##### Table of Contents

















UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K/A








Amendment No. 1 to Form 10-K





|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31, 2004                                                 
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For 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(Address of Principal Executive Offices) |  | 01810-5498(Zip Code)                    

Registrants telephone number, including area code




Securities registered pursuant to Section 12(b) of the
Act:




Securities registered pursuant to Section 12(g) of the
Act:




þ o


o


þ o







DOCUMENTS INCORPORATED BY REFERENCE
















---










DYNAMICS RESEARCH CORPORATION


ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2004





|                                                       |      |                                                                                                                         |  |  |    | 
|------------------------------------------------------ | ---- | ----------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|                                                       |      | Page                                                                                                                    | 
|                                                       |      |                                                                                                                         | 
|Part I                                                 |      |                                                                                                                         |  | 
|                                                       | Item |                                                                                                                         |  |  |   
|                                                       |      | 1. Business                                                                                                             |  |  | 3  | 
|                                                       |      | 2. Properties                                                                                                           |  |  | 12 | 
|                                                       |      | 3. Legal Proceedings                                                                                                    |  |  | 13 | 
|                                                       |      | 4. Submission of Matters to a Vote of
    Security Holders Executive Officers of the Company                            |  |  | 13 | 
|Part II                                                |      |                                                                                                                         |  | 
|                                                       | Item |                                                                                                                         |  |  |   
|                                                       |      | 5. Market for Registrants Common
    Equity, Related Stockholder Matters and Issuer Purchases of
    Equity Securities |  |  | 15 | 
|                                                       |      | 6. Selected Financial Data                                                                                              |  |  | 15 | 
|                                                       |      | 7. Managements Discussion and
    Analysis of Financial Condition and Results of Operations                            |  |  | 17 | 
|                                                       |      | 7A.            Quantitative
    and Qualitative Disclosures About Market Risk                                           |  |  | 34 | 
|                                                       |      | 8. Financial Statements and
    Supplementary Data                                                                      |  |  | 35 | 
|                                                       |      | 9. Changes In and Disagreements With
    Accountants on Accounting and Financial Disclosure                             |  |  | 72 | 
|                                                       |      | 9A. Controls and Procedures                                                                                             |  |  | 72 | 
|Part III                                               |      |                                                                                                                         |  | 
|                                                       | Item |                                                                                                                         |  |  |   
|                                                       |      | 10. Directors and Executive Officers
    of the Registrant                                                              |  |  | 77 | 
|                                                       |      | 11. Executive Compensation                                                                                              |  |  | 77 | 
|                                                       |      | 12. Security Ownership of Certain
    Beneficial Owners and Management                                                  |  |  | 77 | 
|                                                       |      | 13. Certain Relationships and Related
    Transactions                                                                  |  |  | 78 | 
|                                                       |      | 14. Principal Accounting Fees and
    Services                                                                          |  |  | 78 | 
|Part IV                                                |      |                                                                                                                         |  | 
|                                                       | Item |                                                                                                                         |  |  |   
|                                                       |      | 15. Exhibits, Financial Statement
    Schedules                                                                         |  |  | 79 | 
|EX-10.35 DEFERRED STOCK COMPENSATION PLAN             
|EX-10.36 AMENDMENT TO DEFERRED STOCK COMPENSATION PLAN
|EX-10.37 BENEFICIARY DESIGNATION FORM                 
|EX-21.1 Subsidiaries of Dymamics Research             
|EX-23.1 Consent of Grant Thornton LLP                 
|EX-23.2 Consent of KPMG LLP                           
|EX-23.2 Report of KPMG LLP                            
|EX-31.1 SECTION 302 CERTIFICATION OF CEO              
|EX-31.2 SECTION 302 CERTIFICATION OF CFO              
|EX-32.1 SECTION 906 CERTIFICATION OF CEO              
|EX-32.2 SECTION 906 CERTIFICATION OF CFO              














2



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PART I










|        |         
|------- | --------
|Item 1. | BUSINESS

OVERVIEW

















,



















http://www.drc.com http://www.sec.gov


3



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MARKETS




















MAJOR CUSTOMERS




Defense Sector




4



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##### Table of Contents





Aeronautical Systems Center, Air Force Materiel
Command


















Air Force Electronic Systems Center










Air National Guard










5



---



##### Table of Contents






Office of the Undersecretary of Defense for Public
Affairs







Navy Trident Missile Program




Air Force Depot Operations










Army Aviation/ Missile Command




Army Training




Air Force Air Mobility Command




6



---



##### Table of Contents



Office of Naval Research




Missile Defense Agency




Navy Central HIV Program




Air Force Materiel Support Group







Naval Air Systems Command





















Other Business Intelligence Programs






7



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Federal Civilian Agency Sector






Internal Revenue Service




Federal Deposit Insurance Corporation


Configuration and Quality
Management Staff


8



---



##### Table of Contents



www.fdic.gov


United States Customs Service Air and Marine Interdiction
Division




State and Local Government Sector










State of Ohio








State of Colorado














9



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DRCs SOLUTIONS


Systems and Services










Business Intelligence










Business Transformation




Acquisition Management




Training and Performance Support




Automated Case Management




IT Infrastructure Services




Precision Manufacturing




BUSINESS DEVELOPMENT




10



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GOVERNMENT CONTRACTS






















BACKLOG










COMPETITION






11



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RAW MATERIALS




GOVERNMENT REGULATION










EMPLOYEES




PROPRIETARY INFORMATION









|        |           
|------- | ----------
|Item 2. | PROPERTIES



12



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|        |                  
|------- | -----------------
|Item 3. | LEGAL PROCEEDINGS


























|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



Executive Officers of the Registrant




13



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|                   |                                                                |     |    |  | 
|------------------ | -------------------------------------------------------------- | --- | -- |  | 
|Name and Position  |                                                                | Age |   
|                   |                                                                |     |   
|James P. Regan     |                                                                |     | 64 | 
|                   | Chairman and Chief Executive Officer                           |     |    |  | 
|William C. Hoover  |                                                                |     | 55 | 
|                   | President and Chief Operating Officer                          |     |    |  | 
|Richard A. Covel   |                                                                |     | 58 | 
|                   | Vice President, General Counsel and Secretary                  |     |    |  | 
|David Keleher      |                                                                |     | 55 | 
|                   | Senior Vice President and Chief Financial Officer              |     |    |  | 
|Steven P. Wentzell |                                                                |     | 58 | 
|                   | Senior Vice President and General Manager,
    Human Resources |     |    |  | 











14



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PART II







|        |                                                                                                                 
|------- | ----------------------------------------------------------------------------------------------------------------
|Item 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
    STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



|                                    |                |      |   |       |     |  |   |       | 
|----------------------------------- | -------------- | ---- | - | ----- | --- |  | - | ----- | 
|                                    |                | High |   |       | Low | 
|                                    |                |      |   |       |     | 
|Fiscal year ended December 31, 2004 |                |      |   |       |     |  |   |      
|                                    | First quarter  |      | $ | 18.44 |     |  | $ | 14.69 | 
|                                    | Second quarter |      | $ | 18.90 |     |  | $ | 15.06 | 
|                                    | Third quarter  |      | $ | 17.97 |     |  | $ | 14.91 | 
|                                    | Fourth quarter |      | $ | 18.00 |     |  | $ | 15.22 | 
|                                   
|Fiscal year ended December 31, 2003 |                |      |   |       |     |  |   |      
|                                    | First quarter  |      | $ | 14.90 |     |  | $ | 9.70  | 
|                                    | Second quarter |      | $ | 16.16 |     |  | $ | 9.33  | 
|                                    | Third quarter  |      | $ | 19.21 |     |  | $ | 15.20 | 
|                                    | Fourth quarter |      | $ | 19.50 |     |  | $ | 15.22 | 

Number of Holders




Dividend Policy









|        |                        
|------- | -----------------------
|Item 6. | SELECTED FINANCIAL DATA









15



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|                                                                      |                                                    |                                  |         |      |       |   |         |            |       |   |         |       |       |         |         |       |       |   |         |      |       | 
|--------------------------------------------------------------------- | -------------------------------------------------- | -------------------------------- | ------- | ---- | ----- | - | ------- | ---------- | ----- | - | ------- | ----- | ----- | ------- | ------- | ----- | ----- | - | ------- | ---- | ----- | 
|                                                                      |                                                    | Year ended December 31,          |        
|                                                                      |                                                    |                                  |        
|                                                                      |                                                    | 2004(1)                          |         |      | 2003  |   |         | 2002(2)(3) |       |   | 2001(3) |       |       | 2000(3) |        
|(in thousands, except share and per share data)                       |                                                    |                                  |         |      |       |   |         |            |       |   |         |       |       |         |        
|Revenue                                                               |                                                    | $                                | 275,706 |      |       | $ | 244,808 |            |       | $ | 192,610 |       |       | $       | 190,264 |       |       | $ | 182,527 |     
|Operating income (loss)                                               |                                                    | $                                | 17,507  |      |       | $ | 15,389  |            |       | $ | 12,647  |       |       | $       | 13,010  |       |       | $ | 6,584   |     
|Income from continuing operations                                     |                                                    | $                                | 9,373   |      |       | $ | 8,655   |            |       | $ | 7,357   |       |       | $       | 7,102   |       |       | $ | 2,808   |     
|Income (loss) from discontinued operations                            |                                                    |                                  |        |      |       |   | (1,635  | )          |       |   | (1,124  | )     |       |         | (619    | )     |       |   | 1,545   |     
|Gain (loss) on disposal of discontinued operations                    |                                                    |                                  |        |      |       |   | (348    | )          |       |   |        |       |       |         | 62      |       |       |   | 206     |     
|                                                                      |                                                    |                                  |         |      |       |   |         |            |       |   |         |       |       |         |        
|                                                                      |                                                    | Net income                       |         | $    | 9,373 |   |         | $          | 6,672 |   |         | $     | 6,233 |         |         | $     | 6,545 |   |         | $    | 4,559 | 
|                                                                      |                                                    |                                  |         |      |       |   |         |            |       |   |         |       |       |         |        
|Earnings (loss) per share  basic                                     |                                                    |                                  |         |      |       |   |         |            |       |   |         |       |       |         |         |       |       |   |         |     
|                                                                      | Income from continuing operations                  |                                  | $       | 1.10 |       |   | $       | 1.05       |       |   | $       | 0.92  |       |         | $       | 0.92  |       |   | $       | 0.37 |      
|                                                                      | Income (loss) from discontinued operations         |                                  |         |     |       |   |         | (0.20      | )     |   |         | (0.14 | )     |         |         | (0.08 | )     |   |         | 0.20 |      
|                                                                      | Gain (loss) on disposal of discontinued operations |                                  |         |     |       |   |         | (0.04      | )     |   |         |      |       |         |         | 0.01  |       |   |         | 0.03 |      
|                                                                      |                                                    |                                  |         |      |       |   |         |            |       |   |         |       |       |         |        
|                                                                      |                                                    | Net earnings per share  basic   |         | $    | 1.10  |   |         | $          | 0.81  |   |         | $     | 0.78  |         |         | $     | 0.85  |   |         | $    | 0.60  | 
|                                                                      |                                                    |                                  |         |      |       |   |         |            |       |   |         |       |       |         |        
|Earnings (loss) per share  diluted                                   |                                                    |                                  |         |      |       |   |         |            |       |   |         |       |       |         |         |       |       |   |         |     
|                                                                      | Income from continuing operations                  |                                  | $       | 1.03 |       |   | $       | 0.98       |       |   | $       | 0.83  |       |         | $       | 0.88  |       |   | $       | 0.36 |      
|                                                                      | Income (loss) from discontinued operations         |                                  |         |     |       |   |         | (0.18      | )     |   |         | (0.13 | )     |         |         | (0.08 | )     |   |         | 0.20 |      
|                                                                      | Gain (loss) on disposal of discontinued operations |                                  |         |     |       |   |         | (0.04      | )     |   |         |      |       |         |         | 0.01  |       |   |         | 0.03 |      
|                                                                      |                                                    |                                  |         |      |       |   |         |            |       |   |         |       |       |         |        
|                                                                      |                                                    | Net earnings per share  diluted |         | $    | 1.03  |   |         | $          | 0.76  |   |         | $     | 0.70  |         |         | $     | 0.81  |   |         | $    | 0.59  | 
|                                                                      |                                                    |                                  |         |      |       |   |         |            |       |   |         |       |       |         |        
|Net cash provided by operating activities  continuing
    operations |                                                    | $                                | 3,997   |      |       | $ | 13,186  |            |       | $ | 9,915   |       |       | $       | 23,554  |       |       | $ | 3,765   |     
|Research and development expense                                      |                                                    | $                                |        |      |       | $ |        |            |       | $ | 175     |       |       | $       | 367     |       |       | $ |        |     
|Capital expenditures                                                  |                                                    | $                                | 4,544   |      |       | $ | 8,163   |            |       | $ | 3,347   |       |       | $       | 3,595   |       |       | $ | 2,917   |     
|Depreciation                                                          |                                                    | $                                | 3,624   |      |       | $ | 3,007   |            |       | $ | 3,192   |       |       | $       | 2,989   |       |       | $ | 3,155   |     







|                                                                                     |  |                    |           |   |      |   |           |            |  |             |           |   |  |         |           |   |  |   |           |  
|------------------------------------------------------------------------------------ |  | ------------------ | --------- | - | ---- | - | --------- | ---------- |  | ----------- | --------- | - |  | ------- | --------- | - |  | - | --------- | -
|                                                                                     |  | As of December 31, |          
|                                                                                     |  |                    |          
|                                                                                     |  | 2004(1)            |           |   | 2003 |   |           | 2002(2)(3) |  |             | 2001(3)   |   |  | 2000(3) |          
|                                                                                     |  |                    |           |   |      |   |           |            |  |             |           |   |  |         |          
|                                                                                     |  |                    |           |   |      |   |           |            |  | (unaudited) |          
|Total assets                                                                         |  | $                  | 205,134   |   |      | $ | 121,070   |            |  | $           | 111,676   |   |  | $       | 80,821    |   |  | $ | 78,175    |  
|Current portion of long-term debt, notes payable and revolving
    credit facilities |  | $                  | 18,357    |   |      | $ | 9,000     |            |  | $           | 15,144    |   |  | $       | 500       |   |  | $ | 6,284     |  
|Long-term debt (less current portion)                                                |  | $                  | 51,485    |   |      | $ | 7,750     |            |  | $           | 8,250     |   |  | $       | 8,750     |   |  | $ | 9,250     |  
|Stockholders equity                                                                 |  | $                  | 61,318    |   |      | $ | 48,651    |            |  | $           | 39,809    |   |  | $       | 37,138    |   |  | $ | 29,289    |  
|Return on invested capital                                                           |  |                    | 10.7      | % |      |   | 14.0      | %          |  |             | 14.4      | % |  |         | 17.7      | % |  |   | 8.6       | %
|Stockholders equity per share                                                       |  | $                  | 7.02      |   |      | $ | 5.76      |            |  | $           | 4.88      |   |  | $       | 4.68      |   |  | $ | 3.85      |  
|Return on stockholders equity                                                       |  |                    | 17.0      | % |      |   | 20.3      | %          |  |             | 18.6      | % |  |         | 23.5      | % |  |   | 14.7      | %
|Backlog (unaudited)                                                                  |  | $                  | 165,017   |   |      | $ | 123,895   |            |  | $           | 111,070   |   |  | $       | 90,382    |   |  | $ | 88,000    |  
|Number of shares outstanding                                                         |  |                    | 8,737,562 |   |      |   | 8,443,082 |            |  |             | 8,164,180 |   |  |         | 7,940,610 |   |  |   | 7,601,519 |  









|    |                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amounts include results of operations of Impact Innovations
    Group LLC (acquired September 1, 2004) for the period
    subsequent to its acquisition.                                                                
|   
|(2) | Amounts include results of operations of Andrulis Corporation
    (acquired December 20, 2002) and HJ Ford Associates, Inc.
    (acquired May 31, 2002) for the periods subsequent to their
    respective acquisitions.
|   
|(3) | Amounts were restated to report the results of the
    companys Encoder Division as discontinued operations as a
    result of the decision to exit the business in 2002.                                              

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS




OVERVIEW


















ACQUISITIONS




17



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DISCONTINUED OPERATIONS




CRITICAL ACCOUNTING POLICIES












Revenue Recognition








Accounting for Performance of Construction-Type and Certain
Production-Type Contracts








18



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Valuation Allowances










Intangible and Other Long-lived Assets






Goodwill




Business Combinations




Deferred Taxes




Pensions




19



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RESULTS OF OPERATIONS




|                                                                        |                       |                         |      |       |      |  |      |       |   |  |      |       |  
|----------------------------------------------------------------------- | --------------------- | ----------------------- | ---- | ----- | ---- |  | ---- | ----- | - |  | ---- | ----- | -
|                                                                        |                       | Year ended December 31, |     
|                                                                        |                       |                         |     
|                                                                        |                       | 2004                    |      |       | 2003 |  |      | 2002  |  
|                                                                        |                       |                         |      |       |      |  |      |       |  
|Contract revenue                                                        |                       |                         | 97.4 | %     |      |  | 97.2 | %     |   |  | 96.0 | %    
|Product sales                                                           |                       |                         | 2.6  | %     |      |  | 2.8  | %     |   |  | 4.0  | %    
|                                                                        |                       |                         |      |       |      |  |      |       |  
|                                                                        | Total revenue         |                         |      | 100.0 | %    |  |      | 100.0 | % |  |      | 100.0 | %
|                                                                       
|Gross margin on contract revenue(1)                                     |                       |                         | 15.3 | %     |      |  | 16.1 | %     |   |  | 15.4 | %    
|Gross margin on product sales(1)                                        |                       |                         | 26.3 | %     |      |  | 26.4 | %     |   |  | 31.2 | %    
|                                                                        | Total gross margin(1) |                         |      | 15.6  | %    |  |      | 16.4  | % |  |      | 16.1  | %
|                                                                       
|Selling, general and administrative expenses                            |                       |                         | 8.4  | %     |      |  | 9.4  | %     |   |  | 9.3  | %    
|Amortization of intangible assets                                       |                       |                         | 0.8  | %     |      |  | 0.7  | %     |   |  | 0.2  | %    
|                                                                       
|Operating income                                                        |                       |                         | 6.4  | %     |      |  | 6.3  | %     |   |  | 6.6  | %    
|Interest expense, net                                                   |                       |                         | (0.8 | )%    |      |  | (0.3 | )%    |   |  | (0.2 | )%   
|Other income (expense), net                                             |                       |                         | 0.1  | %     |      |  | 0.1  | %     |   |  |     |      
|                                                                       
|Income from continuing operations before provision for income
    taxes |                       |                         | 5.7  | %     |      |  | 6.1  | %     |   |  | 6.4  | %    






|    |                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------
|(1) | These amounts represent a percentage of contract revenues,
    product sales and total revenues, respectively.

Revenue




Contract revenues














20



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|                                              |  |                         |     |   |      |  |     |      |  |  |     |  
|--------------------------------------------- |  | ----------------------- | --- | - | ---- |  | --- | ---- |  |  | --- | -
|                                              |  | Year ended December 31, |    
|                                              |  |                         |    
|                                              |  | 2004                    |     |   | 2003 |  |     | 2002 | 
|                                              |  |                         |     |   |      |  |     |      | 
|Time and materials                            |  |                         | 59  | % |      |  | 64  | %    |  |  | 58  | %
|Cost reimbursable                             |  |                         | 21  | % |      |  | 23  | %    |  |  | 31  | %
|Fixed price, including service-type contracts |  |                         | 20  | % |      |  | 13  | %    |  |  | 11  | %
|                                              |  |                         |     |   |      |  |     |      | 
|                                              |  |                         | 100 | % |      |  | 100 | %    |  |  | 100 | %
|                                              |  |                         |     |   |      |  |     |      | 
|Prime contract                                |  |                         | 74  | % |      |  | 69  | %    |  |  | 66  | %
|Sub-contract                                  |  |                         | 26  | % |      |  | 31  | %    |  |  | 34  | %
|                                              |  |                         |     |   |      |  |     |      | 
|                                              |  |                         | 100 | % |      |  | 100 | %    |  |  | 100 | %
|                                              |  |                         |     |   |      |  |     |      | 



Product sales




Funded backlog










Gross profit and margin










21



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Selling, general and administrative expenses






Amortization of intangible assets




Operating income






Interest income and expense




22



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Other income and expense




Income taxes




Discontinued operations










Shares used in computing earnings (loss) per share










LIQUIDITY AND CAPITAL RESOURCES










23



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Operating Activities














































24



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##### Table of Contents











Investing Activities












Financing Activities


























25



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







Commitments




|                 |                               |                        |        |           |          |   |        |             |  |         |            |        |  |            |        |        |  |   |       |       | 
|---------------- | ----------------------------- | ---------------------- | ------ | --------- | -------- | - | ------ | ----------- |  | ------- | ---------- | ------ |  | ---------- | ------ | ------ |  | - | ----- | ----- | 
|                 |                               | Payments due by period |       
|                 |                               |                        |       
|                 |                               |                        |        | Less than |          |   | Two to |             |  | Four to |            |        | 
|                 |                               | Total                  |        |           | one year |   |        | three years |  |         | five years |        |  | Thereafter |       
|                 |                               |                        |        |           |          |   |        |             |  |         |            |        |  |            |       
|Revolver         |                               | $                      | 10,000 |           |          | $ | 10,000 |             |  | $       |           |        |  | $          |       |        |  | $ |      |      
|Long-term debt   |                               |                        | 59,842 |           |          |   | 8,357  |             |  |         | 16,714     |        |  |            | 29,521 |        |  |   | 5,250 |      
|Operating leases |                               |                        | 14,515 |           |          |   | 4,370  |             |  |         | 5,223      |        |  |            | 3,021  |        |  |   | 1,901 |      
|                 |                               |                        |        |           |          |   |        |             |  |         |            |        |  |            |       
|                 | Total contractual obligations |                        | $      | 84,357    |          |   | $      | 22,727      |  |         | $          | 21,937 |  |            | $      | 32,542 |  |   | $     | 7,151 | 
|                 |                               |                        |        |           |          |   |        |             |  |         |            |        |  |            |       



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Contingencies
























NEW ACCOUNTING PRONOUNCEMENTS





Share-Based Payments Accounting
for Stock-Based Compensation Accounting for Stock Issued to Employees





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Application of
FASB Statement No. 109, Accounting for Income Taxes, to the
Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of Accounting for
Income Taxes








Inventory Costs, an amendment of ARB No. 43,
Chapter 4





IMPACT OF INFLATION AND CHANGING PRICES




FACTORS THAT MAY AFFECT FUTURE RESULTS







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













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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.






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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.




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Security Breaches in Sensitive Government Systems Could
Harm Our Business.




Our Employees May Engage in Misconduct or Other Improper
Activities, Which Could Harm Our Business.




We Are Involved in Various Litigation Matters Which, If
Not Resolved in Our Favor, Could Harm Our Business.









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





















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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.




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Our Financing Requirements May Increase and We Could Have
Limited Access to Capital Markets.




Accounting System Upgrades and Conversions May Delay
Billing and Collections of our Accounts Receivable.










Our Quarterly Operating Results May Vary Significantly
From Quarter to Quarter.






| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | the number, size and timing of client projects commenced and
    completed during a quarter;
|
| |  | bid and proposal efforts undertaken;                                                        
|
| |  | progress on fixed-price projects during a given quarter;                                    
|
| |  | employee productivity and hiring, attrition and utilization
    rates;                      
|
| |  | accuracy of estimates of resources required to complete ongoing
    projects; 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.

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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 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK













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PART II







|        |                                            
|------- | -------------------------------------------
|Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




|                                                                                                                                                        |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                                        |  | Page |   
|                                                                                                                                                        |  |      |   
|Report of Independent Registered Public
    Accounting Firm (Grant Thornton LLP)                                                                        |  |      | 36 | 
|Report of Independent Registered Public Accounting Firm (KPMG
    LLP)                                                                                  |  |      | 37 | 
|Consolidated Balance Sheets as of
    December 31, 2004 and 2003                                                                                        |  |      | 38 | 
|Consolidated Statements of Operations for
    the years ended December 31, 2004, 2003 and 2002                                                          |  |      | 39 | 
|Consolidated Statements of Changes in
    Stockholders Equity and Comprehensive Income (Loss) for
    the years ended December 31, 2004, 2003 and 2002 |  |      | 40 | 
|Consolidated Statements of Cash Flows for
    the years ended December 31, 2004, 2003 and 2002                                                          |  |      | 41 | 
|Notes to Consolidated Financial
    Statements                                                                                                          |  |      | 42 | 
|Schedule II  Valuation and
    Qualifying Accounts and Reserves                                                                                        |  |      | 71 | 




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














Internal Control 
Integrated Framework







| |                       
| | ----------------------
| | /s/ Grant Thornton LLP














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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

































KPMG LLP





















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DYNAMICS RESEARCH CORPORATION





CONSOLIDATED BALANCE SHEETS


(In thousands, except share and per share data)





|                                     |                                                                                                         |                                                                                         |                                            |        |      |         |   |        |      |         | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ---- | ------- | - | ------ | ---- | ------- | 
|                                     |                                                                                                         | December 31,                                                                            |                                           
|                                     |                                                                                                         |                                                                                         |                                           
|                                     |                                                                                                         | 2004                                                                                    |                                            |        | 2003 |        
|                                     |                                                                                                         |                                                                                         |                                            |        |      |        
|ASSETS                              
|Current assets                       |                                                                                                         |                                                                                         |                                            |        |      |         |   |       
|                                     | Cash and cash equivalents                                                                               |                                                                                         | $                                          | 925    |      |         | $ | 2,724  |     
|                                     | Accounts receivable, net of allowances of $396 and $321 at
    December 31, 2004 and 2003, respectively |                                                                                         |                                            | 45,978 |      |         |   | 28,251 |     
|                                     | Unbilled expenditures and fees on contracts in process                                                  |                                                                                         |                                            | 48,119 |      |         |   | 34,257 |     
|                                     | Prepaid expenses and other current assets                                                               |                                                                                         |                                            | 5,668  |      |         |   | 2,145  |     
|                                     |                                                                                                         |                                                                                         |                                            |        |      |        
|                                     |                                                                                                         |                                                                                         | Total current assets                       |        |      | 100,690 |   |        |      | 67,377  | 
|                                     |                                                                                                         |                                                                                         |                                            |        |      |        
|Noncurrent assets                    |                                                                                                         |                                                                                         |                                            |        |      |         |   |       
|                                     | Property, plant and equipment, net                                                                      |                                                                                         |                                            | 22,139 |      |         |   | 20,672 |     
|                                     | Deferred income taxes                                                                                   |                                                                                         |                                            |       |      |         |   | 2,337  |     
|                                     | Goodwill                                                                                                |                                                                                         |                                            | 63,055 |      |         |   | 26,711 |     
|                                     | Intangible assets, net                                                                                  |                                                                                         |                                            | 11,519 |      |         |   | 2,343  |     
|                                     | Unbilled expenditures and fees on contracts in process                                                  |                                                                                         |                                            | 2,203  |      |         |   |       |     
|                                     | Other noncurrent assets                                                                                 |                                                                                         |                                            | 5,528  |      |         |   | 1,630  |     
|                                     |                                                                                                         |                                                                                         |                                            |        |      |        
|                                     |                                                                                                         |                                                                                         | Total noncurrent assets                    |        |      | 104,444 |   |        |      | 53,693  | 
|                                     |                                                                                                         |                                                                                         |                                            |        |      |        
|                                     |                                                                                                         |                                                                                         | Total assets                               |        | $    | 205,134 |   |        | $    | 121,070 | 
|                                     |                                                                                                         |                                                                                         |                                            |        |      |        
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY
|                                    
|Current liabilities                  |                                                                                                         |                                                                                         |                                            |        |      |         |   |       
|                                     | Current portion of long-term debt                                                                       |                                                                                         | $                                          | 8,357  |      |         | $ | 500    |     
|                                     | Notes payable and revolver                                                                              |                                                                                         |                                            | 10,000 |      |         |   | 8,500  |     
|                                     | Accounts payable                                                                                        |                                                                                         |                                            | 20,550 |      |         |   | 13,351 |     
|                                     | Accrued payroll and employee benefits                                                                   |                                                                                         |                                            | 17,914 |      |         |   | 15,657 |     
|                                     | Deferred income taxes                                                                                   |                                                                                         |                                            | 15,418 |      |         |   | 9,698  |     
|                                     | Other accrued expenses                                                                                  |                                                                                         |                                            | 4,447  |      |         |   | 2,371  |     
|                                     | Discontinued operations                                                                                 |                                                                                         |                                            | 422    |      |         |   | 778    |     
|                                     |                                                                                                         |                                                                                         |                                            |        |      |        
|                                     |                                                                                                         |                                                                                         | Total current liabilities                  |        |      | 77,108  |   |        |      | 50,855  | 
|                                     |                                                                                                         |                                                                                         |                                            |        |      |        
|Long-term liabilities                |                                                                                                         |                                                                                         |                                            |        |      |         |   |       
|                                     | Long-term debt, less current portion                                                                    |                                                                                         |                                            | 51,485 |      |         |   | 7,750  |     
|                                     | Deferred income taxes                                                                                   |                                                                                         |                                            | 591    |      |         |   |       |     
|                                     | Accrued pension liability                                                                               |                                                                                         |                                            | 11,336 |      |         |   | 12,030 |     
|                                     | Other long-term liabilities                                                                             |                                                                                         |                                            | 3,296  |      |         |   | 1,386  |     
|                                     | Discontinued operations                                                                                 |                                                                                         |                                            |       |      |         |   | 398    |     
|                                     |                                                                                                         |                                                                                         |                                            |        |      |        
|                                     |                                                                                                         |                                                                                         | Total long-term liabilities                |        |      | 66,708  |   |        |      | 21,564  | 
|                                     |                                                                                                         |                                                                                         |                                            |        |      |        
|                                     |                                                                                                         |                                                                                         | Total liabilities                          |        |      | 143,816 |   |        |      | 72,419  | 
|                                     |                                                                                                         |                                                                                         |                                            |        |      |        
|Commitments and contingencies        |                                                                                                         |                                                                                         |                                            |        |      |         |   |       
|Stockholders equity                 |                                                                                                         |                                                                                         |                                            |        |      |         |   |       
|                                     | Preferred stock, $0.10 par value, 5,000,000 shares
    authorized, no shares issued                     |                                                                                         |                                            |       |      |         |   |       |     
|                                     | Common stock, $0.10 par value, 30,000,000 shares
    authorized:                                        |                                                                                         |                                            |        |      |         |   |        |     
|                                     |                                                                                                         | Issued  8,737,562 and 9,822,508 shares at
    December 31, 2004 and 2003, respectively |                                            |        | 874  |         |   |        | 982  |        
|                                     |                                                                                                         | Treasury stock  1,379,426 shares at
    December 31, 2003                              |                                            |        |     |         |   |        | (138 | )      
|                                     | Capital in excess of par value                                                                          |                                                                                         |                                            | 40,849 |      |         |   | 36,642 |     
|                                     | Unearned compensation                                                                                   |                                                                                         |                                            | (1,572 | )    |         |   | (797   | )   
|                                     | Accumulated other comprehensive loss                                                                    |                                                                                         |                                            | (7,724 | )    |         |   | (7,556 | )   
|                                     | Retained earnings                                                                                       |                                                                                         |                                            | 28,891 |      |         |   | 19,518 |     
|                                     |                                                                                                         |                                                                                         |                                            |        |      |        
|                                     |                                                                                                         |                                                                                         | Total stockholders equity                 |        |      | 61,318  |   |        |      | 48,651  | 
|                                     |                                                                                                         |                                                                                         |                                            |        |      |        
|                                     |                                                                                                         |                                                                                         | Total liabilities and stockholders equity |        | $    | 205,134 |   |        | $    | 121,070 | 
|                                     |                                                                                                         |                                                                                         |                                            |        |      |        






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DYNAMICS RESEARCH CORPORATION





CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except share and per share data)


|                                                                                                                                             |                                     |                                               |                                    |   |           |         |         |      |           |         |         |   |           |         | 
|-------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | --------------------------------------------- | ---------------------------------- | - | --------- | ------- | ------- | ---- | --------- | ------- | ------- | - | --------- | ------- | 
|                                                                                                                                             |                                     | Year Ended December 31,                       |                                   
|                                                                                                                                             |                                     |                                               |                                   
|                                                                                                                                             |                                     | 2004                                          |                                    |   | 2003      |         |         | 2002 |          
|                                                                                                                                             |                                     |                                               |                                    |   |           |         |         |      |          
|Contract revenue                                                                                                                             |                                     | $                                             | 268,634                            |   |           | $       | 237,876 |      |           | $       | 184,994 |  
|Product sales                                                                                                                                |                                     |                                               | 7,072                              |   |           |         | 6,932   |      |           |         | 7,616   |  
|                                                                                                                                             |                                     |                                               |                                    |   |           |         |         |      |          
|                                                                                                                                             |                                     |                                               | Total revenue                      |   |           | 275,706 |         |      |           | 244,808 |         |   |           | 192,610 | 
|                                                                                                                                             |                                     |                                               |                                    |   |           |         |         |      |          
|Cost of contract revenue                                                                                                                     |                                     |                                               | 227,509                            |   |           |         | 199,647 |      |           |         | 156,441 |  
|Cost of product sales                                                                                                                        |                                     |                                               | 5,214                              |   |           |         | 5,100   |      |           |         | 5,238   |  
|Selling, general and administrative expenses                                                                                                 |                                     |                                               | 23,152                             |   |           |         | 22,948  |      |           |         | 17,910  |  
|Amortization of intangible assets                                                                                                            |                                     |                                               | 2,324                              |   |           |         | 1,724   |      |           |         | 374     |  
|                                                                                                                                             |                                     |                                               |                                    |   |           |         |         |      |          
|                                                                                                                                             |                                     |                                               | Total operating costs and expenses |   |           | 258,199 |         |      |           | 229,419 |         |   |           | 179,963 | 
|                                                                                                                                             |                                     |                                               |                                    |   |           |         |         |      |          
|Operating income                                                                                                                             |                                     |                                               | 17,507                             |   |           |         | 15,389  |      |           |         | 12,647  |  
|Interest expense, net                                                                                                                        |                                     |                                               | (2,225                             | ) |           |         | (854    | )    |           |         | (421    | )
|Other income, net                                                                                                                            |                                     |                                               | 360                                |   |           |         | 454     |      |           |         | 67      |  
|                                                                                                                                             |                                     |                                               |                                    |   |           |         |         |      |          
|Income from continuing operations before provision for income
    taxes                                                                      |                                     |                                               | 15,642                             |   |           |         | 14,989  |      |           |         | 12,293  |  
|Provision for income taxes                                                                                                                   |                                     |                                               | 6,269                              |   |           |         | 6,334   |      |           |         | 4,936   |  
|                                                                                                                                             |                                     |                                               |                                    |   |           |         |         |      |          
|Income from continuing operations                                                                                                            |                                     |                                               | 9,373                              |   |           |         | 8,655   |      |           |         | 7,357   |  
|Loss from discontinued operations, net of tax benefit of $1,058
    and $741 in the years ended December 31, 2003 and 2002,
    respectively |                                     |                                               |                                   |   |           |         | (1,635  | )    |           |         | (1,124  | )
|Loss on disposal of discontinued operations, net of tax benefit
    of $226 in the year ended December 31, 2003                              |                                     |                                               |                                   |   |           |         | (348    | )    |           |         |        |  
|                                                                                                                                             |                                     |                                               |                                    |   |           |         |         |      |          
|Net income                                                                                                                                   |                                     | $                                             | 9,373                              |   |           | $       | 6,672   |      |           | $       | 6,233   |  
|                                                                                                                                             |                                     |                                               |                                    |   |           |         |         |      |          
|Earnings (loss) per common share                                                                                                             |                                     |                                               |                                    |   |           |         |         |      |           |         |         |  
|                                                                                                                                             | Basic                               |                                               |                                    |   |           |         |         |      |           |         |         |   |          
|                                                                                                                                             |                                     | Income from continuing operations             |                                    | $ | 1.10      |         |         | $    | 1.05      |         |         | $ | 0.92      |        
|                                                                                                                                             |                                     | Loss from discontinued operations             |                                    |   |          |         |         |      | (0.20     | )       |         |   | (0.14     | )      
|                                                                                                                                             |                                     | Loss on disposal of discontinued operations   |                                    |   |          |         |         |      | (0.04     | )       |         |   |          |        
|                                                                                                                                             |                                     |                                               |                                    |   |           |         |         |      |          
|                                                                                                                                             |                                     |                                               | Net earnings per common share      |   | $         | 1.10    |         |      | $         | 0.81    |         |   | $         | 0.78    | 
|                                                                                                                                             |                                     |                                               |                                    |   |           |         |         |      |          
|                                                                                                                                             | Diluted                             |                                               |                                    |   |           |         |         |      |           |         |         |   |          
|                                                                                                                                             |                                     | Income from continuing operations             |                                    | $ | 1.03      |         |         | $    | 0.98      |         |         | $ | 0.83      |        
|                                                                                                                                             |                                     | Loss from discontinued operations             |                                    |   |          |         |         |      | (0.18     | )       |         |   | (0.13     | )      
|                                                                                                                                             |                                     | Loss on disposal of discontinued operations   |                                    |   |          |         |         |      | (0.04     | )       |         |   |          |        
|                                                                                                                                             |                                     |                                               |                                    |   |           |         |         |      |          
|                                                                                                                                             |                                     |                                               | Net earnings per common share      |   | $         | 1.03    |         |      | $         | 0.76    |         |   | $         | 0.70    | 
|                                                                                                                                             |                                     |                                               |                                    |   |           |         |         |      |          
|                                                                                                                                             | Weighted average shares outstanding |                                               |                                    |   |           |         |         |      |           |         |         |   |          
|                                                                                                                                             |                                     | Weighted average shares outstanding  basic   |                                    |   | 8,499,013 |         |         |      | 8,226,225 |         |         |   | 7,989,793 |        
|                                                                                                                                             |                                     | Dilutive effect of options                    |                                    |   | 574,035   |         |         |      | 615,818   |         |         |   | 887,376   |        
|                                                                                                                                             |                                     |                                               |                                    |   |           |         |         |      |          
|                                                                                                                                             |                                     | Weighted average shares outstanding  diluted |                                    |   | 9,073,048 |         |         |      | 8,842,043 |         |         |   | 8,877,169 |        
|                                                                                                                                             |                                     |                                               |                                    |   |           |         |         |      |          





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DYNAMICS RESEARCH CORPORATION





CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY AND COMPREHENSIVE INCOME (LOSS)


(in thousands)





|                                                                                                                            |  |                 |   |        |           |              |                |         |  |           |        |   |             |   |       |               |  |  |          |   |  |              |      |   |      |   |        |          |  |   |        |   |  |   |        |   |  |   |        |  |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------- |  | --------------- | - | ------ | --------- | ------------ | -------------- | ------- |  | --------- | ------ | - | ----------- | - | ----- | ------------- |  |  | -------- | - |  | ------------ | ---- | - | ---- | - | ------ | -------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ |  |  | - | ------ | -
|                                                                                                                            |  |                 |   |        |           | Common Stock |                |         |  |           |        |   |             |   |       |               | 
|                                                                                                                            |  |                 |   |        |           |              |                |         |  |           |        |   |             |   |       |               | 
|                                                                                                                            |  |                 |   |        |           |              |                | Capital |  |           |        |   | Accumulated |   |       |               |  | 
|                                                                                                                            |  | Preferred Stock |   | Issued |           |              | Treasury Stock |         |  | in Excess |        |   |             |   | Other |               |  |  |          |  
|                                                                                                                            |  |                 |   |        |           |              |                |         |  | of Par    |        |   | Unearned    |   |       | Comprehensive |  |  | Retained |   |  |             
|                                                                                                                            |  | Shares          |   |        | Par value |              | Shares         |         |  | Par value |        |   | Shares      |   |       | Par value     |  |  | Value    |   |  | Compensation |      |   | Loss |   |        | Earnings |  |   | Total  |  
|                                                                                                                            |  |                 |   |        |           |              |                |         |  |           |        |   |             |   |       |               |  |  |          |   |  |              |      |   |      |   |        |          |  |   |        |  
|Balance at December 31, 2001                                                                                                |  |                 |  |        |           | $            |               |         |  |           | 9,320  |   |             | $ | 932   |               |  |  | (1,379   | ) |  | $            | (138 | ) |      | $ | 31,331 |          |  | $ | (992   | ) |  | $ | (608   | ) |  | $ | 6,613  |  |  | $ | 37,138 |  
|Issuance of common stock                                                                                                    |  |                 |  |        |           |              |               |         |  |           | 227    |   |             |   | 22    |               |  |  |         |   |  |              |     |   |      |   | 2,346  |          |  |   |       |   |  |   |       |   |  |   |       |  |  |   | 2,368  |  
|Forfeiture of restricted stock                                                                                              |  |                 |  |        |           |              |               |         |  |           | (3     | ) |             |   |      |               |  |  |         |   |  |              |     |   |      |   | (27    | )        |  |   | 27     |   |  |   |       |   |  |   |       |  |  |   |       |  
|Amortization of unearned compensation                                                                                       |  |                 |  |        |           |              |               |         |  |           |       |   |             |   |      |               |  |  |         |   |  |              |     |   |      |   |       |          |  |   | 149    |   |  |   |       |   |  |   |       |  |  |   | 149    |  
|Accumulated other comprehensive loss(1)                                                                                     |  |                 |  |        |           |              |               |         |  |           |       |   |             |   |      |               |  |  |         |   |  |              |     |   |      |   |       |          |  |   |       |   |  |   | (6,273 | ) |  |   |       |  |  |   | (6,273 | )
|Tax benefit from stock options exercised                                                                                    |  |                 |  |        |           |              |               |         |  |           |       |   |             |   |      |               |  |  |         |   |  |              |     |   |      |   | 194    |          |  |   |       |   |  |   |       |   |  |   |       |  |  |   | 194    |  
|Net income                                                                                                                  |  |                 |  |        |           |              |               |         |  |           |       |   |             |   |      |               |  |  |         |   |  |              |     |   |      |   |       |          |  |   |       |   |  |   |       |   |  |   | 6,233  |  |  |   | 6,233  |  
|                                                                                                                            |  |                 |   |        |           |              |                |         |  |           |        |   |             |   |       |               |  |  |          |   |  |              |      |   |      |   |        |          |  |   |        |   | 
|Balance at December 31, 2002                                                                                                |  |                 |  |        |           |              |               |         |  |           | 9,544  |   |             |   | 954   |               |  |  | (1,379   | ) |  |              | (138 | ) |      |   | 33,844 |          |  |   | (816   | ) |  |   | (6,881 | ) |  |   | 12,846 |  |  |   | 39,809 |  
|Issuance of common stock                                                                                                    |  |                 |  |        |           |              |               |         |  |           | 255    |   |             |   | 26    |               |  |  |         |   |  |              |     |   |      |   | 2,373  |          |  |   |       |   |  |   |       |   |  |   |       |  |  |   | 2,399  |  
|Forfeiture of restricted stock                                                                                              |  |                 |  |        |           |              |               |         |  |           | 23     |   |             |   | 2     |               |  |  |         |   |  |              |     |   |      |   | 228    |          |  |   | (230   | ) |  |   |       |   |  |   |       |  |  |   |       |  
|Amortization of unearned compensation                                                                                       |  |                 |  |        |           |              |               |         |  |           |       |   |             |   |      |               |  |  |         |   |  |              |     |   |      |   |       |          |  |   | 249    |   |  |   |       |   |  |   |       |  |  |   | 249    |  
|Accumulated other comprehensive loss(1)                                                                                     |  |                 |  |        |           |              |               |         |  |           |       |   |             |   |      |               |  |  |         |   |  |              |     |   |      |   |       |          |  |   |       |   |  |   | (675   | ) |  |   |       |  |  |   | (675   | )
|Tax benefit from stock options exercised                                                                                    |  |                 |  |        |           |              |               |         |  |           |       |   |             |   |      |               |  |  |         |   |  |              |     |   |      |   | 197    |          |  |   |       |   |  |   |       |   |  |   |       |  |  |   | 197    |  
|Net income                                                                                                                  |  |                 |  |        |           |              |               |         |  |           |       |   |             |   |      |               |  |  |         |   |  |              |     |   |      |   |       |          |  |   |       |   |  |   |       |   |  |   | 6,672  |  |  |   | 6,672  |  
|                                                                                                                            |  |                 |   |        |           |              |                |         |  |           |        |   |             |   |       |               |  |  |          |   |  |              |      |   |      |   |        |          |  |   |        |   | 
|Balance at December 31, 2003                                                                                                |  |                 |  |        |           |              |               |         |  |           | 9,822  |   |             |   | 982   |               |  |  | (1,379   | ) |  |              | (138 | ) |      |   | 36,642 |          |  |   | (797   | ) |  |   | (7,556 | ) |  |   | 19,518 |  |  |   | 48,651 |  
|Issuance of common stock                                                                                                    |  |                 |  |        |           |              |               |         |  |           | 235    |   |             |   | 23    |               |  |  |         |   |  |              |     |   |      |   | 2,584  |          |  |   |       |   |  |   |       |   |  |   |       |  |  |   | 2,607  |  
|Issuance of restricted stock                                                                                                |  |                 |  |        |           |              |               |         |  |           | 94     |   |             |   | 10    |               |  |  |         |   |  |              |     |   |      |   | 1,680  |          |  |   | (1,690 | ) |  |   |       |   |  |   |       |  |  |   |       |  
|Forfeiture of restricted stock                                                                                              |  |                 |  |        |           |              |               |         |  |           | (32    | ) |             |   | (3    | )             |  |  |         |   |  |              |     |   |      |   | (374   | )        |  |   | 377    |   |  |   |       |   |  |   |       |  |  |   |       |  
|Repurchase and retirement of restricted stock                                                                               |  |                 |  |        |           |              |               |         |  |           | (3     | ) |             |   |      |               |  |  |         |   |  |              |     |   |      |   | (36    | )        |  |   |       |   |  |   |       |   |  |   |       |  |  |   | (36    | )
|Amortization of unearned compensation                                                                                       |  |                 |  |        |           |              |               |         |  |           |       |   |             |   |      |               |  |  |         |   |  |              |     |   |      |   |       |          |  |   | 538    |   |  |   |       |   |  |   |       |  |  |   | 538    |  
|Accumulated other comprehensive loss(1)                                                                                     |  |                 |  |        |           |              |               |         |  |           |       |   |             |   |      |               |  |  |         |   |  |              |     |   |      |   |       |          |  |   |       |   |  |   | (168   | ) |  |   |       |  |  |   | (168   | )
|Tax benefit from stock options exercised and employee stock
    purchase plan                                               |  |                 |  |        |           |              |               |         |  |           |       |   |             |   |      |               |  |  |         |   |  |              |     |   |      |   | 353    |          |  |   |       |   |  |   |       |   |  |   |       |  |  |   | 353    |  
|Redesignation of treasury stock to common stock in accordance
    with Massachusetts Business Corporation Act, Chapter 156D |  |                 |  |        |           |              |               |         |  |           | (1,379 | ) |             |   | (138  | )             |  |  | 1,379    |   |  |              | 138  |   |      |   |       |          |  |   |       |   |  |   |       |   |  |   |       |  |  |   |       |  
|Net income                                                                                                                  |  |                 |  |        |           |              |               |         |  |           |       |   |             |   |      |               |  |  |         |   |  |              |     |   |      |   |       |          |  |   |       |   |  |   |       |   |  |   | 9,373  |  |  |   | 9,373  |  
|                                                                                                                            |  |                 |   |        |           |              |                |         |  |           |        |   |             |   |       |               |  |  |          |   |  |              |      |   |      |   |        |          |  |   |        |   | 
|Balance at December 31, 2004                                                                                                |  |                 |  |        |           | $            |               |         |  |           | 8,737  |   |             | $ | 874   |               |  |  |         |   |  | $            |     |   |      | $ | 40,849 |          |  | $ | (1,572 | ) |  | $ | (7,724 | ) |  | $ | 28,891 |  |  | $ | 61,318 |  
|                                                                                                                            |  |                 |   |        |           |              |                |         |  |           |        |   |             |   |       |               |  |  |          |   |  |              |      |   |      |   |        |          |  |   |        |   | 









|    |                                                      
|--- | -----------------------------------------------------
|(1) | Comprehensive income (loss) is calculated as follows:




|                                                        |                                                                                                                                                                                                                                                 |                         |       |        |      |   |       |      |   |   |       |        |  
|------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | ----- | ------ | ---- | - | ----- | ---- | - | - | ----- | ------ | -
|                                                        |                                                                                                                                                                                                                                                 | Year Ended December 31, |      
|                                                        |                                                                                                                                                                                                                                                 |                         |      
|                                                        |                                                                                                                                                                                                                                                 | 2004                    |       |        | 2003 |   |       | 2002 |  
|                                                        |                                                                                                                                                                                                                                                 |                         |       |        |      |   |       |      |  
|Net income                                              |                                                                                                                                                                                                                                                 | $                       | 9,373 |        |      | $ | 6,672 |      |   | $ | 6,233 |       
|Adjustments to accumulated comprehensive income (loss): |                                                                                                                                                                                                                                                 |                         |       |        |      |   |       |      |   |   |       |       
|                                                        | Minimum pension liability adjustment, net of tax effect and
    adjustments aggregating $193 in the year ended December 31,
    2004, and net tax benefits of $1,732 and $4,059 in the years
    ended December 31, 2003 and 2002, respectively |                         |       | (1,703 | )    |   |       | (675 | ) |   |       | (6,273 | )
|                                                        | Unrealized gain on investment in Lucent Technologies, net of tax
    effect of $993 in 2004                                                                                                                                                     |                         |       | 1,535  |      |   |       |     |   |   |       |       |  
|                                                        |                                                                                                                                                                                                                                                 |                         |       |        |      |   |       |      |  
|Comprehensive income (loss)                             |                                                                                                                                                                                                                                                 | $                       | 9,205 |        |      | $ | 5,997 |      |   | $ | (40   | )     
|                                                        |                                                                                                                                                                                                                                                 |                         |       |        |      |   |       |      |  






40



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DYNAMICS RESEARCH CORPORATION





CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)





|                                                                          |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |        |        |         |         |        |         |         |  
|------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------------------------------------ | ------------------------------------------------------ | --------------------------------------------------- | ------- | ------- | ------- | ------ | ------ | ------ | ------- | ------- | ------ | ------- | ------- | -
|                                                                          |                                                                                    | Year Ended December 31,                                |                                                       
|                                                                          |                                                                                    |                                                        |                                                       
|                                                                          |                                                                                    | 2004                                                   |                                                        |                                                     | 2003    |         |         | 2002   |       
|                                                                          |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |       
|Operating activities                                                      |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |        |        |         |        
|                                                                          | Net income                                                                         |                                                        | $                                                      | 9,373                                               |         |         | $       | 6,672  |        |        | $       | 6,233   |       
|                                                                          | Loss from discontinued operations                                                  |                                                        |                                                        |                                                    |         |         |         | (1,635 | )      |        |         | (1,124  | )     
|                                                                          | Loss on disposal of discontinued operations                                        |                                                        |                                                        |                                                    |         |         |         | (348   | )      |        |         |        |       
|                                                                          |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |       
|                                                                          | Income from continuing operations                                                  |                                                        |                                                        | 9,373                                               |         |         |         | 8,655  |        |        |         | 7,357   |       
|                                                                          | Adjustments to reconcile net cash provided by operating
    activities             |                                                        |                                                        |                                                     |         |         |         |        |        |        |         |         |       
|                                                                          |                                                                                    | Depreciation                                           |                                                        |                                                     | 3,624   |         |         |        | 3,007  |        |         |         | 3,192  |        
|                                                                          |                                                                                    | (Gain) loss on disposal of assets                      |                                                        |                                                     | (2      | )       |         |        | 2      |        |         |         |       |        
|                                                                          |                                                                                    | Non-cash interest expense                              |                                                        |                                                     | 154     |         |         |        | 137    |        |         |         | 92     |        
|                                                                          |                                                                                    | Investment income from equity interest                 |                                                        |                                                     | (249    | )       |         |        | (198   | )      |         |         | (46    | )      
|                                                                          |                                                                                    | Stock compensation expense                             |                                                        |                                                     | 538     |         |         |        | 249    |        |         |         | 149    |        
|                                                                          |                                                                                    | Tax benefit from stock options exercised               |                                                        |                                                     | 353     |         |         |        | 197    |        |         |         | 194    |        
|                                                                          |                                                                                    | Amortization of intangible assets                      |                                                        |                                                     | 2,324   |         |         |        | 1,724  |        |         |         | 374    |        
|                                                                          |                                                                                    | Deferred income taxes provision                        |                                                        |                                                     | 7,697   |         |         |        | 2,733  |        |         |         | 343    |        
|                                                                          | Change in operating assets and liabilities, net of effect of
    acquisitions      |                                                        |                                                        |                                                     |         |         |         |        |        |        |         |         |       
|                                                                          |                                                                                    | Accounts receivable, net                               |                                                        |                                                     | (7,612  | )       |         |        | 1,568  |        |         |         | 3,422  |        
|                                                                          |                                                                                    | Unbilled expenditures and fees on contracts in process |                                                        |                                                     | (17,078 | )       |         |        | (7,643 | )      |         |         | 3,961  |        
|                                                                          |                                                                                    | Prepaid expenses and other current assets              |                                                        |                                                     | (3,336  | )       |         |        | (729   | )      |         |         | (205   | )      
|                                                                          |                                                                                    | Accounts payable                                       |                                                        |                                                     | 8,486   |         |         |        | 1,017  |        |         |         | (8,734 | )      
|                                                                          |                                                                                    | Accrued payroll and employee benefits                  |                                                        |                                                     | 850     |         |         |        | 3,759  |        |         |         | (1,695 | )      
|                                                                          |                                                                                    | Other accrued expenses                                 |                                                        |                                                     | (1,125  | )       |         |        | (1,292 | )      |         |         | 1,511  |        
|                                                                          |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |       
|                                                                          |                                                                                    |                                                        | Net cash provided by continuing operations             |                                                     |         | 3,997   |         |        |        | 13,186 |         |         |        | 9,915   |        
|                                                                          |                                                                                    |                                                        | Net cash provided by (used in) discontinued operations |                                                     |         | (754    | )       |        |        | (1,425 | )       |         |        | 379     |        
|                                                                          |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |       
|                                                                          |                                                                                    |                                                        |                                                        | Net cash provided by operating activities           |         |         | 3,243   |        |        |        | 11,761  |         |        |         | 10,294  |  
|                                                                          |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |       
|Investing activities                                                      |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |        |        |         |        
|                                                                          | Purchase of property, plant and equipment                                          |                                                        |                                                        | (4,544                                              | )       |         |         | (8,163 | )      |        |         | (3,347  | )     
|                                                                          | Proceeds from the sale of assets                                                   |                                                        |                                                        | 17                                                  |         |         |         |       |        |        |         |        |       
|                                                                          | Purchase of businesses, net of cash acquired                                       |                                                        |                                                        | (53,967                                             | )       |         |         | (376   | )      |        |         | (24,321 | )     
|                                                                          | Dividends from equity investment                                                   |                                                        |                                                        | 60                                                  |         |         |         |       |        |        |         |        |       
|                                                                          | Increase in other assets                                                           |                                                        |                                                        | (2,271                                              | )       |         |         | (279   | )      |        |         | (434    | )     
|                                                                          |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |       
|                                                                          |                                                                                    |                                                        | Net cash used in continuing operations                 |                                                     |         | (60,705 | )       |        |        | (8,818 | )       |         |        | (28,102 | )      
|                                                                          |                                                                                    |                                                        | Net cash provided by (used in) discontinued operations |                                                     |         |        |         |        |        | 2,950  |         |         |        | (177    | )      
|                                                                          |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |       
|                                                                          |                                                                                    |                                                        |                                                        | Net cash used in investing activities               |         |         | (60,705 | )      |        |        | (5,868  | )       |        |         | (28,279 | )
|                                                                          |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |       
|Financing activities                                                      |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |        |        |         |        
|                                                                          | Net borrowings (repayments) under revolving credit
    agreement and notes payable |                                                        |                                                        | 1,500                                               |         |         |         | (6,144 | )      |        |         | 2,240   |       
|                                                                          | Issuance of long-term debt                                                         |                                                        |                                                        | 55,000                                              |         |         |         |       |        |        |         |        |       
|                                                                          | Repayments under loan agreement                                                    |                                                        |                                                        | (2,908                                              | )       |         |         |       |        |        |         | (700    | )     
|                                                                          | Principal payments under mortgage agreement                                        |                                                        |                                                        | (500                                                | )       |         |         | (500   | )      |        |         | (500    | )     
|                                                                          | Proceeds from the issuance of common stock                                         |                                                        |                                                        | 2,571                                               |         |         |         | 2,399  |        |        |         | 2,368   |       
|                                                                          |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |       
|                                                                          |                                                                                    |                                                        |                                                        | Net cash provided by (used in) financing activities |         |         | 55,663  |        |        |        | (4,245  | )       |        |         | 3,408   |  
|                                                                          |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |       
|Net increase (decrease) in cash and cash equivalents                      |                                                                                    |                                                        | (1,799                                                 | )                                                   |         |         | 1,648   |        |        |        | (14,577 | )      
|Cash and cash equivalents, beginning of period                            |                                                                                    |                                                        | 2,724                                                  |                                                     |         |         | 1,076   |        |        |        | 15,653  |        
|                                                                          |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |       
|Cash and cash equivalents, end of period                                  |                                                                                    | $                                                      | 925                                                    |                                                     |         | $       | 2,724   |        |        | $      | 1,076   |        
|                                                                          |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |       
|Supplemental disclosure of cash flow information                          |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |        |        |         |        
|                                                                          | Cash paid during the year for interest                                             |                                                        | $                                                      | 1,488                                               |         |         | $       | 711    |        |        | $       | 440     |       
|                                                                          | Cash paid during the year for income taxes, net of refunds                         |                                                        | $                                                      | 124                                                 |         |         | $       | 2,403  |        |        | $       | 4,001   |       
|Supplemental disclosure of noncash financing and investing
    activities |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |        |        |         |        
|                                                                          | Restricted stock issued                                                            |                                                        | $                                                      | 1,680                                               |         |         | $       | 230    |        |        | $       |        |       
|Supplemental disclosure  acquisitions                                    |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |        |        |         |        
|                                                                          | Assets acquired                                                                    |                                                        | $                                                      | 59,267                                              |         |         | $       |       |        |        | $       | 21,498  |       
|                                                                          | Cash payments, net of cash acquired                                                |                                                        |                                                        | (53,967                                             | )       |         |         | (376   | )      |        |         | (24,321 | )     
|                                                                          | Issuance of notes payable to sellers                                               |                                                        |                                                        |                                                    |         |         |         |       |        |        |         | (12,404 | )     
|                                                                          |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |       
|                                                                          | Liabilities assumed                                                                |                                                        | $                                                      | 5,300                                               |         |         | $       | (376   | )      |        | $       | (15,227 | )     
|                                                                          |                                                                                    |                                                        |                                                        |                                                     |         |         |         |        |       






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DYNAMICS RESEARCH CORPORATION








NOTES TO CONSOLIDATED FINANCIAL STATEMENTS







|        |                       
|------- | ----------------------
|NOTE 1. | NATURE OF THE BUSINESS













|        |                                           
|------- | ------------------------------------------
|NOTE 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation













Business Combinations


















Accounting for the
Impairment or Disposal of Long-Lived Assets













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DYNAMICS RESEARCH CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)







Risks, Uncertainties and Use of Estimates










Revenue Recognition


























Income Taxes


Accounting for Income Taxes


43



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DYNAMICS RESEARCH CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)









Cash and Cash Equivalents




Unbilled Expenditures and Fees on Contracts in Process










Concentration of Risk




Inventories




Property, Plant and Equipment




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DYNAMICS RESEARCH CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)









|                                               |                                   |              |        |        |      |   |        |        | 
|---------------------------------------------- | --------------------------------- | ------------ | ------ | ------ | ---- | - | ------ | ------ | 
|                                               |                                   | December 31, |       
|                                               |                                   |              |       
|                                               |                                   | 2004         |        |        | 2003 |  
|                                               |                                   |              |        |        |      |  
|Land                                           |                                   | $            | 1,126  |        |      | $ | 1,126  |       
|Building                                       |                                   |              | 11,525 |        |      |   | 10,535 |       
|Machinery and equipment                        |                                   |              | 42,985 |        |      |   | 39,182 |       
|Leasehold improvements                         |                                   |              | 2,520  |        |      |   | 2,363  |       
|                                               |                                   |              |        |        |      |  
|Total property, plant and equipment, at cost   |                                   |              | 58,156 |        |      |   | 53,206 |       
|Less accumulated depreciation and amortization |                                   |              | 36,017 |        |      |   | 32,534 |       
|                                               |                                   |              |        |        |      |  
|                                               | Net property, plant and equipment |              | $      | 22,139 |      |   | $      | 20,672 | 
|                                               |                                   |              |        |        |      |  











Goodwill and Intangible Assets


Goodwill and
Other Intangible Assets


Impairment of Goodwill and Long-Lived Assets






45



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DYNAMICS RESEARCH CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)









Business Combinations










Fair Value of Financial Instruments




Stockholders Equity




Stock-Based Compensation


Accounting for Stock Issued to Employees Accounting for Stock-Based
Compensation


|                                                                                                                                                    |                      |                         |       |      |      |   |        |      |  |   |        |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ----------------------- | ----- | ---- | ---- | - | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                                                                    |                      | Year ended December 31, |      
|                                                                                                                                                    |                      |                         |      
|                                                                                                                                                    |                      | 2004                    |       |      | 2003 |   |        | 2002 | 
|                                                                                                                                                    |                      |                         |       |      |      |   |        |      | 
|Net income as reported                                                                                                                              |                      | $                       | 9,373 |      |      | $ | 6,672  |      |  | $ | 6,233  |     
|Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    related tax effects |                      |                         | (654  | )    |      |   | (2,092 | )    |  |   | (3,895 | )   
|                                                                                                                                                    |                      |                         |       |      |      |   |        |      | 
|Pro forma net income                                                                                                                                |                      | $                       | 8,719 |      |      | $ | 4,580  |      |  | $ | 2,338  |     
|                                                                                                                                                    |                      |                         |       |      |      |   |        |      | 
|Net earnings per share:                                                                                                                             |                      |                         |       |      |      |   |        |      |  |   |        |     
|                                                                                                                                                    | Basic, as reported   |                         | $     | 1.10 |      |   | $      | 0.81 |  |   | $      | 0.78 | 
|                                                                                                                                                    | Basic, pro forma     |                         | $     | 1.03 |      |   | $      | 0.56 |  |   | $      | 0.29 | 
|                                                                                                                                                    | Diluted, as reported |                         | $     | 1.03 |      |   | $      | 0.76 |  |   | $      | 0.70 | 
|                                                                                                                                                    | Diluted, pro forma   |                         | $     | 0.96 |      |   | $      | 0.52 |  |   | $      | 0.28 | 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)









|                        |  |                         |       |   |      |  |       |      |  |  |       |  
|----------------------- |  | ----------------------- | ----- | - | ---- |  | ----- | ---- |  |  | ----- | -
|                        |  | Year ended December 31, |      
|                        |  |                         |      
|                        |  | 2004                    |       |   | 2003 |  |       | 2002 | 
|                        |  |                         |       |   |      |  |       |      | 
|Expected volatility     |  |                         | 66.88 | % |      |  | 64.43 | %    |  |  | 63.68 | %
|Dividend yield          |  |                         |      |   |      |  |      |      |  |  |      |  
|Risk-free interest rate |  |                         | 3.81  | % |      |  | 3.9   | %    |  |  | 5.0   | %
|Expected life in years  |  |                         | 7.0   |   |      |  | 8.0   |      |  |  | 8.3   |  

Earnings (Loss) Per Share






Investment Held for Sale





Accounting for Certain Investments in
Debt and Equity Securities





Recent Accounting Pronouncements





Share-Based Payments Accounting
for Stock-Based Compensation Accounting for Stock Issued to Employees





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)










Application of
FASB Statement No. 109, Accounting for Income Taxes, to the
Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of Accounting for
Income Taxes





Inventory Costs, an amendment of ARB No. 43




|        |                      
|------- | ---------------------
|NOTE 3. | BUSINESS ACQUISITIONS

Impact Innovations Group LLC


















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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


















|                                                                                        |                                                 |                                                              |                         |        |       |        |  
|--------------------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------------------------------ | ----------------------- | ------ | ----- | ------ | -
|Consideration:                                                                          |                                                 |                                                              |                         |       
|                                                                                        | Cash                                            |                                                              | $                       | 53,399 |      
|                                                                                        | Accrued estimated additional cash consideration |                                                              |                         | 473    |      
|                                                                                        | Transaction costs                               |                                                              |                         | 726    |      
|                                                                                        | Exit costs                                      |                                                              |                         | 469    |      
|                                                                                        |                                                 |                                                              |                        
|                                                                                        |                                                 |                                                              | Total consideration     |        |       | 55,067 |  
|                                                                                        |                                                 |                                                              |                        
|Preliminary allocation of consideration to assets
    acquired/(liabilities assumed):   |                                                 |                                                              |                         |       
|                                                                                        |                                                 |                                                              | Working capital         |        |       | 6,768  |  
|                                                                                        |                                                 |                                                              | Property and equipment  |        |       | 562    |  
|                                                                                        |                                                 |                                                              | Other noncurrent assets |        |       | 57     |  
|                                                                                        |                                                 |                                                              | Long-term liabilities   |        |       | (164   | )
|                                                                                        |                                                 |                                                              |                        
|                                                                                        |                                                 | Preliminary total fair value of net tangible assets acquired |                         |        | 7,223 |       
|                                                                                        |                                                 |                                                              |                        
|Preliminary excess of consideration over fair value of net
    tangible assets acquired |                                                 |                                                              | 47,844                  |       
|                                                                                        |                                                 |                                                              |                        
|Preliminary allocation of excess consideration to identifiable
    intangible assets:   |                                                 |                                                              |                         |       
|                                                                                        |                                                 |                                                              | Customer relationships  |        |       | 11,500 |  
|                                                                                        |                                                 |                                                              |                        
|Preliminary allocation of excess consideration to goodwill                              |                                                 | $                                                            | 36,344                  |       
|                                                                                        |                                                 |                                                              |                        












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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


















|                                               |         |              |         |      |      |   |         |      | 
|---------------------------------------------- | ------- | ------------ | ------- | ---- | ---- | - | ------- | ---- | 
|                                               |         | Year ended   |        
|                                               |         | December 31, |        
|                                               |         |              |        
|                                               |         | 2004         |         |      | 2003 |  
|                                               |         |              |         |      |      |  
|Revenue                                        |         | $            | 309,222 |      |      | $ | 286,810 |     
|Income from continuing operations              |         | $            | 9,692   |      |      | $ | 7,942   |     
|Earnings per share from continuing operations: |         |              |         |      |      |   |         |     
|                                               | Basic   |              | $       | 1.14 |      |   | $       | 0.97 | 
|                                               | Diluted |              | $       | 1.07 |      |   | $       | 0.90 | 




Andrulis Corporation






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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)









|                                                                            |                                                    |                                                  |        |        |        | 
|--------------------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------------------ | ------ | ------ | ------ | 
|Consideration:                                                              |                                                    |                                                  |        |       
|                                                                            | Cash, net of cash acquired of $1,709               |                                                  | $      | 12,172 |       
|                                                                            | Notes payable issued to selling stockholders       |                                                  |        | 12,400 |       
|                                                                            | Transaction costs                                  |                                                  |        | 1,116  |       
|                                                                            | Exit costs                                         |                                                  |        | 705    |       
|                                                                            |                                                    |                                                  |       
|                                                                            |                                                    | Total consideration                              |        |        | 26,393 | 
|                                                                            |                                                    |                                                  |       
|Allocation of consideration to assets acquired/(liabilities
    assumed):   |                                                    |                                                  |        |       
|                                                                            | Working capital, excluding cash acquired of $1,709 |                                                  |        | 4,459  |       
|                                                                            | Property and equipment                             |                                                  |        | 649    |       
|                                                                            | Other noncurrent assets                            |                                                  |        | 30     |       
|                                                                            | Other liabilities                                  |                                                  |        | (1,934 | )     
|                                                                            |                                                    |                                                  |       
|                                                                            |                                                    | Total fair value of net tangible assets acquired |        |        | 3,204  | 
|                                                                            |                                                    |                                                  |       
|Excess of consideration over fair value of net tangible assets
    acquired |                                                    |                                                  | 23,189 |       
|                                                                            |                                                    |                                                  |       
|Allocation of excess consideration to identifiable intangible
    assets:   |                                                    |                                                  |        |       
|                                                                            | Customer relationships                             |                                                  |        | 1,300  |       
|                                                                            | Non-competition agreements                         |                                                  |        | 1,340  |       
|                                                                            |                                                    |                                                  |       
|                                                                            |                                                    |                                                  | 2,640  |       
|                                                                            |                                                    |                                                  |       
|Allocation of excess consideration to goodwill                              |                                                    | $                                                | 20,549 |       
|                                                                            |                                                    |                                                  |       

HJ Ford Associates, Inc.










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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)









|                                                                            |                                                  |                                                  |       |        |        | 
|--------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------------------------------ | ----- | ------ | ------ | 
|Consideration:                                                              |                                                  |                                                  |       |       
|                                                                            | Cash, net of cash acquired of $554               |                                                  | $     | 10,251 |       
|                                                                            | Transaction costs                                |                                                  |       | 342    |       
|                                                                            | Exit costs                                       |                                                  |       | 140    |       
|                                                                            |                                                  |                                                  |      
|                                                                            |                                                  | Total consideration                              |       |        | 10,733 | 
|                                                                            |                                                  |                                                  |      
|Allocation of consideration to assets acquired/(liabilities
    assumed):   |                                                  |                                                  |       |       
|                                                                            | Working capital, excluding cash acquired of $554 |                                                  |       | 3,054  |       
|                                                                            | Property and equipment                           |                                                  |       | 195    |       
|                                                                            | Other noncurrent assets                          |                                                  |       | 222    |       
|                                                                            | Long-term debt                                   |                                                  |       | (700   | )     
|                                                                            |                                                  |                                                  |      
|                                                                            |                                                  | Total fair value of net tangible assets acquired |       |        | 2,771  | 
|                                                                            |                                                  |                                                  |      
|Excess of consideration over fair value of net tangible assets
    acquired |                                                  |                                                  | 7,962 |       
|                                                                            |                                                  |                                                  |      
|Allocation of excess consideration to identifiable intangible
    assets:   |                                                  |                                                  |       |       
|                                                                            | Customer relationships                           |                                                  |       | 1,400  |       
|                                                                            | Non-competition agreements                       |                                                  |       | 400    |       
|                                                                            |                                                  |                                                  |      
|                                                                            |                                                  |                                                  | 1,800 |       
|                                                                            |                                                  |                                                  |      
|Allocation of excess consideration to goodwill                              |                                                  | $                                                | 6,162 |       
|                                                                            |                                                  |                                                  |      











|        |                        
|------- | -----------------------
|NOTE 4. | DISCONTINUED OPERATIONS















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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



















|          |  |                                         |       |  |           |   |             |  |                 |   |   |              |  |   |      |   |  |   |     | 
|--------- |  | --------------------------------------- | ----- |  | --------- | - | ----------- |  | --------------- | - | - | ------------ |  | - | ---- | - |  | - | --- | 
|          |  | Activity  Year Ended December 31, 2004 |      
|          |  |                                         |      
|          |  | Balance                                 |       |  |           |   | Adjustments |  | Expenditures    |   |   | Balance      | 
|          |  | December 31,                            |       |  |           |   | for changes |  | charged against |   |   | December 31, | 
|          |  | 2003                                    |       |  | Provision |   | in estimate |  | accrual         |   |   | 2004         | 
|          |  |                                         |       |  |           |   |             |  |                 |   |   |              | 
|Severance |  | $                                       | 74    |  |           | $ |            |  |                 | $ |  |              |  | $ | (74  | ) |  | $ |    | 
|Lease     |  |                                         | 932   |  |           |   |            |  |                 |   |  |              |  |   | (510 | ) |  |   | 422 | 
|          |  |                                         |       |  |           |   |             |  |                 |   |   |              |  |   |     
|          |  | $                                       | 1,006 |  |           | $ |            |  |                 | $ |  |              |  | $ | (584 | ) |  | $ | 422 | 
|          |  |                                         |       |  |           |   |             |  |                 |   |   |              |  |   |     




|          |  |                                         |   |           |  |             |             |  |                 |         |     |              |      |   |        |   |  |   |       | 
|--------- |  | --------------------------------------- | - | --------- |  | ----------- | ----------- |  | --------------- | ------- | --- | ------------ | ---- | - | ------ | - |  | - | ----- | 
|          |  | Activity  Year Ended December 31, 2003 |  
|          |  |                                         |  
|          |  | Balance                                 |   |           |  | Adjustments |             |  | Expenditures    |         |     | Balance      |     
|          |  | December 31,                            |   |           |  | for changes |             |  | charged against |         |     | December 31, |     
|          |  | 2002                                    |   | Provision |  |             | in estimate |  |                 | accrual |     |              | 2003 |  
|          |  |                                         |   |           |  |             |             |  |                 |         |     |              |      |  
|Severance |  | $                                       |  |           |  | $           | 544         |  |                 | $       |    |              |      | $ | (470   | ) |  | $ | 74    | 
|Lease     |  |                                         |  |           |  |             | 1,325       |  |                 |         | 420 |              |      |   | (813   | ) |  |   | 932   | 
|          |  |                                         |   |           |  |             |             |  |                 |         |     |              |      |   |       
|          |  | $                                       |  |           |  | $           | 1,869       |  |                 | $       | 420 |              |      | $ | (1,283 | ) |  | $ | 1,006 | 
|          |  |                                         |   |           |  |             |             |  |                 |         |     |              |      |   |       






|                      |                                       |                           |   |     |      |  |   |     |     | 
|--------------------- | ------------------------------------- | ------------------------- | - | --- | ---- |  | - | --- | --- | 
|                      |                                       | December 31,              |  
|                      |                                       |                           |  
|                      |                                       | 2004                      |   |     | 2003 | 
|                      |                                       |                           |   |     |      | 
|Current liabilities   |                                       |                           |   |     |      |  |   |    
|                      | Accrued payroll and employee benefits |                           | $ |    |      |  | $ | 74  |    
|                      | Other accrued expenses                |                           |   | 422 |      |  |   | 704 |    
|                      |                                       |                           |   |     |      | 
|                      |                                       | Total current liabilities |   | $   | 422  |  |   | $   | 778 | 
|                      |                                       |                           |   |     |      | 
|Long-term liabilities |                                       |                           |   |     |      |  |   |    
|                      | Other long-term liabilities           |                           | $ |    |      |  | $ | 398 |    
|                      |                                       |                           |   |     |      | 



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|        |                               
|------- | ------------------------------
|NOTE 5. | GOODWILL AND INTANGIBLE ASSETS



|                           |  |                   |        |             |                   |   |       |      |             |   |              |  |  |   |       | 
|-------------------------- |  | ----------------- | ------ | ----------- | ----------------- | - | ----- | ---- | ----------- | - | ------------ |  |  | - | ----- | 
|                           |  | December 31, 2004 |        |             | December 31, 2003 |  
|                           |  |                   |        |             |                   |  
|                           |  |                   |        | Accumulated |                   |   |       |      | Accumulated |  
|                           |  | Cost              |        |             | amortization      |   |       | Cost |             |   | amortization | 
|                           |  |                   |        |             |                   |   |       |      |             |   |              | 
|Customer relationships     |  | $                 | 14,200 |             |                   | $ | 2,681 |      |             | $ | 2,700        |  |  | $ | 1,187 | 
|Non-competition agreements |  |                   | 1,740  |             |                   |   | 1,740 |      |             |   | 1,740        |  |  |   | 910   | 
|                           |  |                   |        |             |                   |   |       |      |             |   |              | 
|                           |  | $                 | 15,940 |             |                   | $ | 4,421 |      |             | $ | 4,440        |  |  | $ | 2,097 | 
|                           |  |                   |        |             |                   |   |       |      |             |   |              | 












|     |  |   |       | 
|---- |  | - | ----- | 
|2005 |  | $ | 3,108 | 
|2006 |  | $ | 2,787 | 
|2007 |  | $ | 2,581 | 
|2008 |  | $ | 2,021 | 
|2009 |  | $ | 1,022 | 









|                             |  |             |        |  |               |   |       |  |  |   |        | 
|---------------------------- |  | ----------- | ------ |  | ------------- | - | ----- |  |  | - | ------ | 
|                             |  | Systems and |        |  |               |   |      
|                             |  | Services    |        |  | Metrigraphics |   | Total | 
|                             |  |             |        |  |               |   |       | 
|Balance at December 31, 2003 |  | $           | 26,711 |  |               | $ |      |  |  | $ | 26,711 | 
|Business acquisition         |  |             | 36,344 |  |               |   |      |  |  |   | 36,344 | 
|                             |  |             |        |  |               |   |       |  | 
|Balance at December 31, 2004 |  | $           | 63,055 |  |               | $ |      |  |  | $ | 63,055 | 
|                             |  |             |        |  |               |   |       |  | 






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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)









|        |             
|------- | ------------
|NOTE 6. | INCOME TAXES



|                                                                                                                                        |  |                         |       |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                        |  | Year ended December 31, |      
|                                                                                                                                        |  |                         |      
|                                                                                                                                        |  | 2004                    |       |   | 2003 |   |        | 2002 | 
|                                                                                                                                        |  |                         |       |   |      |   |        |      | 
|Income from continuing operations                                                                                                       |  | $                       | 6,269 |   |      | $ | 6,334  |      |  | $ | 4,936  |  
|Discontinued operations                                                                                                                 |  |                         |      |   |      |   | (1,284 | )    |  |   | (741   | )
|Stockholders equity for compensation expense for tax
    purposes in excess of amounts recognized for financial reporting
    purposes |  |                         | (353  | ) |      |   | (197   | )    |  |   | (194   | )
|Other comprehensive income                                                                                                              |  |                         | 1,187 |   |      |   | (1,732 | )    |  |   | (4,059 | )
|                                                                                                                                        |  |                         |       |   |      |   |        |      | 
|                                                                                                                                        |  | $                       | 7,103 |   |      | $ | 3,121  |      |  | $ | (58    | )
|                                                                                                                                        |  |                         |       |   |      |   |        |      | 



|                  |         |                         |        |        |      |   |       |       |  |   |       |       | 
|----------------- | ------- | ----------------------- | ------ | ------ | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                  |         | Year ended December 31, |       
|                  |         |                         |       
|                  |         | 2004                    |        |        | 2003 |   |       | 2002  | 
|                  |         |                         |        |        |      |   |       |       | 
|Currently payable |         |                         |        |        |      |   |       |       |  |   |       |      
|                  | Federal |                         | $      | (1,326 | )    |   | $     | 3,054 |  |   | $     | 3,862 | 
|                  | State   |                         |        | (101   | )    |   |       | 547   |  |   |       | 731   | 
|                  |         |                         |        |        |      |   |       |       | 
|                  |         |                         | (1,427 | )      |      |   | 3,601 |       |  |   | 4,593 |      
|                  |         |                         |        |        |      |   |       |       | 
|Deferred          |         |                         |        |        |      |   |       |       |  |   |       |      
|                  | Federal |                         |        | 6,144  |      |   |       | 2,138 |  |   |       | 208   | 
|                  | State   |                         |        | 1,552  |      |   |       | 595   |  |   |       | 135   | 
|                  |         |                         |        |        |      |   |       |       | 
|                  |         |                         | 7,696  |        |      |   | 2,733 |       |  |   | 343   |      
|                  |         |                         |        |        |      |   |       |       | 
|                  |         | $                       | 6,269  |        |      | $ | 6,334 |       |  | $ | 4,936 |      
|                  |         |                         |        |        |      |   |       |       | 



|                                               |                            |                         |       |       |      |   |       |       |  |   |       |       | 
|---------------------------------------------- | -------------------------- | ----------------------- | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                               |                            | Year ended December 31, |      
|                                               |                            |                         |      
|                                               |                            | 2004                    |       |       | 2003 |   |       | 2002  | 
|                                               |                            |                         |       |       |      |   |       |       | 
|Provision at statutory rate                    |                            | $                       | 5,318 |       |      | $ | 5,096 |       |  | $ | 4,179 |      
|State income taxes, net of federal tax benefit |                            |                         | 1,091 |       |      |   | 740   |       |  |   | 569   |      
|Decrease in valuation allowance                |                            |                         | (442  | )     |      |   |      |       |  |   | (7    | )    
|Amortization of acquired intangible assets     |                            |                         |      |       |      |   | 320   |       |  |   |      |      
|Other, net                                     |                            |                         | 302   |       |      |   | 178   |       |  |   | 195   |      
|                                               |                            |                         |       |       |      |   |       |       | 
|                                               | Provision for income taxes |                         | $     | 6,269 |      |   | $     | 6,334 |  |   | $     | 4,936 | 
|                                               |                            |                         |       |       |      |   |       |       | 





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)






















|                                                       |                          |                             |         |         |         |   |         |         |        |  
|------------------------------------------------------ | ------------------------ | --------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------ | -
|                                                       |                          | December 31,                |        
|                                                       |                          |                             |        
|                                                       |                          | 2004                        |         |         | 2003    |  
|                                                       |                          |                             |         |         |         |  
|Pension liability                                      |                          | $                           | 5,995   |         |         | $ | 6,189   |        
|Accrued expenses                                       |                          |                             | 2,271   |         |         |   | 2,653   |        
|Inventory reserves                                     |                          |                             |        |         |         |   | 3       |        
|Capital loss carryforward                              |                          |                             |        |         |         |   | 442     |        
|Receivables reserves                                   |                          |                             | 189     |         |         |   | 182     |        
|                                                       |                          |                             |         |         |         |  
|                                                       |                          |                             | 8,455   |         |         |   | 9,469   |        
|                                                       | Valuation allowance      |                             |         |        |         |   |         | (442    | )     
|                                                       |                          |                             |         |         |         |  
|                                                       | Deferred tax assets, net |                             |         | 8,455   |         |   |         | 9,027   |       
|                                                       |                          |                             |         |         |         |  
|Unbilled expenditures and fees on contracts in process |                          |                             | (17,368 | )       |         |   | (12,222 | )      
|Fixed assets and intangibles                           |                          |                             | (3,807  | )       |         |   | (1,766  | )      
|Unrealized gain on securities available for sale       |                          |                             | (993    | )       |         |   |        |        
|Domestic International Sales Corporation               |                          |                             | (1,798  | )       |         |   | (1,722  | )      
|Other                                                  |                          |                             | (498    | )       |         |   | (678    | )      
|                                                       |                          |                             |         |         |         |  
|                                                       | Deferred tax liability   |                             |         | (24,464 | )       |   |         | (16,388 | )     
|                                                       |                          |                             |         |         |         |  
|                                                       |                          | Deferred tax liability, net |         | $       | (16,009 | ) |         | $       | (7,361 | )
|                                                       |                          |                             |         |         |         |  














|        |                          
|------- | -------------------------
|NOTE 7. | EMPLOYEE BENEFIT PROGRAMS









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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)























Periodic Pension Cost





|                                                 |                           |                         |        |       |      |   |        |       |  |   |        |     | 
|------------------------------------------------ | ------------------------- | ----------------------- | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | --- | 
|                                                 |                           | Year ended December 31, |       
|                                                 |                           |                         |       
|                                                 |                           | 2004                    |        |       | 2003 |   |        | 2002  | 
|                                                 |                           |                         |        |       |      |   |        |       | 
|Service cost  benefits earned during the period |                           | $                       |       |       |      | $ |       |       |  | $ | 1,168  |    
|Interest cost on projected benefit obligation    |                           |                         | 3,940  |       |      |   | 3,808  |       |  |   | 3,487  |    
|Expected return on plan assets                   |                           |                         | (3,847 | )     |      |   | (3,310 | )     |  |   | (3,785 | )  
|Recognized actuarial loss                        |                           |                         | 1,282  |       |      |   | 1,198  |       |  |   | 102    |    
|                                                 |                           |                         |        |       |      |   |        |       | 
|                                                 | Net periodic pension cost |                         | $      | 1,375 |      |   | $      | 1,696 |  |   | $      | 972 | 
|                                                 |                           |                         |        |       |      |   |        |       | 




Changes in Benefit Obligations





|                                                  |  |              |        |   |      |   |        |  
|------------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                                  |  | November 30, |       
|                                                  |  |              |       
|                                                  |  | 2004         |        |   | 2003 |  
|                                                  |  |              |        |   |      |  
|Projected benefit obligation at beginning of year |  | $            | 63,417 |   |      | $ | 55,564 |  
|Interest cost on projected benefit obligation     |  |              | 3,940  |   |      |   | 3,808  |  
|Benefits paid                                     |  |              | (2,059 | ) |      |   | (1,778 | )
|Actuarial loss                                    |  |              | 3,060  |   |      |   | 5,823  |  
|                                                  |  |              |        |   |      |  
|Projected benefit obligation at end of year       |  | $            | 68,358 |   |      | $ | 63,417 |  
|                                                  |  |              |        |   |      |  




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Change in Plan Assets


|                                               |  |              |        |   |      |   |        |  
|---------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                               |  | November 30, |       
|                                               |  |              |       
|                                               |  | 2004         |        |   | 2003 |  
|                                               |  |              |        |   |      |  
|Fair value of plan assets at beginning of year |  | $            | 42,557 |   |      | $ | 36,940 |  
|Actual return on plan assets                   |  |              | 3,912  |   |      |   | 5,819  |  
|Employer contributions                         |  |              | 2,927  |   |      |   | 1,576  |  
|Benefits and expenses paid                     |  |              | (2,059 | ) |      |   | (1,778 | )
|                                               |  |              |        |   |      |  
|Fair value of plan assets at end of year       |  | $            | 47,337 |   |      | $ | 42,557 |  
|                                               |  |              |        |   |      |  

Funded Status


|                                                   |  |              |         |   |      |   |         |  
|-------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                   |  | November 30, |        
|                                                   |  |              |        
|                                                   |  | 2004         |         |   | 2003 |  
|                                                   |  |              |         |   |      |  
|Plan assets less than projected benefit obligation |  | $            | (21,022 | ) |      | $ | (20,860 | )
|Unrecognized net actuarial loss                    |  |              | 20,572  |   |      |   | 18,858  |  
|                                                   |  |              |         |   |      |  
|Accrued pension liability                          |  | $            | (450    | ) |      | $ | (2,002  | )
|                                                   |  |              |         |   |      |  

Weighted Average Assumptions Used to Determine Benefit
Obligations at Measurement Date


|                              |  |              |      |   |      |  |      |  
|----------------------------- |  | ------------ | ---- | - | ---- |  | ---- | -
|                              |  | November 30, |     
|                              |  |              |     
|                              |  | 2004         |      |   | 2003 | 
|                              |  |              |      |   |      | 
|Discount rate                 |  |              | 6.00 | % |      |  | 6.25 | %
|Rate of compensation increase |  |              | N/A  |   |      |  | N/A  |  

Weighted Average Assumptions Used to Determine Net Periodic
Benefit Cost


|                                  |  |              |      |   |      |  |      |  
|--------------------------------- |  | ------------ | ---- | - | ---- |  | ---- | -
|                                  |  | Year Ended   |     
|                                  |  | December 31, |     
|                                  |  |              |     
|                                  |  | 2004         |      |   | 2003 | 
|                                  |  |              |      |   |      | 
|Discount rate                     |  |              | 6.25 | % |      |  | 6.75 | %
|Expected rate of return on assets |  |              | 9.00 | % |      |  | 9.00 | %
|Rate of compensation increase     |  |              | N/A  |   |      |  | N/A  |  



|                  |  |              |     |   |      |  |     |  
|----------------- |  | ------------ | --- | - | ---- |  | --- | -
|                  |  | November 30, |    
|                  |  |              |    
|                  |  | 2004         |     |   | 2003 | 
|                  |  |              |     |   |      | 
|Equity securities |  |              | 63  | % |      |  | 67  | %
|Debt securities   |  |              | 21  | % |      |  | 28  | %
|Other             |  |              | 16  | % |      |  | 5   | %
|                  |  |              |     |   |      | 
|                  |  |              | 100 | % |      |  | 100 | %
|                  |  |              |     |   |      | 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)









Additional Liability


|                                              |  |              |        |   |      |   |        |  
|--------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                              |  | November 30, |       
|                                              |  |              |       
|                                              |  | 2004         |        |   | 2003 |  
|                                              |  |              |        |   |      |  
|Accumulated benefit obligation at end of year |  | $            | 63,049 |   |      | $ | 58,312 |  
|                                              |  |              |        |   |      |  
|Unfunded accumulated benefit obligation       |  | $            | 15,712 |   |      | $ | 15,755 |  
|Accrued pension liability                     |  |              | (450   | ) |      |   | (2,002 | )
|                                              |  |              |        |   |      |  
|Additional minimum liability                  |  | $            | 15,262 |   |      | $ | 13,753 |  
|                                              |  |              |        |   |      |  




Five Year Benefit Payment Projections





|                                                      |  |   |        | 
|----------------------------------------------------- |  | - | ------ | 
|Year ending December 31, 2005                         |  | $ | 2,349  | 
|Year ending December 31, 2006                         |  | $ | 2,605  | 
|Year ending December 31, 2007                         |  | $ | 2,751  | 
|Year ending December 31, 2008                         |  | $ | 3,098  | 
|Year ending December 31, 2009                         |  | $ | 3,246  | 
|Five subsequent fiscal years ending December 31, 2014 |  | $ | 20,055 | 







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|        |            
|------- | -----------
|NOTE 8. | STOCK PLANS





























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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


















































|                                 |           |           |           |          |         |   |      |       | 
|-------------------------------- | --------- | --------- | --------- | -------- | ------- | - | ---- | ----- | 
|                                 |           |           |           | Weighted |        
|                                 |           | Number of |           |          | average |  
|                                 |           | shares    |           |          | price   |  
|                                 |           |           |           |          |         |  
|Outstanding at December 31, 2001 |           |           | 1,751,153 |          |         | $ | 7.76 |      
|                                 | Granted   |           |           | 98,050   |         |   | $    | 16.50 | 
|                                 | Exercised |           |           | (99,607  | )       |   | $    | 6.84  | 
|                                 | Canceled  |           |           | (35,090  | )       |   | $    | 9.38  | 
|                                 |           |           |           |          |         |  
|Outstanding at December 31, 2002 |           |           | 1,714,506 |          |         | $ | 9.56 |      
|                                 | Granted   |           |           | 113,500  |         |   | $    | 12.32 | 
|                                 | Exercised |           |           | (84,734  | )       |   | $    | 7.76  | 
|                                 | Canceled  |           |           | (38,386  | )       |   | $    | 11.58 | 
|                                 |           |           |           |          |         |  
|Outstanding at December 31, 2003 |           |           | 1,704,886 |          |         | $ | 7.47 |      
|                                 | Granted   |           |           | 35,500   |         |   | $    | 15.81 | 
|                                 | Exercised |           |           | (106,132 | )       |   | $    | 7.36  | 
|                                 | Canceled  |           |           | (135,149 | )       |   | $    | 9.43  | 
|                                 |           |           |           |          |         |  
|Outstanding at December 31, 2004 |           |           | 1,499,105 |          |         | $ | 8.75 |      
|                                 |           |           |           |          |         |  




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)












Options Outstanding








|                         |  |        |           |             |              |  |          |       |  |   |       | 
|------------------------ |  | ------ | --------- | ----------- | ------------ |  | -------- | ----- |  | - | ----- | 
|                         |  |        |           | Weighted    |              |  |         
|                         |  |        |           | average     |              |  | Weighted |      
|                         |  |        |           | remaining   |              |  | average  |      
|                         |  |        |           | contractual |              |  | exercise |      
|Range of exercise prices |  | Shares |           |             | life (years) |  |          | price | 
|                         |  |        |           |             |              |  |          |       | 
|$ 3.13  $ 7.50          |  |        | 421,318   |             |              |  | 4.12     |       |  | $ | 5.19  | 
|$ 7.51  $13.68          |  |        | 973,142   |             |              |  | 6.32     |       |  | $ | 9.27  | 
|$13.69  $18.60          |  |        | 81,046    |             |              |  | 8.20     |       |  | $ | 17.11 | 
|$18.61  $24.50          |  |        | 23,599    |             |              |  | 7.03     |       |  | $ | 22.04 | 
|                         |  |        |           |             |              |  |          |       | 
|$ 3.13  $24.50          |  |        | 1,499,105 |             |              |  | 5.82     |       |  | $ | 8.75  | 
|                         |  |        |           |             |              |  |          |       | 







Options Exercisable





|                         |  |        |         |          |       |   |       | 
|------------------------ |  | ------ | ------- | -------- | ----- | - | ----- | 
|                         |  |        |         | Weighted |      
|                         |  |        |         | average  |      
|                         |  |        |         | exercise |      
|Range of exercise prices |  | Shares |         |          | price |  
|                         |  |        |         |          |       |  
|$ 3.13  $ 7.50          |  |        | 419,651 |          |       | $ | 5.18  | 
|$ 7.51  $13.68          |  |        | 288,303 |          |       | $ | 9.22  | 
|$13.69  $18.60          |  |        | 28,979  |          |       | $ | 18.31 | 
|$18.61  $24.50          |  |        | 16,075  |          |       | $ | 22.09 | 
|                         |  |        |         |          |       |  
|$ 3.13  $24.50          |  |        | 753,008 |          |       | $ | 7.59  | 
|                         |  |        |         |          |       |  





|        |                                                                               
|------- | ------------------------------------------------------------------------------
|NOTE 9. | BUSINESS SEGMENT, GEOGRAPHIC, MAJOR CUSTOMER AND RELATED
    PARTY INFORMATION







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|                     |                                  |                                |         |         |       |   |         |         |       |   |         |         |       | 
|-------------------- | -------------------------------- | ------------------------------ | ------- | ------- | ----- | - | ------- | ------- | ----- | - | ------- | ------- | ----- | 
|                     |                                  | Year ended December 31,        |        
|                     |                                  |                                |        
|                     |                                  | 2004                           |         |         | 2003  |   |         | 2002    |      
|                     |                                  |                                |         |         |       |   |         |         |      
|Revenues             |                                  |                                |         |         |       |   |         |         |       |   |         |        
|                     | Systems and Services             |                                | $       | 268,634 |       |   | $       | 237,876 |       |   | $       | 184,994 |      
|                     | Metrigraphics                    |                                |         | 7,072   |       |   |         | 6,932   |       |   |         | 7,616   |      
|                     |                                  |                                |         |         |       |   |         |         |      
|                     |                                  | $                              | 275,706 |         |       | $ | 244,808 |         |       | $ | 192,610 |        
|                     |                                  |                                |         |         |       |   |         |         |      
|Operating income     |                                  |                                |         |         |       |   |         |         |       |   |         |        
|                     | Systems and Services             |                                | $       | 17,385  |       |   | $       | 14,749  |       |   | $       | 11,513  |      
|                     | Metrigraphics                    |                                |         | 122     |       |   |         | 640     |       |   |         | 1,134   |      
|                     |                                  |                                |         |         |       |   |         |         |      
|                     |                                  | $                              | 17,507  |         |       | $ | 15,389  |         |       | $ | 12,647  |        
|                     |                                  |                                |         |         |       |   |         |         |      
|Depreciation         |                                  |                                |         |         |       |   |         |         |       |   |         |        
|                     | Systems and Services             |                                | $       | 2,060   |       |   | $       | 2,126   |       |   | $       | 1,997   |      
|                     | Metrigraphics                    |                                |         | 466     |       |   |         | 546     |       |   |         | 602     |      
|                     |                                  |                                |         |         |       |   |         |         |      
|                     |                                  | Depreciation of segment assets |         |         | 2,526 |   |         |         | 2,672 |   |         |         | 2,599 | 
|                     | Depreciation of corporate assets |                                |         | 1,098   |       |   |         | 335     |       |   |         | 593     |      
|                     |                                  |                                |         |         |       |   |         |         |      
|                     |                                  | $                              | 3,624   |         |       | $ | 3,007   |         |       | $ | 3,192   |        
|                     |                                  |                                |         |         |       |   |         |         |      
|Capital expenditures |                                  |                                |         |         |       |   |         |         |       |   |         |        
|                     | Systems and Services             |                                | $       | 1,436   |       |   | $       | 1,246   |       |   | $       | 2,174   |      
|                     | Metrigraphics                    |                                |         | 7       |       |   |         | 6       |       |   |         | 329     |      
|                     |                                  |                                |         |         |       |   |         |         |      
|                     |                                  | Segment capital expenditures   |         |         | 1,443 |   |         |         | 1,252 |   |         |         | 2,503 | 
|                     | Corporate capital expenditures   |                                |         | 3,101   |       |   |         | 6,911   |       |   |         | 844     |      
|                     |                                  |                                |         |         |       |   |         |         |      
|                     |                                  | $                              | 4,544   |         |       | $ | 8,163   |         |       | $ | 3,347   |        
|                     |                                  |                                |         |         |       |   |         |         |      

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|                 |                      |                      |         |         |         |   |         |        |         | 
|---------------- | -------------------- | -------------------- | ------- | ------- | ------- | - | ------- | ------ | ------- | 
|                 |                      | December 31,         |        
|                 |                      |                      |        
|                 |                      | 2004                 |         |         | 2003    |  
|                 |                      |                      |         |         |         |  
|Segment assets   |                      |                      |         |         |         |   |         |       
|                 | Systems and Services |                      | $       | 179,973 |         |   | $       | 98,274 |        
|                 | Metrigraphics        |                      |         | 1,859   |         |   |         | 2,004  |        
|                 |                      |                      |         |         |         |  
|                 |                      | Total segment assets |         |         | 181,832 |   |         |        | 100,278 | 
|Corporate assets |                      |                      | 23,302  |         |         |   | 20,792  |       
|                 |                      |                      |         |         |         |  
|                 |                      | $                    | 205,134 |         |         | $ | 121,070 |       
|                 |                      |                      |         |         |         |  











|         |              
|-------- | -------------
|NOTE 10. | RESTRUCTURING









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|         |                       
|-------- | ----------------------
|NOTE 11. | FINANCING ARRANGEMENTS





















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

Acquisition term loan


















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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)









Term loan










Revolver













Excess cash flow recapture payments













Outstanding borrowings






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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)






















|                         |            |   |        |        | 
|------------------------ | ---------- | - | ------ | ------ | 
|Year ending December 31, |            |   |        |       
|                         | 2005       |   | $      | 18,357 | 
|                         | 2006       |   |        | 8,357  | 
|                         | 2007       |   |        | 8,357  | 
|                         | 2008       |   |        | 8,357  | 
|                         | 2009       |   |        | 21,164 | 
|                         | Thereafter |   |        | 5,250  | 
|                         |            |   |       
|                         |            | $ | 69,842 |       
|                         |            |   |       














|         |                                
|-------- | -------------------------------
|NOTE 12. | PREFERRED STOCK PURCHASE RIGHTS







|         |                              
|-------- | -----------------------------
|NOTE 13. | COMMITMENTS AND CONTINGENCIES



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)















|                 |                               |       |        |                        |          |   |        |             |  |         |            |        |  |            |        |        |  |   |       |       | 
|---------------- | ----------------------------- | ----- | ------ | ---------------------- | -------- | - | ------ | ----------- |  | ------- | ---------- | ------ |  | ---------- | ------ | ------ |  | - | ----- | ----- | 
|                 |                               |       |        | Payments due by period |         
|                 |                               |       |        |                        |         
|                 |                               |       |        | Less than              |          |   | Two to |             |  | Four to |            |        | 
|                 |                               | Total |        |                        | one year |   |        | three years |  |         | five years |        |  | Thereafter |       
|                 |                               |       |        |                        |          |   |        |             |  |         |            |        |  |            |       
|Revolver         |                               | $     | 10,000 |                        |          | $ | 10,000 |             |  | $       |           |        |  | $          |       |        |  | $ |      |      
|Long-term debt   |                               |       | 59,842 |                        |          |   | 8,357  |             |  |         | 16,714     |        |  |            | 29,521 |        |  |   | 5,250 |      
|Operating leases |                               |       | 14,515 |                        |          |   | 4,370  |             |  |         | 5,223      |        |  |            | 3,021  |        |  |   | 1,901 |      
|                 |                               |       |        |                        |          |   |        |             |  |         |            |        |  |            |       
|                 | Total contractual obligations |       | $      | 84,357                 |          |   | $      | 22,727      |  |         | $          | 21,937 |  |            | $      | 32,542 |  |   | $     | 7,151 | 
|                 |                               |       |        |                        |          |   |        |             |  |         |            |        |  |            |       





















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|         |                                                                       
|-------- | ----------------------------------------------------------------------
|NOTE 14. | QUARTERLY RESULTS (UNAUDITED)(in thousands, except per
    share data)







|     |                                               |                                             |                               |        |         |      |   |            |       |      |               |        |       |      |   |        |       |      | 
|---- | --------------------------------------------- | ------------------------------------------- | ----------------------------- | ------ | ------- | ---- | - | ---------- | ----- | ---- | ------------- | ------ | ----- | ---- | - | ------ | ----- | ---- | 
|     |                                               | First                                       |                               |        | Second  |      |   | Third      |       |      | Fourth        |       
|     |                                               | Quarter                                     |                               |        | Quarter |      |   | Quarter(2) |       |      | Quarter(3)(4) |       
|     |                                               |                                             |                               |        |         |      |   |            |       |      |               |       
|2004 |                                               |                                             |                               |        |         |      |   |            |       |      |               |        |       |      |   |       
|     | Revenues                                      |                                             | $                             | 62,068 |         |      | $ | 64,950     |       |      | $             | 70,451 |       |      | $ | 78,237 |      
|     | Gross profit                                  |                                             | $                             | 9,090  |         |      | $ | 9,433      |       |      | $             | 11,155 |       |      | $ | 13,305 |      
|     | Operating income                              |                                             | $                             | 3,374  |         |      | $ | 4,117      |       |      | $             | 4,441  |       |      | $ | 5,575  |      
|     | Net income                                    |                                             | $                             | 2,044  |         |      | $ | 2,199      |       |      | $             | 2,268  |       |      | $ | 2,862  |      
|     | Earnings per common share  diluted(1)        |                                             | $                             | 0.23   |         |      | $ | 0.24       |       |      | $             | 0.25   |       |      | $ | 0.31   |      
|    
|2003 |                                               |                                             |                               |        |         |      |   |            |       |      |               |        |       |      |   |       
|     | Revenues                                      |                                             | $                             | 58,606 |         |      | $ | 62,138     |       |      | $             | 62,432 |       |      | $ | 61,632 |      
|     | Gross profit                                  |                                             | $                             | 9,201  |         |      | $ | 10,005     |       |      | $             | 9,704  |       |      | $ | 11,151 |      
|     | Operating income                              |                                             | $                             | 2,965  |         |      | $ | 3,473      |       |      | $             | 4,263  |       |      | $ | 4,688  |      
|     | Income from continuing operations             |                                             | $                             | 1,632  |         |      | $ | 1,958      |       |      | $             | 2,387  |       |      | $ | 2,678  |      
|     | Loss from discontinued operations             |                                             |                               | (357   | )       |      |   | (856       | )     |      |               | (147   | )     |      |   | (275   | )    
|     | Loss on disposal of discontinued operations   |                                             |                               | (233   | )       |      |   |           |       |      |               |       |       |      |   | (115   | )    
|     |                                               |                                             |                               |        |         |      |   |            |       |      |               |       
|     | Net income                                    |                                             | $                             | 1,042  |         |      | $ | 1,102      |       |      | $             | 2,240  |       |      | $ | 2,288  |      
|     |                                               |                                             |                               |        |         |      |   |            |       |      |               |       
|     | Earnings (loss) per common share  diluted(1) |                                             |                               |        |         |      |   |            |       |      |               |        |       |      |   |        |      
|     |                                               | Income from continuing operations           |                               | $      | 0.19    |      |   | $          | 0.23  |      |               | $      | 0.27  |      |   | $      | 0.30  |     
|     |                                               | Loss from discontinued operations           |                               |        | (0.04   | )    |   |            | (0.10 | )    |               |        | (0.02 | )    |   |        | (0.03 | )   
|     |                                               | Loss on disposal of discontinued operations |                               |        | (0.03   | )    |   |            |      |      |               |        |      |      |   |        | (0.01 | )   
|     |                                               |                                             |                               |        |         |      |   |            |       |      |               |       
|     |                                               |                                             | Net earnings per common share |        | $       | 0.12 |   |            | $     | 0.13 |               |        | $     | 0.25 |   |        | $     | 0.26 | 
|     |                                               |                                             |                               |        |         |      |   |            |       |      |               |       









|    |                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Income (loss) per share is computed independently for each of
    the quarters presented; accordingly, the sum of the quarterly
    income (loss) per share may not equal the total computed for the
    year.                            
|   
|   
|   
|(2) | 2004 amounts include results of operations of Impact Innovations
    (acquired September 1, 2004) for the period subsequent to
    its acquisition. During this period, revenues attributable to
    Impact Innovations were $4.2 million.
|   
|   
|   
|(3) | 2004 amounts include results of operations of Impact Innovations
    for the entire fourth quarter. During this period, revenues
    attributable to Impact Innovations were $11.9 million.                                               
|   
|   
|   
|(4) | 2004 amounts include approximately $0.8 million of revenue
    adjustments related to rate changes on certain contracts with
    the United States Government.                                                                            
|   

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DYNAMICS RESEARCH CORPORATION





SCHEDULE II  VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES





|                                                  |                         |            |  |                           |            |  |  |             |     |  |            |   |      |            |  |   |      |   |  |   |     | 
|------------------------------------------------- | ----------------------- | ---------- |  | ------------------------- | ---------- |  |  | ----------- | --- |  | ---------- | - | ---- | ---------- |  | - | ---- | - |  | - | --- | 
|                                                  |                         |            |  | Additions                 |            |  |  |             |    
|                                                  |                         |            |  |                           |            |  |  |             |    
|                                                  |                         | Balance at |  |                           | Charged to |  |  | Charged to  |     |  | Deductions |   |      | Balance at | 
|                                                  |                         | Beginning  |  |                           | Costs and  |  |  | Other       |     |  | and        |   |      | End of     | 
|                                                  |                         | of Period  |  |                           | Expenses   |  |  | Accounts(A) |     |  | Write-Offs |   |      | Period     | 
|                                                  |                         |            |  |                           |            |  |  |             |     |  |            |   |      |            | 
|                                                  |                         |            |  | (in thousands of dollars) |            |  | 
|Allowance for doubtful accounts and sales returns |                         |            |  |                           |            |  |  |             |     |  |            |   |      |            |  |   |      |   |  |  
|                                                  | Year ended December 31, |            |  |                           |            |  |  |             |     |  |            |   |      |            |  |   |      |   |  |   |    
|                                                  |                         | 2004       |  | $                         | 321        |  |  | $           | 72  |  |            | $ | 20   |            |  | $ | (17  | ) |  | $ | 396 | 
|                                                  |                         | 2003       |  | $                         | 373        |  |  | $           | 9   |  |            | $ | (30  | )          |  | $ | (31  | ) |  | $ | 321 | 
|                                                  |                         | 2002       |  | $                         | 1,271      |  |  | $           | 10  |  |            | $ | (402 | )          |  | $ | (506 | ) |  | $ | 373 | 
|Restructuring reserve                             |                         |            |  |                           |            |  |  |             |     |  |            |   |      |            |  |   |      |   |  |  
|                                                  | Year ended December 31, |            |  |                           |            |  |  |             |     |  |            |   |      |            |  |   |      |   |  |   |    
|                                                  |                         | 2004       |  | $                         |           |  |  | $           |    |  |            | $ |     |            |  | $ |     |   |  | $ |    | 
|                                                  |                         | 2003       |  | $                         | 168        |  |  | $           |    |  |            | $ |     |            |  | $ | (168 | ) |  | $ |    | 
|                                                  |                         | 2002       |  | $                         |           |  |  | $           | 759 |  |            | $ |     |            |  | $ | (591 | ) |  | $ | 168 | 









|    |                                                              
|--- | -------------------------------------------------------------
|(A) | Recovery of previously reserved amounts and other adjustments

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
    AND FINANCIAL DISCLOSURE









| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | KPMG noted deficiencies in the processes used by management to
    review and document new customer contracts and modifications to
    existing customer contracts for purposes of determining the
    proper revenue recognition model.                                                                                                                                                                                                                                                                                                                           
|
| |  | KPMG noted deficiencies in the systems and processes used in the
    preparation of the financial statements and the lack of proper
    management review and account reconciliation and analysis.                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | It was noted that personnel responsible for accounting and
    financial reporting did not have sufficient background or were
    overloaded with normal day-to-day activities. It was also noted
    that they lacked the Securities and Exchange Commission
    (SEC) and Generally Accepted Accounting Principles
    (GAAP) experience necessary to ensure compliance
    with financial reporting and disclosure requirements. Among
    other things, it was recommended that the company strengthen its
    level of SEC and GAAP accounting experience.









| |   |                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the application of accounting principles to a specified
    transaction, either completed or proposed;                                                                                                                                                                                          
|
| |  | the type of audit opinion that might be rendered on the
    companys financial statements; or                                                                                                                                                                                                  
|
|
| |  | any matter that was either the subject of a disagreement, as
    that term is defined in Item 304(a)(1)(iv) of
    Regulation S-K and the related instructions to
    Item 304 of Regulation S-K, or a reportable event, as
    that term is defined in Item 304(a)(1)(v) of
    Regulation S-K.
|




Item 9A. CONTROLS AND PROCEDURES




| |     |                                                 
| | --- | ------------------------------------------------
| | (a) | Evaluation of Disclosure Controls and Procedures



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| |     |                                                                  
| | --- | -----------------------------------------------------------------
| | (b) | Report of Management on Internal Control over Financial Reporting

Internal
Control  Integrated Framework,










| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Information Technology Access Controls. Design and
    assignment of PeopleSoft access profiles did not limit access to
    assigned duties in several system modules. Also, controls in
    place to establish access did not function as intended. While we
    are not aware of any evidence that this control deficiency
    resulted in financial statement error, the potential exists that
    errors could occur that would not be prevented or detected.                                                                               
|
| |  | Evidence of Compliance with Approval Authority Policy.
    Testing of the operating effectiveness of the companys
    approval controls in many process areas indicated that required
    approvals were not consistently documented. While we are not
    aware of any evidence of transactions that were inconsistent
    with managements intent, the possibility exists that such
    transactions could occur without detection and result in
    financial statement error.                                                             
|
|
| |  | Evidence of the Performance of Review and Monitoring
    Controls. In several instances either: (1) the
    companys internal control design did not require review
    controls, (2) testing indicated that required reviews were
    not consistently documented; or (3) managements
    design of controls did not require documented evidence, such as
    signatures, of reviews performed. Lack of review and the
    inability to demonstrate that reviews were performed creates the
    potential that undetected errors could occur.
|
|
| |  | Assessment of the Effectiveness of Internal Controls. The
    scope, testing and evaluation of test results of
    managements assessment of the effectiveness of internal
    controls were insufficient in these areas: footnote disclosures,
    fixed assets, accounts receivable and information technology
    controls. Also, the basis for evaluating test exceptions was not
    adequately documented.                                                                                                                               







73



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##### Table of Contents







| |     |                                                     
| | --- | ----------------------------------------------------
| | (c) | Changes in Internal Control over Financial Reporting











74



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##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
























Internal Control  Integrated Framework
























































Inadequate assessment of the effectiveness of internal
control





75



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Inadequate segregation of duties








Inadequate delegation of approval authority








Inadequate monitoring and review controls
















Internal Control  Integrated Framework Internal Control 
Integrated Framework


















| |                       
| | ----------------------
| | /s/ Grant Thornton LLP




















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PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



http://www.drc.com







|         |                       
|-------- | ----------------------
|Item 11. | EXECUTIVE COMPENSATION








|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT



Equity Compensation Plan Information


|                                                            |     |                      |           |         |                      |                      |                         |                           |      |  |         |   |         | 
|----------------------------------------------------------- | --- | -------------------- | --------- | ------- | -------------------- | -------------------- | ----------------------- | ------------------------- | ---- |  | ------- | - | ------- | 
|                                                            |     |                      |           |         |                      | Number of securities |                        
|                                                            |     | Number of securities |           |         |                      |                      | remaining available for |                          
|                                                            |     | to be issued upon    |           |         | Weighted-average     |                      |                         | future issuance under     |     
|                                                            |     | exercise of          |           |         | exercise price of    |                      |                         | equity compensation plans |     
|                                                            |     | outstanding options, |           |         | outstanding options, |                      |                         | (excluding securities     |     
|                                                            |     | warrants and rights  |           |         | warrants and rights  |                      |                         | reflected in column (a))  |     
|Plan category                                               |     | (a)                  |           |         | (b)                  |                      |                         | (c)                       |     
|                                                            |     |                      |           |         |                      |                      |                         |                           |     
|Equity compensation plans approved by security holders(1)   |     |                      | 1,149,105 |         |                      | $                    | 9.39                    |                           |      |  | 606,522 |  
|                                                            |     |                      |           |         |                      |                      |                         |                           |     
|Equity compensation plans not approved by security holders: |     |                      |           |         |                      |                      |                         |                           |      |  |         |  
|                                                            | (2) |                      |           | 250,000 |                      |                      | $                       | 4.44                      |      |  |         |  |        
|                                                            | (3) |                      |           | 100,000 |                      |                      | $                       | 12.14                     |      |  |         |  |        
|                                                            |     |                      |           |         |                      |                      |                         |                           |     
|                                                            |     | Total                |           |         | 1,499,105            |                      |                         | $                         | 8.75 |  |         |   | 606,522 | 
|                                                            |     |                      |           |         |                      |                      |                         |                           |     






| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Includes the number of shares subject to options issued under
    the following plans: 1993 Equity Incentive Plan, 1995 Stock
    Option Plan for Non-Employee Directors, 2000 Incentive Plan,
    2000 Employee Stock Purchase Plan and 2003 Incentive Plan.                                                                                                                                                                                                                                                                                                                         
|
| | (2) | In 1999, the company granted Mr. Regan 250,000
    non-qualified stock options to purchase shares of the
    companys common stock. The option price is $4.44, which
    was the fair market value of the common stock at the date of
    grant. Twenty percent of the options vested immediately. An
    additional 20% vest in each successive year from the date of
    grant. The options expire ten years from the date of grant.                                                                                                                                               
|
| | (3) | On February 19, 2003, the Board of Directors authorized the
    grant of 100,000 non-qualified stock options as an inducement
    for the hiring of a new executive officer. The grant was made on
    April 7, 2003, to William C. Hoover, President and Chief
    Operating Officer. The option price is $12.14, which was the
    fair market value of the common stock at the date of grant. The
    options will vest one-third on the first anniversary of
    employment and one third on each successive anniversary. The
    options expire ten years from the date of grant.

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|         |                                               
|-------- | ----------------------------------------------
|Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS








|         |                                       
|-------- | --------------------------------------
|Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES



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PART IV







|         |                                       
|-------- | --------------------------------------
|Item 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULE











79



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##### Table of Contents



SIGNATURES






| |                                     
| | ------------------------------------
| | Dynamics Research
    Corporation   
|
|
| | /s/ James P. Regan                  
|
| |                                     
| | James P. Regan,                     
| | Chairman and Chief Executive Officer














|                                                                     |  |                                                                                      |  |                |  | 
|-------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------ |  | -------------- |  | 
|                                                                    
|/s/ James P. ReganJames
    P. Regan                                 |  | Chairman and Chief Executive Officer                                                 |  | March 31, 2005
|                                                                    
|/s/ William C. HooverWilliam
    C. Hoover                           |  | President and Chief Operating Officer                                                |  | March 31, 2005
|                                                                    
|/s/ David KeleherDavid
    Keleher                                   |  | Senior Vice President and Chief Financial Officer (Principal
    Financial Officer)  |  | March 31, 2005
|                                                                    
|/s/ Francis MurphyFrancis
    Murphy                                 |  | Corporate Controller and Chief Accounting Officer (Principal
    Accounting Officer) |  | March 31, 2005
|                                                                    
|/s/ John S. Anderegg, Jr.John
    S. Anderegg, Jr.                   |  | Director                                                                             |  | March 31, 2005
|                                                                    
|/s/ Francis J. AguilarFrancis
    J. Aguilar                         |  | Director                                                                             |  | March 31, 2005
|                                                                    
|/s/ Gen. George T. Babbitt, Jr.Gen.
    George T. Babbitt, Jr.       |  | Director                                                                             |  | March 31, 2005
|                                                                    
|/s/ Kenneth F. KamesKenneth
    F. Kames                             |  | Director                                                                             |  | March 31, 2005
|                                                                    
|/s/ Lt. Gen. Charles P. McCauslandLt.
    Gen. Charles P. McCausland |  | Director                                                                             |  | March 31, 2005




80



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##### Table of Contents



EXHIBIT INDEX


|            |       |  |             |                                                                                                                                                                                                                                                                                   |           |      
|----------- | ----- |  | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | -----
|Exhibit No. |       |  | Description |                                                                                                                                                                                                                                                                                   | Reference
|            |       |  |             |                                                                                                                                                                                                                                                                                   |          
|            | 2.1   |  |             | 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                                                                                                                     |           | Y**  
|           
|            | 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 Articles of
    Organization of the company.                                                                                                                                                                                              |           | C**  
|           
|            | 3.7   |  |             | Amendment, dated April 25, 2000, to the 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 Consulting Agreement by and between the company and
    Albert Rand.                                                                                                                                                                                                      |           | H* **
|           
|            | 10.5  |  |             | Form of Supplemental Retirement Pension Agreement by and between
    the company and Albert Rand.                                                                                                                                                                                 |           | H* **
|           
|            | 10.6  |  |             | Amended 1993 Equity Incentive Plan.                                                                                                                                                                                                                                               |           | I* **
|           
|            | 10.7  |  |             | Amended 1995 Stock Option Plan for Non-Employee Directors.                                                                                                                                                                                                                        |           | H* **
|           
|            | 10.8  |  |             | Mortgage Security Agreement and Assignment, dated
    February 10, 2000, by and among Dynamics Research
    Corporation and Brown Brothers Harriman & Co. and
    Family Bank, FSB.                                                                                               |           | J**  
|           
|            | 10.9  |  |             | Amendment, dated June 12, 2000, to Mortgage Security
    Agreement and Assignment, by and among Dynamics Research
    Corporation and First Massachusetts Bank, N.A., f/k/a/ Family
    Bank, FSB.                                                                                |           | K**  
|           
|            | 10.10 |  |             | Employment Agreement between the company and James P. Regan.                                                                                                                                                                                                                      |           | L* **
|           
|            | 10.11 |  |             | Change of Control Agreement between the company and James P.
    Regan.                                                                                                                                                                                                           |           | L* **
|           
|            | 10.12 |  |             | 2000 Incentive Plan.                                                                                                                                                                                                                                                              |           | M* **
|           
|            | 10.13 |  |             | Form of grant of stock options under the 2000 Incentive Plan.                                                                                                                                                                                                                     |           | U* **
|           
|            | 10.14 |  |             | Form of grant of restricted stock under the 2000 Incentive Plan.                                                                                                                                                                                                                  |           | U* **
|           
|            | 10.15 |  |             | Non-qualified Stock Option Agreement between the company and
    James P. Regan.                                                                                                                                                                                                  |           | N* **
|           
|            | 10.16 |  |             | 2000 Employee Stock Purchase Plan.                                                                                                                                                                                                                                                |           | F* **
|           
|            | 10.17 |  |             | Special Severance Plan.                                                                                                                                                                                                                                                           |           | O* **
|           
|            | 10.18 |  |             | Senior Management Deferred Compensation Plan.                                                                                                                                                                                                                                     |           | P* **
|           
|            | 10.19 |  |             | Amended and Restated Loan Agreement, dated June 28, 2002,
    by and among Dynamics Research Corporation, certain of its
    subsidiaries, and Brown Brothers Harriman & Co.,
    Banknorth, N.A. and Key Corporation Capital Inc.                                                |           | Q**  
|           
|            | 10.20 |  |             | Amendment, dated December 16, 2002, to the Amended and
    Restated Loan Agreement, dated June 28, 2002, by and among
    Dynamics Research Corporation, certain of its subsidiaries, and
    Brown Brothers Harriman & Co., Banknorth, N.A. and Key
    Corporation Capital Inc. |           | A**  
|           
|            | 10.21 |  |             | Second Amendment, dated June 26, 2002, to the Mortgage
    Security Agreement and Assignment, by and between Dynamics
    Research Corporation and Banknorth N.A., f/k/a/ First
    Massachusetts Bank, N.A., f/k/a Family Bank, FSB.                                             |           | C**  



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##### Table of Contents






|            |       |  |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |           |                
|----------- | ----- |  | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | ---------------
|Exhibit No. |       |  | Description |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Reference
|            |       |  |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |          
|           
|            | 10.22 |  |             | Amendment and Waiver, dated March 26, 2003, to the Amended
    and Restated Loan Agreement, dated June 28, 2002, by and
    among Dynamics Research Corporation, certain of its
    subsidiaries, and Brown Brothers Harriman & Co.,
    Banknorth, N.A. and Key Corporation Capital Inc.                                                                                                                                                                                                                                                                   |           | C**            
|           
|            | 10.23 |  |             | Dynamics Research Corporation Special Severance Plan, as amended
    on May 14, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |           | S* **          
|           
|            | 10.24 |  |             | 2003 Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |           | S* **          
|           
|            | 10.25 |  |             | Form of grant of stock options under the 2003 Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |           | U* **          
|           
|            | 10.26 |  |             | Form of grant of restricted stock under the 2003 Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |           | U* **          
|           
|            | 10.27 |  |             | Third Amendment, dated December 23, 2003, to the Amended
    and Restated Loan Agreement, dated June 28, 2002, by and
    among Dynamics Research Corporation, certain of its
    subsidiaries, and Brown Brothers Harriman & Co.,
    Banknorth, N.A. and Key Corporate Capital Inc.                                                                                                                                                                                                                                                                       |           | S**            
|           
|            | 10.28 |  |             | Second Amended and Restated Loan Agreement by and among Dynamics
    Research Corporation, DRC International Corporation, H.J. Ford
    Associates, Inc., Andrulis Corporation and Impact Innovations
    Group LLC as the Borrowers, and The Lenders Party hereto and
    Brown Brothers Harriman & Co., as Administrative Agent
    and Banknorth, N.A. as documentation Agent and Key Bank National
    Association as Co-Syndication Agent and Fleet National Bank, a
    Bank of America company as Co-Syndication Agent, as of
    September 1, 2004. |           | T**            
|           
|            | 10.29 |  |             | Master Unlimited Guaranty dated as of September 1, 2004 by
    each of Dynamics Research Corporation, DRC International
    Corporation, H.J. Ford Associates, Inc., Andrulis Corporation
    and Impact Innovations Group LLC, 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.                                                                                                                                         |           | T**            
|           
|            | 10.30 |  |             | Security Agreement among Brown Brothers Harriman & Co.,
    as Administrative Agent for the Lenders Party to the Loan
    Agreement and Dynamics Research Corporation, DRC International
    Corporation, H.J. Ford Associates, Inc., Andrulis Corporation
    and Impact Innovations Group LLC, dated September 1, 2004.                                                                                                                                                                                                                                   |           | T**            
|           
|            | 10.31 |  |             | Pledge Agreement by and between Dynamics Research Corporation
    and 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, as of
    September 1, 2004.                                                                                                                                                                                                                                                                                      |           | T**            
|           
|            | 10.32 |  |             | Patent and Patent Application Security Agreement by Dynamics
    Research Corporation and Brown Brothers Harriman & Co.,
    as administrative agent for itself and for each of the other
    Lenders as may become parties to the Loan Agreement, dated
    September 1, 2004.                                                                                                                                                                                                                                                                             |           | T**            
|           
|            | 10.33 |  |             | Trademark and Trademark Application Security Agreement by
    Dynamics Research Corporation and Brown Brothers
    Harriman & Co., as administrative agent for itself and
    for each of the other Lenders as may become parties to the Loan
    Agreement, dated September 1, 2004.                                                                                                                                                                                                                                                                       |           | T**            
|           
|            | 10.34 |  |             | Non-qualified Stock Option Agreement between the company and
    William Hoover, dated April 7, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                       |           | R* **          
|           
|            | 10.35 |  |             | Deferred Stock Compensation Plan for Non-Employee Directors, as
    amended for deferrals on or after January 1, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                       |           | Filed herewith*
|           
|            | 10.36 |  |             | Amendment to Deferred Stock Compensation Plan for Non-Employee
    Directors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |           | Filed herewith*
|           
|            | 10.37 |  |             | Beneficiary Designation Form for the Deferred Compensation Plan
    for Non-Employee Directors                                                                                                                                                                                                                                                                                                                                                                                                                                                              |           | Filed herewith*
|           
|            | 16.1  |  |             | Letter regarding change in certifying accountant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |           | S**            
|           
|            | 21.1  |  |             | Subsidiaries of the registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |           | Filed herewith 
|           
|            | 23.1  |  |             | Consent of Independent Registered Public Accounting Firm (Grant
    Thornton LLP)                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |           | Filed herewith 
|           
|            | 23.2  |  |             | Consent of Independent Registered Public Accounting Firm (KPMG
    LLP)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |           | Filed herewith 
|           
|            | 23.3  |  |             | Report of Independent Registered Public Accounting Firm on
    Financial Schedule (KPMG LLP)                                                                                                                                                                                                                                                                                                                                                                                                                                                                |           | Filed herewith 
|           
|            | 31.1  |  |             | Certification of the Chief Executive Officer pursuant to
    Rule 13a-14(a) under the Securities Exchange Act of 1934,
    as adopted pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.                                                                                                                                                                                                                                                                                                                                                        |           | Filed herewith 






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##### Table of Contents



|            |      |  |             |                                                                                                                                                                                                      |           |               
|----------- | ---- |  | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | --------------
|Exhibit No. |      |  | Description |                                                                                                                                                                                                      | Reference
|            |      |  |             |                                                                                                                                                                                                      |          
|           
|            | 31.2 |  |             | Certification of the Chief Financial Officer pursuant to
    Rule 13a-14(a) under the Securities Exchange Act of 1934,
    as adopted pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002. |           | Filed herewith
|           
|            | 32.1 |  |             | Certification of the Chief Executive Officer pursuant to 18
    U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                       |           | Filed herewith
|           
|            | 32.2 |  |             | Certification of the Chief Financial Officer pursuant to 18
    U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                       |           | 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 Current Report
    on Form 8-K filed on March 24, 2000.                                                                                                                                                      
|  
|K  | Incorporated by reference to the companys Current Report
    on Form 8-K filed on June 27, 2000.                                                                                                                                                       
|  
|L  | Incorporated by reference to the companys Annual Report on
    Form 10-K for the year ended December 31, 1999.                                                                                                                                         
|  
|M  | Incorporated by reference to the companys
    Schedule 14A filed on December 6, 1999.                                                                                                                                                                  
|  
|N  | Incorporated by reference to the companys Registration
    Statement on Form S-8 (Registration No. 333-47838)
    filed on October 12, 2000.                                                                                                           
|  
|O  | Incorporated by reference to the companys Annual Report on
    Form 10-K for the year ended December 31, 2001.                                                                                                                                         
|  
|P  | Incorporated by reference to the companys Quarterly Report
    on Form 10-Q for the quarterly period ended March 31,
    2002.                                                                                                                         
|  
|Q  | Incorporated by reference to the companys Quarterly Report
    on Form 10-Q for the quarterly period ended June 30,
    2002.                                                                                                                          
|  
|R  | Incorporated by reference to the companys Quarterly Report
    on Form 10-Q for the quarterly period ended March 31,
    2003.                                                                                                                         
|  
|S  | Incorporated by reference to the companys Annual Report on
    Form 10-K for the year ended December 31, 2003.                                                                                                                                         
|  
|T  | Incorporated by reference to the companys Current Report
    on Form 8-K, dated September 1, 2004, and filed on
    September 8, 2004.                                                                                                                 
|  
|U  | Incorporated by reference to the companys Quarterly Report
    on Form 10-Q for the quarterly period ended
    September 30, 2004.                                                                                                                     
|  
|*  | 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.