##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
   Form 10-K
   þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission file number
    000-02479
   DYNAMICS RESEARCH
    CORPORATION
 (Exact Name of Registrant as
    Specified in Its Charter)
  Massachusetts

04-2211809(State or other Jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)60 Frontage Road
    Andover, Massachusetts

01810-5498(Zip Code)(Address of Principal Executive
    Offices)   Registrants telephone number, including area code
 (978) 475-9090
   Securities registered pursuant to Section 12(b) of the
    Act:
    Securities registered pursuant to Section 12(g) of the
    Act:
   o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ
     DOCUMENTS
    INCORPORATED BY REFERENCE




---



##### 



DYNAMICS RESEARCH
    CORPORATION
  ANNUAL REPORT ON
    FORM 10-K
    FOR THE YEAR ENDED DECEMBER 31, 2006
  
  PagePart IItem1.

Business


31A.

Risk
    Factors


141B.

Unresolved Staff
    Comments


202.

Properties


203.

Legal
    Proceedings


204.

Submission of
    Matters to a Vote of Security Holders


21Part IIItem5.

Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


226.

Selected Financial
    Data


247.

Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


267A.

Quantitative and
    Qualitative Disclosures About Market Risk


378.

Financial
    Statements and Supplementary Data


389.

Changes in and
    Disagreements With Accountants on Accounting and Financial
    Disclosure


799A.

Controls and
    Procedures


799B.

Other
    Information


81Part IIIItem10

Directors,
    Executive Officers and Corporate Governance


8111.

Executive
    Compensation


8112.

Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


8113.

Certain
    Relationships and Related Transactions, and Director
    Independence


8114.

Principal
    Accounting Fees and Services


81Part IVItem15.

Exhibits and
    Financial Statement Schedules


82Ex-23.1 Consent of Grant Thornton LLPEx-31.1 Section 302 Certification of the Chief Executive OfficerEx-31.2 Section 302 Certification of the Chief Financial OfficerEx-32.1 Section 906 Certification of the Chief Executive OfficerEx-32.2 Section 906 Certification of the Chief Financial Officer    FORWARD-LOOKING
    STATEMENTS
  Form 10-K (Form 10-K) Form 10-K
 2




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##### Table of Contents



PART I  Item 1.
    BUSINESS  OVERVIEW
  Form 10-K
            Form 10-K. Form 10-K
  http://www.drc.com Form 10-K, Form 10-Q Form 8-K 1-800-SEC-0330. http://www.sec.gov
 3




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##### Table of Contents



Form 10-K
  MARKETS
              MAJOR
    CUSTOMERS
    National Defense
    and Intelligence Sector
   4




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##### Table of Contents



Aeronautical
    Systems Center, U.S. Air Force Materiel
    Command
  F/A-22, F-16, HMR HMR HMR
  HMR
    HMR
  U.S. Air
    Force Electronic Systems Center
       5




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##### Table of Contents



sub-contractor
  U.S. Navy
    Trident Missile Program
    U.S. Air
    Force Depot Operations
    E-3A
  U.S. Army
    Aviation/ Missile Command
    U.S. Army
    Training
   6




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##### Table of Contents



U.S. Air
    Force Air Mobility Command
      Office of
    Naval Research
   7




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##### Table of Contents



Missile
    Defense Agency
  42-month
  U.S. Navy
    Central HIV Program
    U.S. Air
    Force Development and Fielding System Group
    Joint Strike
    Fighter Program
    Naval Air
    System Command
    U.S. Air
    Force Directorate of Installations, Logistics, and Mission
    Support (AF/IL)
   8




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##### Table of Contents



U.S. Air
    Force Air Operation Center
  machine-to-machine
  Federal Civilian
    Agency Sector
      Federal
    Deposit Insurance Corporation
    National
    Science Foundation
    National
    Archives and Records Administration
    Department of
    Homeland Security
   9




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##### Table of Contents



U.S. Customs
    Service National Aviation Center
    State and
    Local Government Sector
    State of
    Ohio
  three-and-a-half-year
  State of
    Colorado
      DRCs
    SOLUTIONS
  Systems and
    Services
    Business
    Intelligence
   10




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##### Table of Contents



state-of-the-security
  Business
    Transformation
  state-of-the-art and/or
  Acquisition
    Management
      Training and
    Performance Support
      Automated Case
    Management
      IT
    Infrastructure Services
   11




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##### Table of Contents



Precision
    Manufacturing
  3-D 3-D
  BUSINESS
    DEVELOPMENT
      GOVERNMENT
    CONTRACTS
         12




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BACKLOG
    COMPETITION
        RAW
    MATERIALS
    GOVERNMENT
    REGULATION
       13




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##### Table of Contents



EMPLOYEES
    PROPRIETARY
    INFORMATION
   Item 1A. RISK
    FACTORS



In addition to the other information in this
    Form 10-K,
    readers should carefully consider the risks described below
    before deciding to invest in shares of our common stock. These
    are risks and uncertainties we believe are most important for
    you to consider. Additional risks and uncertainties not
    presently known to us, or which we currently deem immaterial, or
    which are similar to those faced by other companies in our
    industry or business in general, may also impair our business
    operations. If any of the following risks or uncertainties
    actually occurs, our business, financial condition, results of
    operations or cash flows would likely suffer. In that event, the
    market price of our common stock could decline.



Our Revenue is
    Highly Concentrated on the DoD and Other Federal Agencies, and A
    Significant Portion of Our Revenue is Derived From a Few
    Customers. Decreases in Their Budgets, Changes in Program
    Priorities or Military Base Closures Could Affect Our
    Results.



During 2006 and 2005, approximately 91% and 89%, respectively,
    of our total revenue was derived from U.S. Government
    agencies. Within the DoD, certain individual programs account
    for a significant portion of our U.S. Government business.
    Our revenue from contracts with the DoD, either as a prime
    contractor or subcontractor, accounted for approximately 80% and
    78% of our total revenue in 2006 and 2005, respectively. We
    cannot provide any assurance that any of these programs will
    continue as such or will continue at current levels or that
    military base closures or realignments would not affect such
    programs or our ability to re-staff such programs. Our revenue
    could be adversely affected by significant changes in defense
    spending priorities or declining U.S. defense budgets.
    Among the effects of this general decline has been increased
    competition within a consolidating defense industry.



Current budget pressures on the U.S. Government caused
    principally by the war in Iraq may have adverse effects on our
    business. Because war expenditures are not expected to abate
    significantly in the near term, we anticipate continual risks
    related to expenditures on programs we support.



It is not possible for us to predict whether defense budgets
    will increase or decline in the future. Further, changing
    missions and priorities in the defense budget may have adverse
    effects on our business. Funding limitations could result in a
    reduction, delay or cancellation of existing or emerging
    programs. We anticipate there will continue to be significant
    competition when our defense contracts are re-bid, as well as
    significant competitive pressure to lower prices, which may
    reduce profitability in this area of our business, which could
    adversely affect our business, financial condition, results of
    operations and cash flows.

14




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##### Table of Contents



We Must Bear
    the Risk of Various Pricing Structures Associated With
    Government Contracts.
      
    adequately estimate the resources required to complete a project;
    properly determine the scope of an engagement; or
    complete our contractual obligation in a manner consistent with
    the project plan.      Our Contracts
    and Subcontracts with Government Agencies are Subject to a
    Competitive Bidding Process and to Termination Without Cause by
    the Government.
       15




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We Are Subject
    to a High Level of Government Regulations and Audits Under Our
    Government Contracts and Subcontracts.
    Loss of Key
    Personnel Could Limit Our Growth.
    Our Failure to
    Obtain and Maintain Necessary Security Clearances May Limit Our
    Ability to Perform Classified Work for Government Clients, Which
    Could Harm Our Business.
    Security
    Breaches in Sensitive Government Systems Could Harm Our
    Business.
   16




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Our Employees
    May Engage in Misconduct or Other Improper Activities, Which
    Could Harm Our Business.
    We Currently
    Are Involved in Three Litigation Matters Which, If Not Resolved
    in Our Favor, Could Harm Our Business.
  Form 10-K
  
    a civil compliant filed by the U.S. Attorney in the
    U.S. District Court for the District of Massachusetts on
    October 9, 2003. The U.S. Attorney is asserting claims
    against the Company, which are not additive, based on the False
    Claims Act, the Anti-Kickback Act or Breach of Contract, for
    which the government estimates damages at approximately
    $24 million, $20 million and $10 million,
    respectively. The U.S. Attorney is also seeking recovery on
    certain common law claims, costs, equitable claims, and interest
    on Breach of Contract damages. On February 14, 2007, the
    U.S. Attorney filed a motion for summary judgment, as to
    liability and as to damages in this matter. The court, in the
    ordinary course, is expected to rule by the end of 2007. See
    Note 13 of the Notes to Consolidated Financial
    Statements in Part II, Item 8 on this
    Form 10-K
    for an explanation of the uncertainties and likelihood of
    potential outcomes to this litigation.
    a grand jury investigation by the Antitrust Division of the
    Department of Justice which began on October 15,
    2002; and
    a suit characterized as a class action employee suit filed in
    the U.S. District Court for the District of Massachusetts
    on June 28, 2005.  If Our
    Internal Controls over Financial Reporting Do Not Comply with
    Financial Reporting and Control Management Requirements, There
    Could Be a Material Adverse Effect on Our Operations or
    Financial Results. Also, Current and Potential Stockholders
    Could Lose Confidence in Our Financial Reporting, Which Would
    Harm Our Business and the Trading Price of Our
    Stock.
     17




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##### Table of Contents



We Operate in
    Highly Competitive Markets and May Have Difficulties Entering
    New Markets.
      We May Be
    Subject to Product Liability Claims.
    Economic
    Events May Affect Our Business Segments.
    Our Products
    and Services Could Become Obsolete Due to Rapid Technological
    Changes in the Industry.
   18




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##### Table of Contents



Our Financing
    Requirements May Increase and We Could Have Limited Access to
    Capital Markets.
    Our Operating
    Results May Vary Significantly From Quarter to
    Quarter.
    
    the number, size and timing of client projects commenced and
    completed during a quarter;
    contract wins and losses;
    changes to existing contracts made by our customers;
    bid and proposal efforts undertaken;
    progress on fixed-price projects during a given quarter;
    employee productivity and hiring, attrition and utilization
    rates;
    rapid changes in demand from our Precision Manufacturing
    customers;
    accuracy of estimates of resources required to complete ongoing
    projects;
    the trend in interest rates, and
    general economic conditions.  We May Not
    Make or Complete Future Mergers, Acquisitions or Strategic
    Alliances or Investments.
    
    the difficulty of assimilating the acquired operations and
    personnel;
    the potential disruption of our ongoing business and diversion
    of resources and management time;
    the potential failure to retain key personnel of the acquired
    business;
    the difficulty of integrating systems, operations and
    cultures; and
    the potential impairment of relationships with customers as a
    result of changes in management or otherwise arising out of such
    transactions.   19




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The Market
    Price of Our Common Stock May Be Volatile.
    
    decreases in our earnings and revenue or quarterly operating
    results;
    changes in estimates by analysts;
    market conditions in the industry;
    announcements and new developments by competitors; and
    regulatory reviews.   Item 1B. UNRESOLVED
    STAFF COMMENTS



We have not received any written comments from the staff of the
    Securities and Exchange Commission regarding our periodic or
    current reports that (1) were issued not less than
    180 days before the end of our 2006 fiscal year,
    (2) remain unresolved and (3) we believe are material.  Item 2.
    PROPERTIES    Item 3.
    LEGAL
    PROCEEDINGS    Form 10-K.
   20




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##### Table of Contents



Item 4.
    SUBMISSION OF
    MATTERS TO A VOTE OF SECURITY HOLDERS    Executive
    Officers of the Registrant
    Name
    and Position

AgeJames P. Regan

66President, Chairman and Chief
    Executive OfficerRichard A. Covel

60Vice President, General Counsel
    and SecretaryDavid Keleher

57Senior Vice President and Chief
    Financial OfficerSteven P. Wentzell

60Senior Vice President and General
    Manager, Human ResourcesLawrence H.
    OBrien, Jr.

55Senior Vice President and General
    Manager, Business Solutions and Business Development            21




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##### Table of Contents



PART II  Item 5.
    MARKET FOR
    REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
    ISSUER PURCHASES OF EQUITY SECURITIES  mark-up,
  High


LowFiscal year ended
    December 31, 2006First quarter

$
15.64


$
12.65Second quarter

$
15.65


$
13.22Third quarter

$
14.00


$
9.10Fourth quarter

$
10.17


$
9.13Fiscal year ended
    December 31, 2005First quarter

$
18.67


$
14.33Second quarter

$
18.20


$
13.85Third quarter

$
16.49


$
13.93Fourth quarter

$
16.17


$
14.41   Number of
    Shareholders
    Dividend
    Policy
  Form 10-K,
  Issuer Purchases
    of Equity Securities
  Rule 10b-18(a)(3)
  ApproximateTotal Number


Dollar Valueof Shares


of Shares thatPurchased as


May Yet BePart of


PurchasedTotal Number


Average Price


Publicly


Under theof Shares


Paid Per


Announced


ProgramsPurchased(1)


Share


Programs


(in
    millions)PeriodOctober 1, 2006 to
    October 31, 2006


664


$
9.97






$
November 1, 2006 to
    November 30, 2006


159



9.97







December 1, 2006 to
    December 31, 2006














Total


823


$
9.97






$
  22




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##### Table of Contents



(1)
    
    During the three months ended December 31, 2006, we
    repurchased 823 shares that were not part of a publicly
    announced share repurchase program, representing shares
    repurchased to cover payroll withholding taxes in connection
    with the vesting of restricted stock awards.  Securities
    Authorized for Issuance Under Equity Compensation
    Plans
    Number of
    securitiesNumber of
    securities





remaining
    availableto be issued


Weighted-average


for future
    issuanceupon exercise
    of


exercise price
    of


under equity
    compensationoutstanding
    options,


outstanding
    options,


plans (excluding
    securitieswarrants and
    rights


warrants and
    rights


reflected in
    column (a))(a)


(b)


(c)Plan CategoryEquity compensation plans
    approved by security holders:1993 Equity Incentive Plan


83,180


$
10.00



1995 Stock Option Plan for
    Non-Employee Directors


20,614


$
11.47



2000 Incentive Plan


786,885


$
9.37



123,8262003 Incentive Plan





$




400,000Total equity compensation plans
    approved by security holders


890,679


$
9.48



523,826Equity compensation plans not
    approved by security holders(1)


250,000


$
4.44



Total equity compensation plans


1,140,679


$
8.37



523,826     (1)
    
    In 1999, we granted Mr. Regan a non-qualified stock option
    to purchase 250,000 shares of our common stock. The option
    price was the fair market value of the common stock at the date
    of grant. Twenty percent of the options vested immediately and
    an additional 20% vested in each successive year from the date
    of grant. The options expire ten years from the date of grant. 23




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##### Table of Contents



Item 6.
    SELECTED
    FINANCIAL DATA  Form 10-K, Form 10-K.
  Year ended
    December 31,2006


2005


2004(1)


2003


2002(2)(in thousands,
    except share and per share data)Revenue

$
258,987


$
300,440


$
275,706


$
244,808


$
192,610Operating income

$
8,171


$
21,305


$
17,507


$
15,389


$
12,647Income from continuing operations
    before cumulative effect of accounting change

$
3,988


$
11,433


$
9,373


$
8,655


$
7,357Cumulative benefit of accounting
    change


84















Loss from discontinued operations














(1,635
)


(1,124
)Loss on disposal of discontinued
    operations














(348
)


Net income

$
4,072


$
11,433


$
9,373


$
6,672


$
6,233Earnings per share 
    BasicIncome from continuing operations
    before cumulative effect of accounting change

$
0.44


$
1.30


$
1.10


$
1.05


$
0.92Cumulative benefit of accounting
    change


0.01















Loss from discontinued operations














(0.20
)


(0.14
)Loss on disposal of discontinued
    operations














(0.04
)


Net earnings per share 
    Basic

$
0.45


$
1.30


$
1.10


$
0.81


$
0.78Earnings per share 
    DilutedIncome from continuing operations
    before cumulative effect of accounting change

$
0.42


$
1.24


$
1.03


$
0.98


$
0.83Cumulative benefit of accounting
    change


0.01















Loss from discontinued operations














(0.18
)


(0.13
)Loss on disposal of discontinued
    operations














(0.04
)


Net earnings per share 
    Diluted

$
0.43


$
1.24


$
1.03


$
0.76


$
0.70Net cash provided by operating
    activities  continuing operations

$
17,584


$
25,032


$
3,961


$
13,186


$
9,915Capital expenditures

$
2,482


$
4,571


$
4,544


$
8,163


$
3,347Depreciation

$
3,203


$
3,719


$
3,624


$
3,007


$
3,192   24




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##### Table of Contents



As of
    December 31,2006


2005


2004(1)


2003


2002(2)Total assets

$
159,852


$
187,753


$
205,134


$
121,070


$
111,676Current portion of long-term debt

$



$
10,170


$
18,357


$
9,000


$
15,144Long-term debt (less current
    portion)

$
15,000


$
15,242


$
51,485


$
7,750


$
8,250Stockholders equity

$
83,765


$
74,187


$
61,318


$
48,651


$
39,809Return on invested capital(3)


4.8
%


10.2
%


10.7
%


14.0
%


14.4
%Stockholders equity per share

$
8.99


$
8.16


$
7.02


$
5.76


$
4.88Return on stockholders equity


5.2
%


16.9
%


17.0
%


20.3
%


18.6
%Backlog

$
92,903


$
144,571


$
165,017


$
123,895


$
111,070Number of shares outstanding


9,314,962



9,096,893



8,737,562



8,443,082



8,164,180     (1)
    
    Amounts include results of operations of Impact Innovations
    Group LLC (acquired September 1, 2004) for the period
    subsequent to our acquisition.(2)
    
    Amounts include results of operations of Andrulis Corporation
    (acquired December 20, 2002) and HJ Ford (acquired
    June 4, 2002) for the periods subsequent to their
    respective acquisitions.(3)
    
    Return of invested capital is calculated by dividing operating
    income, net of income taxes, by the average quarterly invested
    capital. Invested capital is the sum of outstanding debt and
    stockholders equity. 25




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##### Table of Contents



Item 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  OVERVIEW
             26




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##### Table of Contents



CRITICAL
    ACCOUNTING POLICIES
      Revenue
    Recognition
        fixed-price fixed-price 81-1, Accounting for Performance of Construction-Type and Certain
    Production-Type Contracts.
  Out-of-pocket
   27




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##### Table of Contents



Goodwill and
    Other Intangible Assets
    Income Taxes and
    Deferred Taxes
      Pension
    Obligations
       28




---



##### Table of Contents



RESULTS OF
    OPERATIONS
    Year Ended
    December 31,2006


2005


2004$


%


$


%


$


%Contract revenue

$
252.9



97.6
%

$
293.7



97.7
%

$
268.6



97.4
%Product sales

$
6.1



2.4
%

$
6.8



2.3
%

$
7.1



2.6
%Total revenue

$
259.0



100.0
%

$
300.4



100.0
%

$
275.7



100.0
%Gross profit on contract revenue(1)

$
33.9



13.4
%

$
48.1



16.4
%

$
41.1



15.3
%Gross profit on product sales(1)

$
1.2



19.7
%

$
1.6



23.1
%

$
1.9



26.3
%Total gross profit(1)

$
35.1



13.6
%

$
49.7



16.5
%

$
43.0



15.6
%Selling, General and Administrative

$
24.1



9.3
%

$
25.3



8.4
%

$
23.2



8.4
%Amortization of intangible assets

$
2.8



1.1
%

$
3.0



1.0
%

$
2.3



0.8
%Operating Income

$
8.2



3.2
%

$
21.3



7.1
%

$
17.5



6.4
%Interest expense, net

$
(2.0
)


(0.8
)%

$
(4.4
)


(1.5
)%

$
(2.2
)


(0.8
)%Other income, net

$
0.6



0.2
%

$
2.3



0.8
%

$
0.4



0.1
%Provision for income taxes

$
2.7



1.1
%

$
7.8



2.6
%

$
6.3



2.3
%Net income

$
4.1



1.6
%

$
11.4



3.8
%

$
9.4



3.4
%     (1)
    
    These amounts represent a percentage of contract revenues,
    product sales and total revenues, respectively.  Revenue
        Year Ended
    December 31,2006


2005


2004$


%


$


%


$


%National defense and intelligence

$
206.0



81.4
%

$
233.9



79.7
%

$
215.4



80.2
%Federal civilian agencies

$
30.6



12.1
%

$
33.8



11.5
%

$
31.3



11.6
%State and local government agencies

$
15.3



6.0
%

$
23.0



7.8
%

$
20.3



7.6
%Other

$
1.1



0.4
%

$
3.0



1.0
%

$
1.6



0.6
%Total contract revenue

$
252.9



100.0
%

$
293.7



100.0
%

$
268.6



100.0
%  29




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HMR
    HMR
  sub-contractor
    three-and-one-half
 30




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##### Table of Contents



Year ended
    December 31,2006


2005


2004Time and materials


62
%


56
%


59
%Cost reimbursable


19
%


20
%


21
%Fixed price, including service
    type contracts


19
%


24
%


20
%100
%


100
%


100
%Prime contract


67
%


68
%


74
%Sub-contract


33
%


32
%


26
%100
%


100
%


100
%           Gross
    Profit
    sub-contractor
   31




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##### Table of Contents



Selling, General
    and Administrative Expenses
    Amortization of
    Intangible Assets
    Interest Expense,
    net
    Other Income,
    net
  HMR HMR
  Provision for
    Income Taxes
   32




---



##### Table of Contents



Shares Used
    in Computing Earnings Per Share
    LIQUIDITY AND
    CAPITAL RESOURCES
          Operating
    Activities
       33




---



##### Table of Contents



Form 10-K.
      Investing
    Activities
    placed-in-service
     34




---



##### Table of Contents



Form 10-K.
    Financing
    Activities
  Form 10-K.
        Off-Balance Sheet
    Arrangements
   35




---



##### Table of Contents



Commitments
    Payments due by
    periodLess than


Two to


Four toTotal


one
    year


three
    years


five
    years


ThereafterLong-term debt

$
15.0


$



$
15.0


$



$
Operating leases

$
37.0


$
6.7


$
12.2


$
8.3


$
9.9Letter of credit

$
1.0


$
1.0


$



$



$
Total contractual obligations

$
53.1


$
7.7


$
27.2


$
8.3


$
9.9         Contingencies
  Form 10-K.
    RECENT ACCOUNTING
    PRONOUNCEMENTS
  The Fair Value
    Option for Financial Assets and Financial Liabilities
  Employers Accounting for Defined Benefit Pension and
    Other Postretirement Plans  an amendment of FASB
    Statements No. 87, 88, 106 and 132(R) Employers Accounting
    for Pensions Employers
    Accounting for Postretirement Benefits Other Than
 36




---



##### Table of Contents



Pensions Form 10-K.
  Fair Value Measurements
  Considering the Effects of Prior
    Year Misstatements when Quantifying Misstatements in Current
    Year Financial Statements
  Accounting for Uncertainty in Income Taxes Accounting for Income
    Taxes.
  IMPACT OF
    INFLATION AND CHANGING PRICES
    Item 7A.
    QUANTITATIVE AND
    QUALITATIVE DISCLOSURES ABOUT MARKET RISK  90-day
   37




---



##### Table of Contents



PART II
  Item 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  PageReport of
    Independent Registered Public Accounting Firm


39Consolidated
    Balance Sheets as of December 31, 2006 and 2005


40Consolidated
    Statements of Operations for the years ended December 31,
    2006, 2005 and 2004


41Consolidated
    Statements of Changes in Stockholders Equity and
    Comprehensive Income for the years ended December 31, 2006,
    2005 and 2004


42Consolidated
    Statements of Cash Flows for the years ended December 31,
    2006, 2005 and 2004


43Notes to
    Consolidated Financial Statements


44Schedule II 
    Valuation and Qualifying Accounts and Reserves


78  38




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  Board of Directors
    and 
    Shareholders of Dynamics Research Corporation
            Internal Control-Integrated Framework
      39




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
 CONSOLIDATED
    BALANCE SHEETS (In thousands,
    except share data)
  December 31,2006


2005ASSETSCurrent assetsCash and cash equivalents

$
7,887


$
1,020Accounts receivable, net of
    allowances of $793 in 2006 and $588 in 2005


27,136



32,894Unbilled expenditures and fees on
    contracts in process


36,764



60,210Prepaid expenses and other current
    assets


2,824



1,483Total current assets


74,611



95,607Noncurrent assetsProperty and equipment, net


11,509



12,252Goodwill


63,055



63,055Intangible assets, net


5,671



8,480Deferred tax asset


1,507



3,916Other noncurrent assets


3,499



4,443Total noncurrent assets


85,241



92,146Total assets

$
159,852


$
187,753LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilitiesCurrent portion of long-term debt

$



$
10,170Accounts payable


18,195



25,668Deferred taxes


11,698



19,825Accrued compensation and employee
    benefits


14,473



18,761Other accrued expenses


3,916



6,392Total current liabilities


48,282



80,816Long-term liabilitiesLong-term debt, less current
    portion


15,000



15,242Other long-term liabilities


12,805



17,508Total long-term liabilities


27,805



32,750Total liabilities


76,087



113,566Commitments and
    contingencies  See Note 13Stockholders equityPreferred stock, $0.10 par
    value; 5,000,000 shares authorized; no shares issued and
    outstanding






Common stock, $0.10 par
    value; 30,000,000 shares authorized; 9,314,962 and
    9,096,893 shares issued and outstanding in 2006 and in
    2005, respectively


931



910Capital in excess of par value


47,644



45,571Unearned compensation






(1,850
)Accumulated other comprehensive
    loss


(9,206
)


(10,768
)Retained earnings


44,396



40,324Total stockholders equity


83,765



74,187Total liabilities and
    stockholders equity

$
159,852


$
187,753    40




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
 CONSOLIDATED
    STATEMENTS OF OPERATIONS

(In thousands, except share and per share data) December 31,2006


2005


2004Contract revenue

$
252,890


$
293,662


$
268,634Product sales


6,097



6,778



7,072Total revenue


258,987



300,440



275,706Cost of contract revenue


218,976



245,566



227,509Cost of product sales


4,895



5,212



5,214Selling, general and
    administrative expenses


24,136



25,318



23,152Amortization of intangible assets


2,809



3,039



2,324Total operating costs and expenses


250,816



279,135



258,199Operating income


8,171



21,305



17,507Interest expense, net


(2,042
)


(4,367
)


(2,225
)Other income


589



2,276



360Income before provision for income
    taxes


6,718



19,214



15,642Provision for income taxes


2,730



7,781



6,269Income before cumulative effect of
    accounting change


3,988



11,433



9,373Cumulative benefit of accounting
    change, net of tax of $62


84







Net income

$
4,072


$
11,433


$
9,373Earnings per common shareBasicIncome before cumulative effect of
    accounting change

$
0.44


$
1.30


$
1.10Cumulative effect of accounting
    change


0.01







Net income

$
0.45


$
1.30


$
1.10DilutedIncome before cumulative effect of
    accounting change

$
0.42


$
1.24


$
1.03Cumulative effect of accounting
    change


0.01







Net income

$
0.43


$
1.24


$
1.03Weighted average shares outstandingBasic


9,099,897



8,809,644



8,499,013Diluted


9,426,535



9,253,522



9,073,048    41




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
 CONSOLIDATED
    STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND
    COMPREHENSIVE INCOME

(in thousands) Capital





AccumulatedCommon
    Stock


in Excess





OtherIssued


Treasury
    Stock


of Par


Unearned


Comprehensive


RetainedShares


Par
    value


Shares


Par
    value


Value


Compensation


Loss


Earnings


TotalBalance at December 31,
    2003


9,822


$
982



(1,379
)

$
(138
)

$
36,642


$
(797
)

$
(7,556
)

$
19,518


$
48,651Comprehensive income, net of tax:Net income






























9,373



9,373Other comprehensive loss(1)


























(168
)






(168
)Comprehensive income


































9,205Issuance of common stock through
    stock option exercises and employee stock purchase plan
    transactions


235



23











2,584















2,607Issuance of restricted stock


96



10











1,680



(1,690
)










Forfeiture of restricted stock


(33
)


(3
)










(374
)


377











Release of restricted stock


(4
)














(36
)














(36
)Amortization of unearned
    compensation






















538











538Tax benefit from stock options
    exercised and employee stock purchase plan transactions


















353















353Redesignation of treasury stock to
    common stock in accordance with Massachusetts Business
    Corporation Act, Chapter 156D


(1,379
)


(138
)


1,379



138



















Balance at December 31,
    2004


8,737



874











40,849



(1,572
)


(7,724
)


28,891



61,318Comprehensive income, net of tax:Net income






























11,433



11,433Other comprehensive loss(1)


























(3,044
)






(3,044
)Comprehensive income


































8,389Issuance of common stock through
    stock option exercises and employee stock purchase plan
    transactions


304



30











3,378















3,408Issuance of restricted stock


110



11











1,794



(1,805
)










Forfeiture of restricted stock


(42
)


(4
)










(667
)


671











Release of restricted stock


(12
)


(1
)










(187
)


(9
)










(197
)Amortization of unearned
    compensation






















865











865Tax benefit from stock options
    exercised and employee stock purchase plan transactions


















404















404Balance at December 31,
    2005


9,097



910











45,571



(1,850
)


(10,768
)


40,324



74,187Comprehensive income, net of tax:Net income






























4,072



4,072Other comprehensive income(1)


























1,562







1,562Comprehensive income


































5,634Issuance of common stock through
    stock option exercises and employee stock purchase plan
    transactions


192



19











1,875















1,894Issuance of restricted stock


70



7











(7
)














Forfeiture of restricted stock


(30
)


(3
)










3















Release of restricted stock


(14
)


(2
)










(191
)














(193
)Share-based compensation


















2,082















2,082Tax benefit from stock optionsexercised and employee stock
    purchase plan transactions


















161















161Reversal of unearned compensation
    upon adoption of FASB Statement No. 123R


















(1,850
)


1,850











Balance at December 31,
    2006


9,315


$
931






$



$
47,644


$



$
(9,206
)

$
44,396


$
83,765    (1)
    
    Other comprehensive income (loss)
    is calculated as follows:  Year Ended
    December 31,2006


2005


2004Minimum pension liability
    adjustment, net of tax (expense) benefit of $(1,026), $976 and
    $(193) in the three years ended December 31, 2006

$
1,562


$
(1,509
)

$
(1,703
)Unrealized gains on investments:Unrealized holding gains (losses)
    arising during the period, net of tax (expense) benefit of
    $(89), $207 and $(993) in the three years ended
    December 31, 2006


122



(324
)


1,535Less: reclassification adjustment
    for gains realized in net income, net of tax (expense) benefit
    of $89 and $786 for the two years ended December 31, 2006


(122
)


(1,211
)


Net unrealized gain (loss)






(1,535
)


1,535Other comprehensive income (loss)

$
1,562


$
(3,044
)

$
(168
)     42




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##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
 CONSOLIDATED
    STATEMENTS OF CASH FLOWS

(in thousands) December 31,2006


2005


2004Cash flows from operating
    activities:Net income

$
4,072


$
11,433


$
9,373Adjustments to reconcile net cash
    provided by operating activitiesDepreciation


3,203



3,719



3,624Amortization of intangible assets


2,809



3,039



2,324Share-based compensation ,
    including cumulative effect of accounting change


2,082



865



538Non-cash interest expense


203



304



154Amortization of deferred gain on
    sale of building


(676
)


(6
)


Investment income from equity
    interest


(223
)


(166
)


(249
)Tax benefit from stock options
    exercised and employee stock purchase plan transactions


(161
)


404



353Deferred income taxes


(6,744
)


1,869



7,697Gain on sale of investments and
    long-lived assets, net


(192
)


(1,984
)


(2
)Change in operating assets and
    liabilities:Accounts receivable, net


5,758



13,084



(7,612
)Unbilled expenditures and fees on
    contracts in process


24,502



(11,437
)


(17,078
)Prepaid expenses and other current
    assets


(1,341
)


4,185



(3,336
)Accounts payable


(7,473
)


5,118



8,486Accrued compensation and employee
    benefits


(4,288
)


847



850Other accrued expenses


(2,508
)


1,246



1,188Other long-term liabilities


(1,439
)


(7,488
)


(2,349
)Net cash provided by continuing
    operations


17,584



25,032



3,961Net cash used in discontinued
    operations






(422
)


(754
)Net cash provided by operating
    activities


17,584



24,610



3,207Cash flows from investing
    activities:Additions to property and equipment


(2,482
)


(4,571
)


(4,544
)Proceeds from sale of building, net






19,275



Proceeds from sale of investments
    and long-lived assets


214



2,003



17Purchase of business






(168
)


(53,967
)Dividends from equity investment


155



60



60Increase in other assets


(182
)


(92
)


(1,473
)Net cash provided by (used in)
    investing activities


(2,295
)


16,507



(59,907
)Cash flow from financing activities:Borrowings under revolving credit
    agreement


172,981



138,996



220,476Repayments under revolving credit
    agreement


(157,981
)


(148,996
)


(218,976
)Issuance of long-term debt










55,000Principal payments under loan
    agreements


(25,412
)


(34,430
)


(3,408
)Payments of deferred financing costs


(65
)






(798
)Proceeds from the exercise of stock
    options and employee stock purchase plan transactions


1,894



3,408



2,607Tax benefit from stock options
    exercised and employee stock purchase plan transactions


161







Net cash provided by (used in)
    financing activities


(8,422
)


(41,022
)


54,901Net increase (decrease) in cash and
    cash equivalents


6,867



95



(1,799
)Cash and cash equivalents,
    beginning of period


1,020



925



2,724Cash and cash equivalents, end of
    period

$
7,887


$
1,020


$
925Supplemental disclosure of cash
    flow informationCash paid during the year for
    interest

$
2,078


$
4,302


$
1,607Cash paid during the year for
    income taxes, net of refunds

$
12,486


$
(196
)

$
124Supplemental disclosure of noncash
    financing and investing activitiesIssuance of restricted stock

$
1,000


$
1,805


$
1,690Supplemental disclosure 
    acquisitionsAssets acquired

$



$



$
59,267Cash payments, net of cash acquired






(168
)


(53,967
)Liabilities assumed

$



$
(168
)

$
5,300    43




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
 NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts) NOTE 1.
    NATURE OF THE
    BUSINESS      NOTE 2.
    SUMMARY OF
    SIGNIFICANT ACCOUNTING POLICIES  Principles of
    Consolidation and Basis of Presentation
    HMR HMR HMR HMR HMR
      Risks,
    Uncertainties and Use of Estimates
     44




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
     Accounting for
    Contingencies. case-by-case
  Revenue
    Recognition
        81-1, Accounting for Performance of Construction-Type and Certain
    Production-Type Contracts.
  Out-of-pocket
   45




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
      Concentration of
    Risk
    Cash and Cash
    Equivalents
    Unbilled
    Expenditures and Fees on Contracts in Process
    Valuation
    Allowances
   46




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
    Inventories
  (first-in,
  Property and
    Equipment
        Internal Software
    Developed Costs
  SOP 98-1, Accounting for the Costs of Computer Software Developed or
    Obtained for Internal Use SOP 98-1
  Investment
    Available for Sale
  available-for-sale Accounting for Certain Investments in
    Debt and Equity Securities.
 47




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
        Business
    Combinations
  Business
    Combinations
  Goodwill
  Goodwill and Other Intangible Assets
   48




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
   Intangible and
    Other Long-lived Assets
  Accounting for the Impairment
    or Disposal of Long-lived Assets.
  Asset Retirement
    Obligations
  Accounting
    for Asset Retirement Obligations Accounting for
    Conditional Asset Retirement Obligations and/or and/or and/or
  Income
    Taxes
  Accounting for Income Taxes
  Pension
    Obligations
  Employers Accounting for
    Defined Benefit Pension and Other Postretirement
    Plans  an amendment of FASB Statements No. 87,
    88, 106, and
 49




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
  132(R) Employers Accounting for Pensions
    Deferred
    Financing Costs
    Fair Value of
    Financial Instruments
    Operating
    Leases
  Accounting for
    Leases and/or
  Restructuring
    Costs
  Accounting for Costs Associated with Exit or Disposal
    Activities
 50




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
    Comprehensive
    Income
  Reporting Comprehensive Income.
  Earnings Per
    Share
      Share-Based
    Compensation
  Share-Based Payment
   51




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
   Change in
    Accounting Principle
    Recent Accounting
    Pronouncements
  The
    Fair Value Option for Financial Assets and Financial
    Liabilities
  Employers Accounting
    for Pensions Employers
    Accounting for Postretirement Benefits Other Than Pensions
  Fair Value Measurements
  Considering the Effects of Prior
    Year Misstatements when Quantifying Misstatements in Current
    Year Financial Statements
 52




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
   Accounting for Uncertainty in Income Taxes Accounting for Income
    Taxes.
  NOTE 3.
    BUSINESS
    ACQUISITION       53




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
    Consideration:Cash

$
53,399Accrued estimated additional cash
    consideration


800Legal, accounting and other
    transaction costs


746Exit costs


367Total consideration


55,312Allocation of consideration to
    assets acquired/(liabilities assumed):Working capital


7,013Property and equipment


562Other noncurrent assets


57Long-term liabilities


(164
)Total fair value of net tangible
    assets acquired


7,468Excess of consideration over fair
    value of net tangible assets acquired


47,844Allocation of excess consideration
    to identifiable intangible assets:Customer relationships


11,500Allocation of excess consideration
    to goodwill

$
36,344     Year Ended
    December 31,Adjustments


ExpendituresBeginning





for changes


charged
    against


EndingBalance


Provision


in
    estimate


accrual


Balance2006

$
121


$



$



$
(17
)

$
1042005

$
393


$



$
(102
)

$
(170
)

$
1212004

$



$
469


$



$
(76
)

$
393       54




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
  Year EndedDecember 31,2004Revenue

$
309,222Income from continuing operations

$
9,692Earnings per share from continuing
    operations:Basic

$
1.14Diluted

$
1.07   NOTE 4.
    DISCONTINUED
    OPERATIONS    Activity 
    Year Ended December 31, 2005Balance





Adjustments


Expenditures


BalanceDecember 31,





for changes


charged
    against


December 31,2004


Provision


in
    estimate


accrual


2005Lease

$
422


$



$



$
(422
)

$
   Activity 
    Year Ended December 31, 2004Balance





Adjustments


Expenditures


BalanceDecember 31,





for changes


charged
    against


December 31,2003


Provision


in
    estimate


accrual


2004Severance

$
74


$



$



$
(74
)

$
Lease


932











(510
)


422Total

$
1,006


$



$



$
(584
)

$
422    55




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
   NOTE 5.
    SUPPLEMENTAL
    BALANCE SHEET INFORMATION    December 31,2006


2005Property and equipment, net:Production equipment

$
11,942


$
11,872Software


11,283



10,407Furniture and other equipment


8,792



8,723Leasehold improvements


2,137



1,316Property and equipment


34,154



32,318Less accumulated depreciation


(22,645
)


(20,066
)Property and equipment, net

$
11,509


$
12,252Other noncurrent assets:Equity investments

$
787


$
719Unbilled expenditures and fees on
    contracts in process


493



1,549Other


2,219



2,175Other noncurrent assets

$
3,499


$
4,443Accrued compensation and employee
    benefits:Accrued payroll and payroll taxes

$
5,956


$
5,944Accrued vacation


4,343



4,705Accrued pension liability


2,000



5,818Other


2,174



2,294Accrued compensation and employee
    benefits

$
14,473


$
18,761Other accrued expenses:Amount outstanding under letter of
    credit

$
1,016


$
Accrued income taxes






2,433Deferred gain on sale of building


676



684Other


2,224



3,275Other accrued expenses

$
3,916


$
6,392Other long-term liabilities:Deferred gain on sale of building

$
5,407


$
6,158Long-term contract payments


2,700



2,693Accrued pension liability


1,933



5,328Amount outstanding under letter of
    credit






1,031Other


2,765



2,298Other long-term liabilities

$
12,805


$
17,508  56




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
  NOTE 6.
    GOODWILL AND
    INTANGIBLE ASSETS    December 31,
    2006


December 31,
    2005Accumulated








AccumulatedCost


Amortization


Net


Cost


Amortization


NetCustomer relationships

$
12,800


$
(7,129
)

$
5,671


$
14,200


$
(5,720
)

$
8,480Non-competition agreements














1,740



(1,740
)


Total

$
12,800


$
(7,129
)

$
5,671


$
15,940


$
(7,460
)

$
8,480     2007

$
2,6022008

$
2,0382009

$
1,031     NOTE 7.
    INCOME
    TAXES    Year Ended
    December 31,2006


2005


2004Income from operations

$
2,730


$
7,781


$
6,269Cumulative benefit of accounting
    change


62







Stockholders equity for
    compensation expense for tax purposes in excess of amounts
    recognized for financial reporting purposes


(161
)


(404
)


(353
)Other comprehensive income


1,026



(1,969
)


1,186$
3,657


$
5,408


$
7,102  57




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
    Year Ended
    December 31,2006


2005


2004Currently payable (refundable)Federal

$
8,041


$
4,902


$
(1,326
)State


1,433



1,010



(101
)9,474



5,912



(1,427
)Deferred (prepaid)Federal


(5,174
)


1,493



6,144State


(1,570
)


376



1,552(6,744
)


1,869



7,696$
2,730


$
7,781


$
6,269     Year Ended
    December 31,2006


2005


2004Provision at statutory rate

$
2,351



35.0
%

$
6,533



34.0
%

$
5,318



34.0
%State income taxes, net of federal
    tax benefit


355



5.3



923



4.8



1,091



7.0SFAS 123R expense


166



2.5















Permanent differences, net


177



2.6



170



0.9



173



1.1Tax credits and state audits


(226
)


(3.4
)










(30
)


(0.2
)Adjustments to tax accruals and
    reserves


(266
)


(4.0
)


127



0.7



127



0.8Change in deferred tax rate


186



2.8















Decrease in valuation allowance


















(442
)


(2.8
)Other, net


(13
)


(0.2
)


28



0.1



32



0.2Provision for income taxes

$
2,730



40.6
%

$
7,781



40.5
%

$
6,269



40.1
%  58




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
    December 31,2006


2005Minimum pension liability
    adjustment

$
6,010


$
6,971Deferred gain on sale of building


2,510



2,977Accrued expenses


1,402



1,670Accrued vacation


1,163



1,271Receivables reserves


314



235Deferred tax assets


11,399



13,124Unbilled expenditures and fees on
    contracts in process


(9,207
)


(18,704
)Pension accrual


(5,675
)


(4,591
)Fixed assets and intangibles


(4,628
)


(3,747
)Domestic International Sales
    Corporation


(1,961
)


(1,821
)Other


(119
)


(170
)Deferred tax liability


(21,590
)


(29,033
)Deferred tax liability, net

$
(10,191
)

$
(15,909
)         NOTE 8.
    EMPLOYEE BENEFIT
    PROGRAMS  Defined Benefit
    Pension Plan
   59




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
  Employers Accounting for
    Settlements and Curtailments and for Termination Benefits.
        Net Periodic
    Pension Cost
  Year ended
    December 31,2006


2005


2004Interest cost on projected benefit
    obligation

$
3,995


$
3,937


$
3,940Expected return on plan assets


(5,117
)


(4,407
)


(3,847
)Amortization of net actuarial loss


1,717



1,503



1,282Net periodic pension cost

$
595


$
1,033


$
1,375  60




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
  Obligations and
    Funded Status
  December 31,2006


2005Change in benefit
    obligationProjected benefit obligation at
    beginning of year

$
70,761


$
68,358Curtailment


(3,012
)


Interest cost on projected benefit
    obligation


3,995



3,937Benefits paid


(2,625
)


(2,348
)Actuarial loss


887



814Projected benefit obligation at
    end of year

$
70,006


$
70,761Change in plan assetsFair value of plan assets at
    beginning of year

$
56,260


$
47,337Actual return on plan assets


7,218



3,187Employer contributions


5,220



8,084Benefits paid


(2,625
)


(2,348
)Fair value of plan assets at end
    of year

$
66,073


$
56,260Funded statusPlan assets less projected benefit
    obligation

$
(3,933
)

$
(14,501
)Unrecognized net actuarial loss


15,159



21,102Net amount recognized

$
11,226


$
6,601Amounts recognized in the
    Consolidated Balance Sheets consists of:Accrued pension
    liability  current

$
(2,000
)

$
(5,818
)Accrued pension
    liability  long-term


(1,933
)


(5,328
)Accumulated other comprehensive
    loss


15,159



17,747Net amount recognized

$
11,226


$
6,601     Additional
    Information
   61




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
     Beginning





Experience


Effect of


Endingbalance


Amortization


loss/(gain)


curtailment


balance2006

$
21,102


$
(1,717
)

$
(1,214
)

$
(3,012
)

$
15,1592005

$
20,572


$
(1,503
)

$
2,033


$



$
21,102     Assumptions
      December 31,2006


2005Used to determine benefit
    obligationsDiscount rate


5.75
%


5.75
%Rate of compensation increase


N/A



N/A   Year ended
    December 31,2006


2005


2004Used to determine net periodic
    pension costDiscount rate


5.75
%


6.00
%


6.25
%Expected rate of return on assets


9.00
%


9.00
%


9.00
%Rate of compensation increase


N/A



N/A



N/A  62




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
  Plan
    Assets
    Target


December 31,allocation


2006


2005Equity securities


60
%


66
%


64
%Debt securities


38
%


27
%


24
%Other


2
%


7
%


12
%100
%


100
%


100
%     Estimated Future
    Benefit Payments
    Year ending December 31, 2007

$
3,013Year ending December 31, 2008

$
3,313Year ending December 31, 2009

$
3,466Year ending December 31, 2010

$
3,631Year ending December 31, 2011

$
3,881Five subsequent fiscal years
    ending December 31, 2016

$
22,538   401(k)
    Plan
       63




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##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
   Supplemental
    Executive Retirement Plan
    Deferred
    Compensation Plans
      NOTE 9.
    FINANCING
    ARRANGEMENTS       64




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
    
    Any failure by the Company and its subsidiaries to make any
    payment of principal, interest and other sums due under the 2006
    facility within three (3) calendar days of the date when
    the payment is due;
    Any breach by the Company or any of its subsidiaries of certain
    covenants, representations and warranties;
    Any default and acceleration of any indebtedness owed by the
    Company or any of its subsidiaries to any person (other than the
    bank group) which is in excess of $1,000;
    Any final judgment against the Company or any of its
    subsidiaries in excess of $1,000 which has not been insured to
    the reasonable satisfaction of Brown Brothers
    Harriman & Co. as administrative agent;
    Any bankruptcy (voluntary or involuntary) of the Company or any
    of its subsidiaries;
    Any material adverse change in the business or financial
    condition of the Company and its subsidiaries; or
    A change in control of the Company, as described in the 2006
    facility.    Outstanding
    debt
  90-day
    Outstanding


Interestprincipal


rate


Interest
    rate option and election dateDecember 31, 2005Acquisition term loan (portion)

$
23,100



6.17
%

180-day
    LIBOR Rate option elected on August 1, 2005Acquisition term loan (portion)


2,312



7.25
%

Base Rate option elected on
    December 30, 2005Total debt


25,412Less: Current portion of long-term
    debt


(10,170
)Long-term debt

$
15,242   NOTE 10.
    SHAREHOLDERS
    EQUITY  Preferred Stock
    Purchase Rights
   65




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
      Redesignation of
    Treasury Shares to Common Stock
    Unearned
    Compensation
    Accumulated Other
    Comprehensive Loss
    Earnings Per
    Share
    December 31,2006


2005


2004Weighted average shares
    outstanding  Basic


9,099,897



8,809,644



8,499,013Diluted effect of stock options
    and restricted stock grants


326,638



443,878



574,035Weighted average shares
    outstanding  Diluted


9,426,535



9,253,522



9,073,048  66




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
  NOTE 11.
    SHARE 
    BASED COMPENSATION  Impact of the
    Adoption of SFAS 123R
      Year endedDecember 31,2006Stock options

$
709Employee Stock Purchase Plan


327Impact on operating income


1,036Cumulative effect of accounting
    change


(146
)Impact after cumulative effect of
    accounting change

$
890Decrease in net income

$
718Decrease in earnings per share:Basic

$
0.08Diluted

$
0.08     Year ended
    December 31,2006


2005


2004Cost of products and services

$
1,065


$



$
Selling, general and administrative


1,163



865



538Cumulative effect of accounting
    change


(146
)






Total share-based compensation
    expense

$
2,082


$
865


$
538   Pro forma
    Information for Periods Prior to the Adoption of
    SFAS 123R
   67




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
    Year ended
    December 31,2005


2004Net income, as reported

$
11,433


$
9,373Add: Share-based employee
    compensation expense included in reported net income, net of
    related tax effects


515



322Deduct: Total share-based employee
    compensation expense determined under the fair value based
    method for all awards, net of related tax effects


(1,204
)


(1,224
)Pro forma net income

$
10,744


$
8,471Earnings per share:As reported:Basic

$
1.30


$
1.10Diluted

$
1.24


$
1.03Pro forma:Basic

$
1.22


$
1.00Diluted

$
1.16


$
0.93   Valuation
    Assumptions
    Year ended
    December 31,2006(1)


2005


2004Stock Options:Risk-free interest rate






3.87
%


3.81
%Dividend yield










Volatility






66.38
%


66.88
%Expected life in years






6.5



7.0Employee Stock Purchase Plan:Risk-free interest rate


4.77
%


3.00
%


1.23
%Dividend yield










Volatility


27.09
%


33.05
%


46.44
%Expected life in months


3.0



3.0



3.0     (1)
    
    During 2006, the Company did not grant any stock option awards. 68




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
     Risk-free interest rate.
  Dividend yield.
  Volatility.
  Expected life.
  Share-Based
    Compensation Plans
         69




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
            Employee Stock
    Purchase Plan
     70




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
    Share-Based
    Payment Award Activity
    Stock
    Options


Restricted Stock
    AwardsWeighted





WeightedNumber of


average


Number of


averageshares


exercise
    price


shares


fair
    valueOutstanding at December 31,
    2003


1,704,886


$
7.47



141,100


$
9.11Granted


35,500


$
15.81



96,333


$
17.70Exercised/Vested


(106,132
)

$
7.36



(11,550
)

$
9.95Forfeited/Expired


(135,149
)

$
9.43



(33,475
)

$
11.74Outstanding at December 31,
    2004


1,499,105


$
8.75



192,408


$
12.90Granted


15,000


$
18.57



111,580


$
16.18Exercised/Vested


(173,491
)

$
9.43



(39,002
)

$
16.13Forfeited/Expired


(101,221
)

$
12.00



(43,170
)

$
16.08Outstanding at December 31,
    2005


1,239,393


$
8.51



221,816


$
13.56Granted





$




69,900


$
14.30Exercised/Vested


(51,797
)

$
7.01



(49,433
)

$
16.85Forfeited/Expired


(46,917
)

$
13.42



(30,019
)

$
14.78Outstanding at December 31,
    2006


1,140,679


$
8.37



212,264


$
12.86Exercisable at December 31,
    2004


753,008


$
7.59Exercisable at December 31,
    2005


646,555


$
7.81Exercisable at December 31,
    2006


588,344


$
7.69     Year ended
    December 31,2006


2005


2004Amounts realized or received from
    stock option exercises:Cash proceeds received

$
351


$
1,635


$
784Intrinsic value realized

$
384


$
1,147


$
994Income tax benefit realized

$
134


$
353


$
293    71




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
     Options
    Outstanding


Options
    ExercisableWeighted











WeightedWeighted


average








Weighted


averageaverage


remaining








average


remainingNumber


exercise


contractual


Intrinsic


Number


exercise


contractual


IntrinsicRange of exercise
    prices

of
    options


price


life


value


of
    options


price


life


value$ 0.00  $ 5.00


260,000


$
4.45



2.8


$
1,378



260,000


$
4.45



2.8


$
1,378$ 5.01  $10.00


790,269


$
8.65



4.1



871



250,269


$
8.03



3.3



434$10.01  $15.00


14,900


$
12.14



5.4







14,900


$
12.14



5.4



$15.01  $20.00


61,010


$
17.14



6.6







48,675


$
17.37



6.3



$20.01  $25.00


14,500


$
22.80



5.2







14,500


$
22.80



5.2



1,140,679


$
8.37



3.9


$
2,249



588,344


$
7.69



3.4


$
1,812     NOTE 12.
    BUSINESS SEGMENT,
    GEOGRAPHIC, MAJOR CUSTOMER AND RELATED PARTY
    INFORMATION  Business
    Segment
         72




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
    Year ended
    December 31,2006


2005


2004Revenues from external customersSystems and Services

$
252,890


$
293,662


$
268,634Metrigraphics


6,097



6,778



7,072$
258,987


$
300,440


$
275,706Gross marginSystems and Services

$
33,914


$
48,096


$
41,125Metrigraphics


1,202



1,566



1,858$
35,116


$
49,662


$
42,983Operating incomeSystems and Services

$
8,066


$
20,819


$
16,839Metrigraphics


105



486



668$
8,171


$
21,305


$
17,507Depreciation and amortizationSystems and Services

$
5,385


$
5,821


$
5,024Metrigraphics


365



347



466Segment depreciation and
    amortization


5,750



6,168



5,490Corporate depreciation and
    amortization


262



590



458$
6,012


$
6,758


$
5,948Capital expendituresSystems and Services

$
2,243


$
3,664


$
2,819Metrigraphics


17



63



7Segment capital expenditures


2,260



3,727



2,826Corporate capital expenditures


222



844



1,718$
2,482


$
4,571


$
4,544     December 31,2006


2005Segment assetsSystems and Services

$
143,793


$
177,479Metrigraphics


1,756



1,442Total segment assets


145,549



178,921Corporate assets


14,303



8,832$
159,852


$
187,753  73




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
    Geographic
    Major
    Customers
    Year Ended
    December 31,2006


2005


2004Revenue


%


Revenue


%


Revenue


%U.S. Air Force Aeronautical
    Systems Center

$
47,870



18
%

$
48,693



16
%

$
46,705



17
%U.S. Air Force Electronic
    Systems Center

$
20,409



8
%

$
29,551



10
%

$
30,796



11
%     December 31,2006


2005U.S. Air Force Aeronautical
    Systems Center

$
2,159


$
4,740U.S. Air Force Electronic
    Systems Center

$
2,518


$
1,770     Related
    Party
  HMR HMR HMR HMR HMR HMR
  NOTE 13.
    COMMITMENTS AND
    CONTINGENCIES  Commitments
   74




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
      Payments due by
    periodLess than


Two to


Four toTotal


one
    year


three
    years


five
    years


ThereafterLong-term debt

$
15,000


$



$
15,000


$



$
Operating leases


37,041



6,694



12,171



8,270



9,906Letter of Credit


1,031



1,031











Total contractual obligations

$
53,072


$
7,725


$
27,171


$
8,270


$
9,906         Contingencies
       75




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
       76




---



##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (dollars in thousands, except per share amounts)
    NOTE 14.
    QUARTERLY RESULTS
    (UNAUDITED)  First


Second


Third


Fourth


FiscalQuarter


Quarter


Quarter


Quarter(2)


Year2006Revenues

$
68,213


$
67,278


$
63,161


$
60,335


$
258,987Cost of contract revenue and
    product sales

$
58,243


$
59,609


$
54,973


$
51,046


$
223,871Gross profit

$
9,970


$
7,669


$
8,188


$
9,289


$
35,116Operating income

$
2,635


$
930


$
1,927


$
2,679


$
8,171Income before cumulative effect of
    accounting change

$
1,390


$
176


$
921


$
1,501


$
3,988Net income

$
1,474


$
176


$
921


$
1,501


$
4,072Earnings per share on income
    before cumulative effect of accounting change:Basic(1)

$
0.15


$
0.02


$
0.10


$
0.16


$
0.44Diluted(1)

$
0.15


$
0.02


$
0.10


$
0.16


$
0.42Earnings per share on net income:Basic(1)

$
0.16


$
0.02


$
0.10


$
0.16


$
0.45Diluted(1)

$
0.16


$
0.02


$
0.10


$
0.16


$
0.432005Revenues

$
73,542


$
76,188


$
79,113


$
71,597


$
300,440Cost of contract revenue and
    product sales

$
62,215


$
64,244


$
65,416


$
58,903


$
250,778Gross profit

$
11,327


$
11,944


$
13,697


$
12,694


$
49,662Operating income

$
4,552


$
4,493


$
6,215


$
6,045


$
21,305Net income

$
2,091


$
3,273


$
3,137


$
2,932


$
11,433Earnings per share:Basic(1)

$
0.24


$
0.37


$
0.35


$
0.33


$
1.30Diluted(1)

$
0.23


$
0.36


$
0.34


$
0.31


$
1.24     (1)
    
    Basic and diluted earnings per common share is computed
    independently for each of the quarters presented; accordingly,
    the sum of the quarterly earnings per common share may not equal
    the total computed for the year.(2)
    
    2005 benefited from a credit of approximately $900 related to
    employee benefit costs net of estimated rate changes for
    expenses accrued during previous quarters in 2005 that were not
    realized at the level anticipated. 77




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##### Table of Contents



DYNAMICS RESEARCH
    CORPORATION



SCHEDULE II 
    VALUATION AND QUALIFYING ACCOUNTS AND RESERVES  AdditionsBalance at


Charged to


Charged to


Deductions


Balance atBeginning


Costs and


Other


and


End ofDescription

of
    Period


Expenses


Accounts(A)


Write-Offs


PeriodAllowance for doubtful accountsYear ended December 31,2006

$
588


$
215


$



$
(10
)

$
7932005

$
644


$
107


$
70


$
(233
)

$
5882004

$
440


$
72


$
192


$
(60
)

$
644     (A)
    
    Recovery of previously reserved amounts and other adjustments 78




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##### Table of Contents



Item 9.
    CHANGES IN AND
    DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
    DISCLOSURE    Item 9A.
    CONTROLS AND
    PROCEDURES  Disclosure
    Controls and Procedures
  Rules 13a-15(e) 15d-15(e))
  Report of
    Management on Internal Control over Financial
    Reporting
  Rules 13a-15(f) 15d-15(f). Internal
    Control  Integrated Framework
          Changes in
    Internal Control over Financial Reporting
  Rules 13a-15(f)
 79




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##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
     Internal Control  Integrated Framework
        Internal Control  Integrated Framework Internal Control  Integrated Framework
    
    80




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##### Table of Contents



Item 9B.
    OTHER
    INFORMATION   PART III  Item 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE  Form 10-K.
  http://www.drc.com
  Item 11.
    EXECUTIVE
    COMPENSATION    Item 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS    Item 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE    Item 14.
    PRINCIPAL
    ACCOUNTING FEES AND SERVICES   81




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##### Table of Contents



PART IV  Item 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULE    Form 10-K.
      Form 10-K,
 82




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##### Table of Contents



SIGNATURES
      /s/  James
    P. Regan   President, Chairman and Chief
 Executive Officer
      /s/  James
    P. ReganJames
    P. Regan

President, Chairman and Chief
    Executive Officer

March 16, 2007/s/  David
    KeleherDavid
    Keleher

Senior Vice President and Chief
    Financial Officer (Principal Financial Officer)

March 16, 2007/s/  Francis
    MurphyFrancis
    Murphy

Vice President, Corporate
    Controller and Chief Accounting Officer (Principal Accounting
    Officer)

March 16, 2007/s/  John
    S.
    Anderegg, Jr.John
    S. Anderegg, Jr.

Director

March 16, 2007/s/  Francis
    J. AguilarFrancis
    J. Aguilar

Director

March 16, 2007/s/  Gen.
    George T.
    Babbitt, Jr.Gen.
    George T. Babbitt, Jr.

Director

March 16, 2007/s/  Kenneth
    F. KamesKenneth
    F. Kames

Director

March 16, 2007/s/  Lt.
    Gen. Charles P.
    McCauslandLt.
    Gen. Charles P. McCausland

Director

March 16, 2007/s/  Nickolas
    StavropoulosNickolas
    Stavropoulos

Director

March 16, 2007  83




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##### Table of Contents



EXHIBIT INDEX
  Exhibit
    No.

Description

Reference2
.1

Stock Purchase Agreement, dated
    December 12, 2002, by and among Dynamics Research
    Corporation, Andrulis Corporation and the individuals listed on
    the signature page thereto.

A**2
.2

Equity Purchase Agreement among
    Dynamics Research Corporation and Impact Innovations Group LLC
    and J3 Technology Services Corp., dated August 2, 2004

R**3
.1

Restated Articles of Organization
    of the Company, dated May 22, 1987.

B**3
.2

By-Laws of the Company, dated
    May 22, 1987.

B**3
.3

Certificate of Vote of Directors
    Establishing Series A Preferred Stock, dated July 14,
    1988.

C**3
.4

Certificate of Vote of Directors
    Establishing Series B Preferred Stock, dated
    February 17, 1998.

D**3
.5

Amendment, dated
    September 10, 1998, to the Certificate of Vote of Directors
    Establishing Series B Preferred Stock.

E**3
.6

Amendment, dated April 28,
    1998, to the restated Articles of Organization of the Company.

C**3
.7

Amendment, dated April 25,
    2000, to the restated Articles of Organization of the Company.

C**4
.1

Specimen certificate for shares of
    the Companys common stock.

F**4
.2

Rights Agreement, dated
    February 17, 1998, between Dynamics Research Corporation
    and the American Stock Transfer & Trust Company, as
    Rights Agent.

D**10
.1

Form of indemnification agreement
    for directors of the Company.

G**10
.2

Severance Agreement between John
    S. Anderegg, Jr. and the Company.

G* **10
.3

Deferred Compensation Plan for
    Non-Employee Directors of the Company.

G* **10
.4

Form of Supplemental Retirement
    Pension Agreement by and between the Company and Albert Rand.

H* **10
.5

Amended 1993 Equity Incentive Plan.

I* **10
.6

Amended 1995 Stock Option Plan for
    Non-Employee Directors.

H* **10
.7

Employment Agreement between the
    Company and James P. Regan.

J* **10
.8

Change of Control Agreement
    between the Company and James P. Regan.

J* **10
.9

2000 Incentive Plan.

K* **10
.10

Form of grant of stock options
    under the 2000 Incentive Plan.

S* **10
.11

Forms of grant of restricted stock
    under the 2000 Incentive Plan.

L* **10
.12

Non-qualified Stock Option
    Agreement between the Company and James P. Regan.

M* **10
.13

2000 Employee Stock Purchase Plan.

F* **10
.14

Special Severance Plan.

N* **10
.15

Senior Management Deferred
    Compensation Plan.

O* **10
.16

Third Amended and Restated Loan
    Agreement, as of September 29, 2006, by and among Dynamics
    Research Corporation, DRC International Corporation and H.J.
    Ford Associates, Inc. and Brown Brothers Harriman &
    Co., TD Banknorth, N.A., Bank of America, N.A.

V**10
.17

Dynamics Research Corporation
    Special Severance Plan, as amended on May 14, 2003.

Q* **10
.18

2003 Incentive Plan.

Q* **10
.19

Form of grant of stock options
    under the 2003 Incentive Plan.

S* **10
.20

Form of grant of restricted stock
    under the 2003 Incentive Plan.

S* **




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##### Table of Contents



Exhibit
    No.

Description

Reference10
.21

Master Unlimited Guaranty, dated
    as of September 29, 2006, by each of Dynamics Research
    Corporation, DRC International Corporation, and H.J. Ford
    Associates Inc., in favor of Brown Brothers Harriman &
    Co., for itself and as Administrative Agent for each of the
    Lenders which are and which may become parties to the Loan
    Agreement.

V**10
.22

Deferred Stock Compensation Plan
    for Non-Employee Directors, as amended for deferrals on or after
    January 1, 2005.

T* **10
.23

Amendment to Deferred Stock
    Compensation Plan for Non-Employee Directors

T* **10
.24

Beneficiary Designation Form for
    the Deferred Compensation Plan for Non-Employee Directors.

T* **10
.25

Purchase and Sale Agreement, dated
    November 18, 2005, by and between Dynamics Research
    Corporation and Direct Invest Property Acquisition, LLC.

U**10
.26

Amendment to Purchase and Sale
    Agreement, dated December 28, 2005, by and between Dynamics
    Research Corporation and Direct Invest Property Acquisition, LLC.

U**10
.27

Lease, dated December 28,
    2005, by and between Dynamics Research Corporation and Direct
    Invest-60 Frontage, LLC.

U**10
.28

Consent, Waiver and Amendment
    Agreement, dated December 28, 2005, by and among Dynamics
    Research Corporation, Brown Brothers Harriman & Co.,
    KeyBank National Association, TD Banknorth, N.A., and Bank of
    America, N.A.

U**21
.1

Subsidiaries of the registrant.

L**23
.1

Consent of Independent Registered
    Public Accounting Firm (Grant Thornton LLP).

Filed herewith31
.1

Certification of the Chief
    Executive Officer pursuant to
    Rule 13a-14(a)
    under the Securities Exchange Act of 1934, as adopted pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.

Filed herewith31
.2

Certification of the Chief
    Financial Officer pursuant to
    Rule 13a-14(a)
    under the Securities Exchange Act of 1934, as adopted pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.

Filed herewith32
.1

Certification of the Chief
    Executive Officer pursuant to 18 U.S.C. Section 1350,
    as adopted pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002.

Filed herewith32
.2

Certification of the Chief
    Financial Officer pursuant to 18 U.S.C. Section 1350,
    as adopted pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002.

Filed herewith     A
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed on January 6, 2003.B
    
    Incorporated by reference to the Companys Quarterly
    Report on
    Form 10-Q
    for the quarterly period ended June 17, 1987.C
    
    Incorporated by reference to the Companys Annual Report
    on
    Form 10-K
    for the year ended December 31, 2002.D
    
    Incorporated by reference to the Companys
    Form 8-A
    filed on June 25, 1998.E
    
    Incorporated by reference to the Companys
    Form 8-A/
    A filed on September 30, 1998.F
    
    Incorporated by reference to the Companys Registration
    Statement on
    Form S-8
    (Registration
    No. 333-59706)
    filed on April 27, 2001.G
    
    Incorporated by reference to the Companys Annual Report
    on
    Form 10-K
    for the year ended December 31, 1991.H
    
    Incorporated by reference to the Companys Quarterly
    Report on
    Form 10-Q
    for the quarterly period ended March 31, 1997.I
    
    Incorporated by reference to the Companys Annual Report
    on
    Form 10-K
    for the year ended December 31, 1998.J
    
    Incorporated by reference to the Companys Annual Report
    on
    Form 10-K
    for the year ended December 31, 1999.




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##### Table of Contents



K
    
    Incorporated by reference to the Companys
    Schedule 14A filed on December 6, 1999.L
    
    Incorporated by reference to the Companys Annual Report
    on
    Form 10-K
    for the year ended December 31, 2005.M
    
    Incorporated by reference to the Companys Registration
    Statement on
    Form S-8
    (Registration
    No. 333-47838)
    filed on October 12, 2000.N
    
    Incorporated by reference to the Companys Annual Report
    on
    Form 10-K
    for the year ended December 31, 2001.O
    
    Incorporated by reference to the Companys Quarterly
    Report on
    Form 10-Q
    for the quarterly period ended March 31, 2002.P
    
    Incorporated by reference to the Companys Quarterly
    Report on
    Form 10-Q
    for the quarterly period ended June 30, 2002.Q
    
    Incorporated by reference to the Companys Annual Report
    on
    Form 10-K
    for the year ended December 31, 2003.R
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K,
    dated September 1, 2004, and filed on September 8,
    2004.S
    
    Incorporated by reference to the Companys Quarterly
    Report on
    Form 10-Q
    for the quarterly period ended September 30, 2004.T
    
    Incorporated by reference to the Companys Annual Report
    on
    Form 10-K
    for the year ended December 31, 2004.U
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K,
    dated December 28, 2005, and filed on January 4, 2006.V
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed on October 4, 2006*
    
    Management contract or compensatory plan or arrangement.**
    
    In accordance with
    Rule 12b-32
    under the Securities Exchange Act of 1934, as amended, reference
    is made to the documents previously filed with the Securities
    and Exchange Commission, which documents are hereby incorporated
    by reference.