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| R      | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | OR                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| £ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | FOR THE TRANSITION PERIOD FROM                                                                                           TO                  |

| MASSACHUSETTS                                                  | 04-2211809                           |
|----------------------------------------------------------------|--------------------------------------|
| (State or other jurisdiction of Incorporation or organization) | (I.R.S. Employer Identification No.) |

| Large accelerated filer | £                                               | Accelerated filer  R              |
|-------------------------|------------------------------------------------------|---------------------------------------------|
| Non-accelerated filer   | £ (Do not check if a smaller reporting company) | Smaller reporting company  £ |

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DYNAMICS RESEARCH CORPORATION

|                          |     |                                                                                                                                                                   | Page   |
|-------------------------------|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Part I. Financial Information |     |
|                          | Item 1.  | Financial Statements                                                                                                                                                   |   |
|                          |     | Condensed Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009                                                                       | 3      |
|                          |     | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009 (unaudited)                                            | 4      |
|                          |     | Condensed Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the three months ended September 30, 2010 and 2009 (unaudited) | 5      |
|                          |     | Condensed Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the nine months ended September 30, 2010 and 2009 (unaudited)  | 6      |
|                          |     | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited)                                                      | 7      |
|                          |     | Notes to Condensed Consolidated Financial Statements (unaudited)                                                                                                       | 8      |
|                          | Item 2.  | Management’s Discussion and Analysis of Financial Condition and Results of Operations                                                                            | 17     |
|                          | Item 3.  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                             | 24     |
|                          | Item 4.  | Controls and Procedures                                                                                                                                                | 24     |
|                          |     |
| Part II. Other Information    |     |
|                          | Item 1.  | Legal Proceedings                                                                                                                                                      | 25     |
|                          | Item 1A. | Risk Factors                                                                                                                                                           | 25     |
|                          | Item 2.  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                            | 25     |
|                          | Item 6.  | Exhibits                                                                                                                                                               | 26     |

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Table of Contents

DYNAMICS RESEARCH CORPORATION

|                                                                                                                                                                                    |   | September 30,2010 |    |   | December 31, 2009 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|--------|-------------------|--------|
|                                                                                                                                                                                    |   | (unaudited)       |    |   |              |   |
| Assets                                                                                                                                                                                  |   |              |    |   |              |   |
| Current assets                                                                                                                                                                          |   |              |    |   |              |   |
| Cash and cash equivalents                                                                                                                                                               |   | $                 | 22,539  |   |              | $      | 55 |   |
| Contract receivables, net                                                                                                                                                               |   |              | 52,071  |   |              |   | 72,569 |   |
| Prepaid expenses and other current assets                                                                                                                                               |   |              | 2,965   |   |              |   | 5,702 |   |
| Discontinued operations                                                                                                                                                                 |   |              | -       |   |              |   | 2,058 |   |
| Total current assets                                                                                                                                                                    |   |              | 77,575  |   |              |   | 80,384 |   |
| Noncurrent assets                                                                                                                                                                       |   |              |    |   |              |   |   |   |
| Property and equipment, net                                                                                                                                                             |   |              | 12,843  |   |              |   | 13,915 |   |
| Goodwill                                                                                                                                                                                |   |              | 97,641  |   |              |   | 97,641 |   |
| Intangible assets, net                                                                                                                                                                  |   |              | 2,918   |   |              |   | 4,074 |   |
| Deferred tax asset                                                                                                                                                                      |   |              | 4,133   |   |              |   | 4,252 |   |
| Other noncurrent assets                                                                                                                                                                 |   |              | 3,751   |   |              |   | 3,335 |   |
| Total noncurrent assets                                                                                                                                                                 |   |              | 121,286 |   |              |   | 123,217 |   |
| Total assets                                                                                                                                                                            |   | $                 | 198,861 |   |              | $      | 203,601 |   |
|                                                                                                                                                                                    |   |              |    |   |              |   |   |   |
| Liabilities and stockholders' equity                                                                                                                                                    |   |              |    |   |              |   |   |   |
| Current liabilities                                                                                                                                                                     |   |              |    |   |              |   |   |   |
| Current portion of long-term debt                                                                                                                                                       |   | $                 | 8,000   |   |              | $      | 8,000 |   |
| Accounts payable                                                                                                                                                                        |   |              | 17,473  |   |              |   | 18,299 |   |
| Accrued compensation and employee benefits                                                                                                                                              |   |              | 15,057  |   |              |   | 16,357 |   |
| Deferred taxes                                                                                                                                                                          |   |              | 467     |   |              |   | 7,046 |   |
| Other accrued expenses                                                                                                                                                                  |   |              | 9,329   |   |              |   | 3,708 |   |
| Discontinued operations                                                                                                                                                                 |   |              | -       |   |              |   | 186 |   |
| Total current liabilities                                                                                                                                                               |   |              | 50,326  |   |              |   | 53,596 |   |
| Long-term liabilities                                                                                                                                                                   |   |              |    |   |              |   |   |   |
| Long-term debt                                                                                                                                                                          |   |              | 16,000  |   |              |   | 23,973 |   |
| Other long-term liabilities                                                                                                                                                             |   |              | 28,138  |   |              |   | 31,936 |   |
| Total long-term liabilities                                                                                                                                                             |   |              | 44,138  |   |              |   | 55,909 |   |
| Total liabilities                                                                                                                                                                       |   |              | 94,464  |   |              |   | 109,505 |   |
| Commitments and contingencies                                                                                                                                                           |   |              |    |   |              |   |   |   |
| Stockholders' equity                                                                                                                                                                    |   |              |    |   |              |   |   |   |
| Preferred stock, $0.10 par value per share; 5,000,000 shares authorized; no shares issued and outstanding                                                                               |   |              | -       |   |              |   | - |   |
| Common stock, $0.10 par value per share; 30,000,000 shares authorized; 10,040,026 and 9,923,357 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively |   |              | 1,004   |   |              |   | 992 |   |
| Capital in excess of par value                                                                                                                                                          |   |              | 54,160  |   |              |   | 52,580 |   |
| Accumulated other comprehensive loss, net of taxes                                                                                                                                      |   |              | (20,510 | )      |              |   | (20,505 | ) |
| Retained earnings                                                                                                                                                                       |   |              | 69,743  |   |              |   | 61,029 |   |
| Total stockholders' equity                                                                                                                                                              |   |              | 104,397 |   |              |   | 94,096 |   |
| Total liabilities and stockholders' equity                                                                                                                                              |   | $                 | 198,861 |   |              | $      | 203,601 |   |

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Table of Contents

DYNAMICS RESEARCH CORPORATION

|                                                                |   | Three Months Ended |       |   | Nine Months Ended |   |
|---------------------------------------------------------------------|--------|--------------------|------------|--------|-------------------|--------|
|                                                                |   | September 30,      |       |   | September 30,     |   |
|                                                                |   | 2010               |       |   | 2009              |   |   | 2010 |   |   | 2009 |   |
| Revenue                                                             |   | $                  | 68,420     |   |              | $      | 67,504 |   |   | $ | 202,312 |   |   | $ | 202,835 |   |
| Cost of revenue                                                     |   |               | 57,630     |   |              |   | 56,882 |   |   |   | 170,568 |   |   |   | 169,840 |   |
| Gross profit                                                        |   |               | 10,790     |   |              |   | 10,622 |   |   |   | 31,744 |   |   |   | 32,995 |   |
|                                                                |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses                        |   |               | 5,197      |   |              |   | 5,755 |   |   |   | 16,233 |   |   |   | 18,277 |   |
| Amortization of intangible assets                                   |   |               | 385        |   |              |   | 809 |   |   |   | 1,156 |   |   |   | 2,754 |   |
| Operating income                                                    |   |               | 5,208      |   |              |   | 4,058 |   |   |   | 14,355 |   |   |   | 11,964 |   |
| Interest expense, net                                               |   |               | (339       | )      |              |   | (434 | ) |   |   | (1,082 | ) |   |   | (1,530 | ) |
| Other income, net                                                   |   |               | 151        |   |              |   | 264 |   |   |   | 234 |   |   |   | 585 |   |
| Income from continuing operations before provision for income taxes |   |               | 5,020      |   |              |   | 3,888 |   |   |   | 13,507 |   |   |   | 11,019 |   |
| Provision for income taxes                                          |   |               | 2,014      |   |              |   | 992 |   |   |   | 5,185 |   |   |   | 3,992 |   |
| Income from continuing operations                                   |   |               | 3,006      |   |              |   | 2,896 |   |   |   | 8,322 |   |   |   | 7,027 |   |
| Effect of discontinued operations, net of tax                       |   |               | 87         |   |              |   | 59 |   |   |   | 392 |   |   |   | (251 | ) |
| Net income                                                          |   | $                  | 3,093      |   |              | $      | 2,955 |   |   | $ | 8,714 |   |   | $ | 6,776 |   |
|                                                                |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per share (1)                                              |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                               |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Income from continuing operations                                   |   | $                  | 0.30       |   |              | $      | 0.30 |   |   | $ | 0.84 |   |   | $ | 0.73 |   |
| Effect of discontinued operations, net of tax (Note 3)              |   |               | 0.01       |   |              |   | 0.01 |   |   |   | 0.04 |   |   |   | (0.03 | ) |
| Net income                                                          |   | $                  | 0.31       |   |              | $      | 0.31 |   |   | $ | 0.88 |   |   | $ | 0.70 |   |
| Diluted                                                             |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Income from continuing operations                                   |   | $                  | 0.30       |   |              | $      | 0.29 |   |   | $ | 0.83 |   |   | $ | 0.71 |   |
| Effect of discontinued operations, net of tax (Note 3)              |   |               | 0.01       |   |              |   | 0.01 |   |   |   | 0.04 |   |   |   | (0.03 | ) |
| Net income                                                          |   | $                  | 0.31       |   |              | $      | 0.30 |   |   | $ | 0.87 |   |   | $ | 0.69 |   |
|                                                                |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding                                 |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                               |   |               | 9,937,470  |   |              |   | 9,678,983 |   |   |   | 9,879,905 |   |   |   | 9,631,659 |   |
| Diluted                                                             |   |               | 10,060,980 |   |              |   | 9,983,825 |   |   |   | 10,057,211 |   |   |   | 9,840,605 |   |

| (1) | Totals may not add due to rounding. |
|-----|-------------------------------------|

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Table of Contents

DYNAMICS RESEARCH CORPORATION

|                                                     |   | Common Stock Shares |   |   | Common Stock Par Value |   |   | Capital in Excess of Par Value |   |   | Accumulated Other Comprehensive Loss |   |   | Retained Earnings |    |   | Total  |   |
|----------------------------------------------------------|--------|---------------------|--------|--------|------------------------|--------|--------|--------------------------------|--------|--------|--------------------------------------|--------|--------|-------------------|---------|--------|--------|--------|
| Balance at June 30, 2010                                 |   |                | 10,018 |   |                   | $      | 1,002  |                           |   | $      | 53,789                               |   |   | $                 | (20,508 | )      |   | $      | 66,650 |   |   | $ | 100,933 |   |
| Comprehensive income:                                    |   |                |   |   |                   |   |   |                           |   |   |                                 |   |   |              |    |   |   |   |   |   |   |   |   |   |
| Net income                                               |   |                | -      |   |                   |   | -      |                           |   |   | -                                    |   |   |              | -       |   |   |   | 3,093 |   |   |   | 3,093 |   |
| Other comprehensive income, net of tax:                  |   |                |   |   |                   |   |   |                           |   |   |                                 |   |   |              |    |   |   |   |   |   |   |   |   |   |
| Changes in unrealized loss on derivative instruments     |   |                | -      |   |                   |   | -      |                           |   |   | -                                    |   |   |              | (2      | )      |   |   | - |   |   |   | (2 | ) |
| Comprehensive income                                     |   |                |   |   |                   |   |   |                           |   |   |                                 |   |   |              |    |   |   |   |   |   |   |   | 3,091 |   |
| Issuance of common stock through stock plan transactions |   |                | 26     |   |                   |   | 2      |                           |   |   | 227                                  |   |   |              | -       |   |   |   | - |   |   |   | 229 |   |
| Issuance of restricted stock                             |   |                | 3      |   |                   |   | -      |                           |   |   | -                                    |   |   |              | -       |   |   |   | - |   |   |   | - |   |
| Forfeiture of restricted stock                           |   |                | (3     | )      |                   |   | -      |                           |   |   | -                                    |   |   |              | -       |   |   |   | - |   |   |   | - |   |
| Release of restricted stock                              |   |                | (4     | )      |                   |   | -      |                           |   |   | (41                                  | )      |   |              | -       |   |   |   | - |   |   |   | (41 | ) |
| Share-based compensation                                 |   |                | -      |   |                   |   | -      |                           |   |   | 189                                  |   |   |              | -       |   |   |   | - |   |   |   | 189 |   |
| Tax benefit from stock plan transactions                 |   |                | -      |   |                   |   | -      |                           |   |   | (4                                   | )      |   |              | -       |   |   |   | - |   |   |   | (4 | ) |
| Balance at September 30, 2010                            |   |                | 10,040 |   |                   | $      | 1,004  |                           |   | $      | 54,160                               |   |   | $                 | (20,510 | )      |   | $      | 69,743 |   |   | $ | 104,397 |   |

|                                                     |   | Common Stock Shares |   |   | Common Stock Par Value |   |   | Capital in Excess of Par Value |   |   | Accumulated Other Comprehensive Loss |   |   | Retained Earnings |    |   | Total  |   |
|----------------------------------------------------------|--------|---------------------|--------|--------|------------------------|--------|--------|--------------------------------|--------|--------|--------------------------------------|--------|--------|-------------------|---------|--------|--------|--------|
| Balance at June 30, 2009                                 |   |                | 9,762  |   |                   | $      | 976    |                           |   | $      | 52,433                               |   |   | $                 | (22,118 | )      |   | $      | 54,678 |   |   | $ | 85,969 |   |
| Comprehensive income:                                    |   |                |   |   |                   |   |   |                           |   |   |                                 |   |   |              |    |   |   |   |   |   |   |   |   |   |
| Net income                                               |   |                | -      |   |                   |   | -      |                           |   |   | -                                    |   |   |              | -       |   |   |   | 2,955 |   |   |   | 2,955 |   |
| Other comprehensive income, net of tax:                  |   |                |   |   |                   |   |   |                           |   |   |                                 |   |   |              |    |   |   |   |   |   |   |   |   |   |
| Changes in unrealized loss on derivative instruments     |   |                | -      |   |                   |   | -      |                           |   |   | -                                    |   |   |              | (25     | )      |   |   | - |   |   |   | (25 | ) |
| Comprehensive income                                     |   |                |   |   |                   |   |   |                           |   |   |                                 |   |   |              |    |   |   |   |   |   |   |   | 2,930 |   |
| Issuance of common stock through stock plan transactions |   |                | 60     |   |                   |   | 7      |                           |   |   | 549                                  |   |   |              | -       |   |   |   | - |   |   |   | 556 |   |
| Issuance of restricted stock                             |   |                | 23     |   |                   |   | 2      |                           |   |   | (2                                   | )      |   |              | -       |   |   |   | - |   |   |   | - |   |
| Forfeiture of restricted stock                           |   |                | (3     | )      |                   |   | -      |                           |   |   | -                                    |   |   |              | -       |   |   |   | - |   |   |   | - |   |
| Release of restricted stock                              |   |                | (4     | )      |                   |   | (1     | )                              |   |   | (48                                  | )      |   |              | -       |   |   |   | - |   |   |   | (49 | ) |
| Share-based compensation                                 |   |                | -      |   |                   |   | -      |                           |   |   | 193                                  |   |   |              | -       |   |   |   | - |   |   |   | 193 |   |
| Tax benefit from stock plan transactions                 |   |                | -      |   |                   |   | -      |                           |   |   | 46                                   |   |   |              | -       |   |   |   | - |   |   |   | 46 |   |
| Balance at September 30, 2009                            |   |                | 9,838  |   |                   | $      | 984    |                           |   | $      | 53,171                               |   |   | $                 | (22,143 | )      |   | $      | 57,633 |   |   | $ | 89,645 |   |

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Table of Contents

DYNAMICS RESEARCH CORPORATION

|                                                     |   | Common Stock Shares |   |   | Common Stock Par Value |   |   | Capital in Excess of Par Value |   |   | Accumulated Other Comprehensive Loss |   |   | Retained Earnings |    |   | Total  |   |
|----------------------------------------------------------|--------|---------------------|--------|--------|------------------------|--------|--------|--------------------------------|--------|--------|--------------------------------------|--------|--------|-------------------|---------|--------|--------|--------|
| Balance at December 31, 2009                             |   |                | 9,923  |   |                   | $      | 992    |                           |   | $      | 52,580                               |   |   | $                 | (20,505 | )      |   | $      | 61,029 |   |   | $ | 94,096 |   |
| Comprehensive income:                                    |   |                |   |   |                   |   |   |                           |   |   |                                 |   |   |              |    |   |   |   |   |   |   |   |   |   |
| Net income                                               |   |                | -      |   |                   |   | -      |                           |   |   | -                                    |   |   |              | -       |   |   |   | 8,714 |   |   |   | 8,714 |   |
| Other comprehensive income, net of tax:                  |   |                |   |   |                   |   |   |                           |   |   |                                 |   |   |              |    |   |   |   |   |   |   |   |   |   |
| Changes in unrealized loss on derivative instruments     |   |                | -      |   |                   |   | -      |                           |   |   | -                                    |   |   |              | (5      | )      |   |   | - |   |   |   | (5 | ) |
| Comprehensive income                                     |   |                |   |   |                   |   |   |                           |   |   |                                 |   |   |              |    |   |   |   |   |   |   |   | 8,709 |   |
| Issuance of common stock through stock plan transactions |   |                | 124    |   |                   |   | 12     |                           |   |   | 1,078                                |   |   |              | -       |   |   |   | - |   |   |   | 1,090 |   |
| Issuance of restricted stock                             |   |                | 28     |   |                   |   | 3      |                           |   |   | (3                                   | )      |   |              | -       |   |   |   | - |   |   |   | - |   |
| Forfeiture of restricted stock                           |   |                | (16    | )      |                   |   | (1     | )                              |   |   | 1                                    |   |   |              | -       |   |   |   | - |   |   |   | - |   |
| Release of restricted stock                              |   |                | (19    | )      |                   |   | (2     | )                              |   |   | (209                                 | )      |   |              | -       |   |   |   | - |   |   |   | (211 | ) |
| Share-based compensation                                 |   |                | -      |   |                   |   | -      |                           |   |   | 553                                  |   |   |              | -       |   |   |   | - |   |   |   | 553 |   |
| Tax benefit from stock plan transactions                 |   |                | -      |   |                   |   | -      |                           |   |   | 160                                  |   |   |              | -       |   |   |   | - |   |   |   | 160 |   |
| Balance at September 30, 2010                            |   |                | 10,040 |   |                   | $      | 1,004  |                           |   | $      | 54,160                               |   |   | $                 | (20,510 | )      |   | $      | 69,743 |   |   | $ | 104,397 |   |

|                                                     |   | Common Stock Shares |   |   | Common Stock Par Value |   |   | Capital in Excess of Par Value |   |   | Accumulated Other Comprehensive Loss |   |   | Retained Earnings |    |   | Total  |   |
|----------------------------------------------------------|--------|---------------------|--------|--------|------------------------|--------|--------|--------------------------------|--------|--------|--------------------------------------|--------|--------|-------------------|---------|--------|--------|--------|
| Balance at December 31, 2008                             |   |                | 9,675  |   |                   | $      | 967    |                           |   | $      | 51,919                               |   |   | $                 | (22,268 | )      |   | $      | 50,857 |   |   | $ | 81,475 |   |
| Comprehensive income:                                    |   |                |   |   |                   |   |   |                           |   |   |                                 |   |   |              |    |   |   |   |   |   |   |   |   |   |
| Net income                                               |   |                | -      |   |                   |   | -      |                           |   |   | -                                    |   |   |              | -       |   |   |   | 6,776 |   |   |   | 6,776 |   |
| Other comprehensive income, net of tax:                  |   |                |   |   |                   |   |   |                           |   |   |                                 |   |   |              |    |   |   |   |   |   |   |   |   |   |
| Changes in unrealized gain on derivative instruments     |   |                | -      |   |                   |   | -      |                           |   |   | -                                    |   |   |              | 125     |   |   |   | - |   |   |   | 125 |   |
| Comprehensive income                                     |   |                |   |   |                   |   |   |                           |   |   |                                 |   |   |              |    |   |   |   |   |   |   |   | 6,901 |   |
| Issuance of common stock through stock plan transactions |   |                | 96     |   |                   |   | 10     |                           |   |   | 811                                  |   |   |              | -       |   |   |   | - |   |   |   | 821 |   |
| Issuance of restricted stock                             |   |                | 100    |   |                   |   | 10     |                           |   |   | (10                                  | )      |   |              | -       |   |   |   | - |   |   |   | - |   |
| Forfeiture of restricted stock                           |   |                | (15    | )      |                   |   | (1     | )                              |   |   | 1                                    |   |   |              | -       |   |   |   | - |   |   |   | - |   |
| Release of restricted stock                              |   |                | (18    | )      |                   |   | (2     | )                              |   |   | (152                                 | )      |   |              | -       |   |   |   | - |   |   |   | (154 | ) |
| Share-based compensation                                 |   |                | -      |   |                   |   | -      |                           |   |   | 547                                  |   |   |              | -       |   |   |   | - |   |   |   | 547 |   |
| Tax benefit from stock plan transactions                 |   |                | -      |   |                   |   | -      |                           |   |   | 55                                   |   |   |              | -       |   |   |   | - |   |   |   | 55 |   |
| Balance at September 30, 2009                            |   |                | 9,838  |   |                   | $      | 984    |                           |   | $      | 53,171                               |   |   | $                 | (22,143 | )      |   | $      | 57,633 |   |   | $ | 89,645 |   |

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Table of Contents

DYNAMICS RESEARCH CORPORATION

|                                                                |   | Nine Months Ended |    |
|---------------------------------------------------------------------|--------|-------------------|---------|
|                                                                |   | September 30,     |    |
|                                                                |   | 2010              |    |   | 2009 |   |
| Cash flows from operating activities:                               |   |              |    |   |   |   |
| Net income                                                          |   | $                 | 8,714   |   |   | $ | 6,776 |   |
| Effect of discontinued operations, net of tax (Note 3)              |   |              | 392     |   |   |   | (251 | ) |
| Income from continuing operations                                   |   |              | 8,322   |   |   |   | 7,027 |   |
| Adjustments to reconcile net cash provided by operating activities: |   |              |    |   |   |   |   |   |
| Depreciation                                                        |   |              | 2,660   |   |   |   | 2,180 |   |
| Amortization of intangible assets                                   |   |              | 1,156   |   |   |   | 2,754 |   |
| Share-based compensation                                            |   |              | 553     |   |   |   | 547 |   |
| Investment income from equity interest                              |   |              | (142    | ) |   |   | (316 | ) |
| Tax benefit from stock plan transactions                            |   |              | (160    | ) |   |   | (55 | ) |
| Litigation payment                                                  |   |              | -       |   |   |   | (15,000 | ) |
| Deferred income taxes                                               |   |              | (6,456  | ) |   |   | 7,000 |   |
| Other                                                               |   |              | (381    | ) |   |   | (510 | ) |
| Change in operating assets and liabilities:                         |   |              |    |   |   |   |   |   |
| Contract receivables, net                                           |   |              | 20,498  |   |   |   | (302 | ) |
| Prepaid expenses and other current assets                           |   |              | 2,737   |   |   |   | (1,734 | ) |
| Accounts payable                                                    |   |              | 1,841   |   |   |   | (2,452 | ) |
| Accrued compensation and employee benefits                          |   |              | (1,300  | ) |   |   | 3,477 |   |
| Other accrued expenses                                              |   |              | 5,570   |   |   |   | (2,857 | ) |
| Other long-term liabilities                                         |   |              | (3,427  | ) |   |   | 835 |   |
| Net cash provided by continuing operations                          |   |              | 31,471  |   |   |   | 594 |   |
| Net cash provided by (used in) discontinued operations              |   |              | (161    | ) |   |   | (705 | ) |
| Net cash provided by (used in) operating activities                 |   |              | 31,310  |   |   |   | (111 | ) |
| Cash flows from investing activities:                               |   |              |    |   |   |   |   |   |
| Purchase of business, net of cash acquired                          |   |              | -       |   |   |   | (4,250 | ) |
| Additions to property and equipment                                 |   |              | (4,266  | ) |   |   | (2,196 | ) |
| Proceeds from sale of business                                      |   |              | 1,750   |   |   |   | - |   |
| Proceeds from sale of investments and long-lived assets             |   |              | 19      |   |   |   | 210 |   |
| Dividends from equity investment                                    |   |              | 139     |   |   |   | 456 |   |
| Increase in other assets                                            |   |              | 330     |   |   |   | (114 | ) |
| Net cash used in continuing operations                              |   |              | (2,028  | ) |   |   | (5,894 | ) |
| Net cash used in discontinued operations                            |   |              | (75     | ) |   |   | (67 | ) |
| Net cash used in investing activities                               |   |              | (2,103  | ) |   |   | (5,961 | ) |
| Cash flow from financing activities:                                |   |              |    |   |   |   |   |   |
| Repayments under term loan                                          |   |              | (6,000  | ) |   |   | (6,000 | ) |
| Borrowings under revolving credit agreement                         |   |              | 34,156  |   |   |   | 50,121 |   |
| Repayments under revolving credit agreement                         |   |              | (36,129 | ) |   |   | (45,823 | ) |
| Proceeds from the exercise of stock plan transactions               |   |              | 1,090   |   |   |   | 821 |   |
| Tax benefit from stock plan transactions                            |   |              | 160     |   |   |   | 55 |   |
| Net cash used in financing activities                               |   |              | (6,723  | ) |   |   | (826 | ) |
| Net increase (decrease) in cash and cash equivalents                |   |              | 22,484  |   |   |   | (6,898 | ) |
| Cash and cash equivalents, beginning of period                      |   |              | 55      |   |   |   | 7,111 |   |
| Cash and cash equivalents, end of period                            |   | $                 | 22,539  |   |   | $ | 213 |   |

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NOTE 1. BASIS OF PRESENTATION

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Table of Contents

|                                                                 |   | Three Months Ended |   |   | Nine Months Ended |   |
|----------------------------------------------------------------------|--------|--------------------|--------|--------|-------------------|--------|
|                                                                 |   | September 30,      |   |   | September 30,     |   |
|                                                                 |   | 2010               |   |   | 2009              |   |   | 2010 |   |   | 2009 |   |
| Product revenue                                                      |   | $                  | 386    |   |              | $      | 1,733 |   |   | $ | 4,790 |   |   | $ | 4,589 |   |
|                                                                 |   |               |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before benefit for income taxes                        |   | $                  | 236    |   |              | $      | 86 |   |   | $ | 806 |   |   | $ | (471 | ) |
| (Provision) benefit for income taxes                                 |   |               | (93    | )      |              |   | (27 | ) |   |   | (322 | ) |   |   | 220 |   |
| Income (loss) from operations of discontinued operations, net of tax |   |               | 143    |   |              |   | 59 |   |   |   | 484 |   |   |   | (251 | ) |
| Loss on sale of discontinued operations, net of tax                  |   |               | (56    | )      |              |   | - |   |   |   | (92 | ) |   |   | - |   |
| Effect of discontinued operations, net of tax                        |   | $                  | 87     |   |              | $      | 59 |   |   | $ | 392 |   |   | $ | (251 | ) |

|                                      |   | December 31, |   |
|-------------------------------------------|--------|--------------|--------|
|                                      |   | 2009         |   |
| Accounts receivable                       |   | $            | 946    |   |
| Inventory                                 |   |         | 864    |   |
| Prepaid expenses and other current assets |   |         | 22     |   |
| Property and equipment, net               |   |         | 226    |   |
| Total current assets                      |   | $            | 2,058  |   |
|                                      |   |         |   |   |
| Accounts payable                          |   | $            | 186    |   |
| Total current liabilities                 |   | $            | 186    |   |

|                                                                                                    |   | September 30, |   |   | December 31, |   |
|---------------------------------------------------------------------------------------------------------|--------|---------------|--------|--------|-------------------|--------|
|                                                                                                    |   | 2010          |   |   | 2009              |   |
| Contract receivables, net                                                                               |   |          |   |   |              |   |
| Billed receivables                                                                                      |   | $             | 21,009 |   |              | $      | 28,203 |   |
| Unbilled receivables(1):                                                                                |   |          |   |   |              |   |   |   |
| Revenues recorded in excess of milestone billings on a fixed price contract with the State of Tennessee |   |          | 932    |   |              |   | 18,004 |   |
| Retainages and fee withholdings                                                                         |   |          | 236    |   |              |   | 689 |   |
| Other unbilled receivables                                                                              |   |          | 30,534 |   |              |   | 26,256 |   |
| Total unbilled receivables                                                                              |   |          | 31,702 |   |              |   | 44,949 |   |
| Allowance for doubtful accounts                                                                         |   |          | (640   | )      |              |   | (583 | ) |
| Contract receivables, net                                                                               |   | $             | 52,071 |   |              | $      | 72,569 |   |
|                                                                                                    |   |          |   |   |              |   |   |   |
| Prepaid expenses and other current assets:                                                              |   |          |   |   |              |   |   |   |
| Refundable income taxes                                                                                 |   | $             | -      |   |              | $      | 1,604 |   |
| Restricted cash                                                                                         |   |          | 343    |   |              |   | 262 |   |
| Other                                                                                                   |   |          | 2,622  |   |              |   | 3,836 |   |
| Prepaid expenses and other current assets                                                               |   | $             | 2,965  |   |              | $      | 5,702 |   |

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|                                        |   | September 30, |    |   | December 31, |   |
|---------------------------------------------|--------|---------------|---------|--------|-------------------|--------|
|                                        |   | 2010          |    |   | 2009              |   |
| Property and equipment, net:                |   |          |    |   |              |   |
| Software                                    |   | $             | 12,515  |   |              | $      | 12,107 |   |
| Furniture and other equipment               |   |          | 10,088  |   |              |   | 9,679 |   |
| Leasehold improvements                      |   |          | 7,114   |   |              |   | 6,445 |   |
| Production equipment                        |   |          | 374     |   |              |   | 440 |   |
| Property and equipment                      |   |          | 30,091  |   |              |   | 28,671 |   |
| Less accumulated depreciation               |   |          | (17,248 | )      |              |   | (14,756 | ) |
| Property and equipment, net                 |   | $             | 12,843  |   |              | $      | 13,915 |   |
|                                        |   |          |    |   |              |   |   |   |
| Other noncurrent assets:                    |   |          |    |   |              |   |   |   |
| Deferred compensation plan investments      |   | $             | 1,505   |   |              | $      | 1,378 |   |
| Equity investment                           |   |          | 981     |   |              |   | 978 |   |
| Other                                       |   |          | 1,265   |   |              |   | 979 |   |
| Other noncurrent assets                     |   | $             | 3,751   |   |              | $      | 3,335 |   |
|                                        |   |          |    |   |              |   |   |   |
| Accrued compensation and employee benefits: |   |          |    |   |              |   |   |   |
| Accrued compensation and related taxes      |   | $             | 7,879   |   |              | $      | 9,029 |   |
| Accrued vacation                            |   |          | 4,675   |   |              |   | 4,724 |   |
| Accrued pension liability                   |   |          | 536     |   |              |   | 840 |   |
| Other                                       |   |          | 1,967   |   |              |   | 1,764 |   |
| Accrued compensation and employee benefits  |   | $             | 15,057  |   |              | $      | 16,357 |   |
|                                        |   |          |    |   |              |   |   |   |
| Other accrued expenses:                     |   |          |    |   |              |   |   |   |
| Accrued income taxes                        |   | $             | 4,349   |   |              | $      | - |   |
| Deferred gain on sale of building           |   |          | 676     |   |              |   | 676 |   |
| Other                                       |   |          | 4,304   |   |              |   | 3,032 |   |
| Other accrued expenses                      |   | $             | 9,329   |   |              | $      | 3,708 |   |
|                                        |   |          |    |   |              |   |   |   |
| Other long-term liabilities:                |   |          |    |   |              |   |   |   |
| Accrued pension liability                   |   | $             | 17,935  |   |              | $      | 20,666 |   |
| Deferred gain on sale of building           |   |          | 2,874   |   |              |   | 3,381 |   |
| Deferred compensation plan liability        |   |          | 1,505   |   |              |   | 1,378 |   |
| Other                                       |   |          | 5,824   |   |              |   | 6,511 |   |
| Other long-term liabilities                 |   | $             | 28,138  |   |              | $      | 31,936 |   |

| (1) | At September 30, 2010 and December 31, 2009, $0.2 million and $0.5 million, respectively, of unbilled retainages and fee withholdings are not anticipated to be billed within one year. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|                       |   | September 30, 2010 |   |   | December 31, 2009 |   |
|----------------------------|--------|--------------------|--------|--------|-------------------|--------|
|                       |   | Carrying           |   |   | Accumulated       |   |   |   |   |   | Carrying |   |   | Accumulated |   |   |   |   |
|                       |   | Amount             |   |   | Amortization      |   |   | Net |   |   | Amount |   |   | Amortization |   |   | Net |   |
| Customer relationships     |   | $                  | 1,900  |   |              | $      | (366 | ) |   | $ | 1,534 |   |   | $ | 13,400 |   |   | $ | (11,643 | ) |   | $ | 1,757 |   |
| Customer contracts         |   |               | 3,500  |   |              |   | (2,701 | ) |   |   | 799 |   |   |   | 3,500 |   |   |   | (2,234 | ) |   |   | 1,266 |   |
| Non-competition agreements |   |               | 1,400  |   |              |   | (815 | ) |   |   | 585 |   |   |   | 1,400 |   |   |   | (349 | ) |   |   | 1,051 |   |
| 8(a) contract transition   |   |               | 130    |   |              |   | (130 | ) |   |   | - |   |   |   | 130 |   |   |   | (130 | ) |   |   | - |   |
| Total                      |   | $                  | 6,930  |   |              | $      | (4,012 | ) |   | $ | 2,918 |   |   | $ | 18,430 |   |   | $ | (14,356 | ) |   | $ | 4,074 |   |

| Remainder of 2010   |   | $ | 386   |   |
|---------------------|--------|---|-------|--------|
| 2011                |   | $ | 1,188 |   |
| 2012                |   | $ | 492   |   |
| 2013                |   | $ | 349   |   |
| 2014                |   | $ | 299   |   |
| 2015 and thereafter |   | $ | 204   |   |

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|                             |                        |   | Fair Value Measurements     |   |   |    |   |
|----------------------------------|-----------------------------|--------|-----------------------------|--------|--------|---------|--------|
|                             |                        |   | At September 30, 2010 Using |   |   |    |   |
|                             | Balance Sheet Location      |   | Level 1                     |   |   | Level 2 |   |   | Level 3 |   |   | Total |   |
| Assets:                          |                        |   |                        |   |   |    |   |   |   |   |   |   |   |
| Investments held in Rabbi Trusts | Other noncurrent assets     |   | $                           | 1,505  |   |    | $      | - |   |   | $ | - |   |   | $ | 1,505 |   |
|                             |                        |   |                        |   |   |    |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                     |                        |   |                        |   |   |    |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate swap               | Other long-term liabilities |   | $                           | -      |   |    | $      | 577 |   |   | $ | - |   |   | $ | 577 |   |

|                             |                        |   | Fair Value Measurements    |   |   |    |   |
|----------------------------------|-----------------------------|--------|----------------------------|--------|--------|---------|--------|
|                             |                        |   | At December 31, 2009 Using |   |   |    |   |
|                             | Balance Sheet Location      |   | Level 1                    |   |   | Level 2 |   |   | Level 3 |   |   | Total |   |
| Assets:                          |                        |   |                       |   |   |    |   |   |   |   |   |   |   |
| Investments held in Rabbi Trusts | Other noncurrent assets     |   | $                          | 1,378  |   |    | $      | - |   |   | $ | - |   |   | $ | 1,378 |   |
|                             |                        |   |                       |   |   |    |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                     |                        |   |                       |   |   |    |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate swap               | Other long-term liabilities |   | $                          | -      |   |    | $      | 569 |   |   | $ | - |   |   | $ | 569 |   |

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|                        |   | September 30, |   |   | December 31, |   |
|-----------------------------|--------|---------------|--------|--------|--------------|--------|
|                        |   | 2010          |   |   | 2009         |   |
| Other long-term liabilities |   | $             | 577    |   |         | $      | 569 |   |

|                                                             |   | Three Months EndedSeptember 30, |   |   | Nine Months EndedSeptember 30, |   |
|------------------------------------------------------------------|--------|---------------------------------|--------|--------|--------------------------------|--------|
|                                                             |   | 2010                            |   |   | 2009                           |   |   | 2010 |   |   | 2009 |   |
| Gain (loss) recognized in other comprehensive income, net of tax |   | $                               | (2     | )      |                           | $      | (25 | ) |   | $ | (5 | ) |   | $ | 125 |   |

|                                          |   | Three Months Ended |   |   | Nine Months Ended |   |
|-----------------------------------------------|--------|--------------------|--------|--------|-------------------|--------|
|                                          |   | September 30,      |   |   | September 30,     |   |
|                                          |   | 2010               |   |   | 2009              |   |   | 2010 |   |   | 2009 |   |
| Interest cost on projected benefit obligation |   | $                  | 1,056  |   |              | $      | 1,067 |   |   | $ | 3,163 |   |   | $ | 3,200 |   |
| Expected return on plan assets                |   |               | (1,129 | )      |              |   | (964 | ) |   |   | (3,345 | ) |   |   | (2,892 | ) |
| Recognized actuarial loss                     |   |               | 274    |   |              |   | 303 |   |   |   | 824 |   |   |   | 909 |   |
| Net periodic pension expense                  |   | $                  | 201    |   |              | $      | 406 |   |   | $ | 642 |   |   | $ | 1,217 |   |

|                                   |   | Three Months Ended |   |   | Nine Months Ended |   |
|----------------------------------------|--------|--------------------|--------|--------|-------------------|--------|
|                                   |   | September 30,      |   |   | September 30,     |   |
|                                   |   | 2010               |   |   | 2009              |   |   | 2010 |   |   | 2009 |   |
| Cost of products and services          |   | $                  | 86     |   |              | $      | 87 |   |   | $ | 261 |   |   | $ | 234 |   |
| Selling, general and administrative    |   |               | 103    |   |              |   | 106 |   |   |   | 292 |   |   |   | 313 |   |
| Total share-based compensation expense |   | $                  | 189    |   |              | $      | 193 |   |   | $ | 553 |   |   | $ | 547 |   |

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|                                             |   |      |     |   |     |   |   | Weighted    |   |   |      |   |
|--------------------------------------------------|--------|-----------|----------|--------|----------|--------|--------|-------------|--------|--------|-----------|--------|
|                                             |   |      |     |   |     |   |   | Average     |   |   |      |   |
|                                             |   |      |     |   | Weighted |   |   | Remaining   |   |   |      |   |
|                                             |   |      |     |   | Average  |   |   | Contractual |   |   | Aggregate |   |
|                                             |   | Number of |     |   | Exercise |   |   | Term        |   |   | Intrinsic |   |
|                                             |   | Shares    |     |   | Price    |   |   | (in years)  |   |   | Value     |   |
| Outstanding and exercisable at December 31, 2009 |   |      | 606,843  |   |     | $      | 9.62   |        |   |   | 1.5       |   |   | $ | 981 |   |
| Granted                                          |   |      | 30,000   |   |     | $      | 13.27  |        |   |   |      |   |   |   |   |   |
| Exercised                                        |   |      | (115,150 | )      |     | $      | 8.53   |        |   |   |      |   |   |   |   |   |
| Cancelled                                        |   |      | (2,900   | )      |     | $      | 19.35  |        |   |   |      |   |   |   |   |   |
| Outstanding at September 30, 2010                |   |      | 518,793  |   |     | $      | 10.02  |        |   |   | 1.4       |   |   | $ | 600 |   |
| Exercisable at September 30, 2010                |   |      | 488,793  |   |     | $      | 9.82   |        |   |   | 0.9       |   |   | $ | 600 |   |

|                                                      |   | Three Months Ended |   |   | Nine Months Ended |   |
|-----------------------------------------------------------|--------|--------------------|--------|--------|-------------------|--------|
|                                                      |   | September 30,      |   |   | September 30,     |   |
|                                                      |   | 2010               |   |   | 2009              |   |   | 2010 |   |   | 2009 |   |
| Amounts realized or received from stock option exercises: |   |               |   |   |              |   |   |   |   |   |   |   |
| Cash proceeds received                                    |   | $                  | 139    |   |              | $      | 465 |   |   | $ | 808 |   |   | $ | 564 |   |
| Intrinsic value realized                                  |   | $                  | 21     |   |              | $      | 114 |   |   | $ | 419 |   |   | $ | 137 |   |
| Income tax benefit realized                               |   | $                  | -      |   |              | $      | 45 |   |   | $ | 133 |   |   | $ | 53 |   |

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|                            |   |      |    |   | Weighted   |   |
|---------------------------------|--------|-----------|---------|--------|------------|--------|
|                            |   |      |    |   | Average    |   |
|                            |   | Number of |    |   | Grant-Date |   |
|                            |   | Shares    |    |   | Fair Value |   |
| Nonvested at December 31, 2009  |   |      | 165,701 |   |       | $      | 9.39 |   |
| Granted                         |   |      | 28,300  |   |       | $      | 11.00 |   |
| Vested                          |   |      | (70,978 | )      |       | $      | 9.80 |   |
| Cancelled                       |   |      | (16,501 | )      |       | $      | 9.31 |   |
| Nonvested at September 30, 2010 |   |      | 106,522 |   |       | $      | 9.55 |   |

|                                                              |   | Three Months Ended |       |   | Nine months Ended |   |
|-------------------------------------------------------------------|--------|--------------------|------------|--------|-------------------|--------|
|                                                              |   | September 30,      |       |   | September 30,     |   |
|                                                              |   | 2010               |       |   | 2009              |   |   | 2010 |   |   | 2009 |   |
|  Weighted average shares outstanding - Basic                 |   |               | 9,937,470  |   |              |   | 9,678,983 |   |   |   | 9,879,905 |   |   |   | 9,631,659 |   |
|  Diluted effect of stock options and restricted stock grants |   |               | 123,510    |   |              |   | 304,842 |   |   |   | 177,306 |   |   |   | 208,946 |   |
|  Weighted average shares outstanding - Diluted               |   |               | 10,060,980 |   |              |   | 9,983,825 |   |   |   | 10,057,211 |   |   |   | 9,840,605 |   |

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ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

|   | · | Our dependency on the Federal government and changes in federal spending priorities; |
|--------|--------|--------------------------------------------------------------------------------------|

|   | · | Failure to obtain new government contracts or retain existing contracts; |
|--------|--------|--------------------------------------------------------------------------|

|   | · | The effect of Federal government in-sourcing on our business; |
|--------|--------|---------------------------------------------------------------|

|   | · | The loss of skilled personnel; |
|--------|--------|--------------------------------|

|   | · | The risk of security breaches in systems we develop, install or maintain; |
|--------|--------|---------------------------------------------------------------------------|

|   | · | Failure by Congress to timely approve budgets governing spending by Federal agencies; |
|--------|--------|---------------------------------------------------------------------------------------|

|   | · | Risks due to government contract provisions providing for rights unfavorable to us, including the ability to terminate contracts at any time for convenience; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Potential systems or service failures that could result in liability to our company; |
|--------|--------|--------------------------------------------------------------------------------------|

|   | · | Risks associated with various, complex Federal government procurement laws and regulations; |
|--------|--------|---------------------------------------------------------------------------------------------|

|   | · | Adverse effects in the event of an unfavorable Federal audit of our contracts; |
|--------|--------|--------------------------------------------------------------------------------|

|   | · | Failure to adequately safeguard confidential information; |
|--------|--------|-----------------------------------------------------------|

|   | · | An adverse outcome related to ongoing legal proceedings; |
|--------|--------|----------------------------------------------------------|

|   | · | Competitive conditions in current markets and difficulties in entering new markets; |
|--------|--------|-------------------------------------------------------------------------------------|

|   | · | Our ability to maintain sufficient sources of financing and the risk that our financing requirements should increase; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------|

|   | · | The adverse effect on earnings should our recorded goodwill from prior investments become impaired; and |
|--------|--------|---------------------------------------------------------------------------------------------------------|

|   | · | Economic conditions in the United States and global market conditions that are beyond our control. |
|--------|--------|----------------------------------------------------------------------------------------------------|

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|                                                  |   | Three Months Ended September 30, |   |   |
|-------------------------------------------------------|--------|----------------------------------|--------|--------|
|                                                  |   | 2010                             |   |   | 2009 |   |   |
| (in millions)                                         |   | $(1)                             |   | %(1)   |   |   | $(1) |   | %(1) |   |   |
|  Revenue                                         |   | $                                | 68.4   |   |   |   |   | $ | 67.5 |   |   |   |   |
|                                                  |   |                             |   |   |   |   |   |   |   |   |   |   |   |
|  Gross profit                                    |   | $                                | 10.8   |   |   | 15.8 | % |   | $ | 10.6 |   |   | 15.7 | % |   |
|  Selling, general and administrative             |   |                             | 5.2    |   |   | 7.6 | % |   |   | 5.8 |   |   | 8.5 | % |   |
|  Amortization of intangible assets               |   |                             | 0.4    |   |   | 0.6 | % |   |   | 0.8 |   |   | 1.2 | % |   |
|  Operating income                                |   |                             | 5.2    |   |   | 7.6 | % |   |   | 4.1 |   |   | 6.0 | % |   |
|  Interest expense, net                           |   |                             | (0.3   | )      |   | (0.5 | )% |   |   | (0.4 | ) |   | (0.6 | )% |   |
|  Other income, net                               |   |                             | 0.2    |   |   | 0.2 | % |   |   | 0.3 |   |   | 0.4 | % |   |
|  Provision for income taxes                      |   |                             | 2.0    |   |   | 40.1 | % | (2) |   | 1.0 |   |   | 25.5 | % | (2) |
|  Effect of discontinued operations, net of taxes |   |                             | 0.1    |   |   | 0.1 | % |   |   | 0.1 |   |   | 0.1 | % |   |
|  Net income                                      |   | $                                | 3.1    |   |   | 4.5 | % |   | $ | 3.0 |   |   | 4.4 | % |   |

|                                                  |   | Nine Months Ended September 30, |   |   |
|-------------------------------------------------------|--------|---------------------------------|--------|--------|
|                                                  |   | 2010                            |   |   | 2009 |   |   |
| (in millions)                                         |   | $(1)                            |   | %(1)   |   |   | $(1) |   | %(1) |   |   |
|  Revenue                                         |   | $                               | 202.3  |   |   |   |   | $ | 202.8 |   |   |   |   |
|                                                  |   |                            |   |   |   |   |   |   |   |   |   |   |   |
|  Gross profit                                    |   | $                               | 31.7   |   |   | 15.7 | % |   | $ | 33.0 |   |   | 16.3 | % |   |
|  Selling, general and administrative             |   |                            | 16.2   |   |   | 8.0 | % |   |   | 18.3 |   |   | 9.0 | % |   |
|  Amortization of intangible assets               |   |                            | 1.2    |   |   | 0.6 | % |   |   | 2.8 |   |   | 1.4 | % |   |
|  Operating income                                |   |                            | 14.4   |   |   | 7.1 | % |   |   | 12.0 |   |   | 5.9 | % |   |
|  Interest expense, net                           |   |                            | (1.1   | )      |   | (0.5 | )% |   |   | (1.5 | ) |   | (0.8 | )% |   |
|  Other income, net                               |   |                            | 0.2    |   |   | 0.1 | % |   |   | 0.6 |   |   | 0.3 | % |   |
|  Provision for income taxes                      |   |                            | 5.2    |   |   | 38.4 | % | (2) |   | 4.0 |   |   | 36.2 | % | (2) |
|  Effect of discontinued operations, net of taxes |   |                            | 0.4    |   |   | 0.2 | % |   |   | (0.3 | ) |   | (0.1 | )% |   |
|  Net income                                      |   | $                               | 8.7    |   |   | 4.3 | % |   | $ | 6.8 |   |   | 3.3 | % |   |

| (1) | Totals may not add due to rounding.                                                                                            |
|-----|--------------------------------------------------------------------------------------------------------------------------------|
| (2) | The percentage of provision for income taxes relates to a percentage of income from continuing operations before income taxes. |

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|                                       |   |               |   |   |     |   |   |          |   |   | Nine Months   |   |
|--------------------------------------------|--------|--------------------|--------|--------|----------|--------|--------|---------------|--------|--------|---------------|--------|
|                                       |   | Three Months Ended |   |   | Ended    |   |
|                                       |   | March 31,          |   |   | June 30, |   |   | September 30, |   |   | September 30, |   |
| (in millions)                              |   | 2010 (1)           |   |   | 2010 (1) |   |   | 2010 (1)      |   |   | 2010 (1)      |   |
| National defense and intelligence agencies |   | $                  | 44.3   |   |     | $      | 40.6   |          |   | $      | 45.5          |   |   | $ | 130.4 |   |
| Homeland security                          |   |               | 12.9   |   |     |   | 13.2   |          |   |   | 13.5          |   |   |   | 39.7 |   |
| Federal civilian agencies                  |   |               | 6.0    |   |     |   | 6.2    |          |   |   | 5.4           |   |   |   | 17.6 |   |
| Total revenue from federal agencies        |   |               | 63.2   |   |     |   | 60.0   |          |   |   | 64.4          |   |   |   | 187.6 |   |
| State and local government agencies        |   |               | 5.4    |   |     |   | 5.3    |          |   |   | 4.0           |   |   |   | 14.7 |   |
| Other                                      |   |               | 0.0    |   |     |   | 0.0    |          |   |   | 0.0           |   |   |   | 0.0 |   |
| Total revenue                              |   | $                  | 68.6   |   |     | $      | 65.3   |          |   | $      | 68.4          |   |   | $ | 202.3 |   |

|                                       |   | Three Months Ended |   |   |     |   |
|--------------------------------------------|--------|--------------------|--------|--------|----------|--------|
|                                       |   | March 31,          |   |   | June 30, |   |   | September 30, |   |   | December 31, |   |   | Fiscal |   |
| (in millions)                              |   | 2009 (1)           |   |   | 2009 (1) |   |   | 2009 (1) |   |   | 2009 (1) |   |   | 2009 (1) |   |
| National defense and intelligence agencies |   | $                  | 40.5   |   |     | $      | 40.9 |   |   | $ | 41.5 |   |   | $ | 40.4 |   |   | $ | 163.2 |   |
| Homeland security                          |   |               | 13.4   |   |     |   | 14.2 |   |   |   | 13.9 |   |   |   | 13.1 |   |   |   | 54.6 |   |
| Federal civilian agencies                  |   |               | 7.4    |   |     |   | 6.6 |   |   |   | 6.0 |   |   |   | 6.4 |   |   |   | 26.5 |   |
| Total revenue from federal agencies        |   |               | 61.3   |   |     |   | 61.6 |   |   |   | 61.4 |   |   |   | 60.0 |   |   |   | 244.3 |   |
| State and local government agencies        |   |               | 5.8    |   |     |   | 6.5 |   |   |   | 6.0 |   |   |   | 5.7 |   |   |   | 24.0 |   |
| Other                                      |   |               | 0.1    |   |     |   | 0.1 |   |   |   | 0.1 |   |   |   | 0.1 |   |   |   | 0.3 |   |
| Total revenue                              |   | $                  | 67.2   |   |     | $      | 68.1 |   |   | $ | 67.5 |   |   | $ | 65.8 |   |   | $ | 268.7 |   |

| (1) | Totals may not add due to rounding. |
|-----|-------------------------------------|

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|                                                |   | Three Months Ended |   |   | Nine Months Ended |   |
|-----------------------------------------------------|--------|--------------------|--------|--------|-------------------|--------|
|                                                |   | September 30,      |   |   | September 30,     |   |
|                                                |   | 2010               |   |   | 2009              |   |   | 2010 |   |   | 2009 |   |
|  Fixed price, including service type contracts |   |               | 45     | %      |              |   | 40 | % |   |   | 45 | % |   |   | 38 | % |
|  Time and materials                            |   |               | 34     |   |              |   | 41 |   |   |   | 34 |   |   |   | 43 |   |
|  Cost reimbursable                             |   |               | 21     |   |              |   | 19 |   |   |   | 21 |   |   |   | 19 |   |
|                                                |   |               | 100    | %      |              |   | 100 | % |   |   | 100 | % |   |   | 100 | % |
|                                                |   |               |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
|  Prime contract                                |   |               | 73     | %      |              |   | 70 | % |   |   | 72 | % |   |   | 71 | % |
|  Sub-contract                                  |   |               | 27     |   |              |   | 30 |   |   |   | 28 |   |   |   | 29 |   |
|                                                |   |               | 100    | %      |              |   | 100 | % |   |   | 100 | % |   |   | 100 | % |

|          |   | September 30, |   |   | December 31, |   |
|---------------|--------|---------------|--------|--------|--------------|--------|
| (in millions) |   | 2010          |   |   | 2009         |   |
| Backlog:      |   |          |   |   |         |   |
| Funded        |   | $             | 158.0  |   |         | $      | 158.5 |   |
| Unfunded      |   |          | 268.2  |   |         |   | 276.0 |   |
| Total         |   | $             | 426.2  |   |         | $      | 434.5 |   |

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

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Table of Contents

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

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

|                                    |   |        |   |   |          |   |   | Total Number |   |   | Approximate              |   |
|-----------------------------------------|--------|-------------|--------|--------|---------------|--------|--------|-------------------|--------|--------|--------------------------|--------|
|                                    |   |        |   |   |          |   |   | of Shares         |   |   | Dollar Value             |   |
|                                    |   |        |   |   |          |   |   | Purchased as      |   |   | of Shares that |   |
|                                    |   |  Total |   |   |  Average |   |   | Part of           |   |   | May Yet Be               |   |
|                                    |   | Number      |   |   | Price         |   |   | Publicly          |   |   | Purchased                |   |
|                                    |   | of Shares   |   |   | Paid Per      |   |   | Announced         |   |   | Under the                |   |
| Period                                  |   | Purchased   |   |   | Share         |   |   | Programs          |   |   | Programs                 |   |
| July 1, 2010 to July 31, 2010           |   |        | 190    |   |          | $      | 12.62  |              |   |   | -                        |   |   | $ | - |   |
| August 1, 2010 to August 31, 2010       |   |        | 7,129  |   |          | $      | 9.96   |              |   |   | -                        |   |   |   | - |   |
| September 1, 2010 to September 30, 2010 |   |        | 1,017  |   |          | $      | 10.48  |              |   |   | -                        |   |   |   | - |   |
| Total                                   |   |        | 8,336  |   |          | $      | 10.09  |              |   |   | -                        |   |   | $ | - |   |

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ITEM 6. EXHIBITS

| 18.1   | Letter re change in accounting principles                                                                                                                                                |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                     |
| 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.                                   |

|                              | DYNAMICS RESEARCH CORPORATION                                     |
|-----------------------------------|-------------------------------------------------------------------|
|                              | (Registrant)                                                      |
|                              |                                                              |
|                              |                                                              |
| Date:  November 3, 2010 | /s/ David Keleher                                                 |
|                              | Senior Vice President, Chief Financial Officer and Treasurer      |
|                              | (Principal Financial Officer)                                     |
|                              |                                                              |
| Date:  November 3, 2010 | /s/ Shaun N. McCarthy                                             |
|                              | Vice President, Corporate Controller and Chief Accounting Officer |
|                              | (Principal Accounting Officer)                                    |
|                              |                                                              |
|                              |                                                              |

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