##### Table of Contents



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 MARCH 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM  TO
 Commission file number 000-02479
 
 DYNAMICS RESEARCH CORPORATION
  MASSACHUSETTS
    
    04-2211809(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 60 FRONTAGE ROAD, ANDOVER, MASSACHUSETTS 01810-5498
 978-475-9090
 
 þ o
 o þ o
 o þ




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##### 



DYNAMIC RESEARCH CORPORATION
FORM 10-Q
For the Quarterly Period Ended March 31, 2006
Table of Contents
 PagePart I. Financial Information
    
    
    3Item 1. Financial Statements
    
    
    3Condensed
Consolidated Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005 (audited)
    
    
    3Condensed Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005
(unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005
(unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22Part II. Other Information
    
    
    23Item 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    23Item 6. Exhibits
    
    
    26Ex-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEOEx-32.2 Section 906 Certification of CFO
  Special Note on Factors Affecting Future Results
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 DYNAMICS RESEARCH CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (dollars in thousands, except share data)
 March 31,
    
    
    December 31,2006
    
    
    2005(unaudited)
    
    
    (audited)AssetsCurrent assetsCash and cash equivalents
    
    $
    2,970
    
    
    $
    1,020Accounts receivable, net of allowances of $567 at March 31, 2006 and
$588 at December 31, 2005
    
    
    37,988
    
    
    
    32,894Unbilled expenditures and fees on contracts in process
    
    
    52,743
    
    
    
    60,210Prepaid expenses and other current assets
    
    
    2,876
    
    
    
    1,483Total current assets
    
    
    96,577
    
    
    
    95,607Noncurrent assetsProperty, plant and equipment, net
    
    
    12,523
    
    
    
    12,252Goodwill
    
    
    63,055
    
    
    
    63,055Intangible assets, net
    
    
    7,778
    
    
    
    8,480Other noncurrent assets
    
    
    8,220
    
    
    
    8,359Total noncurrent assets
    
    
    91,576
    
    
    
    92,146Total assets
    
    $
    188,153
    
    
    $
    187,753Liabilities and stockholders equityCurrent liabilitiesCurrent portion of long-term debt
    
    $
    7,857
    
    
    $
    10,170Accounts payable
    
    
    23,807
    
    
    
    25,668Deferred taxes
    
    
    17,855
    
    
    
    19,825Accrued compensation and employee benefits
    
    
    18,109
    
    
    
    18,761Other accrued expenses
    
    
    5,076
    
    
    
    6,392Total current liabilities
    
    
    72,704
    
    
    
    80,816Long-term liabilitiesLong-term debt, less current portion
    
    
    21,314
    
    
    
    15,242Other long-term liabilities
    
    
    17,490
    
    
    
    17,508Total long-term liabilities
    
    
    38,804
    
    
    
    32,750Total liabilities
    
    
    111,508
    
    
    
    113,566Commitments and contingenciesStockholders equityPreferred 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;
9,188,867 and 9,096,893 shares issued and outstanding at March 31, 2006
and December 31, 2005, respectively
    
    
    919
    
    
    
    910Capital in excess of par value
    
    
    44,696
    
    
    
    45,571Unearned compensation
    
    
    
    
    
    
    (1,850
    )Accumulated other comprehensive loss
    
    
    (10,768
    )
    
    
    (10,768
    )Retained earnings
    
    
    41,798
    
    
    
    40,324Total stockholders equity
    
    
    76,645
    
    
    
    74,187Total liabilities and stockholders equity
    
    $
    188,153
    
    
    $
    187,753
  3




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DYNAMICS RESEARCH CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
 (in thousands, except share and per share data)
 Three months endedMarch 31,2006
    
    
    2005Contract revenue
    
    $
    66,759
    
    
    $
    71,839Product sales
    
    
    1,454
    
    
    
    1,703Total revenue
    
    
    68,213
    
    
    
    73,542Cost of contract revenue
    
    
    56,945
    
    
    
    60,806Cost of product sales
    
    
    1,298
    
    
    
    1,409Selling, general and administrative expenses
    
    
    6,633
    
    
    
    6,021Amortization of intangible assets
    
    
    702
    
    
    
    754Total operating costs and expenses
    
    
    65,578
    
    
    
    68,990Operating income
    
    
    2,635
    
    
    
    4,552Interest expense, net
    
    
    (569
    )
    
    
    (1,086
    )Other income
    
    
    339
    
    
    
    25Income before provision for income taxes
    
    
    2,405
    
    
    
    3,491Provision for income taxes
    
    
    1,015
    
    
    
    1,400Income before cumulative effect of accounting change
    
    
    1,390
    
    
    
    2,091Cumulative
benefit of accounting change, net of income taxes of $62
    
    
    84
    
    
    
    Net income
    
    $
    1,474
    
    
    $
    2,091Earnings per common shareBasicIncome before cumulative effect of accounting change
    
    $
    0.15
    
    
    $
    0.24Cumulative
benefit of accounting change
    
    
    0.01
    
    
    
    Net income
    
    $
    0.16
    
    
    $
    0.24DilutedIncome before cumulative effect of accounting change
    
    $
    0.15
    
    
    $
    0.23Cumulative
benefit of accounting change
    
    
    0.01
    
    
    
    Net income
    
    $
    0.16
    
    
    $
    0.23Weighted average shares outstandingBasic
    
    
    9,012,706
    
    
    
    8,695,638Diluted
    
    
    9,396,644
    
    
    
    9,220,103
  4




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DYNAMICS RESEARCH CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 (in thousands)
 Three months endedMarch 31,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    1,474
    
    
    $
    2,091Adjustments to reconcile net cash (used in) provided by operating activitiesDepreciation
    
    
    790
    
    
    
    942Amortization of intangible assets
    
    
    702
    
    
    
    754Stock compensation expense, including cumulative effect of accounting
change
    
    
    441
    
    
    
    224Non-cash interest expense
    
    
    43
    
    
    
    49Investment income from equity interest
    
    
    (44
    )
    
    
    (55
    )Tax benefit from stock options exercised
    
    
    
    
    
    
    90Deferred income taxes
    
    
    (1,970
    )
    
    
    (76
    )Loss on disposal of long-lived assets
    
    
    
    
    
    
    2Gain on sale of marketable securities
    
    
    (211
    )
    
    
    Change in operating assets and liabilities:Accounts receivable, net
    
    
    (5,094
    )
    
    
    8,688Unbilled expenditures and fees on contracts in process
    
    
    7,715
    
    
    
    (7,041
    )Prepaid expenses and other current assets
    
    
    (1,393
    )
    
    
    669Accounts payable
    
    
    (1,861
    )
    
    
    493Accrued payroll and employee benefits
    
    
    (652
    )
    
    
    (2,339
    )Other accrued expenses
    
    
    (1,480
    )
    
    
    (812
    )Other long-term liabilities
    
    
    (18
    )
    
    
    (760
    )Net cash (used in) provided by continuing operations
    
    
    (1,558
    )
    
    
    2,919Net cash used in discontinued operations
    
    
    
    
    
    
    (158
    )Net cash (used in) provided by operating activities
    
    
    (1,558
    )
    
    
    2,761Cash flows from investing activities:Additions to property, plant and equipment
    
    
    (1,061
    )
    
    
    (1,218
    )Purchase of business
    
    
    
    
    
    
    (111
    )Proceeds from sale of marketable securities
    
    
    211
    
    
    
    Dividends from equity investment
    
    
    2
    
    
    
    60Increase in other assets
    
    
    (110
    )
    
    
    (125
    )Net cash used in investing activities
    
    
    (958
    )
    
    
    (1,394
    )Cash flow from financing activities:Net borrowings (repayments) under revolving credit agreement
    
    
    8,036
    
    
    
    (450
    )Principal payments under loan agreements
    
    
    (4,277
    )
    
    
    (2,089
    )Proceeds from the exercise of stock options and issuance of common stock
    
    
    600
    
    
    
    803Tax benefit from stock options exercised
    
    
    107
    
    
    
    Net cash provided by (used in) financing activities
    
    
    4,466
    
    
    
    (1,736
    )Net increase
(decrease) in cash and cash equivalents
    
    
    1,950
    
    
    
    (369
    )Cash and cash equivalents, beginning of period
    
    
    1,020
    
    
    
    925Cash and cash equivalents, end of period
    
    $
    2,970
    
    
    $
    556
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DYNAMICS RESEARCH CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (dollars in thousands, except share amounts)
 NOTE 1. BASIS OF PRESENTATION
    NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
   NOTE 3. SHAREHOLDERS EQUITY
 Earnings Per Share
   6




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DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)
   Three Months EndedMarch 31,2006
    
    
    2005Weighted average shares outstanding  Basic
    
    
    9,012,706
    
    
    
    8,695,638Dilutive effect of stock options and restricted stock grants
    
    
    383,938
    
    
    
    524,465Weighted average shares outstanding  Diluted
    
    
    9,396,644
    
    
    
    9,220,103
 Comprehensive Income
  Three Months EndedMarch 31,2006
    
    
    2005Net income
    
    $
    1,474
    
    
    $
    2,091Change in
unrealized gain on investments available for sale
    
    
    
    
    
    
    (412
    )Comprehensive income
    
    $
    1,474
    
    
    $
    1,679
 NOTE 4. SHARE-BASED COMPENSATION
  Pro forma Information for Periods Prior to the Adoption of SFAS 123R
  Three MonthsEndedMarch 31,2005Net income, as reported
    
    $
    2,091Add: Share-based employee compensation expense included
in reported net income, net of
related tax effects
    
    
    134Deduct: Total share-based employee compensation expense
determined under the fair value
based method for all awards, net of related tax effects
    
    
    (379
    )Pro forma net income
    
    $
    1,846
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DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)
 Three MonthsEndedMarch 31,2005Earnings per common share:As reported:Basic
    
    $
    0.24Diluted
    
    $
    0.23Pro forma:Basic
    
    $
    0.21Diluted
    
    $
    0.20
  Impact of the Adoption of SFAS 123R
   Three MonthsEndedMarch 31,2006Stock options
    
    $
    178ESPP
    
    
    116Impact on operating income
    
    
    294Cumulative effect of accounting change
    
    
    (146
    )Impact after cumulative effect of accounting change
    
    $
    148Impact on net income
    
    $
    (86
    )Impact on earnings per common share:Basic
    
    $
    (0.01
    )Diluted
    
    $
    (0.01
    )
 8




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DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)
  Three MonthsEndedMarch 31,2006Cost of products and services
    
    $
    302Selling, general and administrative
    
    
    285Cumulative effect of accounting change
    
    
    (146
    )Total share-based compensation expense
    
    $
    441
 Valuation Assumptions
  Three Months EndedMarch 31,2006 (1)
    
    
    2005Stock Options:Risk-free interest rate
    
    
    
    
    
    
    3.87
    %Dividend yield
    
    
    
    
    
    
    Volatility
    
    
    
    
    
    
    66.38
    %Expected life in years
    
    
    
    
    
    
    6.5ESPP:Risk-free interest rate
    
    
    3.96
    %
    
    
    1.75
    %Dividend yield
    
    
    
    
    
    
    Volatility
    
    
    35.07
    %
    
    
    32.38
    %Expected life in months
    
    
    3.0
    
    
    
    3.0
 
 (1)
    
    During the three months ended March 31, 2006, the Company did not grant any stock
option awards. Share-Based Payment Award Activity
  9




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DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)
 Stock Options
    
    
    Restricted StockWeighted
    
    
    
    
    
    
    WeightedAwards
    
    
    Average
    
    
    Awards
    
    
    AverageOutstanding
    
    
    Exercise Price
    
    
    Outstanding
    
    
    Fair ValueBalance at December 31, 2005
    
    
    1,239,393
    
    
    $
    8.51
    
    
    
    221,816
    
    
    $
    13.60Granted
    
    
    
    
    
    $
    
    
    
    
    52,400
    
    
    $
    14.17Exercised
    
    
    (28,000
    )
    
    $
    6.23
    
    
    
    (33,008
    )
    
    $
    17.35Cancelled
    
    
    (28,884
    )
    
    $
    10.15
    
    
    
    (11,934
    )
    
    $
    13.25Balance at March 31, 2006
    
    
    1,182,509
    
    
    $
    8.52
    
    
    
    229,274
    
    
    $
    13.17Balance at December 31, 2004
    
    
    1,499,105
    
    
    $
    8.75
    
    
    
    192,408
    
    
    $
    12.90Granted
    
    
    15,000
    
    
    $
    18.57
    
    
    
    75,800
    
    
    $
    16.83Exercised
    
    
    (48,229
    )
    
    $
    7.64
    
    
    
    (32,104
    )
    
    $
    15.42Cancelled
    
    
    (4,512
    )
    
    $
    17.37
    
    
    
    (660
    )
    
    $
    18.10Balance at March 31, 2005
    
    
    1,461,364
    
    
    $
    8.86
    
    
    
    235,444
    
    
    $
    13.81
  Three MonthsEndedMarch 31,2006Amounts realized or received from stock option exercises:Cash proceeds received
    
    $
    175Intrinsic value realized
    
    $
    59Income tax benefit realized
    
    $
    96
    Options Outstanding
    
    Options ExercisableWeighted
    
    
    
    
    
    
    
    
    
    
    
    
    
    WeightedWeighted
    
    Average
    
    
    
    
    
    
    
    
    
    Weighted
    
    AverageAverage
    
    Remaining
    
    
    
    
    
    
    
    
    
    Average
    
    RemainingRange of
    
    Number
    
    Exercise
    
    Contractual
    
    Intrinsic
    
    Number
    
    Exercise
    
    Contractual
    
    IntrinsicExercise Prices
    
    of Options
    
    Price
    
    Life
    
    Value
    
    of Options
    
    Price
    
    Life
    
    Value$3.13  $7.50
    
    
    356,060
    
    
    $
    5.16
    
    
    
    3.36
    
    
    $
    3,468
    
    
    
    356,060
    
    
    $
    5.16
    
    
    
    3.36
    
    
    $
    3,468$7.51  $13.68
    
    
    732,073
    
    
    
    8.90
    
    
    
    5.02
    
    
    
    4,394
    
    
    
    190,406
    
    
    
    8.75
    
    
    
    4.58
    
    
    
    1,171$13.69  $18.60
    
    
    72,376
    
    
    
    17.16
    
    
    
    6.73
    
    
    
    
    
    
    
    49,040
    
    
    
    17.71
    
    
    
    5.86
    
    
    
    $18.61  $24.50
    
    
    22,000
    
    
    
    21.94
    
    
    
    5.56
    
    
    
    
    
    
    
    22,000
    
    
    
    21.94
    
    
    
    5.56
    
    
    
    1,182,509
    
    
    
    8.52
    
    
    
    4.64
    
    
    $
    7,862
    
    
    
    617,506
    
    
    
    7.86
    
    
    
    4.01
    
    
    $
    4,639
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DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)
 NOTE 5. SUPPLEMENTAL BALANCE SHEET INFORMATION
  March 31,
    
    
    December 31,2006
    
    
    2005Property, plant and equipment, net:Machinery and equipment
    
    $
    32,109
    
    
    $
    31,307Leasehold improvements
    
    
    1,269
    
    
    
    1,011Property, plant and equipment
    
    
    33,378
    
    
    
    32,318Less accumulated depreciation
    
    
    (20,855
    )
    
    
    (20,066
    )Property, plant and equipment, net
    
    $
    12,523
    
    
    $
    12,252Other noncurrent assets:Deferred tax asset
    
    $
    3,916
    
    
    $
    3,916Unbilled expenditures and fees on contracts in process
    
    
    1,301
    
    
    
    1,549Equity investment
    
    
    761
    
    
    
    719Other
    
    
    2,242
    
    
    
    2,175Other noncurrent assets
    
    $
    8,220
    
    
    $
    8,359Accrued compensation and employee benefits:Accrued pension liability
    
    $
    5,220
    
    
    $
    5,818Accrued vacation
    
    
    5,464
    
    
    
    4,705Other
    
    
    7,425
    
    
    
    8,238Accrued compensation and employee benefits
    
    $
    18,109
    
    
    $
    18,761Other accrued expenses:Accrued income taxes
    
    $
    2,157
    
    
    $
    2,433Other
    
    
    2,919
    
    
    
    3,959Other accrued expenses
    
    $
    5,076
    
    
    $
    6,392
 March 31,
    
    
    December 31,2006
    
    
    2005Other long-term liabilities:Deferred gain on sale of building
    
    $
    5,914
    
    
    $
    6,158Accrued pension liability
    
    
    6,106
    
    
    
    5,328Other
    
    
    5,470
    
    
    
    6,022Other long-term liabilities
    
    $
    17,490
    
    
    $
    17,508
 NOTE 6. INVESTMENTS AVAILABLE FOR SALE
  NOTE 7. GOODWILL AND INTANGIBLE ASSETS
  March 31, 2006
    
    
    December 31, 2005Accumulated
    
    
    
    
    
    
    AccumulatedCost
    
    
    Amortization
    
    
    Cost
    
    
    AmortizationCustomer relationships
    
    $
    12,800
    
    
    $
    (5,022
    )
    
    $
    14,200
    
    
    $
    (5,720
    )Non-competition agreements
    
    
    
    
    
    
    
    
    
    
    1,740
    
    
    
    (1,740
    )$
    12,800
    
    
    $
    (5,022
    )
    
    $
    15,940
    
    
    $
    (7,460
    )
  Remainder of 2006
    
    $
    2,1072007
    
    $
    2,6022008
    
    $
    2,0382009
    
    $
    1,031
  NOTE 8. INCOME TAXES
  11




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DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)
  NOTE 9. DEFINED BENEFIT PENSION PLAN
  Three Months EndedMarch 31,2006
    
    
    2005Interest cost
    
    $
    1,002
    
    
    $
    997Expected return on plan assets
    
    
    (1,262
    )
    
    
    (1,083
    )Recognized acturial loss
    
    
    440
    
    
    
    396Net periodic benefit cost
    
    $
    180
    
    
    $
    310
  NOTE 10. FINANCING ARRANGEMENTS
  Outstanding
    
    
    InterestPrincipal
    
    
    Rate
    
    
    Interest Rate Option and Election DateMarch 31, 2006Acquisition term loan
    
    $
    10,567
    
    
    
    6.43
    %
    
    90-day LIBOR Rate option elected on February 1, 2006Acquisition term loan
    
    
    5,284
    
    
    
    6.38
    %
    
    60-day LIBOR Rate option elected on February 1, 2006Acquisition term loan
    
    
    5,284
    
    
    
    6.49
    %
    
    60-day LIBOR Rate option elected on March 3, 2006Total acquisition term loan
    
    
    21,135Revolver
    
    
    8,036
    
    
    
    7.75
    %
    
    Base Rate option elected on March 31, 2006Total Debt
    
    
    29,171Less: Current portion of long-term debt
    
    
    (7,857
    )Long-term debt
    
    $
    21,314December 31, 2005Acquisition term loan
    
    $
    23,100
    
    
    
    6.17
    %
    
    180-day LIBOR Rate option elected on August 1, 2005Acquisition term loan
    
    
    2,312
    
    
    
    7.25
    %
    
    Base Rate option elected on December 30, 2005Total Debt
    
    
    25,412Less: Current portion of long-term debt
    
    
    (10,170
    )Long-term debt
    
    $
    15,242
 12




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DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)
 NOTE 11. BUSINESS SEGMENT, MAJOR CUSTOMERS AND RELATED PARTY INFORMATION
 Business Segment
      Three Months EndedMarch 31,2006
    
    
    2005Revenues from external customersSystems and Services
    
    $
    66,759
    
    
    $
    71,839Metrigraphics
    
    
    1,454
    
    
    
    1,703$
    68,213
    
    
    $
    73,542Gross profitSystems and Services
    
    $
    9,814
    
    
    $
    11,033Metrigraphics
    
    
    156
    
    
    
    294$
    9,970
    
    
    $
    11,327Operating IncomeSystems and Services
    
    $
    2,760
    
    
    $
    4,550Metrigraphics
    
    
    (125
    )
    
    
    2$
    2,635
    
    
    $
    4,552
 Major Customers
  13




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DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)
 Three Months Ended March 31,
    
    Accounts Receivable2006
    
    2005
    
    March 31,
    
    December 31,Revenue
    
    %
    
    Revenue
    
    %
    
    2006
    
    2005Customer A
    
    $
    11,971
    
    
    
    18
    %
    
    $
    10,855
    
    
    
    15
    %
    
    $
    4,167
    
    
    $
    4,740Customer B
    
    $
    5,347
    
    
    
    8
    %
    
    $
    7,711
    
    
    
    10
    %
    
    $
    3,750
    
    
    $
    1,770
  Related Party
  NOTE 12. COMMITMENTS AND CONTINGENCIES
    14




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DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)
   15




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
      16




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Results of Operations
  Three Months Ended March 31,2006
    
    
    2005$ millions
    
    
    %
    
    
    $ millions
    
    
    %Contract revenue
    
    $
    66.8
    
    
    
    97.9
    %
    
    $
    71.8
    
    
    
    97.7
    %Product sales
    
    
    1.5
    
    
    
    2.1
    %
    
    
    1.7
    
    
    
    2.3
    %Total revenue
    
    $
    68.2
    
    
    
    100.0
    %
    
    $
    73.5
    
    
    
    100.0
    %Gross profit on contract revenue (1)
    
    $
    9.8
    
    
    
    14.7
    %
    
    $
    11.0
    
    
    
    15.4
    %Gross profit on product sales (1)
    
    
    0.2
    
    
    
    10.7
    %
    
    
    0.3
    
    
    
    17.3
    %Total gross profit (1)
    
    $
    10.0
    
    
    
    14.6
    %
    
    $
    11.3
    
    
    
    15.4
    %Selling general and administrative
    
    $
    6.6
    
    
    
    9.7
    %
    
    $
    6.0
    
    
    
    8.2
    %Amortization of intangible assets
    
    $
    0.7
    
    
    
    1.0
    %
    
    $
    0.8
    
    
    
    1.0
    %Operating income
    
    $
    2.6
    
    
    
    3.9
    %
    
    $
    4.6
    
    
    
    6.2
    %Interest expense, net
    
    $
    (0.6
    )
    
    
    (0.8
    )%
    
    $
    (1.1
    )
    
    
    (1.5
    )%Other income, net
    
    $
    0.3
    
    
    
    0.5
    %
    
    $
    
    
    
    
    0.0
    %Provision for income taxes
    
    $
    (1.0
    )
    
    
    (1.5
    )%
    
    $
    (1.4
    )
    
    
    (1.9
    )%Net income
    
    $
    1.5
    
    
    
    2.2
    %
    
    $
    2.1
    
    
    
    2.8
    %


|    |  |                                                                                                           
|--- |  | ----------------------------------------------------------------------------------------------------------
|(1) |  | These amounts represent a percentage of contract revenues, product sales and total revenues, respectively.

Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005


Revenues
  Contract Revenues
  Three Months EndedMarch 31,2006
    
    
    2005National defense and intelligence agencies
    
    $
    55.0
    
    
    $
    56.0Federal civilian agencies
    
    
    7.3
    
    
    
    9.2State and local government agencies
    
    
    4.3
    
    
    
    5.7Other
    
    
    0.2
    
    
    
    0.9$
    66.8
    
    
    $
    71.8
  17




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Three Months EndedMarch 31,2006
    
    2005Time and materials
    
    
    61
    %
    
    
    55
    %Cost reimbursable
    
    
    21
    %
    
    
    20
    %Fixed price, including service type contracts
    
    
    18
    %
    
    
    25
    %100
    %
    
    
    100.0
    %Prime contract
    
    
    67
    %
    
    
    70
    %Sub-contact
    
    
    33
    %
    
    
    30
    %100
    %
    
    
    100
    %
 Product Sales
  18




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Funded backlog
   Gross Profit
    Selling, general and administrative expenses
  Amortization of intangible assets
  Interest expense, net
  Other income, net
  19




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Income tax provision
  Net income
  LIQUIDITY AND CAPITAL RESOURCES
  Operating activities
      20




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Investing activities
   Financing activities
    RECENT ACCOUNTING PRONOUNCEMENTS
   21




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 Item 4. CONTROLS AND PROCEDURES
  22




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PART II. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
   
 Item 1A. RISK FACTORS
  Our Contracts and Subcontracts with Government Agencies are Subject to a Competitive Bidding
Process and to Termination Without Cause by the Government.
     23




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We Are Involved in Various Litigation Matters Which, If Not Resolved in Our Favor, Could Harm Our
Business.
   24




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25




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Item 6. EXHIBITS
  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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DYNAMICS RESEARCH CORPORATION(Registrant)Date:
May 9, 2006
    
    /s/ David Keleher

David KeleherSenior Vice President and Chief Financial Officer/s/ Francis Murphy

Francis MurphyVice President, Corporate Controller and Chief
Accounting Officer
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##### Table of Contents



ExhibitNumber
    
    Exhibit Name
    
    Location31.1
    
    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.
    
    Filed herewith31.2
    
    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.
    
    Filed herewith32.1
    
    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.
    
    Filed herewith32.2
    
    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.
    
    Filed herewith
 28