Financial Highlights
                                                                        
                                                                        
                                           1994        1995         1996
(In thousands of dollars, except share
 and employee data)

Revenue                              $  102,964  $  103,941   $  130,163
Net income                                  224         559        1,729
Net income per share                        .04         .10          .30
Backlog                                  43,679      61,284       73,200
Number of employees                       1,130       1,249        1,349
Number of shares outstanding          5,631,448   5,622,772    5,693,659
 
 
To Our Shareholders


In 1996 Dynamics Research Corporation's revenue grew 25 percent to
$130.2 million, finally moving up from a plateau just above $100
million where the Company's sales had been for several years.
Importantly, this growth was achieved across all of our operations.
We expect that the initiatives now in place-in particular, a strategy
of applying our core business competencies as a defense contractor to
other federal and state agencies, as well as the private sector-will
yield strong results in 1997.  Net income for 1996 more than tripled
to $1,729,000 or $.30 per share, from $559,000, or $.10 per share the
prior year.

For the final 16 weeks of 1996, revenue rose 34 percent to $45.2
million from $33.7 million for the corresponding quarter last year.
Net income for the quarter was $191,000, or $.03 per share, compared
with $320,000, or $.06 per share, for the same period in 1995,
reflecting a one-time pre-tax charge of $1.8 million for certain
nonrecoverable costs related to a U.S. Air Force Contract.

Revenue growth was broad based across our four principal operating
divisions-Systems, Test Equipment, Encoder and Metrigraphics-with
each group achieving top-line sales growth in excess of 23 percent.
Sales for the Systems and Test Equipment divisions totaled $100.9
million, or 77 percent of revenues, while commercial sales  for  the
precision  manufactured products divisions rose 26 percent to $29.3
million, accounting for 23 percent of 1996 revenues.

Leveraging Information Technology Expertise

Much of our growth was due to the leveraging of our information
technology expertise to secure several major new contracts or expand
existing contracts within the Systems and Test Equipment divisions.

These include:

A one-year, $4.5 million contract for an auto-mated case-management system
for the State of New Hampshire's Department of Health and Human Services.

A four-year contract valued at potentially $13 million from the U.S. Army to
analyze and improve teamwork among emergency room personnel in
both  civilian and military hospitals.

Expansion of our existing core Navy program with an award from the U.S. Navy
for approximately $5 million in 1996 to develop advanced capabilities for
design and fabrication of radiation-hardened semiconductors for use in
Trident II missiles.

In addition, through the January 1996 acquisition of the Massachusetts
operations of Support Systems Associates, Inc., DRC was able to increase the
level of management and technical support to the U.S.  Air Force's
Electronics Systems Center.  Building upon many years of aircraft maintenance
systems experience, DRC won a role as a subcontractor in developing the
next-generation aircraft maintenance information system.  The Company is also
subcontracting to Computer Sciences Corporation on a $3 billion worldwide
integration and systems engineering program for the U.S. Defense Information
Systems Agency.

Subsequent  to  year end, DRC's Systems Division was  awarded a $36
million contract-$24 million of which is slated for 1997-to install
and maintain computer hardware and communications systems for the
State of Ohio's Department of Health and Human Services.  The move
toward upgrading computer systems for state agencies responsible  for
child welfare programs should yield new business opportunities for
DRC beyond its current New Hampshire and Ohio contracts. We also see
opportunities for the expansion of a broad contract with the U.S.
Department of Treasury, which includes support for the Internal
Revenue Service's tax modernization program.

Going After High-Volume Commercial Sales

During the year we saw strong growth in our two  precision
manufactured products divisions, Encoder and Metrigraphics, primarily
due to a strategy of identifying high-volume manufacturing
opportunities for major commercial customers. An ongoing contract for
the production of nozzles for ink-jet printer cartridges represented
$8 million in sales in 1996, while encoders for diesel-engine fuel
pumps accounted for $5.5 million in sales. We are working to ensure
the extension of these existing contracts and are aggressively
seeking new high-volume medical, consumer and other applications  for
our electroforming and sensor manufacturing capabilities.

Investing for Future Growth

DRC made significant investments in capital equipment and research
and development programs in 1996. Approximately $5 million was
spent on capital equipment for the Metrigraphics Division, providing
us with state-of-the-art quality control systems and ample capacity
for precision manufacturing business growth.

We continue to invest in the development of new  business areas. DRC has
assumed responsibility for supporting the Sleuth fraud control system
developed by Pacific Bell Telephone Company.  Sleuth is currently used by six
regional Bell operating companies.

1997 Goals and Outlook

Rapid  advances in computer and communications technology, and the
dynamic shift in the organizational structure, objectives and budget
for the Department of Defense (DoD) has resulted in new business
opportunities for  DRC.  We view ourselves as a strategic partner,
helping our customers adapt to these changes and operate in a leaner, more
efficient fashion.

We also strive to attune ourselves to the marketplace and identify
opportunities for transferring DRCOs expertise into new areas.  In
addition to increasing DoD work, one of our primary objectives for
1997 is to expand the proportion of business from the private sector,
as well as federal and state agencies. Ultimately, our long-range
goal is to achieve a 50/50 balance between our defense and commercial
work.

Looking ahead, overall company growth, as well as a changing business mix
should help us to compete effectively in existing and new markets and to
improve profitability.  Long-term plans call for growing our current divisions
and seeking selective acquisitions that will strengthen our business base in
information technology and commercial manufacturing.

An important addition was made to DRC's senior management team in October
with the recruitment of Dr. Martin M. Dresser to the post of vice president
and general manager of DRC's Systems Division.  He brings to the job stellar
technical credentials and years of senior management experience in growing
new business lines for pre-eminent engineering and defense concerns.

The early 1990's presented a difficult business climate for DRC, but
we emerged a much stronger and strategically diversified company.
Credit for this accomplishment lies with our employees, whose diligence,
inventiveness and adaptability drive our business.  Their talents and efforts
are greatly appreciated.
  
Sincerely,
  
  
Albert Rand                                 John S. Anderegg, Jr.
President and                               Chairman
Chief Executive Officer
  
Trident II: Managing Lifecycle Requirements

Constant testing and evaluation is necessary to verify the integrity
of original components and the operability of  replacement parts
throughout a weapon system's lifecycle.  As an extension of its
longstanding program, supporting the U.S. Navy's Polaris, Poseidon
and Trident missile guidance and navigation systems,  DRC's Test
Equipment Division supplies manufacturers with test equipment to
ensure the accuracy of navigational instruments for Trident II
missiles.  DRC also re-engineers and replaces obsolete circuits
through a process of extracting their electrical characteristics and
reproducing  functionality  using state-of-the-art semiconductor
components. At a Naval research center, DRC is supporting development
of  new  processes for fabricating semiconductors that will survive
severe conditions.


Integrated Expertise

Since the close of the Cold War, the military has sought more efficient, cost-
effective ways to conduct operations without jeopardizing the readiness
or reliability of weapons systems, personnel and equipment. This goal
has resulted in a number of initiatives, including the re-engineering of
many systems and programs, and the integration of new technologies. DRC
develops innovative conceptual approaches for guiding the military through
these changes by mobilizing integrated teams of experts in information
technology, manpower and skills analysis, logistics and engineering.


U.S. Air Force Electronics Systems Center

As part of a multi-year contract to support the U.S. Air Force,  DRC
provides a range of services in support of the acquisition of electronics
systems. DRC's work for the Air Force's Air Mobility Command (AMC),  after it
assumed responsibility for the Air Force's fleet of aerial refueling tankers,
is representative of the Company's unique blend of expertise. AMC had to plan
for tanker maintenance and flight crews, and ensure that the tankers were in
the right place at the right time. DRC brought in a team with experience in
military cargo transport, systems engineering and logistics to analyze and
define requirements for a management information system that tracks and
directs the tankers.


New Hampshire BRIDGES

A federal initiative to improve the flow of information between state  and
federal agencies tracking child welfare cases created an incentive for states
to replace their outdated database systems.  In 1995, DRC began marketing its
information technology services to state health and human services and child
welfare programs.  Within less than a year, the Company was awarded a one-year,
$4.5 million contract to provide software and networking capabilities for an
automated case-management system, known as BRIDGES, for the State  of
New  Hampshire's Department of Health and Human Services. The  system
provides caseworkers and the courts with up-to-date information for
tracking more than 11,000 children.


Venturing into New Markets

Leveraging its expertise in large-scale military information systems, DRC is
aggressively targeting business opportunities with nondefense federal
and state agencies, as well as the commercial sector. Among its current
projects are major implementations of distributed network computing
systems in New Hampshire and Ohio, and the development of tools for
performing cost/benefit analyses related to the tax system modernization
program underway at the Internal Revenue Service. Under an innovative
contract, DRC is bridging civilian and military markets to bring
technology developed to improve aircraft crew performance under high-
stress conditions to the medical emergency room arena.

MedTeams

Hospital emergency room staffs and combat flight crews all work in
high pressure environments. Decisions they must make in as little as
20 seconds may well have life or death consequences. The ability to
manage information and function as a cohesive team greatly increases
the probability of a positive outcome. DRC's behavioral scientists
recognized an  opportunity to adapt a teamwork training program designed for
U.S. Army Aviation cockpit crews-a program that annually saves an estimated
12 to 15 lives and $30 million-to a medical setting.  DRC scientists pursued
the concept and in 1996 secured a four-year contract valued at potentially
$13 million from the U.S. Army Research Laboratory for Team Performance in
Emergency  Medicine (MedTeams) to analyze and improve emergency room teamwork
in civilian and military hospitals.

Diesel Fuel Pumps

DRC's Encoder Division designs and assembles electro-mechanical devices that
calibrate and control motion in sensitive, expensive machinery. A 1994
regulatory mandate for stricter controls on diesel emissions created a major
new market opportunity for DRC. The Company now manufactures encoders for
engine fuel pumps for diesel-powered sport utility vehicles, pickup trucks and
commercial  vans.  The encoder is a critical component of a computer control
system that gauges the amount of fuel injected into the cylinders, so the
optimum amount is used, minimizing the unburned fuel that creates exhaust
fumes.

Competitive Drive

The engine behind much of DRC's growth and improved profitability in 1996 was
the Company's Precision Manufactured Products segment, which is comprised of
two divisions: Encoder and Metrigraphics.  Since 1992, segment revenues have
grown at an annualized rate of 30 percent due to a strategy of securing
high-volume manufacturing contracts in broad commercial markets. Both divisions
are driven by the imperative to make customers more competitive by providing
them with custom-designed components that result in higher performance,
precision and more cost-competitive machinery and products.

Medical Electronics

Metrigraphics designs and produces circuits, disks and screens using
a process  known as electroforming, whereby a thin, flexible metal
film is deposited in precise patterns.  Medical devices such as
electronic cameras incorporated into heart catheters represent a
major potential market for Metrigraphics' technology. These miniature
cameras enable medical technicians to view blockage within the aorta
during angioplasty procedures.  DRC's Metrigraphics Division produces
miniature flexible circuits that connect the electronics in the
camera head. The Company's ability to manufacture precise and finely
calibrated circuits gives it a competitive edge in this fast-growing
market.

Growth Through Adaptation

The ability to identify and move quickly to take advantage of new
opportunities in a fast-changing business environment is crucial to DRC's
growth.  In addition to investing heavily in research and development and
employee training programs, DRC has long fostered an "intrepreneurial" culture
that encourages employees to incubate and champion new business lines.  This
organizational philosophy has made the Company adept at evolving and thriving
in a highly transitional marketplace.

Sleuth Fraud Control

Employees from DRC's Beaverton, Oregon office targeted Pacific Bell
Telephone Company as a strategic business prospect that could benefit
from DRC's unique combination of technical skills and long-term customer
support capabilities.  DRC's efforts resulted in an exclusive license to
maintain and market Pacific Bell's Sleuth telephone fraud detection and
control software system, which is currently used by six regional Bell
operating companies.

<TABLE>
                              Five Year Summary of Selected Financial Data
<CAPTION>                                                                       
                                                                        
                           1996      1995      1994      1993       1992

(in thousands of dollars,
 except share and
 employee data)
<S>                    <C>       <C>        <C>        <C>         <C>
Revenue                 $130,163  $103,941   $102,964   $101,102    $102,581
Operating income           3,345     1,018        632      3,242       6,377
Net income                 1,729       559        224      1,834       4,014
Net income per common share  .30       .10        .04        .33         .70

Total assets              71,102    53,946     53,977     59,494      48,877
Long-term debt
 (excluding
 current portion)            300     1,500      2,717      3,900           -
Shareholders' investment  35,239    33,206     32,713     32,437      30,805
Shareholders' investment    6.19      5.91       5.81       5.78        5.47
 per share        

Return on shareholders'
 investment(%)              4.9       1.7         .7        5.7        13.0

Backlog                   73,200    61,284     43,679     51,257      54,547
Cash flow from operations  1,035     7,499      5,721      1,397       9,468
Research and development
 expense                   2,702     1,949        224      2,007       1,463
Capital expenditures       9,266     4,441      2,444     12,144       4,732

Number of shares outstanding
 at end of year        5,693,659 5,622,772  5,631,448  5,610,878   5,632,264
Number of employees        1,349     1,249      1,130      1,188       1,189
</TABLE>

                                                         Quarterly Data*
                                                                        
                                                                        
                                1st Qtr      2nd Qtr      3rd Qtr    4th Qtr
(in thousands of dollars,
 except per share data)
 unaudited
1996
 Revenue                        $26,627      $28,373      $29,929    $45,234
 Operating income                   434          873        1,465        573
 Net income                         209          498          831        191
 Net income per common share        .04          .09          .15        .03

1995
 Revenue                        $21,929      $23,936      $24,354    $33,722
 Operating income (loss)           (602)         550          544        526
 Net income (loss)                 (388)         318          309        320
 Net income (loss) per
  common share                     (.07)         .06          .06        .06

1994
 Revenue                        $22,692      $23,656      $21,573    $35,043
 Operating income (loss)            696          580       (2,699)     2,055
 Net income (loss)                  390          302       (1,734)     1,266
 Net income (loss) per
  common share                      .07          .05         (.31)       .22

*  The Company uses a 13-period accounting year, each with four weeks.
The first three quarters contain 12 weeks, and the fourth fiscal quarter
contains 16 weeks. The 1994 fiscal year covered a 53-week period with 17
weeks in the fourth fiscal quarter.




Management's Discussion and Analysis
of Financial Condition and Operating Results



Results of Operations

This discussion and analysis should be read in conjunction with, and
is intended to supplement, the information set forth in the Company's
consolidated financial statements and related notes.

The following table sets forth, for the periods indicated, the percentage
which certain items in the Consolidated Statements of Operations bear to
revenue:
                                           1996      1995      1994
Revenue
   Contract revenue                        77.5%     77.7%     82.4%
   Product sales                           22.5      22.3      17.6
   Total revenue                          100.0     100.0     100.0
Costs and Expenses
   Cost of contract revenue*               91.7      90.5      91.2
   Cost of goods*                          69.9      75.8      80.6
   Total cost of sales                     86.8      87.2      89.3
   Selling, engineering and
   administrative expenses                 10.6      11.8      10.1
   Total operating costs                   97.4      99.0      99.4

   Operating income                         2.6       1.0       0.6
   Interest expense, net                    0.4       0.2       0.4
   Income before provision for
   income taxes                             2.2       0.8       0.2
   Provision for income taxes               0.8       0.3       0.0
     Net income                             1.4%      0.5%      0.2%


*These amounts represent a percentage of contract revenue and product
 sales, respectively.

The  following  comments  should be  read  in  conjunction  with  the
foregoing table:
 
Contract Revenue

Contract revenue increased by 24.9% or $20,122,000 in 1996 over 1995
compared to a 4.9% or $4,135,000 decrease in 1995 over 1994.  The
increase in contract revenue in 1996 was broad-based with growth
contributions from additional work received under the Company's long-running
core Navy program, the  January 1996 acquisition of the Massachusetts-based
operations of an Air Force services business, and Department of Defense
logistics and engineering support contracts awarded in 1995 and 1996, as well
as new state contracts.  Much of the Company's revenue relates to the
development and operation of computer-based management information and
logistics support systems, as well as other information technology services.
The Company is continuing to pursue additional programs both within the
Department of Defense and with other government agencies.
 
Product Sales

Product sales in 1996 increased 26.3% or $6,100,000 as compared with
1995.  This was principally the result of increased sales of electroformed
components for a line of commercial ink-jet printers, and increased sales of
a line of custom encoders for a customer in the automotive industry. The
growth in product sales in 1995, 28.3% or $5,112,000, as compared with 1994
was attributable to increased production of parts for commercial ink-jet
printers.
 
Cost of Contract Revenue

Cost of contract revenue as a percentage of contract revenue increased from
90.5% in 1995 to 91.7% in 1996. In the fourth quarter of 1996, the Company
incurred a one-time pre-tax charge of $1,800,000 for unrecoverable costs
associated with an Air Force contract.  Cost of contract revenue as a
percentage of contract revenue decreased from 91.2% in 1994 to 90.5% in 1995,
partially the result of a nonrecurring charge of $750,000 which was taken
during 1994 relating to staff reductions.  The high level of cost of contract
revenue in 1995 and 1994 reflected reduced profitability on the Company's
major Air Force programs, TEMS and TICARRS.  Under TEMS, the Company operated
as a subcontractor during 1994 and 1995 at reduced hourly rates as compared
with its prior prime-contractor status.  TICARRS, a fixed-price contract,
showed a loss in 1994 and continued in 1995 with no recorded profit.
 
Cost of Goods

Cost of Goods as a percentage of product sales decreased from 80.6%
in 1994 to 75.8% in 1995 and 69.9% in 1996.  This decrease was primarily the
result of increasing production levels of electroformed components for a line
of ink-jet printers and a custom encoder product line.  Both of these product
lines became fully operational during 1994.
 
Selling, Engineering and Administrative Expenses

Selling, engineering and administrative expenses increased by 12.7%
or $1,563,000 in 1996 from 1995, and by 18.4% or $1,904,000 in 1995 from 1994.
These increases were principally due to increased research and development
efforts by the Company during both 1995 and 1996 in connection with a software
design and development tool and research and development spending in 1996 in
connection with the Company's efforts to enter the telecommunication fraud
detection  market.  Excluding research and development expenses, selling,
engineering and administrative costs represented 8.5% sales in 1996 and
9.9% in 1995.
 
Interest Expense, Net

Interest expense, net increased to $547,000 in 1996 from $171,000 in 1995
due to an increase in the average level of the Company's borrowing  during
1996.  Capital expenditures in 1996 of $9,266,000 principally in connection
with a program to increase electroforming manufacturing capacity, combined
with the Company's January 1996 acquisition, resulted in the higher level of
borrowings for 1996.
 
Provision (Benefit) for Income Taxes

Provision (benefit) for income taxes was 38.2% for 1996, compared to 34.0%
for 1995 and (11.4%) for 1994.  The Company accounts for income taxes using
the liability method as set forth in Statement of Financial Accounting
Standards No. 109.  The 1995 and 1994 rates were favorably affected by
research and development credits as well as somewhat lower net state tax
rates. 

Liquidity and Capital Resources

The  Company's primary sources of liquidity have been cash flow from
operations and bank credit lines.  The ratio of current assets to current
liabilities was 1.4 to 1 at December 28, 1996 compared to 2.1 to 1  at the end
of 1995.  The change in this ratio is principally attributable to the funding
required to support the 1996 capital expenditure program coupled with a
January 1996 acquisition.

The principal drivers of cash flow are earnings, adjusted for depreciation
and amortization, aggregate billed and unbilled receivables in the Company's
government business, and capital expenditures.  The sum of receivables and
unbilled expenditures and fees on contracts in process decreased slightly
from the end of 1994 to 1995, while increasing at the end of 1996 as a result
of the 24.9% increase in sales.  However, the 1996 billed and unbilled balance
is comparable to 1995 when measured in terms of days sales.  Capital
expenditures increased to $9,266,000 in 1996 and to $4,441,000 in 1995 from
$2,444,000 in 1994 principally in connection with a program to increase
electroform manufacturing capacity.

At December 28, 1996, $8,400,000 was available under the Company's current
lines of credit.  The Company believes that its liquid assets, cash flows
from operations and available bank lines of credit will be sufficient to
support its normal operating and capital requirements for 1997. In February
1997, the Company announced that it had been awarded a $36 million, five-year
contract by the State of Ohio to provide information technology products and
services.  During  1997, significant expenditures are expected to be made to
acquire and install computer hardware under this contract, which may require
increased levels of borrowings.  As of December 28, 1996, the  Company
does not have any major capital commitments.

The  Company's backlog of unfilled orders at the end of 1996 was $73,200,000,
an increase of 19.4% from the $61,284,000 at the end of 1995.  The Company's
backlog at the end of 1994 was $43,679,000.  The 1995 balance included
$10,000,000 related to a commercial order for ink-jet printer components. A
portion of the Company's backlog is based on annual purchase contracts and
the amount of the backlog as of any date is affected by the timing of such
order receipts and deliveries thereunder.

Impact of Inflation and Changing Prices

Overall,  inflation has not had a material impact on  the Company's
operations.  In addition, the terms of Department of Defense contracts, which
accounted for approximately 74% of the Company's revenues in 1996, are
generally for one year and include salary increase factors for future years,
thus reducing the potential impact of inflation on the Company.

Forward-Looking Information

This report includes certain forward-looking statements about the Company's
business including the effect of the federal budget on the Company's sales,
response to the Company's product and services offerings, growth in revenues,
capital  spending, research and development spending and customer mix.  Such
forward-looking statements are subject to risk and uncertainties that could
cause the actual results to vary materially.  These risks and uncertainties,
discussed in more detail in the Company's Form 10-K for  the year ended
December 28, 1996, include possible reductions in federal funding for the
Company's customers and  potential customers, concentration of customers,
risks of sustaining existing contracts and orders thereunder at the same or
increasing levels and obtaining of new contracts, high levels of competition
and difficulties of entering new markets, government contracting issues
including audit adjustments and costs of completing fixed-price contracts,
supply difficulties, warranty claims, and factors affecting the business
segments in which the Company operates and the economy generally.
                                                                 
   

                                             Consolidated Balance Sheets
                                                                        
<TABLE>                                                                        
At December 28, 1996, December 30, 1995 and December 31, 1994
(in thousands of dollars, except share data)
<CAPTION>
                                            1996          1995          1994

Assets
<S>                                    <C>           <C>           <C>
Current Assets:
 Cash and cash equivalents             $     234     $     777     $     206
 Receivables, less allowances
  of $340, $402 and $586                  19,436        16,095        14,939
 Unbilled expenditures and fees on
  contracts in process                    22,690        16,383        18,194
 Inventories                               3,211         2,612         2,353
 Refundable income taxes                   1,436           286           885
 Prepaid expenses and other
  current assets                           1,247         1,284         1,330
       Total current assets               48,254        37,437        37,907

Property, Plant and Equipment, at Cost:
 Land                                      1,126         1,126         1,126
 Building                                  7,774         7,774         7,774
 Machinery and equipment                  38,861        31,537        28,857
 Leasehold improvements                    2,109         1,815         1,377
       Total property, plant and
        equipment, at cost                49,870        42,252        39,134
 Less-accumulated depreciation
  and amortization                        28,266        25,743        23,064
       Net property, plant
        and equipment                     21,604        16,509        16,070
 
 
Excess of purchase price over net
 assets of business acquired,
 net of amortization                       1,244             -             -
       Total assets                    $  71,102     $  53,946     $  53,977

Liabilities and Shareholders' Investment

Current Liabilities:
 Notes payable                         $ 10,600      $       -     $  1,200
 Accounts and drafts payable              8,925          3,550        3,442
 Accrued payroll and employee benefits    6,998          6,416        4,649
 Deferred contract and other revenue         42            983          894
 Other accrued expenses                     852          1,691        1,535
 Current deferred income taxes            6,091          4,407        4,741
 Current portion of long-term debt        1,201          1,217        1,221
       Total current liabilities         34,709         18,264       17,682

Long-term debt, less current portion        300          1,500        2,717
Deferred income taxes                       854            976          865
Commitments and contingencies

Shareholders' Investment
 Preferred stock, par value, $.10 per
  share, 5,000,000 shares authorized,
  none issued                                 -              -            -      
 Common stock, par value, $.10 per share:
  Authorized - 15,000,000 shares
  Issued - 6,689,767 shares in 1996,
   6,618,880 shares in 1995 and
   6,571,495 shares in 1994                 669            662          657
 Less: Treasury stock - 996,108 shares
  in 1996 and 1995, and 940,047 shares
  in 1994, at par value                    (100)          (100)         (94)
 Capital in excess of par value           9,516          9,219         9,284
 Retained earnings                       25,154         23,425        22,866
       Total shareholders' investment    35,239         33,206        32,713
       Total liabilities and
        shareholders' investment       $ 71,102      $  53,946     $  53,977

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

<CAPTION>
For the three years ended
 December 28, 1996                           1996        1995         1994
(in thousands of dollars,
 except per share data)

<S>                                      <C>         <C>          <C>
Revenue:
     Contract revenue                     $100,878    $ 80,756     $ 84,891
     Product sales                          29,285      23,185       18,073
     Total revenue                         130,163     103,941      102,964
Costs and Expenses:
     Cost of contract revenue               92,512      73,077       77,398
     Cost of goods                          20,476      17,579       14,571
     Selling, engineering and
      administrative expenses               13,830      12,267       10,363
     Total operating costs and expenses    126,818     102,923      102,332
Operating Income                             3,345       1,018          632
     Interest expense, net                     547         171          431
Income Before Provision for Income Taxes     2,798         847          201
     Provision (benefit) for income taxes    1,069         288          (23)
Net Income                                $  1,729    $    559     $    224
Net Income Per Common Share               $    .30    $    .10     $    .04

Weighted Average Number of Common
 Shares Outstanding                      5,675,609   5,603,111    5,638,700

The accompanying notes are an integral part of these consolidated
financial statements.                                                        
</TABLE>                                                                        
                                                                        
                     Consolidated Statements of Shareholders' Investment
<TABLE>                                                                        
For the three years
ended December 28, 1996
(in thousands)
<CAPTION>
                              Common Stock
                         Issued         Treasury Stock    Capital in  Retained
                     Shares Par Value   Shares Par Value  Excess of   Earnings
                                                          Par Value
<S>                    <C>     <C>       <C>    <C>       <C>        <C>
Balance at
 December 25, 1993     6,028   $ 603     (927)  $ (93)    $ 6,977    $ 24,950

Year 1994
 10% stock dividend      509      51        -       -       2,255      (2,308)
 Stock options exercised  34       3        -       -          94           -
 Treasury stock purchased  -       -      (13)     (1)        (42)          -
 Net income                -       -        -       -           -         224
Balance at
 December 31, 1994     6,571   $ 657     (940)   $(94)    $ 9,284    $ 22,866

Year 1995
 Stock options exercised  48       5        -       -         159           -
 Treasury stock purchased  -       -      (56)     (6)       (224)          -
 Net income                -       -        -       -           -         559
Balance at
 December 30, 1995     6,619   $ 662     (996)   $(100)   $ 9,219    $ 23,425

Year 1996
 Stock options exercised  71       7        -        -        297           -
 Net income                -       -        -        -          -       1,729
Balance at
 December 28, 1996     6,690   $ 669     (996)   $(100)   $ 9,516    $ 25,154
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

  
Consolidated Statements of Cash Flows


For the three years ended December 28, 1996
(in thousands of dollars)
                                                1996       1995       1994
Cash Provided by Operations:
 Net income                                $   1,729   $    559   $    224
 Depreciation and amortization                 4,927      4,002      4,161
 Increase (decrease) in deferred income taxes   (122)       111       (180)
 Provision for receivable reserves               (62)      (184)       222
                                               6,472      4,488      4,427
Cash Provided by (Used for) Working Capital:
 Receivables                                  (3,279)      (972)     4,855
 Unbilled expenditures and fees
  on contracts in process                     (6,307)     1,811     (1,141)
 Inventories                                    (599)      (259)       277
 Refundable income taxes                      (1,150)       599       (332)
 Prepaid expenses and other current assets        37         46        (15)
 Accounts and drafts payable                   5,375        108       (885)
 Accrued payroll and employee benefits           582      1,767        (87)
 Deferred contract and other revenue            (941)        89     (2,179)
 Other accrued expenses                         (839)       156        591
 Current deferred income taxes                 1,684       (334)       210
                                              (5,437)     3,011      1,294
 Net cash provided by operations               1,035      7,499      5,721

Cash Used for Investing Activities:
 Additions to property and equipment, net     (9,266)    (4,441)    (2,444)
 Acquisition                                  (2,000)         -          -
 Net cash used for investing activities      (11,266)    (4,441)    (2,444)
 
Cash Provided by (Used for)
 Financing Activities:
 Net borrowings (repayments) under
  line of credit agreements                   10,600     (1,200)    (2,065)
 Principal payment under
  long-term borrowings                        (1,216)    (1,221)    (1,200)
 Proceeds from exercise of stock options         304        164         97
 Purchase of treasury shares                       -       (230)       (43)
 Net cash provided by (used for)
  financing activities                         9,688     (2,487)    (3,211)

Net Increase (Decrease) in
 Cash and Cash Equivalents                      (543)       571         66
Cash and Cash Equivalents at the
 Beginning of the Year                           777        206        140
Cash and Cash Equivalents at the
 End of the Year                           $     234   $    777   $    206

Supplemental Disclosures of
 Cash Flow Information:
 Cash paid during the year for:
 Interest                                  $     635   $    435   $    583
 Income taxes                              $   1,237   $    160   $    265

The accompanying notes are an integral part of these consolidated
financial statements.
                                                                        
                              Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies
 
Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Dynamics Research Corporation and its wholly-owned subsidiaries (the
"Company").  All material intercompany transactions and balances have been
eliminated in consolidation.
 
Revenue Recognition

The  Company provides services under fixed-price, cost-reimbursement,
time-and-material, and level-of-effort contracts.  Revenues under cost-
reimbursement and fixed-price contracts are recognized as costs are incurred
and include applicable fees in the proportion that costs incurred  bear to
total estimated costs.  When a loss is indicated on any contract in process,
provision for the total estimated loss is made at that time.  For
time-and-material and level-of-effort contracts, revenues are recorded as
costs are incurred.  Unbilled expenditures and fees on contracts in process
represent the recoverable amounts of contract revenue under contracts in
process which were not billable at the balance sheet date.  Such amounts
generally become billable upon completion of a specific phase of the contract,
negotiation of contract modifications, completion of government audit or upon
acceptance by the government.  Costs related to certain contracts, including
applicable indirect costs, are subject to audit by the U.S. Government.
Revenues from such contracts have been recorded at amounts expected to be
realized upon final settlement.  Deferred contract revenue represents the
amounts billed on certain contracts in excess of costs and fees incurred
to date.
 
Income Taxes

The  Company accounts for income taxes using the liability method as set forth
in Statement of Financial Accounting Standards No. 109 (SFAS  109),
"Accounting for Income Taxes."  Under the liability method, deferred taxes are
determined based upon the difference between the financial statement and tax
bases of assets and liabilities using tax rates currently in effect in the
years in which the differences are expected to reverse. The deferred tax
provision represents the change in the net deferred tax liability balance.
 
Cash and Cash Equivalents

The Company considers all cash investments with original  maturities
of three months or less to be cash equivalents.
 
Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market,
and consist of materials, labor and overhead.  There are no amounts in
inventories relating to contracts having production cycles longer than one
year.
                                          1996          1995          1994
(in thousands of dollars)
   Work in process                    $  1,411       $   686       $   603
   Raw materials and subassemblies       1,800         1,926         1,750
          Total                       $  3,211       $ 2,612       $ 2,353


 
Property, Plant and Equipment

Property, plant and equipment are recorded at cost.  Depreciation and
amortization are provided in amounts sufficient to amortize the cost of such
assets over their estimated useful lives using principally the straight-line
method for plant and equipment.  Leasehold improvements are amortized over
the remaining term of the lease or the life of the related asset, whichever
is shorter.
 
Fair Value of Financial Instruments

In  1995, the Company adopted Statement of Financial Accounting Standards
No. 107 (SFAS 107), "Disclosures About the Fair Value of Financial
Instruments," which requires disclosure about financial instruments, whether
or not recognized on the balance sheet.  The carrying amount reported in the
balance sheet for cash and cash equivalents, accounts receivable, notes
payable and accounts payable approximates fair value due to the short-term
nature of these instruments.  The mortgage note bears a variable interest rate
of LIBOR plus 1% and, as such, the fair value of the note approximates the
carrying value.
 
Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and  expenses during the reporting period.
Actual results could differ from those estimates.
 
Stock-Based Compensation

The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to  Employees."
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which is effective for 1996.  SFAS
No. 123 establishes a fair value based method of accounting for stock-based
compensation plans.  The Company has adopted the disclosure only alternative
under SFAS No. 123, which requires disclosure of the pro forma effects on
earnings and earnings per share as if SFAS No. 123 had been adopted as well
as certain other information.  See Note 7 - Stock Option Plans for required
disclosures.
 
Net Income Per Common Share

Net income per common share is based on net income and the  weighted average
number of common shares outstanding during each year after giving effect to
stock options considered to be dilutive common stock equivalents.  Fully
diluted net income per common share is not materially different from primary
net income per common share.

2. U.S. Government Contracts

The approximate number of U.S. Government contracts to which the Company is a
party has varied between approximately 100 and 150 during the past five years,
with 105 contracts open at December 28, 1996.  Receivables under U.S.
Government contracts at December 28, 1996 were $14,363,000 compared to
$12,551,000 at December 30, 1995, and $12,505,000 at December 31, 1994.

Unbilled  expenditures and fees on contracts in process consist of costs and
estimated earnings in excess of billings on incompleted government contracts
and are comprised principally of amounts, including retainage, for which
billings could not be presented under the terms of the contracts at the
balance sheet dates.  Unbilled expenditures and fees on contracts in process
with the U.S. Government at December 28, 1996 were $22,690,000 compared to
$16,383,000 at December 30, 1995, and $18,194,000 at December 31, 1994.

Overhead and general and administrative costs charged to U.S. Government
contracts are subject to audit for the years after 1994.

3. Income Taxes
<TABLE>
The  components  of  the provisions (benefit) for federal  and  state
income taxes are as follows:

<captio>
                                        1996          1995          1994
(in thousands of dollars)
<S>                                 <C>           <C>             <C>
Currently Payable (Refundable)
          Federal                   $   (513)     $    447        $  (354)
          State                         (101)          160            (24)
          Total                         (614)          607           (378)

Deferred
          Federal                      1,253          (260)           297
          State                          430           (59)            58
          Total                        1,683          (319)           355
          Total provision (benefit) $  1,069      $    288        $   (23)
   
The  major items contributing to the difference between the statutory U.S.
federal income tax rate of 34% and the Company's effective tax rates are
as follows:
                                        1996          1995          1994
(in thousands of dollars)
   Provision at statutory rate      $    951      $    288        $    68
   State income tax, net of
    federal tax benefit                  217            50             23
   R&D tax credit                          -           (50)          (100)
   Other, net                            (99)            -            (14)
   Provision (benefit) for
    income taxes                    $  1,069      $    288        $   (23)
</TABLE>

The tax effects of significant temporary differences that comprise the
deferred tax assets and liabilities as of December 28,1996 and December 30,
1995 are as follows:
                                                    1996            1995
(in thousands of dollars)

   Unbilled costs and fees and deferred
    contract revenue, net                     $   (8,730)      $  (6,557)
   Accrued expenses                                2,044           1,559
   Receivable reserves                               130             161
   Inventory reserves                                239             216
   Other                                             226             214
   Current deferred tax liabilities, net          (6,091)         (4,407)
   Accelerated tax depreciation                     (285)           (516)
   Other                                            (569)           (460)
   Non-current deferred tax liabilities             (854)           (976)
   Total deferred tax liabilities, net        $   (6,945)      $  (5,383)      


Total deferred tax assets and total deferred tax liabilities were $2,639,000
and $9,584,000, respectively at December 28, 1996 compared with $2,150,000
and $7,533,000, respectively at December 30, 1995.

The  Company has state investment tax credit and federal research and
development credit carry forwards of $320,000 and $111,000, respectively at
December 28, 1996.


4. Employee Benefit Programs

The Company  has a noncontributory defined benefit pension plan covering
substantially all of its employees.  Pension plan benefits are generally
based on years of service and compensation during final years of employment.
The Company's funding policy is to contribute at least the minimum amount
required by the Employee Retirement Income Security Act of 1974.  Contributions
are intended to provide not only for benefits attributed to service to date,
but also for those expected to be earned in the future.

Net pension cost for 1996, 1995 and 1994 included the following
components:
                                          1996          1995          1994
(in thousands of dollars)

   Service cost - benefits earned
    during the period                 $  1,380      $  1,042       $  1,309
   Interest cost on projected
    benefit obligation                   2,031         1,822          1,666
   Actual return on plan assets         (1,599)       (3,704)           685
   Net amortization and deferred items    (225)        2,195         (2,198)
   Net periodic pension cost          $  1,587      $  1,355       $  1,462

The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated financial statements at December 28,
1996, December 30, 1995 and December 31, 1994:

                                          1996          1995          1994
(in thousands of dollars)
Actuarial Present Value of
 Benefit Obligations:
    Vested                           $   26,459     $   23,845    $   18,327
    Nonvested                               639            560           466
    Accumulated benefit obligation       27,098         24,405        18,793
    Effect of projected future
     salary increases                     3,734          3,608         2,644
    Projected benefit obligation for
     service rendered to date            30,832         28,013        21,437
    Plan assets at fair market value     25,609         23,104        19,600
    Projected benefit obligation
     in excess of plan assets           (5,223)         (4,909)       (1,837)
    Unrecognized net loss (gain) from
     past experience different
     from that assumed and effects of
     changes in assumptions                727             196        (2,097)
    Prior service cost not yet recognized
     in net periodic pension cost        1,919           2,139         2,359
    Unrecognized net obligation
     at January 1, 1987 being
     recognized over 15 years              175             211           246
    Net pension liability recognized
     in the Consolidated Balance Sheets
     at December 28, 1996, December 30,
     1995 and December 31, 1994      $  (2,402)     $   (2,363)   $   (1,329)

The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.25% and 3.5% in 1996 and 1995 and 8.5%
and 3.5% in 1994.  The expected long-term rate of return on assets was 9% in
1996, 1995 and 1994.  A substantial portion of the projected benefit
obligation increase from 1994 to 1995 was attributable to the decrease in the
discount rate to reflect current market conditions.

The Company also maintains a cash or deferred savings plan (401(k)plan),
under which employees may reduce their compensation and have such "elective
deferrals" contributed to the plan on their behalf.  The Company contributes
to the plan an amount equal to 25% of the first 6% of an employee's elective
deferrals.  The Company contributed $634,462 to the plan for 1996, $578,120
for 1995 and $581,305 for 1994.  The elective deferrals are invested in one
or more collective investment funds at the participant's direction.  The
Company's contributions are invested in guaranteed investment contracts and
are paid to the employee upon termination, subject to forfeiture of any
nonvested portion if termination occurs within the first five years of
employment.

5. Notes Payable and Lines of Credit

At December 28, 1996, the Company had unsecured lines of credit with
various banks that provide for maximum borrowings of $19,000,000, of
which $10,600,000 was utilized.  Borrowings under these lines of credit are
payable on demand and bear interest at the prevailing prime interest rate
(8.25% at December 28, 1996) or at a lower rate quoted by the respective
banks.  The Company's average interest rate on outstanding borrowings at
December 28, 1996 and December 31, 1994 was 6.3% and 7.0%, respectively.
While the arrangements do not have termination dates, the terms are reviewed
and may be revised periodically.

6. Long-term Debt

Long-term debt consists of the following:
                                                           1996        1995
(in thousands of dollars)

Mortgage note payable to a bank, bearing interest
at LIBOR plus 1%, adjusted quarterly
(6.5% through February 3, 1997), due in quarterly
payments of $300,000 plus interest through
February 1998, secured by certain land and buildings   $  1,500     $  2,700

Other                                                         1           17
Less-current portion                                     (1,201)      (1,217)
                                                       $    300     $  1,500

Future maturities of long-term debt are $1,201,000 in 1997 and $300,000 in
1998.

The Mortgage Agreement, as amended December 18, 1996, contains covenants
requiring maintenance of certain operating ratios, minimum balances of net
worth and specified fixed charge coverage ratios.  The Company was in
compliance with all covenants at December 28, 1996 or obtained a waiver
for any events of non-compliance. 


7. Stock Option Plans

The Company has stock option plans which are administered by the Compensation
Committee of the Board of Directors which determines the employees to receive
options and the number and option price of shares covered by each such option.
The 1993 Equity Incentive Plan (1993  Plan) permits the Company to grant
incentive stock options, stock appreciation rights (SAR), awards of
nontransferable shares of restricted common stock and deferred grants of
common stock.  Options also remain  outstanding under the Company's 1983
Stock Option Plan (1983  Plan), which terminated in 1993.  Options granted
under both plans may be either incentive stock options or non-qualified
stock options.  In the case of an incentive stock option, the option price
shall not be less than the fair market value at the time the option is granted,
and the option period may not be greater than 10 years from the date the
option is granted.  Options under the plans have normally been exercisable in
three equal installments, commencing one year from the date of the grant.

The Company's 1995 Stock Option Plan for Non-Employee Directors provides for
each outside director to receive options to purchase 5,000 shares of Common
Stock at the first annual meeting at which such director is elected, and
options to purchase 1,000 shares of Common Stock at each annual meeting
thereafter so long as he or she remains an eligible director.  Such directors
cannot be employees of the Company or holders of five percent or more of the
Company's Common Stock. The exercise price of such options will be the fair
market value of the Common Stock on the date of grant.  Each option is
non-transferable except upon death, expires 10 years after the date of grant
and becomes exercisable in three equal installments on the first, second and
third anniversary of the date of grant.  A total of 100,000 shares has been
reserved for issuance, of which 82,000 shares remained available at
December 28, 1996.

<TABLE>

Transactions involving the plans are summarized as follows:
<CAPTION>
                          1996                1995                 1994
                             Weighted             Weighted            Weighted
                  Number of   Average  Number of   Average  Number of  Average
                    Shares      Price     Shares     Price    Shares     Price
<S>                 <C>         <C>      <C>         <C>      <C>        <C>
Outstanding at
 beginning of year  499,507     $5.19    360,892     $4.66    429,129    $4.52
Granted             139,000      7.97    186,000      5.77          -        -
Exercised           (70,887)     4.26    (47,385)     3.45    (34,120)    2.86
Canceled             (1,830)     5.80          -         -    (34,117)    4.75
Outstanding at
 end of year        565,790     $5.97    499,507     $5.19    360,892    $4.66

Exercisable at
 end of year        303,789              302,510              315,602

</TABLE>

At December 28, 1996, under the 1993 Plan, 440,000 shares have been
reserved, of which 111,000 shares were available for future grants.

The Company  has computed the pro forma disclosures required under SFAS No.
123 for options granted in 1995 and 1996 using the Black-Scholes option
pricing model required by SFAS No. 123.  The assumptions in the Black-Scholes
calculation were that the risk free interest rate was 6%, the expected life
of the option was 9.5  years, the volatility of the Company's stock was 71%
and there was no expected dividend yield.

Options to acquire 139,000 shares were granted in 1996 with a weighted
average fair value of $6.22 and options to purchase 186,000 shares were
granted in 1995 with a weighted average fair value of $4.58.  For the year
ended December 28, 1996, the pro forma net income, giving effect to SFAS No.
123, would have been $1,272,000 or $.23 per share, compared to the reported
net income of $1,729,000 or $.30 per share.  For the year ended December 30,
1995, the pro forma net income, giving effect to SFAS No. 123, would have
been $419,000 or $.07 per share, compared to the reported net income of
$559,000 or $.10 per share.

8. Commitments and Contingencies

The Company conducts certain of its operations in facilities which are under
long-term operating leases expiring at various dates through 2003, with
various options to renew  through 2005.  Rent expense under these leases
(exclusive of real estate taxes, insurance and other expenses payable under
the terms of the leases) was approximately $2,130,000 in 1996, $1,636,000
in 1995 and $1,800,000 in 1994.  The aggregate minimum lease commitment for
the  Company's facilities on December 28, 1996 was $6,531,000, payable as
follows:  $2,197,000 in 1997, $1,806,000 in 1998, $1,171,000 in 1999, $850,000
in 2000, $241,000 in 2001, $198,000 in 2002 and $68,000 in 2003.

9. Preferred Stock Purchase Rights

On July 14, 1988, and as amended on September 6, 1989, the Company declared
a dividend distribution of one preferred stock purchase right (Right) for
every outstanding share of common stock.  The Rights have attached to all
outstanding shares of common stock, and no separate Rights certificates will
be issued.  The Rights will become exercisable upon the earlier to occur of
(i) the date which is  the tenth business day following a public announcement
that a person or group of affiliated or associated persons has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding shares of common stock or (ii) the tenth business day following
the commencement or announcement of an intention to make a tender offer or
exchange offer that would result in a person or group owning 30% or more of
the outstanding common stock.

When exercisable, each Right entitles the registered holder to purchase from
the Company one tenth of a share of its Series A Participating Preferred
Stock, $.10 par value, at a price of $40.00 per each one tenth share of
preferred stock.  Until a Right is exercised, its holder, as such, will have
no rights as a shareholder of the Company including, without limitation, the
right to vote or to receive dividends.  The Rights may be redeemed by the
Company at the discretion of the Board of Directors, at a price of $.01 per
Right, and they expire on July 27, 1998.

10. Acquisition

On January 23, 1996 the Company acquired the Massachusetts-based operations
of Support Systems Associates, Inc. (SSAI) for $2,000,000 in cash.  The
acquired operations had revenue of approximately $5,900,000 in 1995 and
included a prime contract to provide services to the U.S. Air Force.  In
January 1997, the Company paid an additional $125,000 to the seller based
upon the achievement of certain thresholds as provided for in the acquisition
agreement, this amount will be included in the "Excess of purchase price over
net of business acquired."  A second payment of $125,000 may be due in late
1997 or in 1998.  The acquisition was accounted for as a purchase and the
excess of the purchase price over the fair market value of the net assets
acquired is being amortized over 30 months. 

11. Business Segments

The Company provides computer systems services and other engineering and
management support services and manufactures position and motion sensors and
other precision components.  The Systems and services segment provides
specialized technical services to the Department of Defense and other
customers and produced approximately 77% of total Company revenues in 1996.
These services include the development and operation of computer-based
management information systems where sophisticated software programs are
applied to collect, analyze, store and retrieve information regarding the
location, design, configuration, maintenance status and performance test
history of the individual component parts of major weapons systems.  The
Precision products segment produces encoders, which are used to measure
rotary or linear movement, and precision-patterned glass and electroformed
metal  products.  The Precision products segment's primary market is
located  in  the  United  States.  Sales to two commercial customers
represented 11% of the total Company sales in 1996.  These customers
operate in the automotive and computer-peripheral industries.

Identifiable assets by business segment include both assets directly
identified with those operations and an allocable share of jointly used
assets.  General corporate assets consist primarily of cash and the Company's
Andover, Massachusetts corporate headquarters.

Summarized financial information by business segment for 1996, 1995
and 1994 are as follows:
                                        1996           1995          1994
(in thousands of dollars)

Revenue:
  Systems and services             $ 100,878        $  80,756     $  84,891
  Precision products                  29,285           23,185        18,073
      Total Revenue                $ 130,163        $ 103,941     $ 102,964

Operating Income:
  Systems and services             $ (2,263)        $  (1,907)    $    (290)
  Precision products                  5,608             2,925           922
      Total operating income       $  3,345         $   1,018     $     632

Total Assets:
  Systems and services             $ 44,292         $  34,953     $  36,573
  Precision products                 15,556             9,587         6,878
  Corporate                          11,254             9,406        10,526
      Total Assets                 $ 71,102         $  53,946     $  53,977

Depreciation and Amortization:
  Systems and services             $  2,848         $   2,663     $   2,932
  Precision products                  1,640               879           772
  Corporate                             439               460           457
      Total depreciation
       and amortization            $  4,927         $   4,002     $   4,161

Capital Expenditures:
  Systems and services             $  2,583         $   1,753     $   1,971
  Precision products                  5,999             2,494           347
  Corporate                             684               194           126
      Total capital expenditures   $  9,266         $   4,441     $   2,444



                     Management's Responsibility for Financial Statement
   
The management of Dynamics Research Corporation is responsible for the
accuracy and internal consistency of all information contained in this
annual report, including the consolidated financial statements.
Management has followed those generally accepted accounting principles which
it believes to be most appropriate to the circumstances of the Company, and
has made what it believes to be reasonable and prudent judgments and
estimates where necessary.

Dynamics Research Corporation operates under a system of internal accounting
controls designed to provide reasonable assurance that its financial records
are accurate, that the assets of the Company are protected, and that the
financial statements present fairly the financial position and results of
operations of the Company.  The internal accounting control system is tested,
monitored and revised as necessary.

Three directors of the Company, not members of management, serve as the
Audit Committee of the Board of Directors and are the principal means through
which the Board supervises the performance of the financial reporting duties
of management.  The Audit Committee meets with management and the Company's
independent auditors several times a year to review the results of external
audits of the Company and to discuss plans for future audits.  At these
meetings the Audit Committee also meets privately with the independent
auditors to assure its free access to them.

The  Company's independent auditors, Arthur Andersen LLP, audited the
financial statements prepared by the management of Dynamics Research
Corporation.  Their report on these statements is presented below.
   
   
   
   Albert Rand                                Douglas R. Potter
   President, Chief Executive Officer         Vice President of Finance,
                                              Chief Financial Officer
                                                                        
                                                                        
Report of Independent Public Accountants
 
To Dynamics Research Corporation:

We have audited the accompanying consolidated balance sheets of Dynamics
Research Corporation  (a Massachusetts corporation) and subsidiaries as of
December 28, 1996, December 30, 1995 and December 31, 1994, and the related
consolidated statements of operations, shareholders' investment and cash
flows for the years then ended.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the  audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement.  An audit includes examining, on a  test basis,
evidence supporting the amounts and disclosures in  the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.  We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dynamics Research
Corporation and  subsidiaries as of December 28, 1996, December 30, 1995
and December 31, 1994, and the results of their operations and their cash flows
for the  years then ended in conformity with generally accepted accounting
principles.
   
Boston, Massachusetts,
February 7, 1997                                     Arthur Andersen LLP


 
Corporate Information
 
 
 
Auditors
   Arthur Andersen LLP
   225 Franklin Street,
   Boston, Massachusetts 02110
 
 
Legal Councel
   Ropes & Gray
   One International Place
   Boston, Massachusetts 02110
 
 
Transfer Agent
   American Stock Transfer & Trust Company
   40 Wall Street, 46th floor
   New York, New York 10005
   Telephone: 800-937-5449
 
 
Stock Prices
   
Bid price by quarter               1996                   1995
                               High     Low        High        Low
   First quarter             $ 8.50   $ 5.75     $ 4.75      $ 2.75
   Second quarter              9.00     6.25       4.75        4.00
   Third quarter              10.13     7.50       7.50        4.13
   Fourth quarter             11.00     8.63       9.50        5.50

The bid and asked prices of the Company's common stock on February 7,
1997 were $9.625 and $10.125, respectively. Prices shown reflect inter-dealer
prices, without retail mark-up, mark-down, or commission and may not
necessarily represent actual transactions.

Source: Monthly Statistical Report of the National Association of
Securities Dealers, Inc. - NASDAQ.
 
 
Common Stock
   The Company's stock is traded on the NASDAQ National Market, Symbol:
   DRCO; and listed in newspapers as DynamR., DynRsh. or DynRsearch.
 
 
Number of Shareholders
   The approximate number of shareholders of record at February 7, 1997
   was 1000.  As of February 7, 1997 there were 5,693,659 common shares
   outstanding.
 
 
Form 10-K
   A copy of DRC's Form 10-K, which is filed annually with the
   Securities and Exchange Commission, will be sent without charge to
   any shareholder requesting it in writing to the TreasurerOs office,
   Dynamics Research Corporation, 60 Frontage Road, Andover,
   Massachusetts 01810-5498.
 
 
Annual Meeting
   The 1997 Annual Meeting of Shareholders will be held at 3:30 PM on
   April 22, 1997 at the State Street Bank and Trust Building, 33rd
   floor, 225 Franklin Street, Boston, Massachusetts 02110.
 
Directors

Dr. Francis J. Aguilar**
   Professor of Business Administration,
   Emeritus, Harvard University,
   Graduate School of Business Administration

John S. Anderegg, Jr.
   Chairman, Dynamics Research Corporation

General James P. Mullins**
   USAF retired

Albert Rand
   President and Chief Executive Officer,
   Dynamics Research Corporation

Thomas J. Troup*
   Vice Chairman, Burr-Brown Corporation
   
*     Member of the Audit Committee
**   Member of the Audit and Compensation Committees
 
 
Officers

John S. Anderegg, Jr.
   Chairman

Albert Rand
   President, Chief Executive Officer

Arthur Brown
   Vice President, Contracts, Systems Division

William G. Clautice
   Vice President, Strategic Programs,
   Test Equipment Division

Dr. Martin M. Dresser
   Vice President, General Manager, Systems Division

Victor J. Garber
   Vice President, Acquisition Engineering, Systems Division

Dr. Joseph W. Griffin, Jr.
   Vice President, Systems Development,
   Systems Division

Edward C. Johnson
   Vice President, Marketing, Systems Division

Chester Ju
   Vice President, Encoder Division and
   Metrigraphics Division

John M. Nauseef
   Vice President, Dayton Operations, Systems Division
   
Douglas R. Potter
   Vice President of Finance, Chief Financial Officer

Richard P. Rappaport
   Vice President, Test Equipment Division

John L. Wilkinson
   Vice President, Human Resources

David C. Proctor
   Treasurer and Assistant Clerk

John R.D. McClintock
   Clerk