Exhibit 4.2


 


 


Consolidated Financial
Statements


(Expressed in thousands
of Canadian dollars)


 


WESTPORT  INNOVATIONS 
INC.


 


Years ended
March 31, 2008, 2007 and 2006


 

















 


	
  

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  KPMG LLP

  	
   

  	
  Telephone

  	
  (604) 691-3000

  
	
   

  	
  Chartered
  Accountants

  	
   

  	
  Fax

  	
  (604) 691-3031

  
	
   

  	
  PO
  Box 10426 777 Dunsmuir Street

  	
   

  	
  Internet

  	
  www.kpmg.ca

  
	
   

  	
  Vancouver
  BC V7Y 1K3

  	
   

  	
   

  	
   

  
	
   

  	
  Canada

  	
   

  	
   

  	
   

  



 


AUDITORS’ REPORT ON FINANCIAL STATEMENTS


 


To
the Board of Directors and Shareholders of

Westport Innovations Inc.


 


We
have audited the consolidated balance sheets of Westport
Innovations Inc. (the Company) as of
March 31, 2008 and 2007 and the consolidated statements of operations,
shareholders’ equity and comprehensive income (loss) and cash flows for each of
the years in the three year period ended March 31, 2008.  These consolidated financial statements are
the responsibility of the Company’s management. 
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.


 


We
conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.


 


In
our opinion, these consolidated financial
statements present fairly, in all material respects, the financial position of
the Company as of March 31,
2008 and 2007 and the results of its operations and its cash flows for each of
the years in the three year period ended March 31, 2008 in accordance with
Canadian generally accepted accounting principles.


 


Canadian
generally accepted accounting principles vary in certain significant respects
from accounting principles generally accepted in the United States of
America.  Information relating to the
nature and effect of such differences is presented in note 23 to the
consolidated financial
statements.


 


/s/
KPMG LLP


Chartered
Accountants


 


Vancouver,
Canada


May 9, 2008, except as to notes 22 and 23

which are as of July 21, 2008


 


COMMENTS BY AUDITORS FOR US READERS ON CANADA-US
REPORTING DIFFERENCES


 


To
the Board of Directors and Shareholders of

Westport Innovations Inc.


 


In
the United States, reporting standards for auditors require the addition of an
explanatory paragraph (following the opinion paragraph) when there is a change
in accounting principles that has a material effect on the comparability of the
Company’s financial statements, such as the change described in
note 3(a) to the consolidated financial statements as at
March 31, 2008 and for the three years then ended.  Our report to the Board of Directors and
shareholders dated May 9, 2008, except as to notes 22 and 23 which are as
of July 21, 2008 is expressed in accordance with Canadian reporting
standards, which do not require a reference to such a change in accounting
principles in the auditors’ report when the change is properly accounted for
and adequately disclosed in the financial statements.


 


/s/
KPMG LLP


Chartered
Accountants


 


Vancouver,
Canada


May 9, 2008, except as to notes 22 and 23

which are as of July 21, 2008


 


 


KPMG LLP, a Canadian limited liability partnership is the Canadian


member firm of KPMG International, a Swiss cooperative.


 

















 


WESTPORT INNOVATIONS INC.


Consolidated
Balance Sheets


(Expressed in
thousands of Canadian dollars)


 


March 31,
2008 and 2007


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Assets

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current assets:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash equivalents

  	
   

  	
  $

  	
  7,560

  	
   

  	
  $

  	
  1,702

  	
   

  
	
  Short-term investments

  	
   

  	
  15,202

  	
   

  	
  21,379

  	
   

  
	
  Accounts receivable

  	
   

  	
  7,028

  	
   

  	
  10,881

  	
   

  
	
  Loan receivable (note 18(a))

  	
   

  	
  6,774

  	
   

  	
  —

  	
   

  
	
  Inventories (note 4)

  	
   

  	
  9,020

  	
   

  	
  2,816

  	
   

  
	
  Prepaid expenses

  	
   

  	
  1,033

  	
   

  	
  783

  	
   

  
	
  Current portion of future income tax assets
  (note 17)

  	
   

  	
  4,944

  	
   

  	
  1,778

  	
   

  
	
   

  	
   

  	
  51,561

  	
   

  	
  39,339

  	
   

  
	
  Long-term investments (note 5)

  	
   

  	
  18,754

  	
   

  	
  13,115

  	
   

  
	
  Equipment, furniture and leasehold
  improvements (note 6)

  	
   

  	
  3,685

  	
   

  	
  3,863

  	
   

  
	
  Intellectual property (note 7)

  	
   

  	
  574

  	
   

  	
  719

  	
   

  
	
  Deferred charges (note 3(a))

  	
   

  	
  —

  	
   

  	
  920

  	
   

  
	
  Future income tax asset (note 17)

  	
   

  	
  4,366

  	
   

  	
  1,677

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  78,940

  	
   

  	
  $

  	
  59,633

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Liabilities and Shareholders’ Equity

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current liabilities

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accounts payable and accrued liabilities

  	
   

  	
  $

  	
  8,470

  	
   

  	
  $

  	
  6,030

  	
   

  
	
  Deferred revenue

  	
   

  	
  205

  	
   

  	
  365

  	
   

  
	
  Demand instalment loan (note 8)

  	
   

  	
  5,776

  	
   

  	
  1,613

  	
   

  
	
  Short-term debt (note 9)

  	
   

  	
  5,995

  	
   

  	
  —

  	
   

  
	
  Current portion of long-term debt (note 10)

  	
   

  	
  54

  	
   

  	
  6,816

  	
   

  
	
  Current portion of warranty liability

  	
   

  	
  4,899

  	
   

  	
  3,824

  	
   

  
	
  Obligation to issue warrants (note 13)

  	
   

  	
  4,000

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  29,399

  	
   

  	
  18,648

  	
   

  
	
  Warranty liability

  	
   

  	
  4,258

  	
   

  	
  3,147

  	
   

  
	
  Obligation to issue warrants (note 13)

  	
   

  	
  —

  	
   

  	
  4,000

  	
   

  
	
  Long-term debt (note 10)

  	
   

  	
  8

  	
   

  	
  13,781

  	
   

  
	
  Other long-term liabilities (note 11)

  	
   

  	
  1,496

  	
   

  	
  1,720

  	
   

  
	
  Joint Venture Partners’ share of net assets
  of joint ventures (note 18)

  	
   

  	
  13,983

  	
   

  	
  7,719

  	
   

  
	
   

  	
   

  	
  49,144

  	
   

  	
  49,015

  	
   

  
	
  Shareholders’ equity (note 22(c)):

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Share capital:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Authorized:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Unlimited common shares, no par value
  Unlimited preferred shares in series, no par value

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Issued:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  27,416,993 (2007 - 21,624,594) common
  shares

  	
   

  	
  258,202

  	
   

  	
  232,830

  	
   

  
	
  Other equity instruments (note 15)

  	
   

  	
  3,079

  	
   

  	
  12,352

  	
   

  
	
  Additional paid in capital

  	
   

  	
  5,097

  	
   

  	
  5,301

  	
   

  
	
  Deficit

  	
   

  	
  (247,460

  	
  )

  	
  (239,865

  	
  )

  
	
  Accumulated other comprehensive income

  	
   

  	
  10,878

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  29,796

  	
   

  	
  10,618

  	
   

  
	
  Commitments and contingencies (notes 12 and
  19)

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Subsequent events (notes 19(c), 20(d)
  and 22)

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Share consolidation (note 22(c))

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  78,940

  	
   

  	
  $

  	
  59,633

  	
   

  



 


See accompanying notes to consolidated
financial statements.


 


Approved on behalf of the Board:


 


	
  “John A. Beaulieu”

  	
   

  	
  Director

  	
  “Henry Bauermeister”

  	
   

  	
  Director

  



 

















 


WESTPORT INNOVATIONS INC.


Consolidated
Statements of Operations


(Expressed in
thousands of Canadian dollars, except share and per share amounts)


 


Years ended March 31, 2008, 2007 and 2006


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Product revenue

  	
   

  	
  $

  	
  55,238

  	
   

  	
  $

  	
  47,195

  	
   

  	
  $

  	
  29,932

  	
   

  
	
  Parts revenue

  	
   

  	
  16,298

  	
   

  	
  13,285

  	
   

  	
  13,620

  	
   

  
	
   

  	
   

  	
  71,536

  	
   

  	
  60,480

  	
   

  	
  43,552

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cost of revenue and expenses:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cost of revenue

  	
   

  	
  49,023

  	
   

  	
  38,381

  	
   

  	
  28,642

  	
   

  
	
  Research and development (notes
  14(c) and 16)

  	
   

  	
  23,026

  	
   

  	
  21,891

  	
   

  	
  16,939

  	
   

  
	
  General and administrative (note 14(c))

  	
   

  	
  6,033

  	
   

  	
  6,882

  	
   

  	
  4,866

  	
   

  
	
  Sales and marketing (note 14(c))

  	
   

  	
  10,550

  	
   

  	
  7,077

  	
   

  	
  5,849

  	
   

  
	
  Foreign exchange loss (gain)

  	
   

  	
  1,287

  	
   

  	
  (102

  	
  )

  	
  (93

  	
  )

  
	
  Depreciation and amortization

  	
   

  	
  1,550

  	
   

  	
  1,410

  	
   

  	
  2,752

  	
   

  
	
  Bank charges, interest and other

  	
   

  	
  280

  	
   

  	
  408

  	
   

  	
  314

  	
   

  
	
   

  	
   

  	
  91,749

  	
   

  	
  75,947

  	
   

  	
  59,269

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss before undernoted

  	
   

  	
  (20,213

  	
  )

  	
  (15,467

  	
  )

  	
  (15,717

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Interest on long-term debt and amortization
  of discount (note 10(c))

  	
   

  	
  (986

  	
  )

  	
  (1,718

  	
  )

  	
  —

  	
   

  
	
  Interest and other income

  	
   

  	
  1,316

  	
   

  	
  764

  	
   

  	
  450

  	
   

  
	
  Gain on sale of long-term investments
  (notes 5(a) and 5(b))

  	
   

  	
  10,659

  	
   

  	
  8,120

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss before income taxes and Joint Venture
  Partners’ share of income from joint ventures

  	
   

  	
  (9,224

  	
  )

  	
  (8,301

  	
  )

  	
  (15,267

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Income tax recovery (expense) (note 17):

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current

  	
   

  	
  (218

  	
  )

  	
  (404

  	
  )

  	
  —

  	
   

  
	
  Future

  	
   

  	
  4,691

  	
   

  	
  3,455

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  4,473

  	
   

  	
  3,051

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss before Joint Venture Partners’ share
  of income from joint ventures

  	
   

  	
  (4,751

  	
  )

  	
  (5,250

  	
  )

  	
  (15,267

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Joint Venture Partners’ share of net income
  from joint ventures (note 18)

  	
   

  	
  (5,564

  	
  )

  	
  (6,057

  	
  )

  	
  (1,593

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss for the year

  	
   

  	
  $

  	
  (10,315

  	
  )

  	
  $

  	
  (11,307

  	
  )

  	
  $

  	
  (16,860

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Basic and diluted loss per share (note 22(c))

  	
   

  	
  $

  	
  (0.41

  	
  )

  	
  $

  	
  (0.53

  	
  )

  	
  $

  	
  (0.79

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Weighted average common shares outstanding
  - Basic and diluted (note 22(c))

  	
   

  	
  25,167,966

  	
   

  	
  21,478,521

  	
   

  	
  21,208,141

  	
   

  



 


See accompanying notes to consolidated
financial statements.


 

















 


WESTPORT INNOVATIONS INC.


Consolidated
Statements of Shareholders’ Equity and Comprehensive Income (Loss)


(Expressed in
thousands of Canadian dollars, except share amounts)


 


Years ended March 31,
2008, 2007 and 2006


 


	
   

  	
   

  	
  Common

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Accumulated 

  other

  	
   

  	
  Total

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  shares

  	
   

  	
  Share

  	
   

  	
  Other equity

  	
   

  	
  Additional paid

  	
   

  	
  Accumulated

  	
   

  	
  comprehensive

  	
   

  	
  shareholders’

  	
   

  	
  Comprehensive

  	
   

  
	
   

  	
   

  	
  (note 22(c))

  	
   

  	
  capital

  	
   

  	
  instruments

  	
   

  	
  in capital

  	
   

  	
  deficit

  	
   

  	
  income

  	
   

  	
  equity

  	
   

  	
  loss

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance, March 31, 2005

  	
   

  	
  21,132,596

  	
   

  	
  $

  	
  230,379

  	
   

  	
  $

  	
  2,078

  	
   

  	
  $

  	
  2,919

  	
   

  	
  $

  	
  (211,698

  	
  )

  	
  $

  	
  —

  	
   

  	
  $

  	
  23,678

  	
   

  	
  $

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Issue of performance share units for no
  additional consideration

  	
   

  	
  122,197

  	
   

  	
  801

  	
   

  	
  (801

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Stock-based compensation

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  1,082

  	
   

  	
  1,852

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  2,934

  	
   

  	
  —

  	
   

  
	
  Net loss

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (16,860

  	
  )

  	
  —

  	
   

  	
  (16,860

  	
  )

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance, March 31, 2006

  	
   

  	
  21,254,793

  	
   

  	
  231,180

  	
   

  	
  2,359

  	
   

  	
  4,771

  	
   

  	
  (228,558

  	
  )

  	
  —

  	
   

  	
  9,752

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Shares issued for intellectual property

  	
   

  	
  174,029

  	
   

  	
  602

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  602

  	
   

  	
  —

  	
   

  
	
  Issue of common shares on exercise of
  performance share units

  	
   

  	
  81,052

  	
   

  	
  555

  	
   

  	
  (555

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Shares issued for settlement of accrued
  interest

  	
   

  	
  114,720

  	
   

  	
  498

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  498

  	
   

  	
  —

  	
   

  
	
  Share issue costs

  	
   

  	
  —

  	
   

  	
  (5

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (5

  	
  )

  	
  —

  	
   

  
	
  Value of warrants issued with long-term
  debt and conversion options

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  8,989

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  8,989

  	
   

  	
  —

  	
   

  
	
  Stock-based compensation

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  1,559

  	
   

  	
  530

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  2,089

  	
   

  	
  —

  	
   

  
	
  Net loss

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (11,307

  	
  )

  	
  —

  	
   

  	
  (11,307

  	
  )

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance, March 31, 2007

  	
   

  	
  21,624,594

  	
   

  	
  232,830

  	
   

  	
  12,352

  	
   

  	
  5,301

  	
   

  	
  (239,865

  	
  )

  	
  —

  	
   

  	
  10,618

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Transitional adjustment on adoption of new
  accounting standards for financial instruments, net of tax of $3,370
  (note 3(a))

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  3,483

  	
   

  	
  17,032

  	
   

  	
  20,515

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance, April 1, 2007

  	
   

  	
  21,624,594

  	
   

  	
  232,830

  	
   

  	
  12,352

  	
   

  	
  5,301

  	
   

  	
  (236,382

  	
  )

  	
  17,032

  	
   

  	
  31,133

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Issue of common shares on exercise of stock
  options

  	
   

  	
  232,024

  	
   

  	
  1,967

  	
   

  	
  —

  	
   

  	
  (762

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  1,205

  	
   

  	
  —

  	
   

  
	
  Issue of common shares on exercise of
  performance share units

  	
   

  	
  60,383

  	
   

  	
  390

  	
   

  	
  (390

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Issue of common shares on conversion of
  subordinated convertible notes and settlement of accrued interest (note 10(c))

  	
   

  	
  4,831,801

  	
   

  	
  21,759

  	
   

  	
  (7,569

  	
  )

  	
  —

  	
   

  	
  (763

  	
  )

  	
  —

  	
   

  	
  13,427

  	
   

  	
  —

  	
   

  
	
  Issue of common shares on exercise of
  warrants

  	
   

  	
  668,191

  	
   

  	
  1,420

  	
   

  	
  (1,420

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Share issue costs

  	
   

  	
  —

  	
   

  	
  (164

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (164

  	
  )

  	
  —

  	
   

  
	
  Stock-based compensation

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  106

  	
   

  	
  558

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  664

  	
   

  	
  —

  	
   

  
	
  Unrealized gain on available for sale
  securities, net of tax of $182

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  645

  	
   

  	
  645

  	
   

  	
  645

  	
   

  
	
  Reclassification of net realized gains on
  available for sale securities to net loss, net of tax of $1,345

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (6,799

  	
  )

  	
  (6,799

  	
  )

  	
  (6,799

  	
  )

  
	
  Net loss

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (10,315

  	
  )

  	
  —

  	
   

  	
  (10,315

  	
  )

  	
  (10,315

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance, March 31, 2008

  	
   

  	
  27,416,993

  	
   

  	
  $

  	
  258,202

  	
   

  	
  $

  	
  3,079

  	
   

  	
  $

  	
  5,097

  	
   

  	
  $

  	
  (247,460

  	
  )

  	
  $

  	
  10,878

  	
   

  	
  $

  	
  29,796

  	
   

  	
  $

  	
  (16,469

  	
  )

  



 


See accompanying notes to consolidated financial statements.


 
















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Cash Flows


(Expressed in thousands of Canadian
dollars)


 


Years ended March 31,
2008, 2007 and 2006


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash flows
  from operations:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss for the
  year

  	
   

  	
  $

  	
  (10,315

  	
  )

  	
  $

  	
  (11,307

  	
  )

  	
  $

  	
  (16,860

  	
  )

  
	
  Items not
  involving cash:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Depreciation
  and amortization

  	
   

  	
  1,550

  	
   

  	
  1,410

  	
   

  	
  2,752

  	
   

  
	
  Stock-based
  compensation expense

  	
   

  	
  664

  	
   

  	
  2,089

  	
   

  	
  2,934

  	
   

  
	
  Accretion of
  TPC warrants

  	
   

  	
  —

  	
   

  	
  571

  	
   

  	
  1,143

  	
   

  
	
  Future
  income tax recovery

  	
   

  	
  (4,691

  	
  )

  	
  (3,455

  	
  )

  	
  —

  	
   

  
	
  Change in
  deferred lease inducements

  	
   

  	
  (251

  	
  )

  	
  (164

  	
  )

  	
  (154

  	
  )

  
	
  Gain on sale
  of long-term investments

  	
   

  	
  (10,659

  	
  )

  	
  (8,120

  	
  )

  	
  —

  	
   

  
	
  Joint
  Venture Partners’ share of net income from joint ventures

  	
   

  	
  5,564

  	
   

  	
  6,057

  	
   

  	
  1,593

  	
   

  
	
  Interest on
  long-term debt and amortization of discount

  	
   

  	
  690

  	
   

  	
  1,663

  	
   

  	
  —

  	
   

  
	
  Other

  	
   

  	
  (146

  	
  )

  	
  (69

  	
  )

  	
  (69

  	
  )

  
	
  Changes in
  non-cash operating working capital:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accounts
  receivable

  	
   

  	
  3,853

  	
   

  	
  (4,744

  	
  )

  	
  (97

  	
  )

  
	
  Inventories

  	
   

  	
  (6,204

  	
  )

  	
  (1,963

  	
  )

  	
  629

  	
   

  
	
  Prepaid
  expenses

  	
   

  	
  (250

  	
  )

  	
  (62

  	
  )

  	
  (169

  	
  )

  
	
  Accounts
  payable and accrued liabilities

  	
   

  	
  2,343

  	
   

  	
  2,353

  	
   

  	
  (1,197

  	
  )

  
	
  Deferred
  revenue

  	
   

  	
  (133

  	
  )

  	
  129

  	
   

  	
  (1,214

  	
  )

  
	
  Warranty
  liability

  	
   

  	
  2,186

  	
   

  	
  1,201

  	
   

  	
  (959

  	
  )

  
	
   

  	
   

  	
  (15,799

  	
  )

  	
  (14,411

  	
  )

  	
  (11,668

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash flows from investments:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Purchase of equipment, furniture and
  leasehold improvements

  	
   

  	
  (1,690

  	
  )

  	
  (1,175

  	
  )

  	
  (396

  	
  )

  
	
  Proceeds on disposition of equipment,
  furniture and leasehold improvements

  	
   

  	
  609

  	
   

  	
  12

  	
   

  	
  93

  	
   

  
	
  Sale (purchase) of short-term investments,
  net

  	
   

  	
  6,725

  	
   

  	
  (14,593

  	
  )

  	
  13,185

  	
   

  
	
  Purchase of long-term investments

  	
   

  	
  —

  	
   

  	
  (51

  	
  )

  	
  —

  	
   

  
	
  Disposition of long-term investments

  	
   

  	
  17,977

  	
   

  	
  605

  	
   

  	
  —

  	
   

  
	
  Loan receivable

  	
   

  	
  (6,774

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  
	
  Sale of interest in subsidiary

  	
   

  	
  —

  	
   

  	
  4,198

  	
   

  	
  —

  	
   

  
	
  Contributions from joint venture partner

  	
   

  	
  425

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Deferred transaction costs incurred

  	
   

  	
  —

  	
   

  	
  (764

  	
  )

  	
  —

  	
   

  
	
   

  	
   

  	
  17,272

  	
   

  	
  (11,768

  	
  )

  	
  12,882

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash flows from financing:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Issue of demand instalment loan

  	
   

  	
  5,000

  	
   

  	
  —

  	
   

  	
  1,235

  	
   

  
	
  Repayment of demand instalment loan

  	
   

  	
  (837

  	
  )

  	
  (894

  	
  )

  	
  (981

  	
  )

  
	
  Increase in short-term debt

  	
   

  	
  5,995

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Increase in bank loan

  	
   

  	
  —

  	
   

  	
  7,346

  	
   

  	
  —

  	
   

  
	
  Repayment of bank loan

  	
   

  	
  (6,741

  	
  )

  	
  (605

  	
  )

  	
  —

  	
   

  
	
  Repayment of other long-term debt

  	
   

  	
  (73

  	
  )

  	
  (185

  	
  )

  	
  (742

  	
  )

  
	
  Issuance of convertible notes

  	
   

  	
  —

  	
   

  	
  22,092

  	
   

  	
  —

  	
   

  
	
  Finance costs incurred

  	
   

  	
  —

  	
   

  	
  (915

  	
  )

  	
  —

  	
   

  
	
  Shares issued for cash

  	
   

  	
  1,205

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Share issue costs

  	
   

  	
  (164

  	
  )

  	
  (5

  	
  )

  	
  —

  	
   

  
	
   

  	
   

  	
  4,385

  	
   

  	
  26,834

  	
   

  	
  (488

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Increase in cash and cash equivalents

  	
   

  	
  5,858

  	
   

  	
  656

  	
   

  	
  726

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash equivalents, beginning of
  year

  	
   

  	
  1,702

  	
   

  	
  1,046

  	
   

  	
  320

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash equivalents, end of year

  	
   

  	
  $

  	
  7,560

  	
   

  	
  $

  	
  1,702

  	
   

  	
  $

  	
  1,046

  	
   

  



 

















 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Supplementary information:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Interest paid

  	
   

  	
  $

  	
  473

  	
   

  	
  $

  	
  379

  	
   

  	
  $

  	
  222

  	
   

  
	
  Taxes paid

  	
   

  	
  479

  	
   

  	
  15

  	
   

  	
  —

  	
   

  
	
  Non-cash transactions:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Purchase of equipment, furniture and
  leasehold improvements by assumption of capital lease obligation

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  260

  	
   

  
	
  Shares issued on exercise of performance
  share units

  	
   

  	
  390

  	
   

  	
  555

  	
   

  	
  801

  	
   

  
	
  Shares issued for acquisition of
  intellectual property

  	
   

  	
  —

  	
   

  	
  602

  	
   

  	
  —

  	
   

  
	
  Shares issued on conversion of debt (note
  10(c))

  	
   

  	
  21,115

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Shares issued for settlement of interest on
  convertible notes (note 10(c))

  	
   

  	
  644

  	
   

  	
  498

  	
   

  	
  —

  	
   

  
	
  Shares issued on cashless exercise of
  warrants

  	
   

  	
  1,420

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
											



 


See accompanying notes to consolidated
financial statements.


 

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements


(Expressed in thousands of Canadian
dollars except share and per share amounts)


 


Years ended March 31, 2008, 2007 and
2006


 


1.                         Nature
of operations:


 


Westport
Innovations Inc. (the “Company”) was incorporated under the Business
Corporations Act (Alberta) on March 20, 1995.


 


The
Company is involved in the research, development and commercialization of
environmental technologies, including high-pressure direct injection (“HPDI”)
combustion technology that allows diesel engines to operate on cleaner burning
gaseous fuels such as natural gas without sacrificing performance or fuel
economy.  The Company also has a joint
venture interest in Cummins Westport Inc. (“CWI”), a joint venture with Cummins
Inc. (“Cummins”), formed in 2001 (note 18(a)). 
CWI develops, supports and markets a comprehensive product line of
low-emission, high performance engines and ancillary products using proprietary
intellectual property developed by the Company and Cummins.


 


These
consolidated financial statements have been presented on a going concern basis,
which assumes the realization of assets and the settlement of liabilities in
the normal course of operations.  To
date, the Company has financed its operations primarily by equity and debt
financing and margins on the sale of products and parts.  If the Company does not have sufficient
funding from internal or external sources, it may be required to delay
commercialization efforts or to delay, reduce or eliminate certain research and
development programs and forego acquisition of certain inventory or
equipment.  The future operations of the
Company are dependent upon its ability to produce, distribute and sell an
economically viable product to attain profitable operations.


 


2.                         Significant
accounting policies:


 


(a)                   Basis of presentation:


 


The consolidated financial
statements include the accounts of the Company, its wholly owned subsidiaries
and variable interest entities for which the Company is considered the primary
beneficiary.  Intercompany balances and
transactions have been eliminated.


 


Interests in variable interest
entities are consolidated by the Company if the Company is the primary
beneficiary.  The Company has identified
CWI and BTIC Westport Inc. (“BWI”) as variable interest entities and determined
that the Company is the primary beneficiary. 
Accordingly, the Company has consolidated these entities.  The other 50% interest held by the Company’s
joint venture partners is reflected as “Joint Venture Partners’ share of net
assets of joint ventures” in these consolidated financial statements.


 


These financial statements are
presented in accordance with Canadian generally accepted accounting
principles.  Material differences between
Canadian generally accepted accounting principles and those generally accepted
in the United States are disclosed in note 23.


 


(b)                  Cash and cash equivalents:


 


Cash and cash equivalents
includes cash and term deposits with maturities of ninety days or less when
acquired.


 

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements


(Expressed in thousands of Canadian
dollars except share and per share amounts)


 


Years ended March 31, 2008, 2007 and
2006


 


2.                         Significant
accounting policies (continued):


 


(c)                   Short-term investments:


 


Short-term investments,
consisting of investment grade commercial paper, banker acceptances, bearer
deposit notes, guaranteed investment certificates and other term deposits are
considered available for sale and recorded at fair value with changes in fair
value recognized in accumulated other comprehensive income.


 


(d)                  Inventories:


 


The Company’s inventory consists
of the Company’s fuel system products (finished goods), work-in-progress and
parts.  Inventories are recorded at the
lower of cost and net realizable value. 
Cost is determined based on the lower of standard cost which
approximates weighted average cost and net
realizable value.  The cost of fuel system product inventories
and work-in-progress include materials, labour and production overhead.  An inventory obsolescence provision is
provided to the extent cost of inventory exceeds net realizable value.  In establishing the amount of inventory
obsolescence provision, management estimates the likelihood that inventory carrying
values will be affected by changes in market demand and technology, which would
make inventory on hand obsolete.


 


(e)                   Equipment, furniture and leasehold
improvements:


 


Equipment, furniture and
leasehold improvements are stated at cost. 
Depreciation is provided as follows:


 


	
  Assets

  	
   

  	
  Basis

  	
   

  	
  Rate

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Computer
  equipment and software

  	
   

  	
  Straight-line

  	
   

  	
  3
  years

  
	
  Furniture and
  fixtures

  	
   

  	
  Straight-line

  	
   

  	
  5
  years

  
	
  Machinery and
  equipment

  	
   

  	
  Straight-line

  	
   

  	
  8
  years

  
	
  Leasehold
  improvements

  	
   

  	
  Straight-line

  	
   

  	
  Lease
  term

  



 


(f)                     Long-term investments:


 


Long-term investments are
designated as available for sale and recorded at their fair value to the extent
a reliable fair value is determinable. 
Changes in fair value are recognized in accumulated other comprehensive
income.  A decline in value that is
considered other than temporary is recognized in net loss for the period.


 


(g)                  Research and development costs:


 


Research costs are expensed as
incurred and are recorded net of government funding received or
receivable.  Development costs are
deferred only if they meet certain stringent criteria generally related to
technical feasibility, market definition and financing availability for future
development; otherwise they are expensed as incurred.  Related investment tax credits reduce
research and development expenses in the same year in which the related
expenditures are charged to earnings, provided there is reasonable assurance
the benefits will be realized.  As at March 31,
2008 and 2007, no development costs had been deferred.


 

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements


(Expressed in thousands of Canadian
dollars except share and per share amounts)


 


Years ended March 31, 2008, 2007 and
2006


 


2.                         Significant
accounting policies (continued):


 


(h)                  Government assistance:


 


The Company periodically applies
for financial assistance under available government incentive programs which is
recorded in the period it is received or receivable.  Government assistance relating to the
purchase of equipment, furniture and leasehold improvements is reflected as a
reduction of the cost of such assets. 
Government assistance related to research and development activities is
recorded as a reduction of the related expenditures.


 


(i)                      Intellectual property:


 


Intellectual property, consisting
primarily of the cost of acquired patents, licenses and other intellectual
property, is amortized over their estimated useful lives, which currently does
not exceed seven years.


 


(j)                      Impairment of long-lived assets:


 


The Company reviews for
impairment of long-lived assets, including equipment, furniture, and leasehold
improvements and intellectual property, to be held and used whenever events or
changes in circumstances indicate that the carrying amount of the assets may
not be recoverable.  If such conditions
exist, assets are considered impaired if the sum of the undiscounted expected
future cash flows expected to result from the use and eventual disposition of
an asset is less than its carrying amount. 
An impairment loss is measured at the amount by which the carrying
amount of the asset exceeds its fair value. 
When quoted market prices are not available, the Company uses the
expected future cash flows discounted at a rate commensurate with the risks
associated with the recovery of the asset as an estimate of fair value.


 


(k)                   Warranty liability:


 


Estimated warranty costs are
recognized at the time the Company sells its products, and are included in cost
of revenue.  The Company provides
warranty coverage on products sold for a period of two years from the date the
products are put into service by customers. 
Warranty liability represents the Company’s best estimate of warranty
costs expected to be incurred during the warranty period.  Furthermore, the current portion of warranty
liability represents the Company’s best estimate of the costs to be incurred in
the next twelve month period.  The
Company uses historical failure rates and cost to repair defective products
together with information on known product issues to estimate the warranty
liability.  The ultimate amount payable
by the Company and the timing will depend on actual failure rates and cost to
repair failures of its products.


 


(l)                      Extended warranty:


 


The Company sells extended
warranty contracts which provide coverage in addition to the basic two year
coverage.  Proceeds from the sale of
these contracts are deferred and amortized over the extended warranty period
commencing at the end of the basic warranty period.  On a periodic basis, management reviews the
estimated warranty costs expected to be incurred related to these contracts and
recognizes a loss to the extent such costs exceed the related deferred revenue.


 

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements


(Expressed in thousands of Canadian
dollars except share and per share amounts)


 


Years ended March 31, 2008, 2007 and
2006


 


2.                         Significant
accounting policies (continued):


 


(m)                Revenue recognition:


 


Product and parts revenue is
recognized, net of estimated costs of returns, allowances, and sales incentives,
when the products are shipped and title passes to the customers.  Revenue also includes fees earned from
performing research and development activities for third parties, as well as
technology licenses fees from third parties. 
Revenue from research and development activities is recognized as the
services are performed.  Revenue from
technology license fees is recognized over the duration of the licensing
agreement.  Amounts received in advance
of the revenue recognition criteria being met are recorded as deferred revenue.


 


(n)                  Income taxes:


 


The Company uses the asset and
liability method of accounting for income taxes.  Under this method, future income tax assets
and liabilities are determined based on temporary differences between the
accounting and tax basis of the assets and liabilities and for loss carry
forwards, and are measured using the tax rates expected to apply when these tax
assets and liabilities are recovered or settled.  The effect on future tax assets and
liabilities of a change in tax rate is recognized in income in the period that
includes the substantive enactment date. 
A valuation allowance is recorded against any future income tax asset if
it is not “more likely than not” that the benefit of these assets will be
realized.


 


(o)                  Stock-based compensation plans:


 


The Company has a stock option
plan, which is described in note 14(a). 
The Company accounts for stock-based compensation related to stock
options granted to employees and directors using the fair value method and recognizes
stock-based compensation in results from operations over the vesting
period.  The Company has an employee
share purchase plan, which is described in note 14(b).  The Company matches the employees’
contribution and recognizes this cost as an expense in the period it is
incurred.


 


The Company has a Performance
Share Unit (“PSU”) Plan as described in note 14(c).  The value of the units is calculated based on
the market price of the Company’s common shares on the date of grant and is
recorded as compensation expense in the period earned, which generally is the
period over which the PSU’s vest.


 


(p)                  Post-retirement benefits:


 


The Company has implemented a
group registered retirement savings plan (“RRSP”) in which full-time employees
of the Company are eligible to participate. 
Eligible employees may make contributions up to their personal eligible
contribution room under the Canadian Income Tax Act.  The Company contributes up to a maximum
combined total of 5% of the employee’s regular base pay to the RRSP and/or the
employee share purchase plan and recognizes this cost as an expense in the
period it is incurred.  During the year
ended March 31, 2008, the Company recognized $418 (2007 - $356; 2006 -
$317) of expense associated with the RRSP.


 

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements


(Expressed in thousands of Canadian
dollars except share and per share amounts)


 


Years ended March 31, 2008, 2007 and
2006


 


2.                         Significant
accounting policies (continued):


 


(q)                  Foreign currency:


 


Monetary items denominated in
foreign currency are translated into Canadian dollars at exchange rates in
effect at the balance sheet date and non-monetary items are translated at rates
of exchange in effect when the assets were acquired or obligations incurred.  Revenue and expenses are translated at rates
in effect at the time of the transactions. 
Foreign exchange gains and losses are included in results from
operations.


 


(r)                     Use of estimates:


 


The preparation of financial
statements requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent
liabilities at the date of the financial statements, and the reported amounts
of revenue and expenses during the period. 
Significant areas requiring the use of estimates include amortization of
equipment, furniture and leasehold improvements, the determination of future
cash flows and discount rates for impairment of long-lived assets, valuation of
long-term investments, valuation of future income tax assets and the accrual of
warranty liability.  Actual results could
differ from estimates used in the preparation of the consolidated financial
statements.


 


(s)                   Loss per share:


 


Basic loss per share is
calculated using the weighted average number of shares outstanding during the
period.  Diluted loss per share is
computed similarly to basic loss per share, except that the weighted average
number of shares outstanding are increased to include additional shares from
the assumed exercise of conversion options, stock options, warrants, and
performance share units, if dilutive. 
For stock options, warrants and performance units, the number of
additional shares is calculated by assuming that outstanding stock options, warrants,
and performance share units were exercised at the beginning of the year or when
granted and that the proceeds from such exercises were used to repurchase
shares of common stock at the average market price during the period.  For conversion options, the Company uses the
if-converted method which assumes that the conversion of options are exercised
at the beginning of the year or when granted. 
For all periods presented, diluted loss per share does not differ from
basic loss per share as the impact of dilutive securities is anti-dilutive.


 


3.                         Accounting
changes:


 


(a)                   Adoption of new accounting standards:


 


On April 1,
2007, the Company adopted the Canadian Institute of Chartered Accountants
(“CICA”) Handbook Section 1530, Comprehensive Income;
Section 3251, Equity; Section 3855,
Financial Instruments - Recognition and Measurement;
Section 3861, Financial Instruments -
Disclosure and Presentation; and Section 3865, Hedges.  These new
standards resulted in changes in the accounting for available for sale
investments, other financial instruments, and hedges as well as recognition of
certain transitional adjustments that have been recorded for available for sale
investments and deferred financing costs. 
In accordance with the transitional provisions, prior periods have not
been restated.  The principal changes
resulting from these new standards are described below:


 

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements


(Expressed in thousands of Canadian
dollars except share and per share amounts)


 


Years ended March 31, 2008, 2007 and
2006


 


3.                         Accounting
changes (continued):


 


(a)                   Adoption of new accounting standards
(continued):


 


Comprehensive
Income:


 


Section 1530 establishes standards for
reporting and presenting comprehensive income. 
Comprehensive income, composed of net income and other comprehensive
income, is defined as the change in shareholders’ equity from transactions and
other events from non-owner sources. 
Other comprehensive income for the Company includes unrealized gains and
losses on available for sale securities. 
The components of comprehensive income are disclosed in the consolidated
statements of shareholders’ equity and comprehensive income (loss).  Cumulative changes in other comprehensive
income (loss) are included in accumulated other comprehensive income (“AOCI”)
which is presented as a new category in shareholders’ equity.


 


Financial
Instruments:


 


Under Section 3855, financial assets and
liabilities, including derivative instruments, are initially recognized and
subsequently measured based on their classification as held-for-trading,
available for sale financial assets, held-to-maturity, loans and receivables,
or other financial liabilities as follows:


 


·                  Held-for-trading
financial instruments are measured at their fair value with changes in fair
value recognized in the consolidated statement of operations for the period.


 


·                  Available
for sale financial assets are measured at their fair value and changes in fair
value are included in other comprehensive income until the asset is removed
from the balance sheet.


 


·                  Held-to-maturity
investments, loans and receivables and other financial liabilities are measured
at amortized cost using the effective interest rate method.


 


·                  Derivative
instruments, including embedded derivatives, are measured at their fair value
with changes in fair value recognized in the consolidated statement of
operations for the period unless the instrument is a cash flow hedge and hedge
accounting applies in which case changes in fair value are recognized in other
comprehensive income.


 


Upon adoption of this new standard, the Company designated
its short and long-term investments as available for sale financial assets and
recognized these investments at their fair value to the extent a reliable fair
value was determinable.  On April 1,
2007, the Company recorded these investments at their fair value of
$20,402.  The net, after tax, adjustment
to AOCI in shareholders’ equity was $17,032. 
The Company also recognized an adjustment to opening retained earnings
of $3,370 related to the tax benefit of prior year loss carry forwards
recognized to offset the future tax liability generated by the adjustment to
the accounting basis of the investments. 
Investments in private companies are recorded at cost as a reliable fair
value is not available for such investments. 
When the investments are sold or otherwise disposed of, gains or losses
will be recorded in the consolidated statement of operations.


 


Cash and cash equivalents are classified as
held-for-trading measured at fair value and accounts and notes receivable are
classified as loans and receivables measured at amortized cost.


 


Accounts payable and accrued liabilities, demand instalment
loan, short-term and long-term debt are classified as other financial
liabilities and are measured at amortized cost.


 

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements


(Expressed in thousands of Canadian
dollars except share and per share amounts)


 


Years ended March 31, 2008, 2007 and
2006


 


3.                         Accounting
changes (continued):


 


(a)                   Adoption of new accounting standards
(continued):


 


Financial
Instruments (continued):


 


As permitted by Section 3855, the Company has elected
to defer and amortize transaction costs associated with the issuance of
financial instruments.  Accordingly, on
adoption of Section 3855, transaction costs of $146 associated with the
investment in Wild River Resources Ltd. were reclassified to long-term
investments and transaction costs associated with long-term debt of $774 were
deducted from the proceeds of the debt on initial recognition and were
amortized as interest expense using the effective interest rate method over the
term of the related debt.  Prior to April 1,
2007, the Company amortized transaction costs associated with long-term debt on
a straight-line basis.  Accordingly, on
adoption of Section 3855, the Company recognized a reduction in opening
deficit of $113 for the cumulative effect of the change in amortization of
transaction costs associated with long-term debt.


 


Hedges:


 


Section 3865 specifies the circumstances
under which hedge accounting is permissible and how hedge accounting may be
performed.  The Company is not currently
engaged in hedging activities.  Accordingly,
adoption of this new standard had no impact on the consolidated financial
statements.


 


(b)                  Future accounting changes:


 


Financial instruments:


 


In
December 2006, the CICA issued Section 3862, Financial
instruments - Disclosures and Section 3863, Financial Instruments - Disclosures and Financial
Instruments - Presentation. 
Generally, the new sections replace Section 3861, Financial Instruments - Disclosure and Presentation.  These sections establish standards for the
presentation of financial instruments and non-financial derivatives and
identify the information that should be disclosed about them.


 


Both sections are effective for the Company on
April 1, 2008 and are expected to result in more extensive disclosures in
the Company’s annual and interim financial statements.


 


Capital disclosures:


 


In December 2006,
the CICA issued Section 1535 of the CICA Handbook, Capital
Disclosures, which establishes standards for disclosing information
about an entity’s capital and how it is managed.  This section is effective for the Company on April 1,
2008 and is expected to result in more extensive disclosures in the Company’s
annual and interim financial statements.


 


Inventory:


 


In June 2007,
the CICA issued Section 3031 of the CICA Handbook, Inventories,
which establishes standards for the determination of inventory cost and its
subsequent recognition as an expense, including any write-down to net
realizable value.  In certain
circumstances, the new section will also permit the reversal of previous
write-downs.  This section is effective
for the Company on April 1, 2008. 
The Company is currently evaluating the impact of the adoption of this
new standard on its consolidated financial statements.


 

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements


(Expressed in thousands of Canadian
dollars except share and per share amounts)


 


Years ended March 31, 2008, 2007 and
2006


 


3.                         Accounting
changes (continued):


 


(b)                  Future accounting changes (continued):


 


Goodwill and Intangible Assets:


 


In February 2008,
the CICA issued Section 3064, Goodwill and Intangible
Assets, which replaces Section 3062, Goodwill and
Other Intangible Assets and Section 3450, Research and
Development Costs.  Section 3064
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and the
recognition, measurement and presentation of intangible assets.  Standards concerning goodwill are unchanged
from the standards included in the previous Section 3062.  This section is effective for the Company on April 1,
2008.  The Company is currently
evaluating the impact of the adoption of this new standard on the recognition,
measurement, presentation and disclosure of its intangible assets in the
consolidated financial statements.


 


Financial Statement Presentation:


 


In May 2007,
the Accounting Standards Board (“AcSB”) amended Section 1400, General Standards of Financial Statement Presentation, to
change the guidance related to management’s responsibility to assess the ability
of the entity to continue as a going concern. 
Management is required to make an assessment of an entity’s ability to
continue as a going concern and should take into account all available
information about the future, which is at least, but is not limited to, 12
months from the balance sheet date. 
Disclosure is required of material uncertainties related to events or
conditions that may cast significant doubt upon the entity’s ability to
continue as a going concern.  These
amendments are effective for the Company on April 1, 2008.  These standards may impact our disclosure but
is not expected to impact our financial position, results of operations or cash
flows.


 


International Financial Reporting
Standards:


 


In 2006, Canada’s Accounting Standards Board
ratified a strategic plan that will result in Canadian GAAP, as used by
publicly accountable enterprises, being fully converged with International
Financial Reporting Standards (“IFRS”) as issued by the International
Accounting Standards Board over a transitional period to be completed by
2011.  The Company will be required to
report under IFRS effective for interim and annual financial statements
relating to its fiscal year beginning on April 1, 2011.


 


Adoption of IFRS
will impact all areas of financial accounting and reporting.  The
Company is in the process of assessing the impacts of the Canadian convergence
initiative.


 


4.                         Inventories:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Finished goods

  	
   

  	
  $

  	
  4,407

  	
   

  	
  $

  	
  —

  	
   

  
	
  Parts

  	
   

  	
  4,136

  	
   

  	
  2,360

  	
   

  
	
  Work-in-process

  	
   

  	
  477

  	
   

  	
  456

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  9,020

  	
   

  	
  $

  	
  2,816

  	
   

  



 
















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years ended March 31, 2008, 2007 and 2006


 


5.                         Long-term
investments:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Clean Energy Fuels Corp. (a)

  	
   

  	
  $

  	
  18,693

  	
   

  	
  $

  	
  9,134

  	
   

  
	
  Wild River Resources Ltd. (b)

  	
   

  	
  41

  	
   

  	
  3,981

  	
   

  
	
  Prometheus Energy Co. (c)

  	
   

  	
  20

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  18,754

  	
   

  	
  $

  	
  13,115

  	
   

  



 


(a)                    As at March 31, 2008, the Company owned
an approximate 3% (2007 - 6%) interest in Clean Energy Fuels Corp. (“CEFC”), an
owner and operator of natural gas refueling facilities.  During the year ended March 31, 2008,
the Company sold 746,275 shares of CEFC for net proceeds of $11,236 resulting
in a gain on sale of $8,005.  As at March 31,
2008, the Company owned 1,363,071 shares of CEFC which have been valued at a
closing market price of $13.71 per share (US$13.36 per share) on March 31,
2008.  As at March 31, 2007, prior
to adoption of Section 3855 (note 3(a)), this investment was carried at
cost.


 


(b)                   The Company has an approximate 0.2% (2007 -
15.86%) interest in Wild River Resources Ltd. (“WRRL”) (formerly Westport
Research Inc. (“WRI”), a wholly owned subsidiary of the Company prior to June 13,
2006), an oil and gas company.  On June 13,
2006, the Company entered into an agreement with Matco Capital Ltd. (“Matco”),
an unrelated party, to reorganize WRI. 
As part of the reorganization, the Company substantially transferred all
of the assets, liabilities and operations of WRI to another wholly owned subsidiary
of the Company which carries on the business previously carried on by WRI.  Pursuant to the agreement with Matco, the
Company sold 45% of its investment in WRI to Matco for cash consideration.  This transaction resulted in a net gain of
$3,891.  Subsequently, on February 8,
2007, WRI, renamed WRRL, issued shares to third parties further diluting the
Company’s interest from 55% to 17.38%. 
This transaction resulted in a net dilution gain of $4,004.  The Company sold a further 1.52% interest in
WRRL in 2007 for a gain of $225 reducing its investment to 15.86% of the
outstanding shares of WRRL.  Effective February 8,
2007, the Company no longer controlled WRRL. 
Accordingly, the Company no longer consolidates WRRL and accounts for
this investment on a cost basis.


 


On adoption of Section 3855
on April 1, 2007, the Company reclassified the remaining balance of the
deferred charges associated with this investment of $146 to the cost base of
WRRL.  During the year ended March 31,
2008, the Company disposed of substantially all of its shares in WRRL for
$6,741, resulting in a gain on disposal of $2,654.  The proceeds from the sale were used to repay
a bank loan of $6,741 (note 10(b)).  As
at March 31, 2008, the Company carries this investment at cost as the Company
cannot determine with sufficient reliability the fair value of WRRL due to the
absence of a readily available market for the shares of WRRL.


 


(c)                    The Company owns 147,072 shares of Prometheus
Energy Co., a public company that produces, sells and distributes liquid
natural gas, which have been valued at the closing market price of $0.13 per
share on March 31, 2008.


 

















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years
ended March 31, 2008, 2007 and 2006


 


6.                         Equipment,
furniture and leasehold improvements:


 


	
  2008

  	
   

  	
  Cost

  	
   

  	
  Accumulated

  amortization

  	
   

  	
  Net book

  value

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Computer equipment and software

  	
   

  	
  $

  	
  5,670

  	
   

  	
  $

  	
  5,035

  	
   

  	
  $

  	
  635

  	
   

  
	
  Furniture and fixtures

  	
   

  	
  1,307

  	
   

  	
  1,090

  	
   

  	
  217

  	
   

  
	
  Machinery and equipment

  	
   

  	
  17,434

  	
   

  	
  14,984

  	
   

  	
  2,450

  	
   

  
	
  Leasehold improvements

  	
   

  	
  8,329

  	
   

  	
  7,946

  	
   

  	
  383

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  32,740

  	
   

  	
  $

  	
  29,055

  	
   

  	
  $

  	
  3,685

  	
   

  



 


	
  2007

  	
   

  	
  Cost

  	
   

  	
  Accumulated 

  amortization

  	
   

  	
  Net book

  value

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Computer equipment and software

  	
   

  	
  $

  	
  5,142

  	
   

  	
  $

  	
  4,742

  	
   

  	
  $

  	
  400

  	
   

  
	
  Furniture and fixtures

  	
   

  	
  1,182

  	
   

  	
  1,067

  	
   

  	
  115

  	
   

  
	
  Machinery and equipment

  	
   

  	
  19,882

  	
   

  	
  16,906

  	
   

  	
  2,976

  	
   

  
	
  Leasehold improvements

  	
   

  	
  8,149

  	
   

  	
  7,777

  	
   

  	
  372

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  34,355

  	
   

  	
  $

  	
  30,492

  	
   

  	
  $

  	
  3,863

  	
   

  



 


As
at March 31, 2008, equipment with a cost of $224 (2007 - $224) and a net
book value of $34 (2007 - $101) is held under capital lease.


 


7.                         Intellectual
property:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cost

  	
   

  	
  $

  	
  4,321

  	
   

  	
  $

  	
  4,321

  	
   

  
	
  Accumulated amortization

  	
   

  	
  (3,747

  	
  )

  	
  (3,602

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  574

  	
   

  	
  $

  	
  719

  	
   

  



 


The
intellectual property will be amortized over its expected remaining useful life
of four years at an annual amortization expense of $145.


 


8.                         Demand
instalment loan:


 


The Company has a credit
facility for maximum borrowings of $13,000. 
Borrowings may be drawn in the form of demand instalment loans, lease
financing, letters of credit, foreign exchange contracts, corporate credit
cards and operating lines of credit. 
Outstanding amounts of the demand instalment loans drawn under this credit
facility bear interest at prime less 0.25% for borrowings up to $5,000 with
further rate reductions for amounts in excess of $5,000.  The principal amount is repayable over a
60-month period.  At March 31, 2008,
the outstanding amount payable of $5,776 is included in current liabilities as
it is repayable on demand by the bank.


 

















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years
ended March 31, 2008, 2007 and 2006


 


9.                         Short-term
debt:


 


The
Company entered into an agreement with Clean Energy Finance, LLC (“CEF”), a
wholly owned subsidiary of CEFC, whereby CEF may advance the Company up to
US$6,000 to produce approximately 75 LNG systems.  The loan is non-interest bearing, unsecured
and repayable on receipt of proceeds from the sale of these units.  As at March 31, 2008, $5,995 (US$5,840)
has been advanced to the Company.


 


10.                  Long-term
debt:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Capital lease obligations (a)

  	
   

  	
  $

  	
  62

  	
   

  	
  $

  	
  135

  	
   

  
	
  Bank loan (b)

  	
   

  	
  —

  	
   

  	
  6,741

  	
   

  
	
  Subordinated convertible notes (c)

  	
   

  	
  —

  	
   

  	
  13,721

  	
   

  
	
   

  	
   

  	
  62

  	
   

  	
  20,597

  	
   

  
	
  Current portion

  	
   

  	
  54

  	
   

  	
  6,816

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  8

  	
   

  	
  $

  	
  13,781

  	
   

  



 


(a)                   The Company has capital lease obligations
which have terms of two to five years at interest rates ranging from 1.15% to
6.17%.  The capital lease obligations
require the following minimum annual payments during the respective fiscal
years:


 


	
  2009

  	
   

  	
  $

  	
  54

  	
   

  
	
  2010

  	
   

  	
  5

  	
   

  
	
  2011

  	
   

  	
  4

  	
   

  
	
   

  	
   

  	
  63

  	
   

  
	
  Amount representing interest

  	
   

  	
  1

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  62

  	
   

  



 


(b)                   Under the terms of the agreement with Matco (note 5(b)),
Matco facilitated access to a limited recourse credit facility for up to
$7,346.  Interest was payable at prime
plus 1% until December 31, 2006, after which time the interest was payable
by Matco.  Repayments of the amount drawn
under this credit facility was required only from the proceeds of the sale by
the Company of its interest in WRRL and any remaining balance outstanding under
the credit facility was due on or before January 31, 2008.  During 2007, the Company drew the maximum
available under the credit facility of $7,346 and re-paid $605 prior to March 31,
2007, leaving a balance of $6,741.  In
2008, the Company repaid the remaining balance from the proceeds of the sale of
shares in WRRL.


 

















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years
ended March 31, 2008, 2007 and 2006


 


10.                  Long-term
debt (continued):


 


(c)                    On June 12, 2006, the Company agreed to issue up to
$22,092 in five year secured, subordinated convertible notes with a coupon rate
of 8% to funds managed by Perseus, L.L.C. (“Perseus”), a private equity fund
management group.  The notes were issued
in two tranches of $13,807 and $8,285, respectively.  Interest was payable semi-annually in arrears
on June 30 and December 31, in additional notes or shares, at the
Company’s option, for the first two years. 
After the first two years, interest would be calculated at a rate of 8%
on the outstanding principal amount only for the number of trading days in the
period on which the share price traded below $3.00 (post share consolidation - $10.50)
and would be payable semi-annually in cash, additional convertible notes or
shares at the Company’s option.  The
number of shares to be issued if interest was paid in shares was based on the
market price of the common shares on the date interest is due.  The first tranche was convertible to common
shares at a conversion price of $1.30 (post share consolidation - $4.55) at any
time during the term of the notes and the second tranche was convertible to
common shares at a conversion price equal to $1.40 (post share consolidation - $4.90).


 


At
the time of issuance of the notes, the noteholder also received warrants to
acquire, at an exercise price equal to the conversion price of the accompanying
notes, common shares of the Company equal to 25% of the number of common shares
into which the notes were convertible. 
The warrants expire four years from the date of issuance and include a
cashless exercise provision which would allow the noteholder to receive the
number of common shares having a value equal to the net gain that would be
realized by the noteholder had the warrant been exercised for cash and the
related shares sold at the market price on the date the option is
exercised.  Any warrants converted under
the cashless exercise provision would be cancelled.


 


During
2007, the Company received the full proceeds of $22,092 on issue of the notes
and issued 4,134,663 warrants (post share consolidation - 1,181,332).  Of the $22,092 cash proceeds received, the
Company assigned $7,568 to the conversion option, $1,420 to the warrants and
$13,103 to the convertible notes.  The
amount assigned to the convertible notes was being accreted to the principal
amount using the effective interest rate method over the term to maturity.


 


On July 26,
2007, Perseus LLC (“Perseus”) exercised their conversion option and converted
the full $22,092 of the principal amount of the subordinated convertible notes
into 16,538,653 (post share consolidation - 4,725,329) common shares pursuant
to the terms of such subordinated convertible notes.  As part of this transaction, the Company
agreed to pay an inducement amount to Perseus on each of December 31, 2007
and June 30, 2008, equal to 50% of the aggregate interest payment which
Perseus would otherwise have been entitled to receive had the entire principal
amount of the subordinated convertible notes been outstanding on such
dates.  In accordance with EIC-96, “Accounting for early extinguishment of convertible securities through (1) early
redemption or repurchase and (2) induced early conversion”, the
Company charged the inducement fee of $763 to accumulated deficit and recorded
the inducement fee payable along with $121 in accrued interest in accounts
payable.  On conversion, $13,258 of
long-term debt, representing the carrying value of the notes on July 26,
2007, and the carrying value of the conversion option of $7,569 previously
included in other equity instruments were reclassified to share capital.


 

















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years
ended March 31, 2008, 2007 and 2006


 


10.                  Long-term
debt (continued):


 


(c)                     Continued:


 


$385
of the inducement fee was paid during the year ended March 31, 2008 of
which $95 was paid in cash and $288 was paid in common shares.  As at March 31, 2008, inducement payable
of $378 was included in accounts payable.


 


During
the year ended March 31, 2008, $968 (2007 - $553) of interest was paid to
Perseus of which $324 (2007 - $55) was paid in cash and $644 (2007 - $498) paid
in common shares.


 


During
the year ended March 31, 2008, all of the 4,134,663 warrants (post share
consolidation - 1,181,332 warrants) were exercised using the cashless exercise
provisions resulting in the issuance of 2,338,669 (post share consolidation -
668,191) common shares.


 


11.                  Other
long-term liabilities:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Deferred lease inducements (a)

  	
   

  	
  $

  	
  280

  	
   

  	
  $

  	
  531

  	
   

  
	
  Deferred revenue (b)

  	
   

  	
  1,216

  	
   

  	
  1,189

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  1,496

  	
   

  	
  $

  	
  1,720

  	
   

  



 


(a)                    Deferred lease inducements
include leasehold improvements and other costs funded by the lessor and periods
with reduced rental payments.  The
amounts related to leasehold improvements funded by the lessor are amortized on
a straight-line basis over the term of the lease as a reduction to rent
expense.  For lease contracts with
escalating lease payments, total rent expense for the lease term is expensed on
a straight line basis over the lease term. 
The difference between amounts expensed and amounts paid is recorded as
an increase or reduction in deferred lease inducements.


 


(b)                   The Company receives cash in
advance of revenue recognition criteria being met, including upfront fees,
customer deposits, fees for research and development activities and extended
warranty contracts, which are included in deferred revenue and are recognized
into earnings over the contract period, as research and development activities
are completed or over the warranty period as applicable.


 


12.                  Government
assistance:


 


From
time to time, the Company enters into agreements for financial assistance with
government agencies.  During the years
ended March 31, 2008, 2007 and 2006, government assistance of $3,658,
$5,150 and $8,689, respectively, was received or receivable by the Company,
which has been recorded as a reduction of related research and development
expenditures (note 16).


 

















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years
ended March 31, 2008, 2007 and 2006


 


12.                  Government
assistance (continued):


 


Included
in the above amounts is funding of $1,351 (2007 - $2,205; 2006 - $2,623) from
Industry Canada’s Industrial Technologies Office (formerly Technology
Partnerships Canada) (“TPC”) and $946 remains receivable from TPC at March 31,
2008 (2007 - $3,779; 2006 - $1,574). 
Under the terms of the original TPC funding agreement entered into on March 27,
2003, TPC funded 30% of the eligible costs of, among other research projects,
the adaptation of the Company’s technology to diesel engines to the original
scheduled project completion date of March 31, 2006.  In fiscal 2007, TPC substantially completed
its review of a proposed amended statement of work and approval was received
from TPC extending the completion date to March 31, 2008.  Under the amended terms of the agreement,
from fiscal 2009 to fiscal 2015, inclusive, the Company is obligated to pay
annual royalties equal to the greater of $1,350 or 0.33% of the Company’s
annual gross revenue from all sources, provided that gross revenue exceeds
$13,500 in any of the aforementioned fiscal years.  The royalty payment period may be extended
until the earlier of March 31, 2018 or until cumulative royalties total
$28,189.  In addition, the Company is
required to provide TPC with common share purchase warrants having a value of
$4,000 as at September 30, 2008 calculated based on the Black-Scholes
option pricing model.  The value of the
warrants have been accreted on a straight-line basis to September 30,
2006, the original issuance date, as a charge to research and development
expenses.


 


The
Company is also obligated to pay royalties to the Government of Canada’s
Department of Natural Resources and British Columbia’s Green Economy
Development Fund relating to funding received in prior years.  The royalty to the Department of Natural Resources
is 1% of future revenue from engines for power generators until the earlier of
ten years from the project completion date (August 30, 2004) or when
cumulative royalties total $1,000.  As at
March 31, 2008, there have been no revenue from the sales of engines for
power generators and, therefore, no royalty payments have been paid or are
payable.  The royalty to the Green
Economy Development Fund is 0.75% of gross revenue received by the Company on
certain natural gas fuel systems and the obligation will cease on the earlier
of the seventh anniversary of the funding contribution date (April 10,
2001) or when the cumulative royalties paid by the Company equal $800.  As at March 31, 2008, no royalties have
been paid or are payable.


 


13.                  Obligation
to issue warrants:


 


Under
the terms of the agreement with TPC, the Company has an obligation to issue
warrants as at September 30, 2008 with a fair value of $4,000 based on the
Black-Scholes option pricing model.  The
value of these warrants was recognized on a straight-line basis from the date
of the original agreement to September 30, 2006, the original issuance
date.  For the year ended March 31,
2008, accretion totaling nil (2007 - $571; 2006 - $1,143) has been included in
research and development expenses.


 

















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years
ended March 31, 2008, 2007 and 2006


 


14.                  Stock
options and other stock-based plans:


 


(a)                    Share
options:


 


The Company has an incentive share option plan for
employees, directors, officers and consultants. 
The options are granted with an exercise price not less than the market
price of the Company’s common shares on the date immediately prior to the date
of grant.  The exercise period of the options
may not exceed eight years from the date of grant.  Vesting periods of the options are at the
discretion of the board of directors and may be based on fixed terms, achieving
performance milestones or reaching specified share price targets.


 


A summary of the status of the Company’s share option plan
as of March 31, 2008, 2007 and 2006 and changes during the years then
ended is presented as follows:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
  Number of

  shares

  	
   

  	
  Weighted

  average

  exercise

  price

  	
   

  	
  Number of

  shares

  	
   

  	
  Weighted

  average

  exercise

  price

  	
   

  	
  Number of

  shares

  	
   

  	
  Weighted

  average

  exercise

  price

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Outstanding, beginning of year

  	
   

  	
  1,493,998

  	
   

  	
  $

  	
  6.68

  	
   

  	
  1,419,589

  	
   

  	
  $

  	
  7.17

  	
   

  	
  686,404

  	
   

  	
  $

  	
  12.70

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Granted

  	
   

  	
  71,428

  	
   

  	
  9.31

  	
   

  	
  167,392

  	
   

  	
  4.13

  	
   

  	
  908,062

  	
   

  	
  5.18

  	
   

  
	
  Exercised

  	
   

  	
  (232,024

  	
  )

  	
  5.28

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Cancelled/expired

  	
   

  	
  (97,603

  	
  )

  	
  8.22

  	
   

  	
  (92,983

  	
  )

  	
  9.87

  	
   

  	
  (174,877

  	
  )

  	
  18.34

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Outstanding, end of year

  	
   

  	
  1,235,799

  	
   

  	
  $

  	
  6.96

  	
   

  	
  1,493,998

  	
   

  	
  $

  	
  6.68

  	
   

  	
  1,419,589

  	
   

  	
  $

  	
  7.17

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Options exercisable, end of year

  	
   

  	
  833,296

  	
   

  	
  $

  	
  7.77

  	
   

  	
  422,704

  	
   

  	
  $

  	
  10.43

  	
   

  	
  441,218

  	
   

  	
  $

  	
  11.27

  	
   

  



 


	
  Range of exercise prices

  	
   

  	
  Number

  outstanding,

  March 31,

  2008

  	
   

  	
  Weighted

  average

  remaining

  contractual life

  	
   

  	
  Weighted

  average

  exercise price

  	
   

  	
  Number

  exercisable

  March 31,

  2008

  	
   

  	
  Weighted

  average

  exercise price

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  $3.22 to
  $4.90

  	
   

  	
  223,278

  	
   

  	
  7.1

  	
   

  	
  $

  	
  4.17

  	
   

  	
  121,851

  	
   

  	
  $

  	
  4.03

  	
   

  
	
  5.25 to 5.43

  	
   

  	
  603,798

  	
   

  	
  6.0

  	
   

  	
  5.29

  	
   

  	
  328,436

  	
   

  	
  5.29

  	
   

  
	
  5.67 to
  10.68

  	
   

  	
  233,688

  	
   

  	
  5.5

  	
   

  	
  7.35

  	
   

  	
  222,259

  	
   

  	
  7.35

  	
   

  
	
  10.71 to
  13.79

  	
   

  	
  95,133

  	
   

  	
  4.3

  	
   

  	
  11.87

  	
   

  	
  80,847

  	
   

  	
  12.08

  	
   

  
	
  14.49 to
  20.62

  	
   

  	
  36,761

  	
   

  	
  2.7

  	
   

  	
  17.12

  	
   

  	
  36,761

  	
   

  	
  17.12

  	
   

  
	
  24.50 to
  30.80

  	
   

  	
  43,141

  	
   

  	
  2.8

  	
   

  	
  23.49

  	
   

  	
  43,142

  	
   

  	
  23.49

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  $3.22 to
  $30.80

  	
   

  	
  1,235,799

  	
   

  	
  5.8

  	
   

  	
  $

  	
  6.96

  	
   

  	
  833,296

  	
   

  	
  $

  	
  7.77

  	
   

  



 


The fair value of the options granted was determined using
the Black-Scholes option pricing model using the following weighted average
assumptions:  expected dividend yield -
nil% (2007 - nil%, 2006 - nil%); expected stock price volatility - 56.14% (2007
- 59%, 2006 - 65%); risk free interest rate - 3.71% (2007 - 4.79%, 2006 -
4.20%); expected life of options - 4 years (2007 - 5 years, 2006 - 5
years).  The weighted average grant date
fair value was $4.38 for options granted for the year ended March 31, 2008
(2007 - $2.45, 2006 - $3.05).  During the
year ended March 31, 2008, the Company recognized $558 (2007 - $530; 2006
- $1,852) in stock-based compensation related to stock options.


 

















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years
ended March 31, 2008, 2007 and 2006


 


14.                  Stock
options and other stock-based plans (continued):


 


(b)                   Employee
share purchase plan:


 


The Company has an employee share purchase plan (“ESPP”) in
which full-time employees of the Company are eligible to participate.  Eligible employees may make contributions to
the ESPP of up to 10% of their regular base pay.  The Company contributes up to a maximum
combined total of 5% of the employee’s regular base pay to the employee’s RRSP
and/or ESPP.  Shares contributed to the
ESPP are purchased by the Company on a semi-monthly basis on the open
market.  Shares purchased on behalf of
the employee with the employee’s contribution vest with the employee immediately.  Shares purchased with the Company’s
contribution vest on December 31st of each year, so long as the employee
is still employed with the Company.


 


(c)                    Performance
share units:


 


At the Company’s 2006 annual general meeting, the
shareholders of the Company ratified and approved the Amended and Restated Unit
Plan and reserved 2,142,857 common shares under this plan.  The Amended and Restated Unit Plan is in
addition to the Performance Share Unit Plan approved by the shareholders on September 10,
2001 (the “2001 PSU Plan”).  Each
performance share issued pursuant to the Amended and Restated Unit Plan or the
2001 PSU Plan is exercisable into one common share of the Company for no
additional consideration.  Any employee,
contractor, director or executive officer of the Company who is selected by the
Board of Directors of the Company is eligible to participate in the Amended and
Restated Unit Plan.  The Executive and
Senior Management Total Compensation Program sets out provisions where the
Units will be granted to the Company’s executive management if performance
milestones are achieved as determined at the discretion of the Human Resources
and Compensation Committee of the Company’s Board of Directors in consultation
with the Company’s management.


 


These performance milestones are focused on achievement of
key cash management, profitability and revenue growth objectives.  Vesting periods for each Unit granted
pursuant to the Amended and Restated Unit Plan is at the discretion of the
Board of Directors and may include time based, share price or other performance
targets.


 


The value assigned to issued Units and the amounts accrued
are recorded as other equity instruments. 
As Units are exercised and the underlying shares are issued from
treasury of the Company, the value is reclassified to share capital.  During the year ended March 31, 2008,
the Company recognized $106 (2007 - $1,559; 2006 - $1,082) of stock-based
compensation associated with the 2001 PSU Plan and the Amended and Restated
Unit Plan.


 


The stock-based compensation associated with the Unit plans
and the stock option plan as described in note 14(a) is included in
operating expenses as follows:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Research and
  development

  	
   

  	
  $

  	
  87

  	
   

  	
  $

  	
  348

  	
   

  	
  $

  	
  1,604

  	
   

  
	
  General and
  administrative

  	
   

  	
  465

  	
   

  	
  1,494

  	
   

  	
  946

  	
   

  
	
  Sales and
  marketing

  	
   

  	
  112

  	
   

  	
  247

  	
   

  	
  384

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  664

  	
   

  	
  $

  	
  2,089

  	
   

  	
  $

  	
  2,934

  	
   

  



 

















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years
ended March 31, 2008, 2007 and 2006


 


14.                  Stock
options and other stock-based plans (continued):


 


(c)                    Performance
share units (continued):


 


A summary of the status of the PSU’s issued under the 2001
PSU Plan and the amended and restated Unit Plan as of March 31, 2008, 2007
and 2006 and changes during the years then ended is as follows:


 


	
   

  	
   

  	
  Units

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Outstanding, March 31, 2005

  	
   

  	
  297,684

  	
   

  
	
  Units exercised

  	
   

  	
  (122,197

  	
  )

  
	
  Units granted

  	
   

  	
  233,405

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Outstanding, March 31, 2006

  	
   

  	
  408,892

  	
   

  
	
  Units exercised

  	
   

  	
  (81,052

  	
  )

  
	
  Units granted

  	
   

  	
  261,633

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Outstanding, March 31, 2007

  	
   

  	
  589,473

  	
   

  
	
  Units exercised

  	
   

  	
  (60,383

  	
  )

  
	
  Units granted

  	
   

  	
  553,900

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Outstanding, March 31, 2008

  	
   

  	
  1,082,990

  	
   

  



 


As at March 31, 2008, 554,420 PSU’s are vested and
exercisable.


 


15.                    Other
equity instruments:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Value assigned to Performance Share Units
  (note 14(c))

  	
   

  	
  $

  	
  3,079

  	
   

  	
  $

  	
  3,364

  	
   

  
	
  Value assigned to warrants (note 10(c))

  	
   

  	
  —

  	
   

  	
  1,420

  	
   

  
	
  Value assigned to conversion options (note
  10(c))

  	
   

  	
  —

  	
   

  	
  7,568

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  3,079

  	
   

  	
  $

  	
  12,352

  	
   

  



 


16.                    Research
and development expenses:


 


Research
and development expenses are recorded net of program funding received or
receivable.  For the years ending March 31,
2008, 2007 and 2006, the following research and development expenses had been
incurred and program funding received or receivable:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Research and development expenses

  	
   

  	
  $

  	
  26,684

  	
   

  	
  $

  	
  27,041

  	
   

  	
  $

  	
  25,628

  	
   

  
	
  Program funding (note 12)

  	
   

  	
  (3,658

  	
  )

  	
  (5,150

  	
  )

  	
  (8,689

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Research and development

  	
   

  	
  $

  	
  23,026

  	
   

  	
  $

  	
  21,891

  	
   

  	
  $

  	
  16,939

  	
   

  



 
















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years ended March 31, 2008, 2007 and 2006


 


17.                     Income
taxes:


 


(a)                    The
Company’s income tax recovery differs from that calculated by applying the
combined Canadian federal and provincial statutory income tax rates for
manufacturing and processing companies of 33.3% (2007 - 34.1%; 2006 - 34.5%) as
follows:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss before income taxes and Joint Venture
  Partners’ share of income from joint ventures

  	
   

  	
  $

  	
  9,224

  	
   

  	
  $

  	
  8,301

  	
   

  	
  $

  	
  15,267

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Expected income tax recovery

  	
   

  	
  $

  	
  3,075

  	
   

  	
  $

  	
  2,831

  	
   

  	
  $

  	
  5,249

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Reduction (increase) in income taxes
  resulting from:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Non-deductible interest on long-term debt
  and amortization of discount

  	
   

  	
  (141

  	
  )

  	
  (211

  	
  )

  	
  —

  	
   

  
	
  Non-deductible stock-based compensation

  	
   

  	
  (221

  	
  )

  	
  (713

  	
  )

  	
  (1,012

  	
  )

  
	
  Non-deductible expenses

  	
   

  	
  (45

  	
  )

  	
  (375

  	
  )

  	
  (426

  	
  )

  
	
  Change in enacted rates

  	
   

  	
  (1,508

  	
  )

  	
  (5,692

  	
  )

  	
  (192

  	
  )

  
	
  Foreign tax rate differences

  	
   

  	
  (426

  	
  )

  	
  (527

  	
  )

  	
  (168

  	
  )

  
	
  Change in valuation allowance

  	
   

  	
  3,739

  	
   

  	
  7,738

  	
   

  	
  (3,451

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  4,473

  	
   

  	
  $

  	
  3,051

  	
   

  	
  $

  	
  —

  	
   

  



 


(b)                   The tax effects of the significant temporary differences
which comprise tax assets and liabilities, at March 31, 2008 and 2007, are
as follows:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Future tax assets:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net operating loss carry forwards

  	
   

  	
  $

  	
  19,188

  	
   

  	
  $

  	
  19,365

  	
   

  
	
  Long-term investments

  	
   

  	
  626

  	
   

  	
  4,100

  	
   

  
	
  Intellectual property

  	
   

  	
  2,116

  	
   

  	
  2,123

  	
   

  
	
  Equipment, furniture and leasehold improvements

  	
   

  	
  813

  	
   

  	
  292

  	
   

  
	
  Financing and share issue costs

  	
   

  	
  273

  	
   

  	
  190

  	
   

  
	
  Warranty liability

  	
   

  	
  3,205

  	
   

  	
  2,438

  	
   

  
	
  Deferred revenue

  	
   

  	
  439

  	
   

  	
  497

  	
   

  
	
  Capital lease obligations

  	
   

  	
  18

  	
   

  	
  43

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total gross future tax assets

  	
   

  	
  26,678

  	
   

  	
  29,048

  	
   

  
	
  Valuation allowance

  	
   

  	
  (17,368

  	
  )

  	
  (25,593

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total future tax asset

  	
   

  	
  $

  	
  9,310

  	
   

  	
  $

  	
  3,455

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Allocated as follows:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current future tax assets

  	
   

  	
  $

  	
  4,944

  	
   

  	
  $

  	
  1,778

  	
   

  
	
  Long-term future tax asset

  	
   

  	
  4,366

  	
   

  	
  1,677

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total future tax asset

  	
   

  	
  $

  	
  9,310

  	
   

  	
  $

  	
  3,455

  	
   

  



 

















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years
ended March 31, 2008, 2007 and 2006


 


17.                    Income
taxes (continued):


 


(b)                   Continued:


 


In determining the valuation allowance, management
considers whether it is more likely than not that some portion or all of the
future tax assets will not be realized. 
The ultimate realization of future tax assets is dependent on the
generation of income during the future periods in which those temporary
differences become deductible.  Since
evidence does not exist that the future income tax assets will be fully
realized, a valuation allowance has been recorded.  All of the valuation allowance related to CWI
has been reversed as CWI has generated taxable income for three consecutive tax
years and the Company expects that CWI will generate taxable income in the
future.


 


Current tax expense for the year ended March 31, 2008
of $218 (2007 - $404, 2006 - nil) is payable outside of Canada.  Future income tax recovery of $5,855 relates
to temporary differences in the United States and future tax expense of $1,164
relates to tax expense in Canada related to gains on sale of available for sale
investments previously recognized in AOCI.


 


(c)                    The Company has non-capital loss carry forwards in Canada
available to offset future taxable income which expire as follows:


 


	
  2009

  	
   

  	
  $

  	
  1,504

  	
   

  
	
  2010

  	
   

  	
  2,235

  	
   

  
	
  2014

  	
   

  	
  2,703

  	
   

  
	
  2015

  	
   

  	
  2,508

  	
   

  
	
  2026

  	
   

  	
  2,354

  	
   

  
	
  2027

  	
   

  	
  15,171

  	
   

  
	
  2028

  	
   

  	
  21,785

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  48,260

  	
   

  



 


CWI has net operating loss carry forwards in the United
States totalling $15,362 of which $13,713 expire in 2023, and $1,649 expire in
2024.


 


18.                    Investment
in Joint Ventures:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cummins Westport Inc. (a)

  	
   

  	
  $

  	
  13,809

  	
   

  	
  $

  	
  7,719

  	
   

  
	
  BTIC Westport Inc. (b)

  	
   

  	
  174

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  13,983

  	
   

  	
  $

  	
  7,719

  	
   

  



 


(a)                    Cummins
Westport Inc.:


 


The Company entered into a joint venture with Cummins on March 7,
2001.  The joint venture, CWI, was formed
to explore a range of product and technology opportunities using natural gas as
the primary fuel.  The Company provided
personnel, financing and key technologies for the venture, while Cummins
provided an existing product line, manufacturing, product distribution and
customer service functions, as well as key management and engineering
personnel.


 

















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years
ended March 31, 2008, 2007 and 2006


 


18.                    Investment
in Joint Ventures:


 


(a)                    Cummins
Westport Inc. (continued):


 


From inception until December 31, 2003, the Company
was responsible for all capital contributions to fund operations.  Initially and to December 31, 2003, the
Company owned 100% of the common shares and Cummins owned 100% of the
non-participating preferred shares which were convertible into common shares
for no consideration at the option of Cummins.


 


On December 16, 2003, the Company and Cummins amended
the joint venture agreement to have CWI focus on and develop markets for
alternative fuel engines.  In addition,
the two companies signed a Technology Partnership Agreement that creates a
flexible arrangement for future technology development between Cummins and the
Company.  Under the terms of the amended
joint venture agreement, Cummins exercised the conversion feature of the
preferred shares effective January 1, 2004.  However, the Company remained responsible for
funding the profit and loss of CWI through CWI’s fiscal 2004 year which ran
from January 1 to December 31, 2004. 
Based on its economic interest in CWI, the Company continued to
consolidate 100% of the results of operations from CWI until December 31,
2004.


 


Subsequent to December 31, 2004, Cummins shares
equally in the profits and losses of CWI. 
However, the Company has determined that CWI is a VIE and that the
Company is the primary beneficiary. 
Accordingly, the Company continues to consolidate CWI with Cummins’
share of CWI’s income and losses included as “Joint Venture Partners’ share of
net income from joint ventures”.


 


Assets, liabilities, revenue and expenses of CWI included
in the consolidated financial statements of the Company as at and for the
periods presented are as follows:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current assets:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash equivalents

  	
   

  	
  $

  	
  137

  	
   

  	
  $

  	
  43

  	
   

  
	
  Short-term investments

  	
   

  	
  13,713

  	
   

  	
  8,017

  	
   

  
	
  Accounts receivable

  	
   

  	
  3,503

  	
   

  	
  5,771

  	
   

  
	
  Loan receivable

  	
   

  	
  6,774

  	
   

  	
  —

  	
   

  
	
  Prepaid expenses

  	
   

  	
  108

  	
   

  	
  354

  	
   

  
	
  Current portion of future income tax asset

  	
   

  	
  4,944

  	
   

  	
  1,778

  	
   

  
	
   

  	
   

  	
  29,179

  	
   

  	
  15,963

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Future income tax asset

  	
   

  	
  4,366

  	
   

  	
  1,677

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Equipment, furniture and leasehold
  improvements

  	
   

  	
  166

  	
   

  	
  184

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  33,711

  	
   

  	
  $

  	
  17,824

  	
   

  
	
  Current liabilities:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accounts payable and accrued liabilities

  	
   

  	
  $

  	
  2,131

  	
   

  	
  $

  	
  761

  	
   

  
	
  Deferred revenue

  	
   

  	
  69

  	
   

  	
  303

  	
   

  
	
  Current portion of warranty liability

  	
   

  	
  4,689

  	
   

  	
  3,767

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  6,889

  	
   

  	
  $

  	
  4,831

  	
   

  



 

















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years
ended March 31, 2008, 2007 and 2006


 


18.                  Investment
in Joint Ventures (continued):


 


(a)                    Cummins
Westport Inc. (continued):


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
  Long-term liabilities

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Warranty liability

  	
   

  	
  $

  	
  3,985

  	
   

  	
  $

  	
  3,091

  	
   

  
	
  Deferred revenue

  	
   

  	
  386

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  4,371

  	
   

  	
  $

  	
  3,091

  	
   

  



 


The loan receivable above of $6,774 was loaned to Cummins
under a demand loan agreement, with interest accruing monthly at the three
month prime corporate paper rate.  The
loan is unsecured.


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Product revenue

  	
   

  	
  $

  	
  50,999

  	
   

  	
  $

  	
  44,746

  	
   

  	
  $

  	
  28,634

  	
   

  
	
  Parts revenue

  	
   

  	
  16,298

  	
   

  	
  13,285

  	
   

  	
  13,620

  	
   

  
	
   

  	
   

  	
  67,297

  	
   

  	
  58,031

  	
   

  	
  42,254

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cost of revenue and expenses:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cost of revenue

  	
   

  	
  45,490

  	
   

  	
  36,195

  	
   

  	
  27,344

  	
   

  
	
  Research and development

  	
   

  	
  7,562

  	
   

  	
  8,074

  	
   

  	
  6,577

  	
   

  
	
  General and administrative

  	
   

  	
  1,088

  	
   

  	
  856

  	
   

  	
  1,249

  	
   

  
	
  Sales and marketing

  	
   

  	
  6,447

  	
   

  	
  4,216

  	
   

  	
  4,006

  	
   

  
	
   

  	
   

  	
  60,587

  	
   

  	
  49,341

  	
   

  	
  39,176

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Income before undernoted

  	
   

  	
  6,710

  	
   

  	
  8,690

  	
   

  	
  3,078

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Interest and investment income

  	
   

  	
  793

  	
   

  	
  112

  	
   

  	
  —

  	
   

  
	
  Effect of foreign currency translation

  	
   

  	
  (1,518

  	
  )

  	
  61

  	
   

  	
  108

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Income before income taxes

  	
   

  	
  5,985

  	
   

  	
  8,863

  	
   

  	
  3,186

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Income tax recovery (expense):

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current

  	
   

  	
  (208

  	
  )

  	
  (204

  	
  )

  	
  —

  	
   

  
	
  Future

  	
   

  	
  5,855

  	
   

  	
  3,455

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  5,647

  	
   

  	
  3,251

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Income for the year

  	
   

  	
  11,632

  	
   

  	
  12,114

  	
   

  	
  3,186

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Joint Venture Partner’s share of net income
  from joint venture

  	
   

  	
  (5,816

  	
  )

  	
  (6,057

  	
  )

  	
  (1,593

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Company’s share of income

  	
   

  	
  $

  	
  5,816

  	
   

  	
  $

  	
  6,057

  	
   

  	
  $

  	
  1,593

  	
   

  



 


(b)                   BTIC
Westport Inc.:


 


On July 21, 2006, the Company and Beijing Tianhai
Industry Co. Ltd. (“BTIC”) of Beijing, China formed BWI to market liquefied
natural gas (“LNG”) fuel tanks for vehicles. 
Through the 50:50 joint venture agreement and related license and supply
agreements, BTIC and Westport share equally in the profits on products
developed and sold by the joint venture. 
Headquartered in Beijing, China, BWI sells tanks for installation on any
vehicle, regardless of the natural gas engine manufacturer.  During the year ended March 31, 2008,
the Company contributed $425 (US$400) to the formation of this joint venture.


 

















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years
ended March 31, 2008, 2007 and 2006


 


18.                  Investment
in Joint Ventures (continued):


 


(b)                   BTIC
Westport Inc. (continued):


 


The consolidated financial statements include 100% of the
assets, liabilities, revenue and expenses of BWI since the Company has
determined that BWI is a variable interest entity and that the Company is the
primary beneficiary.  Accordingly, the
Company consolidates BWI and BTIC’s share of BWI’s income and losses is
included in “Joint venture partners’ share of income from joint ventures”.  For the year ended March 31, 2008, the
Company’s share of loss from BWI was $252.


 


19.               Commitments
and contingencies:


 


(a)                  The Company has obligations under operating lease
arrangements which require the following minimum annual payments during the
respective fiscal years:


 


	
  2009

  	
   

  	
  $

  	
  1,298

  	
   

  
	
  2010

  	
   

  	
  1,265

  	
   

  
	
  2011

  	
   

  	
  1,253

  	
   

  
	
  2012

  	
   

  	
  1,254

  	
   

  
	
  2013

  	
   

  	
  802

  	
   

  
	
  Thereafter

  	
   

  	
  636

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  6,508

  	
   

  



 


For the year ended March 31, 2008, the Company
incurred operating lease expense of $876 (2007 - $795; 2006 - $990).


 


(b)                 The
Company has an outstanding letter of credit of $600.


 


(c)                  On October 26, 2007, the Company and OMVL SpA (“OMVL”)
entered into a joint venture agreement, engineering agreements and supply
agreements to design, produce and sell alternative fuel engines in the sub-5
litre class for global applications. 
Based in Pernumia, Italy, OMVL designs, manufactures and markets
complete fueling systems for new vehicles and for the aftermarket conversion of
engines from gasoline (petrol) to compressed natural gas and liquid petroleum
gas.  Under the terms of the joint
venture agreement, OMVL and the Company will share 51% and 49%, respectively,
of the profits or losses of the venture. 
The jointly controlled company will be headquartered in Vancouver,
Canada and will exploit the global engineering, production and distribution
strengths of OMVL and its parent company, SIT Group, to deliver engines
worldwide.  The Company will support the
new venture through supply of technology, design, testing and market development
services.  The Company contributed $1,500
to the formation of the joint venture, Juniper Engines Inc., on April 1,
2008.


 

















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years
ended March 31, 2008, 2007 and 2006


 


20.                    Financial
instruments:


 


(a)                    Fair
values:


 


The carrying amounts reported in the balance sheets for
cash and cash equivalents, accounts receivable, loan receivable and accounts
payable and accrued liabilities approximate their fair values due to the short
terms to maturity of these instruments. 
The carrying value of the warranty obligation represents management’s
best estimate of its fair value.


 


The Company’s short and long term investments are recorded
at fair value except for its interest in WRRL which is carried at cost (note
5(b)).


 


The carrying value reported in the balance sheets for
obligations under capital lease, which is based upon discounted cash flows,
approximates its fair value.  The fair
value of the Company’s demand instalment loan and short-term debt are not
materially different from its carrying value based on market rates of interest.


 


The fair value of the Company’s subordinated convertible
notes as described in note 10(c) was not determinable with sufficient
reliability due to the absence of a readily available market for similar
instruments.


 


The carrying value of the Company’s obligation to issue
warrants as described in note 13 represents management’s best estimate of its
fair value.


 


(b)                   Concentrations
of credit risk:


 


The Company is exposed to credit risk only with respect to
uncertainties as to timing and amount of collectability of accounts receivable
and loan receivable.  31% (2007 - 50%) of
accounts receivable relates to government grants receivable and 46% (2007 -
43%) is due from Cummins relating to proceeds for the sale of products
collected by Cummins on the Company’s behalf. 
The loan receivable is due from Cummins.


 


(c)                    Foreign
currency risk:


 


Foreign currency risk is the risk to the Company’s results
from operations that arises from fluctuations in foreign currency exchange
rates.  All of the revenue realized and a
significant portion of the expenses incurred by CWI, and recorded by the
Company, are denominated in United States dollars.  The warranty liability and short-term debt
are also denominated in United States dollars. 
The Company has not entered into foreign exchange contracts to hedge
against gains and losses from foreign currency fluctuations.


 

















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years
ended March 31, 2008, 2007 and 2006


 


20.                    Financial
instruments (continued):


 


(d)                     Derivative
instruments:


 


From time to time, the Company sells call options which
give the counterparty the right, but not the obligation, to acquire shares of
CEFC owned by the Company for an agreed on strike price on or before a specific
expiration date.  The Company marks these
options to market at each balance sheet date with the change in fair value
recognized in interest and other income. 
During the year ended March 31, 2008, the Company sold 1,000 call
option lots, representing 100,000 shares, with an average exercise price of
US$17.50 for net proceeds of $71.  All of
the options sold expired without exercise and no options were outstanding at March 31,
2008.  Subsequent to March 31, 2008,
the Company sold a further 1,750 call option lots, representing 175,000 shares,
with an average exercise price of US$15.14 expiring on June 20, 2008.


 


21.                   Segmented
information:


 


The
Company currently operates in one operating segment which involves the research
and development and the related commercialization of engines and fuel systems operating
on gaseous fuels.  The majority of the
Company’s equipment, furniture and leasehold improvements are located in
Canada.  For the year ended March 31,
2008, 66% (2007 - 72%; 2006 - 82%) of the Company’s revenue was from sales in
North America, 18% (2007 - 13%; 2006 - 4%) from sales in Asia, and 16% (2007 -
15%; 2006 - 14%) from sales elsewhere.


 


22.                   Subsequent
events:


 


(a)                    On July 3, 2008, the Company completed the sale and issue of
15,000 Debenture Units of the Company for total proceeds of $15,000.  Each Debenture Unit consists of one unsecured
subordinated debenture in the principal amount of $1 bearing interest at 9% per
annum and 180 (post share consolidation - 51) common share purchase warrants
exercisable into common shares of the Company at any time for a period of two
years from the date of issue at $5.35 (post share consolidation - $18.73).  The Company has the option to redeem the
debentures at any time after 12 months and before 18 months from the date of
issue at 115% of their principal amount and at 110% of the principal amount
after 18 months.  Interest is payable
semi-annually and the debentures mature on July 3, 2011.  The Company also issued 161,413 (post share
consolidation - 46,118) broker warrants which are exercisable into common
shares of the Company at $4.60 (post share consolidation - $16.10) for a period
of two years.  Subsequent to the share
consolidation effected on July 21, 2008 (note 22(c)), there were 771,428
common share purchase warrants outstanding with an exercise price of $18.73 and
46,118 broker warrants with an exercise price of $16.10.


 


(b)                   On
July 16, 2008, the Company announced that it had entered into a joint
venture agreement with Weichai Power Co., Ltd. (“Weichai Power”), China’s
largest heavy duty engine manufacturer, and Hong Kong Peterson (CNG) Equipment
Limited (“Hong Kong Peterson”) to form a new entity, Weichai Westport Inc.
(“WWI”).  WWI will research, develop,
design, manufacture, market, distribute and sell advanced, alternative fuel
engines (and relevant parts and kits) for use in automobiles, heavy duty
trucks, power generation and shipping applications.  Under the terms of the 30-year joint venture
agreement, Westport’s initial investment to acquire a 35% share of the joint
venture is expected to be approximately US$4.5 million (30 million RMB).  Weichai Power and Hong Kong Peterson will
hold a 40 per cent and 25 per cent interest respectively in WWI.


 

















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years
ended March 31, 2008, 2007 and 2006


 


22.                   Subsequent
events (continued):


 


(c)                    On July 21, 2008, the Company consolidated the number
of common shares then outstanding on a 3.5:1 basis.  Share and per share amounts, share options
and performance share units in these consolidated financial statements have
been adjusted on a retroactive basis to reflect this share consolidation for
all periods presented.


 


23.                    Reconciliation
to United States generally accepted accounting standards:


 


These
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Canada (“Canadian GAAP”) which
differ in certain respects with accounting principles generally accepted in the
United States (“US GAAP”) as follows:


 


(a)                    Convertible notes:


 


For Canadian GAAP purposes, on issue of the convertible
notes described in note 10(c), the Company allocated certain amounts to
the value of the warrants and conversion options based on their estimated fair
value with the difference between the gross proceeds and the value of the
warrants and conversion options allocated to the debt.  For US GAAP purposes, the allocation between
the debt and the warrants would be done on a relative fair value basis.  In addition, under US GAAP, an amount is
allocated only to a beneficial conversion option when the market price of the
shares into which the debt is convertible exceeds the effective exercise price.  For US GAAP purposes, only the second tranche
of the debt issued in January 2007 was deemed to have a beneficial
conversion option.


 


Accordingly, for US GAAP purposes, the amount assigned to
the debt and the warrants was increased by $3,540 and $1,590, respectively as
at March 31, 2007 and the amount assigned to the conversion option was
reduced by $5,130.


 


On conversion, the carrying value of the debt, which is net
of any unamortized discount and debt issuance costs was reclassified to share
capital for Canadian GAAP purposes together with the value assigned to the
conversion options.  The related
inducement fee was charged to deficit. 
For US GAAP, the accounting for the first tranche was the same.  However, for the second tranche which had a
beneficial conversion option, the unamortized debt discount was expensed for US
GAAP purposes.  The inducement fee also
was expensed for US GAAP purposes. 
Accordingly, as at March 31, 2008, share capital under US GAAP was
increased by $3,204 and interest expense for the year ended March 31, 2008
was increased by $4,424.


 


(b)                   Debt issuance costs and the effective interest method:


 


Effective April 1, 2007, the Company began amortizing
debt issuance costs and debt discounts using the effective interest method
under Canadian GAAP (note 3(a)) and classified debt issuance costs as
reductions of the carrying value of the debt to which it relates.  Prior to April 1, 2007, debt issuance
costs were classified as deferred charges and debt issuance costs and debt
discounts were amortized on a straight-line basis.


 

















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years
ended March 31, 2008, 2007 and 2006


 


23.                    Reconciliation
to United States generally accepted accounting standards (continued):


 


(b)                   Debt issuance costs and the effective interest method
(continued):


 


Under US GAAP, debt issuance costs are presented as
deferred charges and debt issuance costs and debt discounts are amortized using
the effective interest method for all years presented.  In addition, the difference between
transaction costs allocated to the debt and debt discounts for Canadian GAAP
purposes compared to US GAAP as described in note 23(a) resulted in a
difference in interest expense for US GAAP purposes.  Accordingly, the adjustment to opening
deficit of $113 made for Canadian GAAP purposes would not be made under US GAAP
and interest expense for the years ended March 31, 2008 and 2007 was
reduced by $147 and $423, respectively.


 


As at March 31, 2007, deferred finance costs were
increased by $85 for US GAAP purposes and the carrying value of the debt was
reduced by $338.


 


(c)                    Investments:


 


On April 1,
2007, the Company changed its accounting for “available-for-sale” securities
under Canadian GAAP (note 3(a)) to be consistent with US GAAP.  However, prior to April 1, 2007, the
Company carried its investments in debt and equity securities at cost.  For US GAAP purposes, the Company’s
investments in debt and equity securities that have quoted market prices would
have been classified as “available for sale” securities with unrealized gains
and losses recognized in other comprehensive income (loss) for all periods
presented.  Accordingly, cumulative
adjustments at April 1, 2008 of $20,402 to investments, $3,370 to opening
deficit and $17,032 to AOCI under Canadian GAAP would not be made under US
GAAP.  For US GAAP purposes, the Company
recognized an increase in investments and AOCI of $20,402 for the year ended March 31,
2007.


 


Under
Canadian GAAP, the income tax recovery generated by a reversal of a previously
recognized future income tax valuation allowance to reduce future income tax
liabilities generated by mark to market adjustments on available for sale
securities is recognized in net loss for the year.  The valuation allowance is reversed while the
related tax expense is included in AOCI until the shares are sold at which time
the tax expense is included in net loss. 
Under US GAAP, the reversal of the valuation allowance would be
recognized in other comprehensive income. 
Accordingly, for US GAAP purposes, future income tax expense of $1,164
recognized under Canadian GAAP would not be recognized in the year ended March 31,
2008.


 


For
Canadian and US GAAP purposes, the cost and the related amounts included in
AOCI related to securities sold are reclassified to net loss based on weighted
average amounts of the shares sold.


 


(d)                   Acquired in-process research and development costs:


 


Under Canadian GAAP, acquired in-process research and
development costs are capitalized and amortized to earnings.  For US GAAP purposes, such in-process
research and development costs are expensed immediately if there is no
alternative use for the research and developments.  Accordingly, amortization of in-process
research and development recorded under Canadian GAAP for the years ended March 31,
2008, 2007 and 2006 of $145, $144 and $305, respectively, would not be
recognized under U.S. GAAP.  As at March 31,
2008, the carrying value of intellectual property would be reduced by $574
(2007 - $719) with a corresponding increase in deficit.


 

















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years
ended March 31, 2008, 2007 and 2006


 


23.                     Reconciliation
to United States generally accepted accounting standards (continued):


 


(e)                    Stock-based compensation:


 


As
described in note 14, the Company has granted stock options to certain
directors, consultants and employees. 
These options are granted for services provided to the Company.  For Canadian GAAP purposes, only options
granted on or after April 1, 2002 are accounted for using the fair value
method.  In addition, on April 1,
2004, the Company recognized a cumulative adjustment to deficit for stock-based
compensation related to stock options granted to employees on or after April 1,
2002 that would have been recognized prior to April 1, 2004 had the
Company applied the fair value method since April 1, 2002.


 


For
US GAAP purposes, effective April 1, 2004, the Company changed its
accounting policy for recognizing stock-based compensation from the intrinsic
value method to the fair value method using the transition provisions of
Statement of Financial Accounting Standards No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure (“SFAS
148”).  As permitted by SFAS 148, the
Company adopted the fair value method retroactively without restatement using
the modified prospective method.  For
U.S. GAAP purposes, all options granted subsequent to December 15, 1995
are measured using the fair value method but, for the Company, only the effect
of those options outstanding and unvested as of April 1, 2004 on the
results from operations in the year in which SFAS 148 is adopted would be
recognized.


 


Accordingly,
on adoption of the fair value method for US GAAP purposes, adjustments to
deficit of $2,493, share capital of $68, and additional paid in capital of
$2,425 recognized for Canadian GAAP purposes are not recognized for US GAAP
purposes.  In addition, for US GAAP
purposes in years prior to 2005, the Company recognized stock-based
compensation of $2,165 relating to stock options issued to non-employees prior
to April 1, 2002.


 


Under
US GAAP, an additional $211 would be recognized prior to 2002 as a result of
certain option modifications.


 


For
Canadian GAAP, the Company recognizes the effect on stock-based compensation of
forfeitures of options prior to vesting as they occur which was also permitted
for US GAAP prior to April 1, 2006. 
On April 1, 2006, for US GAAP purposes, the Company adopted
Statement of Financial Accounting Standards No. 123(R), Share-based Payment (“SFAS 123(R)”), using the modified
prospective method which requires the Company to estimate forfeitures on the
date of grant and calculate stock-based compensation based on options expected
to vest.  The Company determined that the
effect of forfeitures is not material. 
Accordingly, the adoption of SFAS 123(R) resulted in no adjustment
to net loss for any of the periods presented.


 


Additional
information about the PSU’s issued under the 2001 PSU Plan are as follows:


 


	
   

  	
   

  	
  Units

  	
   

  	
  Weighted average

  grant date fair

  value

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Unvested, March 31, 2007

  	
   

  	
  85,713

  	
   

  	
  $

  	
  5.25

  	
   

  
	
  Units granted

  	
   

  	
  553,900

  	
   

  	
  7.91

  	
   

  
	
  Units vested

  	
   

  	
  (111,043

  	
  )

  	
  5.46

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Unvested, March 31, 2008

  	
   

  	
  528,570

  	
   

  	
  $

  	
  6.69

  	
   

  



 

















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Operations


(Expressed in thousands of Canadian dollars,
except share and per share amounts)


 


Years
ended March 31, 2008, 2007 and 2006


 


23.                     Reconciliation
to United States generally accepted accounting standards (continued):


 


(e)                     Stock-based
compensation (continued):


 


The aggregate intrinsic value of the Company’s stock option
awards and PSUs at March 31, 2008 are as follows:


 


	
   

  	
   

  	
  2008

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Stock options

  	
   

  	
   

  	
   

  
	
  Outstanding

  	
   

  	
  $

  	
  5,454

  	
   

  
	
  Exercisable

  	
   

  	
  3,302

  	
   

  
	
  PSUs:

  	
   

  	
   

  	
   

  
	
  Outstanding

  	
   

  	
  $

  	
  4,366

  	
   

  
	
  Exercisable

  	
   

  	
  2,909

  	
   

  



 


The total intrinsic value of options and PSUs exercised for
the year ended March 31, 2008 was $1,508 (2007 - $310; 2006 - $503).  As at March 31, 2008, $4,748 of
compensation cost relating to share-based payment awards has yet to be
recognized in results from operations and will be recognized over a weighted
average period of four years.


 


(f)                       Income
taxes:


 


Under
both Canadian and US GAAP, future income tax assets and liabilities are
measured using the income tax rates and income tax laws that, at the balance
sheet date, are expected to apply when the assets are realized or the
liabilities are settled.  In Canada,
announcements of changes in income tax rates and tax laws by the government can
have the effect of being substantially enacted at the balance sheet date even
though they are not yet proclaimed into law. 
When persuasive evidence exists that the government is able and
committed to enacting proposed changes in the foreseeable future, the
substantively enacted rate is used to measure the future tax assets and
liabilities.  Under US GAAP, only the
income tax rates and income tax laws enacted at the balance sheet date are used
to measure the future income tax assets and liabilities.  For the years ended March 31, 2008,
2007, and 2006, enacted rates for US GAAP purposes were equal to rates used for
Canadian GAAP purposes.


 


Income
tax recovery (expense) consists of:


 


	
   

  	
   

  	
  Net income (loss)

  before taxes and

  Joint Venture

  Partners’ share of

  net income from

  	
   

  	
  Income tax recovery (expense)

  	
   

  
	
   

  	
   

  	
  joint ventures

  	
   

  	
  Current

  	
   

  	
  Deferred

  	
   

  	
  Total

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Year ended March 31, 2008:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Canada

  	
   

  	
  $

  	
  (14,760

  	
  )

  	
  $

  	
  —

  	
   

  	
  $

  	
  (1,164

  	
  )

  	
  $

  	
  (1,164

  	
  )

  
	
  United States

  	
   

  	
  5,862

  	
   

  	
  (218

  	
  )

  	
  5,855

  	
   

  	
  5,637

  	
   

  
	
  Germany

  	
   

  	
  (14

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  China

  	
   

  	
  (312

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  (9,224

  	
  )

  	
  $

  	
  (218

  	
  )

  	
  $

  	
  4,691

  	
   

  	
  $

  	
  4,473

  	
   

  



 
















 


WESTPORT
INNOVATIONS INC.


Notes to Consolidated Financial
Statements


(Expressed in thousands of
Canadian dollars, except share and per share amounts)


 


Years ended March 31, 2008,
2007 and 2006


 


23.                     Reconciliation
to United States generally accepted accounting standards (continued):


 


(f)                       Income taxes (continued):


 


	
   

  	
   

  	
  Net income (loss)

  before taxes and

  Joint Venture

  Partners’ share of

  net income from

  	
   

  	
  Income tax recovery (expense)

  	
   

  
	
   

  	
   

  	
  joint ventures

  	
   

  	
  Current

  	
   

  	
  Deferred

  	
   

  	
  Total

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Year ended March 31, 2007:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Canada

  	
   

  	
  $

  	
  (18,028

  	
  )

  	
  $

  	
  (16

  	
  )

  	
  $

  	
  —

  	
   

  	
  $

  	
  (16

  	
  )

  
	
  United States

  	
   

  	
  8,937

  	
   

  	
  (189

  	
  )

  	
  3,455

  	
   

  	
  3,266

  	
   

  
	
  Germany

  	
   

  	
  790

  	
   

  	
  (199

  	
  )

  	
  —

  	
   

  	
  (199

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  (8,301

  	
  )

  	
  $

  	
  (404

  	
  )

  	
  $

  	
  3,455

  	
   

  	
  $

  	
  3,051

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Year ended March 31, 2006:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Canada

  	
   

  	
  $

  	
  (21,135

  	
  )

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  
	
  United States

  	
   

  	
  3,350

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Germany

  	
   

  	
  2,518

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  (15,267

  	
  )

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  



 


(g)                    Uncertainties in income taxes:


 


On April 1,
2007 for US GAAP purposes, the Company adopted FASB Interpretation No. 48,
Uncertainty in Income Taxes - An Interpretation of
SFAS Statement No. 109 (“FIN 48”).  This interpretation provides guidance on
recognition and measurement of uncertainties in income taxes.  Under FIN 48, a company would recognize the
benefit of tax positions when it is more likely than not that a tax position
will be sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position.  A tax position that meets the
more-likely-than-not recognition threshold is measured to determine the amount
of benefit to recognize in the financial statements. The tax position is
measured at the largest amount of benefit that is greater than 50 percent
likely of being realized upon settlement.


 


Adoption
of this Interpretation did not have an effect on the Company’s consolidated
financial statements for US GAAP purposes as the Company does not believe that
any income tax positions taken in its filings are subject to material
uncertainty if reviewed by the Canada Revenue Agency, Internal Revenue Service
or other tax jurisdiction in which the Company operates.  In cases where the Company is charged
interest and penalties on uncertain tax positions which do not meet the
recognition criteria, the Company includes these in interest expense and other
operating expenses, respectively.


 

















 


WESTPORT
INNOVATIONS INC.


Notes to Consolidated Financial
Statements


(Expressed in thousands of
Canadian dollars, except share and per share amounts)


 


Years ended March 31, 2008,
2007 and 2006


 


23.                     Reconciliation
to United States generally accepted accounting standards (continued):


 


(g)                    Uncertainties in income taxes (continued):


 


The
following is a summary of the tax years that remain subject to examination by
tax jurisdiction:


 


	
  Canada

  	
   

  	
  Fiscal year
  2004 to 2008

  
	
  United
  States

  	
   

  	
  Fiscal year
  2005 to 2008

  
	
  Germany

  	
   

  	
  Fiscal year
  2003 to 2008

  
	
  China

  	
   

  	
  Fiscal year
  2007 to 2008

  



 


However,
in Canada and the United States, if the Company utilizes tax loss carry forwards
in the future, those losses may be challenged in the year they are used even
though the year in which they were incurred is barred by statute.


 


(h)                   Effect of US GAAP differences:


 


The effect of the previously discussed accounting
differences on total assets, total liabilities and shareholders’ equity, net
loss, comprehensive loss and loss per share under US GAAP are as follows:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total assets, Canadian GAAP

  	
   

  	
  $

  	
  78,940

  	
   

  	
  $

  	
  59,633

  	
   

  
	
  Differences in accounting for:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Long-term investments (c)

  	
   

  	
  —

  	
   

  	
  20,402

  	
   

  
	
  Debt issuance costs (b)

  	
   

  	
  —

  	
   

  	
  85

  	
   

  
	
  Intellectual property (d)

  	
   

  	
  (574

  	
  )

  	
  (719

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total assets, US GAAP

  	
   

  	
  $

  	
  78,366

  	
   

  	
  $

  	
  79,401

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total liabilities, Canadian GAAP

  	
   

  	
  $

  	
  49,144

  	
   

  	
  $

  	
  49,015

  	
   

  
	
  Difference in accounting for convertible
  notes (a) (b)

  	
   

  	
  —

  	
   

  	
  3,202

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total liabilities, US GAAP

  	
   

  	
  $

  	
  49,144

  	
   

  	
  $

  	
  52,217

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Shareholders’ equity, Canadian GAAP

  	
   

  	
  $

  	
  29,796

  	
   

  	
  $

  	
  10,618

  	
   

  
	
  Difference in accounting for:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Long-term investments (c)

  	
   

  	
  —

  	
   

  	
  20,402

  	
   

  
	
  Convertible notes (a)(b)

  	
   

  	
  —

  	
   

  	
  (3,117

  	
  )

  
	
  Intellectual property (d)

  	
   

  	
  (574

  	
  )

  	
  (719

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Shareholders’ equity, US GAAP

  	
   

  	
  $

  	
  29,222

  	
   

  	
  $

  	
  27,184

  	
   

  



 

















 


WESTPORT
INNOVATIONS INC.


Notes to Consolidated Financial
Statements


(Expressed in thousands of
Canadian dollars, except share and per share amounts)


 


Years ended March 31, 2008,
2007 and 2006


 


23.                    Reconciliation
to United States generally accepted accounting standards (continued):


 


(h)                   Effect of US GAAP differences (continued):


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss for the year, Canadian GAAP

  	
   

  	
  $

  	
  (10,315

  	
  )

  	
  $

  	
  (11,307

  	
  )

  	
  $

  	
  (16,860

  	
  )

  
	
  Difference in amortization of discount on
  convertible notes and debt issuance costs (a)(b)

  	
   

  	
  147

  	
   

  	
  423

  	
   

  	
  —

  	
   

  
	
  Difference in accounting for inducement fee
  and unamortized discount on conversion of convertible notes (a)

  	
   

  	
  (4,424

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  
	
  Reversal of tax expense on realized gain on
  available for sale securities (c)

  	
   

  	
  1,164

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Amortization of intellectual property (d)

  	
   

  	
  145

  	
   

  	
  144

  	
   

  	
  305

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss for the year, US GAAP

  	
   

  	
  (13,283

  	
  )

  	
  (10,740

  	
  )

  	
  (16,555

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Other comprehensive income (loss):

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Unrealized gain on available for sale
  securities (c)

  	
   

  	
  —

  	
   

  	
  20,402

  	
   

  	
  —

  	
   

  
	
  Reversal of tax expense on realized gain on
  available for sale securities (c)

  	
   

  	
  (1,164

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  (1,164

  	
  )

  	
  20,402

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Comprehensive income (loss), US GAAP

  	
   

  	
  $

  	
  (14,447

  	
  )

  	
  $

  	
  9,662

  	
   

  	
  $

  	
  (16,555

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Basic and diluted loss per share, US GAAP

  	
   

  	
  $

  	
  (0.53

  	
  )

  	
  $

  	
  (0.50

  	
  )

  	
  $

  	
  (0.78

  	
  )

  



 


There
are no differences between Canadian GAAP and US GAAP in total cash flows from
operations, investments and financing presented in the consolidated statement
of cash flows in any of the years presented.


 


(i)                       Additional financial information and disclosures required
under US GAAP:


 


(i)                       Accounts receivable:


 


A summary of the components of accounts receivable is as
follows:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Customer trade receivable

  	
   

  	
  $

  	
  1,014

  	
   

  	
  $

  	
  459

  	
   

  
	
  Government funding receivable

  	
   

  	
  2,077

  	
   

  	
  5,401

  	
   

  
	
  Due from Joint Venture Partner

  	
   

  	
  3,344

  	
   

  	
  4,733

  	
   

  
	
  Other receivables

  	
   

  	
  593

  	
   

  	
  288

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  7,028

  	
   

  	
  $

  	
  10,881

  	
   

  



 

















 


WESTPORT
INNOVATIONS INC.


Notes to Consolidated Financial
Statements


(Expressed in thousands of
Canadian dollars, except share and per share amounts)


 


Years ended March 31, 2008,
2007 and 2006


 


23.                    Reconciliation
to United States generally accepted accounting standards (continued):


 


(i)                   Additional financial information and disclosures required
under US GAAP (continued):


 


(ii)                   Accounts payable and accrued liabilities:


 


A summary of the components of accounts payable and accrued
liabilities is as follows:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Trade accounts payable

  	
   

  	
  $

  	
  6,641

  	
   

  	
  $

  	
  3,884

  	
   

  
	
  Accrued payroll

  	
   

  	
  1,176

  	
   

  	
  1,189

  	
   

  
	
  Accrued interest

  	
   

  	
  378

  	
   

  	
  407

  	
   

  
	
  Income taxes payable

  	
   

  	
  211

  	
   

  	
  284

  	
   

  
	
  Other

  	
   

  	
  64

  	
   

  	
  266

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  8,470

  	
   

  	
  $

  	
  6,030

  	
   

  



 


(iii)           Warranty liability:


 


A continuity of the warranty liability is as follows:


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance, beginning of year

  	
   

  	
  $

  	
  6,971

  	
   

  	
  $

  	
  5,770

  	
   

  	
  $

  	
  6,729

  	
   

  
	
  Warranty claims

  	
   

  	
  (2,333

  	
  )

  	
  (2,270

  	
  )

  	
  (2,661

  	
  )

  
	
  Warranty accruals

  	
   

  	
  6,534

  	
   

  	
  4,924

  	
   

  	
  3,666

  	
   

  
	
  Change in warranty estimates

  	
   

  	
  (1,292

  	
  )

  	
  (1,387

  	
  )

  	
  (1,783

  	
  )

  
	
  Impact of foreign exchange

  	
   

  	
  (723

  	
  )

  	
  (66

  	
  )

  	
  (181

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance, end of year

  	
   

  	
  $

  	
  9,157

  	
   

  	
  $

  	
  6,971

  	
   

  	
  $

  	
  5,770

  	
   

  



 


(iv)                 Inventory:


 


Amounts removed from inventory and included in cost of
sales is based on standard cost which approximates weighted average cost and
variances between actual and standard costs are included in cost of sales.  Cost of inventory includes depreciation and
amortization where applicable but depreciation and amortization related to
inventory sold is included in depreciation and amortization expense.


 


Cost of revenue related to product revenue for the year
ended March 31, 2008 was $37,157 (2007 - $28,961; 2006 - $18,741) and cost
of revenue related to parts revenue was $11,866 (2007 - $9,420; 2006 - $9,901).


 


(v)                     Other disclosures:


 


For US GAAP purposes, the effective interest rate for the
convertible notes described in note 10(c) was 18.22%.


 


Deferred revenue is included in other long-term liabilities
on the balance sheet for Canadian GAAP purposes and disclosed in note 11.  Under US GAAP, this amount would be presented
separately on the balance sheet.


 

















 


WESTPORT
INNOVATIONS INC.


Notes to Consolidated Financial
Statements


(Expressed in thousands of
Canadian dollars, except share and per share amounts)


 


Years ended March 31, 2008,
2007 and 2006


 


23.                    Reconciliation
to United States generally accepted accounting standards (continued):


 


(i)                   Additional financial information and disclosures required
under US GAAP (continued):


 


(v)                     Other disclosures (continued):


 


From time to time, the Company performs research and
development for unrelated parties.  The
Company receives revenue for such research and development activities from
these parties based on contractual arrangements.  These arrangements generally require the
Company to perform certain specific activities and revenue is received as the
activities are performed.  Revenue
received are not repayable, irrespective of the outcome of the activities.  There were no material research and
development arrangements in progress as at March 31, 2008 or 2007.  During the year ended March 31, 2008,
the Company earned revenue of $1,172 (2007 - $1,622; 2006 - $1,298) related to
such activities.  Costs expensed related
to these activities were $721 (2007 - $1,503; 2006 - $1,298).


 


(j)                    Recently issued accounting pronouncements:


 


In September 2006, the Financial Accounting Standards
Board (“FASB”) issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (“SFAS
157”).  This statement defines fair
value, establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements.  FAS
157 does not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting
pronouncements.  SFAS 157 is effective
for the Company on April 1, 2008. 
The Company is currently evaluating the impact SFAS 157 will have on its
financial condition and results of operations for US GAAP purposes.


 


In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities - including an amendment to FAS 115 (“SFAS
159”).  SFAS 159 permits a company
to choose to measure certain financial assets, financial liabilities and firm
commitments at fair value.  The standard
is effective for the Company on April 1, 2008.  The Company does not expect to adopt a fair
value approach.  Accordingly, SFAS 159 is
not expected to impact the consolidated financial statements for US GAAP
purposes.


 


In December 2007, the FASB issued Statement of
Financial Accounting Standards 141(R), Business Combinations
(“SFAS 141(R)”).  The statement broadens
the scope of SFAS 141 to all transactions in which an entity obtains control
over another entity.  The statement
provides further guidance on the recognition of identifiable assets and
liabilities and the measurement of goodwill. 
The statement is effective for the Company on April 1, 2009.  SFAS 141(R) will only affect the Company
if an acquisition occurs after adoption of SFAS 141(R).


 


In December 2007, the FASB issued Statement of
Financial Accounting Standards 160 Non-Controlling Interests
in Consolidated Financial Statements - an amendment of ARB No. 51
(“SFAS 160”).  The statement clarifies
the definition of a non-controlling interest, requires non-controlling
interests to be presented as part of equity on the balance sheet, changes the
way the consolidated income statement is presented and establishes a single
method of accounting for a change in a parent’s ownership interest in a
subsidiary.  The statement also provides
for further disclosures in the consolidated financial statements.  The statement is effective for the Company on
April 1, 2009 and is not expected to materially impact the consolidated
financial statements for US GAAP purposes although the Company may be required
to reclassify the amount for Joint Venture Partners’ share of


 

















 


WESTPORT
INNOVATIONS INC.


Notes to Consolidated Financial
Statements


(Expressed in thousands of
Canadian dollars, except share and per share amounts)


 


Years ended March 31, 2008,
2007 and 2006


 


net assets of joint ventures to equity.


 

















 


WESTPORT
INNOVATIONS INC.


Notes to Consolidated Financial
Statements


(Expressed in thousands of
Canadian dollars, except share and per share amounts)


 


Years ended March 31, 2008,
2007 and 2006


 


23.                    Reconciliation
to United States generally accepted accounting standards (continued):


 


(j)                    Recently issued accounting pronouncements (continued):


 


In March 2008, the FASB issued Statement of Financial
Accounting Standards No. 161, Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133
(“SFAS 161”).  SFAS 161 requires enhanced
disclosures about an entity’s derivative and hedging activities.  FAS 161 is effective for the Company on April 1,
2009.  SFAS 161 encourages, but does not
require, comparative disclosures for earlier periods at initial adoption.  The Company is assessing the impact of the
new statement.


 


In May 2008, the FASB issued Statement of Financial
Accounting Standards No. 162, The Hierarchy of Generally
Accepted Accounting Principles (“SFAS 162”).  SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the preparation
of financial statements that are presented in conformity with US GAAP in the
United States.  SFAS 162 will be
effective 60 days following the SEC’s approval of the Public Company Accounting
Oversight Board (PCAOB) amendments to AU Section 411, The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting Principles.  The Company expects that the adoption of SFAS
162 will not have a significant impact on its financial statements.