Exhibit 4.1


 


Westport
Innovations Inc.


 


ANNUAL
INFORMATION FORM


for the year
ended March 31, 2008


 


101 - 1750 West
75th Avenue


Vancouver,
British Columbia V6P 6G2


Tel: 604.718.2000


Fax: 604.718.2001


www.westport.com


 


Effective date: June 25,
2008


 


 





 

















 


TABLE OF CONTENTS


 


	
  FORWARD-LOOKING INFORMATION

  	
   

  	
  3

  
	
  CORPORATE STRUCTURE

  	
   

  	
  4

  
	
  OUR BUSINESS

  	
   

  	
  4

  
	
  OVERVIEW

  	
   

  	
  4

  
	
  GENERAL DEVELOPMENTS

  	
   

  	
  6

  
	
  BUSINESS STRATEGY

  	
   

  	
  6

  
	
  OPERATIONS

  	
   

  	
  9

  
	
  MEDIUM-DUTY ENGINES

  	
   

  	
  9

  
	
  HEAVY-DUTY ENGINES

  	
   

  	
  12

  
	
  TECHNOLOGY

  	
   

  	
  14

  
	
  INTELLECTUAL PROPERTY

  	
   

  	
  17

  
	
  GOVERNMENT FUNDING

  	
   

  	
  18

  
	
  HUMAN RESOURCES AND POLICIES

  	
   

  	
  19

  
	
  SOCIAL AND ENVIRONMENTAL POLICIES

  	
   

  	
  20

  
	
  SHARE CAPITAL

  	
   

  	
  22

  
	
  DIVIDEND POLICY

  	
   

  	
  22

  
	
  MARKET FOR COMMON SHARES

  	
   

  	
  22

  
	
  DESCRIPTION OF CAPITAL STRUCTURE

  	
   

  	
  23

  
	
  DESCRIPTION OF COMMON SHARES

  	
   

  	
  23

  
	
  DIRECTORS, OFFICERS, AND
  SENIOR MANAGEMENT

  	
   

  	
  24

  
	
  DIRECTOR BIOGRAPHIES

  	
   

  	
  26

  
	
  OFFICER AND SENIOR MANAGEMENT
  BIOGRAPHIES

  	
   

  	
  28

  
	
  SHAREHOLDINGS OF DIRECTORS AND
  OFFICERS

  	
   

  	
  30

  
	
  CONFLICTS OF INTEREST

  	
   

  	
  30

  
	
  RISK FACTORS

  	
   

  	
  30

  
	
  AUDIT COMMITTEE MATTERS

  	
   

  	
  39

  
	
  MANDATE OF THE AUDIT COMMITTEE

  	
   

  	
  39

  
	
  NON-AUDIT SERVICES

  	
   

  	
  43

  
	
  EXTERNAL AUDITOR’S SERVICE FEES

  	
   

  	
  44

  
	
  ADDITIONAL INFORMATION

  	
   

  	
  45

  
	
  LEGAL PROCEEDINGS

  	
   

  	
  45

  
	
  INTERESTS OF MANAGEMENT AND
  OTHERS IN MATERIAL TRANSACTIONS

  	
   

  	
  45

  
	
  TRANSFER AGENT AND REGISTRAR

  	
   

  	
  46

  
	
  MATERIAL CONTRACTS

  	
   

  	
  46

  
	
  INTERESTS OF EXPERTS

  	
   

  	
  49

  
	
  ADDITIONAL INFORMATION

  	
   

  	
  49

  



 


2

















 


FORWARD-LOOKING INFORMATION 


 


Certain statements contained in this Annual
Information Form (“AIF”) constitute “forward-looking statements”
including, without limitation, statements with respect to future demand for
Cummins Westport Inc. (“CWI”) engines, the ability of Westport to successfully
launch High Pressure Direct Injection (“HPDI”) commercially, the ability of
Westport’s products to adapt to hydrogen as a fuel and the ability of Westport
to exploit and protect its intellectual property. When used in this document,
the words “may”, “would”, “could”, “will”, “intend”, “plan”, “anticipate”, “believe”,
“estimate”, “expect”, and similar expressions, as they relate to us or our
management, are intended to identify forward-looking statements. Such
statements reflect our current views with respect to future events and are
subject to certain risks, uncertainties and assumptions, including, without
limitation, product development delays, changing environmental regulations, the
ability to attract and retain business partners, future levels of government
funding, competition from other technologies and the ability to provide the
capital required for research, product development, operations and marketing.
Many factors could cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements that
may be expressed or implied by such forward-looking statements, including among
others, those which are discussed under the heading “Risk Factors”. Should one
or more of these risks or uncertainties materialize, or should assumptions
underlying the forward-looking statements prove incorrect, actual results may
vary materially from those described herein as intended, planned, anticipated,
believed, estimated or expected. We do not intend, and do not assume any
obligation, to update these forward-looking statements, except as required by
law.


 


Unless specifically stated otherwise, all
dollar amounts set forth in this AIF are in Canadian dollars. On Wednesday, June 25,
2008, the Bank of Canada closing rate for one United States dollar was $1.0107
Canadian dollars.


 


3

















 


CORPORATE STRUCTURE


 


In this AIF, references to “Westport”,
“the Company”, “we”, “us” and “our” may refer to Westport Innovations Inc., its
subsidiaries and its joint ventures, collectively, unless the context otherwise
requires.


 


Westport Innovations Inc.’s
governing corporate statute is the Business Corporations Act
(Alberta). Our head office and principal place of business is at 101 - 1750
West 75th Avenue, Vancouver, British Columbia V6P 6G2. Our registered office is
at 4500 Bankers Hall East, 855 – 2nd Street, S.W. Calgary, Alberta T2P 4K7.


 


From 1996 to June 2006, we
conducted our principal operations through one wholly-owned operating
subsidiary, Westport Research Inc. (“WRI”), the governing corporate statute of
which was the Business Corporations Act
(British Columbia). Under a corporate restructuring substantially completed in August 2006,
the assets, liabilities and operations of WRI were transferred to another
wholly-owned subsidiary, Westport Power Inc. (“WPI”), the governing corporate
statute of which is the Business Corporations Act (British
Columbia). This restructuring had no impact on our overall business or mission.
More information on this transaction can be found in the “Material Contracts”
section of this AIF, on www.sedar.com or in our press release dated June 13,
2006. During the year ended March 31, 2008, we disposed of substantially
all of our remaining shares in WRI, now called Wild River Resources Ltd. (“Wild
River”), and now own less than 0.5% of Wild River.


 


In addition, we own 100% of the
voting securities of Westport Fuel Systems Inc. (“WPT Fuel Systems”), a
Delaware corporation; 100% of the voting securities of Westport Innovations
(Australia) Pty Ltd, an Australian corporation; 50% of the voting securities of
CWI, a Delaware corporation; and 50% of the voting securities of BTIC Westport
Inc. (“BWI”), a Chinese corporation. As of March 31, 2008, we also owned
an approximate 2% interest in Clean Energy Fuels Corp. (“Clean Energy”), a
publicly-listed company based in Seal Beach, California, the governing statute
of which is the General Corporation Law of the State of Delaware. As at June 25, 2008, Westport owns
approximately 975,000 shares of Clean Energy common stock with a value of
approximately US$10.55 million
based on the NASDAQ closing price of $10.82 per share on June 25,
2008.


 


OUR BUSINESS


 


The following section contains forward
looking information in respect of our operations. Readers are referred to the
cautionary statements respecting forward-looking information on Page 3 of
this AIF.


 


OVERVIEW


 


We are engaged in the research, development
and marketing of high performance, low-emission engine and fuel injection
systems that utilize alternative gaseous fuels such as natural gas, propane or
hydrogen.  We develop technology and
products that enable light-, medium- and heavy-duty diesel engines to run
primarily on either compressed natural gas (“CNG”) or liquefied natural gas (“LNG”),
giving users a cleaner, more plentiful and generally less expensive alternative
fuel when compared to diesel. Over the longer term, if alternative renewable
energy sources such as biogas or manufactured fuels, including hydrogen, emerge
as cost-competitive options, we expect our gaseous-fuelled engine technologies,
system and 


 


4

















 


experience will position us to exploit new
low-carbon fuels as they emerge. We work with strategic partners, which include
some of the leading diesel engine and truck original equipment manufacturers (“OEMs”),
to manufacture and distribute our engines, and we sell to a diverse group of
leading truck and bus OEMs around the world. Our products are designed to offer
environmental and economic benefits with strong operational performance. We
currently have an installed base of over 17,000 natural gas and propane engines
operating in 19 countries. We have three strategic pillars: CWI, which is
focused on medium-duty applications, LNG systems for heavy-duty trucks, and
corporate development. Our LNG systems for heavy-duty trucks are sold through
WPT Fuel Systems and Westport Innovations (Australia) Pty Ltd.  Corporate development is focused on the
creation of new alliances and joint ventures, market development projects, and
monetization of our significant patent portfolio.


 


CWI is a 50:50 joint venture with Cummins
Inc. (“Cummins”), one of the world’s largest manufacturers of diesel engines.
CWI develops and produces mid-range engines utilizing gaseous fuels.  CWI sells mid-range 5.9- to 8.9-liter engines
globally to more than 50 OEMs of transit and shuttle buses, medium-duty trucks
and refuse haulers as well as specialty vehicles such as short haul port
drayage trucks, material handling trucks, street sweepers and vehicles for
selected industrial applications. Our goal is to offer a superior combination
of performance, emissions characteristics and life-cycle cost savings when
compared with diesel oil, gasoline and other alternatives.  In 2007, CWI launched its newest engine, the
ISL G, which meets 2010 emission requirements today.


 


Outside of CWI, Westport is engaged in the
development, design and marketing of natural gas enabling technology for the
heavy-duty diesel engine and truck market. In 2007, we launched an LNG system
for heavy-duty trucks offering class-leading emissions performance while
maintaining diesel-equivalent horsepower, torque, and fuel efficiency.  We have a relationship with Cummins that
enables us to develop natural gas enabling technology for Cummins heavy-duty
truck engines. Our LNG system solution, available to customers since early
2007, leverages the Cummins ISX 15-liter diesel engine equipped with (i) our
proprietary natural gas fuel injectors known as HPDI technology; (ii) our
proprietary fuel pumps provided by Cryostar SAS (“Cryostar”), a division of The
Linde Group; (iii) proprietary control units; and (iv) onboard LNG
storage tanks designed and patented by us and manufactured by our 50:50 joint
venture with Beijing Tianhai Industry Co. (“BTIC”), a Sino-Korean company
located in Beijing. We also work with Clean Energy, North America’s largest
natural gas refuelling company, and other fuel suppliers around the world to
provide access points for LNG and CNG refuelling stations.


 


We believe we have achieved significant
progress in our markets as demonstrated by our strong revenue growth and will
continue to further penetrate these markets due in part to the macroeconomic
drivers around alternative fuels and our industry relationships developed over
the last twelve years. Through CWI, we are able to leverage Cummins’ extensive
manufacturing capabilities, sales and marketing efforts, distribution networks,
and aftermarket service and support to sell into mid-range engine markets while
incurring manageable overhead costs and minimizing working capital requirements
for us. We intend to use a similar scalable model to launch our LNG systems for
heavy-duty trucks.


 


While focusing firm-wide resources on
developing our products and strategic relationships, we have accumulated a
significant portfolio of patents, which we believe creates barriers to entry
for competing technologies. Additionally, we expect to selectively monetize our
patent assets through licensing agreements. We have already been successful in
achieving licensing revenue for our proprietary pump technology. We will continue
to rely on a combination of patents, trade 


 


5

















 


secrets, trademarks, copyrights, and
contracts to protect our proprietary technology and position in the
marketplace.


 


GENERAL DEVELOPMENTS


 


In January 2008, we announced that the
Kenworth Truck Company (“Kenworth”), a division of PACCAR Inc., will begin
production in 2009 of Kenworth T800 LNG trucks with our LNG fuel system
technology adapted for the Cummins ISX-15-liter engine at Kenworth’s
manufacturing facility in Renton, Washington. In order to support the Kenworth
factory initiative, we are investing approximately $3.5 million in a new LNG
Fuel System Assembly Center in the Metro Vancouver area, which is expected to
be completed in the fall of 2008.


 


On October 26, 2007, we announced the
formation of a 49:51 equity joint venture, Juniper Engines Inc., with OMVL SpA,
an Italian company that designs, manufactures and markets complete fuelling
systems for new vehicles and for the aftermarket conversion of engines from
gasoline (petrol) to CNG and liquefied petroleum gas (“LPG”). The new venture
will design, produce and sell alternative fuel engines in the sub-5 litre class
for global applications. As required under the terms of the Juniper Engines
Inc. joint venture agreement, we invested $1.5 million on April 1, 2008,
giving us 49% of future profits and losses.


 


On June 12, 2006, we agreed to issue up
to $22.1 million in convertible notes to fund our operations. More information
on this transaction can be found in the “Material Contracts” section of this
AIF, on www.sedar.com or in our press release dated June 12, 2006. During
the fiscal year ended March 31, 2008, the holders of the convertible notes
exercised the conversion option and all of the associated warrants. As an
inducement for conversion of the convertible notes, we agreed to pay an amount
equal to 50% of the interest that would otherwise have been payable on the
notes on December 31, 2007 and June 30, 2008, had the notes not been
converted.  As at June 25, 2008, our
remaining liability on this transaction was approximately $0.4 million.


 


BUSINESS STRATEGY


 


Our objective is to enhance and protect our
position as a leading provider of alternative technology fuel systems for
diesel applications using gaseous fuels such as natural gas, propane or
hydrogen both domestically and globally. In order to achieve this goal, we have
focused our efforts on the following business strategies:


 


Continue to
Profitably Grow CWI


 


We believe CWI is a leading provider of mid-range natural gas engines.
Since 2004, CWI revenues, expressed in U.S. dollars to exclude foreign exchange
distortions, have grown at more than 30% compounded annually on a calendar year
basis, while pre-tax operating profits have compounded by approximately 450% in
the same period from breakeven in 2004. We believe this is a result of
providing a quality product for the natural gas market, providing superior
customer service and an increasing number of customers around the world
recognizing the economic benefits due to high oil prices and environmental
advantages of using diesel engines that run on natural gas compared to diesel
fuel. We anticipate increased demand for CWI engines given their performance
and emissions characteristics, and their life-cycle cost advantages. We
anticipate growth in CWI’s natural gas engine sales resulting from penetration
in new geographies globally, attracting new customers in the bus, including
shuttle and transit, 


 


6

















 


and refuse truck markets, and adoption by new markets such as the
container port delivery trucks and yard hostler markets and possibly school
buses.  We also anticipate increasing CWI
penetration levels in both the bus fleet and refuse truck markets as economic
benefits of natural gas increase. We expect the increased adoption rate for CWI
natural gas engines to result in incremental revenue and margins given CWI’s
operating leverage, fully developed technology and fixed cost fulfillment
process.


 


Accelerate Commercialization
of Our HPDI LNG Technology System


 


In March 2007, Westport began to deliver its first LNG engine
systems for heavy-duty trucks. This product has been in development since 1999
and has undergone extensive testing and field trials in Canada, Australia and
California and we are now launching our HPDI LNG system in North America and
Australia. We have already generated significant momentum, including the
exclusive agreement we signed with Kenworth Truck to begin assembly line
production of the Kenworth T800 equipped with our LNG fuel system for the
Cummins ISX 15-liter engine for the San Pedro Bay Ports and other customers. In
February 2008, we announced that Wal-Mart Stores, Inc. (“Wal-Mart”)
will introduce four LNG-fuelled Peterbilt Motor Company trucks into service at
its distribution center in Apple Valley, California. The San Pedro Bay Ports,
under their Clean Air Action Plan, are targeting replacing all of the 16,800
trucks serving the port today over the next four years and have committed that
at least 50% of these new trucks will be fuelled with natural gas.  Of the five truck manufacturers who
participated in the alternative fuel truck procurement process at the Ports in
2008, all five proposed trucks incorporate either Westport’s LNG system with
the Cummins ISX engine, or CWI’s ISL G engine. Another region where we believe
that market conditions are favourable for LNG trucks is Australia. A
significant market driver in Australia is the availability of low-cost feed gas
for LNG production that could provide strong financial incentives for
heavy-duty trucking fleets, mines, and other high fuel use applications to
operate with our LNG system-equipped engines.


 


Leverage Our
Partners’ Resources


 


Our strong relationships not only create a barrier to entry for
competitors who do not have comparable relationships, they also allow us to
achieve significant operating leverage as we utilize our partners’
manufacturing, distribution, and sales and marketing capabilities. CWI engines,
for example, are manufactured or assembled at Cummins plants in the United
States, China and India, allowing CWI to spread production of its engines
without incurring any capital costs. CWI also leverages Cummins’ supply chain,
back office systems and distribution and sales networks. This leverage allows
CWI to grow revenues and gross margins faster than expenses. For LNG systems
for heavy-duty applications, we have established key alliances with Kenworth, a
pre-eminent truck manufacturing company for manufacturing, distribution and
sales, Cummins, one of the largest diesel engine manufacturers in the world for
the supply of engines, BTIC, a Sino-Korean manufacturer of LNG fuel tanks for
our HPDI LNG system, and Cryostar. We plan to use a similar model of leveraging
our partners for manufacturing, distribution and sales. We are pursuing
additional North American and international strategic alliances to continue to
accelerate our market penetration and increased adoption of our technologies.


 


Focus on Geographic
Expansion by Penetrating Key Markets in Asia and Europe


 


China is one of the world’s largest markets for all types of road
vehicles, and its heavy-duty truck (>16 tonne) market is already about as
large as those in Europe and NAFTA. China’s 


 


7

















 


vehicle production has more than doubled in the past five years, while
production in Germany, Japan, and the U.S. is nearly flat or declining.
Assuming that current trends continue, within five to ten years China could be
both the world’s largest consumer and producer of motor vehicles.


 


Vehicle Production in the Top Four Producing
Countries


 





 


China is focused on moderating the impacts of rapid urbanization and
tremendous vehicle growth.  Natural gas
engines are well positioned to increase market share due to lower environmental
impact compared to diesel engines. CWI supplies customers in China with high
performance CNG bus engines and has expanded beyond Beijing into several other
Chinese cities. An additional focus for growth in Asia will be exports of our
CWI engines through Chinese OEMs to other countries in Southeast Asia and South
America. We also focus on promising markets in other parts of Asia, such as
India. According to the International Association for Natural Gas Vehicles, an
industry association, 2005 data showed Pakistan third and India fifth in terms
of total numbers of natural gas vehicles, while Delhi, India has one of the
world’s largest natural gas bus fleets.


 


European regulators have implemented some of the most aggressive
responses to air quality issues and climate change concerns, and are
concurrently promoting increased use of natural gas in vehicles. We believe the
opportunities are strong in Europe’s transit, refuse, and urban truck markets.
CWI engines are already being offered in vehicles produced by Renault Trucks
SAS of France, and have also been sold for transit applications in Eastern
Europe. In 2005, CWI supplied 234 engines for refuse collection and street
sweeper trucks in Paris, France. In 2006, CWI announced an order for 278
engines to Russian Buses, of Moscow, Russia, CWI’s first large order from a
Russian OEM. CWI has also delivered 50 engines to Cairo, Egypt. Longer-term
market prospects are foreseen in North Africa and in Middle Eastern markets.


 


8
















 


Expand OEM and
Market Availability


 


We are also focused on developing
new OEM and supply relationships.   We
cooperate or have cooperated on fuel delivery system development programs with
a number of companies and are continuing discussions with a number of the world’s
leading truck and engine OEMs to develop products for their markets.


 


We have previously developed technologies for the power generation
market and we also believe that our technologies and systems can be applied to
off-road vehicles such as mine-haul trucks, and to marine and rail
transportation.


 


Continue to Leverage
Our Intellectual Property Portfolio


 


We are pursuing opportunities to leverage our significant intellectual
property portfolio to develop new products, achieve stronger market penetration
and increase our revenue streams. Westport and CWI have already realized the
revenue opportunities with a licensing model through relationships with Cummins
India Limited (“CIL”), Dongfeng Cummins Engine Company Ltd. (“DCEC”) and
Cryostar. We are currently in discussions with several international partners
to provide our technology under a licensing agreement.


 


Expand Our Product
Offering by Adapting Our Technology for Multiple Alternative Fuel Use


 


Our products
are built on an alternative fuel platform that leverages the abundant global
supply of natural gas. Over the longer term, if alternative renewable energy
sources such as biogas or manufactured fuels, including hydrogen, and dimethyl
ether emerge as cost-competitive options, we expect our gaseous-fuelled engine
technologies, system and experience will position us to exploit such new
low-carbon fuels as they emerge.


 


In order to maintain technology leadership in the
gaseous fuel combustion area, we are working to adapt our technology with hydrogen
and other alternative fuels. We are working with Ford Motor Company (“Ford”)
and Bayerische Motoren Werke AG (“BMW”) on hydrogen injection technologies and
products.


 


OPERATIONS


 


We provide natural gas enabling technology for medium-duty diesel engines
primarily to the bus fleet and refuse truck markets and also provide a
comprehensive technology system to the heavy-duty truck market that allows
heavy-duty diesel engines to run on primarily natural gas, store natural gas,
and refuel with natural gas. We offer the heavy-duty truck market a total
natural gas solution, which facilitates the conversion to and adoption of
natural gas engines as logistical transition costs are largely avoided.


 


MEDIUM-DUTY ENGINES


 


CWI’s existing mid-range engine products feature spark-ignited
technology and are used mainly for urban buses and trucks. We believe that
because of inherent advantages in low-emission internal combustion natural gas
engines, CWI products can offer lower life cycle costs in a number of applications
compared to conventional and other alternative-fuel engine products. CWI
engines compete with conventional and alternative-fuel engines on a number of
different factors including reliability, performance, price, service, parts
availability, and other factors. CWI 


 


9

















 


believes its engines have a strong competitive advantage over other
alternative fuel engines. CWI is already the leading supplier of natural gas
engines to North American transit and city fleets, and the outlook for product
markets is promising.


 


CWI has five mid-range engines in commercial production today: the ISL
G, C Gas Plus, B Gas Plus, B LPG Plus, and B Gas International (“BGI”).


 


The ISL G was introduced in 2007 and is the world’s first engine for
urban bus and medium-duty truck applications to be certified to the 2010 U.S.
Environmental Protection Agency (“EPA”) and California Air Resources Board (“CARB”)
emissions levels. The ISL G incorporates new combustion and emissions control
technologies to offer all the advantages of previous clean-burning natural gas
engines with an increase in performance and fuel efficiency, while meeting the
strict 2010 EPA and CARB emissions standards of 0.2 grams per brake
horsepower-hour (“g/bhp-hr”) nitrogen oxide (“NOx”) and 0.01 g/bhp-hr
particulate matter. In 2008, the ISL G was certified to the Euro EEV
(Environmentally Enhanced Vehicle) standard, expanding the engine availability
to Europe and other markets around the world.


 


The 8.9-litre, ISL G engine uses stoichiometric cooled-exhaust gas
recirculation (“EGR”) combustion, leveraging Cummins proven cooled EGR diesel
technology to create a high-performance natural gas engine. The use of cooled
EGR in place of large amounts of excess air not only lowers combustion
temperatures, it also allows the creation of an oxygen-free exhaust, which in
turn allows for the use of a three-way catalyst (“TWC”) on the exhaust. TWCs
are simple passive devices that are maintenance-free and have been commonly
used in passenger cars since the 1970’s. CWI’s stoichiometric cooled-EGR
technology improves power density as well as fuel economy and emissions. In
fact, low-speed torque is improved by over 30% compared to previous engines.
With ratings from 250 to 320 horsepower, this new high-performance,
low-emissions engine has sufficient power and torque for large transit buses,
refuse collection trucks and municipal works medium-duty trucks. The ISL G has
replaced the C Gas Plus and the L Gas Plus in North America.


 


The C Gas Plus is an 8.3-litre natural gas engine with ratings from 250
to 280 horsepower. Introduced in June 2001, it is an advanced version of
the C8.3G engine that Cummins had been producing since 1996. The C Gas Plus
will continue to be offered in markets outside of North America certified to
Euro III and IV emissions standards established by the European Union.


 


The B Gas Plus and propane B LPG Plus engines are 5.9 litres in
displacement and are suitable for shuttle bus, vocational and other truck
applications that require less power and smaller package size than the C Gas
Plus. Launched in October 2002, the B Gas Plus is an advanced version of
the previous B5.9G natural gas engine, which Cummins had been producing since
1994. It is certified to 2008 EPA and CARB standards and Euro V, EEV emissions
standards. The B Gas Plus has power ratings from 150 to 230 horsepower. The B
LPG Plus, launched in May 2003, is an advanced version of the B5.9LPG
propane engine. It has a power rating of 195 horsepower and is certified to
2008 EPA and CARB emissions standards.


 


The BGI replaced the B5.9G natural gas engine in developing country
markets with the ability to be assembled locally in China and India to get
closer to customers in those markets and to minimize import costs and allow
more competitive pricing with local Chinese and Indian manufacturers.


 


10

















 


Medium-Duty Engine
Production


 


On December 16, 2003, Westport and Cummins announced the signing
of a restated and amended joint venture agreement (the “Amended JVA”), which
replaced the original joint venture agreement signed in March 2001, and
focused CWI’s business plan on mid-range engines. Pursuant to the Amended JVA,
Cummins converted its preferred share interest in CWI to common shares and CWI
was continued as a 50:50 joint venture. 
Both Westport and Cummins now hold equal numbers of voting common shares
in CWI, and equal representation on the CWI board of directors.


 


Under the Amended JVA, Cummins granted to CWI an exclusive, worldwide
license to make, have made, use, market, or sell engine product and parts
embodying, using or designed to practice any current and future intellectual
property requested or required by CWI in order to pursue the business
opportunities relating to automotive gaseous fuel versions of Cummins B, C, and
L diesel engines (and their derivatives) and any future CWI products for
distribution approved by the CWI board of directors. Cummins has agreed to
manufacture the engines for CWI’s business, and to transfer them to CWI at
cost. In consideration for these terms, CWI agreed to pay Cummins a technology
royalty fee equal to 1.5% of engine revenue in 2004, and to 2.75% of engine
revenue thereafter, to a cumulative maximum of U.S.$10.4 million. CWI operates
with an OEM on-line production model whereby CWI’s proprietary medium-duty
natural gas engine technology is installed directly into the Cummins engine
during the manufacturing process as opposed to being integrated into the
Cummins engine subsequent to engine production for up fitting. Profits and
losses are shared equally between us and Cummins.


 


Although there is no set term to the CWI joint venture, the Amended JVA
provides for the possible termination of the joint venture and the distribution
of CWI’s assets between Cummins and us in the event of unresolved material
breaches by either party or the bankruptcy of either party, or upon a change of
control (50% of voting stock) of either party. Either party may provide written
notice of intent to purchase the other party’s shares in 12 months, at 125% of
fair market value as determined by an independent valuator, and with the
obligation to continue to share profits for two years following the purchase.
Finally, either party may elect to terminate the joint venture if CWI has a
cumulative net loss greater than U.S.$5,000,000 (excluding non-cash expenses
such as stock-based compensation charges, and restructuring charges) at any
time over a five-year period starting January 1, 2004.


 


CWI currently designs and develops commercial mid-range engine products
and markets and sells to transit bus and urban truck OEMs around the world.
These engines operate on natural gas, stored on the vehicle in either
high-pressure compressed gaseous form (CNG), or as a cryogenic liquid (LNG).
CWI also offers engines that operate on LPG. CWI engines are manufactured today
in three different locations: a Cummins joint-venture engine plant in Rocky
Mount, North Carolina, CIL in Pune, India, and DCEC in Xiangfan, Hubei
Province, China. CWI engines are distributed and supported through Cummins’
worldwide distribution network.


 


In January 2005, CWI’s board of directors appointed Guan Saw as
President, effective April 1, 2005. Prior to CWI, Mr. Saw was Cummins
General Manager-East Asia International Distributor Business based in Beijing. Mr. Saw
has been responsible for Cummins distributor business growth in East Asia,
including China, Hong Kong, Taiwan, and Mongolia.


 


The board of directors of CWI is comprised of three representatives from
each of Westport and Cummins. The Chairman of CWI is Steven Chapman, who is
also Cummins Group Vice 


 


11

















 


President – Emerging Markets and Businesses. The other
Cummins-appointed directors are Dr. John Wall (Vice President and Chief
Technical Officer) and Randi Engelhardt (Director of Finance – Emerging Markets
and Businesses). CWI’s Westport-appointed directors are David Demers (Chief
Executive Officer), Dr. Michael Gallagher (President and Chief Operating
Officer), and Elaine Wong (Executive Vice President and Chief Financial
Officer).


 


HEAVY-DUTY ENGINES


 


A central pillar of our strategy to diversify our revenue base has
always been the commercialization of our HPDI technology for heavy-duty trucks,
for both on-road and off-road applications. Our immediate market focus is the
United States, particularly California and Texas, and Australia, where LNG
infrastructure and fuel relationships are established and there is increasing
demand for alternative fuel Class 8 vehicles operating from central
locations, such as ports and goods distribution centers.


 


Our HPDI technology allows a Class 8 heavy-duty truck to operate
with approximately 95% replacement of diesel fuel by natural gas in high duty
cycle applications. In addition, our HPDI technology maintains the diesel
performance and efficiency throughout its operating range. By directly
injecting the natural gas at high pressure into the combustion chamber, HPDI
reproduces key benefits of diesel engines: high efficiency over the speed and
torque operating range; high torque capability; and robust reliability. The use
of diesel pilot ignition provides powerful ignition and contributes to the
reliability and durability of the system. At the same time, the properties of
natural gas contribute to a significant reduction in combustion by-products,
such as NOx, particulate matter (“PM”), and greenhouse gases (“GHG”).


 


We believe HPDI engines are the best solution for ultra-low emissions
heavy-duty trucks that require one or more of the following characteristics:


 


·                  high torque at low engine speeds;


 


·                  excellent transient response;


 


·                  lower NOx (North America) and PM
(Australia) emissions; and


 


·                  lower greenhouse gas emissions.


 


We target geographical markets with the following characteristics:


 


·                  local emissions regulations
requiring stringent environmental performance;


 


·                  LNG fuel availability in the
market at delivered prices that make total life cycle costs for vehicle
purchase and operation materially cheaper than conventional diesel trucks;


 


·                  incentives of various kinds to
offset the total incremental costs of low-emissions vehicles; and/or


 


·                  diesel emissions reduction
equipment costs that are sufficiently large such that when new regulations
force lower emissions, total life-cycle costs for conventional diesel vehicles
rise and surpass equivalent costs for natural gas vehicles.


 


12

















 


We believe that these factors are currently present in southern
California and Australia.  Within these
areas, we target return to base fleets or short-haul heavy-duty truck corridors
where fuel infrastructure can be more easily established and managed. We are
currently targeting prospective customers at the San Pedro Bay Ports and other
fleet operators serving predictable routes in the Los Angeles Basin.


 


The HPDI
technology involves new proprietary natural gas fuel injectors, fuel pumps,
control units, and onboard LNG storage tanks. The LNG is pressurized with a
unique tank-mounted LNG pump, powered by hydraulic oil from a hydraulic pump.
The LNG is then vaporized – using excess heat from the engine coolant – and
exits the tank module as a warm, high-pressure (4,500 psi) gas. At the same
time, a diesel fuel pump pressurizes diesel fuel from the pilot diesel tank.
Both fuels are sent to the fuel conditioning module, where they are pressure
regulated, filtered, and distributed to the fuel injectors. All of our LNG
system components are electronically controlled by the control units, allowing
continuous adjustments that provide optimal engine operation. The Westport
ISX-G engine and LNG fuel system are currently available for North America
(certification valid through December 2009) and Australia (certification
valid through December 2010). We are currently working towards development
of the LNG system to meet the 2010 U.S. standards.


 


Current Engine
Ratings


 


The Westport ISX-G LNG engine, the natural gas version of the ISX, for
North America is offered in four ratings, 400 horsepower with 1450 ft-lbs
torque, or 450 horsepower with 1650 ft-lbs torque, and “Smart-Torque” ratings
at 400 horsepower and 450 horsepower, matching the diesel-fuelled base ISX
engine.


 


In Australia, three HPDI engine ratings are being developed, GX-485
with peak power of 500 horsepower and 1650 ft-lbs torque, GX-525 with peak
power of 550 horsepower and 1850 ft-lbs torque, and GX-550 with peak power of
578 horsepower and 1850 ft-lbs torque. These engines have been certified to the
Australian Design Rules (“ADR”) emission levels for 2008, called ADR
80/02.


 


Heavy-Duty LNG
System Production


 


The main component parts of our LNG system include the (i) Cummins
ISX engine (sold separately), (ii) HDPI engine fuel system, and (iii) LNG
pump and tank. We expect to transition our LNG system production model from an
up fitting model to an OEM on-line production model and have begun this process
by reaching an agreement with Kenworth to produce HDPI trucks on assembly line
in early 2009. For OEM supply, the Cummins ISX engine will be manufactured at
Cummins’ manufacturing plant and then transported to our 21,000 square foot
assembly center in Delta, British Columbia, where it will be upfitted with our
proprietary HDPI technology. The Delta facility will also be responsible for
the final assembly and testing of the HPDI injectors and proprietary cryogenic
LNG pump and storage tanks. The cryogenic pumps and LNG tank are manufactured
based on our proprietary design by our supply partners. Component parts are
delivered to our assembly plant where the assembly process is completed as described
in the illustration below.


 


13

















 





 


TECHNOLOGY


 


We have invested approximately $250 million in developing our
technology, products and test facilities and building our intellectual property
base.  As one of the few companies we are
aware of focused on gaseous fuel engine technologies, we believe we are a world
leader in gaseous-fuelled engines that incorporate high pressure, common rail,
direct injection technologies.


 


We have developed a wide range of demonstration engines incorporating
our technologies, as small as 1.4 litres, used in passenger cars, and as large
as 60 litres, which are large industrial engines for power generation and
off-road applications.


 


Gaseous Fuel
Injectors


 


Our direct-injection gaseous fuel injectors are designed to be
incorporated into a diesel engine with no head modifications and no changes to
the engine hardware beyond substituting a diesel injector for our injector. No
special pistons, cams, heads, gas mixer, or port injectors are needed.
Late-cycle, high-pressure direct injection ensures diffusion-type combustion
and, therefore, retains the high power, torque, and efficiency of a regular
diesel engine.


 


We have developed fuel systems capable of handling the special
challenges presented by compressible fuels. For instance, our injectors are
designed to manage:


 


·                  the high volumetric flow rates
required for a fuel much less dense than diesel;


 


·                  complex fuel routing for two fuels
within the injector;


 


14

















 


·                  carbonizing and thermal
fluctuations that can result from the reduced cooling capacity of a gaseous
fuel; and


 


·                  high pressure differentials within
the injector and the fuel leakage that can result.


 


We design and test our own natural gas direct injection fuel injectors.
We also control injector assembly and quality, but we contract component
fabrication to outside manufacturers.


 


High Pressure Direct
Injection


 


HPDI engines use small diesel pilot sprays and larger gas sprays. For
high duty applications, the diesel is, on average, approximately 5% of the
total energy input and is used to start the combustion process just prior to
the main injection of natural gas. HPDI injectors are common-rail,
diesel-actuated, and electronically controlled. They can power engines at
diesel-like efficiencies but cut engine-out NOx emissions by up to 40-50%, PM
emissions by 60-80%, and GHG emissions by 15-30% compared to the equivalent
diesel engines. Our HPDI technology has been demonstrated on Cummins, MAN and
Detroit Diesel engines and could be applied to any modern direct injection
diesel engine, given sufficient development.


 


Hot Surface Ignition


 


Hot surface ignition (“HSI”) engines use only gaseous fuels (usually
natural gas or hydrogen). There is no diesel pilot spray required. Ignition
generally depends on a continuously operating glow plug. HSI injectors are
common rail and directly actuated. Direct actuation allows almost unlimited
injection flexibility for multiple injections, and unparalleled injection rate
control for rate-shaping. Emissions are drastically reduced because of the
natural gas, but diesel-cycle diffusion combustion retains the power, torque,
and efficiency of the diesel engine.


 


We have demonstrated this technology, also called CNG-DI technology,
for Isuzu Motor Ltd. (“Isuzu”) engines. Testing on Isuzu prototype engines
using HSI shows no measurable particulates, up to 20% less greenhouse gas
emissions (mainly carbon dioxide) than equivalent diesel engines, and 30%
increased fuel efficiency over current natural gas engines of this capacity.


 


In July 2002, to help advance our light-duty technology, we
acquired substantially all of the assets of GVH Entwicklungsgesellschaft für
Verbrennungsmotoren und Energietechnik mbH (“GVH”) of Dortmund, Germany.
Technologies developed by GVH relate to hot surface ignition, glow plugs, fuel
injection, controls and gas compression.


 


Combustion
Technology


 


Our combustion technology was conceived to
manage the challenges unique to burning a directly-injected compressible fuel.
For example, we have developed strategies to select injection pressure,
injection rate, fuel injection timing and quantity, nozzle geometry and EGR
quantity, to best optimize performance and emissions.


 


We have also developed “virtual engine”
modeling and other analytical tools uniquely capable of designing better
methods of burning compressible fuels to power internal combustion engines.


 


15

















 


For instance, we have developed methods for improved
start-of-combustion controls using accelerometers. The accelerometer based
start of combustion system can be used to control homogeneous charge
compression ignition engines.


 


Cryogenics


 


Our cryogenic technologies provide gaseous fuels for mobile
applications, where durability is important, space is limited, and excess
weight is costly. Our designs for compact cryogenic pumps and storage vessels
are well suited to high-vibration applications. 
Our LNG pump is designed to be fitted within a cryogenic vessel to
minimize heat leak and external exposure of cryogenic parts.


 


We have also developed associated refuelling infrastructure components
for LNG and CNG, including cryogenic transfer. Although designed for fuel
storage and delivery, this technology could be easily adapted for other
applications where cryogenic technology is used, such as medical or industrial
applications.


 


Aftertreatment


 


As a natural gas engine fuel system
developer, we have investigated and developed aftertreatment systems for
natural gas engine technology. We have worked with lean NOx absorbers and have
investigated particulate filters. Novel systems and methods, applicable to both
natural gas and diesel engines, have been developed. For example, we have
developed systems and methods for the in-line regeneration of lean NOx
absorbers. The systems allow for thermal management of the catalysts, along
with advanced sulphur management control methods. These systems have allowed us
to demonstrate improved NOx absorber performance. In addition, the sulphur
management methods can improve the durability of NOx absorbers.


 


Compressors


 


We have designed compressors to meet the fuel system’s need to provide
high-pressure natural gas to the injectors. This compressor technology is
modular and scalable to adapt to varying flow rates, gas pressures, and
packaging requirements, which often dominate vehicle fuel-system design. In
general, the compressor allows storage tanks to be drawn down to a low pressure
while maintaining high injection pressure—in the thousands of pounds per square
inch–thus extending time between refills while maintaining consistent gas
delivery performance.


 


Lean Burn Spark
Ignited


 


CWI’s lean burn spark ignited (“LBSI”) gaseous-fuelled engines use
Otto-cycle combustion with large amounts of excess air to maintain relatively
low combustion temperatures resulting in low NOx output. This architecture
relies on traditional spark plugs to ignite a pre-mixed air/fuel charge, which
can accommodate most gaseous fuels including natural gas, propane, hydrogen,
and blended fuels. CWI’s spark ignited engine technologies are integrated with
a robust diesel engine platform to create a clean-burning alternative fuel
engine with excellent reliability and durability characteristics.


 


16
















 


Stoichiometric
Exhaust Gas Recirculation Spark Ignited


 


CWI’s stoichiometric exhaust gas recirculation spark-ignited (“SESI”)
technology builds upon the LBSI approach by using high rates of cooled EGR in
the combustion process in place of large amounts of excess air. The use of
cooled EGR allows the creation of oxygen-free exhaust, which then allows for
the use of a TWC. TWCs are simple passive devices that have been in common use
in passenger cars since the 1970s and have NOx conversion efficiencies in excess
of 95% while controlling carbon monoxide and hydrocarbon emissions. SESI
technology will deliver ultra low emissions, below EPA 2010 levels, with
increased thermal efficiency and higher low-speed torque compared with today’s
LBSI engines.


 


INTELLECTUAL
PROPERTY


 


The goal of our intellectual property strategy is to capture, protect,
and utilize our intellectual property in coordination with our business and
technology plans, to best enable the successful commercialization of our
proprietary and superior products. Our intellectual property strategy is
designed to be adaptive to our target markets and the products intended for
those markets, to support the commercial launch of new products, and to sustain
a long-term competitive edge in the market. We rely on a combination of
patents, trade secrets, trademarks, copyrights, and contracts to protect our
proprietary technology.


 


We are committed to our strategy of building an intellectual property
portfolio that encompasses a variety of intellectual property rights, and
protects our key intellectual assets. We believe these intellectual assets will
enable us to remain competitive in our industry.


 


We use patents as the primary means of protecting our technological
advances and innovations, which include proprietary claims to components,
materials, operating techniques, and systems. We have a proactive approach to
identifying, evaluating and choosing strategic inventions that we seek to
protect through the timely filing and diligent management of patent applications.
We have a comprehensive invention disclosure program involving written
invention memoranda, and maintenance and preservation of supporting laboratory
records. Patent applications are filed in various jurisdictions
internationally, which are carefully chosen based on the likely value and
enforceability of intellectual property rights in those jurisdictions, and to
strategically reflect our anticipated major markets. Patents provide us with a
potential right to exclude others from incorporating these technical
innovations into their products and processes. We also use patents, along with
publications and, where appropriate, licensing of third party technologies, to
provide us with the flexibility to adopt preferred technologies.


 


As of March 31, 2008, we held 52 issued U.S. patents and four
allowed U.S. patents, in addition to corresponding issued patents or pending
patent applications in numerous other countries around the world. The
expiration dates of issued U.S. patents in our portfolio ranges from November 2008
to May 2026. We also have a number of patent applications pending in the
United States and under the international Patent Cooperation Treaty, which
preserves for at least 30 months our right to file patents in all of the major
industrial countries that are of interest to us. These issued and pending
patents cover various aspects of our technology.


 


We believe we have developed a significant
international patent portfolio, which establishes a broad foundation for our
ongoing research activities, which continues to yield new and patentable
developments. We expect to file new patent applications each year as our patent
portfolio expands to strengthen our leadership role as a developer of
gaseous-fuelled engine 


 


17

















 


technology by capturing new developments as
they arise. Our intellectual property program includes a strong
competitor-monitoring element; we actively monitor the patent activity,
technical developments, and market position of our competitors. We expect
activities relating to assertion and enforcement of our intellectual property
rights to increase as the market for our products develops, and we also expect
that our growing patent portfolio, especially when coupled with a strong
enforcement program, will provide us with a significant advantage over our
competitors.


 


Portions of our
know-how are protected as trade secrets and through contractual agreements with
our employees, suppliers, partners, and customers. We carefully protect our
intellectual property rights in our collaboration agreements with a view to
capturing maximum value from our products, and ensuring a competitive
advantage. We are supporting the ongoing development of our market image and
branding strategy by seeking timely registration of our trademarks in
strategically chosen jurisdictions.


 


GOVERNMENT FUNDING


 


Westport and CWI have won significant funding awards from U.S. and
Canadian government agencies and from trade groups for technology development
and demonstration projects. In some cases, the government or trade-group
funding may be repayable in whole or in part, depending on the success of the
technology. Some of the more material awards include:


 


·                  February 2008 – We were
awarded U.S.$2.25 million in funding from the SCAQMD, the California Energy
Commission (“CEC”) and the San Pedro Bay Ports to support the development,
demonstration, commercialization and certification of our heavy duty LNG fuel
system for the Cummins ISX to meet the EPA 2010 NOx (0.2 g/bhp-hr NOx) emissions
standard prior to 2010. Under the terms of the agreement, we will receive
U.S.$1.25 million from the SCAQMD, U.S.$250,000 from each port and U.S.$500,000
from the CEC.


 


·                  January 2007 – We were
awarded AU$1.36 million from the Australian Government’s Alternative Fuels
Conversion Program for a project to evaluate the use of LNG as a fuel for
heavy-duty highway trucks in Australia.


 


·                  February 2006 – CWI awarded
U.S.$350,000 in funding from Utilization Technology Development for CWI’s
previously announced ISL G engine product development program.


 


·                  September 2005 – CWI awarded
U.S.$690,000 in funding from the SCAQMD for CWI’s ISL G engine product
development program.


 


·                  April 2005 – With a
consortium of partners, we announced an additional funding commitment from the
Government of Canada for the Vancouver-based demonstration of public transit
buses announced in June 2004. This is in addition to the “June 2004”
funding for hydrogen-enriched compressed natural gas-fuelled (“HCNG”) buses
listed below.


 


·                  March 2005 – $567,000 in
funding to us from the National Research Council of Canada’s Industrial
Research Assistance Program to offset costs related to our work in Asia and the
development of our natural gas and hydrogen engine technologies.


 


18

















 


·                  February 2005 – U.S.$600,000
from the U.S. National Renewable Energy Laboratory (“NREL”) for CWI to develop
a next-generation natural gas engine that will meet stringent 2010 EPA and 2007
CARB urban bus standards. Scheduled for commercial launch in 2007, the new
engine will be introduced three years ahead of the EPA deadline.


 


·                  December 2004 – U.S.$1.95
million to us from the SCAQMD to advance the development of our proprietary
HPDI technology for heavy-duty truck engines.


 


·                  October 2004 – U.S.$1.5
million to us from NREL, a cost-sharing subcontract to develop and deploy the
next generation of its HPDI technology in heavy-duty natural gas trucks in
California. The total project cost is estimated to be U.S.$1.9 million. NREL
funding is provided through sponsorship from the U.S. Department of Energy “FreedomCAR
and Vehicle Technologies” and “Clean Cities” programs.


 


·                  June 2004 – Together with a
consortium of partners, we announced a major funding commitment (subject to
contract completion) from SDTC for a demonstration of up to five HCNG transit
buses in Vancouver.


 


·                  March 2004 – $350,000 to us
from IRAP for advanced technology development of CNG-DI technology.


 


·                  May 2003 – €220,000 to us
from the German gas industry, led by Ruhrgas AG, to cover costs associated with
the development, preparation, and commissioning of a MAN heavy-duty engine
equipped with our technology and a market study.


 


·                  May 2003 – U.S.$592,000
funding to CWI from NREL to advance development of the 8.9-litre L Gas Plus
spark-ignited natural gas engine for use in larger transit and urban truck
applications.


 


·                  March 2003 – $18.9 million
from Technology Partnerships Canada (“TPC”) to support the development of
high-performance low-emissions engines for vehicle applications. For more
details, please see “Additional Information - Canada’s Industrial Technologies
Office (formerly TPC)”.


 


·                  March 2003 – U.S.$476,000
funding commitment from NREL to a project team involving CWI and led by SunLine
Transit in California for a field trial using an HCNG engine in SunLine’s
transit buses.


 


HUMAN RESOURCES AND
POLICIES


 


We have attracted a highly educated, experienced team
of professionals focused on the development of our technologies. We actively
recruit skilled individuals and then provide them with specific training
relating to our technology. This enables us to hire people from different
professional backgrounds, ensuring a readily available pool of talent. Where appropriate,
we retain consultants and contract workers with specific expertise. Due to our
position as a world leader in natural gas engine technology, we have been able
to attract experienced qualified personnel from around the world building a
diverse workforce.


 


As of March 31, 2008, we had a world wide total
of 206 employees made up mostly of 


 


19

















 


engineers and technicians. Of that number, we had 181
full-time employees and 15 contract or part-time staff in our offices in
Vancouver, Canada and throughout the United States, 1 contract employee in
Australia and nine full-time employees in our Beijing office. CWI had 47
full-time employees, including 36 employees seconded from Cummins and 11
employees seconded from us, as well as four contract staff.


 


Our employees are not represented by a labour union,
and we believe that our relationships with our employees are good. Each new
employee is required to execute confidentiality and proprietary rights
agreements as well as a Code of Conduct as part of the terms of employment. To
encourage focus on achievement of medium- to long-term performance goals,
virtually all of our employees are eligible for annual bonuses that are tied to
achievement of corporate milestones.


 


SOCIAL AND
ENVIRONMENTAL POLICIES


 


Our Environmental Policy Statement outlines the standards to which our
operations must be held:


 


·                  Our operations will comply with
government regulations, industry codes and standards, applicable laws, and
internal company policies.


 


·                  We will monitor industry best
practices and adopt and implement those that contribute to the protection of
the environment.


 


·                  On-site contractors and others
acting on our behalf are expected to abide by the same code of conduct.


 


·                  We will continue to research,
design, and develop engine products that sustain natural resources, preserve
the environment, and safeguard employees, customers, and the general public
from injuries or health hazards.


 


·                  We will determine, evaluate, and
mitigate the environmental impacts of our existing operations, and will conduct
a thorough environmental assessment and risk analysis prior to the
implementation of new projects.


 


·                  We will abide by internally
established standards to utilize energy and other resources efficiently in our
operations, including emissions and waste management programs, which exceed
current legislative requirements.


 


·                  All environmental incidents or
unplanned releases will be investigated and the findings will be communicated
as necessary to all affected parties.


 


·                  We will train our employees on
their individual responsibility to protect the environment, to adhere to the
Environmental Policy Statement, and to cooperate with our efforts in this
regard.


 


·                  In conjunction with external response
agencies, we will respond to environmental emergencies including hazardous
material spills and unplanned releases promptly and effectively via a trained
and coordinated on-site emergency response team.


 


20

















 


·                  We will evaluate our environmental
performance through regular auditing and assessment of our regulatory
compliance and adherence to the above principles, and will communicate the
appropriate information to our board of directors (the “Board”), employees,
shareholders, governmental agencies, and the general public.


 


Our commitment to corporate responsibility is evident not only in the
development of our products and technologies, but also in our ongoing efforts
to enhance the social benefits derived from our business activities and
minimize the environmental footprint of our operations. Every year, we review
our operations, taking a hard and critical look at our environmental footprint
and set targets for improvement. In September 2003, we completed a joint
project with Terasen, a gas utility in Vancouver, which enables us to re-inject
LNG used for our pump testing back to the pipeline. This is a significant
environmental accomplishment, as more than 550,000 kilograms of LNG have been
re-injected to date. We published our first sustainability report at the end of
fiscal 2008 to highlight aspects of our safety, environment and community
engagement performance. We have self-declared this report to correspond to
application Level C in the six-level grid of the Global Reporting Initiative G3
guidelines.


 


We are committed to providing a discrimination and harassment-free
workplace. Our expectations for individual integrity and ethical, moral and
legal conduct are outlined in our Code of Conduct that all employees and
directors review and sign annually. We have also implemented an ethics hotline
to provide an avenue for employees to raise concerns about corporate conduct.
The policy includes the reassurance that they will be protected from reprisals
or victimization for “whistle blowing” in good faith.


 


Our employees demonstrate an active desire to contribute to our
community. We have supported the United Way of the Lower Mainland with a
spirited and employee-driven workplace campaign since 2002. Since that time, our
employees have donated more than $200,000 to the United Way and our campaigns
have been recognized as leading efforts in the British Columbia high-tech
sector.


 


IMPACT is an employee leadership team established to drive community
engagement and community enrichment. Launched in 2007, IMPACT brings together
the various volunteer activities, events and initiatives that employees were
already involved with into one coordinated effort. IMPACT’s vision of community
is broad and encompasses the actual communities in which we live and work, our
immediate neighbours and our workplace. IMPACT has an ambitious and inspiring
mandate to have its activities leave a positive and measurable impact on the
community.  Community leadership is a
core value of ours and to support this, every employee is given 16 hours of
paid leave per year to volunteer with a charitable organization of his or her
choosing.


 


We have been a sustaining member of Canadian Business for Social
Responsibility since 2001 and were one of the first members of the Canadian
high-tech sector to join this group of progressive organizations committed to
the principles of sustainability.


 


We have been listed on the Jantzi Social Index (“JSI”) since August 2000.
The JSI is a socially-screened market capitalization-weighted common stock
index modeled on the S&P/TSX 60 consisting of 60 Canadian companies that
pass a set of broadly based environmental, social and governance rating
criteria. The JSI has begun to generate the first definitive data on the effects
of social screening on financial performance in Canada.


 


21

















 


In November 2007, we were named to the Corporate Knights Cleantech
10TM. Cleantech refers to clean technologies that enable us to make more with
less and to minimize the negative impact of human activity on the environment
and public health. It is much broader than “greentech” or “enviro-tech”, which
focus primarily on regulatory driven pollution control and remediation.  Cleantech Indices LLC determined the listing
by applying a set of 18 screening criteria to all TSX companies that are part
of a broader cleantech investment category. The cleantech criteria emphasized
purity (percentage of revenues of income from cleantech business) and quality
(strategy, management, financial strength, sector leadership). Other key
criteria include growth, earnings, liquidity, capitalization,
technology/intellectual property and overall impact.


 


Our 2008 Sustainability Report has been included in our 2008 Annual
Report.


 


SHARE CAPITAL


 


DIVIDEND POLICY


 


To date, we have
not paid out any dividends on our common shares (“Common Shares”). The future
payment of dividends will be dependent on our ability to pay, including factors
such as cash on hand and achieving profitability, the financial requirements to
fund growth, our general financial condition and other factors that the Board
may consider appropriate in the circumstances. Our bank credit facilities also
contain dividend restrictions.


 


MARKET FOR COMMON
SHARES


 


The outstanding
Common Shares are listed and posted for trading on the Toronto Stock Exchange
under the trading symbol “WPT”. The following table sets forth the market price
ranges and the aggregate volume of trading of the Common Shares on the Toronto
Stock Exchange for the periods indicated:


 


Toronto Stock Exchange


 




	
  Period

  	
   

  	
  High

  ($)

  	
   

  	
  Low ($)

  	
   

  	
  Close ($)

  	
   

  	
  Volume

  	
   

  
	
  April 2007

  	
   

  	
  2.05

  	
   

  	
  1.45

  	
   

  	
  1.95

  	
   

  	
  3,834,976

  	
   

  
	
  May 2007

  	
   

  	
  1.98

  	
   

  	
  1.77

  	
   

  	
  1.84

  	
   

  	
  3,089,440

  	
   

  
	
  June 2007

  	
   

  	
  3.18

  	
   

  	
  1.83

  	
   

  	
  3.02

  	
   

  	
  7,557,733

  	
   

  
	
  July 2007

  	
   

  	
  3.29

  	
   

  	
  2.50

  	
   

  	
  2.75

  	
   

  	
  7,564,332

  	
   

  
	
  August 2007

  	
   

  	
  2.80

  	
   

  	
  1.53

  	
   

  	
  1.76

  	
   

  	
  5,643,972

  	
   

  
	
  September 2007

  	
   

  	
  2.53

  	
   

  	
  1.68

  	
   

  	
  2.44

  	
   

  	
  4,099,074

  	
   

  
	
  October 2007

  	
   

  	
  2.92

  	
   

  	
  2.20

  	
   

  	
  2.49

  	
   

  	
  5,511,699

  	
   

  
	
  November 2007

  	
   

  	
  3.00

  	
   

  	
  2.34

  	
   

  	
  2.72

  	
   

  	
  4,323,054

  	
   

  
	
  December 2007

  	
   

  	
  2.85

  	
   

  	
  2.00

  	
   

  	
  2.85

  	
   

  	
  3,134,545

  	
   

  
	
  January 2008

  	
   

  	
  3.13

  	
   

  	
  1.51

  	
   

  	
  2.79

  	
   

  	
  7,394,215

  	
   

  
	
  February 2008

  	
   

  	
  3.33

  	
   

  	
  2.64

  	
   

  	
  3.20

  	
   

  	
  7,590,971

  	
   

  
	
  March 2008

  	
   

  	
  3.30

  	
   

  	
  2.64

  	
   

  	
  3.05

  	
   

  	
  3,582,339

  	
   

  
	
  April 2008

  	
   

  	
  3.20

  	
   

  	
  2.66

  	
   

  	
  2.90

  	
   

  	
  2,592,883

  	
   

  
	
  May 2008

  	
   

  	
  4.43

  	
   

  	
  2.71

  	
   

  	
  4.30

  	
   

  	
  7,822,834

  	
   

  
	
  June 2008 (to
  June 25, 2008)

  	
   

  	
  5.50

  	
   

  	
  4.25

  	
   

  	
  4.85

  	
   

  	
  10,595,763

  	
   

  






 


22

















 


DESCRIPTION OF
CAPITAL STRUCTURE


 


Our authorized share capital consists of an unlimited
number of Common Shares and an unlimited number of preferred shares (“Preferred
Shares”) issuable in series with no par value. As at March 31, 2008, our
issued share capital consisted of 95,959,485 Common Shares. Our Board may at
any time issue any Preferred Shares in one or more series, each series to
consist of such number of Preferred Shares as may be determined by the Board.
The Board may determine at the time of issuance the designation, rights,
privileges, restrictions and conditions attaching to the Preferred Shares of
each series.


 


As more fully detailed below under “Description of
Common Shares”, the holders of our Common Shares are entitled to notice of, to
attend, and to one vote per Common Share at, all meetings of our shareholders.
The holders of our Preferred Shares shall have no right to receive notice of or
to be present at or vote either in person, or by proxy, at any of our general
meetings by virtue of or in respect of their holding of Preferred Shares.


 


Subject to any rights, privileges, restrictions and
conditions that may have been determined by the directors to apply to any
series of Preferred Shares or any restrictions in any of our debt agreements,
the directors shall have complete uncontrolled discretion to pay dividends on
any class or classes of shares or any series within a class of shares issued
and outstanding in any particular year to the exclusion of any other class or
classes of shares or any series within a class of shares out of any or all
profits or surplus available for dividends.


 


On our winding-up, liquidation or dissolution or upon
the happening of any other event giving rise to a distribution of our assets
other than by way of dividend amongst our shareholders for the purposes of
winding-up its affairs, subject to any rights, privileges, restrictions and
conditions that may have been determined by the Board to attach to any series
of Preferred Shares, the holders of all Common Shares and Preferred Shares
shall be entitled to participate pari passu.


 


DESCRIPTION OF
COMMON SHARES


 


The holders of our Common Shares are entitled to one
vote per Common Share at meetings of shareholders, to receive such dividends as
declared by us and to receive our remaining property and assets upon
dissolution or winding up. Our Common Shares are not subject to any future call
or assessment and there are no pre-emptive, conversion or redemption rights
attached to the Common Shares.


 


23

















 


	
   

  	
   

  	
  March 31, 2008

  	
   

  	
  June 25, 2008

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Weighted

  	
   

  	
   

  	
   

  	
  Weighted

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  average

  	
   

  	
   

  	
   

  	
  average

  	
   

  
	
   

  	
   

  	
  Number

  	
   

  	
  exercise price

  	
   

  	
  Number

  	
   

  	
  exercise price

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  (Unaudited)

  	
   

  	
  (Unaudited)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Shares outstanding

  	
   

  	
  95,959,485

  	
   

  	
  N/A

  	
   

  	
  96,178,020

  	
   

  	
  N/A

  	
   

  
	
  Share Options

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  - Outstanding

  	
   

  	
  4,325,297

  	
   

  	
  $

  	
  1.99

  	
   

  	
  4,105,625

  	
   

  	
  $

  	
  2.01

  	
   

  
	
  - Exercisable

  	
   

  	
  2,916,539

  	
   

  	
  $

  	
  2.22

  	
   

  	
  2,698,534

  	
   

  	
  $

  	
  2.27

  	
   

  
	
  Performance Share Units

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  - Outstanding

  	
   

  	
  3,790,468

  	
   

  	
  N/A

  	
   

  	
  3,790,468

  	
   

  	
  N/A

  	
   

  
	
  - Exercisable

  	
   

  	
  1,940,470

  	
   

  	
  N/A

  	
   

  	
  1,940,470

  	
   

  	
  N/A

  	
   

  



 


As part of our proposed offering of debentures announced in June 2008,
(see “Debenture Units” on Page 45 of this AIF) and which is expected to
close on or about July 3, 2008, 2,700,000 warrants will be issued as part
of the offering and 161,413 issued as broker warrants.  The total 2,861,413 warrants will have a
weighted average exercise price of $5.31.


 


DIRECTORS, OFFICERS, AND SENIOR
MANAGEMENT


 


Our shareholders
elect the members of our Board at each annual general meeting. Directors
typically hold office until the next annual general meeting of shareholders at
which time they may be re-elected or replaced.


 


The following table sets forth the names and
municipalities of residence of all of our directors and senior officers and
those of our wholly-owned subsidiaries as of June 25, 2008, as well as the
positions and offices held by such persons, their principal occupations and
number of Common Shares held as of June 25, 2008:


 


	
  Name and Municipality

  of Residence

  	
   

  	
  Position with the

  Corporation

  	
   

  	
  Principal Occupation for last

  five years

  	
   

  	
  Director of

  the

  Corporation

  Since

  	
   

  	
  Number of

  Common

  Shares held/%

  of outstanding

  Common

  Shares as of

  June 25, 2008

  	
   

  
	
  John A. Beaulieu (1)(2)(3)

  Vancouver, Washington

  	
   

  	
  Chairman and Director

  	
   

  	
  Managing Partner of Cascadia Pacific Management LLP
  (a private venture fund company)

  	
   

  	
  September 1997

  	
   

  	
  41,087/0.04

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Warren J. Baker (3)(4)

  Avila Beach, California

  	
   

  	
  Director

  	
   

  	
  President, California Polytechnic State University

  	
   

  	
  September 2002

  	
   

  	
  7,500/0.01

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Henry F. Bauermeister Jr. (1)(2)

  Lee’s Summit, Missouri

  	
   

  	
  Director

  	
   

  	
  Corporate Director; previously President of Cummins
  Mid-America

  	
   

  	
  October 2005

  	
   

  	
  50,000/0.05

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  David R. Demers (4)(5)(7)

  West Vancouver, British Columbia

  	
   

  	
  Chief Executive Officer and Director

  	
   

  	
  Chief Executive Officer of Westport

  	
   

  	
  March 1995

  	
   

  	
  364,619/0.38

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  J. Michael Gallagher (5)(6)

  Vancouver, British Columbia

  	
   

  	
  President, Chief Operating Officer and Director

  	
   

  	
  President and Chief Operating Officer of Westport

  	
   

  	
  July 2007

  	
   

  	
  86,810/0.09

  	
  %

  



 


24

















 


	
  Name and Municipality

  of Residence

  	
   

  	
  Position with the

  Corporation

  	
   

  	
  Principal Occupation for last

  five years

  	
   

  	
  Director of

  the

  Corporation

  Since

  	
   

  	
  Number of

  Common

  Shares held/%

  of outstanding

  Common

  Shares as of

  June 25, 2008

  	
   

  
	
  Dezsö J. Horváth (1)(2)(3)(4)

  Toronto, Ontario

  	
   

  	
  Director

  	
   

  	
  Dean and Tanna H. Schulich Chair in Strategic
  Management, Schulich School of Business, York University

  	
   

  	
  September 2001

  	
   

  	
  135,000/0.14

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Andrew Littlefair (4)

  Newport Beach, California

  	
   

  	
  Director

  	
   

  	
  President and Chief Executive Officer of Clean
  Energy Fuels Corp.

  	
   

  	
  July 2007

  	
   

  	
  38,500/0.04

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Jonathan E. Burke

  Vancouver, British Columbia

  	
   

  	
  Vice President, Corporate Development, WPI

  	
   

  	
  Vice President, Corporate Development (formerly Senior Director, Investor Relations and
  Corporate Communications, and Director of Investor Relations) of WPI;
  previously Director of Business Development and Investor Relations at MIGENIX
  Inc.

  	
   

  	
  N/A

  	
   

  	
  45,315/0.05

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  K. Bruce Hodgins

  Delta, British Columbia

  	
   

  	
  Vice President, Market Development, WPI

  	
   

  	
  Vice President, Market Development of WPI

  	
   

  	
  N/A

  	
   

  	
  68,713/0.07

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  W. Chipman Johnston

  Calgary, Alberta

  	
   

  	
  Corporate Secretary

  	
   

  	
  Partner (formerly an associate) at Bennett Jones,
  LLP

  	
   

  	
  N/A

  	
   

  	
  10,593/0.01

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Melih Ogmen

  Port Moody, British Columbia

  	
   

  	
  Vice President, Heavy Duty Operations, WPI

  	
   

  	
  Vice President, Heavy Duty Operations of WPI;
  previously President of Hydrogenics Test Systems and General Manager of ATC,
  a Dofasco Company

  	
   

  	
  N/A

  	
   

  	
  Nil/Nil

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Patric Ouellette

  Vancouver, British Columbia

  	
   

  	
  Vice President, Heavy Duty Engineering and Chief
  Technology Officer, WPI

  	
   

  	
  Vice President, Heavy Duty Engineering and Chief
  Technology Officer of Westport

  	
   

  	
  N/A

  	
   

  	
  12,026/0.01

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Anthony R. Picarello

  Chandler, Arizona

  	
   

  	
  Vice President, Global Heavy Duty Sales and
  Marketing, WPI

  	
   

  	
  Vice President, Global Heavy Duty Sales and
  Marketing of WPI; previously Executive Director of Marketing for Volvo Trucks
  North America

  	
   

  	
  N/A

  	
   

  	
  0/0.00

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Duane A. Radcliffe

  Vancouver, British Columbia

  	
   

  	
  Vice President, Organizational Development, WPI

  	
   

  	
  Vice President, Organizational Development (formerly
  Director, Human Resources) of WPI

  	
   

  	
  N/A

  	
   

  	
  760/0.00

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Ian J. Scott

  Vancouver, British Columbia

  	
   

  	
  President, Juniper Engines Inc.

  	
   

  	
  President of Juniper Engines Inc.; previously Vice
  President, Emerging Markets and Business Development, Director, Strategy and
  New Business Development, and Director, Strategic Planning, of WPI

  	
   

  	
  N/A

  	
   

  	
  64,713/0.07

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Nicholas C. Sonntag (6)

  Gibsons, British Columbia/ Beijing, China

  	
   

  	
  Executive Vice President, Corporate Development,
  WPI, and President, Westport Asia

  	
   

  	
  Executive Vice President, Corporate Development of
  WPI and President of Westport Asia; previously President of CH2M HILL China
  Ltd. and President of CH2M HILL Canada Ltd.

  	
   

  	
  N/A

  	
   

  	
  5,000/0.00

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Elaine A. Wong (5)

  Vancouver, British Columbia

  	
   

  	
  Executive Vice President and Chief Financial Officer

  	
   

  	
  Executive Vice President and Chief Financial Officer
  of Westport

  	
   

  	
  N/A

  	
   

  	
  97,831/0.10

  	
  %

  



 


25

















 






Notes:


(1) Member of the Audit Committee.


(2) Member of the Human Resources and
Compensation Committee.


(3) Member of the Nominating and Corporate
Governance Committee.


(4) Member of the Strategy Committee.


(5) Member of the CWI board of directors.


(6) Member of the BWI board of directors.


(7) Member of the board of directors of Juniper
Engines Inc.


 


 


DIRECTOR BIOGRAPHIES


 


John A.
Beaulieu, a U.S. citizen, of Vancouver, Washington, USA, joined the
Board in September of 1997 and was appointed Chairman in 2002. He is also
currently Chair of the Human Resources and Compensation Committee. Mr. Beaulieu
co-founded Cascadia Pacific Management, LLP, a venture capital fund in
Portland, Oregon, in 1990 and has been actively involved in finding, financing,
and assisting in the growth of more than 70 emerging growth technology-based
companies since 1986. Mr. Beaulieu’s business career included being
President of Steelcraft Corporation and holding other general management
positions at American Standard & Evans Products. Earlier executive
employment was at Proctor & Gamble, Ford Motor Company, and Arthur
Young & Co. Mr. Beaulieu obtained a Bachelor of Commerce degree
(1956) and a Masters of Business Administration degree (1963), both from Santa
Clara University of California. Mr. Beaulieu is also a member of the board
of directors of other privately-held venture backed enterprises, and one
socially focused organization.


 


Warren
J. Baker, a
U.S. citizen, of Avila Beach, California, USA, joined Westport’s Board in September of
2002. He is currently Chair of the Nominating and Corporate Governance
Committee. He has been President of California Polytechnic State University in
San Luis Obispo, California since 1979. Dr. Baker is a Fellow of the
American Society of Civil Engineers, a Fellow in the Engineering Society of
Detroit, a member of the board of directors of the California Council for
Science and Technology, and a member of the U.S. Business-Higher Education
Forum. Dr. Baker has served as a member of the U.S. National Science Board,
and has served as Chair of the board of directors of the ASCE Civil Engineering
Research Foundation. Dr. Baker is also a member of the board of directors
of John Wiley & Sons, Inc. of Hoboken, New Jersey, a New York
Stock Exchange listed global publisher of print and electronic products,
specializing in scientific, technical, and medical books and journals. Dr. Baker
also served on the board of directors of the Society of Manufacturing Engineers’
Education Foundation, and is a member of the Board of Governors, U.S. – Mexico
Foundation for Science and a member of the board of directors, MESA California
(Mathematics-Engineering-Science Achievement).


 


Henry
F. Bauermeister Jr., a U.S. citizen, of Lee’s
Summit, Missouri, USA, joined Westport’s Board in October of 2005. He is
currently Chair of the Audit Committee. From 1995 to 2005, Mr. Bauermeister
was the President of Cummins Mid-America, the Cummins distributor for Kansas
and Missouri, located in Kansas City. From 1978 to 1995, he was President of
Diesel ReCon at Cummins Inc., the business unit responsible for remanufacturing
and reselling used engines and parts. Under Mr. Bauermeister’s leadership,
revenues at Cummins Diesel ReCon grew tenfold. Mr. Bauermeister is a
Certified Public Accountant (Indiana) and received his bachelor’s degree from
the University of Nebraska where he majored in Accounting and minored in
Economics. Mr. Bauermeister has held a number of financial positions
within Cummins including the Group Controller position for the Components
Group.


 


26
















 


David R. Demers,  a
Canadian citizen, of West Vancouver, British Columbia, Canada, is one of the
founders of Westport Innovations Inc. and has been Chief Executive Officer
since it was formed in March 1995. 
He started his career at IBM Canada in 1978, where he held several
positions in marketing and management. 
He has a Bachelor of Physics Degree and a Bachelor of Laws Degree, both
from the University of Saskatchewan.  Mr. Demers
has been involved in a number of technology company startups as investor, advisor
and as a director, including ECRI (private software company focusing on crime
analysis), EnWave (TSX:ENW – microwave processing systems), Clean Energy Fuels
(NASDAQ: CLNE — natural gas and hydrogen vehicle fueling), Asia Biochem
(TSX:ABC – a Chinese industrial company), Brightside (private LED display
technology company, sold in 2007 to Dolby). He was a founder of Vancouver
Social Ventures Partners and the Beech Foundation for art education, and from
2005 to 2008 was the Technology Division Campaign Chair for the United Way.


 


J.
Michael Gallagher, a U.S. citizen, of
Vancouver, British Columbia, Canada, has been a member of Westport’s Board
since July 2007 and was appointed Westport’s President in October 2004,
in addition to his role as Westport’s Chief Operating Officer, which he has
held since January 6, 2003. He is also a member of the board of directors
of CWI and BWI, both private companies in which Westport has a 50% investment.
Prior to joining Westport, Dr. Gallagher was Senior Vice-President, Operations,
Americas, for Fluor Corp., an international engineering company headquartered
in California. He also held senior executive positions with the London-based
multinational engineering firm Kvaerner Group, as well as with the Bechtel
Group in San Francisco. Dr. Gallagher is also on the board of several
non-profit organizations, including the California Natural Gas Vehicle
Partnership, WestStart-CALSTART and the Canadian Centre for Policy Ingenuity.


 


Dezsö
J. Horváth,  a Canadian citizen, of
Toronto, Ontario, Canada, has been a member of Westport’s Board since September 2001.
He is currently Chair of the Strategy Committee. He is the Dean and holds the
Tanna H. Schulich Chair in Strategic Management at the Schulich School of
Business at York University in Toronto, Ontario, where he has taught since
1977. He holds an electrical engineering degree, as well as degrees in
management (MBA, Licentiate, PhD) from Swedish universities. After an
early research and development career with the Swedish multinational ASEA (now
ABB) in the electrical industry, he accepted senior academic appointments at
Swedish and then Canadian universities. Since becoming Schulich’s Dean in 1988,
Dr. Horváth has worked with internal and external stakeholders to position
Schulich as “Canada’s Global Business SchoolTM”. In addition to publishing books
and articles on strategic management and international business, Dr. Horváth
has been engaged by major corporations and governments as a consultant in these
fields. In addition to his membership on corporate boards in the past, Dr. Horváth
is currently a Director of Inscape Corporation and Samuel, Son & Co.
Limited. He is also on the board of The Toronto International Leadership Centre
for Financial Sector Supervision (a non-profit organization), as well as being
on the Advisory Board of the St. Petersburg University Graduate School of
Management and the International Advisory Council of the Guanghua School of
Management, Peking University. He is a Co-Founder of the Czech Management
Centre, Prague, and the International Management Centre, Hungary (now part of
the Central European University in Budapest). Dr. Horváth is a member of
the Strategic Management Society, the Academy of Management and the Academy of
International Business (“AIB”). In 2004, he was named AIB International Dean of
the Year.


 


Andrew J. Littlefair,
a U.S. citizen, of Newport Beach, California, USA, has been a member of
Westport’s Board since July 2007. He is President, Chief Executive Officer
and a director of Clean Energy (a publicly traded company). From 1996 to 2001, Mr. Littlefair
served as President of Pickens Fuel Corp. From 1987 to 1996, Mr. Littlefair
served in various management positions 


 


27

















 


at
Mesa, Inc., an energy company of which Boone Pickens was Chief Executive
Officer. From 1983 to 1987, Mr. Littlefair served in the Reagan
Administration as a presidential aide. Mr. Littlefair is also currently
Chairman of NGV America, a U.S. advocacy group for natural gas vehicles. Mr. Littlefair
holds a B.A. from the University of Southern California.


 


OFFICER AND SENIOR MANAGEMENT BIOGRAPHIES


 


Jonathan
E. Burke joined Westport in 2006 as Director of
Investor Relations. He was appointed Senior Director, Investor Relations and
Corporate Communications in 2006, and Vice President, Corporate Development in
2007. Mr. Burke is responsible for Westport’s government relations,
external affairs and new business development initiatives outside of the core
CWI and Heavy-Duty HPDI business units. Mr. Burke has over 10 years’
experience in corporate and investor communications and business development
for both private and public technology companies. Prior to Westport, he was
Director of Business Development and Investor Relations at MIGENIX Inc., a
publicly-traded biotechnology company. Prior to that, he held investor
relations and corporate communications roles in the biotechnology, medical
device, and venture capital fields. Mr. Burke is a Director of the British
Columbia Innovation Council and he holds a Masters of Business Administration
from Athabasca University.


 


K.
Bruce Hodgins joined us in 1999 as Director of Business Development and was promoted
to Vice President in 2001. His current responsibility is development of our
Australian heavy-duty truck business. Mr. Hodgins is one of the original
inventors of the high-pressure direct injection fuel system developed at the
University of British Columbia. He also has had experience developing natural
gas refuelling infrastructure in his role as Technical Director of Fuels and
Lubricants with a Canadian fuel company. Mr. Hodgins obtained a Bachelor
of Applied Science honours degree in Mechanical Engineering from the University
of British Columbia in 1986.


 


W. Chipman Johnston was appointed Westport’s
Corporate Secretary in April 2006. Mr. Johnston has been a Partner of
Bennett Jones LLP, a law firm located in Calgary, Alberta since 2004. From 1996 to 2004, he was an associate of Bennett
Jones LLP. Mr. Johnston’s practice focuses on mergers and acquisitions and
equity capital raisings, primarily with clients in the upstream energy and
oilfield services industries. He is a member of the External Relations
Committee of the Telus World of Science and a member of the TSX Listing
Advisory Committee. Mr. Johnston holds a B.A. from the University of
Calgary and an L.L.B. from Osgoode Hall Law School.


 


Melih
Ogmen joined Westport in April 2007 as Vice President of Heavy-Duty
Operations. In this role he is responsible for global heavy-duty truck system
supply chain and product delivery. Prior to joining Westport, he was President
of Hydrogenics Test Systems, where he delivered to customers a comprehensive
portfolio of world-leading fuel cell testing and diagnostic products. Dr. Ogmen
has also spent 17 years in the automotive industry with companies such as
Powerlasers, Triam Automotive, Magna International, and Dofasco. He received
his Bachelor of Science in Physics at Nottingham University in England and
subsequently obtained his Master of Science (Physics) from the University of
Manitoba and Ph.D. (Physics) from York University in Toronto.


 


Patric
Ouellette joined us in 1996 as Chief Scientist and was promoted to Vice President
and Chief Technology Officer in 2002. He leads the engineering team responsible
for applying Westport’s technologies to partners’ engine platforms and for new
applications. His team also continues to develop technological solutions to
improve performance and reduce emissions of engines operating on alternative
fuels. Dr. Ouellette obtained a Ph.D. in Mechanical Engineering in 1996
and a Master of Applied Science degree in Mechanical Engineering in 1992, both
from the University of British


 


28

















 


Columbia. While at the University of British Columbia
he was part of the team that developed the HPDI fuel system technology later
acquired by Westport. Dr. Ouellette earned a Bachelor of Engineering
degree from Montreal’s École Polytechnique in 1989.


 


Tony
Picarello joined Westport in December 2007 as Vice
President of Global Heavy Duty Sales and Marketing. Mr. Picarello has over
20 years of proven experience in the global automotive products market. He was
most recently the Executive Director of Marketing for Volvo Trucks North
America, responsible for brand, product management and business solutions.
Prior to joining Volvo, Mr. Picarello held several senior executive sales
and marketing positions with Ford Motor Company He received his Bachelor
of Science in Philosophy at Northern Arizona University and subsequently
obtained his Master of Business Administration from the University of Dallas.


 


Duane A. Radcliffe joined Westport in
1999 and was appointed Director, Human Resources in 2004, and Vice President,
Organisational Development in 2008. Mr. Radcliffe is responsible for
leading Westport’s human resources, facilities management and information
technology programs as well as assigned organizational change and integration
efforts. He was also the human resources leader for the CWI joint venture from
2001 to 2003. Prior to joining Westport, Mr. Radcliffe was with a human
resources services provider focusing on organizational integration and
recruitment projects. He earned his Bachelor of Physical Education degree in
1993 from the University of British Columbia and a Masters of Business
Administration in 2004 from Royal Roads University British Columbia.


 


Ian
J. Scott joined Westport in 2001. He was appointed
Director, Strategy and New Business Development in 2003, and Vice President,
Emerging Markets and Business Development in 2006, when he was responsible for
Westport’s new initiatives outside of the core CWI and Heavy-Duty business
units. In 2008, Mr. Scott was appointed President of Juniper Engines Inc.,
Westport’s joint venture with OMVL SpA of Italy. Prior to joining Westport, Mr. Scott
held petroleum engineering positions with Amoco and Schlumberger in Canada,
Europe and Africa. He earned a Bachelor of Applied Science (Geological
Engineering) degree in 1986 and an MBA (Strategic Management) in 2001, both
from the University of British Columbia.


 


Nicholas
C. Sonntag joined Westport in October 2006 as President, Westport Asia, where
he is responsible for the growth and development of Westport’s emerging
businesses and opportunities in Asia. He is also Executive Vice President of
Corporate Development and is a Director of BWI. Prior to joining Westport, he
served as President of CH2M HILL’s operations in Beijing, China, working on
sustainable infrastructure and industrial development across China and Hong
Kong. He has also held senior executive positions with CH2M HILL Canada, the
Stockholm Environment Institute, the International Institute for Sustainable
Development, and the U.N. Conference on Environment and Development. His
memberships and board positions include: Royal Roads School of Environment &
Sustainability; Environmental Forum of the American Chamber of Commerce in
Beijing; Environmental Management College of China; and China-U.S. Center for
Sustainable Development. Mr. Sonntag obtained a Bachelor of Science in
Engineering Physics and a Master of Science, Business Administration from the
University of British Columbia.


 


Elaine
A. Wong joined Westport in September 2001 as Director, Corporate
Performance, responsible for the Company’s financial planning and analysis, and
as Director of Finance for CWI. Ms. Wong is currently an Executive Vice
President and our Chief Financial Officer. She is also a Director of CWI. She
also serves as Westport’s representative on the board of directors of Canadian
Business for Social Responsibility, a non-profit, national membership
organisation of Canadian companies who have made a commitment to operate in a
socially, environmentally, and financially


 


29

















 


responsible manner. Prior to joining us, Ms. Wong
was the Director of Corporate Performance for TELUS Enterprise Solutions, an
information technology company with offices across Canada and in Asia, where
she was involved in strategy, planning, mergers and acquisitions, and other
corporate development projects. Ms. Wong has her Chartered Accountant
(1993) and Certified Public Accountant (Illinois) (2001) designations, as well
as a Bachelors of Commerce Degree with Honours (1990) from the University of
British Columbia.


 


SHAREHOLDINGS OF DIRECTORS AND OFFICERS


 


As of June 25, 2008, our directors and officers
as a group beneficially owned, directly or indirectly 1,028,467 of our Common
Shares, representing approximately 1.07% of the 96,178,020 Common Shares
outstanding on June 25,
2008.


 


CONFLICTS OF INTEREST


 


David
Demers and Michael Gallagher, both directors and officers of Westport, serve on
the board of CWI, our 50:50 joint venture with Cummins. Mr. Demers is also
a director of Juniper Engines Inc., our 49:51 joint venture with OMVL. Elaine
Wong, an officer of Westport, is also a board member of CWI. Michael Gallagher
and Nicholas Sonntag, both officers of Westport, are board members of BWI, our
50:50 joint venture with BTIC.


 


RISK
FACTORS


 


An
investment in our business involves risk and readers should carefully consider
the risks described below and in our other filings on www.sedar.com. Our
ability to generate revenue and profit from our technologies is dependent on a
number of factors, and the risks identified below, if they were to occur, could
have a material impact on our business, financial condition, liquidity, results
of operation or prospects. While we have attempted to identify the primary
known risks that are material to our business, the risks and uncertainties described
below may not be the only ones we face. Additional risks and uncertainties,
including those that we do not know about now or that we currently believe are
immaterial may also adversely affect our business, financial condition,
liquidity, results of operation or prospects.


 


We have incurred and continue to incur losses


 


We
have incurred substantial losses since our inception in 1996, and continue to
incur losses and experience negative cash flows. We cannot predict if and when
we will operate profitably, generate positive cash flows or if we will be able
to implement our business strategy successfully. Pursuing our strategy requires
us to incur significant expenditures for research and product development,
marketing and general administrative activities. As a result, we need to
continue to grow our revenues and gross margins to achieve and sustain
profitability and positive operating cash flows and we may need to raise
additional capital.


 


We may be unable to raise additional capital


 


Execution
of our business plan and our commercial viability could be jeopardized if we
are unable to raise additional funds for our commercialization plans, to fund
working capital, research and development projects, sales, marketing and
product development activities and other business opportunities. We attempt to
mitigate this risk by generating funds from a variety of sources including:
through the sale of our commercial products, through the sale of non-core
assets including long-term investments, through funding from government
agencies, industry and


 


30

















 


business
partners, and through the issuance of shares or debt in the public equity
markets or through strategic investors. In addition, we try to maintain
reserves of cash and short-term investments and seek to obtain funding
commitments before we take on any significant incremental initiatives. There
can, however, be no assurance that we will be able to secure additional
funding, or funding on terms acceptable to us, to pursue our commercialization
plans.


 


Potential fluctuations in our financial results make financial
forecasting difficult


 


We
expect our revenues and results of operation to continue to vary significantly
from quarter to quarter. Sales and margins may be lower than anticipated due to
timing of customer orders and deliveries, unexpected delays in our supply
chain, general economic and market-related factors, product quality,
performance and safety issues and competitive factors. In addition, the
continuance and timing of government funding of our research and development
programs is difficult to predict, and may cause quarter to quarter variations
in financial results. In addition, due to our early stage of commercialization,
we cannot accurately predict our future revenues or results of operations. We
are also subject to normal operating risks such as credit risks, foreign
currency risks and global and regional economic conditions. As a result,
quarter-to-quarter comparisons of our revenues and results of operation may not
be meaningful. It is likely that in one or more future quarters our results of
operation will fall below the expectations of securities analysts and
investors. If this happens, the trading price of our shares might be materially
and adversely affected.


 


A market for engines with our fuel systems may never develop or may
take longer to develop than we anticipate


 


Although
we are seeing strong growth in CWI revenues and interest from the San Pedro Bay
Ports, municipalities and private fleets, engines with our fuel systems
represent an emerging market, and we do not know whether end-users will
ultimately want to use them or pay for their initial incremental cost. The
development of a mass market for our fuel systems may be affected by many factors,
some of which are beyond our control, including: the emergence of newer, more
competitive technologies and products; the future cost of natural gas and other
fuels used by our systems; the ability to successfully build the refueling
infrastructure necessary for our systems; regulatory requirements; availability
of government incentives; customer perceptions of the safety of our products;
and customer reluctance to try a new product.


 


If a
market fails to develop or develops more slowly than we anticipate, we may be
unable to recover the losses we will have incurred in the development of our
products and may never achieve profitability.


 


We currently benefit from government incentives to facilitate demand
for our products and fund our research and development programs and these
incentives may not be renewed or may be redirected


 


While
some of our customers and potential customers have made successful applications
for government incentives to assist them in converting their vehicles to
natural gas engines, there is no guarantee that such incentives will continue
to be available. Today our LNG systems customers and potential customers in the
United States may have access to local, state and federal incentives through
programs and initiatives such as the federal Highway and Energy Bills, which
provide fuel and tax credits, and grants available from Carl Moyer and SCAQMD.
If these and other similar incentive programs are discontinued or are no longer
available to our


 


31

















 


customers
and potential customers, it may have a detrimental effect on our sales. There
are also no guarantees that the San Pedro Bay Ports will carry out or be able
to fund their Clean Air Action Plan.


 


In
addition, from time to time we enter into agreements with government agencies
to fund our research and development programs. There can be no assurance that
we will continue to receive funding from government agencies at the same levels
we have received in the past or at all. Funding agreements with government
agencies are also subject to audit, which could result in certain funding being
denied or monies received from such agencies having to be repaid.


 


Fuel price differentials are hard to predict and may be less favourable in the future


 


The
acceptance of natural gas-fuelled engines by customers depends in part on the
price differential between natural gas and diesel fuel. Natural gas has
generally been, and currently is, less expensive than diesel fuel in many
jurisdictions. This price differential is affected by many factors, including
changes in the resource base for natural gas compared with crude oil, pipeline
transportation capacity for natural gas, refining capacity for crude oil and
government excise and fuel tax policies. There can be no assurance that natural
gas will remain less expensive than diesel fuel.


 


Our growth rate is dependent on growth in natural gas refuelling
infrastructure that may not take place


 


For
motor vehicles, natural gas must be carried on board in liquefied or compressed
form and there are few public or private refuelling stations available in most
jurisdictions. We are involved in developing such infrastructure through our
relationship with Clean Energy, the largest natural gas refuelling company for
vehicles in North America, and are seeking further involvement with other
natural gas refuelling companies. However, there can be no assurance that Clean
Energy will continue to be successful in expanding the availability of natural
gas as a vehicle fuel, or that other companies will develop refuelling stations
to meet projected demand. If customers are unable to obtain fuel conveniently
and affordably, a mass market for vehicles powered by our technology is
unlikely to develop.


 


Changes in environmental and regulatory policies could hurt the market
for our products


 


We
currently benefit from, and hope to continue to benefit from, certain
government environmental policies, mandates and regulations around the world,
most significantly in the automotive markets and in the United States. Examples
of such regulations include those that provide economic incentives, subsidies,
tax credits and other benefits to purchasers of low emission vehicles, restrict
the sale of engines that do not meet emission standards, fine the sellers of
non-compliant engines, tax the operators of diesel engines and require the use
of more expensive ultra-low sulphur diesel fuel. There can be no assurance that
these policies, mandates and regulations will be continued. Incumbent industry
participants with a vested interest in gasoline and diesel, many of which have
substantially greater resources than we do, may invest significant time and
money in an effort to influence environmental regulations in ways that delay or
repeal requirements for clean vehicle emissions. If these are discontinued or
if current requirements are relaxed, this may have a material impact on our
competitive position.


 


32

















 


We currently face and will
continue to face significant competition


 


Our products face and will
continue to face significant competition, including from incumbent
technologies. New developments in technology may negatively affect the
development or sale of some or all of our products or make our products
uncompetitive or obsolete. Other companies, many of which have substantially
greater customer bases, businesses, financial and other resources than us, are
currently engaged in the development of products and technologies that are
similar to, or may be competitive with, certain of our products and
technologies.


 


Competition
for our products may come from current power technologies, from improvements to
current power technologies and from new alternative power technologies,
including other fuel systems. Each of our target markets is currently serviced
by existing manufacturers with existing customers and suppliers using proven
and widely accepted technologies. Additionally, there are competitors working
on developing technologies such as cleaner diesel engines, bio-diesel, fuel
cells, advanced batteries and hybrid battery/internal combustion engines in
each of our targeted markets. Each of these competitors has the potential to
capture market share in various markets, which could have a material adverse
effect on our position in the industry and our financial results. For our
products to be successful against competing technologies, especially diesel
engines, they must offer advantages in one or more of these areas: emissions
performance, fuel economy, engine performance, power density, engine and fuel
system weight, and engine and fuel system price. There can be no assurance that
our products will be able to offer advantages in all or any of these areas.


 


We depend on our intellectual property and our failure to protect that intellectual
property could adversely affect our future growth and success


 


Failure
to protect our existing and future intellectual property rights could seriously
harm our business and prospects, and may result in the loss of our ability to
exclude others from practicing our technology or our own right to practice our
technologies. If we do not adequately ensure our freedom to use certain
technology, we may have to pay others for rights to use their intellectual
property, pay damages for infringement or misappropriation and/or be enjoined
from using such intellectual property. Our patents do not guarantee us the
right to practice our technologies if other parties own intellectual property
rights that we need in order to practice such technologies. Our patent position
is subject to complex factual and legal issues that may give rise to
uncertainty as to the validity, scope and enforceability of a particular
patent. There can be no assurance that:


 


·                  any of the rights we have under
U.S. or foreign patents owned by us or other patents that third parties license
to us will not be curtailed, for example through invalidation, circumvention,
challenge, being rendered unenforceable or by license to others;


 


·                  we were the first inventors of
inventions covered by our issued patents or pending applications or that we
were the first to file patent applications for such inventions;


 


·                  any of our pending or future
patent applications will be issued with the breadth of claim coverage sought by
us, or be issued at all;


 


·                  our competitors will not
independently develop or patent technologies that are substantially equivalent
or superior to our technologies;


 


33

















 


·                  any of our trade secrets will
not be learned independently by our competitors; or


 


·                  the steps we take to protect
our intellectual property will be adequate.


 


In
addition, effective patent, trademark, copyright and trade secret protection
may be unavailable, limited or not applied for in certain foreign countries.


 


We
also seek to protect our proprietary intellectual property, including
intellectual property that may not be patented or patentable, in part by
confidentiality agreements and, if applicable, inventors’ rights agreements
with our strategic partners and employees. There can be no assurance that these
agreements will not be breached, that we will have adequate remedies for any
breach or that such persons or institutions will not assert rights to intellectual
property arising out of these relationships.


 


Certain
intellectual property has been licensed to us on a non-exclusive basis from
third parties who may also license such intellectual property to others,
including our competitors. If necessary or desirable, we may seek further
licenses under the patents or other intellectual property rights of others.
However, we can give no assurances that we will obtain such licenses or that
the terms of any offered licenses will be acceptable to us. The failure to obtain
or renew a license from a third party for intellectual property we use at
present could cause us to incur substantial costs and to suspend the
manufacture, shipment of products or our use of processes requiring such
intellectual property.


 


We could become engaged in intellectual property litigation that may
negatively affect our business


 


While
we are not currently engaged in any intellectual property litigation, we could
become subject to lawsuits in which it is alleged that we have infringed the
intellectual property rights of others or in which the scope, validity and
enforceability of our intellectual property rights is challenged. In addition,
we may commence lawsuits against others who we believe are infringing upon our
rights. Our involvement in intellectual property litigation could be time
consuming and result in significant expense to us, diversion of resources, and
delays or stoppages in the development, production and sales of products
or intellectual property, whether or not any claims have merit or such
litigation is resolved in our favour. In the event of an adverse outcome as a
defendant in any such litigation, we may, among other things, be required to:


 


·                  pay substantial damages;


 


·                  cease the development,
manufacture, use, sale or importation of products that infringe upon other
patented intellectual property;


 


·                  expend significant resources to
develop or acquire non-infringing intellectual property;


 


·                  discontinue processes
incorporating infringing technology; or


 


·                  obtain licenses to the
infringing intellectual property.


 


Any
such result could require the expenditure of substantial time and other
resources and could have a material adverse effect on our business and
financial results.


 


34
















 


We could become liable for
environmental damages resulting from our research, development or manufacturing
activities


 


The nature of our business and
products exposes us to potential claims and liability for environmental damage,
personal injury, loss of life, and damage to or destruction of property. Our
business is subject to numerous laws and regulations that govern environmental
protection and human health and safety. These laws and regulations have changed
frequently in the past and it is reasonable to expect additional and more
stringent changes in the future. Our operations may not comply with future laws
and regulations, and we may be required to make significant unanticipated
capital and operating expenditures. If we fail to comply with applicable environmental
laws and regulations, governmental authorities may seek to impose fines and
penalties on us or to revoke or deny the issuance or renewal of operating
permits, and private parties may seek damages from us. Under those
circumstances, we might be required to curtail or cease operations, conduct
site remediation or other corrective action, or pay substantial damage claims.
In addition, depending on the nature of the claim, our current insurance
policies may not provide sufficient or any coverage for such claims.


 


Certain of our products
may not be commercially viable


 


Our direct injection technology
has been demonstrated in heavy-duty trucks, light-duty vehicles and high
horsepower applications. However, we do not know when or whether we will be successful
in the commercialization of products for any of our target markets. There can
be no assurance that engines using our direct injection technology will perform
as well as we expect, or that prototypes and commercial systems will be
developed and sold in commercially viable numbers.


 


Our HPDI LNG systems presently
have higher initial capital costs than many established competing technologies,
and manufacturing costs of some of our products at a large-scale commercial
level have not yet been confirmed. If we are unable to produce fuel systems
that are economically competitive, on a life cycle costs basis, in terms of
price, reliability and longevity, operators of commercial vehicle fleets and
power generators will be unlikely to buy products containing our fuel systems.


 


We are dependent on
relationships with strategic partners


 


Execution of our current
strategy is dependent on cooperation with strategic partners for technology
development, manufacturing and distribution. To be commercially viable, our fuel
systems must be integrated into engines and our engines must be integrated into
chassis manufactured by OEMs. We can offer no guarantee that existing
technology agreements will be renewed or advanced into commercialization
agreements, or that OEMs will manufacture engines with our fuel systems or
chassis for our engines, or, if they do manufacture such products, that
customers will choose to purchase them. Any integration, design, manufacturing
or marketing problems encountered by OEMs could adversely affect the market for
our products and our financial results. In addition, there can be no assurance
of the commercial success of any joint ventures in which we are, or will
become, involved.


 


Any change in our relationships
with our strategic partners, whether as a result of economic or competitive
pressures or otherwise, including any decision by our strategic partners to
reduce their commitment to our products and technology in favour of competing
products or technologies, or to bring to an end our various alliances, could
have a material adverse effect on 


 


35

















 


our business and financial
results.


 


In addition, agreements with
our strategic partners may have provisions that give rise to disputes regarding
the rights and obligations of the parties. 
These and other possible disagreements could lead to termination of the
agreement or delays in collaborative research, development, supply, or
commercialization of certain products, or could require or result in litigation
or arbitration.  Moreover, disagreements
could arise with our strategic partners over rights to intellectual
property.  These kinds of disagreements
could result in costly and time-consuming litigation.  Any such conflicts with our strategic partners
could reduce our ability to obtain future collaboration agreements and could
have a negative impact on our relationship with existing strategic partners.


 


We are dependent on
relationships with our suppliers


 


While we have negotiated supply
agreements with various manufacturers and have entered into strategic supply
agreements with BTIC and Cryostar, certain of these manufacturers may presently
be the sole supplier of key components for our products and we are dependent on
their ability to source materials, manage their capacity, workforce and
schedules. In particular, we are dependent on sole suppliers for our injectors,
tanks, and pumps for our HPDI LNG systems and their ability to ramp up capacity
and maintain quality and cost to support our production requirements. For a
number of reasons, including but not limited to shortages of parts, labour
disruptions, lack of capacity and equipment failure, a supplier may fail to
supply materials or components that meet our quality, quantity or cost requirements
or to supply any at all. If we are not able to resolve these issues or obtain
substitute sources for these materials or components in a timely manner or on
terms acceptable to us, our ability to manufacture certain products may be
harmed and we may be subjected to cancellation of orders or penalties for
failed or late deliveries, which could have a material adverse effect on our
business and financial results. Our products also use steel and other materials
that have global demand. The prices and quantities at which those supplies are
available fluctuate and may increase significantly. Competitive pressure,
however, may not allow us to increase the sales price of our products. Any such
increases may therefore negatively affect our margins and financial condition.
We mitigate these risks by seeking secondary suppliers, by carrying inventory,
and by locking in long-term pricing when possible. There are no guarantees,
however, that we will be successful in securing alternative suppliers or that
our inventory levels will be sufficient for our production requirements.


 


We are dependent on our
relationship with Cummins for CWI revenues and profits


 


The majority of our revenues
are currently derived from the operations of CWI, which, in turn, purchases all
of its current and foreseeable engine products from Cummins-affiliated plants
and distributors. Although the factories operate with modern technology and
experienced management, there can be no assurance that the factory and
distribution systems will always be able to perform on a timely and
cost-effective basis. Any reduction in the manufacturing and distribution
capabilities of Cummins-affiliated plants and distributors could have a
material adverse effect on our business and financial results.


 


Our limited production
trials, commercial launch activities and field tests could encounter problems


 


We are currently conducting,
and plan to continue to conduct, limited production trials and field tests on a
number of our products as part of our product development cycle and we are
working 


 


36

















 


on scaling up our production
capabilities. These trials, production readiness activities and field tests may
encounter problems and delays for a number of reasons, including the failure of
our technology, the failure of the technology of others, the failure to combine
these technologies properly and the failure to maintain and service the test
prototypes properly. Some of these potential problems and delays are beyond our
control. Any problem or perceived problem with our limited production trials
and field tests could hurt our reputation and the reputation of our products
and delay their commercial launch.


 


We may have difficulty
managing the expansion of our operations


 


To support the launch, and
increase sales and service, of our LNG system products, we may be required to
expand the scope of our operations rapidly. This may include a need for a
significant increase in employees and an increase in the size, or relocation,
of our premises and changes to our information systems, processes and policies.
Such rapid expansion may place a significant strain on our senior management
team, support teams, information technology platforms and other resources. In
addition, we may be required to place more reliance on our strategic partners
and suppliers, some of whom may not be capable of meeting our production
demands in terms of timing, quantity, quality or cost. Difficulties in
effectively managing the budgeting, forecasting and other process control
issues presented by any rapid expansion could harm our business, prospects,
results of operations or financial condition.


 


Warranty claims could
diminish our margins


 


There is a risk that the
warranty accrual included in our cost of product revenue is not sufficient and
that we may recognize additional expenses as a result of warranty claims in
excess of our current expectations. Such warranty claims may necessitate a
redesign, re-specification or recall of our products, which, in turn, may have
an adverse impact on our finances and on existing or future sales. Although we
attempt to mitigate against these risks through our sales and marketing
initiatives and our product development, quality assurance, support and service
programs, there can be no assurance that such initiatives and programs are
adequate or that sales of our commercial products will continue to grow and
contribute financially.


 


Although CWI products have
shown improvements in warranty experience over the past few years and we continue
to work to improve our products, there are no guarantees that this trend will
continue or that it will not reverse. New products may have different
performance characteristics from previous products. In addition, we have
limited field experience with our HPDI LNG systems from which to make our
warranty accrual estimates.


 


We could become subject to
product liability claims


 


Our business exposes us to
potential product liability claims that are inherent in natural gas, propane,
and hydrogen and products that use these gases. Natural gas, propane, and
hydrogen are flammable gases and therefore potentially dangerous products. We
also produce fuel processors that generate hydrogen from certain raw fuels,
which are also flammable. Any accidents involving our products or other natural
gas, propane, or hydrogen-based products could materially impede widespread
market acceptance and demand for our engines and fuel systems. In addition, we
may be subject to a claim by end-users or others alleging that they have suffered
property damage, personal injury or death because our products did not perform
adequately. Such a claim could be made whether or not our products perform
adequately under the circumstances. From time to time, we may be subject to
product liability claims in the ordinary 


 


37

















 


course of business and we carry
a limited amount of product liability insurance for this purpose. However, our
current insurance policies may not provide sufficient or any coverage for such
claims, and we cannot predict whether we will be able to maintain our insurance
coverage on commercially acceptable terms.


 


We have foreign currency
risk


 


While a majority of our
revenues, cost of sales, expenses and warranty balances are all denominated in
U.S. dollars, many of our operating expenses, other than cost of sales, are in
Canadian dollars. Foreign exchange gains and losses are included in results
from operations. A large decline in the value of the U.S. dollar relative to
the Canadian dollar could impair revenues, margins and other financial results.
For example, for fiscal 2008, the decline of the U.S. dollar offset the
increase in our revenues. We have not entered into foreign exchange contracts
to hedge against gains and losses from foreign currency fluctuations. From
fiscal 2002 to fiscal 2007, on average, the U.S. dollar has declined 28%
against the Canadian dollar. From fiscal 2007 to fiscal 2008, on average, the
U.S. dollar depreciated a further 12%.


 


We could lose or fail to
attract the personnel necessary to run our business


 


Our success depends in large
part on our ability, and that of our affiliates, to attract and retain key
management, engineering, scientific, manufacturing and operating personnel. As
we develop additional capabilities we may require more skilled personnel. Given
the highly specialized nature of our products, these personnel must be highly
skilled and have a sound understanding of our industry, business or our
technology. Recruiting personnel for the alternative fuel industry is also
highly competitive. Although to date we have been successful in recruiting and
retaining qualified personnel, there can be no assurance that we will continue
to attract and retain the personnel needed for our business. The failure to
attract or retain qualified personnel could have a material adverse effect on
our business.


 


If we do not properly
manage foreign sales and operations, our business could suffer


 


We expect that a substantial
portion of our future revenues will be derived from sales outside of Canada,
and we operate in jurisdictions where we may lack sufficient expertise, local
knowledge or contacts. Establishment of an international market for our
products may take longer and cost more to develop than we anticipate, and is
subject to inherent risks, including unexpected changes in government policies,
trade barriers, difficulty in staffing and managing foreign operations, longer
payment cycles, and foreign exchange controls that restrict or prohibit
repatriation of funds. As a result, if we do not properly manage foreign sales
and operations, our business could suffer.


 


We may not realize the
anticipated benefits from joint ventures, investments or acquisitions


 


Our joint ventures, and any
future joint venture, investment or acquisition could expose us to certain
liabilities, including those that we fail or are unable to identify during the
investment of acquisition process. In addition, joint ventures and acquisitions
often result in difficulties in integration, and, if such difficulties were to
occur, they could adversely affect our results. The integration process may
also divert the attention of, and place significant demands on, our managerial
resources, which may disrupt our current business operations. As a result, we
may fail to meet our current product development and commercialization
schedules. Additionally, we 


 


38

















 


may not be able to find
suitable joint venture partners, investments or acquisitions, which could adversely
affect our business strategy.


 


Our share price may
fluctuate


 


The stock market in general,
and the market prices of securities of technology companies in particular, can
be extremely volatile, and fluctuations in our share price may be unrelated to
our operating performance. Our share price could be subject to significant
fluctuations in response to many factors, including: actual or anticipated
variations in our results of operations; the addition or loss of customers;
announcements of technological innovations, new products or services by us or
our competitors; changes in financial estimates or recommendations by
securities analysts; conditions or trends in our industry; our announcements of
significant acquisitions, strategic relationships, joint ventures or capital
commitments; additions or departures of key personnel; general market
conditions; and other events or factors, many of which may be beyond our
control.


 


AUDIT COMMITTEE MATTERS


 


MANDATE OF THE AUDIT
COMMITTEE


 


The mandate (the “Mandate”)
of the Audit Committee as proscribed by the Board of Directors is set out in
the Audit Committee Charter. The charter was most recently updated on May 22,
2008 and is reflected below.


 


Purpose


 


The Audit Committee is a
standing committee of the Board of Westport, and was established to assist the
Board in fulfilling its oversight responsibilities with respect to:


 


(a)          the integrity of financial statements, management’s discussion and
analysis (“MD&A”) and other information provided to shareholders and others;


 


(b)         the adequacy and effectiveness of the system of internal controls
implemented and maintained by Westport management (“Management”);


 


(c)          the understanding of risks, specifically around financial reporting;


 


(d)         the promotion of legal and ethical conduct; and


 


(e)          the independence, qualifications, and performance of the external
auditors.


 


Authority


 


The Audit Committee has
unrestricted access to our personnel and documents and to its external auditors
and will be provided with the resources necessary to carry out its
responsibilities. The Committee shall have the authority to authorize
investigations into any matter within the Audit Committee’s scope of
responsibility and is empowered, if it deems it necessary, to retain special
legal, accounting or other consultants to advise the Audit Committee at our
expense. The Audit Committee shall have sole authority to recommend to the
Board the appointment, termination and compensation of the external auditors
who shall report directly to the Audit Committee.


 


39

















 


Composition


 


The Audit Committee shall consist, at a minimum, of three members of
the Board, one of whom shall be designated the Chair, as appointed by the
Board. The Audit Committee shall be composed solely of outside (non-Management)
directors who are also “unrelated” and “independent” as defined by the Canadian
Securities Administrators under Multilateral Instrument 52-110. Each of the
directors on the Audit Committee shall possess a basic level of “financial
literacy”, and at least one member should have accounting or related financial
management experience. The Board shall give consideration to the periodic
rotation of Audit Audit Committee membership and, from time to time as the
Board sees fit, the Chair of the Audit Committee.


 


Meetings


 


Regular meetings of the Audit Committee shall be held at least four
times per year. The meetings will be scheduled to permit timely review of the
interim and annual financial statements, as well as the Company’s other
financial disclosures. Additional meetings may be called as necessary.  A quorum of a majority of the members of the
Audit Committee, one of whom must be the Audit Committee Chair, unless he or
she has designated another member to act as Chair, is required for each
meeting.


 


The Audit Committee Chair shall, in consultation with Management and
the external auditors, set the Audit Committee meeting agendas.  Audit Committee members may recommend agenda
items subject to approval by the Chair. The Audit Committee shall meet in
executive session with Management, the external auditors, and as an Audit
Committee to discuss any matters that the Audit Committee or each of these
groups believes should be discussed. The Audit Committee and the General
Counsel shall also meet in executive session to review legal matters that may
have a material impact on the financial statements. In addition to the above
scheduled meetings, any member of the Audit Committee, the Chair of the Board
or the auditors may, subject to required notice, call a meeting of the Audit
Committee at any time.


 


Audit Committee minutes shall be prepared and subsequently approved for
all meetings. Copies of such minutes shall be filed with the Corporate
Secretary of Westport and circulated to all Board members.


 


The Audit Committee is charged with the following specific
responsibilities:


 


1.             The Audit Committee’s
Relationship with the External Auditors


 


The Audit Committee is responsible for recommending to the Board:


 


(a)          the external auditor to be nominated
for the purpose of preparing or issuing an auditor’s report or performing other
audit, review or attestation services for Westport; and


 


(b)         the compensation of the external
auditor.


 


The Audit Committee shall satisfy itself regarding the independence of
the external auditors and report their conclusions and the basis for those
conclusions to the Board.


 


With regard to overseeing the work of the external auditors, the Audit
Committee is responsible, in consultation with management, for the following
activities:


 


40

















 


(a)          approving the audit scope;


 


(b)         reviewing the results of their work;


 


(c)          pre-approving any non-audit services or
delegating such authority to the Audit Committee Chair;


 


(d)         evaluating the performance of the external
auditors; and


 


(e)          resolving any disagreements between
Management and the external auditors regarding financial reporting.


 


The Audit Committee shall obtain from the external auditors, on an
annual basis, a report summarizing, among other things, the results of their
audit, assessments or recommendations relating to accounting policies or
estimates, and their assessment of internal management controls, including the
identification of any weaknesses in such controls.


 


2.             Oversight of Risk
Management Processes


 


Risk management is an important part of maintaining a sound system of
internal control. As part of the risk management
oversight responsibility of the Board and as delegated to the Audit Committee
by the Board, the Audit Committee shall be responsible for assessing the range
of risks and making recommendations as required to the Board regarding
appropriate responsibilities and delegations for the identification, monitoring
and management of these risks. In this respect, the Audit Committee shall:


 


(a)          have the primary oversight role with respect
to identifying and monitoring the management of principal financial risks that
could impact the financial reporting of Westport; and


 


(b)         assess, as part of its oversight of the system
of internal controls, the effectiveness of the overall process for identifying
principal business risks and provide its view to the Board.


 


3.             Oversight of Internal
Controls


 


The
Audit Committee shall have the responsibility of assessing whether Management
has designed and implemented an effective system of internal control over
financial reporting.


 


Management
shall be required to provide the Audit Committee, at least annually, with a
report on internal controls, including reasonable assurance that such controls
are adequate to facilitate reliable and timely financial information. The Audit
Committee shall also review and follow-up on any areas of internal control
weakness identified by the external auditors with the auditors and Management.


 


The
General Counsel of Westport shall advise the Audit Committee and the Board with
respect to Westport’s policies and procedures regarding compliance with
applicable laws and regulations and with Westport’s Code of Conduct and
Employee Handbook.


 


The
Audit Committee shall also review and approve Westport’s policy regarding the
hiring of partners and employees and former partners and employees of its
present and former external auditors.


 


41

















 


4.             Oversight of Continuous Disclosure
Reporting


 


Prior to any disclosure, the Audit Committee shall review and recommend
to the Board the approval of the following:


 


(a)          the quarterly and annual financial
statements, MD&A and earnings press releases, in order to satisfy itself
that all disclosures are in compliance with regulatory requirements, public
financing documents and prospectuses; and


 


(b)         other continuous disclosure documents
containing financial information that would likely be material to either the
quarterly or annual financial statements.


 


In discharging its responsibilities, the Audit
Committee will review:


 


(a)          all critical accounting policies and
practices used or to be used by Westport, and changes in the selection and
application of accounting principles;


 


(b)         significant financial reporting issues that
have arisen in connection with the preparation of such audited financial
statements;


 


(c)          analyses prepared by Management, and/or the
external auditors setting forth significant financial reporting issues and
judgments made in connection with the preparation of the financial statements,
including analyses of the effects of alternative GAAP methods on the financial
statements; and


 


(d)         the effect of emerging regulatory and
accounting initiatives.


 


The Audit Committee shall review and discuss with
the external auditor any audit problems or difficulties and Management’s
response thereto. This review shall include any difficulties encountered by the
external auditor in the course of performing its audit work, including any restrictions
on the scope of its activities or its access to information, and any
significant disagreements with Management.


 


The Audit Committee shall also establish a process
to receive, retain and treat complaints received by Westport regarding
accounting, internal controls or auditing matters and establish procedures for
the confidential, anonymous submission by Westport employees of questionable
practices. This process will be reviewed annually.


 


Lastly, the Audit Committee shall oversee Management’s development and
implementation of appropriate policies regarding continuous disclosure and
compliance with filing requirements and prompt reporting to all investors of
material events having an impact on Westport.


 


5.             Related
Companies Financial Results


 


The audited consolidated financial statements of Westport may include
the results of other companies, in whole or in part, in which Westport
maintains an equity interest. In addition, an investor company may include the
disclosure of Westport’s results or the results of a co-owned subsidiary. The
Audit Committee shall establish a coordination and communications framework
with the accountants, auditors and audit committees of these companies. The
Audit Committee shall satisfy itself that Westport’s consolidated financial
statements accurately reflect the results 


 


42

















 


of all companies included, regardless of whether these companies were
audited by different external auditors.


 


6.             Other Responsibilities


 


(a)          Review of Charter. The Audit Committee shall review and
reassess the adequacy of this charter at least annually and recommend to the
Board any amendments or modifications to this charter that the Audit Committee
deems appropriate. The Audit Committee shall also prepare and disclose a
summary of this charter to shareholders.


 


(b)         Annual Performance Evaluation. At least annually, as part of
the Board self-assessment process, the Audit Committee shall evaluate its own
performance and report the results of such evaluation to the Board.


 


(c)          Annual Communication Regarding Significant
Disagreements.
The Audit Committee shall annually inform the external auditors and Management
that they should promptly contact the Audit Committee or its Chair about any
significant issue or disagreement related to the system of internal controls
and financial reporting.


 


(d)         Annual Review of Transactions Involving
Directors and Officers. The Audit Committee shall annually review a summary of the directors’
and executive officers’ travel and entertainment expenses, related party
transactions and any conflicts of interest.


 


NON-AUDIT SERVICES


 


The Canadian Institute of Chartered Accountants
revised rules of Professional Conduct on auditor independence (the “Rules”)
as they relate to public companies include prohibitions or restrictions on
services that may be provided by auditors to their audit clients and require
that all services provided to a listed entity audit client, including its
subsidiaries, be pre-approved by the client’s audit committee. In accordance
with those Rules, the Audit Committee has approved, adopted and made effective
Westport’s Audit Committee Preapproval Policy. That policy requires that the
Audit Committee approve annually the types of services management may engage
the external auditor to perform and that the Audit Committee set a dollar limit
per engagement and in aggregate that management may spend on non-audit
services. Amounts outside of these services or authorized limits require
explicit approval from the Audit Chair.


 


43
















 


EXTERNAL AUDITORS’
SERVICE FEES


 


During the
financial years ended March 31, 2008 and 2007 KPMG LLP was paid the
following fees from Westport:


 


	
  Item

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
  Audit fees

  	
   

  	
  $

  	
  224,540

  	
   

  	
  $

  	
  198,655

  	
   

  
	
  Audit-related fees

  	
   

  	
  32,300

  	
   

  	
  0

  	
   

  
	
  Tax fees

  	
   

  	
  55,162

  	
   

  	
  48,925

  	
   

  
	
  All other fees

  	
   

  	
  0

  	
   

  	
  0

  	
   

  
	
  Total

  	
   

  	
  $

  	
  312,002

  	
   

  	
  $

  	
  247,580

  	
   

  



 


Audit Fees


 


Audit fees were
for professional services rendered by KPMG LLP for the audit of the annual
financial statements of Westport and CWI and services provided in connection
with statutory and regulatory filings or engagements.


 


Audit-Related Fees


 


Audit-related
fees were for assurance and related services reasonably related to the
performance of the audit or review of the annual statements and are not
reported under the heading audit fees above.


 


Tax Fees


 


Tax fees were for
tax compliance and tax advice. These services consisted of tax compliance
including the preparation of tax returns.


 


All Other Fees


 


There were no fees paid to KPMG LLP that would
be considered “Other Fees” in 2008 or 2007. Fees to be disclosed under this
category would be for products and services other than those described under
the headings audit fees, audit-related fees and tax fees above.


 


44

















 


Composition of the Audit
Committee


 


The following table sets forth the name of each
of the current members of the Audit Committee, whether such member is
independent, whether such member is financially literate and the relevant
education and experience of such member.


 


	
  Name

  	
   

  	
  Independent?

  	
   

  	
  Financially

  Literate?

  	
   

  	
  Relevant Education and Experience

  
	
  Henry F. Bauermeister 

  Jr. (Chair)

  	
   

  	
  Yes

  	
   

  	
  Yes

  	
   

  	
  Mr. Bauermeister is a Certified Public
  Accountant (Indiana) and received his bachelor’s degree from the University
  of Nebraska where he majored in Accounting and minored in Economics.
  Mr. Bauermeister has held a number of financial positions within Cummins
  including the Group Controller position for the Components Group.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  John A. Beaulieu

  	
   

  	
  Yes

  	
   

  	
  Yes

  	
   

  	
  Mr. Beaulieu holds a Bachelor of Commerce
  degree and a Masters of Business Administration degree, both from Santa Clara
  University of California. As a co-founder of Cascadia Pacific Management,
  LLP, a venture capital fund, Mr. Beaulieu has significant experience in
  the analysis and evaluation of financial results. He has been actively
  involved in finding, financing, and growing more than 70 emerging
  technology-based companies since 1986. In addition, during
  Mr. Beaulieu’s business career he has held general management positions
  with a number of companies, including President of Steelcraft Corp, Evans
  Products Company and Ford Motor Company.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Dezsö J. Horváth

  	
   

  	
  Yes

  	
   

  	
  Yes

  	
   

  	
  Dr. Horváth obtained his Masters of Business
  Administration and a PhD in Policy and Organisational Behaviour from the
  University of Umea, Sweden. Dr. Horváth holds the Tanna H. Schulich
  Chair in Strategic Management at the Schulich School of Business at York
  University in Toronto, Ontario, where he has taught since 1977. Through his
  academic background and responsibilities as the Dean of the Schulich School
  of Business, Dr. Horváth has acquired significant financial experience
  relating to accounting and financial issues. Dr. Horváth is / has been a
  member of a number of advisory boards in both the public and private sector..

  



 


ADDITIONAL INFORMATION


 


LEGAL PROCEEDINGS


 


We are not involved in any material legal proceedings,
nor are any such proceedings known to be contemplated. From time to time, we
may be involved in litigation relating to claims arising out of our operations
in the normal course of business.


 


INTERESTS OF
MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS


 


Other than as described below or elsewhere disclosed
in this AIF, none of our insiders, directors or executive officers, nor any
associate or affiliate of such persons, has had any material interest, direct
or indirect, in any transaction of ours within our three most recently
completed financial years, nor in any transaction or proposed transaction
within our current financial year which has materially affected or would
materially affect us or any of our subsidiaries.


 


On
July 26, 2007, Perseus, L.L.C. (“Perseus”) exercised the conversion option
on approximately $22.1 million of secured, subordinated convertible debentures
(the “Notes”) held by them in order to acquire approximately 16.5 million of
our Common Shares, which were then sold to third parties at a price of $3.10
per share for total gross proceeds of approximately $51.3 million with all
proceeds going to Perseus and its affiliates. As an inducement for Perseus’s
conversion of the Notes, we agreed to pay an amount equal to 50% of the
interest that would 


 


45

















 


otherwise
have been payable on the Notes, on December 31, 2007 and June 30,
2008, had the Notes not been converted. Under the terms of the Notes, Perseus
was entitled to two of our seven directors. Messrs. John C. Fox and
Kenneth M. Socha, both Senior Managing Directors of Perseus, served on the
Board until July 26, 2007.


 


Mr. Littlefair, a member of
our Board, is President, Chief Executive Officer and a director of Clean
Energy, a publicly traded company in which we own approximately 2% of the
issued and outstanding shares of common stock and with which we maintains an
ongoing business relationship. In addition, Mr. Demers
served as a director of Clean Energy until April 4, 2008. Mr. Kenneth M. Socha
also served as a director of Clean Energy. Mr. Thomas Boone Pickens, one of our insiders,
is also a director of Clean Energy. Further, during the third quarter of the
fiscal year ended March 31, 2008, we entered into a non-interest bearing,
limited recourse loan of $6.0 million with Clean Energy Finance, LLC. This loan
allowed us to finance the establishment and maintenance of an inventory of
approximately 75 liquefied natural gas fuel systems in anticipation of
deliveries to customers of the San Pedro Bay Ports, and is repayable only from
the receipt of funds from the sale of these fuel systems.


 


TRANSFER AGENT AND
REGISTRAR


 


Our transfer agent and registrar for our Common Shares
is Computershare Trust Company of Canada at its principal offices in Vancouver,
British Columbia, Calgary, Alberta and Toronto, Ontario.


 


MATERIAL CONTRACTS


 


Debenture Units


 


On June 12, 2008, we announced a debt financing agreement to issue
15,000 debenture units at $1,000 per unit for total gross proceeds of $15
million.  The offering is expected to
close in July 2008, subject to market conditions and the satisfaction or
waiver of customary closing conditions. Each debenture unit will consist of a
$1,000 principal amount 9% unsecured, subordinated debenture (each, a “Debenture”)
due three years from the closing date, and 180 Common Share purchase warrants
(each, a “Warrant”) with an exercise price of $5.35.  In total, we expect to receive approximately
$14.3 million, net of commissions from the offering.  We also issued 161,413 broker warrants with a
strike price of $4.60.


 


The Debentures will bear interest from the date of issue at the rate of
9% per annum, compounded annually, payable in cash semi-annually in arrears on December 15th
and June 15th of each year during the term of such Debentures, commencing
on December 15, 2008. We will have the option to redeem the Debentures for
cash at a redemption price equal to 115% of their principal amount, plus any
accrued and unpaid interest to the date of redemption, at any time after 12
months and before 18 months from the date of closing of the offering (the “Closing
Date”). At any time after 18 months from the Closing Date to the maturity date,
we will have the option to redeem all of the Debentures for cash at a price
equal to 110% of their principal amount, plus accrued but unpaid interest to
the date of redemption.


 


Each Warrant will entitle the holder to purchase one Common Share upon
the payment of the exercise price of $5.35 per Warrant. The Warrants terminate
two years from the Closing Date.


 


The Debentures will be direct obligations of Westport and will not be
secured by any mortgage, pledge, hypothec or other charge and will be subordinated
to other liabilities of Westport as 


 


46

















 


described under “Subordination”. The note indenture governing the
debentures (“Note Indenture”) will restrict Westport from incurring additional
indebtedness for borrowed money, including obligations under banker’s
acceptances, commercial paper, bonds and debentures (“Debt”) and from
guaranteeing any Debt of other persons, except for:


 


(i)            Senior Indebtedness, as defined in
the Note Indenture;


 


(ii)           unsecured Debt ranking pari passu
with the Debentures in an aggregate principal amount not to exceed $20,000,000
outstanding at any time;


 


(iii)          guarantees of outstanding Debt of
other persons provided that the aggregate outstanding principal amount of pari
passu Debt permitted pursuant to paragraph (ii) above together with the
outstanding principal amount of any Debt of other persons guaranteed by
Westport does not exceed $30,000,000 at any time; and


 


(iv)          Debt which is expressly
subordinated to and postponed in favour of the Debentures.


 


Westport will not be restricted from increasing the amount of the
Senior Indebtedness (as described in paragraphs (i), (ii) and (iii) of
the definition of Senior Indebtedness set out in the Note Indenture) to its
bankers or other senior lenders currently outstanding or from creating liens on
its assets to secure Senior Indebtedness described in such paragraphs or
permitted increases to such Senior Indebtedness. The Note Indenture will not
restrict subsidiaries and affiliates of Westport from incurring indebtedness
for borrowed money or other obligations.


 


Canada’s Industrial
Technologies Office (formerly Technology Partnerships Canada or TPC)


 


In March 2003, we were awarded a strategic
project investment of $18.9 million from TPC (now renamed the “Industrial
Technologies Office” (the “ITO”)) to support the development of
high-performance low-emissions engines. At the time, TPC was a Government of
Canada initiative established to invest strategically in Canadian research,
development and innovation.


 


Under the terms of that agreement, TPC was to
contribute the lesser of $18,912,010 and 30% of defined eligible costs to our
research and development activities from November 15, 2001 until March 31,
2006, the scheduled project completion date. 
On September 30, 2006, we were to issue $4 million in warrants
using the closing share price as at that date and Black-Scholes to value each
warrant. Moreover, from fiscal year 2007 to 2013, we were to pay a royalty
equal to the greater of $1.35 million, of 0.33% of revenues as defined under
the agreement. This period was subject to extension to the earlier of 2016, or
when we had paid $28.2 million in royalties.


 


In 2007, the ITO agreed to extend the agreement by two
years. Under the amended terms, subject to certain terms and conditions, for
each fiscal year from 2009 to 2015 inclusive in which gross business revenues
received by us are greater than $13,500,000, the royalty will be the greater of
$1,350,000 and 0.33% of such gross business revenues. If royalty repayments do
not total $28,189,000 by March 31, 2015, the repayment period will be
extended until that amount is reached or until March 31, 2018, whichever
is earlier.


 


Unless the agreement is extended again, the ITO
warrants will be issued on September 30, 2008. The number of warrants to
be issued will equal $4,000,000 divided by the value attributed to each ITO
warrant as determined by the Black-Scholes formula.


 


47

















 


Perseus, L.L.C.


 


On June 12, 2006, we agreed to issue up to $22.1
million in Notes to Perseus, a private equity fund management group. The Notes
were issued in two tranches of $13.8 million and $8.3 million, respectively,
with the first tranche completed in July 2006 and the second tranche
completed in January 2007. Interest was payable semi-annually in arrears,
on June 30 and December 31, in additional notes or shares at our
option, for the first two years.


 


After the first two years, interest was to be
calculated at a rate of 8% on the outstanding principal amount of the Notes
only for the number of trading days in the period on which the share price is
below $3.00 and was payable semi-annually in cash, additional convertible notes
or shares at our option. The first tranche was convertible to Common Shares at
a conversion price of $1.30 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. At the time of issuance of the Notes, the noteholders also received
warrants to acquire, at an exercise price equal to the conversion price of the
accompanying notes, Common Shares equal to 25% of the number of Common Shares
into which the Notes are convertible. The warrants expired four years from the
date of issuance and include a cashless exercise provision which allowed 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 were then cancelled. For so long as Perseus continued to hold Notes
and warrants convertible into a specified percentage of Westport’s issued and
outstanding shares, Perseus had the right to nominate two of seven Board seats.
The Notes were secured with a second charge on all of our assets.


 


On July 26,
2007, Perseus exercised the conversion option on the Notes held by them in
order to acquire approximately 16.5 million of our Common Shares, which were
then sold to third parties at a price of $3.10 per share for total gross
proceeds of approximately $51.3 million with all proceeds going to Perseus and
its affiliates. As an inducement for Perseus’s conversion of the Notes, we
agreed to pay an amount equal to 50% of the interest that would otherwise have
been payable on the Notes on December 31, 2007 and June 30, 2008, had
the Notes not been converted. The two Perseus nominated directors also resigned
effective July 26, 2007. The 4,134,663 warrants issued as part of the
convertible debt were exercised on a cashless basis into 2,338,669 common
shares.


 


Matco Capital Ltd.


 


On June 13, 2006, we entered into an agreement with Matco Capital
Ltd. (“Matco”), an unrelated party, to reorganize WRI, at the time a wholly
owned subsidiary of Westport. As part of the reorganization, we substantially
transferred all of the assets, liabilities and operations of WRI to another
wholly owned Westport company, WPI, which carries on the business previously
carried on by WRI.  On closing and
post-reorganization, we sold 45% of WRI to Matco for $4.2 million in cash
consideration and recognized a gain of $3.9 million, net of related transaction
costs. In addition, Matco facilitated access to a limited recourse credit
facility for $9.7 million secured only by a pledge by us of 4% of the total
shares in WRI and other Matco collateral. Under the terms of our original
investment agreement with Matco, the full amount was only drawable under the
limited recourse credit facility if a previously identified transaction was
completed before December 31, 2006. However, as this transaction did not
occur, drawings under this credit facility were limited to $7.3 million.
Proceeds from the sale of our remaining 


 


48

















 


shares in WRI are to be first applied to repay the loan. During the
year ended March 31, 2007, we drew the full amount available to us under
this credit facility of $7.3 million. We paid interest of prime plus 1% on
amounts drawn until December 31, 2006, after which time Matco is
responsible for bearing such interest costs.


 


In February 2007, Wild River (formerly WRI) completed a $25.5
million private placement by issuing additional shares, thereby diluting our
ownership percentage from 55% to approximately 17%. This dilution resulted in a
net dilution gain of approximately $4.0 million. As part of that transaction,
we also recognized a gain of $0.2 million on the disposition of an additional
1.5% interest in Wild River reducing our investment to approximately 16% as at March 31,
2007. The proceeds from the sale were used to pay down the related credit
facility to $6.7 million. In December 2007, we sold substantially all of
our shares in Wild River for proceeds of $6.7 million, which were applied
against our related limited recourse bank loan of $6.7 million, thereby fully
repaying the loan. We now own less than 0.5% of Wild River.


 


There were no material changes to the share ownership of Westport, its
listing on the Toronto Stock Exchange, CWI, the composition of the board of
directors, management or in any of its relationships and commitments to
shareholders, employees, government and industry partners, customers, and
suppliers arising from this series of transactions. We also retain all rights
to its intellectual property and will continue to develop and commercialize
HPDI technology under its current business plans.


 


Amended and Restated
Joint Venture Agreement


 


We entered into the Amended JVA with Cummins on December 16,
2003. A copy of the Amended JVA is attached to our material change report dated
December 16, 2003 and is available on SEDAR at http://www.sedar.com. See
also “OUR BUSINESS” and “OPERATIONS” in this AIF.


 


INTERESTS OF EXPERTS


 


KPMG LLP, our independent auditors, have audited our
financial statements for the year ended March 31, 2008 as set forth in our
Annual Report. As at the date hereof, the partners and associates of KPMG LLP
as a group, did not beneficially own any of our outstanding Common Shares.


 


ADDITIONAL
INFORMATION


 


Additional information, including information as to
directors’ and officers’ remuneration and indebtedness, principal holders of
our securities, options to purchase securities, and interests of insiders in
material transactions is contained in our most recent Management Information
Circular, which is available on SEDAR at http://www.sedar.com, and which is
incorporated herein by reference and forms an integral part of this AIF.


 


Additional financial information is contained in our
financial statements and Management’s Discussion & Analysis for the
year ended March 31, 2008, which are incorporated herein by reference and
form an integral part of this AIF.


 


Additional information relating to Westport may be
found on SEDAR at: http://www.sedar.com


 


49

















 


www.westport.com


 


50