financial highlights


                                            1995        1996          1997
(In thousands of dollars, except share and employee data)

Revenue                                $  103,941   $  130,163    $  159,377
Net income                                    559        1,729         4,129
Net income per share - basic*                 .09          .28           .66
Net income per share - diluted*               .09          .27           .64
Backlog                                    61,284       73,200       110,001
Number of employees                         1,249        1,349         1,455
Number of shares outstanding*           6,185,049    6,263,025     6,288,872

*Restated for the April 1997 10% stock dividend.



To Our Shareholders


Dynamics Research Corporation (DRC) revenues grew 22 percent in 1997,
bringing total sales to a record $159 million for the year. Much of this
growth is attributable to initiatives put in place earlier that are now
bearing fruit. We enter 1998 with a substantial backlog and are committed
to sustaining the strong growth achieved during the past two years.

Financial Results

Revenues for the year ended December 31, 1997 increased to $159.4 million
from $130.2 million for 1996. Net income for 1997 advanced to $4,129,000,
or $.66 per basic share and $.64 per diluted share, from $1,729,000, or
$.28 per basic share and $.27 per diluted share, the  prior year. Results for
1997 include a one-time net income benefit realized during the third quarter
amounting to $1.0 million, or $.16 per share, from the refund of income taxes
and related interest.  Sales for the Systems and Test Equipment divisions
totaled $131 million for the year, or 83 percent of revenues, while
sales for the Precision Manufactured Products divisions equaled $28 million,
or 17 percent of 1997 revenues.

Expanding Beyond Core Defense Initiatives

We continue to make excellent progress on changing our business mix to
promote growth and improve profitability. We are accomplishing this by using
the expertise and systems developed in our Department of Defense work for
other government agencies and businesses. Approximately 34 percent of this
year's revenues were generated from non-defense sources and sales of our
precision manufactured products-up from 26 percent last year, while
defense-related projects accounted for 66 percent of sales.  Our long-stated
goal is to achieve a 50/50 balance between defense and non-defense revenues.

The most significant area of growth in 1997 was our state government
business. We won several major contracts, competing effectively against
well-known management consulting firms and computer hardware vendors. Our
success in this arena stems from a strong track record with existing clients,
an advantageous cost structure, and Systems Engineering Institute Level II
certification, a difficult-toobtain classification designed to ensure the
consistency, quality and comprehensiveness of DRC's systems integration
programs.

Major Wins

Major non-defense information system contracts awarded to
DRC in 1997 include:

A $36-million contract for the State of Ohio's Department of Health
and Human Services system for tracking child support payments;

A second, $19-million contract with Ohio to provide
computer hardware and software for an automated child welfare system;

A $28-million, seven-year contract with the State of
Colorado's child protection and juvenile justice agencies; Expansion
of an existing contract supporting a case-management system for New
Hampshire's Department of Health and Human Services; and

A $3-million contract for evaluating and certifying
year 2000 conversions for Internal Revenue Service information systems.

Pioneering New Military Niches

Reengineering consulting, logistics planning, decision support systems
and supply chain management-core DRC competencies-continue to constitute
the bulk of our defense business. Significantly, the realignment of
military budgets is generating greater demand for DRC's information
technology expertise. Opportunities are arising to manage programs that
are being privatized and to reengineer customer workflow to achieve
better efficiencies. We are also winning projects in new niches where
DRC has proven expertise. Key projects in this category include:

A three-year, $12-million extension of an existing contract supporting the
U.S. Navy's specialized semiconductor production facility in San Diego,
California. DRC engineers model and simulate semiconductor performance
before the chips are actually produced.

Marketing a test device for joint tactical communications, a sophisticated
display device that collects and synthesizes positioning information from
ships, airplanes and ground stations.

A $13 million, four-year program for the U.S. Army known as MedTeams grew to
$2.7 million in 1997 from $800,000 in 1996. This innovative program, which
draws upon DRC's experience in training combat flight crews, analyzes and
improves emergency room teamwork in civilian and military hospitals.

Telecommunications Initiative

One of the most promising areas of growth at DRC is the Sleuth
telecommunications fraud control system, a product initially developed by
Pacific Bell and now marketed and maintained by DRC under an exclusive
license. Accounting for $2.6 million of DRC revenues in 1997, Sleuth is used
to monitor calling card fraud by SBC Communications (formerly Southwest Bell
and Pacific Bell), Ameritech, Bell Atlantic, Bell South, U.S. West and is
soon to be installed in the NYNEX operations acquired by Bell Atlantic.

Precision Manufactured Products

Identifying new medical, high technology and consumer applications for
electroformed circuits and conductors was a primary focus for the
Metrigraphics Division in 1997. DRC is now seeking to develop potential
high-volume products in collaboration with household-name manufacturers
in several industries. Electroform products expanded beyond consumer and
office markets this year, as we produced products to be used in
engineering, cartography and industrial packaging applications.

Within the Encoder Division, high-volume production of diesel fuel
pump encoders for a major auto parts supplier remained strong, and we
are pursuing other volume production opportunities with original
equipment manufacturers.

Laying Groundwork for Future Growth

Entering 1998, our goals for the year are to maintain a 20 percent
growth curve, further improve margins and continue diversifying into non-
defense business. We anticipate that state government work will be a
major area of growth again this year. Our greatest emphasis going
forward is on the expansion of our commercial base, particularly within
the Systems Division.

We are constantly balancing the drive to invest in initiatives that
will generate strong future returns against the need to bring results to the
bottom line today. DRC is aggressively exploring and qualifying potential
new markets and technologies in which we expect to have a strong competitive
advantage. Our success in securing state health and human service agency
contracts is a prime example of how our strategy of migrating core
competencies into new, growing markets has paid off.

Among the many product and market development initiatives now
underway are:

Expansion of DoD work for programs undergoing privatization, particularly
those involving reengineering and logistics support;

Gaining entree through year 2000 date conversion contracts to the market for
revitalizing or replacing Bull computers in private corporations and state
and local governments;

Identifying and developing new applications for electroforming processes for
fine precision structures.

During the year we established a line of credit of up to $45 million
that gives us the flexibility to pursue new opportunities. The strength
of our board was augmented with the addition of two new directors:
Martin V. Joyce, Jr. and Kenneth F. Kames. Mr. Joyce is a vice president
of A.T. Kearney, Inc., a leading management consulting firm, and has far-
reaching expertise in the software and information technology industry.
Mr. Kames spearheads new business development for The Gillette Company
and brings a strong background in acquisitions and joint ventures. As
has been our practice in the past, we declared a 10 percent stock
dividend in April 1997 to increase the liquidity of DRC stock.

DRC is at an exciting point in its history. We are in the right place at the
right time to benefit from major changes in the marketplace. Much of the
credit for this goes to our employees who are willing and able to move
quickly to capitalize on new opportunities, as well as to our shareholders
for their ongoing support.

Sincerely,


John S. Anderegg, Jr.         Albert Rand
Chairman                      President and
                              Chief Executive Officer



poised to profit
from market forces


The market for information technology services and devices is changing
faster than ever, buffeted by major social, technological and economic
trends. DRC is constantly reevaluating and reshaping its capabilities to
capitalize on these changing market conditions.


Major Market Forces


Shifting defense priorities driving demand for sophisticated information
systems that improve efficiency and lower costs;

Acquisition of information technology among state governments to improve
data tracking systems and meet more stringent federal reporting
requirements;

Telecommunications industry deregulation, resulting in consolidation and
the rise of innovative new service providers; and

Product advances across a wide range of industries enabled by the
miniaturization of electronics.

The pages that follow detail only a few of the many initiatives
percolating within DRC to take advantage of these trends.



Health and Human Services

Market Force

Recent legislation has mandated comprehensive computerized tracking and
management capabilities at state health and human service agencies.


The Response

Leverage expertise in designing and maintaining complex management
information systems to address the burgeoning state market.


supporting welfare reform


When the State of Ohio needed to establish the computer and communications
infrastructure for a statewide system to monitor child support payments, it
turned to DRC. In February 1997, DRC received a $36 million contract to
design, procure, install and maintain the computer hardware and
communications networks supporting 4,400 caseworkers throughout the state's
88 counties.

DRC's performance on the initial contract was a key factor in
winning additional work from Ohio. In November, it won a second contract
totaling nearly $19 million to provide computer hardware, software and
technical su
pport services in support of the Ohio Works First initiative
and its automated child welfare information system.


DRC's work for Ohio has primarily focused on providing systems
integration services. Its work for health and human service agencies in
the states of New Hampshire and Colorado has focused on developing and
implementing sophisticated software-based management information systems
for child welfare.


decision support systems


The complex logistics behind day-to-day maintenance and support typically
account for two-thirds of the costs of aircraft operations. As the Air Force
seeks lower-cost ways to meet its high maintenance standards, it is using
innovative decision support software and Internet-based communications
systems devised by DRC.

DRC software engineers have accessed an existing information system to
create a logistics model for managing the location and movement of
repair parts to and among the Air Force's five domestic Air Logistics
Center maintenance depots. The software tracks the availability of
maintenance bays, mechanics and machinery; forecasts space and equipment
demand; and schedules all repairs.  It also manages the timely delivery of
replacement parts, eliminating costly inventory build up.

To facilitate fast access to this mission-critical supply chain, DRC has
also implemented a highly secure Web site that enables maintenance staff
around the country to review schedules and trace the location of parts.



Aircraft Maintenance


Market Force

The Department of Defense is striving to make weapons system maintenance
as cost-efficient as possible without jeopardizing readiness or
reliability.


The Response

Devise software-based decision support systems and secure Internet
communications to optimize maintenance operations.


fraud control system

In 1996, DRC obtained an exclusive license to maintain and market a
telephone fraud detection system from a unit of SBC Communications that
detects potentially fraudulent credit card calls. The system is now used
by all five regional Bell operating companies, and is soon to be
installed in the NYNEX operations acquired by Bell Atlantic.

DRC software engineers have upgraded the Fraud Control System into a
comprehensive product that detects suspicious calling patterns in all
long-distance calls. With deregulation continuing to blur the lines
between Bell operating companies, local exchange carriers and
independent telephone companies, all carriers will benefit from putting
universal fraud control measures in place. DRC is exploring
opportunities with several major computer and telecommunications
equipment vendors about marketing the Fraud Control System to local
exchange carriers, independents and major international
telecommunications companies.


Telecommunications
Industry Deregulation


Market Force

Telecommunications industry deregulation has resulted in a wave of
consolidations and the rise of innovative new service providers.


The Response

Enhancing a Fraud Control System currently in use by Regional Bell
Operating Companies and making it an attractive cost-control tool for
independent telephone companies and local exchange carriers.




Miniaturization of Electronics


Market Force

The miniaturization of electronics is resulting in the deployment of
next-generation medical, high technology and consumer products.


The Response

Partner with product designers at major manufacturers to engineer DRC's
electroformed circuits and components into new miniature devices.


precision electroforming


The miniaturization of electronics is opening new markets for DRC-
already one of the largest independent suppliers of high-precision miniature
circuits, disks and other optical components. These devices are manufactured
through a process known as electroforming, whereby a thin, flexible metal
layer is deposited on glass, film or ceramic substrates in patterns with
tolerances of less than one micron.

DRC currently produces nozzles for controlling the flow of ink for business
and industrial ink jet printers, as well as flexible circuits used in imaging
electronics for intravascular catheters used in angioplasty. DRC is
collaborating with design engineers at major medical, high technology,
recreational equipment, automobile and household equipment manufacturers to
devise new high volume applications for its electroformed precision parts.



Command, Control and Communications


Market Force

In an effort to better coordinate and streamline operations, branches of
the military are seeking to integrate differing communications
protocols.


The Response

A unique DRC workstation tests devices that receive and synthesize
tactical data and positioning information from diverse military sources.



improving  tactical communications


Entering the large and fast-growing marketplace for command, control and
communications systems, DRC has developed a unique tool that tests
critical communications devices and simulates the theater of operation.
DRC's test device (Joint Tactical Information Distribution System Test
Device), gauges the efficiency and functionality of equipment
transmitting and receiving tactical data to or from such diverse sources
as satellites, aircraft, ships and groundbased installations. These
devices, which identify and locate forces within a particular geographic
region-the Persian Gulf, for example-must integrate information that
comes in a range of different formats, including voice, data, or
scrambled and unscrambled frequencies.

Comprised of a computer workstation and sophisticated communications
electronics, the test device processes data from these diverse sources
and displays the location of forces as icons on a large screen. The test
device's simulation capabilities make it an excellent training device.
It also represents an area of potential growth for DRC because of its
unique ability to integrate data from multiple sources. Currently in use
as a training system at Naval and Air Force bases, the next-generation
system will operate as an interface device connecting forces within the
theater of operation.


<TABLE>
Five Year Summary of Selected Financial Data
<CAPTION>
(in thousands of dollars, exceop share and employee data)

                         1997        1996       1995        1994        1993
<S>                    <C>         <C>         <C>         <C>         <C>
Revenue             $  159,377  $  130,163  $  103,941  $  102,964  $  101,102
Operating income         6,245       3,345       1,018         632       3,242
Net income               4,129       1,729         559         224       1,834
Net income per
 common share - basic*     .66         .28         .09         .04         .30
Net income per
 common share - diluted*   .64         .27         .09         .04         .29

Total assets            78,859      71,102      53,946      53,977      59,494
Long-term debt
 (excluding current
  portion)              10,000         300       1,500       2,717       3,900
Shareholders'
 investment             39,147      35,239      33,206      32,713      32,437
Shareholders'
 investment per share*    6.22        5.63        5.37        5.28        5.25
Return on  shareholders'
 investment(%)           10.55         4.9         1.7          .7         5.7
Backlog                110,001      73,200      61,284      43,679      51,257
Cash flow from
 operations              7,980       1,035       7,499       5,721       1,397
Research and
 development expense     1,441       2,702       1,949         224       2,007
Capital expenditures     5,104       9,266       4,441       2,444      12,144

Number of shares
 outstanding
 at end of year*     6,288,872   6,263,025   6,185,049   6,194,593   6,171,966
Number of employees      1,455       1,349       1,249       1,130       1,188
</TABLE>
<TABLE>
Quarterly Data**
<CAPTION>
(in thousands of dollars, except per share data) unaudited

                                  1st          2nd          3rd          4th
1997
<S>                            <C>           <C>           <C>          <C>
Revenue                    $   33,008    $   40,146    $   43,269   $   42,954
Operating income                  764         1,609         1,471        2,401
Net income                        326           824         1,723        1,256
Net income per common
 share - basic*                   .05           .13           .27          .20
Net income per common
 share - diluted*                 .05           .13           .27          .19

1996

Revenue                    $   26,627    $   28,373    $   29,929   $   45,234
Operating income                  434           873         1,465          573
Net income                        209           498           831          191
Net income per common
 share - basic*                   .03           .08           .13          .03
Net income per common
 share - diluted*                 .03           .08           .13          .03

1995

Revenue                    $   21,929    $   23,936    $   24,354   $   33,722
Operating income (loss)          (602)          550           544          526
Net income (loss)                (388)          318           309          320
Net income (loss) per
 common share - basic*           (.06)          .05           .05          .05
Net income (loss) per
 common share - diluted*         (.06)          .05           .05          .05

</TABLE>

*    Restated for the April 1997 10% stock dividend.
**   Prior to 1997 the Company used a 13-period accounting year, each with
     four weeks. The first three quarters contained 12 weeks, and the fourth
     fiscal quarter contained 16 weeks. The Company now employs a
     calendar-month accounting year.


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


Results of Operations

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

The following table sets forth, for the periods indicated, the percentage
which certain items in the Consolidated Statements of Operations bear to
revenue:
                                        1997          1996          1995
Revenue
 Contract revenue                       82.7%         77.5%         77.7%
 Product sales                          17.3          22.5          22.3
 Total revenue                         100.0         100.0         100.0

Costs and Expenses
 Cost of contract revenue*              90.0          91.7          90.5
 Cost of product sales*                 75.0          69.9          75.8
 Total cost of sales                    87.4          86.8          87.2
 Selling, engineering and
  administrative expenses                8.7          10.6          11.8
 Total operating costs                  96.1          97.4          99.0

 Operating income                        3.9           2.6           1.0
 Interest expense, net                   0.1           0.4           0.2
 Income before income taxes              3.9           2.2           0.8
 Provision for income taxes              1.3           0.8           0.3
     Net income                          2.6%          1.4%          0.5%

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

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

Contract Revenue

Contract revenue increased by 30.6% or $30,901,000 in 1997 over 1996 and 24.9%
or $20,122,000 in 1996 over 1995. Approximately 60% of the 1997 increase is
attributable to major contracts with the State of Ohio for statewide network
infrastructure for Human Services systems and with the state of Colorado for
similar network infrastructure as well as software system implementation
services. The remainder of the increase in contract revenue was broad-based
with growth contributions from additional work received under the Company's
long running core U.S. Navy program, technical and management services
programs for the U.S. Army, Air Force and Navy, and services for the U.S.
Department of the Treasury. The 1996 increase from 1995 was the result of
increases in work for the U.S. Navy, U.S. Air Force, defense logistics and
engineering support contracts as well as new state contracts. Much of
the Company's defense revenue relates to the development and operation
of computer-based management information and logistics support systems,
as well as other information technology services. Revenue for this segment
also includes tasks to provide Year 2000 validation and compliance services
for the Internal Revenue Service.

Product Sales

Product sales decreased during 1997 by 5.8% or $1,687,000 as compared to
1996. This was principally the result of decreased sales of electroformed
components partially offset by increased sales of custom encoders across a
wide range of customers. The 26.3% or $6,100,000 growth in product sales in
1996, as compared with 1995, is attributable primarily to increased sales of
electroformed components for a line of commercial ink-jet printers, and
increased sales of a line of custom encoders for a customer in the
automotive industry.

Cost of Contract Revenue

Cost of contract revenue as a percentage of contract revenue decreased
to 90.0% in 1997 from 91.7% in 1996. In the fourth quarter of 1996, the
Company incurred a one-time pre-tax charge of $1,800,000 for unrecoverable
costs associated with an Air Force contract. Cost of contract revenue,
excluding the 1996 one-time charge, increased from 89.9% in 1996 to 90.0% in
1997, principally as a result of increased subcontract costs related to the
development of a statewide infrastructure under the state of Ohio Human
Services system contract.  Cost of contract revenue as a percentage of
contract revenue increased to 91.7% in 1996 from 90.5% in 1995.

Cost of Goods

Cost of goods as a percentage of product sales increased from 69.9% in
1996 to 75.0% in 1997. This increase was primarily the result of
decreased production levels of electroformed components during 1997.
Cost of goods as a percentage of product sales decreased from 75.8% in
1995 to 69.9% in 1996 as a result of the substantial increase in
production levels of electroformed components for a line of ink-jet
printers and of a custom encoder product line.

Selling, Engineering and Administrative Expenses

Selling, engineering and administrative expenses as a percentage of sales
decreased by 1.9% in 1997 from 1996, reflecting flat spending while revenue
grew 22%. The increased expense in 1996 from 1995 was principally due to
increased research and development efforts by the Company in connection with
a software design and development tool and research and development spending
in connection with the Company's efforts to enter the telecommunication fraud
detection market. Excluding research and development, selling, engineering
and administrative costs decreased as a percentage of total revenue from
9.9% of sales in 1995 to 8.5% in 1996 and 7.8% in 1997.

Interest Expense, (Net)

Interest expense, (net) decreased to $108,000 in 1997 from $547,000 in
1996. The change was due to interest income of $740,000 related to an
income tax credit which was received during the year, partially offset
by increased interest expense resulting from an increase in the average
level of the Company's borrowings as a result of additional working capital
requirements associated with the substantial increase in revenue. Higher
average borrowings resulted in higher interest expense for 1996 from 1995 and
resulted from capital expenditures in 1996 of $9,266,000, including $4,900,000
in connection with a program to increase electroforming manufacturing
capacity, combined with $2,000,000 expended for a January 1996 acquisition of
a defense services business.

Provision for Income Taxes

The Company's effective income tax rate for 1997 was 32.7% compared to
38.2% for 1996 and 34.0% for 1995. The Company's tax provision for 1997
reflects a one-time benefit of $747,000 resulting from a refund of income
taxes relating to the Company's prior years research and development expenses.
The 1995 rate was favorably affected by research and development credits as
well as somewhat lower net state tax rates.

Backlog

The Company's funded backlog of unfilled orders at the end of 1997 was
$110,000,000, an increase of 50.3% from the $73,200,000 at the end of 1996.
The Company's funded backlog at the end of 1995 was $61,300,000. The 1995
balance included $10,000,000 related to a commercial order for inkjet printer
components. A portion of the Company's backlog is based on annual purchase
contracts and the amount of the backlog as of any date can be affected by the
timing of such order receipts and deliveries thereunder.

Liquidity and capital resources

The Company's primary sources of liquidity have been cash flow from
operations and bank credit lines. The principal drivers of cash flow are
earnings, adjusted for depreciation and amortization, aggregate billed
and unbilled receivables in the Company's government and state businesses,
and capital expenditures. The sum of receivables and unbilled expenditures
and fees on contracts in process increased in 1997 and 1996 as a result of
the substantial increase in revenue during each of the years. However, the
1997 billed and unbilled receivables balance is comparable to 1996 and 1995
when measured in terms of days' sales. Capital expenditures, which had
increased from $4,400,000 in 1995 to $9,266,000 in 1996 principally in
connection with a program to increase electroforming manufacturing capacity,
were $5,104,000 in 1997.

The Company announced during October, 1997 that it had signed a long-
term credit agreement that provides unsecured loans in an aggregate principal
amount of up to $45 million. This credit facility consists of a revolving
loan of up to $30 million for working capital purposes and up to $15 million
for acquisitions. This facility provides the Company with greater flexibility
to finance the growth of its business and to pursue new opportunities.

At December 31, 1997, $20,000,000 was available for working capital
purposes under the Company's long-term credit facility. The Company
believes that its liquid assets, cash flows from operations and availability
under its credit facility will be sufficient to support its normal operating
and capital requirements for 1998. The Company does not have any significant
capital commitments as of December 31, 1997 outside the ordinary course of
business.

Year 2000

The Company has established a steering committee to coordinate the
identification, evaluation and implementation of changes to its entire
computer infrastructure necessary to achieve a year 2000 data conversion
with no disruption to its business operations or customers. The Company
is also communicating with its suppliers and others with whom it does
business to coordinate year 2000 conversions. These actions are necessary to
ensure that the systems and applications the Company utilizes will recognize
and process year 2000 and beyond data. The cost of compliance and its effect
on the Company's future results of operations has not yet been determined.

Impact of Inflation and Changing Prices

Overall, inflation has not had a material impact on the Company's operations.
In addition, the terms of Defense contracts, which accounted for approximately
66% of the Company's revenues in 1997, are generally for one year and include
salary increase factors for future years, thus reducing the potential impact
of inflation on the Company.

Forward-Looking Information

This report includes certain forward-looking statements about the
Company's business including the effect of the federal budget on the
Company's sales, response to the Company's product and services offerings,
growth in revenues, capital spending, research and development spending and
customer mix. Such forward-looking statements are subject to risk and
uncertainties that could cause the actual results to vary materially.
These risks and uncertainties, discussed in more detail in the Company's
Form 10-K for the year ended December 31, 1997, include possible reductions
in federal funding for the Company's customers and potential customers,
concentration of customers, risks of sustaining existing contracts and orders
thereunder at the same or increasing levels and of obtaining new contracts,
high levels of competition and difficulties of entering new markets,
government contracting issues including audit adjustments and costs of
completing fixedprice contracts, supply difficulties, warranty claims, and
factors affecting the business segments in which the Company operates and the
economy generally.


<TABLE>
Consolidated Balance Sheets

<CAPTION>
At December 31, 1997, December 28, 1996
 and December 30, 1995
(in thousands of dollars, except share data)

                                         1997          1996           1995

Assets
<S>                                    <C>           <C>            <C>
Current assets:

 Cash and cash equivalents           $    542      $    234       $    777
 Receivables, less allowances of
  $217, $340 and $402                  17,397        19,436         16,095
 Unbilled expenditures and fees on
  contracts in process                 32,175        22,690         16,383
 Inventories                            3,377         3,211          2,612
 Refundable income taxes                  878         1,436            286
 Prepaid expenses and
  other current assets                  1,668         1,247          1,284
     Total current assets              56,037        48,254         37,437

Property, plant and equipment, at cost:

 Land                                   1,126         1,126          1,126
 Building                               7,774         7,774          7,774
 Machinery and equipment               39,130        38,861         31,537
 Leasehold improvements                 2,296         2,109          1,815
     Total property, plant and
      equipment, at cost               50,326        49,870         42,252
 Less-accumulated depreciation
  and amortization                     28,098        28,266         25,743
     Net property, plant
      and equipment                    22,228        21,604         16,509

 Excess of purchase price over
  net assets of business acquired,
  net of accumulated amortization         594         1,244              -

     Total assets                    $ 78,859      $ 71,102       $ 53,946

Liabilities and Shareholders' Investment

Current liabilities:
Notes payable                        $      -      $ 10,600       $      -
Accounts and drafts payable             8,355         8,925          3,550
Accrued payroll and
 employee benefits                      8,032         6,998          6,416
Deferred contract and
 other revenue                             35            42            983
Other accrued expenses                  4,216           852          1,691
Current deferred income taxes           8,999         6,091          4,407
Current portion of long-term debt           -         1,201          1,217
     Total current liabilities         29,637        34,709         18,264

Long-term debt, less
 current portion                       10,000           300          1,500
Deferred income taxes                      75           854            976

Commitments and contingencies

Shareholders' Investment

Preferred stock, par value,
 $.10 per share, 5,000,000 shares
 authorized, none issued                    -             -              -
Common stock, par value, $.10 per share:
 Authorized - 15,000,000 shares
 Issued - 7,366,484 shares in 1997,
  6,689,767 shares in 1996 and
  6,618,880 shares in 1995                737           669            662
Less: Treasury stock - 1,077,612
 shares in 1997, and 996,108 shares
 in 1996 and 1995, at par value          (108)         (100)          (100)
Capital in excess of par value         14,506         9,516          9,219
Retained earnings                      24,012        25,154         23,425
 Total shareholders' investment        39,147        35,239         33,206
     Total liabilities and
      shareholders' investment       $ 78,859      $ 71,102       $ 53,946

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


Dynamics Research Corporation

<TABLE>
Consolidated Statements of Operations
<CAPTION>
For the three years ended December 31, 1997
(in thousands of dollars, except share data)
                                        1997          1996           1995
<S>                                   <C>            <C>           <C>
Revenue:

 Contract revenue                   $ 131,779      $ 100,878     $  80,756
 Product sales                         27,598         29,285        23,185

Total revenue                         159,377        130,163       103,941

Costs and expenses:
 Cost of contract revenue             118,617         92,512        73,077
 Cost of goods                         20,700         20,476        17,579
 Selling, engineering and
  administrative expenses              13,815         13,830        12,267
Total operating costs and expenses    153,132        126,818       102,923

Operating income                        6,245          3,345         1,018

 Interest expense, net                    108            547           171

Income before provision for
 income taxes                            6,137         2,798           847

 Provision for income taxes              2,008         1,069           288

Net income                          $    4,129     $   1,729     $     559

Net income per common
 share - basic*                     $      .66     $     .28     $     .09

Net income per common
 share - diluted*                   $      .64     $     .27     $     .09

Basic weighted average number
 of common shares outstanding*       6,275,455     6,243,170     6,163,422

Diluted weighted average number
 of common shares outstanding*       6,506,013     6,466,841     6,261,526


*Restated for the April 1997 10% stock dividend.
</TABLE>

<TABLE>
For the three years ended December 31, 1997
(in thousands)

<CAPTION>
                              Common Stock               Capital in
                       Issued         Treasury Stock     Excess of    Retained
                 Shares  Par Value   Shares  Par Value   Par Value    Earnings
<S>               <C>        <C>      <C>         <C>       <C>        <C>
Balance at December
 31, 1994         6,571   $  657      (940)    $  (94)    $ 9,284    $ 22,866

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

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

Year 1997
Stock options
 exercised          107       11         -          -         540           -
Treasury stock
 purchased            -        -       (82)        (8)       (760)          -
10% Stock dividend  569       57         -          -       5,210      (5,271)
Net income            -        -         -          -           -       4,129

Balance at December
 31, 1997         7,366    $ 737    (1,078)    $ (108)    $14,506     $24,012

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


<TABLE>
Consolidated Statements of Cash Flows
For the three years ended December 31, 1997
(in thousands of dollars)

                                        1997           1996            1995

<S>                                    <C>            <C>             <C>
Cash provided by operations:

Net income                         $   4,129      $   1,729        $    559
Depreciation and amortization          5,376          4,927           4,002
Increase (decrease) in deferred
 income taxes                           (779)          (122)            111
Provision for receivable reserves       (123)           (62)           (184)
                                       8,603          6,472           4,488

Cash provided by (used for)
 working capital:

Receivables                            2,162         (3,279)           (972)
Unbilled expenditures and fees
 on contracts in process              (9,485)        (6,307)          1,811
Inventories                             (166)          (599)           (259)
Refundable income taxes                  558         (1,150)            599
Prepaid expenses and other
 current assets                         (421)            37              46
Accounts and drafts payable             (570)         5,375             108
Accrued payroll and
 employee benefits                     1,034            582           1,767
Deferred contract and other revenue       (7)          (941)             89
Other accrued expenses                 3,364           (839)            156
Current deferred income taxes          2,908          1,684            (334)
                                        (623)        (5,437)          3,011

Net cash provided by operations        7,980          1,035           7,499

Cash used for investing activities:

Additions to property and
 equipment, net                       (5,104)        (9,266)         (4,441)
Net assets of business
 acquired, net                          (250)        (2,000)              -

Net cash used for
 investing activities                 (5,354)       (11,266)         (4,441)

Cash provided by (used for)
 financing activities:

Net borrowings (repayments)
 under line of credit agreements     (10,600)        10,600          (1,200)
Principal payments under
 long-term borrowings                 (1,501)        (1,216)         (1,221)
Proceeds from long-term borrowings    10,000              -               -
Proceeds from exercise
 of stock options                        551            304             164
Purchase of treasury shares             (768)             -            (230)

Net cash provided by (used for)
 financing activities                 (2,318)         9,688          (2,487)

Net increase (decrease)
 in cash and cash equivalents            308          (543)             571

Cash and cash equivalents
 at the beginning of the year            234           777              206

Cash and cash equivalents
 at the end of the year            $    542       $    234         $    777

Supplemental disclosures of cash flow information:

Cash paid during the year for:

Interest                           $    792       $    635         $    435
Income taxes                       $    430       $   1,237        $    160

</TABLE>


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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Revenue Recognition

The Company provides services under fixed-price, cost reimbursement, time
and material, and level of effort contracts.  Revenues under
cost-reimbursement and fixed-price contracts are recognized as costs are
incurred and include applicable fees in the proportion that costs incurred
bear to total estimated costs.  When a loss is indicated on any contract
in process, provision for the total estimated loss is made at that time.
For time and material and level of effort types of contracts, revenues are
recorded as the costs are incurred.  Costs related to cetain contracts,
including applicable indirect costs (for the year after 1995), are subject
to audit by the U.S. Government.  Revenues from such contracts have been
recorded at amounts expected to be realized upon final settlement.  Deferred
contract revenue represents the amounts billed on certain contracts in excess
of costs and fees incurred to date.

Income Taxes

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

Cash and Cash Equivalents

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

Unbilled Expenditures and Fees on Contracts in Process

Unbilled expenditures and fees on contracts in process consist of costs and
estimated earnings in excess of billings on uncompleted government contracts
and are comprised principally of amounts, including retainage, for which
billings could not be presented under the terms of the contracts at the
balance sheet dates. Unbilled expenditures and fees on contracts in process
with the U.S. Government at December 31, 1997 were $29,437,000 compared to
$22,690,000 at December 28, 1996, and $16,383,000 at December 30, 1995.

The approximate number of U.S. Government contracts has varied between 100
and 150 during the past five years, with 115 contracts open at December 31,
1997.  Receivables under the U.S. Government contacts at December 31, 1997
were $8,808,000 compared to $14,363,000 at December 28, 1996 and $12,551,000
at December 30, 1995.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market,
and consist of materials, labor and overhead.  There are no amounts in
inventories relating to contracts having production cycles longer than
one year.

(in thousands of dollars)               1997          1996        1995

Work in process                     $  1,364      $  1,411     $   686
Raw materials and subassemblies        2,013         1,800       1,926
Total                               $  3,377      $  3,211      $2,612


Property, Plant and Equipment

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

Fair Value of Financial Instruments

The Company's financial instruments consist mainly of cash and
equivalents, accounts receivable and accounts payable. The carrying
amounts of the Company's cash and equivalents, accounts receivable and
accounts payable approximate their fair value due to the short-term
nature of these instruments.

Use of Estimates

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

Stock-Based Compensation

Effective January 1, 1996, the Company adopted the provision of SFAS No. 123,
"Accounting for Stock-Based Compensation," (See Note 5).  The Company has
elected to continue to account for stock options at intrinsic value with
disclosure of the effects of fair value accounting on net income and earnings
per share on a pro forma basis.

Net Income Per Common Share

SFAS No. 128, "Earnings per Share," requires the computation of basic and
diluted earnings per share.  Basic earnings per share is computed by
dividing net income by the weighted average number of shares of common
stock outstanding during the year.  Diluted earnings per share is determined
by giving effect to the excercise of stock options using the treasury
stock method.


(in thousands of dollars,
 except per share data)

Year Ended December                     1997         1996          1995

Net Income                          $  4,129     $  1,729      $    559
Weighted-average shares*               6,275        6,243         6,163
Dilutive effect of options*              231          224            98
Adjusted weighted-average shares       6,506        6,467         6,261
Basic earnings per share*           $    .66     $    .28      $    .09
Diluted earnings per share*         $    .64     $    .27      $    .09

SFAS No. 128 was adopted in 1997. As a result, reported primary earnings per
share for 1996 and 1995 were restated and there was no effect on fully
diluted earnings per share. The effect of this accounting change on
previously reported earnings per share was as follows:


Years Ended December                                 1996          1995

Primary earnings per share,
 as previously reported*                          $   .27      $    .09
Effect of SFAS No. 128                                .01           .00
Basic earnings per share, as restated*            $   .28      $    .09

*Restated for the April 1997 10% stock dividend.

Accounting Pronouncements

The Financial Accounting Standards Board issued two new statements in June
1997.  SFAS No. 130, "Reporting Comprehensive Income," establishes standards
for reporting and display of comprehensive income and it components.  SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related
Information," establishes standard for the way that public business
enterprises report information and operating segments in annual financial
statements and requires reporting of selected information in interim
financial reports.  Both statements are effective for fiscal years beginning
after December 15, 1997.  The required disclosuresfor SFAS No. 130 will be
included in the Company's quarterly report on Form 10-Q for the first quarter
of 1998.  The required disclosures for SFAS No. 131 will be included in the
Company's 1998 annual report on Form 10-K.


2.  Income Taxes

The components of the provisions for federal and state income taxes
are as follows:

<TABLE>

(in thousands of dollars)
                                          1997          1996          1995


<S>                                       <C>           <C>            <C>
Currently payable (refundable)

Federal                               $   (747)     $   (513)     $    447
State                                        -          (101)          160
Total                                     (747)         (614)          607

Deferred

Federal                                  2,387         1,253          (260)
State                                      368           430           (59)
Total                                    2,755         1,683          (319)
Total provision                      $   2,008      $  1,069     $     288

The major items contributing to the difference between the statutory
U.S. federal income tax rate of 34% and the Company's effective tax
rates are as follows:

(in thousands of dollars)
                                          1997          1996          1995

Provision at statutory rate          $   2,086      $    951     $     288
State income tax, net of
 federal tax benefit                       365           217            50
Tax Credit refund                         (747)            -             -
Other, net                                 304           (99)          (50)
Provision for income taxes           $   2,008      $  1,069     $     288

</TABLE>

The tax credit refund resulted from a refund of income taxes relating to the
Company's prior year research and development expenses.  The tax effects
of significant temporary difference that comprise the deferred tax assets
and liabilities as of December 31, 1997 and December 28, 1996 are as follows:


(in thousands of dollars)                         1997            1996

Unbilled costs and fees and deferred
 contact revenue, net                       $  (11,074)     $   (8,730)
Accrued expenses                                 1,961           2,044
Receivable reserves                                 88             130
Inventory reserves                                  16             239
Other                                               10             226
Current deferred tax liabilities, net           (8,999)         (6,091)
Accelerated tax depreciation                         4            (285)
State net operating loss carryforwards             213               -
Other                                             (292)           (569)
Non-current deferred tax liabilities               (75)           (854)
Total defferd tax liabilities, net              (9,074)         (6,945)

Total deferred tax assets and total deferred tax liabilities were $4,939,000
and $14,013,000 respectively at December 31, 1997 compared with $2,639,000
and $9,584,000, respectively at December 28, 1996.

3.  Employee Benefit Programs

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

Net pension cost for 1997, 1996 and 1995 included the following
components:

(in thousands of dollars)                 1997         1996          1995

Service cost - benefits earned
 during the period                   $   1,555    $   1,380     $    1,042
Interest cost on projected
 benefit obligation                      2,235        2,031          1,822
Actual return on plan assets            (3,485)      (1,599)        (3,074)
Net amortization and deferred items      1,436         (255)         2,195
Net periodic pension costs           $   1,741    $   1,587     $    1,355

The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated financial statements at December 31,
1997, December 28, 1996 and December 30, 1995:

<TABLE>
Actuarial present value of benefit obligations

(in thousands of dollars)                 1997         1996           1995

<S>                                     <C>          <C>            <C>
Vested                               $  29,389    $  26,459      $  23,845
Nonvested                                  837          639            560
Accumulated benefit obligation          30,226       27,098         24,405
Effect of projected future
 salary increases                        5,467        3,734          3,608
Projected benefit obligation for
 service rendered to date               35,693       30,832         28,013
Plan assets at fair market value        30,256       25,609         23,104
Projected benefit obligation in
 excess of plan assets                  (5,437)      (5,223)        (4,909)
Unrecognized net loss (gain) from
 past experience different from that
 assumed and effect of changes in
 assumptions                             1,377          727            196
Prior service cost not yet recognized
 in periodic pension cost                1,699        1,919          2,139
Unrecognized net obligation at January
 1, 1987 being recognized over 15 years    140          175            211
Net pension liability recognized in the
 Consolidated Balance Sheets at
 December 31, 1997, December 28, 1996
 and December 30, 1995               $  (2,221)   $  (2,402)     $  (2,363)

</TABLE>


The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of
the projected benefit obligation were 7.0% and 4.0% in 1997 and 7.25% and
3.5% in 1996 and 1995.  The expected long-term rate of return on assets
was 9% in 1997, 1996 and 1995.

The Company has established a Supplemental Executive Retirement Plan ("SERP")
for a certain key employee providing for annual benefits commencing on the
sixth anniversary of the Executive's retirement.  The cost of these benefits
is being charged to expense and accrued using a projected unit credit
method.  The charge to expense for the year ended December 31, 1997 was
$203,000.

The Company also maintains a cash or deferred savings plan (401(k)
plan), under which employees may reduce their compensation and have such
"elective deferrals" contributed to the plan on their behalf. The
Company contributes to the plan an amount equal to 25% of the first 6%
of an employee's elective deferrals. The Company contributed $719,000 to
the plan for 1997, $634,000 for 1996 and $578,000 for 1995. The elective
deferrals are invested in one or more collective investment funds at the
participant's direction. The Company's contributions are invested in
guaranteed investment contracts and are paid to the employee upon
termination, subject to forfeiture of any non-vested portion if
termination occurs within the first five years of employment.


4.  Lines of Credit and Long-Term Debt


Long-term debt consists of the following:
(in thousands of dollars)                          1997           1996

Long-term credit facility                     $  10,000        $     -
Mortgage note payable                                 -          1,500
Other                                                 -              1
Less - current portion                                -         (1,201)
                                              $  10,000            300

The Company entered into a long-term credit agreement with a syndicate of
banks and financial institutions that provide unsecured loans in the
aggregate principal amount of up to $45 million.  The credit facility
consists of a revolving loan of up to $30 million for working capital
purposes and up to $15 million for acquisitions.  The credit agreement
provides for interest at the prime rate or LIBOR plus .50% (at the Company's
option) and a fee of .20% of any unused portion of the line.  The agreement
expires October, 2000 and is renewable annually.  The agreement stipulates
that the Company maintains minimum levels of tangible net worth and
specified fixed coverage ratios.  The $15 million acquisition line converts
to a three-year term loan in October, 1999, with quarterly principal and
interest payments.  This long-term credit facility replaced the Company's
short-term lines of credit.

The Mortgage note payable to a bank, with interest at LIBOR plus 1%, adjusted
quarterly, due in quarterly payments of $300,000 plus interest through
February 1998, secured by cerain land and buildings, was paid in full in
May 1997.

The Company had unsecured lines of credit at December 28, 1996, with various
banks that provided for maximum borrowings fo $19,000,000, of which
$10,600,000 was utilized.  Borrowings under these lines of credit were
payable upon demand with interest at the prevailing prime interest rate or at
a lower rate quoted by the respective banks.   The Company's average interest
rate on outstanding borrowings at December 28, 1996 was 6.3%.


5.  Stock Option Plans

The Company has stock option plans which are administered by the
Compensation Committee of the Board of Directors who determine which
employees receive options and the number and option price of shares
covered by each such option.

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

The Company's 1995 Stock Option Plan for Non-Employee Directors provides
for each outside director to receive options to purchase 5,000 shares of
Common Stock at the first annual meeting at which such director is
elected, and options to purchase 1,000 shares of Common Stock at each
annual meeting thereafter so long as he or she remains an eligible
director. Such directors cannot be an employee of the Company or one of
its subsidiaries or a holder of five percent or more of the Company's
Common Stock.  The excercise price of such options will be the fair market
value of the Common Stock on the date of grant.  Each option is
non-transferable except upon death, expires 10 years after the date of grant
and becomes exercisable in three equal installments on the first, second and
third anniversary of the date of grant.  A total of 110,000 shares has been
reserved for issuance of which 78,200 shares remained available for grant
at December 31, 1997.

Transaction involving the plans are summarizes as follows:*

<TABLE>
                   1997                   1996                   1995
                        Weighted               Weighted               Weighted
            Number      Average     Number     Average    Number      Average
            of shares   Price       of shares  Price      of shares   Price

<S>           <C>          <C>       <C>          <C>      <C>           <C>
Outstanding   622,368    $ 5.43      549,457    $ 4.72     396,981     $ 4.24
 at beginning
 of year
Granted        59,350      9.05      152,900      7.25     204,600       5.25
Exercised    (109,082)     4.97      (77,976)     3.87     (52,124)      3.14
Cancelled           -         -       (2,013)     5.27           -          -
Outstanding
 at end
 of year      572,636    $ 5.91      622,368    $ 5.43     549,457       4.72

Exercisable
 at end of
 year         346,453                334,168               332,761

*Restated for the April 1997 10% stock dividend.

</TABLE>
At December 31, 1997, under the 1993 Plan, 1,000,000 shares have been
reserved, of which 590,750 shares were available for future grants.

The Company has computed the pro forma disclosures required under SFAS No.
123 for options granted in 1996 and 1997 using the Black-Scholes option
pricing model prescribed by SFAS No. 123.  The assumptions in the
Black-Scholes calculation was that the risk free interest rate was 6%, the
expected life of the option was 9.2 years, the volatility of the Company's
stock was 69.7% and there was no expected dividend yield.

Options to purchase 59,350 shares were granted in 1997 with a weighted
average fair value of $7.1 and options to purchase 152,900 shares were
granted in 1996 with a weighted average fair value of $5.65.  Options to
purchase 204,600 shares were granted in 1995 with a weighted average fair
value of $4.16.

The Company accounts for the Stock Option Plan under APB Opinion No. 25
under which no compensation cost has been recognized.  Had compensation
costs for these plans been determined consistent with SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:

                                    1997          1996           1995
Net Income
 As reported                     4,129,000     1,729,000        559,000
 Pro forma                       3,474,000     1,311,000        419,000
Earnings per share - basic
 As reported                           .66           .28            .09
 Pro forma                             .55           .21            .07
Earnings per share - diluted
 As reported                           .64           .27            .09
Pro forma                              .52           .20            .07

Because the SFAS No.123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.


6.  Commitments and Contingencies

The Company conducts certain of its operations in facilities which are under
long-term operating leases expiring at various dates through 2003, with
various options to renew through 2005.  It is expected that in the normal
course of business, leases that expire will be renewed or relaced.  Rent
expense under these leases (exclusive of real estate taxes, insurance and
other expenses payable under the terms of the leases) was approximately
$2,524,000 in 1997, $2,130,000 in 1996, and $1,636,000 in 1995.  The
aggregate minimum lease commitment for the Company's facilities on December
31, 1997 was $7,645,000, payable as follows: $2,922,000 in 1998, $2,225,000
in 1999, $1,585,000 in 2000, $503,000 in 2001, $355,000 in 2002 and $55,000
in 2003.


7.  Preferred Stock Purchase Rights

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

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


8.  Acquisition

On January 23, 1996 the Company acquired the Massachusetts-based operations
of Support Systems Associates, Inc. (SSAI), a private company headquartered
in Hauppauge, New York.  The Company paid $2,000,000 in cash for the
acquired business, which had revenue of approximately $5,900,000 in 1995.
The acquired assets included a prime contract to provide services to the U.S.
Air Force.  In January 1997, the Company paid an additional $125,000 to the
seller based upon the achievement of certain thresholds as provided for in
the acquisition agreement.  A final additional payment of $125,000 was made
in November 1997.  The acquisition was accounted for as a purchase.  The
excess of the purchase price over the fair market value of the net assets
acquired is being amortized over 30 months.


9.  Business Segments

The Company provides computer systems services, other engineering and
management support services and manufactures position and motion sensors and
other precision components.  The Systems and services segment provides
specialized technical services to the Department of Defense and other
customers and produced approximately 83%, 77% and 78% of total Company
revenues in 1997, 1996 and 1995, respectively.  These services include the
development and operation of computer-based management information systems
where sophisticated software programs are applied to collect, analyze, store
and retrieve information regarding the location, design, configuration,
maintenance status and performance test history of the individual components
parts of major weapons systems.  This segment also includes contracts to
provide network infrastructure for State Human Services systems as well as
software system implementation services.  The Precision products segment
produces encoders, which are used to measure rotary or linear movement, and
precision-patterned glass and electroformed metal products.  The Precision
products segment's primary market is located in the United States.  In 1997,
sales to two commercial customers represented 6% of the total Company sales.
These customers operate in the automotive and computer-peripheral industries.

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

Summarized financial information by business segment for 1997, 1996 and 1995
are as follows:


<TABLE>
(in thousands of dollars)                 1997           1996          1995


<S>                                    <C>            <C>           <C>
Revenue:

Systems and services                 $ 131,779      $ 100,878     $  80,756
Precision products                      27,598         29,285        23,185
Total revenue                        $ 159,377      $ 130,163     $ 103,941

Operating income:

Systems and services                 $   3,767      $  (2,263)    $  (1,907)
Precision products                       2,478          5,608         2,925
Total operating income               $   6,245      $   3,345     $   1,018

Total Assets
Systems and service                  $  52,285      $  44,292     $   34,953
Precision products                      14,637         15,556          9,584
Corporate                               11,937         11,254          9,406
Total assets                         $  78,859      $  71,102     $   53,946

Depreciation and amortization:

Systems and services                 $   2,963      $   2,848     $    2,663
Precision products                       1,840          1,640            879
Corporate                                  573            439            460
Total depreciation and amortization  $   5,376      $   4,927     $    4,002

Capital expenditures:

Systems and services                 $   3,244      $   2,583     $    1,753
Precision products                       1,065          5,999          2,494
Corporate                                  795            684            194
Total capital expenditures           $   5,104      $   9,266     $    4,441

</TABLE>




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

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

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

The Company's independent auditors, Arthur Andersen LLP, audited the
financial statements prepared by the management of Dynamics Research
Corporation. Their report on these statements is presented below.


Albert Rand                                   Douglas R. Potter
President, Chief Executive Officer            Vice President of Finance,
                                              Chief Financial Officer


To Dynamics Research Corporation:

We have audited the accompanying consolidated balance sheets of Dynamics
Research Corporation (a Massachusetts corporation) and subsidiaries as of
December 31, 1997, December 28, 1996 and December 30, 1995, and the related
consolidated statements of operations, shareholders' investment and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

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


Boston, Massachusetts,                                Arthur Andersen LLP
February 20, 1998





Directors and Officers


Directors

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

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

Martin V. Joyce, Jr.*
 Vice President, A.T. Kearney, Inc.

Kenneth F. Kames
 Vice President, New Business Development, The Gilette Company

General James P. Mullins*
 USAF retired

Albert Rand
 President and Chief Executive Officer, Dynamics Research Corporation

*Member of the Audit Committee
 Member of the Compensation Committees

Officers

John S. Anderegg, Jr.
 Chairman

Albert Rand
 President, Chief Executive Officer

Arthur Brown
 Vice President, Contracts, Systems Division

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

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

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

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

Edward C. Johnson
 Vice President, Marketing, Systems Division

Chester Ju
 Vice President, Encoder Division and Metrigraphics Division

John M. Nauseef
 Vice President, Dayton Operations,
 Systems Division

Douglas R. Potter
 Vice President of Finance and
 Chief Financial Officer

Richard P. Rappaport
 Vice President, Test Equipment Division

John L. Wilkinson
 Vice President, Human Resources, Clerk

David C. Proctor
Treasurer, Assistant Clerk

CORPORATE HEADQUARTERS

60 Frontage Road
Andover, Massachusetts  01810-5498
Telephone:     (978) 475-9090
Fax:           (978) 475-8205
Internet:      www.drc.com

AUDITORS
Arthur Andersen LLP
225 Franklin Street, Boston, Massachusetts 02110

LEGAL COUNSEL
Ropes & Gray
One International Place, Boston, Massachusetts 02110

TRANSFER AGENT
American Stock Transfer & Trust Company, 46th floor
40 Wall Street, New York, New York  10005
Telephone:     (800) 937-5449

STOCK PRICES

Bid price by quarter                      1997               1996
                                       High     Low       High     Low
First quarter                        $10.13   $8.25      $7.73   $5.23
Second quarter                         9.38    7.75       8.18    5.68
Third quarter                         11.50    8.13       9.21    6.82
Fourth quarter                        14.25    9.75      10.00    7.85

*Restated for the April 1997 10% stock dividend.

The bid and asked prices of the Company's common stock on February 24, 1998
were $11.88 and $12.13, respectively.  Prices shown reflect inter-dealer
prices, without retail mark-up, mark-down, or commission and may not
necessarily represent actual transactions.  Source:  Monthly Statistical
Report of the National Association of Securities Dealers, Inc. - NASDAQ.

COMMON STOCK

The Company's stock is traded on the NASDAQ National Market System, Symbol:
DRCO; and listed in newspapers as DynamR., DynRsh. or DynRsearch.

NUMBER OF SHAREHOLDERS
The approximate number of shareholders of record at February 24, 1998 was
960. As of February 24, 1998 there were 6,291,372 common shares outstanding.

FORM 10-K
A copy of DRC's Form 10-K, which is filed annually with the Securities and
Exchange Commission, will be sent without charge to any shareholder
requesting it in writing to the Treasurer's office, Dynamics Research
Corporation, 60 Frontage Road, Andover, Massachusetts 01810-5498.

ANNUAL MEETING

The 1998 Annual Meeting of Shareholders will be held at 3:30 PM on April 28,
1998 at the State Street Bank and Trust Building, 33rd floor, 225 Franklin
Street, Boston, Massachusetts 02110.OTHER DRC OFFICE LOCATIONS

Alabama
     2361 Fairlane Drive, Montgomery
     Meadow Green Center, Madison

California
     61 Columbia, Aliso Viejo
     4811 Chippendale Drive, Sacramento

Colorado
     1250 Academy Park Loop, Colorado Springs
     900 East Louisiana Ave., Denver
     1700 Lincoln Street, Denver

Florida
     11800 Research Parkway, Orlando

Georgia
     605 Richard Russell Parkway, Warner Robins

Illinois
     1 Colony Square, O'Fallon

Maryland
     45370 Alton Lane, California

Massachusetts
     93 Border Street, West Newton
     50-60 Concord Street, Wilmington
     209 Burlington Road, Bedford
     293 Boston Post Road, Marlborough
     500 Research Drive, Wilmington

Missouri
     Northwest Plaza Office Tower, St. Ann

New Hampshire
     49 Donovan Street, Concord

New Mexico
     10010 Indian School Road N.E., Albuquerque

Ohio
     230 Northland Boulevard, Cincinnati
     2900 Presidential Drive, Fairborn
     50 West Broad Street, Columbus
     460-70 Starr Avenue, Columbus

Oklahoma
     3000 Tower Drive, Del City

Oregon
     19545 NW Von Neuman Drive, Beaverton

Texas
     8000 IH-10 West, San Antonio

Virginia
     2550 Huntington Ave., Alexandria
     1755 Jefferson Davis Highway, Arlington
     1919 Commerce Drive, Hampton
     612 Nevan Road, Virginia Beach