Document:

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

 

50Exhibit 4.2

 

 

Consolidated Financial
Statements

(Expressed in thousands
of Canadian dollars)

 

WESTPORT  INNOVATIONS 
INC.

 

Years ended
March 31, 2008, 2007 and 2006

 

 

	
  

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  KPMG LLP

  	
   

  	
  Telephone

  	
  (604) 691-3000

  
	
   

  	
  Chartered
  Accountants

  	
   

  	
  Fax

  	
  (604) 691-3031

  
	
   

  	
  PO
  Box 10426 777 Dunsmuir Street

  	
   

  	
  Internet

  	
  www.kpmg.ca

  
	
   

  	
  Vancouver
  BC V7Y 1K3

  	
   

  	
   

  	
   

  
	
   

  	
  Canada

  	
   

  	
   

  	
   

  

 

AUDITORS’ REPORT ON FINANCIAL STATEMENTS

 

To
the Board of Directors and Shareholders of

Westport Innovations Inc.

 

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

 

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

 

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

 

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

 

/s/
KPMG LLP

Chartered
Accountants

 

Vancouver,
Canada

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

which are as of July 21, 2008

 

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

 

To
the Board of Directors and Shareholders of

Westport Innovations Inc.

 

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

 

/s/
KPMG LLP

Chartered
Accountants

 

Vancouver,
Canada

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

which are as of July 21, 2008

 

 

KPMG LLP, a Canadian limited liability partnership is the Canadian

member firm of KPMG International, a Swiss cooperative.

 

 

WESTPORT INNOVATIONS INC.

Consolidated
Balance Sheets

(Expressed in
thousands of Canadian dollars)

 

March 31,
2008 and 2007

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Assets

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current assets:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash equivalents

  	
   

  	
  $

  	
  7,560

  	
   

  	
  $

  	
  1,702

  	
   

  
	
  Short-term investments

  	
   

  	
  15,202

  	
   

  	
  21,379

  	
   

  
	
  Accounts receivable

  	
   

  	
  7,028

  	
   

  	
  10,881

  	
   

  
	
  Loan receivable (note 18(a))

  	
   

  	
  6,774

  	
   

  	
  —

  	
   

  
	
  Inventories (note 4)

  	
   

  	
  9,020

  	
   

  	
  2,816

  	
   

  
	
  Prepaid expenses

  	
   

  	
  1,033

  	
   

  	
  783

  	
   

  
	
  Current portion of future income tax assets
  (note 17)

  	
   

  	
  4,944

  	
   

  	
  1,778

  	
   

  
	
   

  	
   

  	
  51,561

  	
   

  	
  39,339

  	
   

  
	
  Long-term investments (note 5)

  	
   

  	
  18,754

  	
   

  	
  13,115

  	
   

  
	
  Equipment, furniture and leasehold
  improvements (note 6)

  	
   

  	
  3,685

  	
   

  	
  3,863

  	
   

  
	
  Intellectual property (note 7)

  	
   

  	
  574

  	
   

  	
  719

  	
   

  
	
  Deferred charges (note 3(a))

  	
   

  	
  —

  	
   

  	
  920

  	
   

  
	
  Future income tax asset (note 17)

  	
   

  	
  4,366

  	
   

  	
  1,677

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  78,940

  	
   

  	
  $

  	
  59,633

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Liabilities and Shareholders’ Equity

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current liabilities

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accounts payable and accrued liabilities

  	
   

  	
  $

  	
  8,470

  	
   

  	
  $

  	
  6,030

  	
   

  
	
  Deferred revenue

  	
   

  	
  205

  	
   

  	
  365

  	
   

  
	
  Demand instalment loan (note 8)

  	
   

  	
  5,776

  	
   

  	
  1,613

  	
   

  
	
  Short-term debt (note 9)

  	
   

  	
  5,995

  	
   

  	
  —

  	
   

  
	
  Current portion of long-term debt (note 10)

  	
   

  	
  54

  	
   

  	
  6,816

  	
   

  
	
  Current portion of warranty liability

  	
   

  	
  4,899

  	
   

  	
  3,824

  	
   

  
	
  Obligation to issue warrants (note 13)

  	
   

  	
  4,000

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  29,399

  	
   

  	
  18,648

  	
   

  
	
  Warranty liability

  	
   

  	
  4,258

  	
   

  	
  3,147

  	
   

  
	
  Obligation to issue warrants (note 13)

  	
   

  	
  —

  	
   

  	
  4,000

  	
   

  
	
  Long-term debt (note 10)

  	
   

  	
  8

  	
   

  	
  13,781

  	
   

  
	
  Other long-term liabilities (note 11)

  	
   

  	
  1,496

  	
   

  	
  1,720

  	
   

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

  	
   

  	
  13,983

  	
   

  	
  7,719

  	
   

  
	
   

  	
   

  	
  49,144

  	
   

  	
  49,015

  	
   

  
	
  Shareholders’ equity (note 22(c)):

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Share capital:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Authorized:

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Issued:

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  258,202

  	
   

  	
  232,830

  	
   

  
	
  Other equity instruments (note 15)

  	
   

  	
  3,079

  	
   

  	
  12,352

  	
   

  
	
  Additional paid in capital

  	
   

  	
  5,097

  	
   

  	
  5,301

  	
   

  
	
  Deficit

  	
   

  	
  (247,460

  	
  )

  	
  (239,865

  	
  )

  
	
  Accumulated other comprehensive income

  	
   

  	
  10,878

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  29,796

  	
   

  	
  10,618

  	
   

  
	
  Commitments and contingencies (notes 12 and
  19)

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Share consolidation (note 22(c))

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  78,940

  	
   

  	
  $

  	
  59,633

  	
   

  

 

See accompanying notes to consolidated
financial statements.

 

Approved on behalf of the Board:

 

	
  “John A. Beaulieu”

  	
   

  	
  Director

  	
  “Henry Bauermeister”

  	
   

  	
  Director

  

 

 

WESTPORT INNOVATIONS INC.

Consolidated
Statements of Operations

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

 

Years ended March 31, 2008, 2007 and 2006

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Product revenue

  	
   

  	
  $

  	
  55,238

  	
   

  	
  $

  	
  47,195

  	
   

  	
  $

  	
  29,932

  	
   

  
	
  Parts revenue

  	
   

  	
  16,298

  	
   

  	
  13,285

  	
   

  	
  13,620

  	
   

  
	
   

  	
   

  	
  71,536

  	
   

  	
  60,480

  	
   

  	
  43,552

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cost of revenue and expenses:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cost of revenue

  	
   

  	
  49,023

  	
   

  	
  38,381

  	
   

  	
  28,642

  	
   

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

  	
   

  	
  23,026

  	
   

  	
  21,891

  	
   

  	
  16,939

  	
   

  
	
  General and administrative (note 14(c))

  	
   

  	
  6,033

  	
   

  	
  6,882

  	
   

  	
  4,866

  	
   

  
	
  Sales and marketing (note 14(c))

  	
   

  	
  10,550

  	
   

  	
  7,077

  	
   

  	
  5,849

  	
   

  
	
  Foreign exchange loss (gain)

  	
   

  	
  1,287

  	
   

  	
  (102

  	
  )

  	
  (93

  	
  )

  
	
  Depreciation and amortization

  	
   

  	
  1,550

  	
   

  	
  1,410

  	
   

  	
  2,752

  	
   

  
	
  Bank charges, interest and other

  	
   

  	
  280

  	
   

  	
  408

  	
   

  	
  314

  	
   

  
	
   

  	
   

  	
  91,749

  	
   

  	
  75,947

  	
   

  	
  59,269

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss before undernoted

  	
   

  	
  (20,213

  	
  )

  	
  (15,467

  	
  )

  	
  (15,717

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  (986

  	
  )

  	
  (1,718

  	
  )

  	
  —

  	
   

  
	
  Interest and other income

  	
   

  	
  1,316

  	
   

  	
  764

  	
   

  	
  450

  	
   

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

  	
   

  	
  10,659

  	
   

  	
  8,120

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  (9,224

  	
  )

  	
  (8,301

  	
  )

  	
  (15,267

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Income tax recovery (expense) (note 17):

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current

  	
   

  	
  (218

  	
  )

  	
  (404

  	
  )

  	
  —

  	
   

  
	
  Future

  	
   

  	
  4,691

  	
   

  	
  3,455

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  4,473

  	
   

  	
  3,051

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  (4,751

  	
  )

  	
  (5,250

  	
  )

  	
  (15,267

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  (5,564

  	
  )

  	
  (6,057

  	
  )

  	
  (1,593

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss for the year

  	
   

  	
  $

  	
  (10,315

  	
  )

  	
  $

  	
  (11,307

  	
  )

  	
  $

  	
  (16,860

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  $

  	
  (0.41

  	
  )

  	
  $

  	
  (0.53

  	
  )

  	
  $

  	
  (0.79

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  25,167,966

  	
   

  	
  21,478,521

  	
   

  	
  21,208,141

  	
   

  

 

See accompanying notes to consolidated
financial statements.

 

 

WESTPORT INNOVATIONS INC.

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

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

 

Years ended March 31,
2008, 2007 and 2006

 

	
   

  	
   

  	
  Common

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Accumulated 

  other

  	
   

  	
  Total

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  shares

  	
   

  	
  Share

  	
   

  	
  Other equity

  	
   

  	
  Additional paid

  	
   

  	
  Accumulated

  	
   

  	
  comprehensive

  	
   

  	
  shareholders’

  	
   

  	
  Comprehensive

  	
   

  
	
   

  	
   

  	
  (note 22(c))

  	
   

  	
  capital

  	
   

  	
  instruments

  	
   

  	
  in capital

  	
   

  	
  deficit

  	
   

  	
  income

  	
   

  	
  equity

  	
   

  	
  loss

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance, March 31, 2005

  	
   

  	
  21,132,596

  	
   

  	
  $

  	
  230,379

  	
   

  	
  $

  	
  2,078

  	
   

  	
  $

  	
  2,919

  	
   

  	
  $

  	
  (211,698

  	
  )

  	
  $

  	
  —

  	
   

  	
  $

  	
  23,678

  	
   

  	
  $

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Issue of performance share units for no
  additional consideration

  	
   

  	
  122,197

  	
   

  	
  801

  	
   

  	
  (801

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Stock-based compensation

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  1,082

  	
   

  	
  1,852

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  2,934

  	
   

  	
  —

  	
   

  
	
  Net loss

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (16,860

  	
  )

  	
  —

  	
   

  	
  (16,860

  	
  )

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance, March 31, 2006

  	
   

  	
  21,254,793

  	
   

  	
  231,180

  	
   

  	
  2,359

  	
   

  	
  4,771

  	
   

  	
  (228,558

  	
  )

  	
  —

  	
   

  	
  9,752

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Shares issued for intellectual property

  	
   

  	
  174,029

  	
   

  	
  602

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  602

  	
   

  	
  —

  	
   

  
	
  Issue of common shares on exercise of
  performance share units

  	
   

  	
  81,052

  	
   

  	
  555

  	
   

  	
  (555

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Shares issued for settlement of accrued
  interest

  	
   

  	
  114,720

  	
   

  	
  498

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  498

  	
   

  	
  —

  	
   

  
	
  Share issue costs

  	
   

  	
  —

  	
   

  	
  (5

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (5

  	
  )

  	
  —

  	
   

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

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  8,989

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  8,989

  	
   

  	
  —

  	
   

  
	
  Stock-based compensation

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  1,559

  	
   

  	
  530

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  2,089

  	
   

  	
  —

  	
   

  
	
  Net loss

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (11,307

  	
  )

  	
  —

  	
   

  	
  (11,307

  	
  )

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance, March 31, 2007

  	
   

  	
  21,624,594

  	
   

  	
  232,830

  	
   

  	
  12,352

  	
   

  	
  5,301

  	
   

  	
  (239,865

  	
  )

  	
  —

  	
   

  	
  10,618

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  3,483

  	
   

  	
  17,032

  	
   

  	
  20,515

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance, April 1, 2007

  	
   

  	
  21,624,594

  	
   

  	
  232,830

  	
   

  	
  12,352

  	
   

  	
  5,301

  	
   

  	
  (236,382

  	
  )

  	
  17,032

  	
   

  	
  31,133

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Issue of common shares on exercise of stock
  options

  	
   

  	
  232,024

  	
   

  	
  1,967

  	
   

  	
  —

  	
   

  	
  (762

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  1,205

  	
   

  	
  —

  	
   

  
	
  Issue of common shares on exercise of
  performance share units

  	
   

  	
  60,383

  	
   

  	
  390

  	
   

  	
  (390

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

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

  	
   

  	
  4,831,801

  	
   

  	
  21,759

  	
   

  	
  (7,569

  	
  )

  	
  —

  	
   

  	
  (763

  	
  )

  	
  —

  	
   

  	
  13,427

  	
   

  	
  —

  	
   

  
	
  Issue of common shares on exercise of
  warrants

  	
   

  	
  668,191

  	
   

  	
  1,420

  	
   

  	
  (1,420

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Share issue costs

  	
   

  	
  —

  	
   

  	
  (164

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (164

  	
  )

  	
  —

  	
   

  
	
  Stock-based compensation

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  106

  	
   

  	
  558

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  664

  	
   

  	
  —

  	
   

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

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  645

  	
   

  	
  645

  	
   

  	
  645

  	
   

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

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (6,799

  	
  )

  	
  (6,799

  	
  )

  	
  (6,799

  	
  )

  
	
  Net loss

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (10,315

  	
  )

  	
  —

  	
   

  	
  (10,315

  	
  )

  	
  (10,315

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance, March 31, 2008

  	
   

  	
  27,416,993

  	
   

  	
  $

  	
  258,202

  	
   

  	
  $

  	
  3,079

  	
   

  	
  $

  	
  5,097

  	
   

  	
  $

  	
  (247,460

  	
  )

  	
  $

  	
  10,878

  	
   

  	
  $

  	
  29,796

  	
   

  	
  $

  	
  (16,469

  	
  )

  

 

See accompanying notes to consolidated financial statements.

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Cash Flows

(Expressed in thousands of Canadian
dollars)

 

Years ended March 31,
2008, 2007 and 2006

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash flows
  from operations:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss for the
  year

  	
   

  	
  $

  	
  (10,315

  	
  )

  	
  $

  	
  (11,307

  	
  )

  	
  $

  	
  (16,860

  	
  )

  
	
  Items not
  involving cash:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Depreciation
  and amortization

  	
   

  	
  1,550

  	
   

  	
  1,410

  	
   

  	
  2,752

  	
   

  
	
  Stock-based
  compensation expense

  	
   

  	
  664

  	
   

  	
  2,089

  	
   

  	
  2,934

  	
   

  
	
  Accretion of
  TPC warrants

  	
   

  	
  —

  	
   

  	
  571

  	
   

  	
  1,143

  	
   

  
	
  Future
  income tax recovery

  	
   

  	
  (4,691

  	
  )

  	
  (3,455

  	
  )

  	
  —

  	
   

  
	
  Change in
  deferred lease inducements

  	
   

  	
  (251

  	
  )

  	
  (164

  	
  )

  	
  (154

  	
  )

  
	
  Gain on sale
  of long-term investments

  	
   

  	
  (10,659

  	
  )

  	
  (8,120

  	
  )

  	
  —

  	
   

  
	
  Joint
  Venture Partners’ share of net income from joint ventures

  	
   

  	
  5,564

  	
   

  	
  6,057

  	
   

  	
  1,593

  	
   

  
	
  Interest on
  long-term debt and amortization of discount

  	
   

  	
  690

  	
   

  	
  1,663

  	
   

  	
  —

  	
   

  
	
  Other

  	
   

  	
  (146

  	
  )

  	
  (69

  	
  )

  	
  (69

  	
  )

  
	
  Changes in
  non-cash operating working capital:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accounts
  receivable

  	
   

  	
  3,853

  	
   

  	
  (4,744

  	
  )

  	
  (97

  	
  )

  
	
  Inventories

  	
   

  	
  (6,204

  	
  )

  	
  (1,963

  	
  )

  	
  629

  	
   

  
	
  Prepaid
  expenses

  	
   

  	
  (250

  	
  )

  	
  (62

  	
  )

  	
  (169

  	
  )

  
	
  Accounts
  payable and accrued liabilities

  	
   

  	
  2,343

  	
   

  	
  2,353

  	
   

  	
  (1,197

  	
  )

  
	
  Deferred
  revenue

  	
   

  	
  (133

  	
  )

  	
  129

  	
   

  	
  (1,214

  	
  )

  
	
  Warranty
  liability

  	
   

  	
  2,186

  	
   

  	
  1,201

  	
   

  	
  (959

  	
  )

  
	
   

  	
   

  	
  (15,799

  	
  )

  	
  (14,411

  	
  )

  	
  (11,668

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash flows from investments:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Purchase of equipment, furniture and
  leasehold improvements

  	
   

  	
  (1,690

  	
  )

  	
  (1,175

  	
  )

  	
  (396

  	
  )

  
	
  Proceeds on disposition of equipment,
  furniture and leasehold improvements

  	
   

  	
  609

  	
   

  	
  12

  	
   

  	
  93

  	
   

  
	
  Sale (purchase) of short-term investments,
  net

  	
   

  	
  6,725

  	
   

  	
  (14,593

  	
  )

  	
  13,185

  	
   

  
	
  Purchase of long-term investments

  	
   

  	
  —

  	
   

  	
  (51

  	
  )

  	
  —

  	
   

  
	
  Disposition of long-term investments

  	
   

  	
  17,977

  	
   

  	
  605

  	
   

  	
  —

  	
   

  
	
  Loan receivable

  	
   

  	
  (6,774

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  
	
  Sale of interest in subsidiary

  	
   

  	
  —

  	
   

  	
  4,198

  	
   

  	
  —

  	
   

  
	
  Contributions from joint venture partner

  	
   

  	
  425

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Deferred transaction costs incurred

  	
   

  	
  —

  	
   

  	
  (764

  	
  )

  	
  —

  	
   

  
	
   

  	
   

  	
  17,272

  	
   

  	
  (11,768

  	
  )

  	
  12,882

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash flows from financing:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Issue of demand instalment loan

  	
   

  	
  5,000

  	
   

  	
  —

  	
   

  	
  1,235

  	
   

  
	
  Repayment of demand instalment loan

  	
   

  	
  (837

  	
  )

  	
  (894

  	
  )

  	
  (981

  	
  )

  
	
  Increase in short-term debt

  	
   

  	
  5,995

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Increase in bank loan

  	
   

  	
  —

  	
   

  	
  7,346

  	
   

  	
  —

  	
   

  
	
  Repayment of bank loan

  	
   

  	
  (6,741

  	
  )

  	
  (605

  	
  )

  	
  —

  	
   

  
	
  Repayment of other long-term debt

  	
   

  	
  (73

  	
  )

  	
  (185

  	
  )

  	
  (742

  	
  )

  
	
  Issuance of convertible notes

  	
   

  	
  —

  	
   

  	
  22,092

  	
   

  	
  —

  	
   

  
	
  Finance costs incurred

  	
   

  	
  —

  	
   

  	
  (915

  	
  )

  	
  —

  	
   

  
	
  Shares issued for cash

  	
   

  	
  1,205

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Share issue costs

  	
   

  	
  (164

  	
  )

  	
  (5

  	
  )

  	
  —

  	
   

  
	
   

  	
   

  	
  4,385

  	
   

  	
  26,834

  	
   

  	
  (488

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Increase in cash and cash equivalents

  	
   

  	
  5,858

  	
   

  	
  656

  	
   

  	
  726

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash equivalents, beginning of
  year

  	
   

  	
  1,702

  	
   

  	
  1,046

  	
   

  	
  320

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash equivalents, end of year

  	
   

  	
  $

  	
  7,560

  	
   

  	
  $

  	
  1,702

  	
   

  	
  $

  	
  1,046

  	
   

  

 

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Supplementary information:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Interest paid

  	
   

  	
  $

  	
  473

  	
   

  	
  $

  	
  379

  	
   

  	
  $

  	
  222

  	
   

  
	
  Taxes paid

  	
   

  	
  479

  	
   

  	
  15

  	
   

  	
  —

  	
   

  
	
  Non-cash transactions:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  260

  	
   

  
	
  Shares issued on exercise of performance
  share units

  	
   

  	
  390

  	
   

  	
  555

  	
   

  	
  801

  	
   

  
	
  Shares issued for acquisition of
  intellectual property

  	
   

  	
  —

  	
   

  	
  602

  	
   

  	
  —

  	
   

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

  	
   

  	
  21,115

  	
   

  	
  —

  	
   

  	
  —

  	
   

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

  	
   

  	
  644

  	
   

  	
  498

  	
   

  	
  —

  	
   

  
	
  Shares issued on cashless exercise of
  warrants

  	
   

  	
  1,420

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
											

 

See accompanying notes to consolidated
financial statements.

 

 

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

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

 

Years ended March 31, 2008, 2007 and
2006

 

1.                         Nature
of operations:

 

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

 

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

 

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

 

2.                         Significant
accounting policies:

 

(a)                   Basis of presentation:

 

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

 

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

 

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

 

(b)                  Cash and cash equivalents:

 

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

 

 

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

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

 

Years ended March 31, 2008, 2007 and
2006

 

2.                         Significant
accounting policies (continued):

 

(c)                   Short-term investments:

 

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

 

(d)                  Inventories:

 

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

 

(e)                   Equipment, furniture and leasehold
improvements:

 

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

 

	
  Assets

  	
   

  	
  Basis

  	
   

  	
  Rate

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Computer
  equipment and software

  	
   

  	
  Straight-line

  	
   

  	
  3
  years

  
	
  Furniture and
  fixtures

  	
   

  	
  Straight-line

  	
   

  	
  5
  years

  
	
  Machinery and
  equipment

  	
   

  	
  Straight-line

  	
   

  	
  8
  years

  
	
  Leasehold
  improvements

  	
   

  	
  Straight-line

  	
   

  	
  Lease
  term

  

 

(f)                     Long-term investments:

 

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

 

(g)                  Research and development costs:

 

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

 

 

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

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

 

Years ended March 31, 2008, 2007 and
2006

 

2.                         Significant
accounting policies (continued):

 

(h)                  Government assistance:

 

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

 

(i)                      Intellectual property:

 

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

 

(j)                      Impairment of long-lived assets:

 

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

 

(k)                   Warranty liability:

 

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

 

(l)                      Extended warranty:

 

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

 

 

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

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

 

Years ended March 31, 2008, 2007 and
2006

 

2.                         Significant
accounting policies (continued):

 

(m)                Revenue recognition:

 

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

 

(n)                  Income taxes:

 

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

 

(o)                  Stock-based compensation plans:

 

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

 

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

 

(p)                  Post-retirement benefits:

 

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

 

 

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

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

 

Years ended March 31, 2008, 2007 and
2006

 

2.                         Significant
accounting policies (continued):

 

(q)                  Foreign currency:

 

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

 

(r)                     Use of estimates:

 

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

 

(s)                   Loss per share:

 

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

 

3.                         Accounting
changes:

 

(a)                   Adoption of new accounting standards:

 

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

 

 

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

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

 

Years ended March 31, 2008, 2007 and
2006

 

3.                         Accounting
changes (continued):

 

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

 

Comprehensive
Income:

 

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

 

Financial
Instruments:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

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

 

Years ended March 31, 2008, 2007 and
2006

 

3.                         Accounting
changes (continued):

 

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

 

Financial
Instruments (continued):

 

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

 

Hedges:

 

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

 

(b)                  Future accounting changes:

 

Financial instruments:

 

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

 

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

 

Capital disclosures:

 

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

 

Inventory:

 

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

 

 

WESTPORT INNOVATIONS INC.

Notes to Consolidated Financial Statements

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

 

Years ended March 31, 2008, 2007 and
2006

 

3.                         Accounting
changes (continued):

 

(b)                  Future accounting changes (continued):

 

Goodwill and Intangible Assets:

 

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

 

Financial Statement Presentation:

 

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

 

International Financial Reporting
Standards:

 

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

 

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

 

4.                         Inventories:

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Finished goods

  	
   

  	
  $

  	
  4,407

  	
   

  	
  $

  	
  —

  	
   

  
	
  Parts

  	
   

  	
  4,136

  	
   

  	
  2,360

  	
   

  
	
  Work-in-process

  	
   

  	
  477

  	
   

  	
  456

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  9,020

  	
   

  	
  $

  	
  2,816

  	
   

  

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years ended March 31, 2008, 2007 and 2006

 

5.                         Long-term
investments:

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Clean Energy Fuels Corp. (a)

  	
   

  	
  $

  	
  18,693

  	
   

  	
  $

  	
  9,134

  	
   

  
	
  Wild River Resources Ltd. (b)

  	
   

  	
  41

  	
   

  	
  3,981

  	
   

  
	
  Prometheus Energy Co. (c)

  	
   

  	
  20

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  18,754

  	
   

  	
  $

  	
  13,115

  	
   

  

 

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

 

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

 

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

 

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

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years
ended March 31, 2008, 2007 and 2006

 

6.                         Equipment,
furniture and leasehold improvements:

 

	
  2008

  	
   

  	
  Cost

  	
   

  	
  Accumulated

  amortization

  	
   

  	
  Net book

  value

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Computer equipment and software

  	
   

  	
  $

  	
  5,670

  	
   

  	
  $

  	
  5,035

  	
   

  	
  $

  	
  635

  	
   

  
	
  Furniture and fixtures

  	
   

  	
  1,307

  	
   

  	
  1,090

  	
   

  	
  217

  	
   

  
	
  Machinery and equipment

  	
   

  	
  17,434

  	
   

  	
  14,984

  	
   

  	
  2,450

  	
   

  
	
  Leasehold improvements

  	
   

  	
  8,329

  	
   

  	
  7,946

  	
   

  	
  383

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  32,740

  	
   

  	
  $

  	
  29,055

  	
   

  	
  $

  	
  3,685

  	
   

  

 

	
  2007

  	
   

  	
  Cost

  	
   

  	
  Accumulated 

  amortization

  	
   

  	
  Net book

  value

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Computer equipment and software

  	
   

  	
  $

  	
  5,142

  	
   

  	
  $

  	
  4,742

  	
   

  	
  $

  	
  400

  	
   

  
	
  Furniture and fixtures

  	
   

  	
  1,182

  	
   

  	
  1,067

  	
   

  	
  115

  	
   

  
	
  Machinery and equipment

  	
   

  	
  19,882

  	
   

  	
  16,906

  	
   

  	
  2,976

  	
   

  
	
  Leasehold improvements

  	
   

  	
  8,149

  	
   

  	
  7,777

  	
   

  	
  372

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  34,355

  	
   

  	
  $

  	
  30,492

  	
   

  	
  $

  	
  3,863

  	
   

  

 

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

 

7.                         Intellectual
property:

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cost

  	
   

  	
  $

  	
  4,321

  	
   

  	
  $

  	
  4,321

  	
   

  
	
  Accumulated amortization

  	
   

  	
  (3,747

  	
  )

  	
  (3,602

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  574

  	
   

  	
  $

  	
  719

  	
   

  

 

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

 

8.                         Demand
instalment loan:

 

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

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years
ended March 31, 2008, 2007 and 2006

 

9.                         Short-term
debt:

 

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

 

10.                  Long-term
debt:

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Capital lease obligations (a)

  	
   

  	
  $

  	
  62

  	
   

  	
  $

  	
  135

  	
   

  
	
  Bank loan (b)

  	
   

  	
  —

  	
   

  	
  6,741

  	
   

  
	
  Subordinated convertible notes (c)

  	
   

  	
  —

  	
   

  	
  13,721

  	
   

  
	
   

  	
   

  	
  62

  	
   

  	
  20,597

  	
   

  
	
  Current portion

  	
   

  	
  54

  	
   

  	
  6,816

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  8

  	
   

  	
  $

  	
  13,781

  	
   

  

 

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

 

	
  2009

  	
   

  	
  $

  	
  54

  	
   

  
	
  2010

  	
   

  	
  5

  	
   

  
	
  2011

  	
   

  	
  4

  	
   

  
	
   

  	
   

  	
  63

  	
   

  
	
  Amount representing interest

  	
   

  	
  1

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  62

  	
   

  

 

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

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years
ended March 31, 2008, 2007 and 2006

 

10.                  Long-term
debt (continued):

 

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

 

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

 

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

 

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

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years
ended March 31, 2008, 2007 and 2006

 

10.                  Long-term
debt (continued):

 

(c)                     Continued:

 

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

 

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

 

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

 

11.                  Other
long-term liabilities:

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Deferred lease inducements (a)

  	
   

  	
  $

  	
  280

  	
   

  	
  $

  	
  531

  	
   

  
	
  Deferred revenue (b)

  	
   

  	
  1,216

  	
   

  	
  1,189

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  1,496

  	
   

  	
  $

  	
  1,720

  	
   

  

 

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

 

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

 

12.                  Government
assistance:

 

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

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years
ended March 31, 2008, 2007 and 2006

 

12.                  Government
assistance (continued):

 

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

 

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

 

13.                  Obligation
to issue warrants:

 

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

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years
ended March 31, 2008, 2007 and 2006

 

14.                  Stock
options and other stock-based plans:

 

(a)                    Share
options:

 

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

 

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

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
  Number of

  shares

  	
   

  	
  Weighted

  average

  exercise

  price

  	
   

  	
  Number of

  shares

  	
   

  	
  Weighted

  average

  exercise

  price

  	
   

  	
  Number of

  shares

  	
   

  	
  Weighted

  average

  exercise

  price

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Outstanding, beginning of year

  	
   

  	
  1,493,998

  	
   

  	
  $

  	
  6.68

  	
   

  	
  1,419,589

  	
   

  	
  $

  	
  7.17

  	
   

  	
  686,404

  	
   

  	
  $

  	
  12.70

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Granted

  	
   

  	
  71,428

  	
   

  	
  9.31

  	
   

  	
  167,392

  	
   

  	
  4.13

  	
   

  	
  908,062

  	
   

  	
  5.18

  	
   

  
	
  Exercised

  	
   

  	
  (232,024

  	
  )

  	
  5.28

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Cancelled/expired

  	
   

  	
  (97,603

  	
  )

  	
  8.22

  	
   

  	
  (92,983

  	
  )

  	
  9.87

  	
   

  	
  (174,877

  	
  )

  	
  18.34

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Outstanding, end of year

  	
   

  	
  1,235,799

  	
   

  	
  $

  	
  6.96

  	
   

  	
  1,493,998

  	
   

  	
  $

  	
  6.68

  	
   

  	
  1,419,589

  	
   

  	
  $

  	
  7.17

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Options exercisable, end of year

  	
   

  	
  833,296

  	
   

  	
  $

  	
  7.77

  	
   

  	
  422,704

  	
   

  	
  $

  	
  10.43

  	
   

  	
  441,218

  	
   

  	
  $

  	
  11.27

  	
   

  

 

	
  Range of exercise prices

  	
   

  	
  Number

  outstanding,

  March 31,

  2008

  	
   

  	
  Weighted

  average

  remaining

  contractual life

  	
   

  	
  Weighted

  average

  exercise price

  	
   

  	
  Number

  exercisable

  March 31,

  2008

  	
   

  	
  Weighted

  average

  exercise price

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  $3.22 to
  $4.90

  	
   

  	
  223,278

  	
   

  	
  7.1

  	
   

  	
  $

  	
  4.17

  	
   

  	
  121,851

  	
   

  	
  $

  	
  4.03

  	
   

  
	
  5.25 to 5.43

  	
   

  	
  603,798

  	
   

  	
  6.0

  	
   

  	
  5.29

  	
   

  	
  328,436

  	
   

  	
  5.29

  	
   

  
	
  5.67 to
  10.68

  	
   

  	
  233,688

  	
   

  	
  5.5

  	
   

  	
  7.35

  	
   

  	
  222,259

  	
   

  	
  7.35

  	
   

  
	
  10.71 to
  13.79

  	
   

  	
  95,133

  	
   

  	
  4.3

  	
   

  	
  11.87

  	
   

  	
  80,847

  	
   

  	
  12.08

  	
   

  
	
  14.49 to
  20.62

  	
   

  	
  36,761

  	
   

  	
  2.7

  	
   

  	
  17.12

  	
   

  	
  36,761

  	
   

  	
  17.12

  	
   

  
	
  24.50 to
  30.80

  	
   

  	
  43,141

  	
   

  	
  2.8

  	
   

  	
  23.49

  	
   

  	
  43,142

  	
   

  	
  23.49

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  $3.22 to
  $30.80

  	
   

  	
  1,235,799

  	
   

  	
  5.8

  	
   

  	
  $

  	
  6.96

  	
   

  	
  833,296

  	
   

  	
  $

  	
  7.77

  	
   

  

 

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

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years
ended March 31, 2008, 2007 and 2006

 

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

 

(b)                   Employee
share purchase plan:

 

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

 

(c)                    Performance
share units:

 

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

 

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

 

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

 

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

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Research and
  development

  	
   

  	
  $

  	
  87

  	
   

  	
  $

  	
  348

  	
   

  	
  $

  	
  1,604

  	
   

  
	
  General and
  administrative

  	
   

  	
  465

  	
   

  	
  1,494

  	
   

  	
  946

  	
   

  
	
  Sales and
  marketing

  	
   

  	
  112

  	
   

  	
  247

  	
   

  	
  384

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  664

  	
   

  	
  $

  	
  2,089

  	
   

  	
  $

  	
  2,934

  	
   

  

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years
ended March 31, 2008, 2007 and 2006

 

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

 

(c)                    Performance
share units (continued):

 

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

 

	
   

  	
   

  	
  Units

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Outstanding, March 31, 2005

  	
   

  	
  297,684

  	
   

  
	
  Units exercised

  	
   

  	
  (122,197

  	
  )

  
	
  Units granted

  	
   

  	
  233,405

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Outstanding, March 31, 2006

  	
   

  	
  408,892

  	
   

  
	
  Units exercised

  	
   

  	
  (81,052

  	
  )

  
	
  Units granted

  	
   

  	
  261,633

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Outstanding, March 31, 2007

  	
   

  	
  589,473

  	
   

  
	
  Units exercised

  	
   

  	
  (60,383

  	
  )

  
	
  Units granted

  	
   

  	
  553,900

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Outstanding, March 31, 2008

  	
   

  	
  1,082,990

  	
   

  

 

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

 

15.                    Other
equity instruments:

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  $

  	
  3,079

  	
   

  	
  $

  	
  3,364

  	
   

  
	
  Value assigned to warrants (note 10(c))

  	
   

  	
  —

  	
   

  	
  1,420

  	
   

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

  	
   

  	
  —

  	
   

  	
  7,568

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  3,079

  	
   

  	
  $

  	
  12,352

  	
   

  

 

16.                    Research
and development expenses:

 

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

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Research and development expenses

  	
   

  	
  $

  	
  26,684

  	
   

  	
  $

  	
  27,041

  	
   

  	
  $

  	
  25,628

  	
   

  
	
  Program funding (note 12)

  	
   

  	
  (3,658

  	
  )

  	
  (5,150

  	
  )

  	
  (8,689

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Research and development

  	
   

  	
  $

  	
  23,026

  	
   

  	
  $

  	
  21,891

  	
   

  	
  $

  	
  16,939

  	
   

  

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years ended March 31, 2008, 2007 and 2006

 

17.                     Income
taxes:

 

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

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  $

  	
  9,224

  	
   

  	
  $

  	
  8,301

  	
   

  	
  $

  	
  15,267

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Expected income tax recovery

  	
   

  	
  $

  	
  3,075

  	
   

  	
  $

  	
  2,831

  	
   

  	
  $

  	
  5,249

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Reduction (increase) in income taxes
  resulting from:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  (141

  	
  )

  	
  (211

  	
  )

  	
  —

  	
   

  
	
  Non-deductible stock-based compensation

  	
   

  	
  (221

  	
  )

  	
  (713

  	
  )

  	
  (1,012

  	
  )

  
	
  Non-deductible expenses

  	
   

  	
  (45

  	
  )

  	
  (375

  	
  )

  	
  (426

  	
  )

  
	
  Change in enacted rates

  	
   

  	
  (1,508

  	
  )

  	
  (5,692

  	
  )

  	
  (192

  	
  )

  
	
  Foreign tax rate differences

  	
   

  	
  (426

  	
  )

  	
  (527

  	
  )

  	
  (168

  	
  )

  
	
  Change in valuation allowance

  	
   

  	
  3,739

  	
   

  	
  7,738

  	
   

  	
  (3,451

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  4,473

  	
   

  	
  $

  	
  3,051

  	
   

  	
  $

  	
  —

  	
   

  

 

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

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Future tax assets:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net operating loss carry forwards

  	
   

  	
  $

  	
  19,188

  	
   

  	
  $

  	
  19,365

  	
   

  
	
  Long-term investments

  	
   

  	
  626

  	
   

  	
  4,100

  	
   

  
	
  Intellectual property

  	
   

  	
  2,116

  	
   

  	
  2,123

  	
   

  
	
  Equipment, furniture and leasehold improvements

  	
   

  	
  813

  	
   

  	
  292

  	
   

  
	
  Financing and share issue costs

  	
   

  	
  273

  	
   

  	
  190

  	
   

  
	
  Warranty liability

  	
   

  	
  3,205

  	
   

  	
  2,438

  	
   

  
	
  Deferred revenue

  	
   

  	
  439

  	
   

  	
  497

  	
   

  
	
  Capital lease obligations

  	
   

  	
  18

  	
   

  	
  43

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total gross future tax assets

  	
   

  	
  26,678

  	
   

  	
  29,048

  	
   

  
	
  Valuation allowance

  	
   

  	
  (17,368

  	
  )

  	
  (25,593

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total future tax asset

  	
   

  	
  $

  	
  9,310

  	
   

  	
  $

  	
  3,455

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Allocated as follows:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current future tax assets

  	
   

  	
  $

  	
  4,944

  	
   

  	
  $

  	
  1,778

  	
   

  
	
  Long-term future tax asset

  	
   

  	
  4,366

  	
   

  	
  1,677

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total future tax asset

  	
   

  	
  $

  	
  9,310

  	
   

  	
  $

  	
  3,455

  	
   

  

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years
ended March 31, 2008, 2007 and 2006

 

17.                    Income
taxes (continued):

 

(b)                   Continued:

 

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

 

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

 

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

 

	
  2009

  	
   

  	
  $

  	
  1,504

  	
   

  
	
  2010

  	
   

  	
  2,235

  	
   

  
	
  2014

  	
   

  	
  2,703

  	
   

  
	
  2015

  	
   

  	
  2,508

  	
   

  
	
  2026

  	
   

  	
  2,354

  	
   

  
	
  2027

  	
   

  	
  15,171

  	
   

  
	
  2028

  	
   

  	
  21,785

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  48,260

  	
   

  

 

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

 

18.                    Investment
in Joint Ventures:

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cummins Westport Inc. (a)

  	
   

  	
  $

  	
  13,809

  	
   

  	
  $

  	
  7,719

  	
   

  
	
  BTIC Westport Inc. (b)

  	
   

  	
  174

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  13,983

  	
   

  	
  $

  	
  7,719

  	
   

  

 

(a)                    Cummins
Westport Inc.:

 

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

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years
ended March 31, 2008, 2007 and 2006

 

18.                    Investment
in Joint Ventures:

 

(a)                    Cummins
Westport Inc. (continued):

 

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

 

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

 

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

 

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

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current assets:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash equivalents

  	
   

  	
  $

  	
  137

  	
   

  	
  $

  	
  43

  	
   

  
	
  Short-term investments

  	
   

  	
  13,713

  	
   

  	
  8,017

  	
   

  
	
  Accounts receivable

  	
   

  	
  3,503

  	
   

  	
  5,771

  	
   

  
	
  Loan receivable

  	
   

  	
  6,774

  	
   

  	
  —

  	
   

  
	
  Prepaid expenses

  	
   

  	
  108

  	
   

  	
  354

  	
   

  
	
  Current portion of future income tax asset

  	
   

  	
  4,944

  	
   

  	
  1,778

  	
   

  
	
   

  	
   

  	
  29,179

  	
   

  	
  15,963

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Future income tax asset

  	
   

  	
  4,366

  	
   

  	
  1,677

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Equipment, furniture and leasehold
  improvements

  	
   

  	
  166

  	
   

  	
  184

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  33,711

  	
   

  	
  $

  	
  17,824

  	
   

  
	
  Current liabilities:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accounts payable and accrued liabilities

  	
   

  	
  $

  	
  2,131

  	
   

  	
  $

  	
  761

  	
   

  
	
  Deferred revenue

  	
   

  	
  69

  	
   

  	
  303

  	
   

  
	
  Current portion of warranty liability

  	
   

  	
  4,689

  	
   

  	
  3,767

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  6,889

  	
   

  	
  $

  	
  4,831

  	
   

  

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years
ended March 31, 2008, 2007 and 2006

 

18.                  Investment
in Joint Ventures (continued):

 

(a)                    Cummins
Westport Inc. (continued):

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
  Long-term liabilities

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Warranty liability

  	
   

  	
  $

  	
  3,985

  	
   

  	
  $

  	
  3,091

  	
   

  
	
  Deferred revenue

  	
   

  	
  386

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  4,371

  	
   

  	
  $

  	
  3,091

  	
   

  

 

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

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Product revenue

  	
   

  	
  $

  	
  50,999

  	
   

  	
  $

  	
  44,746

  	
   

  	
  $

  	
  28,634

  	
   

  
	
  Parts revenue

  	
   

  	
  16,298

  	
   

  	
  13,285

  	
   

  	
  13,620

  	
   

  
	
   

  	
   

  	
  67,297

  	
   

  	
  58,031

  	
   

  	
  42,254

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cost of revenue and expenses:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cost of revenue

  	
   

  	
  45,490

  	
   

  	
  36,195

  	
   

  	
  27,344

  	
   

  
	
  Research and development

  	
   

  	
  7,562

  	
   

  	
  8,074

  	
   

  	
  6,577

  	
   

  
	
  General and administrative

  	
   

  	
  1,088

  	
   

  	
  856

  	
   

  	
  1,249

  	
   

  
	
  Sales and marketing

  	
   

  	
  6,447

  	
   

  	
  4,216

  	
   

  	
  4,006

  	
   

  
	
   

  	
   

  	
  60,587

  	
   

  	
  49,341

  	
   

  	
  39,176

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Income before undernoted

  	
   

  	
  6,710

  	
   

  	
  8,690

  	
   

  	
  3,078

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Interest and investment income

  	
   

  	
  793

  	
   

  	
  112

  	
   

  	
  —

  	
   

  
	
  Effect of foreign currency translation

  	
   

  	
  (1,518

  	
  )

  	
  61

  	
   

  	
  108

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Income before income taxes

  	
   

  	
  5,985

  	
   

  	
  8,863

  	
   

  	
  3,186

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Income tax recovery (expense):

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current

  	
   

  	
  (208

  	
  )

  	
  (204

  	
  )

  	
  —

  	
   

  
	
  Future

  	
   

  	
  5,855

  	
   

  	
  3,455

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  5,647

  	
   

  	
  3,251

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Income for the year

  	
   

  	
  11,632

  	
   

  	
  12,114

  	
   

  	
  3,186

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  (5,816

  	
  )

  	
  (6,057

  	
  )

  	
  (1,593

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Company’s share of income

  	
   

  	
  $

  	
  5,816

  	
   

  	
  $

  	
  6,057

  	
   

  	
  $

  	
  1,593

  	
   

  

 

(b)                   BTIC
Westport Inc.:

 

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

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years
ended March 31, 2008, 2007 and 2006

 

18.                  Investment
in Joint Ventures (continued):

 

(b)                   BTIC
Westport Inc. (continued):

 

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

 

19.               Commitments
and contingencies:

 

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

 

	
  2009

  	
   

  	
  $

  	
  1,298

  	
   

  
	
  2010

  	
   

  	
  1,265

  	
   

  
	
  2011

  	
   

  	
  1,253

  	
   

  
	
  2012

  	
   

  	
  1,254

  	
   

  
	
  2013

  	
   

  	
  802

  	
   

  
	
  Thereafter

  	
   

  	
  636

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  6,508

  	
   

  

 

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

 

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

 

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

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years
ended March 31, 2008, 2007 and 2006

 

20.                    Financial
instruments:

 

(a)                    Fair
values:

 

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

 

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

 

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

 

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

 

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

 

(b)                   Concentrations
of credit risk:

 

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

 

(c)                    Foreign
currency risk:

 

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

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years
ended March 31, 2008, 2007 and 2006

 

20.                    Financial
instruments (continued):

 

(d)                     Derivative
instruments:

 

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

 

21.                   Segmented
information:

 

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

 

22.                   Subsequent
events:

 

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

 

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

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years
ended March 31, 2008, 2007 and 2006

 

22.                   Subsequent
events (continued):

 

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

 

23.                    Reconciliation
to United States generally accepted accounting standards:

 

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

 

(a)                    Convertible notes:

 

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

 

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

 

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

 

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

 

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

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years
ended March 31, 2008, 2007 and 2006

 

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

 

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

 

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

 

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

 

(c)                    Investments:

 

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

 

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

 

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

 

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

 

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

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years
ended March 31, 2008, 2007 and 2006

 

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

 

(e)                    Stock-based compensation:

 

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

 

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

 

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

 

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

 

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

 

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

 

	
   

  	
   

  	
  Units

  	
   

  	
  Weighted average

  grant date fair

  value

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Unvested, March 31, 2007

  	
   

  	
  85,713

  	
   

  	
  $

  	
  5.25

  	
   

  
	
  Units granted

  	
   

  	
  553,900

  	
   

  	
  7.91

  	
   

  
	
  Units vested

  	
   

  	
  (111,043

  	
  )

  	
  5.46

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Unvested, March 31, 2008

  	
   

  	
  528,570

  	
   

  	
  $

  	
  6.69

  	
   

  

 

 

WESTPORT INNOVATIONS INC.

Consolidated Statements of Operations

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

 

Years
ended March 31, 2008, 2007 and 2006

 

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

 

(e)                     Stock-based
compensation (continued):

 

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

 

	
   

  	
   

  	
  2008

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Stock options

  	
   

  	
   

  	
   

  
	
  Outstanding

  	
   

  	
  $

  	
  5,454

  	
   

  
	
  Exercisable

  	
   

  	
  3,302

  	
   

  
	
  PSUs:

  	
   

  	
   

  	
   

  
	
  Outstanding

  	
   

  	
  $

  	
  4,366

  	
   

  
	
  Exercisable

  	
   

  	
  2,909

  	
   

  

 

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

 

(f)                       Income
taxes:

 

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

 

Income
tax recovery (expense) consists of:

 

	
   

  	
   

  	
  Net income (loss)

  before taxes and

  Joint Venture

  Partners’ share of

  net income from

  	
   

  	
  Income tax recovery (expense)

  	
   

  
	
   

  	
   

  	
  joint ventures

  	
   

  	
  Current

  	
   

  	
  Deferred

  	
   

  	
  Total

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Year ended March 31, 2008:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Canada

  	
   

  	
  $

  	
  (14,760

  	
  )

  	
  $

  	
  —

  	
   

  	
  $

  	
  (1,164

  	
  )

  	
  $

  	
  (1,164

  	
  )

  
	
  United States

  	
   

  	
  5,862

  	
   

  	
  (218

  	
  )

  	
  5,855

  	
   

  	
  5,637

  	
   

  
	
  Germany

  	
   

  	
  (14

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  China

  	
   

  	
  (312

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  (9,224

  	
  )

  	
  $

  	
  (218

  	
  )

  	
  $

  	
  4,691

  	
   

  	
  $

  	
  4,473

  	
   

  

 

 

WESTPORT
INNOVATIONS INC.

Notes to Consolidated Financial
Statements

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

 

Years ended March 31, 2008,
2007 and 2006

 

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

 

(f)                       Income taxes (continued):

 

	
   

  	
   

  	
  Net income (loss)

  before taxes and

  Joint Venture

  Partners’ share of

  net income from

  	
   

  	
  Income tax recovery (expense)

  	
   

  
	
   

  	
   

  	
  joint ventures

  	
   

  	
  Current

  	
   

  	
  Deferred

  	
   

  	
  Total

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Year ended March 31, 2007:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Canada

  	
   

  	
  $

  	
  (18,028

  	
  )

  	
  $

  	
  (16

  	
  )

  	
  $

  	
  —

  	
   

  	
  $

  	
  (16

  	
  )

  
	
  United States

  	
   

  	
  8,937

  	
   

  	
  (189

  	
  )

  	
  3,455

  	
   

  	
  3,266

  	
   

  
	
  Germany

  	
   

  	
  790

  	
   

  	
  (199

  	
  )

  	
  —

  	
   

  	
  (199

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  (8,301

  	
  )

  	
  $

  	
  (404

  	
  )

  	
  $

  	
  3,455

  	
   

  	
  $

  	
  3,051

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Year ended March 31, 2006:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Canada

  	
   

  	
  $

  	
  (21,135

  	
  )

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  
	
  United States

  	
   

  	
  3,350

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Germany

  	
   

  	
  2,518

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  (15,267

  	
  )

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  

 

(g)                    Uncertainties in income taxes:

 

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

 

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

 

 

WESTPORT
INNOVATIONS INC.

Notes to Consolidated Financial
Statements

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

 

Years ended March 31, 2008,
2007 and 2006

 

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

 

(g)                    Uncertainties in income taxes (continued):

 

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

 

	
  Canada

  	
   

  	
  Fiscal year
  2004 to 2008

  
	
  United
  States

  	
   

  	
  Fiscal year
  2005 to 2008

  
	
  Germany

  	
   

  	
  Fiscal year
  2003 to 2008

  
	
  China

  	
   

  	
  Fiscal year
  2007 to 2008

  

 

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

 

(h)                   Effect of US GAAP differences:

 

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

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total assets, Canadian GAAP

  	
   

  	
  $

  	
  78,940

  	
   

  	
  $

  	
  59,633

  	
   

  
	
  Differences in accounting for:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Long-term investments (c)

  	
   

  	
  —

  	
   

  	
  20,402

  	
   

  
	
  Debt issuance costs (b)

  	
   

  	
  —

  	
   

  	
  85

  	
   

  
	
  Intellectual property (d)

  	
   

  	
  (574

  	
  )

  	
  (719

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total assets, US GAAP

  	
   

  	
  $

  	
  78,366

  	
   

  	
  $

  	
  79,401

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total liabilities, Canadian GAAP

  	
   

  	
  $

  	
  49,144

  	
   

  	
  $

  	
  49,015

  	
   

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

  	
   

  	
  —

  	
   

  	
  3,202

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total liabilities, US GAAP

  	
   

  	
  $

  	
  49,144

  	
   

  	
  $

  	
  52,217

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Shareholders’ equity, Canadian GAAP

  	
   

  	
  $

  	
  29,796

  	
   

  	
  $

  	
  10,618

  	
   

  
	
  Difference in accounting for:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Long-term investments (c)

  	
   

  	
  —

  	
   

  	
  20,402

  	
   

  
	
  Convertible notes (a)(b)

  	
   

  	
  —

  	
   

  	
  (3,117

  	
  )

  
	
  Intellectual property (d)

  	
   

  	
  (574

  	
  )

  	
  (719

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Shareholders’ equity, US GAAP

  	
   

  	
  $

  	
  29,222

  	
   

  	
  $

  	
  27,184

  	
   

  

 

 

WESTPORT
INNOVATIONS INC.

Notes to Consolidated Financial
Statements

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

 

Years ended March 31, 2008,
2007 and 2006

 

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

 

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

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss for the year, Canadian GAAP

  	
   

  	
  $

  	
  (10,315

  	
  )

  	
  $

  	
  (11,307

  	
  )

  	
  $

  	
  (16,860

  	
  )

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

  	
   

  	
  147

  	
   

  	
  423

  	
   

  	
  —

  	
   

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

  	
   

  	
  (4,424

  	
  )

  	
  —

  	
   

  	
  —

  	
   

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

  	
   

  	
  1,164

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Amortization of intellectual property (d)

  	
   

  	
  145

  	
   

  	
  144

  	
   

  	
  305

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss for the year, US GAAP

  	
   

  	
  (13,283

  	
  )

  	
  (10,740

  	
  )

  	
  (16,555

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Other comprehensive income (loss):

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Unrealized gain on available for sale
  securities (c)

  	
   

  	
  —

  	
   

  	
  20,402

  	
   

  	
  —

  	
   

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

  	
   

  	
  (1,164

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  (1,164

  	
  )

  	
  20,402

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Comprehensive income (loss), US GAAP

  	
   

  	
  $

  	
  (14,447

  	
  )

  	
  $

  	
  9,662

  	
   

  	
  $

  	
  (16,555

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Basic and diluted loss per share, US GAAP

  	
   

  	
  $

  	
  (0.53

  	
  )

  	
  $

  	
  (0.50

  	
  )

  	
  $

  	
  (0.78

  	
  )

  

 

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

 

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

 

(i)                       Accounts receivable:

 

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

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Customer trade receivable

  	
   

  	
  $

  	
  1,014

  	
   

  	
  $

  	
  459

  	
   

  
	
  Government funding receivable

  	
   

  	
  2,077

  	
   

  	
  5,401

  	
   

  
	
  Due from Joint Venture Partner

  	
   

  	
  3,344

  	
   

  	
  4,733

  	
   

  
	
  Other receivables

  	
   

  	
  593

  	
   

  	
  288

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  7,028

  	
   

  	
  $

  	
  10,881

  	
   

  

 

 

WESTPORT
INNOVATIONS INC.

Notes to Consolidated Financial
Statements

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

 

Years ended March 31, 2008,
2007 and 2006

 

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

 

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

 

(ii)                   Accounts payable and accrued liabilities:

 

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

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Trade accounts payable

  	
   

  	
  $

  	
  6,641

  	
   

  	
  $

  	
  3,884

  	
   

  
	
  Accrued payroll

  	
   

  	
  1,176

  	
   

  	
  1,189

  	
   

  
	
  Accrued interest

  	
   

  	
  378

  	
   

  	
  407

  	
   

  
	
  Income taxes payable

  	
   

  	
  211

  	
   

  	
  284

  	
   

  
	
  Other

  	
   

  	
  64

  	
   

  	
  266

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  8,470

  	
   

  	
  $

  	
  6,030

  	
   

  

 

(iii)           Warranty liability:

 

A continuity of the warranty liability is as follows:

 

	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance, beginning of year

  	
   

  	
  $

  	
  6,971

  	
   

  	
  $

  	
  5,770

  	
   

  	
  $

  	
  6,729

  	
   

  
	
  Warranty claims

  	
   

  	
  (2,333

  	
  )

  	
  (2,270

  	
  )

  	
  (2,661

  	
  )

  
	
  Warranty accruals

  	
   

  	
  6,534

  	
   

  	
  4,924

  	
   

  	
  3,666

  	
   

  
	
  Change in warranty estimates

  	
   

  	
  (1,292

  	
  )

  	
  (1,387

  	
  )

  	
  (1,783

  	
  )

  
	
  Impact of foreign exchange

  	
   

  	
  (723

  	
  )

  	
  (66

  	
  )

  	
  (181

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance, end of year

  	
   

  	
  $

  	
  9,157

  	
   

  	
  $

  	
  6,971

  	
   

  	
  $

  	
  5,770

  	
   

  

 

(iv)                 Inventory:

 

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

 

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

 

(v)                     Other disclosures:

 

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

 

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

 

 

WESTPORT
INNOVATIONS INC.

Notes to Consolidated Financial
Statements

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

 

Years ended March 31, 2008,
2007 and 2006

 

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

 

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

 

(v)                     Other disclosures (continued):

 

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

 

(j)                    Recently issued accounting pronouncements:

 

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

 

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

 

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

 

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

 

 

WESTPORT
INNOVATIONS INC.

Notes to Consolidated Financial
Statements

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

 

Years ended March 31, 2008,
2007 and 2006

 

net assets of joint ventures to equity.

 

 

WESTPORT
INNOVATIONS INC.

Notes to Consolidated Financial
Statements

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

 

Years ended March 31, 2008,
2007 and 2006

 

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

 

(j)                    Recently issued accounting pronouncements (continued):

 

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

 

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

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