##### 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 1934For the quarterly period ended June 30, 2005ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from           to
 Commission file number 000-02479
 DYNAMICS RESEARCH CORPORATION
  Massachusetts
(State or other Jurisdiction of
Incorporation or Organization)
    
    04-2211809
(I.R.S. Employer Identification No.)
 60 Frontage Road
Andover, Massachusetts
(Address of Principal Executive Offices)
    
    01810-5498
(Zip Code)
  þ o
 þ o




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Page NumberPART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    
    
    Consolidated Financial StatementsConsolidated Balance Sheets as of June 30, 2005 (unaudited) and December 31, 2004 (audited)
    
    
    3Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004 (unaudited)
    
    
    4Consolidated Statement of Changes in Stockholders Equity and Comprehensive Income for the three and six months ended June 30, 2005 (unaudited)
    
    
    5Consolidated Statement of Changes in Stockholders Equity and Comprehensive Income for the three and six months ended June 30, 2004 (unaudited)
    
    
    6Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004 (unaudited)
    
    
    7Notes to Consolidated Financial Statements (unaudited)
    
    
    8Item 2.
    
    
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3.
    
    
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    42Item 4.
    
    
    
    Controls and Procedures
    
    
    42PART II.
    
    OTHER INFORMATIONItem 1.
    
    
    
    Legal Proceedings
    
    
    44Item 4.
    
    
    
    Submission of Matters to a Vote of Security Holders
    
    
    45Item 6.
    
    
    
    Exhibits
    
    
    46Signatures
    
    
    
    
    
    
    
    
    47EX-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
  2




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##### Table of Contents



June 30,
    
    December 31,2005
    
    2004(unaudited)
    
    (audited)AssetsCurrent assetsCash and cash equivalents
    
    $
    814
    
    
    $
    925Accounts receivable, net of allowances of $301 at June 30, 2005
and $396 at December 31, 2004
    
    
    36,986
    
    
    
    45,978Unbilled expenditures and fees on contracts in process
    
    
    53,031
    
    
    
    48,119Prepaid expenses and other current assets
    
    
    3,821
    
    
    
    5,668Total current assets
    
    
    94,652
    
    
    
    100,690Noncurrent assetsProperty, plant and equipment, net
    
    
    22,655
    
    
    
    22,139Goodwill
    
    
    63,055
    
    
    
    63,055Intangible assets, net
    
    
    10,000
    
    
    
    11,519Unbilled expenditures and fees on contracts in process
    
    
    6,489
    
    
    
    2,203Other noncurrent assets
    
    
    3,148
    
    
    
    5,528Total noncurrent assets
    
    
    105,347
    
    
    
    104,444Total assets
    
    $
    199,999
    
    
    $
    205,134Liabilities and stockholders equityCurrent liabilitiesCurrent portion of long-term debt
    
    $
    8,357
    
    
    $
    8,357Revolver
    
    
    3,013
    
    
    
    10,000Accounts payable
    
    
    19,920
    
    
    
    20,550Accrued payroll and employee benefits
    
    
    19,069
    
    
    
    17,914Deferred income taxes
    
    
    16,321
    
    
    
    15,418Other accrued expenses
    
    
    3,102
    
    
    
    4,447Discontinued operations
    
    
    106
    
    
    
    422Total current liabilities
    
    
    69,888
    
    
    
    77,108Long-term liabilitiesLong-term debt, less current portion
    
    
    47,306
    
    
    
    51,485Deferred income taxes
    
    
    1,015
    
    
    
    591Accrued pension liability
    
    
    8,409
    
    
    
    11,336Other long-term liabilities
    
    
    6,529
    
    
    
    3,296Total long-term liabilities
    
    
    63,259
    
    
    
    66,708Total liabilities
    
    
    133,147
    
    
    
    143,816Commitments and contingenciesStockholders equityPreferred stock, $0.10 par value, 5,000,000 shares authorized,
no shares issued
    
    
    
    
    
    
    Common stock, $0.10 par value, 30,000,000 shares authorized:Issued
 8,913,311 shares at June 30, 2005 and 8,737,562 shares
at December 31, 2004
    
    
    891
    
    
    
    874Capital in excess of par value
    
    
    43,274
    
    
    
    40,849Unearned compensation
    
    
    (2,309
    )
    
    
    (1,572
    )Accumulated other comprehensive loss
    
    
    (9,259
    )
    
    
    (7,724
    )Retained earnings
    
    
    34,255
    
    
    
    28,891Total stockholders equity
    
    
    66,852
    
    
    
    61,318Total liabilities and stockholders equity
    
    $
    199,999
    
    
    $
    205,134
  3




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##### Table of Contents



Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Contract revenue
    
    $
    74,539
    
    
    $
    63,065
    
    
    $
    146,378
    
    
    $
    123,702Product sales
    
    
    1,649
    
    
    
    1,885
    
    
    
    3,352
    
    
    
    3,316Total revenue
    
    
    76,188
    
    
    
    64,950
    
    
    
    149,730
    
    
    
    127,018Cost of contract revenue
    
    
    62,947
    
    
    
    54,158
    
    
    
    123,753
    
    
    
    105,995Cost of product sales
    
    
    1,297
    
    
    
    1,359
    
    
    
    2,706
    
    
    
    2,500Selling, general and administrative expenses
    
    
    6,686
    
    
    
    4,935
    
    
    
    12,707
    
    
    
    10,270Amortization of intangible assets
    
    
    765
    
    
    
    381
    
    
    
    1,519
    
    
    
    762Total operating costs and expenses
    
    
    71,695
    
    
    
    60,833
    
    
    
    140,685
    
    
    
    119,527Operating income
    
    
    4,493
    
    
    
    4,117
    
    
    
    9,045
    
    
    
    7,491Interest expense, net
    
    
    (1,046
    )
    
    
    (361
    )
    
    
    (2,132
    )
    
    
    (574
    )Other income
    
    
    2,077
    
    
    
    56
    
    
    
    2,102
    
    
    
    437Income before provision for income taxes
    
    
    5,524
    
    
    
    3,812
    
    
    
    9,015
    
    
    
    7,354Provision for income taxes
    
    
    2,251
    
    
    
    1,613
    
    
    
    3,651
    
    
    
    3,111Net income
    
    $
    3,273
    
    
    $
    2,199
    
    
    $
    5,364
    
    
    $
    4,243Earnings per common shareBasic
    
    $
    0.37
    
    
    $
    0.26
    
    
    $
    0.62
    
    
    $
    0.50Diluted
    
    $
    0.36
    
    
    $
    0.24
    
    
    $
    0.58
    
    
    $
    0.47Weighted average shares outstandingWeighted average shares outstanding  basic
    
    
    8,743,516
    
    
    
    8,461,945
    
    
    
    8,719,577
    
    
    
    8,428,105Dilutive
effect of options and restricted stock grants
    
    
    458,497
    
    
    
    557,194
    
    
    
    487,458
    
    
    
    570,234Weighted
average shares outstanding 
diluted
    
    
    9,202,013
    
    
    
    9,019,139
    
    
    
    9,207,035
    
    
    
    8,998,339
  4




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##### Table of Contents



AccumulatedCommon stock
    
    
    Capital in
    
    
    
    
    
    
    otherIssued
    
    
    excess of
    
    
    Unearned
    
    
    comprehensive
    
    
    RetainedShares
    
    
    Par value
    
    
    par value
    
    
    compensation
    
    
    loss
    
    
    earnings
    
    
    TotalThree
months ended June 30, 2005Balance March 31, 2005
    
    
    8,880
    
    
    $
    888
    
    
    $
    42,824
    
    
    $
    (2,614
    )
    
    $
    (8,136
    )
    
    $
    30,982
    
    
    $
    63,944Issuance of common stock through stock options exercised
and employee stock purchase plan
    
    
    42
    
    
    
    4
    
    
    
    538
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    542Issuance of restricted stock
    
    
    15
    
    
    
    1
    
    
    
    227
    
    
    
    (228
    )
    
    
    
    
    
    
    
    
    
    
    Forfeiture of restricted stock
    
    
    (23
    )
    
    
    (2
    )
    
    
    (335
    )
    
    
    280
    
    
    
    
    
    
    
    
    
    
    
    (57
    )Retirement of restricted stock
    
    
    (1
    )
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    253
    
    
    
    
    
    
    
    
    
    
    
    253Change in unrealized gain on investment in Lucent
Technologies shares, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,123
    )
    
    
    
    
    
    
    (1,123
    )Tax benefit from stock options exercised and employee
stock purchase plan
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,273
    
    
    
    3,273Balance June 30, 2005
    
    
    8,913
    
    
    $
    891
    
    
    $
    43,274
    
    
    $
    (2,309
    )
    
    $
    (9,259
    )
    
    $
    34,255
    
    
    $
    66,852Six months ended June 30, 2005Balance December 31, 2004 (audited)
    
    
    8,737
    
    
    $
    874
    
    
    $
    40,849
    
    
    $
    (1,572
    )
    
    $
    (7,724
    )
    
    $
    28,891
    
    
    $
    61,318Issuance of common stock through stock options exercised
and employee stock purchase plan
    
    
    121
    
    
    
    12
    
    
    
    1,333
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,345Issuance of restricted stock
    
    
    91
    
    
    
    8
    
    
    
    1,495
    
    
    
    (1,503
    )
    
    
    
    
    
    
    
    
    
    
    Forfeiture of restricted stock
    
    
    (24
    )
    
    
    (2
    )
    
    
    (347
    )
    
    
    289
    
    
    
    
    
    
    
    
    
    
    
    (60
    )Retirement of restricted stock
    
    
    (12
    )
    
    
    (1
    )
    
    
    (176
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (177
    )Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    477
    
    
    
    
    
    
    
    
    
    
    
    477Change in unrealized gain on investment in Lucent
Technologies shares, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,535
    )
    
    
    
    
    
    
    (1,535
    )Tax benefit from stock options exercised and employee
stock purchase plan
    
    
    
    
    
    
    
    
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,364
    
    
    
    5,364Balance June 30, 2005
    
    
    8,913
    
    
    $
    891
    
    
    $
    43,274
    
    
    $
    (2,309
    )
    
    $
    (9,259
    )
    
    $
    34,255
    
    
    $
    66,852
  Three
    
    
    Sixmonths
    
    
    monthsended
    
    
    endedJune 30, 2005Net income
    
    $
    3,273
    
    
    $
    5,364Change in unrealized gain on investment in Lucent
Technologies shares sold in June 2005, net of tax:Unrealized holding (loss) during the period
    
    
    
    
    
    
    (412
    )Reclassification adjustment of realized gain
included in net income
    
    
    (1,123
    )
    
    
    (1,123
    )(1,123
    )
    
    
    (1,535
    )Comprehensive income
    
    $
    2,150
    
    
    $
    3,829
  5




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##### Table of Contents



AccumulatedCommon stock
    
    
    Capital in
    
    
    
    
    
    
    otherIssued
    
    
    Treasury stock
    
    
    excess of
    
    
    Unearned
    
    
    comprehensive
    
    
    RetainedShares
    
    
    Par value
    
    
    Shares
    
    
    Par value
    
    
    par value
    
    
    compensation
    
    
    loss
    
    
    earnings
    
    
    TotalThree months ended June 30, 2004Balance March 31, 2004
    
    
    9,932
    
    
    $
    993
    
    
    
    (1,379
    )
    
    $
    (138
    )
    
    $
    38,496
    
    
    $
    (1,933
    )
    
    $
    (7,556
    )
    
    $
    21,562
    
    
    $
    51,424Issuance of common stock through stock options exercised
and employee stock purchase plan
    
    
    69
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    778
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    785Issuance of restricted stock
    
    
    17
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    284
    
    
    
    (286
    )
    
    
    
    
    
    
    
    
    
    
    Forfeiture of restricted stock
    
    
    (10
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (121
    )
    
    
    122
    
    
    
    
    
    
    
    
    
    
    
    Repurchase and retirement of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144
    
    
    
    
    
    
    
    
    
    
    
    144Tax benefit from stock options exercised and employee
stock purchase plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,199
    
    
    
    2,199Balance June 30, 2004
    
    
    10,008
    
    
    $
    1,001
    
    
    
    (1,379
    )
    
    $
    (138
    )
    
    $
    39,538
    
    
    $
    (1,953
    )
    
    $
    (7,556
    )
    
    $
    23,761
    
    
    $
    54,653Six months ended June 30, 2004Balance December 31, 2003 (audited)
    
    
    9,822
    
    
    $
    982
    
    
    
    (1,379
    )
    
    $
    (138
    )
    
    $
    36,642
    
    
    $
    (797
    )
    
    $
    (7,556
    )
    
    $
    19,518
    
    
    $
    48,651Issuance of common stock through stock options exercised
and employee stock purchase plan
    
    
    121
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    1,374
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,386Issuance of restricted stock
    
    
    88
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    1,570
    
    
    
    (1,579
    )
    
    
    
    
    
    
    
    
    
    
    Forfeiture of restricted stock
    
    
    (20
    )
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (212
    )
    
    
    214
    
    
    
    
    
    
    
    
    
    
    
    Repurchase and retirement of restricted stock
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36
    )Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    209
    
    
    
    
    
    
    
    
    
    
    
    209Tax benefit from stock options exercised and employee
stock purchase plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,243
    
    
    
    4,243Balance June 30, 2004
    
    
    10,008
    
    
    $
    1,001
    
    
    
    (1,379
    )
    
    $
    (138
    )
    
    $
    39,538
    
    
    $
    (1,953
    )
    
    $
    (7,556
    )
    
    $
    23,761
    
    
    $
    54,653
  Three
    
    
    Sixmonths
    
    
    monthsended
    
    
    endedJune 30, 2004Net income
    
    $
    2,199
    
    
    $
    4,243Adjustments to Accumulated other comprehensive loss
    
    
    
    
    
    
    Comprehensive income
    
    $
    2,199
    
    
    $
    4,243
  6




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##### Table of Contents



Six months endedJune 30,2005
    
    
    2004Operating activitiesNet income
    
    $
    5,364
    
    
    $
    4,243Adjustments to reconcile net cash provided by (used in) operating activitiesDepreciation
    
    
    1,908
    
    
    
    1,772Amortization of intangible assets
    
    
    1,519
    
    
    
    762Stock compensation expense
    
    
    477
    
    
    
    209Non-cash interest expense
    
    
    98
    
    
    
    54Investment income from equity interest
    
    
    (89
    )
    
    
    (113
    )Tax benefit from stock options exercised
    
    
    120
    
    
    
    200Deferred income taxes
    
    
    2,320
    
    
    
    378(Gain) loss on sale of shares of Lucent Technologies and disposal of capital equipment
    
    
    (1,999
    )
    
    
    4Change in operating assets and liabilitiesAccounts receivable, net
    
    
    8,992
    
    
    
    (10,927
    )Unbilled expenditures and fees on contracts in process
    
    
    (9,024
    )
    
    
    (9,972
    )Prepaid expenses and other current assets
    
    
    1,847
    
    
    
    (21
    )Accounts payable
    
    
    2,170
    
    
    
    910Accrued payroll and employee benefits
    
    
    1,155
    
    
    
    (1,029
    )Other accrued expenses
    
    
    (4,122
    )
    
    
    370Net cash provided by (used in) continuing operations
    
    
    10,736
    
    
    
    (13,160
    )Net cash used in discontinued operations
    
    
    (316
    )
    
    
    (442
    )Net cash provided by (used in) operating activities
    
    
    10,420
    
    
    
    (13,602
    )Investing activitiesAdditions to property, plant and equipment
    
    
    (2,426
    )
    
    
    (2,182
    )Purchase of business
    
    
    (128
    )
    
    
    Dividends from equity investment
    
    
    60
    
    
    
    60Proceeds from sale of shares of Lucent Technologies and disposal of capital equipment
    
    
    2,001
    
    
    
    10Increase in other assets
    
    
    (217
    )
    
    
    (352
    )Net cash used in investing activities
    
    
    (710
    )
    
    
    (2,464
    )Financing activitiesNet (repayments) borrowings under revolving credit agreement
    
    
    (6,987
    )
    
    
    12,387Principal payments under loan agreements
    
    
    (4,179
    )
    
    
    (250
    )Proceeds from the exercise of stock options and issuance of common stock
    
    
    1,345
    
    
    
    1,350Net cash (used in) provided by financing activities
    
    
    (9,821
    )
    
    
    13,487Net decrease in cash and cash equivalents
    
    
    (111
    )
    
    
    (2,579
    )Cash and cash equivalents, beginning of period
    
    
    925
    
    
    
    2,724Cash and cash equivalents, end of period
    
    $
    814
    
    
    $
    145Supplemental informationCash paid for interest
    
    $
    2,023
    
    
    $
    429Cash (refunded) paid for income taxes, net
    
    $
    (696
    )
    
    $
    258
  7




---



##### Table of Contents



Earnings Per Share
    Stock-Based Compensation
 Accounting for Stock
Issued to Employees Accounting for Stock-Based
Compensation
 8




---



##### Table of Contents



Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income, as reported
    
    $
    3,273
    
    
    $
    2,199
    
    
    $
    5,364
    
    
    $
    4,243Deduct: Total
stock-based employee
compensation
determined under
fair-value-based
method for all awards,
net of related tax
effects
    
    
    (122
    )
    
    
    (133
    )
    
    
    (268
    )
    
    
    (213
    )Pro forma net income
    
    $
    3,151
    
    
    $
    2,066
    
    
    $
    5,096
    
    
    $
    4,030Net income per share:Basic, as reported
    
    $
    0.37
    
    
    $
    0.26
    
    
    $
    0.62
    
    
    $
    0.50Basic, pro forma
    
    $
    0.36
    
    
    $
    0.24
    
    
    $
    0.58
    
    
    $
    0.48Diluted, as reported
    
    $
    0.36
    
    
    $
    0.24
    
    
    $
    0.58
    
    
    $
    0.47Diluted, pro forma
    
    $
    0.34
    
    
    $
    0.23
    
    
    $
    0.55
    
    
    $
    0.45
  Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Expected volatility
    
    
    
    
    
    
    69.88
    %
    
    
    66.38
    %
    
    
    69.88
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Risk-free interest rate
    
    
    
    
    
    
    4.39
    %
    
    
    3.87
    %
    
    
    4.29
    %Expected life in years
    
    
    
    
    
    
    7.00
    
    
    
    6.5
    
    
    
    7.00
 Investment Available for Sale
 Accounting for Certain Investments
in Debt and Equity Securities
   9




---



##### Table of Contents



Recent Accounting Pronouncements
 Accounting Changes and Error Corrections: a Replacement
of Accounting Principles Board (APB) Opinion No. 20 and FASB Statement No. 3
 Share-Based Payment Accounting for Stock Issued to
Employees
 Critical Accounting Policies
   Revenue Recognition
     10




---



##### Table of Contents



Accounting for Performance of Construction-Type and Certain Production-Type Contracts
     Valuation Allowances
  Intangible and Other Long-lived Assets
   Goodwill
  11




---



##### Table of Contents



Business Combinations
  Deferred Taxes
  Pensions
     12




---



##### Table of Contents



Consideration:Cash
    
    $
    53,399Accrued estimated additional cash consideration
    
    
    473Transaction costs
    
    
    726Exit costs
    
    
    469Total consideration
    
    
    55,067Preliminary allocation of consideration to assets
acquired/(liabilities assumed):Working capital
    
    
    6,768Property and equipment
    
    
    562Other noncurrent assets
    
    
    57Long-term liabilities
    
    
    (164
    )Preliminary total fair value of net tangible assets acquired
    
    
    7,223Preliminary excess of consideration over fair value of net
tangible assets acquired
    
    
    47,844Preliminary allocation of excess consideration to identifiable
intangible assets:Customer relationships
    
    
    11,500Preliminary allocation of excess consideration to goodwill
    
    $
    36,344
  Balance at December 31, 2004
    
    $
    393Expenditures charged against accrual
    
    
    (107
    )Balance at June 30, 2005
    
    $
    286
  Three months
    
    Six monthsended
    
    endedJune 30, 2004
    
    June 30, 2004Revenue
    
    $
    78,089
    
    
    $
    152,027Net income
    
    $
    2,178
    
    
    $
    4,123Earnings per shareBasic
    
    $
    0.26
    
    
    $
    0.49Diluted
    
    $
    0.24
    
    
    $
    0.46
 13




---



##### Table of Contents



June 30,
    
    December 31,2005
    
    2004Cost
    
    $
    14,200
    
    
    $
    14,200Less accumulated amortization
    
    
    4,200
    
    
    
    2,681$
    10,000
    
    
    $
    11,519
  Remainder of 2005
    
    $
    1,5202006
    
    $
    2,8092007
    
    $
    2,6022008
    
    $
    2,0382009
    
    $
    1,031
         14




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##### Table of Contents



Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004RevenueSystems and Services
    
    $
    74,539
    
    
    $
    63,065
    
    
    $
    146,378
    
    
    $
    123,702Metrigraphics
    
    
    1,649
    
    
    
    1,885
    
    
    
    3,352
    
    
    
    3,316$
    76,188
    
    
    $
    64,950
    
    
    $
    149,730
    
    
    $
    127,018Operating incomeSystems and Services
    
    $
    4,439
    
    
    $
    4,010
    
    
    $
    8,990
    
    
    $
    7,478Metrigraphics
    
    
    54
    
    
    
    107
    
    
    
    55
    
    
    
    13$
    4,493
    
    
    $
    4,117
    
    
    $
    9,045
    
    
    $
    7,491
  June 30,
    
    December 31,2005
    
    2004Segment assetsSystems and Services
    
    $
    175,553
    
    
    $
    179,973Metrigraphics
    
    
    1,564
    
    
    
    1,859Total segment assets
    
    
    177,117
    
    
    
    181,832Corporate assets
    
    
    22,882
    
    
    
    23,302$
    199,999
    
    
    $
    205,134
   Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Customer A
    
    
    16
    %
    
    
    17
    %
    
    
    16
    %
    
    
    17
    %Customer B
    
    
    11
    %
    
    
    13
    %
    
    
    11
    %
    
    
    12
    %
  June 30,
    
    December 31,2005
    
    2004Customer A
    
    $
    4,027
    
    
    $
    4,650Customer B
    
    $
    2,247
    
    
    $
    2,698
 15




---



##### Table of Contents




    
    Any failure by the company and its subsidiaries to make any payment of principal,
interest and other sums due under the facility within three calendar days of the date
when such payment is due;
    
    Any breach by the company or any of its subsidiaries of certain covenants,
representations and warranties;
    
    Any default and acceleration of any indebtedness owed by the company or any of its
subsidiaries to any person (other than the bank group) which is in excess of
$1,000,000;
    
    Any final judgment against the company or any of its subsidiaries in excess of
$1,000,000 which has not been insured to the reasonable satisfaction of the
Administrative Agent;
    
    Any bankruptcy (voluntary or involuntary) of the company or any of its subsidiaries;
    
    Any material adverse change in the business or financial condition of the company and its subsidiaries; or
    
    Any change in control of the company.
 Acquisition term loan
  16




---



##### Table of Contents



Term loan
  Revolver
  Excess cash flow recapture
  Outstanding borrowings
  Outstanding
    
    Interestprincipal
    
    rate
    
    Interest rate option and election dateJune 30, 2005Acquisition term loan
    
    $
    48,163
    
    
    
    5.96
    %
    
    90-day LIBOR Rate option elected on May 3, 2005Term loan
    
    
    7,500
    
    
    
    5.71
    %
    
    90-day LIBOR Rate option elected on May 3, 2005Revolver (portion)
    
    
    2,500
    
    
    
    5.63
    %
    
    30-day LIBOR Rate option elected on June 2, 2005
 17




---



##### Table of Contents



Outstanding
    
    Interestprincipal
    
    rate
    
    Interest rate option and election dateRevolver (portion)
    
    
    513
    
    
    
    6.00
    %
    
    Base Rate option; election date not applicable$
    58,676December 31, 2004Acquisition term loan
    
    $
    52,092
    
    
    
    5.41
    %
    
    90-day LIBOR Rate option elected on November 1, 2004Term loan
    
    
    7,750
    
    
    
    5.16
    %
    
    90-day LIBOR Rate option elected on November 1, 2004Revolver
    
    
    10,000
    
    
    
    5.28
    %
    
    30-day LIBOR Rate option elected on  December 1, 2004$
    69,842
   Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Interest cost
    
    $
    1,076
    
    
    $
    977
    
    
    $
    2,076
    
    
    $
    1,954Expected return on plan assets
    
    
    (996
    )
    
    
    (979
    )
    
    
    (2,077
    )
    
    
    (1,958
    )Recognized actuarial loss
    
    
    400
    
    
    
    327
    
    
    
    800
    
    
    
    654Net periodic benefit cost
    
    $
    480
    
    
    $
    325
    
    
    $
    799
    
    
    $
    650
    Balance at December 31, 2004
    
    $
    422Expenditures charged against accrual
    
    
    (316
    )Balance at June 30, 2005
    
    $
    106
    18




---



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19




---



##### Table of Contents



20




---



##### Table of Contents



Three months ended June 30,2005
    
    2004% of
    
    
    
    
    
    % of$ thousands
    
    revenues
    
    $ thousands
    
    revenuesContract revenue (Systems and Services)
    
    $
    74,539
    
    
    
    97.8
    %
    
    $
    63,065
    
    
    
    97.1
    %Product sales (Metrigraphics)
    
    
    1,649
    
    
    
    2.2
    %
    
    
    1,885
    
    
    
    2.9
    %Total revenue
    
    
    76,188
    
    
    
    100.0
    %
    
    
    64,950
    
    
    
    100.0
    %Gross profit/margin on contract revenue (1)
    
    
    11,592
    
    
    
    15.6
    %
    
    
    8,907
    
    
    
    14.1
    %Gross profit/margin on product sales (1)
    
    
    352
    
    
    
    21.3
    %
    
    
    526
    
    
    
    27.9
    %Total gross profit/margin (1)
    
    
    11,944
    
    
    
    15.7
    %
    
    
    9,443
    
    
    
    14.5
    %Selling, general and administrative expenses
    
    
    6,686
    
    
    
    8.8
    %
    
    
    4,935
    
    
    
    7.6
    %Amortization of intangible assets
    
    
    765
    
    
    
    1.0
    %
    
    
    381
    
    
    
    0.6
    %Operating income
    
    
    4,493
    
    
    
    5.9
    %
    
    
    4,117
    
    
    
    6.3
    %Interest expense, net
    
    
    (1,046
    )
    
    
    (1.4
    )%
    
    
    (361
    )
    
    
    (0.5
    )%Other income, net
    
    
    2,077
    
    
    
    2.7
    %
    
    
    56
    
    
    
    0.1
    %Income before provision for income taxes
    
    $
    5,524
    
    
    
    7.3
    %
    
    $
    3,812
    
    
    
    5.9
    %
 Six months ended June 30,2005
    
    2004% of
    
    
    
    
    
    % of$ thousands
    
    revenues
    
    $ thousands
    
    revenuesContract revenue (Systems and Services)
    
    $
    146,378
    
    
    
    97.8
    %
    
    $
    123,702
    
    
    
    97.4
    %Product sales (Metrigraphics)
    
    
    3,352
    
    
    
    2.2
    %
    
    
    3,316
    
    
    
    2.6
    %Total revenue
    
    
    149,730
    
    
    
    100.0
    %
    
    
    127,018
    
    
    
    100.0
    %Gross profit/margin on contract revenue (1)
    
    
    22,625
    
    
    
    15.5
    %
    
    
    17,707
    
    
    
    14.3
    %Gross profit/margin on product sales (1)
    
    
    646
    
    
    
    19.3
    %
    
    
    816
    
    
    
    24.6
    %Total gross profit/margin (1)
    
    
    23,271
    
    
    
    15.5
    %
    
    
    18,523
    
    
    
    14.6
    %Selling, general and administrative expenses
    
    
    12,707
    
    
    
    8.5
    %
    
    
    10,270
    
    
    
    8.1
    %Amortization of intangible assets
    
    
    1,519
    
    
    
    1.0
    %
    
    
    762
    
    
    
    0.6
    %Operating income
    
    
    9,045
    
    
    
    6.0
    %
    
    
    7,491
    
    
    
    5.9
    %Interest expense, net
    
    
    (2,132
    )
    
    
    (1.4
    )%
    
    
    (574
    )
    
    
    (0.5
    )%Other income, net
    
    
    2,102
    
    
    
    1.4
    %
    
    
    437
    
    
    
    0.4
    %Income before provision for income taxes
    
    $
    9,015
    
    
    
    6.0
    %
    
    $
    7,354
    
    
    
    5.8
    %
 (1)
    
    These amounts represent a percentage of contract revenues, product sales and total
revenues, respectively. 21




---



##### Table of Contents



Revenues
  Contract revenues (Systems and Services segment)
  Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Defense and intelligence agencies
    
    $
    59,978
    
    
    $
    51,937
    
    
    $
    115,992
    
    
    $
    101,750Federal civilian agencies
    
    
    8,560
    
    
    
    7,094
    
    
    
    17,775
    
    
    
    13,556State and local government agencies
    
    
    5,356
    
    
    
    3,990
    
    
    
    11,050
    
    
    
    8,326Other
    
    
    645
    
    
    
    44
    
    
    
    1,561
    
    
    
    70$
    74,539
    
    
    $
    63,065
    
    
    $
    146,378
    
    
    $
    123,702
     Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Time and materials
    
    
    57
    %
    
    
    62
    %
    
    
    56
    %
    
    
    62
    %Cost reimbursable
    
    
    20
    %
    
    
    22
    %
    
    
    20
    %
    
    
    22
    %Fixed price,
including
service-type
contracts
    
    
    23
    %
    
    
    16
    %
    
    
    24
    %
    
    
    16
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Prime contract
    
    
    66
    %
    
    
    70
    %
    
    
    68
    %
    
    
    70
    %Sub-contract
    
    
    34
    %
    
    
    30
    %
    
    
    32
    %
    
    
    30
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 22




---



##### Table of Contents



Product revenues (Metrigraphics segment)
  Funded backlog
  Gross margin
    23




---



##### Table of Contents



Selling, general and administrative expenses
  Amortization of intangible assets
  Operating income (loss)
   Interest income and expense
   Other income, net
  24




---



##### Table of Contents



Income tax provision
  25




---



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Operating activities
         26




---



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Investing activities
   Financing activities
       27




---



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
    
    Any failure by the company and its subsidiaries to make any payment of principal,
interest and other sums due under the facility within three calendar days of the date
when such payment is due;
    
    Any breach by the company or any of its subsidiaries of certain covenants,
representations and warranties;
    
    Any default and acceleration of any indebtedness owed by the company or any of its
subsidiaries to any person (other than the bank group) which is in excess of
$1,000,000;
    
    Any final judgment against the company or any of its subsidiaries in excess of
$1,000,000 which has not been insured to the reasonable satisfaction of the
Administrative Agent;
    
    Any bankruptcy (voluntary or involuntary) of the company or any of its subsidiaries; and
    
    Any material adverse change in the business or financial condition of the company and its subsidiaries; or
    
    Any change in control of the company.
    Commitments
  Payments due by periodLess than
    
    Two to three
    
    Four to fiveTotal
    
    one year
    
    years
    
    years
    
    ThereafterRevolver
    
    $
    3,013
    
    
    $
    3,013
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term debt
    
    
    55,663
    
    
    
    8,357
    
    
    
    16,714
    
    
    
    30,592
    
    
    
    Operating leases
    
    
    19,689
    
    
    
    3,493
    
    
    
    6,557
    
    
    
    4,383
    
    
    
    5,256Total contractual obligations
    
    $
    78,365
    
    
    $
    14,863
    
    
    $
    23,271
    
    
    $
    34,975
    
    
    $
    5,256
 28




---



##### Table of Contents



29




---



##### Table of Contents



Revenue Recognition
    Accounting for Performance of Construction-Type and
Certain Production-Type Contracts
     Valuation Allowances
  30




---



##### Table of Contents



Intangible and Other Long-lived Assets
   Goodwill
  Business Combinations
  Deferred Taxes
  Pensions
  31




---



##### Table of Contents



Accounting Changes and Error Corrections: a Replacement
of Accounting Principles Board (APB) Opinion No. 20 and FASB Statement No. 3
 Share-Based Payment Accounting for Stock Issued to
Employees
 FACTORS THAT MAY AFFECT FUTURE RESULTS
  Our Revenue is Highly Concentrated on the Department of Defense and Other Federal
Agencies, and a Significant Portion of Our Revenue is Derived From a Few Customers.
Decreases in Their Budgets, Changes in Program Priorities or Military Base Closures
Could Affect Our Results
   32




---



##### Table of Contents



33




---



##### Table of Contents



We Must Bear the Risk of Various Pricing Structures Associated With Government
Contracts.
   
    
    adequately estimate the resources required to complete a project;
    
    properly determine the scope of an engagement; or
    
    complete our contractual obligation in a manner consistent with the project plan.
   Our Contracts and Subcontracts with Government Agencies Are Subject to a
Competitive Bidding Process and to Termination Without Cause by the Government.
   34




---



##### Table of Contents



35




---



##### Table of Contents



We Are Subject to a High Level of Government Regulations and Audits Under Our
Government Contracts and Subcontracts.
  Loss of Key Personnel Could Limit Our Growth.
  Our Failure to Obtain and Maintain Necessary Security Clearances May Limit Our
Ability to Perform Classified Work for Government Clients, Which Could Harm Our
Business.
  Security Breaches in Sensitive Government Systems Could Harm Our Business.
  Our Employees May Engage in Misconduct or Other Improper Activities, Which Could
Harm Our Business.
  36




---



##### Table of Contents



We Are Involved in Various Litigation Matters Which, If Not Resolved in Our Favor,
Could Harm Our Business.
  If We Are Unable to Effectively and Efficiently Eliminate the Material Weaknesses
and Significant Deficiencies in Our Internal Controls and Procedures, We May Not Be
Able to Accurately Report Our Financial Results. As a Result, Current and Potential
Stockholders Could Lose Confidence in Our Financial Reporting, Which Would Harm Our
Business and the Trading Price of Our Stock.
   37




---



##### Table of Contents



We Operate in Highly Competitive Markets and May Have Difficulties Entering New
Markets.
  38




---



##### Table of Contents



We May Be Subject to Product or Service Liability Claims.
  Economic Events May Affect Our Business Segments.
  Our Products and Services Could Become Obsolete Due to Rapid Technological Changes
in the Industry.
  39




---



##### Table of Contents



Our Financing Requirements May Increase and We Could Have Limited Access to
Capital Markets.
  Accounting System Upgrades and Conversions May Delay Billing and Collections of
our Accounts Receivable.
  Our Quarterly Operating Results May Vary Significantly From Quarter to
Quarter.
  
    
    the number, size and timing of client projects commenced and completed during a quarter;
    
    bid and proposal efforts undertaken;
    
    progress on fixed-price projects during a given quarter;
    
    employee productivity and hiring, attrition and utilization rates;
    
    accuracy of estimates of resources required to complete ongoing projects;
    
    the trend in interest rates; and
    
    general economic conditions.
  We May Not Make or Complete Future Mergers, Acquisitions or Strategic Alliances or
Investments.
  40




---



##### Table of Contents




    
    the difficulty of assimilating the acquired operations and personnel;
    
    the potential disruption of our ongoing business and diversion of resources
and management time;
    
    the potential failure to retain key personnel of the acquired business;
    
    the difficulty of integrating systems, operations and cultures; and
    
    the potential impairment of relationships with customers as a result of
changes in management or otherwise arising out of such transactions.
  The Market Price of Our Common Stock May Be Volatile.
  
    
    decreases in our earnings and revenue or quarterly operating results;
    
    changes in estimates by analysts;
    
    market conditions in the industry;
    
    announcements and new developments by competitors; and
    
    regulatory reviews.
  41




---



##### Table of Contents



Information Technology Access Controls
 Evidence of Compliance with Approval Authority Policy
 Evidence of the Performance of Review Controls
 42




---



##### Table of Contents



Assessment of the Effectiveness of Internal Controls
  -
    
    Implementation of a remediation action plan, which is substantially complete;-
    
    Significant changes in and strengthening of management processes and methodologies to the assessment process;-
    
    Earlier completion of activities;-
    
    Risk evaluation and mitigation plans, and-
    
    Application of additional resources.
   43




---



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44




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##### Table of Contents



(a)
    
    The Annual Meeting of Stockholders of the company was held on May 5, 2005.(b)
    
    Proxies representing 7,853,851 shares were received (total shares
outstanding as of the Record Date were 8,876,717). The results of the voting
at the Annual Meeting as to the approval of a proposal to fix the number of
directors at seven and to elect two Class III directors (Mr. Kenneth F. Kames
and Mr. James P. Regan) for the term of three years are set forth below:Fix the number of directors at seven and elect Mr. Kames and Mr. Regan:
 (i)
    
    Mr. KamesVotes for
    
    
    7,787,740Votes withheld
    
    
    66,111(ii)
    
    Mr. ReganVotes for
    
    
    7,804,898Votes withheld
    
    
    48,953
  45




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##### Table of Contents



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.
 46




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##### Table of Contents



DYNAMICS RESEARCH CORPORATION(Registrant)Date:
August 8, 2005
    
    /s/ David KeleherDavid KeleherSenior Vice President and Chief Financial Officer/s/ Francis MurphyFrancis MurphyVice President, Corporate Controller and ChiefAccounting Officer
 47




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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.
    
    Furnished 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.
    
    Furnished herewith
 48