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Note 16. Research and Development

Company-funded and customer-funded research and development costs are as follows:

Our customer-funded research and development costs primarily are related to U.S. Government contracts, including the ARH, V-22, VH-71 and H-1 development contracts.

As part of the realignment of Bell/Agusta Aerospace Company LLC (“BAAC”) (see Note 18), Bell Helicopter, Agusta S.p.A. and two of its affiliated companies (collectively, “Agusta”) agreed to share certain Model BA609 development costs. On behalf of BAAC, Agusta will incur development costs to enhance its investment in BAAC. Agusta also may make cash contributions to reimburse portions of our development costs incurred on behalf of BAAC. Based on development costs incurred, we received $11 million, $19 million and $43 million in cash contributions from Agusta, which were recorded in income in 2007, 2006 and 2005, respectively.

During 2005, Bell Helicopter entered into four separate risk-sharing arrangements. Two of the arrangements are with commercial participants in the development of the Bell Model 429 aircraft. In 2007, one agreement was modified to reduce the amount of cash and in-kind development efforts required from the participant, with corresponding reductions in the entitlements the participant may obtain upon future Model 429 production and sales. The arrangements require contributions from the participants totaling $14 million, which are due once the development effort reaches certain predetermined milestones, as well as in-kind development contributions from one participant. The other two arrangements are with Canadian governmental organizations. These arrangements, which currently include the Model 429 aircraft and may potentially include certain future aircraft, each require cash contributions of up to CAD 115 million from the participants, based on a percentage of qualifying research and development costs incurred.

Each of the participants under these arrangements is entitled to payments from Bell Helicopter, with the commercial participants also entitled to discounts, based on future sales of the Model 429 aircraft. In addition, there are certain requirements related to production of future Model 429 aircraft in Canada. Based on the development activities completed and costs incurred, we have recorded income of $22 million, $22 million and $35 million in 2007, 2006 and 2005, respectively, related to these arrangements.

In 2007, 2006 and 2005, we received, or were due to receive, $33 million, $41 million and $78 million, respectively, in cost reimbursements of company-funded amounts from our risk-sharing partners. Based on these reimbursements, our net company-funded costs totaled $332 million, $310 million and $248 million in 2007, 2006 and 2005, respectively.

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Note
16. Research and Development

Company-funded and
customer-funded research and development costs are as follows:

Our customer-funded research and development
costs primarily are related to U.S. Government contracts, including the ARH,
V-22, VH-71 and H-1 development contracts.

As part of the
realignment of Bell/Agusta Aerospace Company LLC (“BAAC”) (see Note 18), Bell
Helicopter, Agusta S.p.A. and two of its affiliated companies (collectively, “Agusta”)
agreed to share certain Model BA609 development costs. On behalf of BAAC,
Agusta will incur development costs to enhance its investment in BAAC. Agusta
also may make cash contributions to reimburse portions of our development costs
incurred on behalf of BAAC. Based on development costs incurred, we received
$11 million, $19 million and $43 million in cash contributions from Agusta,
which were recorded in income in 2007, 2006 and 2005, respectively.

During 2005, Bell
Helicopter entered into four separate risk-sharing arrangements. Two of the
arrangements are with commercial participants in the development of the Bell
Model 429 aircraft. In 2007, one agreement was modified to reduce the amount of
cash and in-kind development efforts required from the participant, with
corresponding reductions in the entitlements the participant may obtain upon
future Model 429 production and sales. The arrangements require contributions
from the participants totaling $14 million, which are due once the development
effort reaches certain predetermined milestones, as well as in-kind development
contributions from one participant. The other two arrangements are with
Canadian governmental organizations. These arrangements, which currently
include the Model 429 aircraft and may potentially include certain future
aircraft, each require cash contributions of up to CAD 115 million from the
participants, based on a percentage of qualifying research and development
costs incurred.

Each of the participants under these
arrangements is entitled to payments from Bell Helicopter, with the commercial
participants also entitled to discounts, based on future sales of the Model 429
aircraft. In addition, there are certain requirements related to production of
future Model 429 aircraft in Canada. Based on the development activities
completed and costs incurred, we have recorded income of $22 million, $22
million and $35 million in 2007, 2006 and 2005, respectively, related to these
arrangements.

In
2007, 2006 and 2005, we received, or were due to receive, $33 million, $41
million and $78 million, respectively, in cost reimbursements of company-funded
amounts from our risk-sharing partners. Based on these reimbursements, our net
company-funded costs totaled $332 million, $310 million and $248 million in
2007, 2006 and 2005, respectively.

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Note 16. Research and Development

Company-funded and customer-funded research and development costs are as follows:

Our customer-funded research and development costs primarily are related to U.S. Government contracts, including the ARH, V-22 and H-1 development contracts.

As part of the realignment of Bell/Agusta Aerospace Company LLC (“BAAC”) (see Note 18), Bell Helicopter, Agusta S.p.A. and two of its affiliated companies (collectively, “Agusta”) agreed to share certain Model BA609 development costs. On behalf of BAAC, Agusta will incur development costs to enhance its investment in BAAC. We record these development costs in consolidation as research and development expense, with a credit to minority interest for Agusta’s share. Agusta also may make cash contributions to reimburse portions of Bell Helicopter’s development

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costs incurred on behalf of BAAC. Based on development costs incurred, Bell Helicopter received $19 million and $43 million in cash contributions from Agusta, which were recorded in income in 2006 and 2005, respectively.

During 2005, Bell Helicopter entered into four separate risk-sharing arrangements. Two of the arrangements are with commercial participants in the development of the Bell Model 429 aircraft. The arrangements require contributions from the participants totaling $20 million, which are due once the development effort reaches certain predetermined milestones, as well as in-kind development contributions from one participant. The other two arrangements are with Canadian governmental organizations. These arrangements, which currently include the Model 429 aircraft and may potentially include certain future aircraft, each require cash contributions of up to CAD 115 million from the participants, based on a percentage of qualifying research and development costs incurred.

Each of the participants under these arrangements is entitled to payments from Bell Helicopter, with the commercial participants also entitled to discounts, based on future sales of the Model 429 aircraft. In addition, there are certain requirements related to production of future Model 429 aircraft in Canada, and one of the commercial participants is entitled to perform certain manufacturing functions for the Model 429 aircraft. Based on the development activities completed and costs incurred, we have recorded income of $22 million in 2006 and $35 million in 2005 related to these arrangements.

In 2006 and 2005, we received, or were due to receive, $41 million and $78 million, respectively, in cost reimbursements of company-funded amounts from our risk-sharing partners. Based on these reimbursements, our net company-funded costs totaled $310 million in 2006 and $248 million in 2005.

Research and Development

Information regarding our research and development expenditures is contained in Note 20 to the Consolidated Financial Statements on page 74 of this Annual Report on Form 10-K.