CONSOLIDATED BALANCE SHEETS

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

		Note

Assets
Current Assets
	Cash and cash equivalents	4	7,471		4,277
	Trade receivables	5	13,879		18,986
	Inventory	6	22,701		22,702
	Other current assets	7	2,393		2,777

			46,444		48,742
Long Term Assets
	Property and equipment	8	3,092		3,702
	Intangible assets	9	495		623

			3,587		4,325
Total Assets		11	50,031		53,067

Liabilities
Current Liabilities
	Debt facility	11	17,030		22,152
	Accounts payable and accrued liabilities	10	25,343		23,832
	Deferred revenue		779		1,944
	Deferred tax liability	18	281		294
	Warrant liability	12, 15	1,057		117

			44,490		48,339
Long Term Liabilities
	Deferred revenue		459		498
	Warrant liability	12, 15	3,420		3

			3,879		501
Commitments and contingencies		14
Shareholders' equity (deficiency)
	Capital stock	12	225,943		221,128
	Contributed surplus	12	9,593		9,235
	Deficit		(226,263	)	(218,225	)
	Accumulated other comprehensive loss		(9,618	)	(9,618	)

Total Shareholders' equity (deficiency)			(345	)	2,520
	Non-controlling interests	3	2,007		1,707

Total Equity			1,662		4,227
Total Liabilities and Equity			50,031		53,067

Shares issued & outstanding		13	5,486,776		3,020,069

See Note 1: Nature of Business, Basis of Presentation and Going Concern
See accompanying notes

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

				Three months ended						Six months ended

		Note		August 31, 2016			August 31, 2015			August 31, 2016			August 31, 2015
REVENUE
	Hardware and other		16		9,530			22,613			18,152			46,177
	Services		16		3,700			4,304			7,623			7,080

					13,230			26,917			25,775			53,257

COST OF SALES
	Hardware and other		6		7,085			19,458			13,804			38,208
	Services		6		1,923			2,744			3,857			4,490
	Inventory provision		6		365			730			365			1,025

					9,373			22,932			18,026			43,723

Gross profit					3,857			3,985			7,749			9,534

EXPENSES
	Research and development				2,027			3,875			4,136			8,108
	Selling and marketing				1,774			3,052			3,795			6,296
	General and administrative				3,120			3,603			6,251			7,089

					6,921			10,530			14,182			21,493

Loss before other items					(3,064	)		(6,545	)		(6,433	)		(11,959	)
	Goodwill impairment				—			(11,927	)		—			(11,927	)
	Amortization of intangible assets		9		(94	)		(149	)		(184	)		(332	)
	Accretion expense				(33	)		(61	)		(68	)		(132	)
	Interest expense		11, 15		(354	)		(560	)		(736	)		(1,091	)
	Warrant issuance expenses				(469	)		—			(561	)		—
	Fair value adjustment – warrant liability		12		602			373			846			895
	Foreign exchange loss				(68	)		(214	)		(220	)		(294	)

Loss before income taxes					(3,480	)		(19,083	)		(7,356	)		(24,840	)
	Income tax expense		18		220			1,620			382			1,687

Net loss and comprehensive loss					(3,700	)		(20,703	)		(7,738	)		(26,527	)
	Net income attributable to non-controlling interest				(238	)		(269	)		(300	)		(399	)

Net loss and comprehensive loss attributable to shareholders					(3,938	)		(20,972	)		(8,038	)		(26,926	)
Net loss and comprehensive loss per share
	Basic and diluted		13		(0.96	)		(6.96	)		(2.16	)		(8.94	)
Weighted average shares outstanding
	Basic and diluted		13		4,085,920			3,014,892			3,716,149			3,013,417

				Three months ended						Six months ended

		Note		August 31, 2016			August 31, 2015			August 31, 2016			August 31, 2015
Operating activities
Net loss					(3,700	)		(20,703	)		(7,738	)		(26,527	)
Items not affecting cash
	Goodwill impairment				—			11,927			—			11,927
	Amortization of property and equipment		8		458			498			927			970
	Amortization of intangible assets		9		94			149			184			332
	Accretion expense				33			61			68			132
	Fair value adjustment – warrant liability		12		(602	)		(373	)		(846	)		(895	)
	Stock-based compensation		12		160			228			375			505
	Unrealized foreign exchange (gain) loss				24			117			5			279
	Deferred income tax expense				14			1,485			(13	)		1,485

					(3,519	)		(6,611	)		(7,038	)		(11,792	)
Changes in non-cash working capital items					3,095			2,644			5,763			2,821

					(424	)		(3,967	)		(1,275	)		(8,971	)

Investing activities
	Acquisition of property and equipment				(148	)		(430	)		(317	)		(1,251	)
	Acquisition of intangible assets				(20	)		(163	)		(56	)		(328	)

					(168	)		(593	)		(373	)		(1,579	)

Financing activities
	Repayments on capital lease obligation				(12	)		(272	)		(32	)		(216	)
	Proceeds from debt facility		11		—			—			—			1,300
	Repayment of debt facility		11		(1,837	)		(898	)		(5,122	)		(898	)
	Issuance of warrants				4,028			—			5,203			—
	Issuance of common shares, net				1,957			14			4,798			26

					4,136			(1,156	)		4,847			212

Effect of foreign exchange on cash and cash equivalents					(24	)		(117	)		(5	)		(279	)
Net increase (decrease) in cash and cash equivalents					3,520			(5,833	)		3,194			(10,617	)
Cash and cash equivalents at beginning of period					3,951			18,908			4,277			23,692

Cash and cash equivalents at end of period					7,471			13,075			7,471			13,075

Cash paid during the period for interest					328			544			694			1,014

Cash paid during the period for taxes					92			30			503			216

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 29, 2016	3,020,069	$	221,128	$	9,235		$	(218,225	)	$	(9,618	)	$	1,707	$	4,227

Stock-based compensation	—		—		215			—			—			—		215
Share issuance	599,998		2,839		—			—			—			—		2,839
Exercise of warrants	6		—		—			—			—			—		—
Exercise of options	288		1		—			—			—			—		1
Share issuance – ESPP	206		1		—			—			—			—		1
Net (loss) / income	—		—		—			(4,100	)		—			62		(4,038	)

Balance at May 31, 2016	3,620,567	$	223,969	$	9,450		$	(222,325	)	$	(9,618	)	$	1,769	$	3,245

Stock-based compensation	—		—		160			—			—			—		160
Share issuance	1,823,880		1,929		—			—			—			—		1,929
Exercise of pre-funded warrants	30,164		—		—			—			—			—		—
Exercise of options	11,893		44		(17	)		—			—			—		27
Share issuance – ESPP	272		1		—			—			—			—		1
Net (loss) / income	—		—		—			(3,938	)		—			238		(3,700	)

Balance at August 31, 2016	5,486,776	$	225,943	$	9,593		$	(226,263	)	$	(9,618	)	$	2,007	$	1,662

		Capital Stock		Contributed Surplus			Deficit			AOCL			Non- Controlling Interest		Equity

Balance at February 28, 2015	3,011,632	$	220,952	$	8,388		$	(175,921	)	$	(9,618	)	$	967	$	44,768

Stock-based compensation	—		—		277			—			—			—		277
Share issuance – ESPP	980		16		(4	)		—			—			—		12
Net (Loss) / Income	—		—		—			(5,954	)		—			130		(5,824	)

Balance at May 31, 2015	3,012,612	$	220,968	$	8,661		$	(181,875	)	$	(9,618	)	$	1,097	$	39,233

Stock-based compensation	—		—		228			—			—			—		228
Vesting of restricted units	2,400		133		(133	)		—			—			—		—
Share issuance – ESPP	2,343		17		(3	)		—			—			—		14
Net (Loss) / Income	—		—		—			(20,972	)		—			269		(20,703	)

Balance at August 31, 2015	3,017,355	$	221,118	$	8,753		$	(202,847	)	$	(9,618	)	$	1,366	$	18,772

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 the NASDAQ Capital Market under the symbol DRWI.

These consolidated interim 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.à r.l., incorporated in Luxembourg, 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, DragonWave India Private Limited, incorporated in India and DragonWave Inc.'s majority owned subsidiary, DragonWave HFCL India Private Limited, incorporated in India. 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"].

The consolidated interim financial statements for the three and six months ended August 31, 2016 have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the disbursement of liabilities and commitments in the normal course of business in the foreseeable future. The Company has a history of losses and has consumed significant cash resources in the past, and has continued to do so in the three and six months ended August 31, 2016. Recently, additional pressure has been placed on the Company's liquidity position as a result of reduced revenue from a significant OEM channel and a dispute over inventory shipped to a customer in India in June 2015.

The Company has been able to make progress in restructuring the business. This progress includes the following highlights:

Despite the progress identified above, the Company remains in breach of the original terms of its debt facility, and is negotiating a new long-term debt facility. See Note 11 for further details on the debt facility. The continued consumption of cash has raised substantial doubt about DragonWave Inc.'s ability to

continue as a going concern. Management's plans to restructure the business and overcome these difficulties include initiatives in a number of areas including:

These plans may be difficult to achieve. They are dependent on a number of key assumptions including the timing of significant new customer projects, success in arbitration with the customer located in India, and accommodations from the Company's suppliers and credit lenders. It is possible that the plans described above may not be fully executed or may occur too slowly to solve the Company's current liquidity concerns. There can be no assurance that the existing financing facility can be renegotiated or that any other forms of financing can be arranged on satisfactory terms. These consolidated interim financial statements do not include any adjustments to the accounts and classification of assets and liabilities that may be necessary if the Company is unable to continue as a going concern. Such adjustments could be material.

The consolidated interim 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 consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended February 29, 2016.

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. In August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers" which reflects decisions reached by the FASB at its meeting earlier in the year to defer the effective date to fiscal years beginning after December 15, 2017, with early adoption permitted for the year

beginning after December 15, 2016. The Company is currently assessing the impact this amendment will have on the Company's consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements – Going Concern". The update provides U.S. GAAP guidance on management's responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company's ability to continue as a going concern within one year from the date the financial statements are issued. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The Company is currently assessing the impact this amendment will have on the Company's consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes". The amendments in this Update eliminate the current requirement for companies to separate deferred income tax liabilities and assets into current and non-current amounts in a classified statement of financial position. Instead, companies will be required to classify all deferred tax liabilities and assets as non-current. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, with early adoption is permitted. The Company is currently assessing the impact this amendment will have on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases". The amendments in this Update create Topic 842, Leases, and supersede the lease requirements in Topic 840, Leases. The Update will require companies to recognize a right-of-use asset and a lease liability in their balance sheets, while still distinguishing between finance leases and operating leases. For finance leases, the lessee would recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of comprehensive income, and for operating leases, the lessee would recognize a straight-line lease expense. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the impact this amendment will have on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting". The amendments in this Update simplify several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statements of cash flows. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, with early adoption is permitted. The Company is currently assessing the impact this amendment will have on the Company's consolidated financial statements.

Non-controlling interest consists of the minority owned portion of the Company's 50.1% owned subsidiary, DragonWave HFCL India Private Limited.

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

In accordance with the fourth forbearance agreement which is valid until April 1, 2017 the Company is required to have a minimum of $1,000 held at Comerica Bank [February 29, 2016 – $1,000].

The Company could elect to repatriate funds from its foreign subsidiaries and this may result in withholding taxes.

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, 2016, two customers exceeded 10% of the total receivable balance. These customers represented 37% and 14% of the trade receivables balance [February 29, 2016 – two customers represented 52% and 16% of the trade receivables balance].

Included in general and administrative expenses is a recovery of $24 and an expense of $13 related to bad debt expense for the three and six months ended August 31, 2016 [three and six months ended August 31, 2015 – expense of $112 and $148].

Cost of sales for the three and six months ended August 31, 2016 was $9,373 and $18,026 respectively [three and six months ended August 31, 2015 – $22,932 and $43,723 respectively], which included $6,756 and $12,455 of product costs respectively [three and six months ended August 31, 2015 – $18,550 and $35,777 respectively]. The remaining costs of $2,617 and $5,571 respectively [three and six months ended August 31, 2015 – $4,382 and $7,946 respectively] related principally to the costs of sub-contractors for services, warehousing, freight, warranty, overhead and other direct costs of sales.

For the three and six months ended August 31, 2016, the Company recognized an impairment loss on inventory of $365 [three and six months ended August 31, 2015 – $730 and $1,025 respectively].

The Company allocates overhead and labour to inventory. Included in cost of sales for the three and six months ended August 31, 2016 were overhead and labour allocations of $213 and $397 respectively [three and six months ended August 31, 2015 – $580 and $1,196 respectively]. Included in inventory at August 31, 2016 were overhead and labour allocations of $523 [February 29, 2016 – $551].

The Company uses an outsourced manufacturing model in which most of the component acquisition and assembly of its products is executed by third parties. The Company's contract manufacturers currently have inventory intended for use in the production of its products, and the Company has purchase orders or demand forecasts in place for raw materials and manufactured products with these contract manufacturers. The value of the inventory held by the Company's primary contract manufacturer at August 31, 2016 was $13,585 [February 29, 2016 – $16,848].

Depreciation expense relating to the above property and equipment was allocated to operating expenses as follows:

Depreciation expense includes amortization of assets recorded under capital lease.

For the three and six months ended August 31, 2016, the Company recognized amortization of intangible assets of $94 and $184 respectively [August 31, 2015 – $149 and $332 respectively]. The Company estimates that it will recognize $251, $239 and $5 respectively for the next three succeeding years.



Trade payables	13,590	11,858
Accrued liabilities	5,815	5,830
Termination fee	3,486	3,337
Payroll related accruals	1,084	1,257
Warranty accrual	855	926
Income taxes payable	455	555
Capital lease obligation	58	69

Total accounts payable and accrued liabilities	25,343	23,832

On April 10, 2013, the Company announced changes to its existing operational framework with Nokia. Included in the changes was an agreement to a termination fee in the amount of $8,668 to be paid to Nokia in installments. Payments totaling $4,351 were made by the year ended February 29, 2016. As at August 31, 2016 the liability is valued at $3,486 and is considered short term in nature [February 29, 2016 – $3,337 short term].

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 accrual for the respective periods:

The Company has established a credit facility with Comerica Bank and Export Development Canada. 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 $17,030 on the facility as at August 31, 2016 [February 29, 2016 – $22,152], and $1,862 against its letter of credit facility [February 29, 2016 – $1,853].

The credit facility which was extended on January 6, 2014, matured on June 1, 2016 and is secured by a first priority charge on all of the assets of DragonWave Inc. and its principal direct and indirect subsidiaries. The terms of the credit facility include other customary terms, conditions, covenants, and representations and warranties. 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 were amortized over the 30 month term of the facility. During the three and six months ended August 31, 2016 the weighted average debt outstanding was $17,823 and $18,787 [three and six months ended August 31, 2015 – $33,436 and $33,038] and the Company recognized $328 and $680 in interest expense related to the debt facility [three and six months ended August 31, 2015 – $560 and $1,104] and expensed nil and $18 in deferred financing cost [three and six months ended August 31, 2015 – $14 and $28].

The credit facility contains financial covenants including minimum tangible net worth requirements, minimum cash levels to be held at Comerica bank and minimum liquidity ratio requirements. The credit facility also imposes certain restrictions on the Company's ability to acquire capital assets above a threshold over a trailing six month period.

On October 12, 2016, the Company has signed a fourth forbearance agreement which is valid until April 1, 2017, which identifies new minimum covenant levels reflecting the Company's revised financial plans. The forbearance agreement includes a requirement to hold a minimum of $1,000 at Comerica Bank. In addition, the forbearance agreement reduces the facility commitment from $40,000 to $30,000, includes additional compliance requirements and implements more frequent monitoring. Warrants to purchase 375,000 common shares will be issued to the lenders at an exercise price of $4.00 per share and will expire five years from the date of issuance. The Company is in ongoing negotiations with its lending partners to put in place a new long term debt facility.

Subsequent to August 31, 2016, DragonWave Inc. has not made any payments on the debt facility.

On September 23, 2013 the Company completed a public offering. Under the terms of the offering, the Company issued and sold 11,910,000 units at $2.10 on a pre-consolidation basis, 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 1/25^th of one common share at an exercise price of $2.80 per share following the August 8, 2016 public offering, until September 23, 2018, subject to certain adjustments. Upon issuance, the Company recognized a liability in the amount of $6,425 for the warrants, see Warrants section for further details.

On February 2, 2016, the Company effected a share consolidation of the Company's common shares at a ratio of 1-for-25. As a result of the share consolidation, every 25 shares of the issued and outstanding common shares consolidated into one newly-issued outstanding common share. Each fractional share remaining after the share consolidation was cancelled. The number of outstanding stock options and restricted share units were proportionately adjusted by the consolidation ratio and the exercise prices correspondingly increased by the same consolidation ratio. All shares and exercise prices are presented on a post-consolidation basis in these consolidated interim financial statements.

On April 11, 2016 the Company completed a registered direct offering. Under the terms of the offering, the Company issued and sold 599,998 units at $7.25, for aggregate gross proceeds of $4,350. After deducting commissions and listing expenses, the Company realized net proceeds of $4,014. 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 $8.50 per share until April 11, 2021. Upon issuance, the Company recognized a liability in the amount of $1,175 for the warrants, see Warrants section for further details.

On August 8, 2016 the Company completed a public offering. Under the terms of the offering, the Company issued and sold 1,760,880 Class A units at $3.35 and 30,164 Class B units at $3.34, for aggregate gross proceeds of $6,000. After deducting commissions and expenses, the Company realized net proceeds of $5,277. Concurrent with the underwritten public offering in the United States, the Company issued an additional 63,000 Class A Units on a private placement basis to purchasers in Canada for additional gross proceeds of $211. Each Class A unit consisted of one common share, one five-year warrant (the "Long-Term Warrant") to purchase one common share and two six-month warrants (the "Short-Term Warrant"). Each Class B unit consisted of a pre-funded warrant (the "Pre-Funded Warrant") to purchase one common share, one Long-Term Warrant and two Short-Term Warrants. The Long-Term Warrants have an exercise price of $4.37 per share, are exercisable immediately and will expire on August 8, 2021. The Short-Term Warrants have an exercise price of $4.00 per share, are exercisable immediately and will expire on February 8, 2017. The Pre-Funded Warrants are exercisable immediately with no expiration date, are deemed purchased for a price of $3.34 per underlying common share by virtue of purchasing a Class B

Unit and have an exercise price of $0.01 per share. Upon issuance, the Company recognized a liability in the amount of $4,028 for the warrants, see Warrants section for further details.

On June 20, 2014 the Shareholders approved the adoption of a new Share Based Compensation Plan (the "Plan") to replace the Previous Plan. The Plan includes provision for granting of performance share units ("PSUs"), restricted share units ("RSUs"), deferred share units ("DSUs"), Bonus Shares (as defined in the 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. 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 between six months to four years from the date of the option grant. All remaining outstanding options expire five years from the grant date, or upon termination of employment. The maximum number of common shares issuable under the Plan is 548,678, which represents 10% of the common shares issued and outstanding as at August 31, 2016.

	Three and six months ended August 31, 2016					Three and six months ended August 31, 2015

	Options			Weighted Average Exercise Price (CAD)		Options			Weighted Average Exercise Price (CAD)
Options at February 29, 2016 and February 28, 2015		276,728		$	32.82		159,421		$	76.34
Granted		82,025		$	6.22		59,608		$	19.29
Exercised		(288	)	$	3.00		—		$	—
Forfeited		(16,205	)	$	131.67		(7,283	)	$	182.77

Options at May 31, 2016 and 2015		342,260		$	21.79		211,746		$	56.62

Granted		5,120		$	7.32		160		$	14.50
Exercised		(11,893	)	$	3.00		—		$	—
Forfeited		(26,117	)	$	33.48		(20,359	)	$	93.78

Options at August 31, 2016 and 2015		309,370		$	21.28		191,547		$	52.63

The following table shows the weighted average values used in determining the fair value of options granted during the three months ended August 31, 2016 and August 31, 2015:

The 5,120 and 87,145 options granted during the three and six months ended August 31, 2016 were determined to have a fair value of $20 and $295 respectively [three and six months ended August 31, 2015 – 160 options valued at $1 and 59,768 options valued at $521].

The following table summarizes the various exercise prices inherent in the Company's stock options outstanding and exercisable on August 31, 2016:

The Company has recognized $160 and $375 for the three and six months ended August 31, 2016 as compensation expense for stock-based grants, with a corresponding credit to contributed surplus [three and six months ended August 31, 2015 – $212 and $460]. Stock compensation expense was allocated to operating expenses as follows:

As at August 31, 2016, compensation costs not yet recognized relating to stock option awards outstanding is $1,184 [February 29, 2016 – $1,476] net of estimated forfeitures. Performance vesting awards will vest as performance conditions are met. Compensation will be adjusted for subsequent changes in estimated forfeitures.

The total intrinsic value of options exercised during the three and six months ended August 31, 2016 is $22 [August 31, 2015 – Nil].

The intrinsic value associated with fully vested options at August 31, 2016 is $55 [February 29, 2016 – Nil].

The Company has recognized nil for the three and six months ended August 31, 2016 as compensation expense for restricted share units, with a corresponding credit to contributed surplus [three and six months ended August 31, 2015 – $13 and $39].

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, 2016 a total of 218 and 384 common shares were purchased by employees at fair market value, while the Company issued 54 and 94 common shares, net of forfeitures, as its matching contribution during the three and six months ended August 31, 2016. 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, with a corresponding credit to contributed surplus. The total fair value of the shares earned during the three and six months ended August 31, 2016 was $3 and $6 [three and six months ended August 31, 2015 – $3 and $6]. The fair value of the unearned ESPP shares as at August 31, 2016 was $2 [August 31, 2015 – $13]. The number of shares held for release, and still restricted under the plan at August 31, 2016 was 679 [August 31, 2015-915].

Effective May 30, 2007, the Company granted warrants to purchase up to 5,050 common shares of the Company at a price of $88.75 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. Each whole warrant entitles the holder to purchase 1/25^th of one common share of the Company.

On September 23, 2013 the Company completed a public offering. Under the terms of the offering, the Company issued and sold 11,910,000 units at $2.10 on a pre-consolidation basis, 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 1/25^th common share of the Company at an exercise price of $2.80 per share until September 23,

2018 following the August 8, 2016 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 are presented as "Fair value adjustment – warrant liability" in the consolidated statement of operations. As at August 31, 2016, 2,088,750 warrants were outstanding. During the three and six months ended August 31, 2016 the Company realized a gain in the amount of $42 and a loss of $100 in the consolidated statement of operations which represented the change in fair value of the remaining warrant liability of $103.

On August 1, 2014 the Company completed a public offering. Under the terms of the offering, the Company issued and sold 15,927,500 units at $1.80 CAD on a pre-consolidation basis for aggregate gross proceeds of $28,670 CAD. Each unit consisted of one common share of the Company and one half of one warrant. Each whole warrant entitles the holder to purchase 1/25^th of one common share of the Company at an exercise price of $56.25 CAD 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 a warrant liability of $2,551 which represented the estimated fair value of the liability as at August 1, 2014. During the three and six months ended August 31, 2016 the Company realized a gain in the amount of $122 and $117 in the consolidated statement of operations which represented the change in fair value of the warrant liability.

On April 11, 2016 the Company completed a registered direct offering. Under the terms of the offering, the Company issued and sold 599,998 units at $7.25, for aggregate gross proceeds of $4,350. 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 $8.50 per share until April 11, 2021, subject to certain adjustments. Equity issuance expenses relating to the offering totaled $428 of which $92 was expensed as the proportionate warrant costs. As a result of the offering, the Company issued 299,999 warrants and recognized a warrant liability of $1,175 which represented the estimated fair value of the liability as at April 11, 2016. During the three and six months ended August 31, 2016 the Company realized a gain in the amount of $438 and $829 in the consolidated statement of operations which represented the change in fair value of the remaining warrant liability of $346.

deemed purchased for a price of $3.34 per underlying common share by virtue of purchasing a Class B Unit and have an exercise price of $0.01 per share. The Pre-Funded Warrants were fully exercised on August 25, 2016. Equity issuance expenses relating to the offering totaled $723 of which $469 was expensed as the proportionate warrant costs. As a result of the offering, the Company issued 1,854,044 Long-Tem Warrants and 3,708,088 Short-Term Warrants and recognized a warrant liability of $4,028 which represented the estimated fair value of the liability as at August 31, 2016.

	August 31, 2016

	Warrants Outstanding		Shares Purchasable		Exercise Price		Termination date
May 2007 Issuance		31,562		1,262	$	88.75 CAD	May 30, 2017
September 2013 Issuance		2,088,750		83,550	$	2.80	September 23, 2018
April 2016 Issuance		299,999		299,999	$	8.50	April 11, 2021
August 2016 Issuance – short-term warrants		3,708,088		3,708,088	$	4.00	February 8, 2017
August 2016 Issuance – long-term warrants		1,854,044		1,854,044	$	4.37	August 8, 2021

Total		7,982,443		5,946,943

Basic loss per share is calculated by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the period. In the computation of diluted earnings per share, the Company includes the number of additional common shares that would have been outstanding if the dilutive potential equity instruments had been issued.

As at August 31, 2016 a total of 309,370 options and 7,982,443 warrants have been excluded from the diluted net loss per share calculations, as their effect would have been anti-dilutive.

The following table illustrates the net loss per share during the three and six months ended excluding the effect of outstanding options and warrants:

Future minimum operating lease payments per fiscal year that relate to office and warehouse space in various countries as at August 31, 2016 are as follows:

In January 2016, a customer in India initiated an arbitration process with the Company to resolve the dispute over inventory shipped to this customer in June 2015, with a value of $4,707. The customer has now submitted its claim statement, which discloses an aggregate claim amount of approximately $5,100 in respect of, among other things, damages claimed with respect to lost revenue, import duties, and inventory replacement costs. The Company believes that the claim has no merit. The Company has booked the value of the inventory provided to the customer as an asset with a value of $4,600. The Company has not received any payment with respect to this inventory. The Company submitted a counter-claim in June 2016 for the full value of the contract and damages. The arbitration meetings are held on a regular basis but since no decision has been made as of the date of this report, the outcome of this matter is not determinable.

A complaint for patent infringement against the Company was filed but not served on September 9, 2016. The Company believes that it has no merit and intends to vigorously defend itself in this matter.

See Note 6 for the discussion on the purchase order commitments with contract manufacturers.

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.

Level 1 – Unadjusted quoted prices at the measurement date for identical assets or liabilities in active markets.

Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs which are supported by little or no market activity.

The September 23, 2013 warrant liability is classified as Level 3 as it is measured at fair value using significant unobservable inputs. Significant assumptions used at August 31, 2016 for the warrants include a dividend yield of 0%, a 1% assumption that the fundamental transaction will happen every year, volatility of 75%, and a risk free spot rate term structure.

The April 11, 2016 warrant liability is classified as Level 3 as it is measured at fair value using significant unobservable inputs. Significant assumptions used at August 31, 2016 for the warrants include a dividend yield of 0%, a 1% assumption that the fundamental transaction will happen every year, volatility of 75%, and a risk free spot rate term structure.

The August 8, 2016 warrant liability is classified as Level 3 as it is measured at fair value using significant unobservable inputs. Significant assumptions used at August 31, 2016 for the warrants include a dividend yield of 0%, a 1% assumption that the fundamental transaction will happen every year, volatility of 75%, and a risk free spot rate term structure.

As at August 31, 2016 the Company held the following Level 3 financial instruments carried at fair value on the consolidated balance sheet.

As at February 29, 2016, the Company held the following Level 3 financial instruments carried at fair value on the consolidated balance sheet.

A reconciliation of the Level 3 warrant liability measured at fair value for the three and six months ended August 31, 2016 follows:



Balance at February 29, 2016	2,088,750	3
Warrant issuance	299,999	1,175
Fair value adjustment – warrant liability	—	(249	)

Balance at May 31, 2016	2,388,749	929

Warrant issuance	5,562,132	4,028
Fair value adjustment – warrant liability	—	(480	)

Balance at August 31, 2016	7,950,881	4,477

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 months ended August 31, 2016 was $354 and $718 on the Company's cash, cash equivalents, and debt facility [three and six months ended August 31, 2015 – expense of $547 and $1,064].

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 trade receivables and other receivables, and 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 the Company's operating expenses incurred in foreign currencies with gains or losses on the

forward contracts. As at August 31, 2016 and August 31, 2015, the Company had no forward contracts in place.

As of August 31, 2016, if the US dollar had appreciated 1% against all foreign currencies to which the Company is exposed, 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 $10 for the three and six months ended August 31, 2016 [three and six months ended August 31, 2015 – increase of $35], with an equal and opposite effect if the US dollar had depreciated 1% against all foreign currencies at August 31, 2016.

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, 2016, the Company had cash and cash equivalents totaling $7,471 [February 29, 2016 – $4,277]. See Note 1 for further discussion of liquidity risk associated with the Company and Note 11 for details of the debt facility requirement.

The Company operates in one operating segment – broadband wireless backhaul equipment.

The Company analyzes its sales according to geographic region and targets product development and sales strategies by region. The following table presents total revenues by geographic location through direct and indirect sales and through its Original Equipment Manufacturer (OEM) partner, Nokia:

	Three Months Ended August 31, 2016								Three Months Ended August 31, 2015

	Direct & Indirect Sales		OEM Sales through Nokia		Total		% of total revenue		Direct & Indirect Sales		OEM Sales through Nokia		Total		% of total revenue
Canada		771		—		771		6%		898		—		898		3%
Europe, Middle East & Africa		1,424		2,895		4,319		33%		2,060		7,767		9,827		37%
India		1,952		212		2,164		16%		7,307		1,412		8,719		32%
United States		3,581		—		3,581		27%		5,382		19		5,401		20%
Rest of World		2,380		15		2,395		18%		1,379		693		2,072		8%

		10,108		3,122		13,230		100%		17,026		9,891		26,917		100%

	Six Months Ended August 31, 2016								Six Months Ended August 31, 2015

	Direct & Indirect Sales		OEM Sales through Nokia		Total		% of total revenue		Direct & Indirect Sales		OEM Sales through Nokia		Total		% of total revenue
Canada		1,416		—		1,416		6%		1,580		—		1,580		3%
Europe, Middle East & Africa		2,318		7,507		9,825		38%		3,667		19,270		22,937		43%
India		3,405		266		3,671		14%		10,572		1,985		12,557		24%
United States		7,016		—		7,016		27%		11,342		19		11,361		21%
Rest of World		3,733		114		3,847		15%		2,465		2,357		4,822		9%

		17,888		7,887		25,775		100%		29,626		23,631		53,257		100%

The Company has shown revenue by the customers' purchasing entities' geographic location, except in cases where the geographic location of the product deployment is explicitly known.

For the three months ended August 31, 2016, the Company was dependent on three key customers with respect to revenue. These customers represented approximately 24%, 13% and 11% of sales during that three month period [three months ended August 31, 2015 – three customers represented 37%, 26% and 10%].

The Company was dependent on three key customers with respect to revenue in the six months ended August 31, 2016. These customers represented approximately 31%, 14% and 10% of sales for the six months ended August 31, 2016 [six months ended August 31, 2015 – two customers represented 44% and 19%].

The Company accrues tax expenses for entities located in foreign jurisdictions that are anticipated to be profitable for fiscal year 2017. The determination of the Company's tax provision is based on the statutory tax rates applicable in each region and takes into account any available tax losses in each country. For the three and six months ended August 31, 2016, the Company recognized tax expenses of $220 and $382 [three and six months ended August 31, 2015 – $1,620 and $1,687].

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

	August 31, 2016								February 29, 2016

Native Currency	Native Currency $		Foreign Exchange Rate to USD		USD Amount		% of total		USD Amount		% of total
US Dollar		4,045		1.000		4,045		54.1%		1,600		37.4%
Canadian Dollar		402		0.764		307		4.1%		39		0.9%
Indian Rupee		179,656		0.015		2,682		35.9%		2,317		54.2%
Other						437		5.9%		321		7.5%

Total Cash and Cash Equivalents						7,471		100.0%		4,277		100.0%



Trade receivables	14,130		19,209
Allowance for doubtful accounts	(251	)	(223	)

Total trade receivables	13,879		18,986



Raw materials	3,336	2,389
Work in progress	2,473	614
Finished goods	14,461	16,986

Total production inventory	20,270	19,989

Inventory held for customer service/warranty	2,431	2,713

Total inventory	22,701	22,702



Deposits on inventory	215	670
Prepaid expenses	1,496	1,355
Indirect taxes (net)	610	610
Deferred financing costs	—	18
Receivable from contract manufacturers and other items	72	124

Total other current assets	2,393	2,777

	August 31, 2016						February 29, 2016

	Cost		Accumulated Amortization		Net Book Value		Net Book Value
Test and research & development equipment		24,419		22,162		2,257		2,655
Computer hardware		3,703		3,593		110		213
Production fixtures		2,567		2,050		517		559
Leasehold improvements		1,081		1,006		75		103
Other		1,600		1,467		133		172

Total		33,370		30,278		3,092		3,702



DragonWave Inc.		For the three and six months ended August 31 2016

	August 31, 2016						February 29, 2016

	Cost		Accumulated Amortization		Net Book Value		Net Book Value
Infrastructure Systems Software and Computer Software		7,102		6,607		495		623



Volatility	104.6%	80.7%
Risk free rate	0.61%	0.66%
Dividend yield	Nil	Nil
Average expected life	3.97 yrs	3.97 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 remaining contractual life (yrs)		Weighted average exercise price (CAD)
$	3.00	$	3.25		88,038		4.23	$	3.00		88,038		4.23	$	3.00
$	3.26	$	6.78		78,912		4.69	$	6.10		1,937		4.36	$	3.50
$	6.79	$	21.00		49,019		3.84	$	18.02		14,991		3.72	$	19.24
$	21.01	$	54.88		59,399		2.48	$	46.80		43,816		2.40	$	44.83
$	54.89	$	98.25		34,002		1.33	$	63.98		30,580		1.29	$	64.80

					309,370		3.63	$	21.28		179,362		3.24	$	25.12

	Three Months Ended				Six Months Ended

	August 31 2016		August 31 2015		August 31 2016		August 31 2015
Research and development		38		41		97		85
Sales and marketing		51		42		120		89
General and administrative		71		129		158		286

		160		212		375		460



Assets held at fair value (A)	7,471	4,277
Loans and receivables (B)	13,951	19,110
Other financial liabilities (C)	41,005	44,434
Liabilities held at fair value (D)	4,477	120



		Consolidated Interim Financial Statements


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


2017			457
2018			136
2019			10

			603