CONSOLIDATED BALANCE SHEETS

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

		Note

Assets
Current Assets
	Cash and cash equivalents	4	33,572		18,992
	Trade receivables	5	32,921		17,408
	Inventory	6	20,394		30,416
	Other current assets	7	5,616		5,909
	Deferred tax asset		119		69

			92,622		72,794
Long Term Assets
	Property and equipment	8	3,274		3,168
	Deferred tax asset		1,508		1,536
	Deferred financing cost	11	46		60
	Intangible assets	9	1,220		1,635
	Goodwill		11,927		11,927

			17,975		18,326
Total Assets			110,597		91,120

Liabilities
Current Liabilities
	Accounts payable and accrued liabilities	10	34,160		29,964
	Deferred revenue		870		984
	Capital lease obligation	3	598		1,795

			35,628		32,743
Long Term Liabilities
	Debt facility	11	19,000		15,000
	Other long term liabilities	12	2,198		574
	Warrant liability	13	4,104		1,360

			25,302		16,934
Commitments		15
Shareholders' equity
	Capital stock	13	220,914		198,593
	Contributed surplus	13	7,766		7,118
	Deficit	13	(169,897	)	(154,505	)
	Accumulated other comprehensive loss	13	(9,618	)	(9,682	)

Total Shareholders' equity			49,165		41,524
	Non-controlling interests	3	502		(81	)

Total Equity			49,667		41,443
Total Liabilities and Equity			110,597		91,120

Shares issued & outstanding		14	75,242,381		58,008,746

CONSOLIDATED STATEMENTS OF OPERATIONS

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

				Three months ended						Six months ended

		Note		August 31, 2014			August 31, 2013			August 31, 2014			August 31, 2013
REVENUE					37,933			25,453			66,704			49,985
	Cost of sales		6		32,040			22,659			54,925			44,371

Gross profit					5,893			2,794			11,779			5,614

EXPENSES
	Research and development				4,428			4,783			8,693			10,085
	Selling and marketing				3,308			3,175			6,673			6,557
	General and administrative				4,429			4,433			8,855			9,181

					12,165			12,391			24,221			25,823

Loss before other items					(6,272	)		(9,597	)		(12,442	)		(20,209	)
	Amortization of intangible assets		9		(339	)		(437	)		(648	)		(996	)
	Accretion expense				—			(56	)		(40	)		(121	)
	Interest expense		11, 16		(379	)		(380	)		(804	)		(918	)
	Gain on change in estimate		3		—			342			101			342
	Gain on contract amendment		3		—			—			—			5,285
	Warrant issuance expenses				(221	)		—			(221	)		—
	Fair value adjustment–warrant liability		13		(1,002	)		—			(852	)		—
	Foreign exchange gain (loss)				253			(397	)		374			(495	)

Loss before income taxes					(7,960	)		(10,525	)		(14,532	)		(17,112	)
	Income tax expense				450			76			545			168

Net Loss					(8,410	)		(10,601	)		(15,077	)		(17,280	)
	Net (Gain) Loss Attributable to Non-Controlling Interest				(454	)		92			(419	)		146

Net Loss applicable to shareholders					(8,864	)		(10,509	)		(15,496	)		(17,134	)
Net loss per share
	Basic		14		(0.14	)		(0.28	)		(0.25	)		(0.45	)
	Diluted		14		(0.14	)		(0.28	)		(0.25	)		(0.45	)
Weighted Average Shares Outstanding
	Basic		14		63,894,060			38,112,887			61,056,200			38,086,403
	Diluted		14		63,894,060			38,112,887			61,056,200			38,086,403

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

Expressed in US $000's
(Unaudited)

		Three months ended						Six months ended

		August 31, 2014			August 31, 2013			August 31, 2014			August 31, 2013
Net Loss			(8,410	)		(10,601	)		(15,077	)		(17,280	)
	Foreign currency translation differences for foreign operations		—			(120	)		—			(116	)

Comprehensive Loss			(8,410	)		(10,721	)		(15,077	)		(17,396	)

Total comprehensive gain (loss) attributable to:
Shareholders of the Company			(8,864	)		(10,569	)		(15,496	)		(17,192	)
Non-controlling interest			454			(152	)		419			(204	)

			(8,410	)		(10,721	)		(15,077	)		(17,396	)

				Three months ended						Six months ended

		Note		August 31, 2014			August 31, 2013			August 31, 2014			August 31, 2013
Operating Activities
Net Loss					(8,410	)		(10,601	)		(15,077	)		(17,280	)
Items not affecting cash
	Amortization of property and equipment				658			1,270			1,355			2,796
	Amortization of intangible assets				339			437			648			996
	Accretion expense				—			56			40			121
	Bad debt expense				1			275			149			280
	Interest expense				18			156			28			419
	Gain on change in estimate		3		—			(342	)		(101	)		(342	)
	Gain on contract amendment		3		(530	)		—			(530	)		(5,285	)
	Fair value adjustment–warrant liability		13		1,002			—			852			—
	Stock-based compensation				288			327			647			642
	Unrealized foreign exchange loss (gain)				30			18			48			(66	)
	Future income tax expense (recovery)				28			76			(22	)		168
	Inventory impairment				1,223			64			1,313			163

					(5,353	)		(8,264	)		(10,650	)		(17,388	)
Changes in non-cash working capital items					(767	)		(4,567	)		(733	)		5,836

					(6,120	)		(12,831	)		(11,383	)		(11,552	)

Investing Activities
	Acquisition of property and equipment				(966	)		(250	)		(1,461	)		(484	)
	Acquisition of intangible assets				(93	)		(68	)		(233	)		(292	)

					(1,059	)		(318	)		(1,694	)		(776	)

Financing Activities
	Capital lease obligation				(483	)		(335	)		(672	)		(926	)
	Contribution by non-controlling interest in DW-HFCL		3		—			—			164			—
	Restricted cash on debt facility				—			340			—			(968	)
	Warrant liability				2,551			—			2,551			—
	Deferred financing cost				—			(25	)		—			(25	)
	Debt facility				1,500			—			4,000			—
	Issuance of common shares net of issuance costs				21,646			28			21,662			109

					25,214			8			27,705			(1,810	)

Effect of foreign exchange on cash and cash equivalents					(30	)		(45	)		(48	)		37
Net increase in cash and cash equivalents					18,005			(13,186	)		14,580			(14,101	)
Cash and cash equivalents at beginning of period					15,567			22,044			18,992			22,959

Cash and cash equivalents at end of period					33,572			8,858			33,572			8,858

Cash paid during the period for interest					318			257			598			517

Cash paid during the period for taxes					573			9			574			—

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Expressed in US $000's except share amounts

(Unaudited)

		Capital Stock		Contributed Surplus		Deficit			AOCL			Non- Controlling Interest			Equity

Balance at February 28, 2014	58,008,746	$	198,593	$	7,118	$	(154,505	)	$	(9,682	)	$	(81	)	$	41,443

Stock-based compensation	—		—	$	359		—			—			—		$	359
Exercise of stock options	—		—		—		—			—			—		$	—
Exercise of warrants	473,646	$	161		—		—			—			—		$	161
Other	8,851	$	15	$	1	$	81			—			—		$	97
Other comprehensive loss	—		—		—		—			—			—		$	—
Contribution by non-controlling interest in DW-HFCL	—		—		—		—			—		$	164		$	164
Net Loss	—		—		—	$	(6,632	)		—		$	(35	)	$	(6,667	)

Balance at May 31, 2014	58,491,243	$	198,769	$	7,478	$	(161,056	)	$	(9,682	)	$	48		$	35,557

Stock-based compensation	—		—	$	288		—			—			—		$	288
Exercise of stock options	—		—		—		—			—			—		$	—
Public offering	15,927,500	$	21,631		—		—			—			—		$	21,631
Exercise of warrants	813,076	$	497		—		—			—			—		$	497
Other	10,562	$	17		—	$	23		$	64			—		$	104
Other comprehensive loss	—		—		—		—			—			—		$	—
Net Loss	—		—		—	$	(8,864	)		—		$	454		$	(8,410	)

Balance at August 31, 2014	75,242,381	$	220,914	$	7,766	$	(169,897	)	$	(9,618	)	$	502		$	49,667

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

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

Stock-based compensation	—		—	$	322			—			—			—		$	322
Exercise of stock options	10,321	$	24	$	(9	)		—			—			—		$	15
Other	6,105	$	18		—			—			—			—		$	18
Other comprehensive loss	—		—		—			—		$	(60	)	$	(60	)	$	(120	)
Net Loss	—		—		—		$	(10,509	)		—		$	(92	)	$	(10,601	)

Balance at August 31, 2013	38,123,880	$	179,589	$	6,638		$	(137,331	)	$	(9,743	)	$	(188	)	$	38,965

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 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.

The Company's warrants issued from the public issuance on August 1, 2014 are traded on the Toronto Stock Exchange under the symbol DWI.WT and on the NASDAQ Global Market under the symbol DRWIW.

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.à. 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 interim 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 interim financial statements reflect all adjustments necessary to present fairly the financial position as at August 31, 2014 and February 28, 2014 and the results of operations, cash flows and changes in equity for the three and six month periods ended August 31, 2014 and August 31, 2013.

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, 2014.

Parent's Accounting for the Cumulative Translation Adjustment Upon Derecognition of Certain Subsidiaries or Groups of Assets Within a Foreign Entity or of an Investment in a Foreign Entity

In March 2013, the FASB issued ASU 2013-05, "Foreign Currency Matters." ASU 2013-05 resolves the diversity in practice about whether Subtopic 810-10, "Consolidation-Overall", or Subtopic 830-30 "Foreign Currency Matters, Translation of Financial Statements", applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. In addition, the amendments in ASU 2013-05 resolve the diversity in

practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. ASU 2013-05 became effective for the Company on March 1, 2014. The adoption did not have an impact on the Company's consolidated interim financial statements.

Obligations Resulting From Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date

In February 2013, the FASB issued ASU No. 2013-04, "Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date" ("ASU 2013-04"). ASU 2013-04 provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors as well as any additional amount the reporting entity expects to pay on behalf of its co-obligors. ASU 2013-04 also requires an entity to disclose the nature and amount of those obligations. The ASU became effective for the Company on March 1, 2014. The adoption did not have an impact on the Company's consolidated interim financial statements.

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists

In June 2013, the FASB issued ASU No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" ("ASU 2013-11"). The amendments provide guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The amendments in this ASU became effective for the Company on March 1, 2014. The adoption did not have an impact on the Company's consolidated interim financial statements.

In May 2014, the FASB issued ASU No. 2014-9, "Revenue from Contracts with Customers". The amendments in this Update create Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments supersede the cost guidance in Subtopic 605-35, Revenue Recognition–Construction-Type and Production-Type Contracts, and create new Subtopic 340-40, Other Assets and Deferred Costs–Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, with no early adoption permitted. The Company is currently assessing the impact this amendment will have on the Company's consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, "Compensation–Stock Compensation". The amendments apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2015, early adoption permitted. The Company does not expect the adoption of this guidance to have a material effect on the Company's Consolidated Financial Statements.

On June 1, 2012 the Company announced the closing of the acquisition of the microwave transport business of Nokia Siemens Networks (whose name was changed to Nokia Solutions and Networks, also referred to as NSN, in August 2013 in connection with the acquisition of Nokia Corporation of Siemens' 50% stake in Nokia Siemens Networks, was recently renamed Networks and now operates under the Nokia brand, and is referred to herein as "Nokia" or "Nokia's Networks 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.à.r.l and Nokia dated May 3, 2012. The terms "Nokia" or "Nokia's Networks business" are used interchangeably herein to refer to Nokia Solutions Networks or NSN.

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

The Company also recorded a liability included in accounts payable and accrued liabilities, based on management's estimate, for a termination fee valued at $8,668 at May 31, 2013 and scheduled to be paid in several tranches. Under the terms of the renewed framework, on April 12, 2013 Nokia paid $13,843 to the Company which settled the balance of the Company's contingent receivable. Nokia 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 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 during the three months ended May 31, 2013. The net impact of these items resulted in a gain on contract amendment of $5,285 in the statement of operations in the six months ended August 31, 2013.

During the first quarter of 2015, the Company revised the termination fee estimate and also entered into a revised payment schedule with Nokia consisting of quarterly payments through fiscal year 2015 and 2016. This led to a gain of $101 recorded in the statement of operations. The first payment in the amount of $684 was made in May 2014 and second payment for $1,344 in August 2014. The total termination fee liability is valued at $6,575 as at August 31, 2014 (short term: $4,984 and long term: $1,591). [February 28, 2014–$9,085 entirely classified as short term].

During the three months ended August 31, 2014 the Company negotiated a reduction in capital lease payments to Nokia resulting in a $530 gain on contract amendment. As part of the same overall arrangement, the amount was offset by a related expense associated with the modification of an existing supply contract.

Non-controlling interest consists of the minority owned portion of the Company's 50.1% owned subsidiary, DragonWave HFCL India Private Limited. During the six month period ended August 31, 2014 the minority owner, HFCL, made a capital contribution of $164. The Company had contributed its portion during the year ended February 28, 2014.

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

	as at August 31, 2014								as at February 28, 2014

Native Currency	Domestic Currency		Foreign Exchange Rate to USD		USD Amount		% of total		USD Amount		% of total
US Dollar		22,540		1.000		22,540		67.2%		16,934		89.2%
Canadian Dollar		8,686		0.921		7,999		23.8%		979		5.2%
Euro		329		1.316		433		1.3%		235		1.2%
Chinese Renminbi		8,541		0.163		1,390		4.1%		195		1.0%
British Pounds		84		1.655		139		0.4%		42		0.2%
Other						1,071		3.2%		607		3.2%

Total Cash & Cash Equivalents						33,572		100.0%		18,992		100.0%

TOTAL						33,572		100.0%		18,992		100.0%

The Company is required to maintain a minimum of $10,000 within our lenders (Comerica Bank) operating account [February 28, 2014–$10,000].

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.

As at August 31, 2014, two customers exceeded 10% of the total receivable balance. These customers represented 70% of the trade receivables balance [February 28, 2014–one customer represented 56% of the trade receivables balance].

Included in general and administrative expenses is an expense of $1 related to bad debt expense for the three months ended August 31, 2014 and $149 related to bad debt expense for the six months ended August 31, 2014 [three and six months ended August 31, 2013–expense of $275 and $280].

Cost of sales for the three and six months ended August 31, 2014 was $32,040 and $54,925 respectively [three and six months ended August 31, 2013–$22,659 and $44,371 respectively], which included $28,630 and $48,490 respectively of product costs [three and six months ended August 31, 2013–$21,520 and $41,842]. The remaining costs of $3,410 and $6,435 respectively [three and six months ended August 31, 2013–$1,139 and $2,529 respectively] related principally to warehousing, freight, warranty, overhead and other direct costs of sales.

For the three and six months ended August 31, 2014, the Company recognized an impairment loss on inventory of $1,223 and $1,313 [three and six months ended August 31, 2013–$64 and $163 respectively]. This impairment loss related primarily to raw material and finished goods for certain older product lines.

The Company allocates overhead and labour to inventory. Included in cost of goods sold for the three and six months ended August 31, 2014 were overhead allocations of $1,055 and $1,900 [three and six months ended August 31, 2013–$847 and $1,800 respectively]. Included in inventory at August 31, 2014 were overhead allocations of $674 [August 31, 2013–$1,291].

	August 31, 2014						February 28, 2014

	Cost		Accumulated Amortization		Net Book Value		Net Book Value
Test and R&D equipment		22,326		19,937		2,389		2,214
Computer hardware		3,289		3,091		198		267
Production fixtures		1,598		1,280		318		245
Leasehold improvements		960		866		94		139
Furniture and fixtures		894		715		179		168
Communication equipment		286		274		12		14
Other		373		289		84		121

Total		29,726		26,452		3,274		3,168

Depreciation expenses relating to the above property and equipment of $375, $14, $269 and $797, $29, $529 were included in research and development ("R&D"), selling and marketing ("S&M") and general and administrative ("G&A") expenses respectively for the three and six months ended August 31, 2014 [three and six months ended August 31, 2013: $969, $17, $284 and $2,197, $34, $565]. Depreciation expense includes amortization of assets recorded under capital lease.

For the three and six months ended August 31, 2014, the Company recognized amortization of intangible assets of $339 and $648 [three and six months ended August 31, 2013–$437 and $996 of which $250 was amortization of Customer Relationships]. The Company estimates that it will recognize $857 and $363 respectively for the next two succeeding years.

The Company conducts its annual impairment test in its second fiscal quarter. The analysis for fiscal 2015 did not result in any impairment loss. The goodwill impairment test is a three-step process: the first is a qualitative assessment, the second and third are quantitative tests which require the Company make assumptions regarding fair value. The Company believed that there were qualitative factors in-place that would suggest that the second quantitative test would need to be performed because of the existence of losses realized over successive quarters.

The second step consisted of calculating the fair value of the aggregated reporting unit using 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, the Company relied 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. Management's estimates were based upon assumptions believed to be reasonable, but which by nature are uncertain and unpredictable. Because the second step indicated that no impairment existed, the third step of the process was not required.

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 August 31, 2014, this asset based credit facility was for a total of $40,000 plus $4,000 for letters of credit and foreign exchange facilities. Credit availability is subject to ongoing compliance with borrowing covenants and short term assets on hand. The Company had drawn $19,000 on the facility as at August 31, 2014 [February 28, 2014–$15,000], and $2,927 against its letter of credit facility.

The credit facility which was extended on January 6, 2014, matures on June 1, 2016 and is secured by a first priority charge on all of the assets of DragonWave and its principal direct and indirect subsidiaries. The terms of the credit facility include other customary terms, conditions, covenants, and representations and warranties, consistent with the facility already in place. 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% to 4% above the applicable base rates. 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 30 month term of the facility. During the three and six month period ended August 31, 2014 the weighted average debt outstanding was $18,821 and $16,910 [three months and six months ended August 31, 2013–$15,000] and the Company recognized $329 and $600 in interest expense related to the debt facility [three and six months ended August 31, 2013–$244 and $510] and expensed $14 and $160 in deferred financing cost [three months ended August 31, 2013–$130 and $354].

The Company was in breach of one of its covenants in both March, 2014 and April, 2014. DragonWave obtained a waiver for these breaches and amended the terms of the facility on May 13, 2014. The Company is in compliance with all covenants as at August 31, 2014.

On September 23, 2013 the Company completed a public equity offering. Under the terms of the offering, the Company issued and sold 11,910,000 units at $2.10 for aggregate gross proceeds of $25,011. After deducting commissions and listing expenses, the Company realized net proceeds of $22,434. Each unit consisted of one common share of the Company and three quarters of one warrant. Each whole warrant entitles the holder to purchase one common share of the Company at an exercise price of U.S. $2.70 per share until September 23, 2018, subject to certain adjustments. As at September 23, 2013 the Company recognized a liability in the amount of $6,425 for the warrants, see Warrants section for further details.

On August 1, 2014 the Company completed a public equity offering. Under the terms of the offering, the Company issued and sold 15,927,500 units at $1.80 CDN for aggregate gross proceeds of $28,670 CDN. After deducting commissions and listing expenses, the Company realized net proceeds of $23,960 USD ($26,184 CND). Each unit consisted of one common share of the Company and one half of one warrant. Each whole warrant entitles the holder to purchase one common share of the Company at an exercise price

of $2.25 CND per share until August 1, 2016. Upon issuance, the Company recognized a liability in the amount of $2,551 for the warrants, see Warrants section for further details.

The Company had previously established the DragonWave Inc. Key Employee Stock Option/Stock Issuance Plan applicable to full-time employees, directors and consultants of the Company for purchase of common shares. 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 Plan is 10% of the Common Shares issued and outstanding.

On June 20, 2014 the Shareholders approved the adoption of a new Share Based Compensation Plan to replace the current Key Employee Stock Option/Stock Issuance Plan. The Share Based Compensation Plan includes provision for granting of performance share units ("PSUs"), restricted share units ("RSUs"), deferred share units ("DSUs"), Bonus Shares (as defined in the Share Based Compensation Plan) and options to purchase Common Shares. Settlement of vested PSUs, RSUs and DSUs is effected by delivering Common Shares acquired in the open market and/or issued from treasury, or by making a cash payment equal to the number of PSUs, RSUs or DSUs multiplied by the volume weighted average trading price of the Common Shares on the applicable stock exchange for the five trading days preceding the settlement date, or by a combination of these methods. The manner of settlement for RSUs, PSUs and DSUs is determined by the Compensation Committee in its sole discretion. The maximum number of Common Shares issuable under the Plan is 10% of the Common Shares issued and outstanding at 7,524,238 at August 31, 2014.

	Three and six months ended August 31, 2014

	Options			Weighted Average Price (CAD)
Options outstanding at February 28, 2014		3,173,321		$	3.71
Granted		27,700		$	1.47
Exercised		—			—
Forfeited		(18,340	)	$	3.39

Options outstanding at May 31, 2014		3,182,681		$	3.69

Granted		1,029,176		$	2.15
Exercised		—			—
Forfeited		(77,333	)	$	5.46

Options outstanding at August 31, 2014		4,134,524		$	3.28

The following table shows the weighted average values used in determining the fair value of options granted during the three months ended August 31, 2014 and August 31, 2013:

The 1,029,176 and 1,056,876 options granted during the three and six months ended August 31, 2014 were determined to have a fair value of $1,169 and $1,189 respectively [three and six months ended August 31, 2013: 25,100 options valued at $38 and 685,600 options valued at $841].

The following table summarizes the various exercise prices inherent in the Company's stock options outstanding and exercisable on August 31, 2014:

The Company has recognized $268 and $627 for the three and six months ended August 31, 2014 as compensation expense for stock-based grants, with a corresponding credit to contributed surplus [three and six months ended August 31, 2013–$322 and $633]. Stock-based compensation of $71, $75, $122 was included in R&D, S&M and G&A expenses respectively for the three month period ended August 31, 2014. Stock-based compensation of $153, $178, $296 was included in R&D, S&M and G&A expenses respectively for the six month period ended August 31, 2014.

As at August 31, 2014, compensation costs not yet recognized relating to stock option awards outstanding is $2,737 net of estimated forfeitures. Performance vesting awards will vest as performance conditions are met. Compensation will be adjusted for subsequent changes in estimated forfeitures.

There were no options exercised with an intrinsic value during the three and six months ended August 31, 2014.

The intrinsic value associated with fully vested options at August 31, 2014 is $96.

The Company has entered into restricted stock agreements with certain of its independent directors. These units are unvested and subject to each director's continued engagement on the Board for a period of one year from the date of issuance.

The following table sets forth the summary of restricted share activity under our Share Based Compensation Plan for the three months ended August 31, 2014:

The Company has recognized $20 for the three months ended August 31, 2014 as compensation expense for restricted stock units, with a corresponding credit to contributed surplus.

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 six months ended August 31, 2014 a total of 8,449 and 16,730 common shares were purchased by employees at fair market value, while the Company issued 2,113 and 4,183 common shares as its matching contribution, gross of 1,500 forfeited shares during the six months ended August 31, 2014. 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, 2014 was $3 and $6 [three and six months ended August 31, 2013–$5 and $16]. The fair value of the unearned ESPP shares as at August 31, 2014 was $12 [August 31, 2013–$14]. The number of shares held for release, and still restricted under the plan at August 31, 2014 was 8,359 [August 31, 2013–6,206].

Effective May 30, 2007, the Company granted warrants to purchase up to 126,250 common shares of the Company at a price of $3.56 CAD per share. The warrants expire 10 years after the date of issuance. The warrants vested based on the achievement of pre-determined business milestones and resulted in 31,562 warrants being eligible for exercise. 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.

On September 23, 2013 the Company completed a public equity offering. Under the terms of the offering, the Company issued and sold 11,910,000 units at $2.10 for aggregate gross proceeds of $25,011. Equity issuance expenses relating to the offering totaled $2,576 of which $662 was expensed as the proportionate warrant costs. Each unit consisted of one common share of the Company and three quarters of one warrant (warrants issued–8,932,500). Each whole warrant entitles the holder to purchase one common share of the Company at an exercise price of U.S. $2.70 per share until September 23, 2018. On August 1, 2014 the warrant exercise price was adjusted to U.S. $1.30 as a result of a subsequent equity financing undertaken by the Company. In the event of a fundamental transaction the Company may be required to settle the warrants with a cash payment. As a result the Company recognized a warrant liability of $6,425 which represented the estimated fair value of the liability as at September 23, 2013. The warrant liability is adjusted quarterly to its estimated fair value. Increases or decreases in the fair value of the warrants is presented as "Fair value adjustment–warrant liability" in the consolidated statement of operations. As at August 31, 2014, 2,098,750 warrants were outstanding and the liability for warrants was decreased to $1,553. In the three and six month period ended August 31, 2014 the Company increased its common stock value by $161 and $648 which represented the value of the 672,250 and 1,072,250 warrants exercised on a cash-less basis to 813,076 and 1,286,722 common shares and realized a loss in the amount of $1,002 and $852 in the consolidated statement of operations which represented the change in fair value of the remaining warrant liability.

On August 1, 2014 the Company completed a public equity offering. Under the terms of the offering, the Company issued and sold 15,927,500 units at $1.80 CDN for aggregate gross proceeds of $26,234 ($28,670 CDN). Each unit consisted of one common share of the Company and one half of one warrant. Each whole warrant entitles the holder to purchase one common share of the Company at an exercise price of $2.25 CDN per share until August 1, 2016, subject to certain adjustments. Equity issuance expenses relating to the offering totaled $2,275 of which $221 was expensed as the proportionate warrant costs. As a result of the offering, the Company issued warrants totaling 7,963,750 and recognized warrant liability of $2,551 which represented the estimated fair value of the liability as at August 1, 2014.

The warrant liability is adjusted quarterly to its estimated fair value. Increases or decreases in the fair value of the warrants is presented as "Fair value adjustment–warrant liability" in the consolidated statement of operations. As at August 31, 2014, the warrant liability estimated fair value remained unchanged at $2,551.

The following table illustrates the dilutive impact on net loss per share during the three and six month period ended including the effect of outstanding options and warrants:

		Three months ended						Six months ended

		August 31, 2014			August 31, 2013			August 31, 2014			August 31, 2013
Basic Net loss per share
	Net loss applicable to shareholders		(8,864	)		(10,509	)		(15,496	)		(17,134	)
	Weighted average number of shares outstanding		63,894,060			38,112,887			61,056,200			38,086,403

Net Loss per share		$	(0.14	)	$	(0.28	)	$	(0.25	)	$	(0.45	)

Diluted Net Loss per share
	Net Loss		(8,864	)		(10,509	)		(15,496	)		(17,134	)
	Weighted average number of shares outstanding		63,894,060			38,112,887			61,056,200			38,086,403
	Dilutive effect of warrants		—			—			—			—
	Dilutive effect of stock options		—			—			—			—

Adjusted weighted average number of shares outstanding			63,894,060			38,112,887			61,056,200			38,086,403

Net Loss per share		$	(0.14	)	$	(0.28	)	$	(0.25	)	$	(0.45	)

As at August 31, 2014, 4,134,524 options, 80,000 RSUs and 10,062,500 warrants were excluded from the diluted loss per share calculation as they were anti-dilutive.

Future minimum operating lease payments which relate to office and warehouse space in various countries as at August 31, 2014 per fiscal year are as follows:

Financial instruments are classified into one of the following categories: assets held at fair value, loans and receivables, other financial liabilities, or liabilities held at fair value.

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

The Company classifies its fair value measurements using a fair value hierarchy that reflects the significance of inputs used in making the measurements. The accounting standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The inputs fall into three levels that may be used to measure fair value. Warrants are valued using a combination of Monte Carlo and Black-Scholes valuation techniques with the key inputs similar to inputs used to value our outstanding stock options.

The September 23, 2013 warrant liability is classified as Level 3 as it is measured at fair value using significant unobservable inputs.

The August 1, 2014 warrant liability is classified as Level 1 as they are traded on the Toronto Stock Exchange and on the NASDAQ Global Market.

As at August 31, 2014 the Company held the following Level 3 financial instruments carried at fair value on the consolidated balance sheet.

As at February 28, 2014, the Company held the following Level 2 and Level 3 financial instruments carried at fair value on the consolidated balance sheet.

A reconciliation of the Level 1 and Level 3 warrant liability measured at fair value for the three and six month periods ended August 31, 2014 follows:



Balance at February 28, 2014	3,171,000		1,360
Fair value adjustment–warrant liability	—		(150	)
Exercise of warrants	(400,000	)	(162	)

Balance at May 31, 2014	2,771,000		1,048
Fair value adjustment–warrant liability	—		1,002
Issuance of warrants	7,963,750		2,551
Exercise of warrants	(672,250	)	(497	)

Balance at August 31, 2014	10,062,500		4,104

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, excluding deferred financing costs, recognized during the three and six month period ended August 31, 2014 was $365 and $644 on the Company's cash, cash equivalents, and debt facility [three months and six months ended August 31, 2013–expense of $261 and $576].

In addition to trade receivables and other receivables, the Company is exposed to credit risk on its cash and cash equivalents 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, the Company may 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 August 31, 2014, the Company had no forward contracts in place [February 28, 2014–one forward contract with a notional value of $1,242 resulting in a gain of $19]. 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, 2014, 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 an increase in after-tax net loss of $3 for the three and six months ended August 31, 2014 [three and six months ended August 31, 2013–decrease of $152], with an equal and opposite effect if the US dollar had depreciated 1% against all foreign currencies at August 31, 2014.

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 August 31, 2014, the Company had cash and cash equivalents totaling $33,572 [February 28, 2014–$18,992]. Based on current revenue expectations, the continuing availability of credit facilities, the Company believes that its liquidity risk is manageable.

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

	Three Months Ended August 31, 2014								Six Months Ended August 31, 2014

	Direct/ Indirect Sales		OEM sales through Nokia		Total		% of total revenue		Direct/ Indirect Sales		OEM sales through Nokia		Total		% of total revenue
Europe		859		10,230		11,089		29%		3,108		18,612		21,720		33%
India		6,617		2,764		9,381		25%		6,617		3,636		10,253		15%
North America		5,486		—		5,486		14%		12,039		—		12,039		18%
Asia Pacific		525		3,924		4,449		12%		629		8,418		9,047		13%
Africa		187		3,064		3,251		9%		415		4,329		4,744		7%
Middle East		428		2,637		3,065		8%		2,027		5,142		7,170		11%
Carribean & Latin America		1,206		6		1,212		3%		1,607		125		1,731		3%

		15,308		22,625		37,933		100%		26,442		40,262		66,704		100%

In the previous fiscal year we did not have visibility to the geographic breakdown of sales shipped through Nokia's warehouses to the end customer. Below is the financial information available on the geographic distribution of our sales at that time.

The Company was dependent on two key customers with respect to revenue in the three months ended August 31, 2014. These customers represented approximately 60% and 17% of sales for the three months ended August 31, 2014 [three months ended August 31, 2013–two customers represented 61% and 10%].

The Company was dependent on two key customers with respect to revenue in the six months ended August 31, 2014. These customers represented approximately 60% and 10% of sales for the six months ended August 31, 2014 [six months ended August 31, 2013–two customers represented 59% and 11%].

Included in general and administrative expenses is $98 and $209 related to premises rental expense for the three and six month periods ended August 31, 2014 [three and six months ended August 31, 2013–$138 and $281]. Total rental expense for the three and six month periods ended August 31, 2014 was $557 and $1,126 [three months ended August 31, 2013–$581 and $1,325].

Certain comparative figures have been reclassified to conform with the presentation adopted in the current interim period.



Trade Receivables (gross)	33,580		17,936
Allowance for doubtful accounts	(659	)	(528	)

Trade Receivables (net)	32,921		17,408



Raw Materials		3,923	6,368
Work in Progress		555	696
Finished Goods		12,990	20,748

	Total Production Inventory	17,468	27,812
Inventory held for customer service/warranty		2,926	2,604

	Total Inventory	20,394	30,416



Deposits on inventory	1,269	1,345
Prepaid expenses	2,030	1,759
Indirect taxes (net)	880	614
Deferred financing costs	55	176
Receivable from Contract Manufacturers and other items	1,382	2,015

Total other current assets	5,616	5,909

	August 31, 2014								February 28, 2014

	Cost		Accumulated Amortization		Impairment		Net Book Value		Cost		Accumulated Amortization		Impairment		Net Book Value
Infrastructure Systems Software		2,583		1,629		—		954		2,370		1,212		—		1,158
Computer Software		3,942		3,676		—		266		3,922		3,445		—		477

Total Intangible Assets		6,525		5,305		—		1,220		6,292		4,657		—		1,635



Trade payables	21,946	12,684
Accrued liabilities	4,268	5,452
Estimated termination fee	4,984	9,085
Payroll related accruals	1,916	1,769
Warranty accrual	640	506
Income taxes payable	406	468

Total Accounts Payable and Accrued Liabilities	34,160	29,964



DragonWave Inc.		For the three and six months ended August 31 2014



Warranty accrual	166	113
Deferred revenue	396	461
Termination fee	1,591	—
Capital lease obligation	45	—

Total Other Long Term Liabilities	2,198	574



Volatility	75.8%	73.3%
Risk Free Rate	1.35%	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)
$	1.21	$	1.35		528,600		4.22	$	1.21		264,300	$	1.21
$	1.36	$	2.06		442,600		4.14	$	2.02		—		—
$	2.07	$	2.09		108,000		3.25	$	2.08		47,178	$	2.08
$	2.13	$	2.15		1,029,176		4.87	$	2.15		—		—
$	2.16	$	2.49		639,177		3.69	$	2.24		202,309	$	2.24
$	2.50	$	3.17		499,166		2.90	$	2.93		256,649	$	2.94
$	3.18	$	6.66		277,355		0.93	$	5.90		272,332	$	5.94
$	6.67	$	7.00		367,750		1.69	$	6.77		299,493	$	6.77
$	7.01	$	13.33		242,700		0.58	$	10.53		240,900	$	10.55

					4,134,524		3.45	$	3.28		1,583,161	$	4.93

	Three months ended August 31, 2014

	RSU's		Weighted Average Price (CAD)
RSU balances at May 31, 2014		—		—
Granted		80,000	$	2.15

RSU balances at August 31, 2014		80,000	$	2.15



Assets held at fair value (A)	33,572	19,011
Loans and receivables (B)	34,300	19,405
Other financial liabilities (C)	53,705	44,043
Liabilities held at fair value (D)	4,104	1,360



Financial Assets
Foreign exchange forward contracts	19	—	19
Financial Liabilities
Warrant liability	—	1,360	1,360

	Three Months Ended August 31, 2013				Six Months Ended August 31, 2013

	Total Revenue		% of Total Revenue		Total Revenue		% of Total Revenue
North America		6,566		26%		14,045		28%
Europe, Middle East and Africa		2,904		11%		5,365		11%
Nokia–India		2,413		10%		3,678		7%
Other Nokia warehouses		13,044		51%		25,829		52%
Rest of World		526		2%		1,068		2%

Total		25,453		100%		49,985		100%



		Consolidated Interim Financial Statements


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

		Three Months Ended						Six Months Ended

		August 31, 2014			August 31, 2013			August 31, 2014			August 31, 2013
Balance at the beginning of the period			704			744			619			825
	Accruals		246			199			528			251
	Utilization		(144	)		(195	)		(341	)		(328	)

Ending Balance			806			748			806			748

	Short term Portion		640			516			640			516
	Long term Portion		166			232			166			232


2015	$	919
2016	$	1,339
2017	$	936
Thereafter		—

	$	3,194