199 and $1,741 [for the three and six months ended August 31, 2011—$622 and $1,209].

During the three and six months ended August 31, 2012, the Company performed analyses 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 these analyses, the Company determined that the carrying value of its Customer Relationship and Developed Technology intangible assets were in excess of the relative 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 impairment charges on intangible assets of $1,148 and $4,017 during the three and six months ended August 31, 2012 [three and six months ended August 31, 2011—$8,315].

The goodwill impairment test is a three-step process which requires the Company to make assumptions regarding fair value. The first step in the impairment test is to assess qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. Because the Company impaired some intangible assets with finite lives, the Company believed there were qualitative factors in-place that would suggest that the two-step goodwill impairment test would need to be performed. The second step consisted of calculating the fair value of our aggregated reporting unit. The Company used both a market-based approach and an estimate of discounted future cash flows.

In applying the market-based approach the Company calculated its market capitalization using values from a reasonable time period around the date of the impairment test. The Company applied a control premium that was identified using recent comparable transactions.

In applying the discounted cash flow methodology, we rely on a number of factors, including future business plans, actual and forecasted operating results, and market data. The significant assumptions employed under this method include discount rates; revenue growth rates, including assumed terminal growth rates; and operating margins used to project future cash flows for a reporting unit. The discount rates utilized reflect market-based estimates of capital costs and discount rates adjusted for management's assessment of a market participant's view with respect to other risks associated with the projected cash flows of the individual reporting unit. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable.

Our annual goodwill impairment analysis for fiscal 2013 did not result in any impairment loss.

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 periods:

Concurrently with the closing of the acquisition of Nokia Siemens Networks' Microwave Transport on June 1, 2012, the Company established a new long term credit facility with Comerica Bank and Export Development Canada. The credit facility is for a total of $40,000, of which the Company has drawn $15,000 as of August 31, 2012. The Company has access, subject to ongoing compliance with borrowing covenants, to $20,000 in additional credit (for total maximum credit of $60,000). The credit facility matures on May 31, 2014 and is secured by a first-priority charge on all of the assets of DragonWave and its principal direct and indirect subsidiaries. Borrowing options under the credit facility include US dollar, Canadian dollar and Euro loans. Interest rates vary with market rate fluctuations, with loans bearing interest in the range of 3—4% above the applicable base rates. The terms of the credit facility include other customary terms, conditions, covenants, and representations and warranties. Direct costs associated with obtaining the debt facility such as closing fees, registration and legal expenses have been capitalized and will be amortized over the two year term of the facility. During the three months ended August 31, 2012 the

weighted average debt outstanding was $34,341, and the Company accrued $570 in interest expense related to the debt facility.

On March 13, 2012 the Company settled a portion its contingent consideration, with regards to the purchase of Axerra Networks, with 400,983 common shares of DragonWave, valued at $4.49 per common share based on a 20 day volume weighted average price.

On June 1, 2012, as part of a business acquisition, the Company issued 2,000,978 common shares of DragonWave, valued at $3.21 CAD per common share based on a 5 day volume weighted average price.

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 3,802,531 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 following are the weighted average values used in determining the fair value for the periods presented:

The 555,000 options granted during the three months ended August 31, 2012 and the 567,000 options granted during the six months ended August 31, 2012 were determined to have a fair value of $876 and $896 respectively.

The following table summarizes the various exercise prices inherent in the Company's stock options outstanding and exercisable on August 31, 2012:

The Company has recognized $388 and $792 for the three and six months ended August 31, 2012 as compensation expense for stock-based grants, with a corresponding credit to contributed surplus [three and six months ended August 31, 2011—$582 and $1,074].

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 and six months ended August 31, 2012 a total of 7,661 and 18,765 common shares were purchased by employees at fair market value, while the Company issued 1,910 and 4,684 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 six months ended August 31, 2012 was $11 and $25 [three and six months ended August 31, 2011—$9 and $16]. The fair value of the unearned ESPP shares as at August 31, 2012 was $39 [February 29, 2012—$48]. The number of shares held for release, and still restricted under the plan at August 31, 2012 was 10,606 [February 29, 2012—10,085].

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,						Six months ended,

		August 31, 2012			August 31, 2011			August 31, 2012			August 31, 2011
Basic Net Income (Loss) per share
	Net Income (Loss) applicable to shareholders		(1,122	)		(2,206	)		(13,701	)		(12,096	)
	Weighted average number of shares outstanding		37,992,859			35,494,976			36,962,103			35,462,012

Net Income (Loss) per share		$	(0.03	)	$	(0.06	)	$	(0.37	)	$	(0.34	)

Diluted Net Income (Loss) per share
	Net Income (Loss)		(1,122	)		(2,206	)		(13,701	)		(12,096	)
	Weighted average number of shares outstanding		37,992,859			35,494,976			36,962,103			35,462,012
	Dilutive effect of warrants		—			—			—			—
	Dilutive effect of stock options		—			—			—			—

Adjusted weighted average number of shares outstanding			37,992,859			35,494,976			36,962,103			35,462,012

Net Income (Loss) per share		$	(0.03	)	$	(0.06	)	$	(0.37	)	$	(0.34	)

As at August 31, 2012, 2,668,284 options and 31,562 warrants were excluded from the net income (loss) per share calculation as they were anti-dilutive.

Future minimum operating lease payments as at August 31, 2012 per fiscal year are as follows:

Under the research and development agreements of DragonWave 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 nil in the three and six months ended August 31, 2012 [three and six months ended August 31, 2011—287 and $637].

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.

During the three and six months ended August 31, 2012 the Company adjusted the contingent royalty liability based on a change in estimate. A corresponding gain of $352 and $1,542 was made to recognize the change in estimate in the consolidated statement of operations and comprehensive income (loss) in the three and six months ended August 31, 2012 [three and six months ended August 31, 2011—$1,850]. The Company has a maximum potential obligation of an additional $15,878.

The Company leases premises from a real estate company controlled by a former member of the Board of Directors. The real estate company ceased to be a related party on June 12, 2012. During the six months ended August 31, 2012, the Company paid $895 [three and six months ended August 31, 2011—$433 and $739], relating to the rent, operating costs, and leasehold improvements associated with this real estate. The value owing for net purchases at February 29, 2012 was $3.

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, loans and receivables, or other financial 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, short term investments and the Company's line of credit with fixed interest rates expose the Company to interest rate risk on these financial instruments. Interest expense of $740 and $711 was recognized during the three and six months ended August 31, 2012 on the Company's cash, cash equivalents, short term investments and line of credit [three and six months ended August 31, 2011—Income of $127 and $211].

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 fair 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.

Foreign exchange risk arises because of fluctuations in exchange rates. To mitigate exchange risk, we utilize forward contracts to secure exchange rates with the objective of offsetting fluctuations in our operating expenses incurred in foreign currencies with gains or losses on the forward contracts. Our foreign exchange forward contracts mature at various dates through November 2012 and have an aggregate fair value of $13,835. During the three months ended August 31, 2012, the Company recorded approximately $267 of gains related to its foreign exchange forward contracts. Our foreign exchange forward contracts are over-the-counter instruments. There is an active market for this instrument and, therefore, it is classified as Level 1 in the fair value hierarchy. All foreign currency gains and losses related to forward contracts are included in Foreign exchange gain (loss) in the Consolidated Statements of Operations.

As of August 31, 2012, if the US dollar had appreciated 1% against all foreign currencies, 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 $39 for the three and six months ended August 31, 2012 [three and six months ended August 31, 2011—$91], with an equal and opposite effect if the US dollar had depreciated 1 percent against all foreign currencies at August 31, 2012.

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.

The Company was dependent on one key customer with respect to revenue in the three and six months ended August 31, 2012. This customers represented approximately 76% and 59% of sales for three and six months ended August 31, 2012 [three and six months ended August 31, 2011—two customer representing 29% and 15% of sales and two customers representing 17% and 15% respectively].

During the six month period ending August 31, 2012, the Company implemented several structural adjustments to reflect the Company's global integration plan for the planned acquisition of Nokia Siemens Networks' microwave transport business. One of these changes aimed at reducing its operating expenses in order to better align it with its revenues.

Restructuring charges of $798 related to severance costs have been recognized in the six month period ended August 31, 2012.

Certain of the comparative figures have been reclassified to conform with the presentation adopted in the current fiscal year.



Trade Receivables (gross)	32,426		9,915
Allowance for doubtful accounts	(98	)	(65	)

Trade Receivables (net)	32,328		9,850



Raw Materials		7,093	8,313
Work in Progress		1,045	1,350
Finished Goods		20,384	15,067

	Total Production Inventory	28,522	24,730
Inventory held for customer service/warranty		2,594	2,313

	Total Inventory	31,116	27,043



Deposits on inventory	5,426	2,896
Prepaid expenses	2,139	1,425
Lease holiday	1,136	—
VAT receivable (net)	599	474
Deferred financing costs	596	—
Foreign exchange contracts	267	—
Receivable from the Office of the Chief Scientist	73	75
Income Tax Receivable	304	484
Other & miscellaneous receivables	100	147

Total other current assets	10,640	5,501

	August 31, 2012						February 29, 2012

	Cost		Accumulated Amortization		Net Book Value		Net Book Value
Test equipment		19,457		11,134		8,323		3,810
R&D equipment		2,524		2,320		204		378
Computer hardware		2,873		2,259		614		214
Production fixtures		1,136		981		155		278
Leasehold improvements		941		685		256		312
Furniture and fixtures		676		589		87		104
Communication equipment		282		218		64		53
Other		358		117		241		35

Total		28,247		18,303		9,944		5,184

	August 31, 2012								February 29, 2012

	Cost		Accumulated Amortization		Impairment		Net Book Value		Cost		Accumulated Amortization		Impairment		Net Book Value
Customer Relationships		10,002		679		7,847		1,476		8,257		318		5,938		2,001
Developed Technology		17,068		2,252		4,485		10,331		6,268		1,423		2,377		2,468
Infrastructure Systems Software		1,519		216		—		1,303		1,071		—		—		1,071
Computer Software		3,159		2,589		—		570		2,978		2,254		—		724

Total Intangible Assets		31,748		5,736		12,332		13,680		18,574		3,995		8,315		6,264



DragonWave Inc.		For the three and six months ended August 31 2012



Trade payables	24,501	5,029
Accrued liabilities	18,583	3,168
Payroll related accruals	1,797	3,500
Warranty accrual	962	1,023

Total Accounts Payable and Accrued Liabilities	45,843	12,720



Warranty accrual	151	418
Deferred Revenue	437	645

Total Other Long Term Liabilities	588	1,063

			Weighted Average Price (CAD)

Options outstanding at February 28, 2012	2,396,079		$	5.90

Granted	12,000		$	3.93
Exercised	—		$	—
Forfeited	(148,816	)	$	7.23

Options outstanding at May 31, 2012	2,259,263		$	5.80

Granted	555,000		$	2.94
Exercised	(16,444	)	$	2.43
Forfeited	(129,535	)	$	6.90

Options outstanding at August 31, 2012	2,668,284		$	5.17

	Three months ended

	August 31, 2012		August 31, 2011
Volatility		73%		70%
Risk Free Rate		1.09%		1.56%
Dividend Yield		Nil		Nil
Average Expected Life		4 yrs		4 yrs

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		338,785		1.37	$	1.35		301,155	$	1.35
$	2.01	$	3.00		561,935		4.76	$	2.93		6,775	$	2.68
$	3.01	$	4.00		168,371		2.14	$	3.44		109,975	$	3.38
$	4.01	$	5.00		256,853		1.09	$	4.46		248,897	$	4.46
$	5.01	$	6.00		56,117		2.24	$	5.65		37,137	$	5.68
$	6.01	$	7.00		873,053		3.27	$	6.47		367,153	$	6.38
$	7.01	$	8.00		140,000		3.29	$	7.82		58,667	$	7.82
$	8.01	$	10.00		141,800		2.57	$	9.34		83,380	$	9.35
$	10.01	$	13.74		131,370		2.31	$	12.40		85,903	$	12.32

					2,668,284		2.77	$	5.17		1,299,042	$	5.20


2013	$	948
2014	$	1,828
2015	$	1,658
2016	$	1,413
Thereafter	$	1,006

	$	6,853



Held-for-trading(1)	44,246	52,975
Loans and receivables(2)	45,034	10,214
Other financial liabilities(3)	59,343	11,655


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