<PAGE>

                                   Form 10-Q
                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549


            [x]     Quarterly Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
                 For the Quarterly Period Ended March 31, 2001.

                                       OR

            [ ]    Transition Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
                For the Transition Period from _____ to _____ .

                           Commission File No.1-7348


                         DYNAMICS RESEARCH CORPORATION
                         -----------------------------
             (Exact name of registrant as specified in its charter)


             Massachusetts                               04-2211809
             ------------------------------------------------------
         (State or other Jurisdiction of              (I.R.S. Employer
          Incorporation or Organization)             Identification No.)


         60 Frontage Road, Andover, Massachusetts            01810-5498
         --------------------------------------------------------------
         (Address of Principal Executive Offices)            (Zip Code)

       Registrant's telephone number, including area code (978) 475-9090


  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  x     No_____.
   -------

  The number of shares outstanding of the Registrant's Common stock, par value
$.10 per share, at May 4, 2001 was 7,601,519 shares.
<PAGE>

                         DYNAMICS RESEARCH CORPORATION


                                     INDEX

                                                                       Page
Part I  Financial Information                                         Number
                                                                      ------

        Item 1. Financial Statements

                Consolidated Balance Sheets -
                     March 31, 2001 and December 31, 2000                3

                Consolidated Statements of Operations -
                     Three Months Ended March 31, 2001 and
                     March 31, 2000                                      4

                Consolidated Statements of Cash Flows -
                     Three Months Ended March 31, 2001 and
                     March 31, 2000                                      5

                Notes to Consolidated Financial Statements               6

        Item 2. Management's Discussion and Analysis of
                Financial Condition and Results of Operations           10


Part II. Other Information

        Item 6. Exhibits and Reports on Form 8-K                        14


Signature                                                               15

<PAGE>

<TABLE>
<CAPTION>
                         PART I. FINANCIAL INFORMATION

                          DYNAMICS RESEARCH CORPORATION
                           CONSOLIDATED BALANCE SHEETS
           (in thousands of dollars except share and per share data)

                                                 (unaudited)
Assets                                          March 31, 2001    December 31, 2000
-------                                         --------------    -----------------
CURRENT ASSETS
<S>                                             <C>               <C>
   Cash and cash equivalents                       $  5,104           $    527
   Receivables, net allowances of
     $1,335 in 2001 and $1,096 in 2000               22,946             31,967
   Unbilled expenditures and fees on
     contracts in process                            26,854             24,633
   Inventories                                        3,678              3,208
   Prepaid expenses and other current
     assets                                           1,622              3,926
                                                   --------           --------
        Total current assets                         60,204             64,261

   Net property, plant and equipment                 14,272             14,441
                                                   --------           --------
        Total assets                               $ 74,476           $ 78,702
                                                   ========           ========

Liabilities and Stockholders' Equity
-------------------------------------
CURRENT LIABILITIES
   Notes payable                                   $    -             $  5,784
   Current portion of long-term debt                    500                500
   Accounts payable                                  13,184             12,843
   Accrued payroll and employee benefits              9,783              9,901
   Other accrued expenses                             5,049              5,711
   Current deferred income taxes                      5,376              4,575
                                                   --------           --------
      Total current liabilities                      33,892             39,314
                                                   --------           --------

   Long-term debt                                     9,125              9,250
   Deferred income taxes                                849                849

   Commitments and contingencies

Stockholders' Equity
   Preferred stock, par value, $.10 per share
     5,000,000 shares authorized, non issued             -                   -
   Common stock, par value, $.10 per share:
     Authorized - 30,000,000 shares
     Issued - 8,980,945 shares in 2001 and 2000         898                898
     Treasury stock - 1,379,426 shares in 2001
       and 2000, at par value                          (138)              (138)
   Capital in excess of par value                    28,461             28,461
   Retained earnings                                  1,389                 68
                                                   --------           --------
       Total stockholders' equity                    30,610             29,289
                                                   --------           --------
          Total liabilities and
          stockholders' equity                     $ 74,476           $ 78,702
                                                   ========           ========

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       3
<PAGE>

<TABLE>
<CAPTION>
                                                   DYNAMICS RESEARCH CORPORATION
                                               CONSOLIDATED STATEMENTS OF OPERATIONS
                                     (in thousands of dollars except share and per share data)
                                                            (unaudited)

                                                                               Three                           Three
                                                                            Months Ended                    Months Ended
                                                                           March 31, 2001                  March 31, 2000
                                                                         -------------------             -------------------
Revenue
<S>                                                                        <C>                             <C>
  Contract revenue                                                          $   42,372                      $   41,172
  Product sales                                                                  6,268                           6,618
                                                                         -------------------             -------------------
     Total revenue                                                              48,640                          47,790

Costs and expenses
  Cost of contract revenue                                                      37,299                          37,329
  Cost of product sales                                                          4,531                           4,905
  Selling, engineering and administrative expenses                               4,330                           4,044
                                                                         -------------------             -------------------
     Total operating costs and expenses                                         46,160                          46,278
                                                                         -------------------             -------------------

Operating income                                                                 2,480                           1,512

Interest expense, net                                                              242                             569
                                                                         -------------------             -------------------

Income from continuing operations before provision
  for income taxes                                                               2,238                             943

Provision for income taxes                                                         918                             387
                                                                         -------------------             -------------------

Income from continuing operations                                                1,320                             556

Gain from discontinued operations, net of tax                                        -                             171
                                                                         -------------------             -------------------

Net income                                                                  $    1,320                      $      727
                                                                         ===================             ===================

Earnings per share

  Per common share - basic
     Income from continuing operations                                      $     0.17                      $     0.08
     Gain from discontinued operations                                               -                            0.02
                                                                         -------------------             -------------------
     Net income                                                             $     0.17                      $     0.10
                                                                         ===================             ===================

  Per common share - diluted
     Income from continuing operations                                      $     0.17                      $     0.07
     Gain from discontinued operations                                               -                            0.02
                                                                         -------------------             -------------------
     Net income                                                             $     0.17                      $     0.09
                                                                         ===================             ===================

Weighted average shares outstanding
  Weighted average shares outstanding - basic                                7,601,519                       7,448,524
  Dilutive effect of options                                                   185,008                         344,188
                                                                         -------------------             -------------------
  Weighted average shares outstanding - diluted                              7,786,527                       7,792,712
                                                                         ===================             ===================

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       4

<PAGE>

<TABLE>
<CAPTION>
                                                   DYNAMICS RESEARCH CORPORATION
                                               CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                     (in thousands of dollars)
                                                            (unaudited)

                                                                                      Three                    Three
                                                                                    Months Ended             Months Ended
                                                                                      March 31,                March 31,
                                                                                        2001                     2000
                                                                                    ------------             ------------

Cash provided by operations
<S>                                                                                  <C>                      <C>
  Net income                                                                          $ 1,320                 $    727
  Adjustments to reconcile net income to cash provided by (used for)
     operating activities
  Gain from discontinued operations                                                         -                     (171)
  Depreciation and amortization                                                           819                    1,067
  Deferred income taxes                                                                   801                      658
                                                                                    ------------             ------------
                                                                                        2,940                    2,281
                                                                                    ------------             ------------
Cash provided by (used for) working capital
  Receivables                                                                           9,021                    1,931
  Unbilled expenditures and fees on contracts in process                               (2,221)                  (4,530)
  Inventories                                                                            (470)                     221
  Prepaid expenses and other current assets                                             2,304                     (344)
  Accounts payable                                                                        342                   (1,454)
  Accrued payroll and employee benefits                                                  (118)                   2,908
  Other accrued expenses                                                                 (662)                  (1,254)
                                                                                    ------------             ------------
                                                                                        8,196                   (2,522)
                                                                                    ------------             ------------

  Net cash provided by (used for) continuing operations                                11,136                     (241)
  Net cash used for discontinued operations                                                 -                      (70)
                                                                                    ------------             ------------
  Cash provided by (used for) operating activities                                     11,136                     (311)
                                                                                    ------------             ------------
Cash used for investing activities
  Additions to property, plant and equipment                                             (650)                    (793)
                                                                                    ------------             ------------
  Net cash used for investing activities                                                 (650)                    (793)
                                                                                     ------------             ------------
Cash provided by (used for) financing activities
  Repayment of working capital agreement                                                    -                  (19,700)
  Principal payment under 10-year mortgage                                               (125)                       -
  Proceeds from short-term bridge mortgage                                                  -                    7,500
  Net borrowings (repayments) under revolving credit agreement                         (5,784)                  10,677
  Proceeds from the exercise of stock options                                               -                      593
                                                                                    ------------             ------------
  Net cash used for financing activities                                               (5,909)                    (930)
                                                                                     ------------             ------------
  Net increase (decrease) in cash and cash equivalents                                  4,577                   (2,034)
  Cash and cash equivalents at the beginning of the period                                527                    2,267
                                                                                    ------------             ------------
  Cash and cash equivalents at the end of the period                                  $ 5,104                 $    233
                                                                                    ============             ============

Supplemental information
  Cash paid for interest                                                              $   278                 $    365
  Cash paid for taxes                                                                 $   120                 $     51

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       5
<PAGE>

                         DYNAMICS RESEARCH CORPORATION

                   Notes to Consolidated Financial Statements
                   ------------------------------------------


Note 1.  Significant Accounting Policies
----------------------------------------

Basis of Presentation
---------------------

The accompanying consolidated financial statements include the accounts of the
company and its wholly owned subsidiaries.  All material intercompany
transactions and balances have been eliminated in consolidation.  Certain prior
period amounts have been reclassified to conform to current period presentation.

Certain information in footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States has been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, although the registrant
believes that the disclosures are adequate to make the information presented not
misleading.  The accompanying consolidated financial statements have not been
audited by independent accountants, but in the opinion of the management, such
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present the results of operations.
The results of the three months ended March 31, 2001 may not be indicative of
the results that may be expected for the fiscal year ended December 31, 2001.

Risks, Uncertainties and Use of Estimates
-----------------------------------------

The company is subject to certain business risks specific to the industries in
which it operates, including 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 at the
date of the financial statements and the reported amounts of revenue and
expenses during the reported period.  Actual results could differ from those
estimates.

Inventories
-----------

Inventories stated at the lower of cost or market (in thousands of dollars):

                                     March 31, 2001     December 31, 2000
                                    ----------------   -------------------

Work in process                         $  582                $  726
Raw materials and subassemblies          3,096                 2,482
                                    ----------------   -------------------
Total inventories                       $3,678                $3,208
                                    ================   ===================

                                       6
<PAGE>

Property, Plant and Equipment
-----------------------------

Property, plant and equipment stated at cost  (in thousands of dollars):

                                     March 31, 2001     December 31, 2000
                                    ----------------   -------------------
Land                                    $ 1,126              $ 1,126
Building                                  7,774                7,774
Machinery and equipment                  45,783               45,133
Leasehold improvements                    2,551                2,551
                                    -----------------  -------------------
Total property, plant and equipment      57,234               56,584
Less accumulated depreciation and
     amortization                        42,962               42,143
                                    -----------------  -------------------
Net property, plant and equipment       $14,272              $14,441
                                    =================  ===================

New Accounting Pronouncements
-----------------------------

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS No.
133 (as amended by SFAS No. 137 and SFAS No. 138) was effective January 1, 2001.
The adoption of SFAS No. 133 did not have a material impact on the company's
financial position or results of operations, because it currently has no
derivative instruments or hedging activities.

Earnings Per Common Share
-------------------------

Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Diluted
earnings per share is determined by giving effect to the exercise of stock
options using the treasury stock method. Due to their antidilutive effect,
58,800 and 128,800 stock options were excluded from the calculation of diluted
earnings per share in the first quarter of 2001 and 2000, respectively.

Note 2. Contract Loss Provision
-------------------------------

In 1997, the company entered into a fixed-price software development contract
with the Colorado Department of Human Services. This contract encountered
difficulties, and as a result, the company recorded losses, including an $11.9
million charge in 1999. The losses were included in the results of operations of
the Systems and Services segment as a charge to cost of contract revenue. The
company continued to update its estimate of project cost and recorded, as
necessary, changes in estimates during each reporting period in 2000, including
a scheduled extension of about six months during the year.

Entering 2001, the project was scheduled for completion in the first half of the
year, including rollout of the first release of the new child welfare
information and management system, plus three releases of increased
functionality. Since the beginning of the year, the first release of the system
has been fully implemented, providing approximately 3000 State employees with
access to the system to manage the State's child welfare cases. The additional
releases, including youth corrections administrative processes, are in
development and test phases. Completion of the additional releases has been
extended from June to August of 2001, and as a result, the company provided for
the cost of the schedule extension in the first quarter of 2001. While the
company believes it has reasonably estimated and provided for the costs to
complete the contract, estimates of project costs will continue to be updated
and changes in estimates provided for, as necessary, in each reporting period.
Accordingly, there can be no assurances that actual costs on the project will
not differ materially from current estimates.

                                       7
<PAGE>

Note 3. Restructuring
---------------------

In the fourth quarter of 1999, the company adopted a restructuring plan intended
to reduce overhead costs and increase efficiencies. The company recorded a
restructuring charge of $1.2 million.

During 2000, the company expended approximately $0.9 million related to
severance costs and outplacement services for 58 employees. During the fourth
quarter of 2000, the company determined that $0.1 million of reserves related to
a specific business were no longer necessary, and these reserves were reversed
against cost of contract revenue. The restructuring reserve balance was $0.2
million at December 31, 2000. During the first quarter of 2001, the company
expended approximately $0.1 million against the reserve. The remaining
restructuring reserve of $0.1 million at March 31, 2001 will be expended during
the second quarter of 2001, primarily on continuation pay for employees who had
left the company prior to December 31, 2000.

Note 4. Discontinued Operations
-------------------------------

In June 1999, the company completed the sale of its previously discontinued
Telecommunications Fraud Control business for $1.7 million plus royalties. No
royalty income was recognized in the first three months of 2001, however $0.2
million was recorded in the first quarter of 2000. The company may benefit
modestly from future royalty payments over the next 15 months, up to a cap of
$0.9 million, net of taxes. These receipts will be recorded as gain from
discontinued operations, after deducting taxes, when received.

Note 5. Debt
------------

The company's secured revolving credit agreement (the "Revolver") provides for
borrowings of up to the lesser of $20 million or 80% of eligible accounts
receivable, as defined, and expires on February 10, 2003. Interest on the
outstanding balance of the Revolver is payable monthly and prior to February
2001, interest accrued at the prime rate. The agreement included a fee of 0.375%
on the unused portion of the Revolver. Commencing in February 2001, the company
exercised an option to elect an interest rate of LIBOR plus 2% or the prime
rate, and the fee on the unused Revolver was reduced to 0.25%. At March 31,
2001, there was no outstanding balance under the Revolver and the company had
$13.6 million of unused credit line available.

The company has a 10-year, $10 million mortgage loan (the "Mortgage") on the
company's real estate. Interest on the Mortgage accrues at the rate of LIBOR
plus 2.5%. The agreement requires quarterly principal payments of $125,000
beginning on August 1, 2000, with a final payment of $5 million in June 2010.
The interest rate on the Mortgage was 8.18% on March 31, 2001.

The Revolver is secured by all assets. The Mortgage is secured by the corporate
office facility in Andover, Massachusetts. The Revolver and Mortgage require the
company to meet certain financial covenants including maintaining a minimum
tangible net worth, cash flow and debt coverage ratios, as well as limit the
company's ability to incur additional debt, to pay dividends, to purchase
capital assets, to sell or dispose of assets, to make additional acquisitions or
investments, or to enter into new leases, among other restrictions. The company
was in compliance with all covenants on March 31, 2001.

Note 6.  Commitments and Contingencies
--------------------------------------

As a defense contractor, the company is subject to many levels of audit and
review, including the Defense Contract Audit Agency (DCAA), the Inspector
General, the Defense Criminal Investigative Service, the General Accounting
Office, the Department of Justice and Congressional Committees. As a result of
certain DCAA audit findings in January 2000, the United States Government
temporarily deferred a portion of its payments to the company. At December 31,

                                       8
<PAGE>

2000, $1.0 million in payments were deferred, $0.8 million of which was paid in
the first quarter of 2001. In the second quarter of 2001, the government
has released the remaining $0.2 million. 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, and
accrues for liabilities associated with these activities, if any, for which the
company considers it probable that future expenditures will be made and for
which such expenditures can be reasonably estimated. In management's opinion,
the outcome from such audits and other matters discussed above is not expected
to have a material adverse effect on the company's financial position or results
of operations.

On October 26, 2000, the United States Attorney's Office announced the
indictment of two former company employees for conspiracy to defraud the United
States Air Force. Although the alleged events are historical, occurring between
1997 and January 2000, the government's investigation is ongoing. The United
States Attorney's Office has informed the company that it is not a target of the
investigation.  Separately, the United States Attorney's Office is investigating
certain company activity and billing transactions from prior years. The company
does not know, at this time, what financial effects, if any, may result to the
company from these matters.

Note 7.  Segment Information
----------------------------
Identifiable assets by business segment include both assets directly identified
with those operations and an allocable share of jointly used assets.

Summarized financial information by business segment for the three months ended
March 31, 2001 and March 31, 2000 are as follows (in thousands of dollars):
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                           Identifiable
                                 Systems                                                    Continuing
                                   and                         Metri-                       Operations
                                 Services       Encoder       graphics       Corporate         Total
                             ---------------------------------------------------------------------------
<S>                            <C>           <C>            <C>           <C>              <C>
March 31, 2001
Net sales                        $42,372        $3,490         $2,778      $      -           $48,640
Operating income (loss)            1,713          (297)         1,064             -             2,480
Identifiable assets at
March 31, 2001                    52,053         6,277          2,903           13,243         74,476

March 31, 2000
Net sales                        $41,172        $4,493         $2,125      $      -           $47,790
Operating income                     662           377            473             -             1,512
Identifiable assets at
March 31, 2000                    56,356         6,175          2,556           10,515         75,602
</TABLE>

Net sales and operating income (loss) are presented after the elimination of
intersegment transactions, which are not material.

During the first quarter of 2001 and 2000, revenue from Department of Defense
(DoD) customers represented approximately 69% and 71% of total revenue from
continuing operations, respectively.  Revenue earned from one significant DoD
contract represented approximately 18% and 16% of total revenue from continuing
operations in the first three months of 2001 and 2000, respectively.

                                       9
<PAGE>

Note 8. Sale of Tactical Communications Group
---------------------------------------------

During the first quarter of 2001, the company agreed to sell the assets of its
Tactical Communications Group (the "TCG") for $0.3 million and transfer related
employees. TCG develops and sells communications software for defense
applications. In 2000, TCG recorded revenues of $2.3 million and an after tax
loss of $0.9 million. In the fourth quarter of 2000, in anticipation of the
sale, the company recorded a $0.4 million impairment provision on the assets of
TCG in cost of contract revenue. The gain or loss upon closing of the
transaction, planned for the second quarter of 2001, is expected to be
immaterial.

Note 9.  Employee Stock Purchase Plan
-------------------------------------

On January 30, 2001, company's shareholders approved the adoption of the 2000
Employee Stock Purchase Plan (the "ESPP"). The ESPP is designed to give eligible
employees an opportunity to purchase common stock of the company through
accumulated payroll deductions. The purchase price of the stock is equal to 85%
of the fair market value of a share of common stock on the first day or last day
of the each three-month offering period, whichever is lower. All employees of
the company or designated subsidiaries who customarily work at least 20 hours
per week and do not own five percent or more of the company's common stock are
eligible to participate in the purchase plan. A total of 800,000 shares has been
reserved for issuance under the ESPP.

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

Results of Operations

Total revenue increased slightly to $48.6 million in the first quarter of 2001
compared with $47.8 million in the first quarter of 2000. Contract revenue for
the Systems and Services segment increased 2.9% to $42.4 million in the first
three months of 2001 compared with $41.2 million in the same period last year.
The increase was primarily due to growth in services provided to state and
federal civil agencies. Revenues from defense services decreased slightly to
approximately 69% of total revenue. In the past several months, the company has
changed its contractual relationship with two major customers.  With these
changes, slightly more than $2.0 million of low margin work performed by
subcontractors no longer flows through the company's operating results as
revenues and cost of sales.  Analytically excluding the effect of the eliminated
subcontracts in order to understand the trend in defense services work, revenues
increased 5% for the first quarter of 2001 when compared with the same quarter a
year ago.  These increases were mainly in acquisition, logistics, training and
depot support services.

Product sales decreased 5.3% to $6.3 million in the first three months of 2001
compared with $6.6 million in the same period of 2000. Encoder Division sales
decreased to $3.5 million in the first three months of 2001 from $4.5 million
for the same period in 2000.  The Encoder Division has been significantly
effected by the current economic downturn in high tech and manufacturing.  The
company expects the lower levels of revenues to continue into the second and
third quarters of 2001.

Metrigraphics Division sales increased 30.7% to $2.8 million in the first
quarter of 2001 compared to $2.2 million in the first quarter of 2000. The
increase was due to growth in the inkjet printer cartridge and medical
electronics businesses, as well as other electronic areas.

Total gross margin was $6.8 million and $5.6 million in the first quarter of
2001 and 2000, respectively, representing 14.0% and 11.6% of total revenue in
the first three months of 2001 and 2000, respectively.  The increase in gross
margin resulted primarily from a shift in mix of product and service offerings
toward higher margin sales (see discussion below).

Gross margin on contract revenue was $5.1 million and $3.8 million for the first
three months of 2001 and 2000, respectively, representing 12.0% and 9.3% of
contract revenue in the first quarter of 2001 and 2000, respectively.  The
increase was due to improved contract pricing, a mix shift toward higher gross
margin time and materials work and control of overhead costs, which remained
essentially flat in the first quarter of 2001 compared with the same period last
year.

As described in Note 2 to the financial statements, the company is in the final
stages of completing a major software development project for the State of
Colorado. While the company believes it has reasonably estimated and provided
for the costs to complete the contract, estimates of project costs will continue
to be updated and changes in estimates provided for, as necessary, in each
reporting period. Accordingly, there can be no assurances that actual costs on
the project will not differ materially from current estimates.


In the first quarter of 2001 and 2000, gross margin on product sales was $1.7
million representing 27.7% and 25.9% of product sales in the first three months
of 2001 and 2000, respectively. The increase in the gross margin percentage

                                       10
<PAGE>

resulted primarily from a favorable revenue mix shift toward higher gross margin
Metrigraphics products.  Gross margin for the Metrigraphics Division was 51.8%
for the first quarter of 2001, up from 39.5% for the same quarter last year.
The increase resulted entirely from the 30.7% increase in revenue, benefiting
from leverage on existing fixed overhead costs. The Encoder Division gross
margin decreased to 8.5% in the first quarter of 2001, from 20.4% in the first
three months of 2000, resulting primarily from the decline in revenue. While
cost reduction actions have been taken, they have not fully offset the lower
revenue.  The company continues to evaluate the need for further actions.

Selling, engineering and administrative expenses increased 7.1% to $4.3 million
in the first three months of 2001 compared with $4.0 million for the same
quarter in 2000. The increase reflects three factors; normal cost inflation of
approximately 4%, a planned increase in sales and marketing activities and
planned expenses associated with employee-centered initiatives.

Net interest expense was $0.2 million and $0.6 million for the first three
months of 2001 and 2000, respectively, reflecting lower average debt levels.

Income tax expense for the first quarter of 2001 and 2000 was $0.9 million and
$0.4 million, respectively, representing 41% of pre-tax income in both quarters.

In June 1999, the company completed the sale of its previously discontinued
Telecommunications Fraud Control business for $1.7 million plus royalties. No
royalty income was recognized in the first three months of 2001, however $0.2
million was recorded in the first quarter of 2000. The company may benefit
modestly from future royalty payments over the next 15 months, up to a cap of
$0.9 million, net of taxes. These receipts will be recorded as gain from
discontinued operations, after deducting taxes, when received.

In the fourth quarter of 1999, the company adopted a restructuring plan intended
to reduce overhead costs and increase efficiencies. The company recorded a
restructuring charge of $1.2 million. The restructuring reserve balance was $0.2
million at December 31, 2000. During the first quarter of 2001, the company
expended approximately $0.1 million against the reserve. The remaining
restructuring reserve of $0.1 million at March 31, 2001 will be expended during
the second quarter of 2001, primarily on continuation pay for employees who had
left the company prior to December 31, 2000.

The company's total employment at March 31, 2001 was 1,498, down from 1,504 at
December 31, 2000.

The company's funded backlog was $94.3 million at March 31, 2001, up from $89.8
million at December 31, 2000. A portion of the company's backlog is based on
annual purchase contracts. The amount of backlog as of any date can be affected
by the timing of order receipts and associated deliveries.


Liquidity and Capital Resources

Cash provided for continuing operations in the first quarter of 2001 was $11.1
million primarily resulting from decreased accounts receivable, an income tax
refund of $2.2 million, and positive cash earnings partially offset by increased
unbilled expenditures and fees on contracts in process. Cash used for continuing

                                       11
<PAGE>

operations in the first quarter of 2000 was $0.2 million resulting from
increased unbilled expenditures and fees on contracts in process, and decreased
accounts payable and other accrued expenses, partially offset by positive cash
earnings, increased accrued payroll and employee benefits and decreased
receivables.

Cash used for investing activities was $0.7 million and $0.8 million in the
first three months of 2001 and 2000, respectively, related to the purchase of
property, plant and equipment.

The company's secured revolving credit agreement (the "Revolver") provides for
borrowings of up to the lesser of $20 million or 80% of eligible accounts
receivable, as defined, and expires on February 10, 2003. Interest on the
outstanding balance of the Revolver is payable monthly and prior to February
2001, interest accrued at the prime rate. The agreement included a fee of 0.375%
on the unused portion of the Revolver. Commencing in February 2001, the company
exercised an option to elect an interest rate of LIBOR plus 2% or the prime
rate, and the fee on the unused Revolver was reduced to 0.25%. At March 31,
2001, there was no outstanding balance under the Revolver and the company had
$13.6 million of unused credit line available.

The company has a 10-year, $10 million mortgage loan (the "Mortgage") on the
company's real estate. Interest on the Mortgage accrues at the rate of LIBOR
plus 2.5%. The agreement requires quarterly principal payments of $125,000
beginning on August 1, 2000, with a final payment of $5 million in June 2010.
The interest rate on the Mortgage was 8.18% on March 31, 2001.

The Revolver is secured by all assets.  The Mortgage is secured by the corporate
office facility in Andover, Massachusetts. The Revolver and Mortgage require the
company to meet certain financial covenants including maintaining a minimum
tangible net worth, cash flow and debt coverage ratios, as well as limit the
company's ability to incur additional debt, to pay dividends, to purchase
capital assets, to sell or dispose of assets, to make additional acquisitions or
investments, or to enter into new leases, among other restrictions. The company
was in compliance with all covenants on March 31, 2001.

During the first quarter of 2001, the company agreed to sell the assets of its
Tactical Communications Group (the "TCG") for $0.3 million and transfer related
employees. TCG develops and sells communications software for defense
applications. In 2000, TCG recorded revenues of $2.3 million and an after tax
loss of $0.9 million. In the fourth quarter of 2000, in anticipation of the
sale, the company recorded a $0.4 million impairment provision on the assets of
TCG in cost of contract revenue. The gain or loss upon closing of the
transaction, planned for the second quarter of 2001, is expected to be
immaterial.

The company's prospective cash flows are subject to certain trends, events and
uncertainties, including demands for capital to support growth, economic
conditions, government payment practices and contractual matters. The company's
capital expenditures are expected to be in the range of $7 million to $8 million
in 2001, primarily for technology advancements, infrastructure improvements and
capacity expansion in support of growth and operational performance enhancement.

As a defense contractor, the company is subject to many levels of audit and
review, including the Defense Contract Audit Agency (DCAA), the Inspector
General, the Defense Criminal Investigative Service, the General Accounting
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, and accrues for liabilities associated with these activities, if
any, for which the company considers it probable that future expenditures will
be made and for which such expenditures can be reasonably estimated. In

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<PAGE>

management's opinion, the outcome from such audits and other matters discussed
above is not expected to have a material adverse effect on the company's
financial position or results of operations.

On October 26, 2000, the United States Attorney's Office announced the
indictment of two former company employees for conspiracy to defraud the United
States Air Force. Although the alleged events are historical, occurring between
1997 and January 2000, the government's investigation is ongoing.  The United
States Attorney's Office has informed the company that it is not a target of the
investigation.  Separately, the United States Attorney's Office is investigating
certain company activity and billing transactions from prior years. The company
does not know, at this time, what financial effects, if any, may result to the
company from these matters.

The company's need for, cost of, and access to funds are dependent on future
operating results, as well as conditions external to the company.  The company
believes that its current assets, cash flows from operations and available lines
of credit are sufficient to support its normal operations and capital
requirements for the foreseeable future.

Forward-Looking Information

Safe harbor statements under the Private Securities Litigation Reform Act of
1995: Some statements contained or implied in this quarterly report which are
not historical fact such as financial forecasts contain forward-looking
information. These statements may be identified by forward-looking words such as
"expect," "look," "believe," "anticipate," "may," "will" and other forward-
looking terminology.  Such statements are subject to risks and uncertainties
that could cause actual results to differ materially, including uncertainties
regarding contractual requirements, actions by customers and actual costs to
complete; federal budget matters; government contracting risks, competitive
market conditions; customer requirements, schedules and related funding;
technological change; uncertainty of future financing; overall economic factors;
ability to successfully complete and integrate acquisitions and other matters.
These factors are discussed in more detail in the company's Annual Report on
Form 10-K for the year ended December 31, 2000.  The company assumes no
obligation to update any forward-looking information.

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<PAGE>

                          PART II.  OTHER INFORMATION



Item 6.  (a) Exhibits

    10.14  2000 Employee Stock Purchase Plan (Incorporated by reference to the
Registrants' Form S-8 on April 27, 2001)


Item 6.  (b) Reports on Form 8-K

    None

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<PAGE>

                                   SIGNATURE



  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:  May 15, 2001               By:  /s/ David Keleher
                                      --------------------
                                  David Keleher
                                  Vice President and Chief Financial Officer





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