		Note

Assets
Current Assets
	Cash and cash equivalents	4	22,044		22,959
	Restricted cash	4	1,308		—
	Trade receivables	5	18,917		35,452
	Inventory	6	35,258		32,722
	Other current assets	7	5,203		6,077
	Contingent receivable	3	—		13,843
	Deferred tax asset		69		69

			82,799		111,122
Long Term Assets
	Property and equipment	8	5,524		7,444
	Deferred tax asset		1,568		1,581
	Deferred financing cost	11	—		149
	Intangible assets	9	2,436		2,771
	Goodwill		11,927		11,927

			21,455		23,872
Total Assets			104,254		134,994

Liabilities
Current Liabilities
	Accounts payable and accrued liabilities	10	34,783		56,962
	Debt facility	11	15,000		15,000
	Deferred revenue		1,060		1,163
	Capital lease obligation	3	1,890		3,251
	Contingent liabilities	3	516		255

			53,249		76,631
Long Term Liabilities
	Capital lease obligation	3	988		1,451
	Other long term liabilities	12	558		783
	Contingent liabilities	3	128		519

			1,674		2,753
Commitments		15
Shareholders' equity
	Capital stock	13	179,547		179,429
	Contributed surplus	13	6,325		6,047
	Deficit		(126,822	)	(120,197	)
	Accumulated other comprehensive loss		(9,683	)	(9,685	)

Total Shareholder's equity			49,367		55,594
	Non-controlling interests	3	(36	)	16

Total Equity			49,331		55,610
Total Liabilities and Equity			104,254		134,994

Shares issued & outstanding		13	38,107,454		38,048,297
On behalf of the Board:

CONSOLIDATED STATEMENTS OF OPERATIONS

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

				Three months ended

		Note		May 31, 2013			May 31, 2012
REVENUE			18		24,532			12,974
	Cost of sales		6		21,712			8,841

Gross profit					2,820			4,133

EXPENSES
	Research and development				5,302			4,399
	Selling and marketing				3,382			3,658
	General and administrative				4,748			5,270

					13,432			13,327

Income (loss) before amortization of intangible assets and other items					(10,612	)		(9,194	)
	Amortization of intangible assets		9		(559	)		(542	)
	Accretion expense				(65	)		(22	)
	Restructuring expense		19		—			(798	)
	Interest income (expense)		11		(538	)		29
	Impairment of intangible assets		9		—			(2,869	)
	Gain on change in estimate		15		—			1,190
	Gain on contract amendment		3		5,285			—
	Foreign exchange gain (loss)				(98	)		(1,003	)

Income (loss) before income taxes					(6,587	)		(13,209	)
	Income tax expense (recovery)				92			(572	)

Net Income (loss)					(6,679	)		(12,637	)
	Net Loss Attributable to Non-Controlling Interest				54			58

Net Income (loss) applicable to shareholders					(6,625	)		(12,579	)
Income (loss) per share
	Basic		14		(0.17	)		(0.35	)
	Diluted		14		(0.17	)		(0.35	)
Weighted Average Shares Outstanding
	Basic		14		38,059,919			35,931,347
	Diluted		14		38,059,919			35,931,347

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

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

		Three months ended

		May 31, 2013			May 31, 2012
Operating Activities
Net Income (Loss)			(6,679	)		(12,637	)
Items not affecting cash
	Amortization of property and equipment		1,526			754
	Amortization of intangible assets		559			542
	Accretion expense		65			22
	Royalty amortization		—			(93	)
	Interest expense		263			—
	Impairment of intangible assets		—			2,869
	Gain on change in estimate		—			(1,190	)
	Gain on contract amendment		(5,285	)
	Stock-based compensation		315			404
	Unrealized foreign exchange loss (gain)		(84	)		1,116
	Future income tax expense (recovery)		92			(572	)
	Inventory impairment		99			34

			(9,129	)		(8,751	)
Changes in non-cash working capital items			10,408			463

			1,279			(8,288	)

Investing Activities
	Acquisition of property and equipment		(234	)		(220	)
	Acquisition of intangible assets		(224	)		(466	)

			(458	)		(686	)

Financing Activities
	Principle payments on capital lease obligations		(591	)		—
	Restricted cash on debt facility		(1,308	)		—
	Deferred financing cost		—			(435	)
	Issuance of common shares net of issuance costs		81			43

			(1,818	)		(392	)

Effect of foreign exchange on cash and cash equivalents			82			(1,184	)
Net decrease in cash and cash equivalents			(915	)		(10,550	)
Cash and cash equivalents at beginning of period			22,959			52,798

Cash and cash equivalents at end of period			22,044			42,248

Cash paid during the period for interest			260			—

CONSOLIDATED STATEMENTS OF CHANGES IN 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 29, 2012	35,586,206	$	172,264	$	4,606		$	(65,448	)	$	(9,658	)	$	301		$	102,065

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	)	$	209		$	91,565

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 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	)	$	162		$	96,027

Stock-based compensation	—		—	$	398			—			—			—		$	398
Exercise of stock options	6,889	$	14	$	(5	)		—			—			—		$	9
Other	8,816	$	20	$	3			—			—			—		$	23
Other comprehensive loss	—		—		—			—		$	4			—		$	4
Net Loss	—		—		—		$	(13,867	)		—		$	(69	)	$	(13,936	)

Balance at November 30, 2012	38,041,010	$	179,407	$	5,726		$	(93,016	)	$	(9,685	)	$	93		$	82,525

Stock-based compensation	—			$	319			—			—			—		$	319
Exercise of stock options	714	$	3	$	(2	)		—			—			—		$	1
Other	6,573	$	19	$	4			—			—			—		$	23
Other comprehensive loss	—		—		—			—			—		$	4		$	4
Net Loss	—		—		—		$	(27,181	)		—		$	(81	)	$	(27,262	)

Balance at February 28, 2013	38,048,297	$	179,429	$	6,047		$	(120,197	)	$	(9,685	)	$	16		$	55,610

Stock-based compensation	—			$	311			—			—			—		$	311
Exercise of stock options	49,610	$	99	$	(34	)		—			—			—		$	65
Other	9,547	$	19	$	1			—			—			—		$	20
Other comprehensive loss	—		—		—			—		$	2		$	2		$	4
Net Loss	—		—		—		$	(6,625	)		—		$	(54	)	$	(6,679	)

Balance at May 31, 2013	38,107,454	$	179,547	$	6,325		$	(126,822	)	$	(9,683	)	$	(36	)	$	49,331

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 a provider of high-capacity packet microwave solutions that drive next-generation IP networks.

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. LTD., incorporated in Singapore, DragonWave S.r.l, incorporated in Italy, DragonWave S.a r.l., incorporated in Luxembourg, DragonWave Comericio de Equipamentos De Telecommunicacao Ltda., incorporated in Brazil, DragonWave Telecommunication Technology (Shanghai) Co., Ltd., incorporated in China, DragonWave Mexico S.A. de C.V., incorporated in Mexico, Axerra Networks Asia Pacific Limited, incorporated in Hong Kong, and DragonWave Inc.'s majority owned subsidiary, DragonWave HFCL India Private Ltd. 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 necessary to present fairly the financial position as at May 31, 2013 and February 28, 2013 and the results of operations, cash flows and changes in equity for the three month periods ended May 31, 2013 and May 31, 2012.

The interim consolidated financial statements follow the same accounting policies as the most recent annual consolidated financial statements, except for the changes in accounting policies and methods described below. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended February 28, 2013.

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. GAAP more comparable to those prepared under International Financial Reporting Standards. The adoption did not have an impact on our consolidated financial statements.

In January 2013, the FASB issued ASU 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities" ("ASU 2013-01"), which clarifies that the scope

of ASU 2011-11 applies to derivatives accounted for in accordance with ASU Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The adoption did not have an impact on our consolidated financial statements.

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

In February 2013, the FASB issued ASU 2013-02, Topic 220—Comprehensive Income: Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income ("ASU 2013-02"). ASU 2013-02 changes the presentation requirements of significant reclassifications out of accumulated other comprehensive income in their entirety and their corresponding effect on net income. For other significant amounts that are not required to be reclassified in their entirety, the standard requires the company to cross-reference to related footnote disclosures. ASU 2013-02 became effective for the company on March 1, 2013. The adoption of this guidance did not have a material effect on the Company's Consolidated Financial Statements.

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.

On April 10, 2013, the Company announced changes to its existing operational framework with Nokia Siemens Networks. In line with the renewed framework, the Company will continue to be the preferred, strategic supplier to Nokia Siemens Networks of packet microwave and related products, and the companies will jointly coordinate technology development activities.

Under the terms of the renewed framework, on April 12, 2013 Nokia Siemens paid $13,843 to the Company which settled the balance of the Company's contingent receivable. Nokia Siemens Networks took on additional commitments and costs so that DragonWave can continue to develop and supply microwave products. The Italian services agreement, pursuant to which Nokia Siemens Networks has provided research & development and certain other services to DragonWave since June 1, 2012, was terminated. As a result, the Company reduced accounts payable by $13,258. Capital assets with a net book value of $628 and the corresponding capital lease obligation associated with the Italian operations in the amount of $1,323 was also eliminated by the Company.

The Company also recorded a liability for a termination fee of $8,668 to be paid in several tranches over the balance of fiscal year 2014. The net impact of these items resulted in a gain of $5,285 in the statement of operations in the three months ended May 31, 2013.

On January 22, 2013 the Company sold all of its shares of DragonWave Networks Ltd ("DWL"), incorporated in Israel. The shares were sold for a nominal amount. Under the share purchase agreement, the Company has a liability to pay certain future obligations and as at May 31, 2013 has recorded a discounted liability of $644 [February 28, 2013—$1,011]. The maximum potential liability to the Company, as at May 31, 2013 is $1,087 [February 28, 2013—$1,328]. Also, under the terms of a supply and services agreement, the Company has an opportunity to earn an additional $5,271 [February 28, 2013—$5,271] based on business performance subsequent to the disposition for which the Company has recorded a receivable of $583 [February 28, 2013—$583] which represents management's estimate of the amounts to be collected based on the discounted forecasted future cash inflows.

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

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

As at May 31, 2013, the Company was required to have a minimum of $10,000 held at Comerica Bank [February 28, 2013—$7,500].

Restricted cash represents the cash required as collateral on the Company's debt facility as at May 31, 2013.

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 May 31, 2013, two customers exceeded 10% of the total receivable balance. These customers represented 47% of the trade receivables balance [May 31, 2012—one customer represented 67% of the trade receivables balance].

Included in general and administrative expenses is an expense of $5 related to bad debt expense for the three months ended May 31, 2013 [three months ended May 31, 2012—expense of $35].

Cost of sales for the three months ended May 31, 2013 was $21,712 [three months ended May 31, 2012—$8,841], which included $20,322 [three months ended May 31, 2012—$8,416] of costs associated with inventory. The remaining costs of $1,390 [three months ended May 31, 2012—$425] related principally to freight, warranty and other direct costs of sales.

For the three months ended May 31, 2013, the Company recognized an impairment loss on inventory of $99 [three months ended May 31, 2012—$34].

	May 31, 2013						February 28, 2013

	Cost		Accumulated Amortization		Net Book Value		Net Book Value
Test equipment		18,434		14,534		3,900		5,915
R&D equipment		2,215		1,986		229		148
Computer hardware		3,108		2,543		565		669
Production fixtures		1,321		1,117		204		208
Leasehold improvements		928		751		177		200
Furniture and fixtures		778		602		176		72
Communication equipment		282		244		38		46
Other		436		201		235		186

Total		27,502		21,978		5,524		7,444

Amortization expenses relating to the above property and equipment of $1,228, $17, $281 was included in research and development, selling and marketing and general and administrative expenses respectively for the three months ended May 31, 2013 [three months ended May 31, 2012: R&D—$434; S&M—$44; G&A—$276]. Accumulated amortization was $21,087 as at February 28, 2013.

	May 31, 2013								February 28, 2013

	Cost		Accumulated Amortization		Impairment		Net Book Value		Cost		Accumulated Amortization		Impairment		Net Book Value
Customer Relationships		1,745		1,196		201		348		1,745		946		201		598
Developed Technology		10,800		1,206		9,594		—		10,800		1,206		9,594		—
Infrastructure Systems Software		2,082		655		—		1,427		2,008		535		—		1,473
Computer Software		3,714		3,053		—		661		3,564		2,864		—		700

Total Intangible Assets		18,341		6,110		9,795		2,436		18,117		5,551		9,795		2,771

For the three months ended May 31, 2013, the Company recognized amortization of intangible assets of $559 [three months ended May 31, 2012—$542].

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:

The Company has established a long term credit facility with Comerica Bank and Export Development Canada. As at May 31, 2013, this asset based credit facility was for a total of $20,000 plus $2,500 for letters of credit and foreign exchange facilities. Credit availability is subject to ongoing compliance with borrowing covenants and short term assets on hand. As at May 31, 2013, the Company had drawn $15,000 on the facility.

As at February 28, 2013, the Company was in breach of one of the covenants then in place on the facility. However, the Company obtained a waiver of the breach from its lenders for a period through April 30, 2013, which eliminated any acceleration of repayment of the Company's obligation. Concurrent with the receipt of the waiver the Company revised the terms of the credit facility, as noted above, and as at May 31, 2013 is in compliance with the revised covenants.

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 dollars Canadian dollar, and Euro loans. Interest rates vary with market rate fluctuations, with loans bearing interest in the range of 3% to 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 May 31, 2013 the weighted average debt outstanding was $15,000 [three months ended May 31, 2012—nil] and the Company recognized $488 in interest expense related to the debt facility [three months ended May 31, 2012—nil].

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. The earn-out phase of the acquisition of Axerra Networks Inc. was completed on February 13, 2012, and the amount was determined to be $1,884. Issuance costs were $42.

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. A discount of $1,144 and issuance costs of $98 were included in the final amount in shareholders' equity.

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 3,810,745 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 of options granted in 2013 and 2012:

The 660,500 options granted during the three months ended May 31, 2013 were determined to have a fair value of $803 [three months ended May 31, 2012: 12,000—$35].

The following table summarizes the various exercise prices inherent in the Company's stock options outstanding and exercisable on May 31, 2013:

The Company has recognized $315 for the three months ended May 31, 2013 as compensation expense for stock-based grants, with a corresponding credit to contributed surplus [three months ended May 31, 2012—$404].

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, 2013 a total of 7,638 common shares were purchased by employees at fair market value, while the Company issued 1,909 common shares 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, 2013 was $11 [three months ended May 31, 2013—$14]. The fair value of the unearned ESPP shares as at May 31, 2013 was $16 [February 28, 2013—$23]. The number of shares held for release, and still restricted under the plan at May 31, 2013 was 6,895 [February 28, 2013—7,760].

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, 2013			May 31, 2012
Basic Net Income (Loss) per share
	Net Income (Loss) applicable to shareholders		(6,625	)		(12,579	)
	Weighted average number of shares outstanding		38,059,919			35,931,347

Net Income (Loss) per share		$	(0.17	)	$	(0.35	)

Diluted Net Income (Loss) per share
	Net Income (Loss)		(6,625	)		(12,579	)
	Weighted average number of shares outstanding		38,059,919			35,931,347
	Dilutive effect of warrants		—			—
	Dilutive effect of stock options		—			—

Adjusted weighted average number of shares outstanding			38,059,919			35,931,347

Net Income (Loss) per share		$	(0.17	)	$	(0.35	)

As at May 31, 2013, 2,864,017 options, and 31,562 warrants were excluded from the diluted income (loss) per share calculation as they were anti-dilutive.

Future minimum operating lease payments as at May 31, 2013 per fiscal year are as follows:

Under the research and development agreements of DragonWave Networks Ltd., a former 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. DragonWave was 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 was contingent on actual sales of the products and in the absence of such sales, no payment is required. During the prior fiscal year the Company adjusted the contingent royalty liability to $403 based on a change in estimate and recognized a gain of $1,165 in the consolidated statement of operations.

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, trade receivables, other receivables, accounts payable, accrued liabilities, debt facility, contingent liabilities and lease obligations are short term financial instruments whose fair value approximates the carrying amount. 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 with the exception of the Company's contingent receivable and contingent liabilities which have been measured using a Level 3 input, a discounted cash flow model that values the underlying assets and liabilities based on expected timing of payments and receipts.

Cash and cash equivalents and the Company's debt facility which has interest rates with market rate fluctuations expose the Company to interest rate risk on these financial instruments. Net interest expense of $538 was recognized during three months ended May 31, 2013 on the Company's cash, cash equivalents, and debt facility [three months ended May 31, 2012—Income of $29].

In addition to trade receivables and other receivables, the Company is exposed to credit risk on its cash and cash equivalents, and restricted cash 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 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. As at May 31, 2013 the Company had no forward contracts in place [February 28, 2013—no contracts]. 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 May 31, 2013, 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 (loss) of $154 for the three months ended May 31, 2013 [three months ended May 31, 2013—decrease of $215], with an equal and opposite effect if the US dollar had depreciated 1 percent against all foreign currencies at May 31, 2013.

A risk exists that the Company will encounter difficulty in satisfying its financial obligations as they become due. The Company manages its liquidity risk by forecasting cash flows from operations and anticipated investing and financing activities. As at May 31, 2013, the Company had cash and cash equivalent totaling $23,352 [February 28, 2013—$22,959]. Based on current revenue expectations, the continuing availability of credit facilities, and other options available, the Company believes that its liquidity risk is manageable.

The Company operates in one reportable segment, broadband wireless backhaul equipment.

The Company was dependent on two key customers with respect to revenue in the three months ended May 31, 2013. These customers represented approximately 69% of sales for the three months ended May 31, 2013 [three months ended May 31, 2012—three customers representing 17%, 10% and 10% of sales].

During the three months ended May 31, 2013 the Company had no restructuring activities. During the three months ended May 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 were recognized during the three months ended May 31, 2012.

As at February 28, 2013 the Company had a liability of $488 related to restructuring activities. As at May 31, 2013 the Company has no remaining liability.

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

		Three months ended

		May 31, 2013			May 31, 2012
Net Income (Loss)			(6,679	)		(12,637	)
	Foreign currency translation differences for foreign operations		4			(68	)

Comprehensive Income (Loss)			(6,675	)		(12,705	)

Total comprehensive income (loss) attributable to:
Shareholders of the Company			(6,623	)		(12,613	)
Non-controlling interest			(52	)		(92	)

			(6,675	)		(12,705	)



Trade Receivables (gross)	19,180		35,710
Allowance for doubtful accounts	(263	)	(258	)

Trade Receivables (net)	18,917		35,452



Raw Materials		8,114	10,268
Work in Progress		540	649
Finished Goods		23,756	19,511

	Total Production Inventory	32,410	30,428
Inventory held for customer service/warranty		2,848	2,294

	Total Inventory	35,258	32,722



Deposits on inventory	1,926	2,604
Prepaid expenses	1,705	1,410
Other contingent receivable	583	583
VAT receivable (net)	404	720
Deferred financing costs	521	596
Other & miscellaneous receivables	64	164

Total other current assets	5,203	6,077



Trade payables	15,176	36,915
Accrued liabilities	8,114	16,845
Termination fee	8,668	—
Payroll related accruals	2,066	2,629
Warranty accrual	684	573
Income taxes payable	75	—

Total Accounts Payable and Accrued Liabilities	34,783	56,962



DragonWave Inc.		For the three months ended May 31 2013



Cash	22,044	22,959
Cash equivalents	—	—

Total Cash and cash equivalents	22,044	22,959
Restricted cash	1,308	—

Total Cash and cash equivalents, and Restricted cash	23,352	22,959

			Three Months Ended

			May 31, 2013			May 31, 2012
Balance at the beginning of the period				825			1,441
		Accruals		184			184
		Utilization		(133	)		(214	)
		Changes in estimates		(132	)		(146	)

Ending Balance				744			1,265

	Short term Portion			684			1,026
	Long term Portion			60			239



Warranty accrual	60	252
Deferred Revenue	498	531

Total Other Long Term Liabilities	558	783

	Three months ended May 31, 2013

	Options			Weighted Average Price (CAD)
Opening Balance		2,529,088		$	4.89
Granted		660,500		$	2.24
Exercised		(49,610	)	$	1.34
Forfeited		(275,961	)	$	5.31

Closing Balance		2,864,017		$	4.30

	Three months ended

	May 31, 2013		May 31, 2012
Volatility		74.4%		78.0%
Risk Free Rate		1.03%		1.22%
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		274,082		0.62	$	1.35		274,082	$	1.35
$	2.01	$	2.50		772,000		4.85	$	2.22		3,500	$	2.37
$	2.51	$	3.00		521,493		4.09	$	2.94		2,393	$	3.00
$	3.01	$	4.00		102,034		1.00	$	3.43		92,501	$	3.40
$	4.01	$	5.00		206,853		0.34	$	4.46		206,853	$	4.46
$	5.01	$	6.50		333,674		1.96	$	6.05		250,930	$	6.06
$	6.51	$	8.00		420,511		2.92	$	6.82		214,321	$	6.83
$	8.01	$	10.00		137,700		1.84	$	9.34		106,320	$	9.35
$	10.01	$	13.74		95,670		1.63	$	13.05		78,759	$	13.02

					2,864,017		2.97	$	4.30		1,229,659	$	5.39


2014	$	1,669
2015	$	1,792
2016	$	1,376
2017	$	990
Thereafter		—

	$	5,827



Held-for-trading(1)	23,352	22,959
Loans and receivables(2)	19,688	51,362
Other financial liabilities(3)	52,365	75,690


(Signed) CLAUDE HAW Director		(Signed) LORI O'NEILL Director