##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR
THE TRANSTITION PERIOD FROM TO  TO
 Commission file number 000-02479
 
 DYNAMICS RESEARCH CORPORATION
  MASSACHUSETTS
    
    04-2211809(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 60 FRONTAGE ROAD, ANDOVER, MASSACHUSETTS 01810-5498
 978-475-9090
 
 þ o
  o þ o
 o þ




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##### 



DYNAMICS RESEARCH CORPORATION
FORM 10-Q
For the Quarterly Period Ended June 30, 2007
Table of Contents
 PagePart I. Financial Information
    
    
    3Item 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006 (unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the three and six months ended June
30, 2007 and 2006 (unaudited)
    
    
    4Condensed Consolidated Statements of Changes in Shareholders Equity and Comprehensive
Income for the three months ended June 30, 2007 and 2006 (unaudited)
    
    
    5Condensed Consolidated Statements of Changes in Shareholders Equity and Comprehensive
Income for the six months ended June 30, 2007 and 2006 (unaudited)
    
    
    6Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and
2006 (unaudited)
    
    
    7Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23Part II. Other Information
    
    
    24Item 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 4. Submissions of Matters to a Vote of Security Holders
    
    
    25Item 6. Exhibits
    
    
    25Ex-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEOEx-32.2 Section 906 Certification of CFO
  Special Note on Factors Affecting Future Results
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 DYNAMICS RESEARCH CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (unaudited)
 (dollars in thousands, except share data)
 June 30,
    
    
    December 31,2007
    
    
    2006(unaudited)
    
    
    (restated)(See Note 1)AssetsCurrent assetsCash and cash equivalents
    
    $
    286
    
    
    $
    7,887Accounts receivable, net of allowances of $782 at June
30, 2007 and $793 at December 31, 2006
    
    
    33,238
    
    
    
    27,072Unbilled expenditures and fees on contracts in process
    
    
    33,723
    
    
    
    36,174Prepaid expenses and other current assets
    
    
    3,686
    
    
    
    2,933Total current assets
    
    
    70,933
    
    
    
    74,066Noncurrent assetsProperty, plant and equipment, net
    
    
    10,673
    
    
    
    11,509Goodwill
    
    
    63,055
    
    
    
    63,055Intangible assets, net
    
    
    4,370
    
    
    
    5,671Deferred tax asset
    
    
    1,507
    
    
    
    1,507Other noncurrent assets
    
    
    3,594
    
    
    
    4,044Total noncurrent assets
    
    
    83,199
    
    
    
    85,786Total assets
    
    $
    154,132
    
    
    $
    159,852Liabilities and stockholders equityCurrent liabilitiesAccounts payable
    
    $
    14,051
    
    
    $
    18,195Accrued compensation and employee benefits
    
    
    13,585
    
    
    
    14,473Deferred taxes
    
    
    8,039
    
    
    
    9,864Other accrued expenses
    
    
    4,369
    
    
    
    5,201Total current liabilities
    
    
    40,044
    
    
    
    47,733Long-term liabilitiesLong-term debt
    
    
    13,027
    
    
    
    15,000Other long-term liabilities
    
    
    12,673
    
    
    
    12,805Total long-term liabilities
    
    
    25,700
    
    
    
    27,805Total liabilities
    
    
    65,744
    
    
    
    75,538Commitments and contingencies  Note 11
    
    
    
    
    
    
    Stockholders equityPreferred
stock, $0.10 par value: 5,000,000 shares authorized; no shares issued
and outstandingCommon stock, $0.10 par value; 30,000,000 shares
authorized; 9,464,489 and 9,314,962 shares issued and
outstanding at June 30, 2007 and December 31, 2006,
respectively
    
    
    946
    
    
    
    931Capital in excess of par value
    
    
    49,066
    
    
    
    47,644Accumulated other comprehensive loss
    
    
    (9,206
    )
    
    
    (9,206
    )Retained earnings
    
    
    47,582
    
    
    
    44,945Total stockholders equity
    
    
    88,388
    
    
    
    84,314Total liabilities and stockholders equity
    
    $
    154,132
    
    
    $
    159,852
  3




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##### Table of Contents



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




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##### Table of Contents



DYNAMICS RESEARCH CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
 FOR THE THREE MONTHS ENDED JUNE 30, 2007 AND 2006
 (unaudited)
 (in thousands)
 AccumulatedCapital in
    
    
    otherCommon stock
    
    
    excess of
    
    
    comprehensive
    
    
    RetainedShares
    
    
    Par value
    
    
    par value
    
    
    loss
    
    
    earnings
    
    
    TotalBalance March 31, 2007 (unaudited)
    
    
    9,378
    
    
    $
    938
    
    
    $
    48,310
    
    
    $
    (9,206
    )
    
    $
    46,068
    
    
    $
    86,110Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,514
    
    
    
    1,514Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,514Issuance of common stock through
stock options exercised and
employee stock purchase
transactions
    
    
    42
    
    
    
    4
    
    
    
    337
    
    
    
    
    
    
    
    
    
    
    
    341Issuance of restricted stock
    
    
    52
    
    
    
    5
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    Forfeiture of restricted stock
    
    
    (6
    )
    
    
    (1
    )
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Release of restricted stock
    
    
    (2
    )
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    (18
    )Share-based compensation expense
    
    
    
    
    
    
    
    
    
    
    407
    
    
    
    
    
    
    
    
    
    
    
    407Tax benefit from stock options
exercised and employee stock purchase transactions
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    34Balance June 30, 2007 (unaudited)
    
    
    9,464
    
    
    $
    946
    
    
    $
    49,066
    
    
    $
    (9,206
    )
    
    $
    47,582
    
    
    $
    88,388
 AccumulatedCapital in
    
    
    otherCommon stock
    
    
    excess of
    
    
    comprehensive
    
    
    RetainedShares
    
    
    Par value
    
    
    par value
    
    
    loss
    
    
    earnings
    
    
    TotalBalance March 31, 2006 (unaudited)
    
    
    9,189
    
    
    $
    919
    
    
    $
    44,696
    
    
    $
    (10,768
    )
    
    $
    41,798
    
    
    $
    76,645Impact of
restatement  Note 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    549
    
    
    
    549Balance March 31, 2006 (unaudited)
    
    
    9,189
    
    
    
    919
    
    
    
    44,696
    
    
    
    (10,768
    )
    
    
    42,347
    
    
    
    77,194Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    176
    
    
    
    176Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    176Issuance of common stock through
stock options exercised and
employee stock purchase
transactions
    
    
    51
    
    
    
    5
    
    
    
    534
    
    
    
    
    
    
    
    
    
    
    
    539Issuance of restricted stock
    
    
    17
    
    
    
    2
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    Forfeiture of restricted stock
    
    
    (4
    )
    
    
    (1
    )
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Release of restricted stock
    
    
    (1
    )
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    (14
    )Share-based compensation expense
    
    
    
    
    
    
    
    
    
    
    591
    
    
    
    
    
    
    
    
    
    
    
    591Tax benefit from stock options
exercised and employee stock
purchase transactions
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    49Balance June 30, 2006 (unaudited)
    
    
    9,252
    
    
    $
    925
    
    
    $
    45,855
    
    
    $
    (10,768
    )
    
    $
    42,523
    
    
    $
    78,535
  5




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##### Table of Contents



DYNAMICS RESEARCH CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
 FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
 (unaudited)
 (in thousands)
 AccumulatedCapital in
    
    
    
    
    
    
    otherCommon stock
    
    
    excess of
    
    
    Unearned
    
    
    comprehensive
    
    
    RetainedShares
    
    
    Par value
    
    
    par value
    
    
    compensation
    
    
    loss
    
    
    earnings
    
    
    TotalBalance December 31, 2006 (audited)
    
    
    9,315
    
    
    $
    931
    
    
    $
    47,644
    
    
    $
    
    
    
    $
    (9,206
    )
    
    $
    44,396
    
    
    $
    83,765Impact of
restatement  Note 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    549
    
    
    
    549Balance December 31, 2006 (unaudited)
    
    
    9,315
    
    
    
    931
    
    
    
    47,644
    
    
    
    
    
    
    
    (9,206
    )
    
    
    44,945
    
    
    
    84,314Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,637
    
    
    
    2,637Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,637Issuance of common stock through
stock options exercised and employee
stock purchase transactions
    
    
    94
    
    
    
    10
    
    
    
    754
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    764Issuance of restricted stock
    
    
    84
    
    
    
    8
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeiture of restricted stock
    
    
    (10
    )
    
    
    (1
    )
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Release of restricted stock
    
    
    (19
    )
    
    
    (2
    )
    
    
    (191
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (193
    )Share-based compensation expense
    
    
    
    
    
    
    
    
    
    
    803
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    803Tax benefit from stock options
exercised and employee stock
purchase transactions
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63Balance June 30, 2007 (unaudited)
    
    
    9,464
    
    
    $
    946
    
    
    $
    49,066
    
    
    $
    
    
    
    $
    (9,206
    )
    
    $
    47,582
    
    
    $
    88,388
 AccumulatedCapital in
    
    
    
    
    
    
    otherCommon stock
    
    
    excess of
    
    
    Unearned
    
    
    comprehensive
    
    
    RetainedShares
    
    
    Par value
    
    
    par value
    
    
    compensation
    
    
    loss
    
    
    earnings
    
    
    TotalBalance December 31, 2005 (audited)
    
    
    9,097
    
    
    $
    910
    
    
    $
    45,571
    
    
    $
    (1,850
    )
    
    $
    (10,768
    )
    
    $
    40,324
    
    
    $
    74,187Impact of
restatement  Note 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    549
    
    
    
    549Balance December 31, 2005 (unaudited)
    
    
    9,097
    
    
    
    910
    
    
    
    45,571
    
    
    
    (1,850
    )
    
    
    (10,768
    )
    
    
    40,873
    
    
    
    74,736Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,650
    
    
    
    1,650Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,650Issuance of common stock through
stock options exercised and employee
stock purchase transactions
    
    
    114
    
    
    
    11
    
    
    
    1,128
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,139Issuance of restricted stock
    
    
    70
    
    
    
    7
    
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeiture of restricted stock
    
    
    (16
    )
    
    
    (2
    )
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Release of restricted stock
    
    
    (13
    )
    
    
    (1
    )
    
    
    (177
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (178
    )Share-based compensation expense
    
    
    
    
    
    
    
    
    
    
    1,032
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,032Tax benefit from stock options
exercised and employee stock
purchase transactions
    
    
    
    
    
    
    
    
    
    
    156
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156Reversal of unearned compensation
upon adoption of SFAS No. 123(R)
    
    
    
    
    
    
    
    
    
    
    (1,850
    )
    
    
    1,850
    
    
    
    
    
    
    
    
    
    
    
    Balance June 30, 2006 (unaudited)
    
    
    9,252
    
    
    $
    925
    
    
    $
    45,855
    
    
    $
    
    
    
    $
    (10,768
    )
    
    $
    42,523
    
    
    $
    78,535
  6




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##### Table of Contents



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




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##### Table of Contents



DYNAMICS RESEARCH CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except per share amounts)
 NOTE 1. BASIS OF PRESENTATION AND RESTATEMENT
    As of December 31, 2006Previously
    
    
    AsReported
    
    
    RestatedChanges to Consolidated Balance Sheet:Deferred income taxes
    
    $
    11,698
    
    
    $
    9,864Other accrued expenses
    
    $
    3,916
    
    
    $
    5,201Total current liabilities
    
    $
    48,282
    
    
    $
    47,733Total liabilities
    
    $
    76,087
    
    
    $
    75,538Retained earnings
    
    $
    44,396
    
    
    $
    44,945Total stockholders equity
    
    $
    83,765
    
    
    $
    84,314
  NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
   8




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##### Table of Contents



DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)
  NOTE 3. SHAREHOLDERS EQUITY
 Earnings Per Share
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Weighted average shares outstanding  Basic
    
    
    9,317,297
    
    
    
    9,079,011
    
    
    
    9,308,558
    
    
    
    9,057,556Diluted effect of stock options and restricted
stock grants
    
    
    333,622
    
    
    
    360,943
    
    
    
    301,017
    
    
    
    368,713Weighted average shares outstanding  Diluted
    
    
    9,650,919
    
    
    
    9,439,954
    
    
    
    9,609,575
    
    
    
    9,426,269
 Comprehensive Income
  9




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##### Table of Contents



DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)
 NOTE 4. SHARE-BASED COMPENSATION
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of products and services
    
    $
    154
    
    
    $
    298
    
    
    $
    280
    
    
    $
    600Selling, general and administrative
    
    
    253
    
    
    
    293
    
    
    
    523
    
    
    
    578Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (146
    )Total share-based compensation expense
    
    $
    407
    
    
    $
    591
    
    
    $
    803
    
    
    $
    1,032
  Stock Options
    
    
    Restricted StockWeighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    Average
    
    
    Number of
    
    
    AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Fair ValueOutstanding at March 31, 2007
    
    
    1,061,367
    
    
    $
    8.34
    
    
    
    193,151
    
    
    $
    11.77Granted
    
    
    
    
    
    $
    
    
    
    
    51,600
    
    
    $
    12.26Exercised/Vested
    
    
    (26,535
    )
    
    $
    6.02
    
    
    
    (15,234
    )
    
    $
    15.36Cancelled
    
    
    (3,750
    )
    
    $
    17.81
    
    
    
    (6,220
    )
    
    $
    12.67Outstanding at June 30, 2007
    
    
    1,031,082
    
    
    $
    8.37
    
    
    
    223,297
    
    
    $
    11.61Outstanding at December 31, 2006
    
    
    1,140,679
    
    
    $
    8.37
    
    
    
    212,264
    
    
    $
    12.86Granted
    
    
    
    
    
    $
    
    
    
    
    84,100
    
    
    $
    11.42Exercised/Vested
    
    
    (58,880
    )
    
    $
    7.14
    
    
    
    (62,677
    )
    
    $
    15.40Cancelled
    
    
    (50,717
    )
    
    $
    9.92
    
    
    
    (10,390
    )
    
    $
    12.68Outstanding at June 30, 2007
    
    
    1,031,082
    
    
    $
    8.37
    
    
    
    223,297
    
    
    $
    11.61Outstanding at March 31, 2006
    
    
    1,182,509
    
    
    $
    8.52
    
    
    
    229,274
    
    
    $
    13.17Granted
    
    
    
    
    
    $
    
    
    
    
    17,500
    
    
    $
    14.69Exercised/Vested
    
    
    (15,568
    )
    
    $
    7.66
    
    
    
    (9,399
    )
    
    $
    15.77Cancelled
    
    
    (7,166
    )
    
    $
    18.75
    
    
    
    (4,404
    )
    
    $
    15.03Outstanding at June 30, 2006
    
    
    1,159,775
    
    
    $
    8.47
    
    
    
    232,971
    
    
    $
    13.14Outstanding at December 31, 2005
    
    
    1,239,393
    
    
    $
    8.51
    
    
    
    221,816
    
    
    $
    13.60Granted
    
    
    
    
    
    $
    
    
    
    
    69,900
    
    
    $
    14.30Exercised/Vested
    
    
    (43,568
    )
    
    $
    6.74
    
    
    
    (42,407
    )
    
    $
    17.00Cancelled
    
    
    (36,050
    )
    
    $
    11.86
    
    
    
    (16,338
    )
    
    $
    13.73Outstanding at June 30, 2006
    
    
    1,159,775
    
    
    $
    8.47
    
    
    
    232,971
    
    
    $
    13.14
  10




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##### Table of Contents



DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)
 NOTE 5. SUPPLEMENTAL BALANCE SHEET INFORMATION
  June 30,
    
    
    December 31,2007
    
    
    2006Property and equipment, net:Production equipment
    
    $
    11,943
    
    
    $
    11,942Software
    
    
    11,508
    
    
    
    11,283Furniture and other equipment
    
    
    9,019
    
    
    
    8,792Leasehold improvements
    
    
    2,424
    
    
    
    2,137Property and equipment
    
    
    34,894
    
    
    
    34,154Less accumulated depreciation
    
    
    (24,221
    )
    
    
    (22,645
    )Property and equipment, net
    
    $
    10,673
    
    
    $
    11,509Other noncurrent assets:Deferred compensation plan investment
    
    $
    1,760
    
    
    $
    1,627Equity investments
    
    
    715
    
    
    
    787Unbilled expenditures and fees on contracts in process
    
    
    600
    
    
    
    1,038Other
    
    
    519
    
    
    
    592Other noncurrent assets
    
    $
    3,594
    
    
    $
    4,044Accrued compensation and employee benefits:Accrued payroll and payroll taxes
    
    $
    5,933
    
    
    $
    5,956Accrued vacation
    
    
    5,225
    
    
    
    4,343Accrued pension liability
    
    
    
    
    
    
    2,000Other
    
    
    2,427
    
    
    
    2,174Accrued compensation and employee benefits
    
    $
    13,585
    
    
    $
    14,473Other accrued expenses:Amount outstanding under letter of credit
    
    $
    991
    
    
    $
    1,016Accrued income taxes
    
    
    794
    
    
    
    946Deferred gain on sale of building
    
    
    676
    
    
    
    676Other
    
    
    1,908
    
    
    
    2,563Other accrued expenses
    
    $
    4,369
    
    
    $
    5,201Other long-term liabilities:Deferred gain on sale of building
    
    $
    5,070
    
    
    $
    5,407Accrued pension liability
    
    
    3,558
    
    
    
    1,933Deferred compensation plan liability
    
    
    1,760
    
    
    
    1,627Long-term contract payments
    
    
    710
    
    
    
    2,700Other
    
    
    1,575
    
    
    
    1,138Other long-term liabilities
    
    $
    12,673
    
    
    $
    12,805
 NOTE 6. GOODWILL AND INTANGIBLE ASSETS
  11




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##### Table of Contents



DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)
  Remainder of 2007
    
    $
    1,3012008
    
    $
    2,0382009
    
    $
    1,031
  NOTE 7. INCOME TAXES
     NOTE 8. DEFINED BENEFIT PENSION PLAN
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Interest cost on projected benefit obligation
    
    $
    1,006
    
    
    $
    1,002
    
    
    $
    2,012
    
    
    $
    2,004Expected return on plan assets
    
    
    (1,464
    )
    
    
    (1,262
    )
    
    
    (2,927
    )
    
    
    (2,524
    )Recognized actuarial loss
    
    
    270
    
    
    
    440
    
    
    
    540
    
    
    
    880Net periodic pension cost
    
    $
    (188
    )
    
    $
    180
    
    
    $
    (375
    )
    
    $
    360
  12




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##### Table of Contents



DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)
  NOTE 9. FINANCING ARRANGEMENTS
  NOTE 10. BUSINESS SEGMENT, MAJOR CUSTOMERS AND RELATED PARTY INFORMATION
 Business Segment
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues from external customersSystems and Services
    
    $
    57,030
    
    
    $
    65,720
    
    
    $
    112,942
    
    
    $
    132,479Metrigraphics
    
    
    980
    
    
    
    1,558
    
    
    
    1,848
    
    
    
    3,012$
    58,010
    
    
    $
    67,278
    
    
    $
    114,790
    
    
    $
    135,491Gross profit (loss)Systems and Services
    
    $
    9,570
    
    
    $
    7,367
    
    
    $
    18,549
    
    
    $
    17,181Metrigraphics
    
    
    (220
    )
    
    
    302
    
    
    
    (500
    )
    
    
    458$
    9,350
    
    
    $
    7,669
    
    
    $
    18,049
    
    
    $
    17,639Operating income (loss)Systems and Services
    
    $
    3,394
    
    
    $
    899
    
    
    $
    6,338
    
    
    $
    3,659Metrigraphics
    
    
    (458
    )
    
    
    31
    
    
    
    (951
    )
    
    
    (94
    )$
    2,936
    
    
    $
    930
    
    
    $
    5,387
    
    
    $
    3,565
  Major Customers
  Three Months Ended June 30,2007
    
    
    2006Revenue
    
    
    %
    
    
    Revenue
    
    
    %U.S. Air Force Aeronautical Systems Center
    
    $
    6,139
    
    
    
    11
    %
    
    $
    14,742
    
    
    
    22
    %
 Six Months Ended June 30,2007
    
    
    2006Revenue
    
    
    %
    
    
    Revenue
    
    
    %U.S. Air Force Aeronautical Systems Center
    
    $
    13,706
    
    
    
    12
    %
    
    $
    26,713
    
    
    
    20
    %
  June 30,
    
    
    December 31,2007
    
    
    2006U.S. Air Force Aeronautical Systems Center
    
    $
    4,218
    
    
    $
    2,159
  13




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##### Table of Contents



DYNAMICS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands, except share amounts)
 Related Party
 HMR HMR HMR HMR HMR
 HMR HMR
  June 30,
    
    
    December 31,2007
    
    
    2006Accounts receivable
    
    $
    2,952
    
    
    $
    870Unbilled expenditures and fees on contracts in process
    
    $
    1,838
    
    
    $
    967Prepaid
expenses and other current assets
    
    $
    860
    
    
    $
    110
 NOTE 11. COMMITMENTS AND CONTINGENCIES
  14




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##### Table of Contents



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




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  OVERVIEW
     CRITICAL ACCOUNTING POLICIES
  16




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##### Table of Contents




    
    Revenue recognition
    
    Goodwill and other intangible assets
    
    Income taxes and deferred taxes
    
    Pension obligations
  Income Taxes and Deferred Taxes
   RESULTS OF OPERATIONS
  Three Months Ended June 30,2007
    
    

2006$(1)
    
    
    %(1)
    
    
    $(1)
    
    
    %(1)Contract revenue
    
    $
    57.0
    
    
    
    98.3
    %
    
    $
    65.7
    
    
    
    97.7
    %Product sales
    
    
    1.0
    
    
    
    1.7
    
    
    
    1.6
    
    
    
    2.3Total revenue
    
    $
    58.0
    
    
    
    100.0
    %
    
    $
    67.3
    
    
    
    100.0
    %Gross profit on contract revenue (2)
    
    $
    9.6
    
    
    
    16.8
    %
    
    $
    7.4
    
    
    
    11.2
    %Gross profit on product sales (2)
    
    
    (0.2
    )
    
    
    (22.4
    )
    
    
    0.3
    
    
    
    19.4Total gross profit (2)
    
    
    9.4
    
    
    
    16.1
    
    
    
    7.7
    
    
    
    11.4Selling, general and administrative expenses
    
    
    5.8
    
    
    
    9.9
    
    
    
    6.0
    
    
    
    9.0Amortization of intangible assets
    
    
    0.7
    
    
    
    1.1
    
    
    
    0.7
    
    
    
    1.0Operating income
    
    
    2.9
    
    
    
    5.1
    
    
    
    0.9
    
    
    
    1.4Interest expense, net
    
    
    (0.5
    )
    
    
    (0.8
    )
    
    
    (0.6
    )
    
    
    (0.8
    )Other income, net
    
    
    0.1
    
    
    
    0.2
    
    
    
    
    
    
    
    Provision for income taxes
    
    
    (1.1
    )
    
    
    (1.8
    )
    
    
    (0.2
    )
    
    
    (0.3
    )Net income
    
    $
    1.5
    
    
    
    2.6
    %
    
    $
    0.2
    
    
    
    0.3
    %
 17




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##### Table of Contents



Six Months Ended June 30,2007
    
    

2006$(1)
    
    
    %(1)
    
    
    $(1)
    
    
    %(1)Contract revenue
    
    $
    112.9
    
    
    
    98.4
    %
    
    $
    132.5
    
    
    
    97.8
    %Product sales
    
    
    1.8
    
    
    
    1.6
    
    
    
    3.0
    
    
    
    2.2Total revenue
    
    $
    114.8
    
    
    
    100.0
    %
    
    $
    135.5
    
    
    
    100.0
    %Gross profit on contract revenue (2)
    
    $
    18.5
    
    
    
    16.4
    %
    
    $
    17.2
    
    
    
    13.0
    %Gross profit on product sales (2)
    
    
    (0.5
    )
    
    
    (27.1
    )
    
    
    0.5
    
    
    
    15.2Total gross profit (2)
    
    
    18.0
    
    
    
    15.7
    
    
    
    17.6
    
    
    
    13.0Selling, general and administrative expenses
    
    
    11.4
    
    
    
    9.9
    
    
    
    12.7
    
    
    
    9.4Amortization of intangible assets
    
    
    1.3
    
    
    
    1.1
    
    
    
    1.4
    
    
    
    1.0Operating income
    
    
    5.4
    
    
    
    4.7
    
    
    
    3.6
    
    
    
    2.6Interest expense, net
    
    
    (0.9
    )
    
    
    (0.8
    )
    
    
    (1.1
    )
    
    
    (0.8
    )Other income, net
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    0.3Provision for income taxes
    
    
    (1.9
    )
    
    
    (1.7
    )
    
    
    (1.2
    )
    
    
    (0.9
    )Cumulative benefit of accounting change
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    0.1Net income
    
    $
    2.6
    
    
    
    2.3
    %
    
    $
    1.7
    
    
    
    1.2
    %
 
 (1)
    
    Totals may not add due to rounding.(2)
    
    These amounts represent a percentage of contract revenues, product sales and total revenues, respectively. Revenues
  Contract Revenues
  Three Months Ended June 30,2007
    
    
    2006$(1)
    
    
    %(1)
    
    
    $(1)
    
    
    %(1)National defense and intelligence agencies
    
    $
    45.2
    
    
    
    79.3
    %
    
    $
    53.5
    
    
    
    81.4
    %Federal civilian agencies
    
    
    7.9
    
    
    
    13.9
    
    
    
    9.0
    
    
    
    13.8State and local government agencies
    
    
    3.8
    
    
    
    6.6
    
    
    
    3.0
    
    
    
    4.6Other
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.3Total contract revenue
    
    $
    57.0
    
    
    
    100.0
    %
    
    $
    65.7
    
    
    
    100.0
    %
 Six Months Ended June 30,2007
    
    
    2006$(1)
    
    
    %(1)
    
    
    $(1)
    
    
    %(1)National defense and intelligence agencies
    
    $
    89.9
    
    
    
    79.6
    %
    
    $
    108.5
    
    
    
    81.8
    %Federal civilian agencies
    
    
    15.5
    
    
    
    13.7
    
    
    
    16.3
    
    
    
    12.3State and local government agencies
    
    
    7.3
    
    
    
    6.5
    
    
    
    7.3
    
    
    
    5.5Other
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.3Total contract revenue
    
    $
    112.9
    
    
    
    100.0
    %
    
    $
    132.5
    
    
    
    100.0
    %
 
 (1)
    
    Totals may not add due to rounding. 18




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##### Table of Contents



HMR
    Three MonthsEnded
    
    Three Months Ended
    
    Six Months EndedMarch 31,
    
    June 30,
    
    June 30,2007(1)
    
    2007
    
    2006
    
    2007
    
    2006Time and materials
    
    
    57
    %
    
    
    56
    %
    
    
    61
    %
    
    
    56
    %
    
    
    61
    %Cost reimbursable
    
    
    22
    
    
    
    22
    
    
    
    20
    
    
    
    22
    
    
    
    20Fixed price, including
service type contracts
    
    
    21
    
    
    
    22
    
    
    
    19
    
    
    
    22
    
    
    
    19100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Prime contract
    
    
    57
    %
    
    
    55
    %
    
    
    69
    %
    
    
    56
    %
    
    
    68
    %Sub-contract
    
    
    43
    
    
    
    45
    
    
    
    31
    
    
    
    44
    
    
    
    32100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 
 (1)
    
    Percentages for prime contract and sub-contact for the three months ended March 31, 2007 have
been reclassified to conform to current period presentation. Product Sales
  19




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Funded Backlog
  Gross Profit
    Selling, general and administrative expenses
  Amortization of intangible assets
  Interest expense, net
  20




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Other income (expense), net
 HMR
 Income tax provision
  LIQUIDITY AND CAPITAL RESOURCES
     Operating activities
    21




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##### Table of Contents



Investing activities
   Financing activities
   22




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##### Table of Contents



RECENT ACCOUNTING PRONOUNCEMENTS
   
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 Item 4. CONTROLS AND PROCEDURES
   23




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PART II. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
  
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  ApproximateTotal Number
    
    
    Dollar Valueof Shares
    
    
    of Shares thatPurchased as
    
    
    May Yet BePart of
    
    
    PurchasedTotal Number
    
    
    Average Price
    
    
    Publicly
    
    
    Under theof Shares
    
    
    Paid Per
    
    
    Announced
    
    
    ProgramsPeriod
    
    Purchased
    
    
    Share
    
    
    Programs
    
    
    (in millions)April 1, 2007 to April 30, 2007
    
    
    792
    
    
    $
    11.20
    
    
    
    
    
    
    $
    May 1, 2007 to May 31, 2007
    
    
    130
    
    
    $
    13.05
    
    
    
    
    
    
    
    June 1, 2007 to June 30, 2007
    
    
    548
    
    
    $
    13.06
    
    
    
    
    
    
    
    Total
    
    
    1,470
    
    
    $
    12.06
    
    
    
    
    
    
    $
    
  24




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##### Table of Contents



Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   Number of Shares
    
    Number ofVoted
    
    SharesFor
    
    WithheldClass II Directors:Dr. Francis J. Aguilar
    
    
    7,652,589
    
    
    
    205,616Mr. John S. Anderegg, Jr.
    
    
    7,710,021
    
    
    
    148,184Mr. Nickolas Stavropoulos
    
    
    7,730,647
    
    
    
    127,558
  Class I Directors:Lieutenant General Charles
P. McCausland (U.S.A.F., retired)General George T. Babbitt, Jr.
(U.S.A.F., retired)Class III Directors:Mr. Kenneth F. KamesMr. James P. Regan
 
 Item 6. EXHIBITS
  31.1
    
    Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 25




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##### Table of Contents



SIGNATURES
  DYNAMICS RESEARCH CORPORATION
(Registrant)Date: August 9, 2007
    /s/ David KeleherDavid KeleherSenior Vice President, Chief Financial Officer
and Treasurer/s/ Francis MurphyFrancis MurphyVice President, Corporate Controller and Chief
Accounting Officer 26