Kaman (KAMN)

Income Taxes

Methodology

Tax laws in certain of our operating jurisdictions require items to be reported for tax purposes at different times than the items are reflected in our financial statements. Some of these differences are permanent, such as expenses that are never deductible on our tax returns, an example being the recapitalization costs incurred during 2005, and some are temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax returns in future years for which we have already recorded the tax benefit in our financial statements. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment is not yet due or the realized tax benefit of expenses we have already reported in our tax returns, but have not yet recognized as expense in our financial statements.

As of December 31, 2007 we had recognized $32.1 million of net deferred tax assets, net of valuation allowances. The realization of these benefits is dependent in part on future taxable income. For those foreign countries or U.S. states where the expiration of tax loss or credit carry forwards or the projected operating results indicates that realization is not likely, a valuation allowance is provided.

Judgment and Uncertainties

Management believes that sufficient income will be earned in the future to realize deferred income tax assets, net of valuation allowances recorded. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory tax rates and future taxable income levels.

Our effective tax rate on earnings from continuing operations was 36.6 percent for 2007. Our effective tax rate is based on expected or reported income or loss, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions. We establish reserves when, despite our belief that our tax return positions are valid and defensible, we believe that certain positions may not prevail if challenged. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit or changes in tax legislation. Our effective tax rate includes the impact of reserve provisions and changes to reserves that we consider appropriate. This rate is then applied to our quarterly operating results. In the event that there is a significant unusual or one-time item recognized in our operating results, the tax attributable to that item would be separately calculated and recorded at the same time as the unusual or one-time item.

Effect if Actual Results Differ From Assumptions

On January 1, 2007, the company adopted FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” The cumulative effect of the adoption of FIN 48 was a decrease of $0.4 million in the liability for unrecognized tax benefits and a corresponding increase to retained earnings. The total liability for unrecognized tax benefits upon adoption was $5.1 million, including interest and penalties of $1.2 million. Included in unrecognized tax benefits upon adoption were items approximating $1.5 million that, if recognized, would favorably affect our effective tax rate in future periods. Currently we do not anticipate that total unrecognized tax benefits will change significantly within the next twelve months. We file tax returns in numerous U.S. and foreign jurisdictions, with returns subject to examination for varying periods, but generally back to and including 2004. It is our policy to record interest and penalties on unrecognized tax benefits as income taxes. A discussion of the effect of the adoption of FIN 48 is included in Note 13.

Income Taxes

SIZE="2">Methodology

Tax laws in certain of our operating jurisdictions require items to be reported for tax purposes at different times than
the items are reflected in our financial statements. Some of these differences are permanent, such as expenses that are never deductible on our tax returns, an example being the recapitalization costs incurred during 2005, and some are temporary
differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax returns in future years for which we
have already recorded the tax benefit in our financial statements. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment is not yet due or the realized tax benefit of expenses we have
already reported in our tax returns, but have not yet recognized as expense in our financial statements.

As of December 31, 2007 we had recognized
$32.1 million of net deferred tax assets, net of valuation allowances. The realization of these benefits is dependent in part on future taxable income. For those foreign countries or U.S. states where the expiration of tax loss or credit carry
forwards or the projected operating results indicates that realization is not likely, a valuation allowance is provided.

Judgment and
Uncertainties

Management believes that sufficient income will be earned in the future to realize deferred income tax assets, net of valuation
allowances recorded. The realization of these deferred tax assets can be impacted by changes to tax laws, statutory tax rates and future taxable income levels.

SIZE="2">Our effective tax rate on earnings from continuing operations was 36.6 percent for 2007. Our effective tax rate is based on expected or reported income or loss, statutory tax rates, and tax planning opportunities available to us in the
various jurisdictions in which we operate. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions. We establish reserves when, despite our belief that our tax return positions are valid and
defensible, we believe that certain positions may not prevail if challenged. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit or changes in tax legislation. Our effective tax rate includes
the impact of reserve provisions and changes to reserves that we consider appropriate. This rate is then applied to our quarterly operating results. In the event that there is a significant unusual or one-time item recognized in our operating
results, the tax attributable to that item would be separately calculated and recorded at the same time as the unusual or one-time item.

Effect if
Actual Results Differ From Assumptions

On January 1, 2007, the company adopted FASB Interpretation No. 48 (“FIN 48”),
“Accounting for Uncertainty in Income Taxes.” The cumulative effect of the adoption of FIN 48 was a decrease of $0.4 million in the liability for unrecognized tax benefits and a corresponding increase to retained earnings. The total
liability for unrecognized tax benefits upon adoption was $5.1 million, including interest and penalties of $1.2 million. Included in unrecognized tax benefits upon adoption were items approximating $1.5 million that, if recognized, would favorably
affect our effective tax rate in future periods. Currently we do not anticipate that total unrecognized tax benefits will change significantly within the next twelve months. We file tax returns in numerous U.S. and foreign jurisdictions, with
returns subject to examination for varying periods, but generally back to and including 2004. It is our policy to record interest and penalties on unrecognized tax benefits as income taxes. A discussion of the effect of the adoption of FIN 48 is
included in Note 13.