10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSTITION PERIOD FROM TO                      TO                     

Commission file number 000-02479

DYNAMICS RESEARCH CORPORATION

(Exact Name of Registrant as specified in its Charter)

MASSACHUSETTS	04-2211809
(State of Incorporation)	(I.R.S. Employer Identification No.)

60 FRONTAGE ROAD, ANDOVER, MASSACHUSETTS 01810-5498
(Address of Principal Executive Offices) (Zip Code)

978-475-9090
(Registrant’s Telephone Number, Including Area Code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ   No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer o       Accelerated filer þ       Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No þ

     As of July 31, 2007, there were 9,463,359 shares of the registrant’s common stock outstanding.

DYNAMICS RESEARCH CORPORATION
FORM 10-Q
For the Quarterly Period Ended June 30, 2007
Table of Contents

	Page
Part I. Financial Information		3
Item 1. Financial Statements		3
Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006 (unaudited)		3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006 (unaudited)		4
Condensed Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income for the three months ended June 30, 2007 and 2006 (unaudited)		5
Condensed Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income for the six months ended June 30, 2007 and 2006 (unaudited)		6
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006 (unaudited)		7
Notes to Condensed Consolidated Financial Statements (unaudited)		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3. Quantitative and Qualitative Disclosures About Market Risk		23
Item 4. Controls and Procedures		23
Part II. Other Information		24
Item 1. Legal Proceedings		24
Item 1A. Risk Factors		24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		24
Item 4. Submissions of Matters to a Vote of Security Holders		25
Item 6. Exhibits		25
Ex-31.1 Section 302 Certification of CEO
Ex-31.2 Section 302 Certification of CFO
Ex-32.1 Section 906 Certification of CEO
Ex-32.2 Section 906 Certification of CFO

Special Note on Factors Affecting Future Results

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements regarding future events and the future results of Dynamics Research Corporation (the “Company”) that are based on current expectations, estimates, forecasts, and projections about the industries in which the Company operates and the beliefs and assumptions of the management of the Company. Words such as “anticipates”, “believes”, “estimates”, “expects”, “intends”, “plans”, “projects”, and other similar expressions are intended to identify such forward-looking statements. These forward-looking statements are predictions of future events or trends and are not statements of historical matters. These statements are based on current expectations and beliefs of the Company and involve a number of risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document or, in the case of the statements incorporated by reference, the date of those statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the Company’s Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2006 under the section entitled “Risk Factors”. Except to the extent required by applicable law or regulation, the Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

2

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

DYNAMICS RESEARCH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands, except share data)

	June 30,			December 31,
	2007			2006
	(unaudited)			(restated)
				(See Note 1)
Assets
Current assets
Cash and cash equivalents	$	286		$	7,887
Accounts receivable, net of allowances of $782 at June 30, 2007 and $793 at December 31, 2006		33,238			27,072
Unbilled expenditures and fees on contracts in process		33,723			36,174
Prepaid expenses and other current assets		3,686			2,933
Total current assets		70,933			74,066
Noncurrent assets
Property, plant and equipment, net		10,673			11,509
Goodwill		63,055			63,055
Intangible assets, net		4,370			5,671
Deferred tax asset		1,507			1,507
Other noncurrent assets		3,594			4,044
Total noncurrent assets		83,199			85,786
Total assets	$	154,132		$	159,852
Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	14,051		$	18,195
Accrued compensation and employee benefits		13,585			14,473
Deferred taxes		8,039			9,864
Other accrued expenses		4,369			5,201
Total current liabilities		40,044			47,733
Long-term liabilities
Long-term debt		13,027			15,000
Other long-term liabilities		12,673			12,805
Total long-term liabilities		25,700			27,805
Total liabilities		65,744			75,538
Commitments and contingencies – Note 11		—			—
Stockholders’ equity
Preferred stock, $0.10 par value: 5,000,000 shares authorized; no shares issued and outstanding
Common stock, $0.10 par value; 30,000,000 shares authorized; 9,464,489 and 9,314,962 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively		946			931
Capital in excess of par value		49,066			47,644
Accumulated other comprehensive loss		(9,206	)		(9,206	)
Retained earnings		47,582			44,945
Total stockholders’ equity		88,388			84,314
Total liabilities and stockholders’ equity	$	154,132		$	159,852

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

DYNAMICS RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(dollars in thousands, except per share data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Contract revenue	$	57,030		$	65,720		$	112,942		$	132,479
Product sales		980			1,558			1,848			3,012
Total revenue		58,010			67,278			114,790			135,491
Cost of contract revenue		47,460			58,353			94,393			115,298
Cost of product sales		1,200			1,256			2,348			2,554
Selling, general and administrative expenses		5,763			6,036			11,361			12,669
Amortization of intangible assets		651			703			1,301			1,405
Total operating costs and expenses		55,074			66,348			109,403			131,926
Operating income		2,936			930			5,387			3,565
Interest expense, net		(473	)		(566	)		(929	)		(1,135	)
Other income		122			12			74			351
Income before provision for income taxes		2,585			376			4,532			2,781
Provision for income taxes		1,071			200			1,895			1,215
Income before cumulative effect of accounting change		1,514			176			2,637			1,566
Cumulative benefit of accounting change, net of tax of $62		—			—			—			84
Net income	$	1,514		$	176		$	2,637		$	1,650
Earnings per common share
Basic
Income before cumulative effect of accounting change	$	0.16		$	0.02		$	0.28		$	0.17
Cumulative effect of accounting change		—			—			—			0.01
Net income	$	0.16		$	0.02		$	0.28		$	0.18
Diluted
Income before cumulative effect of accounting change	$	0.16		$	0.02		$	0.27		$	0.17
Cumulative effect of accounting change		—			—			—			0.01
Net income	$	0.16		$	0.02		$	0.27		$	0.18
Weighted average shares outstanding
Basic		9,317,297			9,079,011			9,308,558			9,057,556
Diluted		9,650,919			9,439,954			9,609,575			9,426,269

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

DYNAMICS RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2007 AND 2006

(unaudited)

(in thousands)

										Accumulated
							Capital in			other
	Common stock						excess of			comprehensive			Retained
	Shares			Par value			par value			loss			earnings		Total
Balance March 31, 2007 (unaudited)		9,378		$	938		$	48,310		$	(9,206	)	$	46,068	$	86,110
Comprehensive income:
Net income		—			—			—			—			1,514		1,514
Comprehensive income		—			—			—			—			—		1,514
Issuance of common stock through stock options exercised and employee stock purchase transactions		42			4			337			—			—		341
Issuance of restricted stock		52			5			(5	)		—			—		—
Forfeiture of restricted stock		(6	)		(1	)		1			—			—		—
Release of restricted stock		(2	)		—			(18	)		—			—		(18	)
Share-based compensation expense		—			—			407			—			—		407
Tax benefit from stock options exercised and employee stock purchase transactions		—			—			34			—			—		34
Balance June 30, 2007 (unaudited)		9,464		$	946		$	49,066		$	(9,206	)	$	47,582	$	88,388

										Accumulated
							Capital in			other
	Common stock						excess of			comprehensive			Retained
	Shares			Par value			par value			loss			earnings		Total
Balance March 31, 2006 (unaudited)		9,189		$	919		$	44,696		$	(10,768	)	$	41,798	$	76,645
Impact of restatement — Note 1		—			—			—			—			549		549
Balance March 31, 2006 (unaudited)		9,189			919			44,696			(10,768	)		42,347		77,194
Comprehensive income:
Net income		—			—			—			—			176		176
Comprehensive income		—			—			—			—			—		176
Issuance of common stock through stock options exercised and employee stock purchase transactions		51			5			534			—			—		539
Issuance of restricted stock		17			2			(2	)		—			—		—
Forfeiture of restricted stock		(4	)		(1	)		1			—			—		—
Release of restricted stock		(1	)		—			(14	)		—			—		(14	)
Share-based compensation expense		—			—			591			—			—		591
Tax benefit from stock options exercised and employee stock purchase transactions		—			—			49			—			—		49
Balance June 30, 2006 (unaudited)		9,252		$	925		$	45,855		$	(10,768	)	$	42,523	$	78,535

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

DYNAMICS RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(unaudited)

(in thousands)

												Accumulated
							Capital in					other
	Common stock						excess of			Unearned		comprehensive			Retained
	Shares			Par value			par value			compensation		loss			earnings		Total
Balance December 31, 2006 (audited)		9,315		$	931		$	47,644		$	—	$	(9,206	)	$	44,396	$	83,765
Impact of restatement — Note 1		—			—			—			—		—			549		549
Balance December 31, 2006 (unaudited)		9,315			931			47,644			—		(9,206	)		44,945		84,314
Comprehensive income:
Net income		—			—			—			—		—			2,637		2,637
Comprehensive income		—			—			—			—		—			—		2,637
Issuance of common stock through stock options exercised and employee stock purchase transactions		94			10			754			—		—			—		764
Issuance of restricted stock		84			8			(8	)		—		—			—		—
Forfeiture of restricted stock		(10	)		(1	)		1			—		—			—		—
Release of restricted stock		(19	)		(2	)		(191	)		—		—			—		(193	)
Share-based compensation expense		—			—			803			—		—			—		803
Tax benefit from stock options exercised and employee stock purchase transactions		—			—			63			—		—			—		63
Balance June 30, 2007 (unaudited)		9,464		$	946		$	49,066		$	—	$	(9,206	)	$	47,582	$	88,388

													Accumulated
							Capital in						other
	Common stock						excess of			Unearned			comprehensive			Retained
	Shares			Par value			par value			compensation			loss			earnings		Total
Balance December 31, 2005 (audited)		9,097		$	910		$	45,571		$	(1,850	)	$	(10,768	)	$	40,324	$	74,187
Impact of restatement — Note 1		—			—			—			—			—			549		549
Balance December 31, 2005 (unaudited)		9,097			910			45,571			(1,850	)		(10,768	)		40,873		74,736
Comprehensive income:
Net income		—			—			—			—			—			1,650		1,650
Comprehensive income		—			—			—			—			—			—		1,650
Issuance of common stock through stock options exercised and employee stock purchase transactions		114			11			1,128			—			—			—		1,139
Issuance of restricted stock		70			7			(7	)		—			—			—		—
Forfeiture of restricted stock		(16	)		(2	)		2			—			—			—		—
Release of restricted stock		(13	)		(1	)		(177	)		—			—			—		(178	)
Share-based compensation expense		—			—			1,032			—			—			—		1,032
Tax benefit from stock options exercised and employee stock purchase transactions		—			—			156			—			—			—		156
Reversal of unearned compensation upon adoption of SFAS No. 123(R)		—			—			(1,850	)		1,850			—			—		—
Balance June 30, 2006 (unaudited)		9,252		$	925		$	45,855		$	—		$	(10,768	)	$	42,523	$	78,535

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

DYNAMICS RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

	Six Months Ended
	June 30,
	2007			2006
Cash flows from operating activities:
Net income	$	2,637		$	1,650
Adjustments to reconcile net cash provided by (used in) operating activities
Depreciation		1,576			1,620
Amortization of intangible assets		1,301			1,405
Share-based compensation, including cumulative effect of accounting change		803			1,032
Non-cash interest expense		73			79
Amortization of deferred gain on sale of building		(338	)		(338	)
Investment income from equity interest		(99	)		(116	)
Tax benefit from stock options exercised and employee stock purchase plan transactions		(63	)		(156	)
Deferred income taxes		(1,825	)		(4,872	)
Gain on sale of investments and long-lived assets, net		—			(194	)
Change in operating assets and liabilities:
Accounts receivable, net		(6,166	)		(2,946	)
Unbilled expenditures and fees on contracts in process		2,889			14,526
Prepaid expenses and other current assets		(753	)		(1,840	)
Accounts payable		(4,144	)		(4,524	)
Accrued compensation and employee benefits		(888	)		(833	)
Other accrued expenses		(962	)		(2,534	)
Other long-term liabilities		206			(613	)
Net cash provided by (used in) operating activities		(5,753	)		1,346
Cash flows from investing activities:
Additions to property, plant and equipment		(740	)		(1,571	)
Proceeds from sale of investments and long-lived assets		—			213
Dividends from equity investment		171			122
Increase in other assets		(133	)		(80	)
Net cash used in investing activities		(702	)		(1,316	)
Cash flow from financing activities:
Borrowings under revolving credit agreement		110,685			75,404
Repayments under revolving credit agreement		(112,658	)		(71,179	)
Principal payments under loan agreements		—			(6,241	)
Proceeds from the exercise of stock options and employee stock purchase plan transactions		764			1,139
Tax benefit from stock options exercised and employee stock purchase plan transactions		63			156
Net cash used in financing activities		(1,146	)		(721	)
Net decrease in cash and cash equivalents		(7,601	)		(691	)
Cash and cash equivalents, beginning of period		7,887			1,020
Cash and cash equivalents, end of period	$	286		$	329

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7

DYNAMICS RESEARCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except per share amounts)

NOTE 1. BASIS OF PRESENTATION AND RESTATEMENT

     The unaudited condensed consolidated financial statements of Dynamics Research Corporation (the “Company”) and its subsidiaries included herein have been prepared in accordance with accounting principles generally accepted in the United States of America. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

     On January 1, 2007, the Company adopted Financial Accounting Standards Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). There was no transition adjustment required due to the adoption of FIN 48 (See Note 7 for additional information).

     The Company has restated its consolidated financial statements as of December 31, 2006 and 2005 to correct certain tax liabilities, which resulted in an increase in stockholders’ equity of $549. The restatement reflects corrections in the measurement of deferred income tax liabilities relating to property and equipment. The principal corrections pre-date all periods reported in the Company’s financial statements, and, as a result, the related financial statement effects are immaterial to the statements of operations for each of the three years in the period ended December 31, 2006. A summary of the aggregate effect of the restatement on the Company’s consolidated balance sheet as of December 31, 2006 is shown below.

	As of December 31, 2006
	Previously		As
	Reported		Restated
Changes to Consolidated Balance Sheet:
Deferred income taxes	$	11,698	$	9,864
Other accrued expenses	$	3,916	$	5,201
Total current liabilities	$	48,282	$	47,733
Total liabilities	$	76,087	$	75,538
Retained earnings	$	44,396	$	44,945
Total stockholders’ equity	$	83,765	$	84,314

     In the opinion of management, all material adjustments that are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected. All material intercompany transactions and balances have been eliminated in consolidation. The results of the three and six months ended June 30, 2007 may not be indicative of the results that may be expected for the year ending December 31, 2007. The accompanying financial information should be read in conjunction with the consolidated financial statements and notes contained in the Company’s Form 10-K, filed with the United States Securities and Exchange Commission (“SEC”) for the year ended December 31, 2006. The Company has reclassified certain prior period amounts to conform with the current period presentation.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

     In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for the Company’s fiscal year beginning January 1, 2008. The Company is currently evaluating whether it will elect the option provided for in SFAS 159, and whether the adoption will have an impact on its financial statements.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those

8

DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)

assumptions. Under SFAS 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for the Company’s fiscal year beginning January 1, 2008, with early adoption permitted. The Company is currently evaluating whether the adoption of SFAS 157 will have a material impact on its financial statements.

NOTE 3. SHAREHOLDERS’ EQUITY

     Earnings Per Share

     Basic earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Unvested restricted shares are excluded from the basic earnings per share calculation but are included in the diluted earnings per share calculation. Diluted earnings per share are determined by using the weighted average number of common and dilutive common equivalent shares outstanding during the period.

     Due to their anti-dilutive effect, approximately 71,800 and 86,000 options to purchase common stock were excluded from the calculation of diluted earnings per share for the three months ended June 30, 2007 and 2006, respectively. Approximately 82,800 and 86,000 options to purchase common stock were excluded from the calculation of diluted earnings per share for the six months ended June 30, 2007 and 2006, respectively. However, these options could become dilutive in future periods.

     The following table illustrates the reconciliation of the weighted average shares outstanding:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Weighted average shares outstanding — Basic		9,317,297		9,079,011		9,308,558		9,057,556
Diluted effect of stock options and restricted stock grants		333,622		360,943		301,017		368,713
Weighted average shares outstanding — Diluted		9,650,919		9,439,954		9,609,575		9,426,269

     Comprehensive Income

     Comprehensive income for the three and six months ended June 30, 2007 of $1,514 and $2,637, respectively, and for the three months ended June 30, 2006 of $176, consisted solely of net income. Comprehensive income for the six months ended June 30, 2006 consisted of net income of $1,650 and an unrealized holding gain with an offsetting reclassification adjustment for the sale of an investment. During the first quarter of 2006, the Company recorded an unrealized holding gain of $122, net of tax benefit of $89, for the release of Lucent Technologies, Inc. (“Lucent”) shares to the Company. The Company subsequently sold all of the Lucent shares and realized a gain of $122, net of tax expense of $89.

9

DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)

NOTE 4. SHARE-BASED COMPENSATION

     Total share-based compensation recorded in the Condensed Consolidated Statements of Operations was as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Cost of products and services	$	154	$	298	$	280	$	600
Selling, general and administrative		253		293		523		578
Cumulative effect of accounting change		—		—		—		(146	)
Total share-based compensation expense	$	407	$	591	$	803	$	1,032

     A summary of share-based payment award activity was as follows:

	Stock Options					Restricted Stock
				Weighted					Weighted
	Number of			Average		Number of			Average
	Shares			Exercise Price		Shares			Fair Value
Outstanding at March 31, 2007		1,061,367		$	8.34		193,151		$	11.77
Granted		—		$	—		51,600		$	12.26
Exercised/Vested		(26,535	)	$	6.02		(15,234	)	$	15.36
Cancelled		(3,750	)	$	17.81		(6,220	)	$	12.67
Outstanding at June 30, 2007		1,031,082		$	8.37		223,297		$	11.61
Outstanding at December 31, 2006		1,140,679		$	8.37		212,264		$	12.86
Granted		—		$	—		84,100		$	11.42
Exercised/Vested		(58,880	)	$	7.14		(62,677	)	$	15.40
Cancelled		(50,717	)	$	9.92		(10,390	)	$	12.68
Outstanding at June 30, 2007		1,031,082		$	8.37		223,297		$	11.61
Outstanding at March 31, 2006		1,182,509		$	8.52		229,274		$	13.17
Granted		—		$	—		17,500		$	14.69
Exercised/Vested		(15,568	)	$	7.66		(9,399	)	$	15.77
Cancelled		(7,166	)	$	18.75		(4,404	)	$	15.03
Outstanding at June 30, 2006		1,159,775		$	8.47		232,971		$	13.14
Outstanding at December 31, 2005		1,239,393		$	8.51		221,816		$	13.60
Granted		—		$	—		69,900		$	14.30
Exercised/Vested		(43,568	)	$	6.74		(42,407	)	$	17.00
Cancelled		(36,050	)	$	11.86		(16,338	)	$	13.73
Outstanding at June 30, 2006		1,159,775		$	8.47		232,971		$	13.14

     During 2005, the Company realigned its approach to share-based compensation by increasing the issuance of restricted stock awards and reducing the issuance of stock options. As a result, no stock options were awarded during the three or six months ended June 30, 2007 and 2006. Also, during the fourth quarter of 2006, the Company’s Board of Directors approved an amendment to eliminate the “look-back” option and to reduce the stock purchase discount from 15% to 5% under the Employee Stock Purchase Plan (“ESPP”) effective November 1, 2006. Under SFAS 123R, this amendment results in the Company accounting for shares purchased in connection with the ESPP after the effective date as non-compensatory. The fair value of purchases made under the ESPP during the three and six months ended June 30, 2006 were estimated using the Black-Scholes option pricing model as of the date of purchase. The following weighted average assumptions were used for the three and six months ended June 30, 2006: risk-free rate of 4.71% and 4.60%, respectively; dividend yield of zero for both periods; volatility of 32.21% and 32.85%, respectively; and expected life of three months for both periods.

10

DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)

NOTE 5. SUPPLEMENTAL BALANCE SHEET INFORMATION

     The composition of selected balance sheet accounts is as follows:

	June 30,			December 31,
	2007			2006
Property and equipment, net:
Production equipment	$	11,943		$	11,942
Software		11,508			11,283
Furniture and other equipment		9,019			8,792
Leasehold improvements		2,424			2,137
Property and equipment		34,894			34,154
Less accumulated depreciation		(24,221	)		(22,645	)
Property and equipment, net	$	10,673		$	11,509
Other noncurrent assets:
Deferred compensation plan investment	$	1,760		$	1,627
Equity investments		715			787
Unbilled expenditures and fees on contracts in process		600			1,038
Other		519			592
Other noncurrent assets	$	3,594		$	4,044
Accrued compensation and employee benefits:
Accrued payroll and payroll taxes	$	5,933		$	5,956
Accrued vacation		5,225			4,343
Accrued pension liability		—			2,000
Other		2,427			2,174
Accrued compensation and employee benefits	$	13,585		$	14,473
Other accrued expenses:
Amount outstanding under letter of credit	$	991		$	1,016
Accrued income taxes		794			946
Deferred gain on sale of building		676			676
Other		1,908			2,563
Other accrued expenses	$	4,369		$	5,201
Other long-term liabilities:
Deferred gain on sale of building	$	5,070		$	5,407
Accrued pension liability		3,558			1,933
Deferred compensation plan liability		1,760			1,627
Long-term contract payments		710			2,700
Other		1,575			1,138
Other long-term liabilities	$	12,673		$	12,805

NOTE 6. GOODWILL AND INTANGIBLE ASSETS

     The Company’s identifiable intangible assets consisted of only customer relationships as of June 30, 2007 and December 31, 2006. The carrying cost of customer relationships for both periods was $12,800, offset by an accumulated amortization balance of $8,430 and $7,129 as of June 30, 2007 and December 31, 2006, respectively. The Company recorded amortization expense for its identifiable intangible assets of $651 and $703 for the three months ended June 30, 2007 and 2006, respectively, and $1,301 and $1,405 for the six months ended June 30, 2007 and 2006, respectively.

11

DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)

     Amortization expense on the Company’s identifiable intangible assets for their remaining useful lives is as follows:

Remainder of 2007	$	1,301
2008	$	2,038
2009	$	1,031

     There were no changes in the carrying amount of goodwill for the six months ended June 30, 2007. The carrying amount of goodwill of $63,055 at June 30, 2007 and December 31, 2006 was included in the Systems and Services segment.

NOTE 7. INCOME TAXES

     For the six months ended June 30, 2007 and 2006, the effective income tax rate was 41.8% and 43.7%, respectively, compared to 40.6% for the year ended December 31, 2006. The 2006 year end tax rate reflects favorable state income tax audits and tax credits and adjustments of tax accruals and reserves.

     On January 1, 2007, the Company adopted the provisions of FIN 48. The implementation of FIN 48 did not have a material impact on the amount of the Company’s tax liability for unrecognized tax benefits. As of the date of adoption, the Company had approximately $300 of unrecognized tax benefits, of which $100 would affect its effective tax rate if recognized. Interest costs and penalties related to uncertain tax positions continue to be classified as net interest expense and selling, general and administrative costs, respectively, in the Company’s financial statements. As of the date of adoption, the Company had approximately $89 of accrued interest and penalties related to unrecognized tax benefits.

     The Internal Revenue Service (“IRS”) has initiated an audit of the Company’s 2004 income tax return. The IRS continues to challenge the deferral of income for tax purposes related to unbilled receivables including the applicability of a Letter Ruling issued by the IRS to the Company in January 1976 which granted to the Company deferred tax treatment of the unbilled receivables. This issue has been elevated to the IRS National Office for determination. While the outcome of the audit is not expected to be known for several months and remains uncertain, the Company may incur interest expense, its deferred tax liabilities may be reduced and income tax payments may be increased substantially in future periods.

     The Company files income tax returns in the U.S. federal jurisdiction and numerous state jurisdictions. Tax returns for all years after 2002 are subject to future examination by federal, state and local tax authorities.

NOTE 8. DEFINED BENEFIT PENSION PLAN

     The components of net periodic benefit cost for the Company’s defined benefit pension plan are below:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Interest cost on projected benefit obligation	$	1,006		$	1,002		$	2,012		$	2,004
Expected return on plan assets		(1,464	)		(1,262	)		(2,927	)		(2,524	)
Recognized actuarial loss		270			440			540			880
Net periodic pension cost	$	(188	)	$	180		$	(375	)	$	360

     On October 25, 2006, the Company’s Board of Directors approved amendments to the Company’s Defined Benefit Pension Plan (the “Pension Plan”) which removed the 3% annual benefit inflator for active participants in the Pension Plan and froze each participant’s calculated pension benefit as of December 31, 2006.

12

DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)

     The Company no longer expects to make any additional pension payments during 2007 based on the current and projected funded status of the Pension Plan.

NOTE 9. FINANCING ARRANGEMENTS

     The Company’s outstanding debt at June 30, 2007 and December 31, 2006 was $13,027 and $15,000, respectively, which consisted of net borrowings against the Company’s $50 million revolving credit facility (“Revolver”). The weighted average interest rate on $12,000 of the outstanding balance at June 30, 2007 was 6.85% based on 90-day LIBOR options elected during the second quarter of 2007. The interest rate on the remaining $1,027 outstanding balance at June 30, 2007 was 8.25% based on a base rate option that was in effect on June 30, 2007. The interest rate on the outstanding balance at December 31, 2006 was 6.87% based on the 90-day LIBOR option elected on October 5, 2006. Borrowings under the Revolver have been classified as a long-term liability. The repayment of borrowings under the Revolver is contractually due on September 29, 2009; however, the Company may repay at any time prior to that date. The Company was in compliance with its debt covenants at June 30, 2007.

NOTE 10. BUSINESS SEGMENT, MAJOR CUSTOMERS AND RELATED PARTY INFORMATION

     Business Segment

     Results of operations information for the Company’s two reportable business segments are as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2007			2006		2007			2006
Revenues from external customers
Systems and Services	$	57,030		$	65,720	$	112,942		$	132,479
Metrigraphics		980			1,558		1,848			3,012
	$	58,010		$	67,278	$	114,790		$	135,491
Gross profit (loss)
Systems and Services	$	9,570		$	7,367	$	18,549		$	17,181
Metrigraphics		(220	)		302		(500	)		458
	$	9,350		$	7,669	$	18,049		$	17,639
Operating income (loss)
Systems and Services	$	3,394		$	899	$	6,338		$	3,659
Metrigraphics		(458	)		31		(951	)		(94	)
	$	2,936		$	930	$	5,387		$	3,565

     Sales between segments represent less than 1% of total revenue and are accounted for at cost.

     Major Customers

     Revenues from Department of Defense (“DoD”) customers accounted for approximately 78% and 80% of total revenues in both the three months and six months ended June 30, 2007 and 2006, respectively. Revenues earned from a significant DoD customer were as follows:

	Three Months Ended June 30,
	2007					2006
	Revenue		%			Revenue		%
U.S. Air Force Aeronautical Systems Center	$	6,139		11	%	$	14,742		22	%

	Six Months Ended June 30,
	2007					2006
	Revenue		%			Revenue		%
U.S. Air Force Aeronautical Systems Center	$	13,706		12	%	$	26,713		20	%

     The outstanding accounts receivable balances of this customer were as follows:

	June 30,		December 31,
	2007		2006
U.S. Air Force Aeronautical Systems Center	$	4,218	$	2,159

     The Company had no other customer in the three or six months ended June 30, 2007 and 2006 that accounted for more than 10% of revenues.

13

DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)

     Related Party

     Through its wholly owned subsidiary, H.J. Ford Associates, Inc. (“HJ Ford”), the Company has a 40% interest in ^HMRTech, LLC (“^HMRTech”) which is accounted for using the equity method. Revenues from ^HMRTech included in contract revenues for the three months ended June 30, 2007 and 2006 were $93 and $131, respectively, and $190 and $221, respectively, for the six months then ended. The amounts due from ^HMRTech included in accounts receivable at June 30, 2007 and December 31, 2006, were $35 and $50, respectively. The Company’s portion of earnings in ^HMRTech recorded in other income for the six months ended June 30, 2007 and 2006 was $163 and $130, respectively.

     The Company also has a 40% interest in ^HMRTech/HJ Ford SBA JV, LLC, (the “Joint Venture”) formed by ^HMRTech and HJ Ford under the Small Business Administration Mentor-Protégé program, which is accounted for using the equity method of accounting. In April 2006, the Joint Venture was awarded a Consolidated Acquisition of Professional Services contract by the U.S. Air Force Aeronautical Systems Center and began generating revenues under this contract in August 2006. The Company is a subcontractor to the Joint Venture and also provides the Joint Venture with various administrative services pursuant to an Operating Agreement. Revenues recognized by the Company as a subcontractor to the Joint Venture for the three and six months ended June 30, 2007 were $5,743 and $10,664, respectively. The Company’s operating costs were reduced by $393 and $747 related to the provision of administrative services to the Joint Venture for the three and six months ended June 30, 2007, respectively. The Company recorded approximately 60% of the provision in cost of contract revenue and the remaining provision was recorded in selling, general and administrative expenses for both the three and six months ended June 30, 2007.

     The table below presents the various amounts included in the Company’s Consolidated Balance Sheet related to the above mentioned transactions with the Joint Venture:

	June 30,		December 31,
	2007		2006
Accounts receivable	$	2,952	$	870
Unbilled expenditures and fees on contracts in process	$	1,838	$	967
Prepaid expenses and other current assets	$	860	$	110

NOTE 11. COMMITMENTS AND CONTINGENCIES

     As a defense contractor, the Company is subject to many levels of audit and review from various government agencies, including the Defense Contract Audit Agency, various inspectors general, the Defense Criminal Investigation Service, the Government Accountability Office, the Department of Justice and Congressional Committees. Both related to and unrelated to its defense industry involvement, the Company is, from time to time, involved in audits, lawsuits, claims, administrative proceedings and investigations. The Company accrues for liabilities associated with these activities when it becomes probable that future expenditures will be made and such expenditures can be reasonably estimated. Except as noted below, the Company does not presently believe it is reasonably likely that any of these matters would have a material adverse effect on the Company’s business, financial position, results of operations or cash flows. The Company’s evaluation of the likelihood of expenditures related to these matters is subject to change in future periods, depending on then current events and circumstances,

14

DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)

which could have material adverse effects on the Company’s business, financial position, results of operations and cash flows.

     On October 26, 2000, two former Company employees were indicted and charged with conspiracy to defraud the U.S. Air Force and wire fraud, among other charges, arising out of a scheme to defraud the U.S. out of approximately $10 million. Both men subsequently pled guilty to the principal charges against them. On October 9, 2003, the U.S. Attorney filed a civil complaint in the U.S. District Court for the District of Massachusetts against the Company based in substantial part upon the actions and omissions of the former employees that gave rise to the criminal cases against them. In the civil action, the U.S. Attorney is asserting claims against the Company, which are not additive, based on the False Claims Act, the Anti-Kickback Act, or breach of contract for which the government estimates damages at approximately $24 million, $20 million and $10 million, respectively. The U.S. Attorney is also seeking recovery on certain common law claims, costs, equitable claims, and interest on breach of contract damages. On February 14, 2007, the U.S. Attorney filed a motion for summary judgment as to liability and as to damages in this matter. The Company has filed an opposition to the government’s motion which includes substantive defenses. The court, in the ordinary course, is expected to rule by the end of 2007. The Company filed a motion, which was granted in part, to compel further discovery. While there can be no assurance as to the ultimate disposition of this case, the Company considers it to be probable that the court may grant summary judgment as to the breach of contract liability claim and more likely than not, but not probable, that the court may grant summary judgment as to the False Claims Act liability claim. For the claim in which management believes an unfavorable outcome is probable, the Company has recognized its estimated liability. The Company believes, however, that it is unlikely the court would grant summary judgment as to the government’s claim of damages, in which circumstance the case would proceed to trial as to damages. If, upon conclusion of summary judgment, liability claims are entered against the Company, the Company estimates that it would become liable for repayment of certain contract billings and penalties that together are expected to range from approximately $181 to $1.75 million, excluding the outcome as to damages. Regarding the alleged actual damages, the Company believes that it has substantive defenses and intends to vigorously defend itself. The Company presently has insufficient information to quantify potential actual damages, if any. As a result, the ultimate outcome of the litigation as to damages remains indeterminate. If an unfavorable determination is rendered, the outcome would have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.

     The Company has provided documents in response to a previously disclosed grand jury subpoena issued on October 15, 2002 by the U.S. District Court for the District of Massachusetts, directing the Company to produce specified documents dating back to 1996. The subpoena relates to an investigation, currently focused on the period from 1996 to 1999, by the Antitrust Division of the Department of Justice in New York into the bidding and procurement activities involving the Company and several other defense contractors who have received similar subpoenas and may also be subjects of the investigation. On February 7, 2007, the Company learned that the Antitrust Division has communicated to the Department of Justice in Washington, D.C. the results of its investigation which have not been made available to the Company. The Company has cooperated in the investigation; however, it does not have a sufficient basis to predict the outcome of the investigation. Should the Company be found to have violated the antitrust laws, the matter could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.

     On June 28, 2005, a suit, characterized as a class action employee suit, was filed in the U.S. District Court for the District of Massachusetts alleging violations of the Fair Labor Standards Act and certain provisions of Massachusetts General Laws. The Company believes that its practices complied with the Fair Labor Standards Act and Massachusetts General Laws. The Company intends to vigorously defend itself and has sought to have the complaint dismissed from District Court and addressed in accordance with the Company’s mandatory dispute resolution program for the arbitration of workplace complaints. On April 10, 2006, the U.S. District Court for the District of Massachusetts entered an order granting in part the Company’s motion to dismiss the civil action filed against the Company, and to compel compliance with its mandatory dispute resolution program, directing that the parties arbitrate the aforementioned claims, and striking the class action waiver which was part of the dispute resolution program. Following the District Court’s decision, the plaintiffs commenced an arbitration before the American Arbitration Association, asserting the same claims as they asserted in the District Court. An arbitrator has been selected, but no substantive action has occurred in the arbitration. On January 26, 2007 the Company filed an appeal with the United States Court of Appeals for the Second Circuit appealing the portion of the District Court’s decision that the class action waiver is not enforceable. The outcome of the arbitration, if unfavorable, could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.

15

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes. Unless the context otherwise requires, references in this Form 10-Q to “DRC”, “we”, “us” or “our” refer to Dynamics Research Corporation and its subsidiaries.

OVERVIEW

     DRC, founded in 1955 and headquartered in Andover, Massachusetts, provides IT, engineering and other services focused on national defense and intelligence, public safety and citizen services for government customers. The government market is composed of three sectors: national defense and intelligence, federal civilian agencies, and state and local governments. Our core capabilities are focused on IT, engineering and technical subject matter expertise that pertain to the knowledge domains of our core customers.

     Recent industry reports, such as the Federal IT Market Forecast published by INPUT, Inc., are projecting long-term growth rates of approximately 5% for the federal government professional services industry. We are cognizant of funding challenges facing the federal government and the resulting increase in competitiveness in our industry. Significant contract awards have been and will continue to be delayed and new initiatives have been slow to start. Customers are moving away from General Services Administration and time and materials contracts toward agency sponsored Indefinite Delivery-Indefinite Quantity contract vehicles and fixed price contracts and task orders. The DoD seeks to reduce spending on contracted program support services, often referred to as advisory and assistance services, and frequently is setting this work aside for small businesses. However, there is increasing demand from federal customers for engineering, training, business transformation, lean six sigma and business intelligence solutions and services. In addition, many federal customers are seeking to streamline their procurement activities by consolidating work under large contract vehicles. Our competitive strategy is intended to align with these trends.

     Operating income for the three months ended June 30, 2007 and 2006 was $2.9 million and $0.9 million, respectively, and $5.4 million and $3.6 million, respectively, for the six months then ended. The operating margin for the three months ended June 30, 2007 and 2006 was 5.1% and 1.4% of total revenue, respectively, and 4.7% and 2.6% of total revenue, respectively, for the six months then ended. The increase in operating margin was primarily due to a favorable increase in total gross margin reflecting a shift in our business into the new Consolidated Acquisition of Professional Services (“CAPS”) contract with the Aeronautical Systems Center (“ASC”) and lower indirect costs which resulted from a variety of cost savings initiatives undertaken in 2006.

     We have two reportable business segments: Systems and Services and Metrigraphics. The Systems and Services segment accounted for 98.4% of total revenue and the Metrigraphics segment accounted for 1.6% of total revenue for the six months ended June 30, 2007.

CRITICAL ACCOUNTING POLICIES

     There are business risks specific to the industries in which we operate. These risks include, but are not limited to: estimates of costs to complete contract obligations, changes in government policies and procedures, government contracting issues and risks associated with technological development. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates and assumptions also affect the amount of revenue and expenses during the reported period. Actual results could differ from those estimates.

16

     The use of alternative estimates and assumptions and changes in business strategy or market conditions may significantly impact our assets or liabilities, and potentially result in a different impact to our results of operations. Consistent with prior year, we believe the following critical accounting policies affect the more significant judgments made and estimates used in the preparation of our consolidated financial statements:

• Revenue recognition

• Goodwill and other intangible assets

• Income taxes and deferred taxes

• Pension obligations

     Except for income taxes and deferred taxes, there have been no material changes from the methodology applied by management for critical accounting policies previously disclosed in our most recent Form 10-K. The methodology applied to management’s estimate for income taxes and deferred taxes has changed due to the implementation of a new accounting pronouncement as described below.

     Income Taxes and Deferred Taxes

     On January 1, 2007, we adopted FIN 48 which addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

     The impact from our adoption of FIN 48 is more fully described in Note 7 in our “Notes to Condensed Consolidated Financial Statements” in Part I, Item 1 on this Form 10-Q. For further discussion of our critical accounting policy related to income taxes and deferred taxes, refer to the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our 2006 Form 10-K.

RESULTS OF OPERATIONS

     Operating results (in millions) expressed as a percentage of segment and total revenue are as follows:

	Three Months Ended June 30,
	2007						2006
	$ (1)			% (1)			$ (1)			% (1)
Contract revenue	$	57.0			98.3	%	$	65.7			97.7	%
Product sales		1.0			1.7			1.6			2.3
Total revenue	$	58.0			100.0	%	$	67.3			100.0	%
Gross profit on contract revenue (2)	$	9.6			16.8	%	$	7.4			11.2	%
Gross profit on product sales (2)		(0.2	)		(22.4	)		0.3			19.4
Total gross profit (2)		9.4			16.1			7.7			11.4
Selling, general and administrative expenses		5.8			9.9			6.0			9.0
Amortization of intangible assets		0.7			1.1			0.7			1.0
Operating income		2.9			5.1			0.9			1.4
Interest expense, net		(0.5	)		(0.8	)		(0.6	)		(0.8	)
Other income, net		0.1			0.2			—			—
Provision for income taxes		(1.1	)		(1.8	)		(0.2	)		(0.3	)
Net income	$	1.5			2.6	%	$	0.2			0.3	%

17

	Six Months Ended June 30,
	2007						2006
	$ (1)			% (1)			$ (1)			% (1)
Contract revenue	$	112.9			98.4	%	$	132.5			97.8	%
Product sales		1.8			1.6			3.0			2.2
Total revenue	$	114.8			100.0	%	$	135.5			100.0	%
Gross profit on contract revenue (2)	$	18.5			16.4	%	$	17.2			13.0	%
Gross profit on product sales (2)		(0.5	)		(27.1	)		0.5			15.2
Total gross profit (2)		18.0			15.7			17.6			13.0
Selling, general and administrative expenses		11.4			9.9			12.7			9.4
Amortization of intangible assets		1.3			1.1			1.4			1.0
Operating income		5.4			4.7			3.6			2.6
Interest expense, net		(0.9	)		(0.8	)		(1.1	)		(0.8	)
Other income, net		0.1			0.1			0.4			0.3
Provision for income taxes		(1.9	)		(1.7	)		(1.2	)		(0.9	)
Cumulative benefit of accounting change		—			—			0.1			0.1
Net income	$	2.6			2.3	%	$	1.7			1.2	%

(1)	Totals may not add due to rounding.
(2)	These amounts represent a percentage of contract revenues, product sales and total revenues, respectively.

Revenues

     We reported total revenues of $58.0 million and $67.3 million in the second quarters of 2007 and 2006, respectively. The revenues for the second quarter of 2007 represent a decrease of $9.3 million, or 13.8%, from the same period in 2006. Our revenues for the six months ended June 30, 2007 and 2006 were $114.8 million and $135.5 million, respectively, representing a decrease of $20.7 million, or 15.3 %, compared to the same six month period in 2006.

     Contract Revenues

     Contract revenues in our Systems and Services segment were earned from the following sectors (in millions):

	Three Months Ended June 30,
	2007					2006
	$ (1)		% (1)			$ (1)		% (1)
National defense and intelligence agencies	$	45.2		79.3	%	$	53.5		81.4	%
Federal civilian agencies		7.9		13.9			9.0		13.8
State and local government agencies		3.8		6.6			3.0		4.6
Other		0.1		0.2			0.2		0.3
Total contract revenue	$	57.0		100.0	%	$	65.7		100.0	%

	Six Months Ended June 30,
	2007					2006
	$ (1)		% (1)			$ (1)		% (1)
National defense and intelligence agencies	$	89.9		79.6	%	$	108.5		81.8	%
Federal civilian agencies		15.5		13.7			16.3		12.3
State and local government agencies		7.3		6.5			7.3		5.5
Other		0.3		0.3			0.4		0.3
Total contract revenue	$	112.9		100.0	%	$	132.5		100.0	%

(1) Totals may not add due to rounding.

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     National defense and intelligence agency revenues for the second quarter and first half of 2007 were lower than the comparable periods in 2006 primarily due from the transition into the new CAPS contract and the loss of the Air National Guard (“Guard”) contract in May 2006, partially offset by increased revenues from the Naval Air System Command AIRSpeed sub-contract awarded in March 2006. Approximately $11 million of the second quarter change and $20 million of the first half change resulted from the transition into the new CAPS contract and the loss of the Guard contract. Under the new CAPS contract structure, work performed by other contractor team members on these programs, which under the predecessor contract was passed through our revenue and cost of sales at a very low profit margin, is contracted directly between the Joint Venture and the subcontractor and no longer is included in our financial results.

     On July 2, 2007, we were notified that the U.S. Air Force contracting officer for the CAPS contract had made a determination that the Joint Venture would no longer be qualified to bid on certain types of contract task orders, due to the fact that ^HMRTech had graduated from the Small Business Administration (“SBA”) 8(a) program in April 2007. We believe strongly this position is an incorrect interpretation of SBA regulations, which govern eligibility for task orders under existing contracts following 8(a) graduation. The Joint Venture has protested this determination with the SBA and with the Government Accountability Office. An estimated $1.5 million of revenues in the fourth quarter of 2007 and approximately $17 million in revenues in 2008 would be affected by this determination. Though we believe there will be an acceptable resolution of this situation, we are actively developing alternate plans to retain our work, should this determination be upheld. As a result, the effect, if any, that an unfavorable outcome may have on our financial results is uncertain at this time.

     Revenues from federal civilian agencies decreased primarily due to the loss of the Internal Revenue Service contract for which task orders ended in May 2006, partially offset by added revenues in the first half of 2007 from the FDIC contract awarded in November 2006.

     Revenues from state and local government agencies increased during the second quarter of 2007 primarily due to higher revenues from our State of Colorado contract awarded in April 2006, partially offset by lower revenues from our contract with the State of Ohio, under which a significant portion of the development work has been completed.

     Revenues by contract type as a percentage of Systems and Services revenues were as follows (in millions):

	Three Months
	Ended			Three Months Ended						Six Months Ended
	March 31,			June 30,						June 30,
	2007 (1)			2007			2006			2007			2006
Time and materials		57	%		56	%		61	%		56	%		61	%
Cost reimbursable		22			22			20			22			20
Fixed price, including service type contracts		21			22			19			22			19
		100	%		100	%		100	%		100	%		100	%
Prime contract		57	%		55	%		69	%		56	%		68	%
Sub-contract		43			45			31			44			32
		100	%		100	%		100	%		100	%		100	%

(1) Percentages for prime contract and sub-contact for the three months ended March 31, 2007 have been reclassified to conform to current period presentation.

     Product Sales

     Product sales for our Metrigraphics segment were $1.0 million and $1.6 million in the three months ended June 30, 2007 and 2006, respectively, and $1.8 million and $3.0 million, respectively, in the six months then ended. The decrease from the prior year periods was primarily due to a decrease in medical device sales.

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     Funded Backlog

     Our funded backlog was $113.2 million at June 30, 2007, $92.9 million at December 31, 2006 and $128.9 million at June 30, 2006. We expect that substantially all of our backlog will generate revenue during the subsequent twelve month period. The funded backlog generally is subject to possible termination at the convenience of the contracting party. Contracts are generally funded on an annual basis or incrementally for shorter time periods. Due to current budgetary pressures, we have seen an increase in the application of incremental funding, thereby reducing backlog in proportion to revenue. A portion of our funded backlog is based on annual purchase contracts and subject to annual governmental approval or appropriations legislation and the amount of funded backlog as of any date can be affected by the timing of order receipts and deliveries.

Gross Profit

     Total gross profit was $9.4 million for the three months ended June 30, 2007, compared to $7.7 million in the same period in 2006, resulting in a gross margin of 16.1% and 11.4% for the second quarters of 2007 and 2006, respectively. For the six months ended June 30, 2007 and 2006, the total gross profit was $18.0 million and $17.6 million, respectively, resulting in a gross margin of 15.7% and 13.0%, respectively.

     Our gross profit on contract revenue was $9.6 million and $7.4 million for the three months ended June 30, 2007 and 2006, respectively, and $18.5 million and $17.2 million for the respective six months then ended. The increase in gross profit resulted in a gross margin of 16.8% and 11.2% in the three months ended June 30, 2007 and 2006, respectively, and 16.4% and 13.0% for the respective six months then ended. The increase in gross margin was primarily attributable to the reduction in low margin subcontractor revenues resulting from the transition to the new CAPS contract noted above. For both the three and six months ended June 30, 2007, lower severance cost and stock-based compensation also contributed to the increase in gross profit, compared to the same periods last year.

     Our gross profit (loss) on product sales was $(0.2) million and $0.3 million for the three months ended June 30, 2007 and 2006, respectively, and $(0.5) million and $0.5 million for the respective six months then ended. The decline in gross profit was primarily attributable to the decline in medical device sales.

Selling, general and administrative expenses

     Selling, general and administrative expenses were $5.8 million and $6.0 million in the three months ended June 30, 2007 and 2006, respectively, and $11.4 million and $12.7 million for the respective six months then ended. Selling, general and administrative expenses as a percent of total revenue in the three months ended June 30, 2007 and 2006 was 9.9% and 9.0%, respectively, and 9.9% and 9.4% for the respective six months then ended. Selling, general and administrative expenses were lower than the same periods in 2006 as a result of cost savings initiatives undertaken in the first half of 2006, which also included higher severance costs.

Amortization of intangible assets

     Amortization expense was $0.7 million in both the three months ended June 30, 2007 and 2006, and $1.3 million and $1.4 million for the respective six months then ended. Amortization expense primarily relates to intangible assets acquired in our 2004 acquisition of Impact Innovations Group LLC and is included in the Systems and Services segment. The remaining amortization expense for the current fiscal year will be approximately $1.3 million.

Interest expense, net

     We incurred interest expense of $0.5 million and $0.6 million in the three months ended June 30, 2007 and 2006, respectively, and $0.9 million and $1.1 million for the respective six months then ended. The decrease in interest expense compared to the same periods in 2006 was primarily due to a lower outstanding debt balance during the first half of 2007, partially offset by a higher average interest rate during the first half of 2007 compared to the same period in 2006.

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Other income (expense), net

     We recorded net other income of $0.1 million and $0.4 million in the first half of 2007 and 2006, respectively. The amount in 2006 included $0.2 million of realized gains resulting from the sale of Lucent Technologies, Inc. (“Lucent”) shares during that period. Other income includes recognition of our portion of income or loss related to our investments in ^HMRTech and the Joint Venture. We recorded income related to these equity investments of $0.1 million in the first half of both 2007 and 2006.

Income tax provision

     We recorded income tax provisions of $1.1 million, or 41.4% of pre-tax income, and $0.2 million, or 53.2% of pre-tax income, in the three months ended June 30, 2007 and 2006, respectively. The income tax provision for the six months ended June 30, 2007 and 2006 was $1.9 million, or 41.8% of pre-tax income, and $1.2 million, or 43.7% of pre-tax income, respectively, compared to 40.6% for the year ended December 31, 2006. The 2006 year-end tax rate reflects favorable state income tax audits and tax credits and adjustments of tax accruals and reserves.

LIQUIDITY AND CAPITAL RESOURCES

     The following discussion analyzes liquidity and capital resources by operating, investing and financing activities as presented in our Consolidated Statements of Cash Flows. Our principal sources of liquidity are cash flows from operations and borrowings from our revolving credit facility.

     Our results of operations, cash flows and financial condition are subject to certain trends, events and uncertainties, including demands for capital to support growth, economic conditions, government payment practices and contractual matters. Our need for access to funds is dependent on future operating results, our growth and acquisition activity and external conditions.

     Based upon our present business plan and operating performance, we believe that cash provided by operating activities, combined with amounts available for borrowing under our revolving credit facility, will be adequate to fund the capital requirements of our existing operations during 2007 and for the foreseeable future. In the event that our current capital resources are not sufficient to fund requirements, we believe our access to additional capital resources would be sufficient to meet our needs. However, the development of adverse economic or business conditions could significantly affect the need for and availability of capital resources.

     At June 30, 2007 and December 31, 2006, we had cash and cash equivalents aggregating $0.3 million and $7.9 million, respectively. The decrease in cash and cash equivalents is the result of $5.8 million, $1.1 million and $0.7 million of net cash used in operating, financing and investing activities, respectively.

     Operating activities

     Net cash used in operating activities totaled $5.8 million in the first half of 2007, compared to cash provided of $1.3 million in the first half of 2006. The cash used in the first half of 2007 was primarily attributable to an increase in account receivables and a decrease in accounts payable, offset by a decrease in unbilled expenditures. The cash provided in the first half of 2006 was primarily attributable to cash provided by unbilled expenditures, partially offset by cash used for accounts payable, accounts receivable and other prepaid and accrued expenses.

     Total accounts receivable and unbilled expenditures combined were $67.6 million and $64.3 million at June 30, 2007 and December 31, 2006, respectively. Accounts receivable increased $6.2 million while unbilled expenditures decreased $ 2.1 million in the first half of 2007. During the second quarter of 2007 accounts receivable decreased $5.4 million. Total accounts receivable (including unbilled expenditures) days sales outstanding, or DSO, was 105 days at June 30, 2007, 121 days at March 31, 2007 and 96 days at December 31, 2006.

     At June 30, 2007, our receivables and unbilled expenditure balance for our contract with the State of Ohio totaled $10.8 million, or 14 days, compared to $9.4 million, or 11 days, at December 31, 2006. Under the current

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terms of the contract, this amount is anticipated to be invoiced and collected in accordance with completion of contract milestones.

     The increase in accounts receivable during the first half of 2007 was primarily due to a $3.0 million receivable from the State of Ohio contract and a slowdown in cash collections on U.S. government receivables. We consider the increase to be temporary with no increased risk of collection.

     Our net deferred tax liability was $6.5 million at June 30, 2007 compared to $8.4 million at December 31, 2006. The decrease in deferred taxes was principally due to deferred taxes on unbilled receivables which declined from $9.2 million at December 31, 2006 to $7.9 million at June 30, 2007. We paid $2.9 million in income taxes in the first half of 2007 and currently anticipate additional income tax payments of $3.5 million in the remaining half of 2007. The Internal Revenue Service (“IRS”) continues to challenge the deferral of income for tax purposes related to our unbilled receivables including the applicability of a Letter Ruling issued by the IRS to us in January 1976 which granted to us deferred tax treatment of our unbilled receivables. This issue has been elevated to the IRS National Office for determination. While the outcome of the audit of the 2004 income tax return is not expected to be known for several months and remains uncertain, we may incur interest expense, our deferred tax liabilities may be reduced and income tax payments may be increased substantially in future periods.

     Share-based compensation expense was $0.8 million in the first half of 2007, compared to $1.0 million in the same period in 2006. During the first quarter of 2006, we recorded a pre-tax cumulative benefit of accounting change of $0.1 million related to the adoption of SFAS 123R for estimating forfeitures for restricted stock awards that were unvested as of January 1, 2006. We anticipate share-based compensation expense will remain at a comparable level through the remaining of 2007.

     Non-cash amortization expense of our acquired intangible assets was $1.3 million in the first half of 2007, compared to $1.4 million in the same period in 2006. We anticipate that non-cash expense for the amortization of intangible assets will remain at a comparable level through the remaining half of 2007.

Investing activities

     Net cash used in investing activities was $0.7 million and $1.3 million in the first half of 2007 and 2006, respectively. The net cash used in the first half of 2007 was primarily comprised of capital expenditures aggregating $0.7 million. The net cash used in the first half of 2006 was primarily comprised of capital expenditures aggregating $1.6 million, partially offset by $0.2 million of proceeds from the sale of Lucent shares. We expect capital expenditures to be approximately $2 million in 2007.

     We believe that selective acquisitions of businesses are an important component of our growth strategy. We may acquire, from time to time, businesses that are aligned with our core capabilities and which complement our customer base. We will continue to consider acquisition opportunities that align with our strategic objectives, along with the possibility of utilizing our credit facility as a source of financing.

Financing activities

     Net cash used in financing activities was $1.1 million and $0.7 million in the first half of 2007 and 2006, respectively. The amount of cash used in the first half of 2007 represents net repayments under our revolving credit agreement of $2.0 million, partially offset by $0.8 million of proceeds from the issuance of common stock through the exercises of stock options and employee stock purchase plan transactions. The amount in the first half of 2006 represents $4.2 million of net borrowings under our then existing revolving credit agreement and $1.1 million of proceeds from the issuance of common stock through the exercises of stock options and employee stock purchase plan transactions, partially offset by $6.2 million of principal payments of our then existing acquisition term loan.

     The average daily borrowing on our Revolver for the first half of 2007 was $10.7 million at a weighted average interest rate of 7.55%, compared to an average daily borrowing of $7.7 million at a weighted average interest rate of 7.66% under our then existing revolver in the first half of 2006. Also, at June 30, 2006 our average daily outstanding balance under our then existing acquisition term loan was $20.9 million at a weighted average interest

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rate of 6.68%. At June 30, 2007, the outstanding balance of the Revolver was $13.0 million with a weighted average interest rate of 6.96%.

RECENT ACCOUNTING PRONOUNCEMENTS

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115”, (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for our fiscal year beginning January 1, 2008. We are currently evaluating whether we will elect the option provided for in SFAS 159, and whether the adoption will have an impact of on our financial statements.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under SFAS 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for our fiscal year beginning January 1, 2008, with early adoption permitted. We are currently evaluating whether the adoption of SFAS 157 will have a material impact on our financial statements.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are subject to interest rate risk associated with our Revolver, where interest payments are tied to either the LIBOR or the prime rate. At any time, a sharp rise in interest rates could have an adverse effect on net interest expense as reported in our Condensed Consolidated Statements of Operations. A hypothetical and instantaneous increase of one full percentage point in the interest rate on our Revolver would increase annual interest expense by approximately $0.1 million.

     We presently have no investments in debt securities and, accordingly, no exposure to market interest rates on investments. We have no significant exposure to foreign currency fluctuations. Foreign sales, which are nominal, are primarily denominated in United States dollars.

Item 4. CONTROLS AND PROCEDURES

     The Company’s principal executive officer (“CEO”) and principal financial officer (“CFO”) evaluated, together with other members of senior management, the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2007; and, based on this review, the Company’s CEO and CFO concluded that, as of June 30, 2007, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by it in the reports that it files or submits under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

     During the quarter ended March 31, 2007, the Company enhanced its reconciliation controls to address a significant deficiency in its accounting for income taxes, which resulted in the identification of an overstatement of the Company’s deferred tax liabilities. As described in Note 1 to the financial statements, the Company restated its financial statements as of December 31, 2006 and 2005 to correct for this overstatement. There has been no other change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarterly period ended June 30, 2007 that has materially effected, or is reasonably likely to materially effect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

     As a defense contractor, we are subject to many levels of audit and review from various government agencies, including the Defense Contract Audit Agency, various inspectors general, the Defense Criminal Investigation Service, the Government Accountability Office, the Department of Justice and Congressional Committees. Both related to and unrelated to its defense industry involvement, we are, from time to time, involved in audits, lawsuits, claims, administrative proceedings and investigations. We accrue for liabilities associated with these activities when it becomes probable that future expenditures will be made and such expenditures can be reasonably estimated. We are a party to or have property subject to litigation and other proceedings referenced in Note 11 of the Notes to Condensed Consolidated Financial Statements (Unaudited) included in this Form 10-Q and in Note 13 of our Form 10-K for the year ended December 31, 2006. Our evaluation of the likelihood of expenditures related to these matters is subject to change in future periods, depending on then current events and circumstances, which could have material adverse effects on our business, financial position, results of operations and cash flows.

Item 1A. RISK FACTORS

     For information regarding factors that could affect our results of operations, financial condition and liquidity, refer to the section titled “Risk Factors” in Part 1, Item 1A of our 2006 Form 10-K. There have been no material changes from the risk factors previously disclosed in our most recent Form 10-K.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     The following table sets forth all purchases made by us or on our behalf by any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act, of shares of our common stock during each month in the second quarter of 2007.

							Approximate
					Total Number		Dollar Value
					of Shares		of Shares that
					Purchased as		May Yet Be
					Part of		Purchased
	Total Number		Average Price		Publicly		Under the
	of Shares		Paid Per		Announced		Programs
Period	Purchased		Share		Programs		(in millions)
April 1, 2007 to April 30, 2007		792	$	11.20		—	$	—
May 1, 2007 to May 31, 2007		130	$	13.05		—		—
June 1, 2007 to June 30, 2007		548	$	13.06		—		—
Total		1,470	$	12.06		—	$	—

     During the second quarter of 2007, we repurchased 1,470 shares that were not part of a publicly announced share repurchase program, representing shares repurchased to cover payroll withholding taxes in connection with the vesting of restricted stock awards.

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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The Company’s Annual Meeting of Shareholders was held on May 24, 2007. Proxies representing 7,858,205 shares were received. The total shares outstanding as of the March 30, 2007 Record Date were 9,380,687. The following proposal was adopted by the votes specified below:

The number of votes to elect three Class II directors for a term of three years expiring at the 2010 Annual Meeting of Stockholders was as follows:

	Number of Shares		Number of
	Voted		Shares
	For		Withheld
Class II Directors:
Dr. Francis J. Aguilar		7,652,589		205,616
Mr. John S. Anderegg, Jr.		7,710,021		148,184
Mr. Nickolas Stavropoulos		7,730,647		127,558

Continuing Class I directors and Class III directors with terms expiring at the 2009 Annual Meeting of Stockholders and 2008 Annual Meeting of Stockholders, respectively, were as follows:

Class I Directors:

Lieutenant General Charles P. McCausland (U.S.A.F., retired)

General George T. Babbitt, Jr. (U.S.A.F., retired)

Class III Directors:

Mr. Kenneth F. Kames

Mr. James P. Regan

Item 6. EXHIBITS

The following Exhibits are filed or furnished, as applicable, herewith:

31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	DYNAMICS RESEARCH CORPORATION (Registrant)
Date: August 9, 2007	/s/ David Keleher
	David Keleher
	Senior Vice President, Chief Financial Officer and Treasurer
	/s/ Francis Murphy
	Francis Murphy
	Vice President, Corporate Controller and Chief Accounting Officer

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, James P. Regan, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Dynamics Research Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 9, 2007	Date: /s/ James P. Regan
	James P. Regan
	Chairman, President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, David Keleher, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Dynamics Research Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2007	/s/ David Keleher
	David Keleher
	Senior Vice President, Chief Financial Officer and Treasurer

EX-32.1

Exhibit 32.1

The following certification accompanies Dynamics Research Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007 and is not filed as provided in Item 601(b)(32)(ii) of Regulation S-K of the Securities and Exchange Commission.

Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the
Sarbanes—Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Dynamics Research Corporation, a Massachusetts corporation (the “Company”), for the quarter ended June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, the Chief Executive Officer, hereby certifies pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that, to his knowledge:

(1) the Report of the Company filed today pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), fully complies with the requirements of Section 13(a) of the Exchange Act; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 9, 2007	/s/ James P. Regan
	James P. Regan
	Chairman, President and Chief Executive Officer

EX-32.2

Exhibit 32.2

The following certification accompanies Dynamics Research Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007 and is not filed as provided in Item 601(b)(32)(ii) of Regulation S-K of the Securities and Exchange Commission.

Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the
Sarbanes—Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Dynamics Research Corporation, a Massachusetts corporation (the “Company”), for the quarter ended June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, the Chief Financial Officer of the Company, hereby certifies pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that, to his knowledge:

(1) the Report of the Company filed today pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), fully complies with the requirements of Section 13(a) of the Exchange Act; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 9, 2007	/s/ David Keleher
	David Keleher
	Senior Vice President, Chief Financial Officer and Treasurer