UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

R	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	FOR THE QUARTERLY PERIOD ENDED ~~MARCH 31,~~JUNE 30, 2012

	OR

£	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 001-34135

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.)

TWO TECH DRIVE, ANDOVER, MASSACHUSETTS 01810-2434

(Address of principal executive offices) (Zip Code)

978-289-1500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R¨ No ¨R

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R

As of ~~April 30,~~August 6, 2012, there were ~~10,447,164~~10,490,880 shares of the registrant’s common stock outstanding.

DYNAMICS RESEARCH CORPORATION

FORM 10-Q

For the Quarterly Period Ended ~~March 31,~~June 30, 2012

Table of Contents

			Page
Part I. Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of ~~March 31,~~June 30, 2012 (unaudited) and December 31, 2011	3
		Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended ~~March 31,~~June 30, 2012 and 2011	4
		Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended ~~March 31,~~June 30, 2012 and 2011	5
		Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three months ended ~~March 31,~~June 30, 2012 and 2011	6
		Condensed Consolidated Statements of ~~Cash Flows~~Changes in Stockholders’ Equity (unaudited) for the ~~three~~six months ended ~~March 31,~~June 30, 2012 and 2011	7
		Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2012 and 2011	8
		Notes to Condensed Consolidated Financial Statements (unaudited)	89
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1720
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2531
	Item 4.	Controls and Procedures	2531

Part II. Other Information
	Item 1.	Legal Proceedings	2632
	Item 1A.	Risk Factors	2632
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2733
	Item 5	Other Information	33
	Item 6.	Exhibits	2733

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DYNAMICS RESEARCH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

	March 31, 2012			December 31, 2011			June 30, 2012			December 31, 2011
	(unaudited)						(unaudited)
Assets
Current assets
Cash and cash equivalents	$	10		$	3,908		$	8		$	3,908
Contract receivables, net		70,840			66,466			64,072			66,466
Prepaid expenses and other current assets		3,425			2,566			4,250			2,566
Total current assets		74,275			72,940			68,330			72,940
Noncurrent assets
Property and equipment, net		14,538			15,265			13,651			15,265
Goodwill		211,805			211,805			199,805			211,805
Intangible assets, net		17,710			18,741			16,679			18,741
Deferred tax asset		-			497			1,964			497
Other noncurrent assets		4,170			4,312			3,974			4,312
Total noncurrent assets		248,223			250,620			236,073			250,620
Total assets	$	322,498		$	323,560		$	304,403		$	323,560

Liabilities and stockholders' equity
Current liabilities
Current portion of long-term debt	$	13,063		$	12,375		$	13,750		$	12,375
Accounts payable		28,639			24,504			22,915			24,504
Accrued compensation and employee benefits		19,507			24,902			20,083			24,902
Deferred tax liability		3,655			3,383			3,479			3,383
Other accrued expenses		6,836			8,556			5,245			8,556
Total current liabilities		71,700			73,720			65,472			73,720
Long-term liabilities
Long-term debt		102,215			102,453			96,170			102,453
Deferred tax liability		665			-
Other long-term liabilities		31,627			33,066			31,845			33,066
Total long-term liabilities		134,507			135,519			128,015			135,519
Total liabilities		206,207			209,239			193,487			209,239
Commitments and contingencies
Stockholders' equity
Preferred stock, $0.10 par value; 5,000,000 shares authorized; no shares issued and outstanding		-			-			-			-
Common stock, $0.10 par value; 30,000,000 shares authorized; 10,447,350 and 10,321,749 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively		1,045			1,032
Common stock, $0.10 par value; 30,000,000 shares authorized; 10,459,394 and 10,321,749 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively								1,046			1,032
Capital in excess of par value		55,738			55,528			56,712			55,528
Accumulated other comprehensive loss, net of taxes		(27,474	)		(27,430	)		(27,745	)		(27,430	)
Retained earnings		86,982			85,191			80,903			85,191
Total stockholders' equity		116,291			114,321			110,916			114,321
Total liabilities and stockholders' equity	$	322,498		$	323,560		$	304,403		$	323,560

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

Table of Contents

DYNAMICS RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(Dollars in thousands, except share data)

							Three Months Ended						Six Months Ended
	Three Months Ended March 31,						June 30,						June 30,
	2012			2011			2012			2011			2012			2011
Revenue	$	85,869		$	69,524		$	80,834		$	68,472		$	166,703		$	137,996
Cost of revenue		72,273			58,760			68,307			58,045			140,580			116,805
Gross profit		13,596			10,764
Gross profit on revenue								12,527			10,427			26,123			21,191

Selling, general and administrative expenses		6,891			5,669			6,410			6,809			13,301			12,478
Amortization of intangible assets		1,031			374			1,031			374			2,062			748
Operating income		5,674			4,721
Impairment of goodwill								12,000			-			12,000			-
Operating income (loss)								(6,914	)		3,244			(1,240	)		7,965
Interest expense, net		(2,779	)		(252	)		(2,621	)		(768	)		(5,400	)		(1,020	)
Other income, net		135			96
Income from continuing operations before provision for income taxes		3,030			4,565
Provision for income taxes		1,239			1,857
Net income	$	1,791		$	2,708
Other income (expense), net								(71	)		67			64			163
Income (loss) before provision (benefit) for income taxes								(9,606	)		2,543			(6,576	)		7,108
Provision (benefit) for income taxes								(3,527	)		1,106			(2,288	)		2,963
Net income (loss)							$	(6,079	)	$	1,437		$	(4,288	)	$	4,145

Earnings per share
Earnings (loss) per common share
Basic	$	0.17		$	0.27		$	(0.59	)	$	0.14		$	(0.42	)	$	0.42
Diluted	$	0.17		$	0.27		$	(0.59	)	$	0.14		$	(0.42	)	$	0.41

Weighted average shares outstanding
Basic		10,419,343			9,973,442			10,319,901			10,050,545			10,330,851			9,971,411
Diluted		10,464,125			10,174,186			10,319,901			10,194,171			10,330,851			10,145,738

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

Table of Contents

DYNAMICS RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

~~FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011~~

~~(Dollars~~ (Dollars in thousands)

Three Months Ended
March 31,

2012 2011
Net income $ 1,791 $ 2,708
Other comprehensive income (loss), net of tax:
Unrealized losses on derivative instruments:
Unrealized holding losses arising during the period (54 ) (37 )
Less: reclassification adjustment for losses included in net income 10 91
Other comprehensive income (loss) (44 ) 54
Comprehensive income $ 1,747 $ 2,762

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012			2011		2012			2011
Net income (loss)	$	(6,079	)	$	1,437	$	(4,288	)	$	4,145
Other comprehensive income (loss), net of tax:
Pension liability adjustment, net of tax of $182:		(278	)		-		(278	)		-
Unrealized gains (losses) on derivative instruments, net of tax of $5 and $150 for the three months ended June 30, 2012 and 2011, respectively, and $25 and $185 for the six months ended June 30, 2012 and 2011, respectively.		7			228		(37	)		282
Other comprehensive income (loss), net of tax		(271	)		228		(315	)		282
Comprehensive income (loss)	$	(6,350	)	$	1,665	$	(4,603	)	$	4,427

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

Table of Contents

DYNAMICS RESEARCH CORPORATION~~CORPORATION~~

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

FOR THE THREE MONTHS ENDED ~~MARCH 31,~~JUNE 30, 2012 AND 2011

(In thousands)

	Common Stock Shares			Common Stock Par Value			Capital in Excess of Par Value			Accumulated Other Comprehensive Loss			Retained Earnings		Total			Common Stock Shares			Common Stock Par Value			Capital in Excess of Par Value			Accumulated Other Comprehensive Loss			Retained Earnings			Total
Balance at December 31, 2011		10,322			1,032			55,528			(27,430	)		85,191		114,321
Comprehensive income		-			-			-			(44	)		1,791		1,747
Balance at March 31, 2012																			10,447		$	1,045		$	55,738		$	(27,474	)	$	86,982		$	116,291
Comprehensive loss																			-			-			-			(271	)		(6,079	)		(6,350	)
Issuance of common stock through stock plan transactions		11			1			112			-			-		113			17			2			118			-			-			120
Issuance of restricted stock		127			13			(13	)		-			-		-			2			-			-			-			-			-
Forfeited restricted stock		1			-			-			-			-		-
Forfeiture of restricted stock																			(6	)		(1	)		1			-			-			-
Release of restricted stock		(14	)		(1	)		(145	)		-			-		(146	)		(1	)		-			(10	)		-			-			(10	)
Share-based compensation		-			-			176			-			-		176			-			-			175			-			-			175
Common stock subject to rescission rights		-			-			80			-			-		80			-			-			724			-			-			724
Tax benefit from stock plan transactions		-			-			-			-			-		-			-			-			(34	)		-			-			(34	)
Balance at March 31, 2012		10,447		$	1,045		$	55,738		$	(27,474	)	$	86,982	$	116,291
Balance at June 30, 2012																			10,459		$	1,046		$	56,712		$	(27,745	)	$	80,903		$	110,916

	Common Stock Shares			Common Stock Par Value			Capital in Excess of Par Value			Accumulated Other Comprehensive Loss			Retained Earnings		Total
Balance at December 31, 2010		10,040		$	1,004		$	54,138		$	(21,691	)	$	73,734	$	107,185
																		Common Stock Shares			Common Stock Par Value			Capital in Excess of Par Value			Accumulated Other Comprehensive Loss			Retained Earnings			Total
Balance at March 31, 2011																			10,104		$	1,010		$	54,504		$	(21,637	)	$	76,442		$	110,319
Comprehensive income		-			-			-			54			2,708		2,762			-			-			-			228			1,437			1,665
Issuance of common stock through stock plan transactions		62			6			380			-			-		386			206			20			1,307			-			-			1,327
Issuance of restricted stock		30			3			(3	)		-			-		-			16			2			(2	)		-			-			-
Forfeiture of restricted stock																			(9	)		(1	)		1			-			-			-
Repurchased shares		(21	)		(2	)		(308	)		-			-		(310	)		(2	)		-			(25	)		-			-			(25	)
Release of restricted stock		(7	)		(1	)		(114	)		-			-		(115	)
Share-based compensation		-			-			187			-			-		187			-			-			142			-			-			142
Tax benefit from stock plan transactions		-			-			224			-			-		224			-			-			351			-			-			351
Balance at March 31, 2011		10,104		$	1,010		$	54,504		$	(21,637	)	$	76,442	$	110,319
Balance at June 30, 2011																			10,315		$	1,031		$	56,278		$	(21,409	)	$	77,879		$	113,779

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

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DYNAMICS RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(In thousands)

	Common Stock Shares			Common Stock Par Value			Capital in Excess of Par Value			Accumulated Other Comprehensive Loss			Retained Earnings			Total
Balance at December 31, 2011		10,322		$	1,032		$	55,528		$	(27,430	)	$	85,191		$	114,321
Comprehensive loss		-			-			-			(315	)		(4,288	)		(4,603	)
Issuance of common stock through stock plan transactions		28			3			230			-			-			233
Issuance of restricted stock		129			13			(13	)		-			-			-
Forfeiture of restricted stock		(5	)		(1	)		1			-			-			-
Release of restricted stock		(15	)		(1	)		(155	)		-			-			(156	)
Share-based compensation		-			-			351			-			-			351
Common stock subject to rescission rights		-			-			804			-			-			804
Tax benefit from stock plan transactions		-			-			(34	)		-			-			(34	)
Balance at June 30, 2012		10,459		$	1,046		$	56,712		$	(27,745	)	$	80,903		$	110,916


	Common Stock Shares			Common Stock Par Value			Capital in Excess of Par Value			Accumulated Other Comprehensive Loss			Retained Earnings			Total
Balance at December 31, 2010		10,040		$	1,004		$	54,138		$	(21,691	)	$	73,734		$	107,185
Comprehensive income		-			-			-			282			4,145			4,427
Issuance of common stock through stock plan transactions		268			26			1,687			-			-			1,713
Issuance of restricted stock		46			5			(5	)		-			-			-
Forfeiture of restricted stock		(9	)		(1	)		1			-			-			-
Release of restricted stock		(9	)		(1	)		(139	)		-			-			(140	)
Share-based compensation		-			-			329			-			-			329
Repurchased shares		(21	)		(2	)		(308	)		-			-			(310	)
Tax benefit from stock plan transactions		-			-			575			-			-			575
Balance at June 30, 2011		10,315		$	1,031		$	56,278		$	(21,409	)	$	77,879		$	113,779

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

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DYNAMICS RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(Dollars in thousands)

							Six Months Ended
	Three Months Ended March 31,						June 30,
	2012			2011			2012			2011
Cash flows from operating activities:
Net income	$	1,791		$	2,708
Adjustments to reconcile net cash used in operating activities:
Net income (loss)							$	(4,288	)	$	4,145
Adjustments to reconcile net cash provided by operating activities:
Impairment of goodwill								12,000			-
Depreciation		1,014			865			2,018			1,707
Amortization of intangible assets		1,031			374			2,062			748
Share-based compensation		176			187			351			329
Investment income (loss) from equity interest		19			(18	)
Tax benefit from stock plan transactions, net of tax deficiencies from equity awards		-			(224	)
Investment loss (income) from equity interest								38			(75	)
Tax benefit from stock plan transactions								34			(575	)
Loss on extinguishment of debt								-			193
Settlement of derivative instrument								-			340
Deferred income taxes		1,463			831			(1,165	)		835
Other		339			(124	)		662			(235	)
Change in operating assets and liabilities:
Contract receivables, net		(4,374	)		(9,580	)		2,394			(7,423	)
Prepaid expenses and other current assets		(859	)		(465	)		(1,684	)		321
Accounts payable		4,135			215			(1,589	)		4,235
Accrued compensation and employee benefits		(5,395	)		(5,028	)		(4,819	)		(2,873	)
Other accrued expenses		602			809			(309	)		(810	)
Other long-term liabilities		(1,562	)		(53	)		(1,587	)		(861	)
Net cash used in operating activities		(1,620	)		(9,503	)
Net cash provided by operating activities								4,118			1
Cash flows from investing activities:
Purchase of business, net of cash acquired		(2,388	)		-			(2,388	)		(142,822	)
Additions to property and equipment		(92	)		(320	)		(215	)		(862	)
Dividends from equity investment		44			-			86			35
Increase in other assets		(5	)		-			-			(24	)
Net cash used in investing activities		(2,441	)		(320	)		(2,517	)		(143,673	)
Cash flow from financing activities:
Borrowings under loan agreements								-			144,021
Repayments under previous term loan		-			(2,000	)		-			(22,000	)
Repayments under new term loan		(2,750	)		-			(6,500	)		-
Borrowings under revolving credit agreement		20,900			-			53,300			-
Repayments under revolving credit agreement		(18,100	)		-			(52,500	)		-
Payments of deferred financing cost								-			(1,900	)
Proceeds from the exercise of stock plan transactions		113			386			233			1,713
Payments for repurchase of shares		-			(310	)
Tax benefit from stock plan transactions, net of tax deficiencies from equity awards		-			224
Payments of repurchased shares								-			(310	)
Tax benefit from stock plan transactions								(34	)		575
Net cash provided by (used in) financing activities		163			(1,700	)		(5,501	)		122,099
Net decrease in cash and cash equivalents		(3,898	)		(11,523	)		(3,900	)		(21,573	)
Cash and cash equivalents, beginning of period		3,908			30,163			3,908			30,163
Cash and cash equivalents, end of period	$	10		$	18,640		$	8		$	8,590

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

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DYNAMICS RESEARCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share amounts)

NOTE 1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements of Dynamics Research Corporation (the “Company”) and its subsidiaries included herein have been prepared in accordance with accounting principles generally accepted in the United States of America. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

In the opinion of management, all material adjustments that are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected. All material intercompany transactions and balances have been eliminated in consolidation. The results for the three and six months ended ~~March 31,~~June 30, 2012 may not be indicative of the results that may be expected for the year ending December 31, 2012. The accompanying financial information should be read in conjunction with the consolidated financial statements and notes contained in the Company’s Form 10-K, filed with the United States Securities and Exchange Commission (“SEC”) for the year ended December 31, 2011.

NOTE 2. BUSINESS ACQUISITION

On June 30, 2011, the Company completed an acquisition by merger of 100% of the outstanding shares of High Performance Technologies, Inc. ("HPTi") for $143 million in cash plus net working capital of $3.4 million. HPTi is a leading provider of high-end technology services to the federal healthcare and military technology markets. The merger strengthens and expands the Company’s market presence as a provider of high-end services and solutions in the federal market.

The following pro forma results of operations have been prepared as though the merger of HPTi had occurred on January 1, 2010. These pro forma results include adjustments for interest expense and amortization of deferred financing costs on the term loan used to finance the transaction, amortization expense for the identifiable intangible asset determined in the independent appraisal and the effect of income taxes. This pro forma information does not purport to be indicative of the results of operations that would have been attained had the merger been made as of January 1, 2010, or of results of operations that may occur in the future.

			Three		Six
			Months		Months
	Three Months Ended		Ended		Ended
	March 31,		June 30,		June 30,
	2011		2011		2011
Revenue	$	95,444	$	96,119	$	191,563
Operating income	$	6,935	$	7,431	$	14,366
Net income	$	2,380	$	2,612	$	4,992

Earnings per common share:
Basic	$	0.24	$	0.26	$	0.50
Diluted	$	0.23	$	0.26	$	0.49

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DYNAMICS RESEARCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share amounts)

NOTE 3. SUPPLEMENTAL BALANCE SHEET INFORMATION

The composition of selected balance sheet accounts are as follows:

	March 31, 2012			December 31, 2011			June 30, 2012			December 31, 2011
Contract receivables, net:
Billed receivables	$	30,432		$	25,821		$	29,242		$	25,821
Unbilled receivables(1):
Revenues recorded in excess of milestone billings on fixed price contracts with state and local government agencies		6,176			7,058			6,075			7,058
Retainages and fee withholdings		416			518			573			518
Other unbilled receivables		34,863			33,935			29,167			33,935
Total unbilled receivables		41,455			41,511			35,815			41,511
Allowance for doubtful accounts		(1,047	)		(866	)		(985	)		(866	)
Contract receivables, net	$	70,840		$	66,466		$	64,072		$	66,466

Prepaid expenses and other current assets:
Restricted cash	$	248		$	240		$	251		$	240
Other		3,177			2,326			3,999			2,326
Prepaid expenses and other current assets	$	3,425		$	2,566		$	4,250		$	2,566

Property and equipment, net:
Software	$	11,349		$	11,334		$	11,338		$	11,334
Furniture and other equipment								10,084			10,185
Leasehold improvements		11,077			10,861			11,127			10,861
Furniture and other equipment		10,083			10,185
Property and equipment		32,509			32,380			32,549			32,380
Less accumulated depreciation		(17,971	)		(17,115	)		(18,898	)		(17,115	)
Property and equipment, net	$	14,538		$	15,265		$	13,651		$	15,265

Other noncurrent assets:
Deferred compensation plan investments	$	1,410		$	1,395		$	1,374		$	1,395
Equity investments		975			1,038			914			1,038
Other		1,785			1,879			1,686			1,879
Other noncurrent assets	$	4,170		$	4,312		$	3,974		$	4,312

Accrued compensation and employee benefits:
Accrued vacation	$	6,927		$	6,036		$	6,778		$	6,036
Accrued compensation and related taxes		6,194			11,601			6,224			11,601
Accrued pension liability		5,796			5,480			5,122			5,480
Other		590			1,785			1,959			1,785
Accrued compensation and employee benefits	$	19,507		$	24,902		$	20,083		$	24,902

Other accrued expenses:
Accrued interest	$	1,421		$	1,525		$	193		$	1,525
Deferred rent liability		1,107			554			1,136			554
Deferred gain on sale of building		676			676			676			676
Net working capital payment accrual		-			2,388			-			2,388
Other		3,632			3,413			3,240			3,413
Other accrued expenses	$	6,836		$	8,556		$	5,245		$	8,556

910

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DYNAMICS RESEARCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share amounts)

	March 31, 2012		December 31, 2011		June 30, 2012		December 31, 2011
Other long-term liabilities:
Accrued pension liability	$	21,059	$	21,576	$	21,743	$	21,576
Deferred rent liability		6,324		6,610		6,068		6,610
Deferred gain on sale of building		1,859		2,028		1,690		2,028
Deferred compensation plan liability		1,410		1,395		1,374		1,395
Other		975		1,457		970		1,457
Other long-term liabilities	$	31,627	$	33,066	$	31,845	$	33,066

(1)

At ~~March 31,~~June 30, 2012 and December 31, 2011, unbilled retainages and fee withholdings of ~~$0.4 million and~~ $0.5 million were not anticipated to be billed within one year. Additionally, at ~~March 31, 2012 and~~ December 31, 2011 ~~$1.7 million and~~ $0.2 million ~~respectively,~~ of the other unbilled receivable balances were not scheduled to be invoiced within one year.

NOTE 4. GOODWILL AND INTANGIBLE ASSETS

Goodwill

~~At March 31, 2012 and December 31, 2011, the Company’s goodwill totaled $211.8 million.~~ The Company’s annual goodwill impairment test is conducted at November 30 of each calendar year and interim evaluations are performed when the Company determines that a triggering event has occurred that would more likely than not reduce the fair value of its goodwill below its carrying value. During the ~~first~~second quarter of 2012, due to a decline in the market price of the Company’s stock, the market capitalization of the Company was below the carrying value, which we considered a triggering event and therefore performed an interim impairment test.

We have updated our annual impairment and year-end analysis as of ~~March 31,~~June 30, 2012. This analysis followed the same methodology and weightings of the Company’s annual impairment evaluation including application of a control premium, which is more fully described in our Annual Report on Form 10-K for the 2011 fiscal year. The Company’s quoted market price is the primary driver in the valuation testing since quoted market prices in active markets provide the best evidence of fair value.

Based on the step 1 analysis performed, management, with the assistance of a third party valuation specialist, determined on August 2, 2012 that the Company’s fair value ~~exceeded~~was below the carrying value of its equity as of ~~March 31, 2012 resulting~~June 30, 2012. As a result, the Company has estimated the range of impairment to be between $12.0 million and $212.0 million and has recorded in the ~~Company passing~~second quarter of 2012 an estimated preliminary impairment charge of $12.0 million. Due to the ~~first~~timing and complexity of step 2 of the impairment ~~test. Accordingly,~~test, which is required to determine the ~~second step~~actual impairment, the Company was unable to finalize the amount of impairment prior to filing form 10-Q for the quarter ended June 30, 2012. Step 2 of the impairment ~~testing was not required, and no~~test will be completed in the third quarter of 2012. Any adjustment to the estimated impairment ~~charges were recorded.~~charge made in the second quarter of 2012 will be recorded in the third quarter of 2012.

The following table represents changes in goodwill:

		December 31, 2011				Estimated Goodwill Impairment				June 30, 2012
Goodwill		$	211,805			$	12,000			$	199,805

Intangible Assets

Components of the Company’s identifiable intangible assets are as follows:

	Weighted average amortization life (years)		Cost		Accumulated Amortization			Net		Weighted average amortization life (years)		Cost		Accumulated Amortization			Net
Balance at March 31, 2012:
Balance at June 30, 2012:
Customer relationships		8.3	$	14,600	$	(1,842	)	$	12,758		8.3	$	14,600	$	(2,470	)	$	12,130
Contractual backlog		6.5		6,700		(2,198	)		4,502		6.5		6,700		(2,452	)		4,248
Customer contracts		5.4		3,500		(3,354	)		146		5.4		3,500		(3,401	)		99
Trade name		1.5		600		(296	)		304		1.5		600		(398	)		202
Total		7.3	$	25,400	$	(7,690	)	$	17,710		7.3	$	25,400	$	(8,721	)	$	16,679

1011

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DYNAMICS RESEARCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share amounts)

	Weighted average amortization life (years)		Cost		Accumulated Amortization			Net
Balance at December 31, 2011:
Customer relationships		8.3	$	14,600	$	(1,214	)	$	13,386
Contractual backlog		6.5		6,700		(1,943	)		4,757
Customer contracts		5.4		3,500		(3,307	)		193
Non-competition agreements		3.0		1,400		(1,400	)		-
Trade name		1.5		600		(195	)		405
Total		7.0	$	26,800	$	(8,059	)	$	18,741

During the first quarter of 2012, the Company wrote-off $1.4 million of fully amortized intangible assets related to the non-compete agreements acquired in the Kadix acquisition. The Company recorded amortization expense for its identifiable intangible assets of $1.0 million and $0.4 million for the three months ended ~~March 31,~~June 30, 2012 and 2011, respectively, and $2.1 million and $0.7 million for the first half of 2012 and 2011, respectively. At ~~March 31,~~June 30, 2012, estimated future amortization expense for the identifiable intangible assets to be recorded in subsequent fiscal years was as follows:

Year ending December 31:
Remainder of 2012	$	3,093	$	2,062
2013	$	3,722	$	3,722
2014	$	3,663	$	3,663
2015	$	2,887	$	2,887
2016	$	2,139	$	2,139
2017 and thereafter	$	2,206	$	2,206

Valuation of Long-Lived Assets

Long-lived assets, such as property, plant, and equipment, and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of asset groups to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized in our statement of operations and as a reduction to the asset group if it is concluded that the fair market value of the asset group is less than its carrying value. Due to the same circumstances that required the interim goodwill impairment test above, we evaluated our long lived assets for impairment for the quarter ended June 30, 2012. We determined that the carrying amount of our long-lived assets did not exceed their estimated undiscounted future cash flows, and thus our long-lived assets are not impaired as of June 30, 2012.

NOTE 5. INCOME TAXES

The Company recorded income tax ~~provisions~~benefits of ~~$1.2~~$3.5 million and ~~$1.9~~$2.3 million in the second quarter and first ~~quarters~~half of 2012, respectively, and income tax provisions of $1.1 million and $3.0 million in the second quarter and first half of 2011, respectively. The effective income tax rate was ~~40.9%~~34.8% and ~~40.7%~~41.7% in the first ~~quarter~~half of 2012 and 2011, respectively. Excluding the goodwill impairment charge, the effective income tax for the first half of 2012 was 40.8%.

At ~~March 31,~~June 30, 2012, the Company’s unrecognized tax benefits, which if recognized in future periods, could favorably impact the effective tax rate by approximately $0.3 million. The total amount of accrued interest and penalties resulting from such unrecognized tax benefits was $0.3 million and $0.2 million at ~~March 31,~~June 30, 2012 and December 31, 2011, respectively.

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DYNAMICS RESEARCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share amounts)

The Company is permitted to deduct certain intangible assets and goodwill balances over a period of 15 years from the date of historical acquisitions, thereby reducing the Company’s taxable income as reported on the income tax return. The Company estimates the annual cash savings from these deductions, as compared with tax expense to be provided for in the Company’s financial statements, from these deductions as follows:

Year	Income Tax Benefit
2012	$	4,500
2013	$	4,700
2014	$	4,700
2015	$	5,000
2016	$	5,300
2017 and thereafter	$	43,400
	$	67,600

In the year in which these benefits are realized, the Company recognizes a long term deferred tax liability.

The Internal Revenue Service (“IRS”) had challenged the deferral of income for tax reporting purposes related to unbilled receivables including the applicability of a Letter Ruling issued by the IRS to the Company in January 1976 which granted to the Company deferred tax treatment of the unbilled receivables. This issue was elevated to the IRS National Office for determination. On October 23, 2008, the Company received a notification of ruling from the IRS National Office. This ruling provided clarification regarding the IRS position relating to revenue recognition for tax purposes regarding its unbilled receivables. During September 2009, the IRS completed its examination of the Company’s tax returns for 2004 through 2007 and issued a Revenue Agent Report (“RAR”), which reduced the deferral of income for tax reporting purposes. As a result the Company reclassified approximately $1.0 million from deferred to current taxes payable. The RAR also included an assessment of interest of $0.5 million. The Company has filed a protest letter with the IRS to appeal the assessment. The Company believes the appeal will be successful and has made no provision for the interest associated with the assessment. The IRS has also initiated an exam of the 2009 tax year which is ongoing.

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~~DYNAMICS RESEARCH CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

~~(Dollars in thousands, except per share amounts)~~

NOTE 6. FINANCING ARRANGEMENTS

The Company’s outstanding debt consisted of the following:

	Senior												Senior
	Term			Subordinated									Term			Subordinated
	Loan			Debt			Revolver			Total			Loan			Debt			Revolver			Total
Balance at December 31, 2011	$	76,111		$	38,717		$	-		$	114,828		$	76,111		$	38,717		$	-		$	114,828
Borrowings		-			-			20,900			20,900			-			-			53,300			53,300
Repayments		(2,750	)		-			(18,100	)		(20,850	)		(6,500	)		-			(52,500	)		(59,000	)
Amortization of loan origination fees		342			58			-			400			677			115			-			792
Balance at March 31, 2012		73,703			38,775			2,800			115,278
Balance at June 30, 2012														70,288			38,832			800			109,920
Less: Current portion of long-term debt		(13,063	)		-			-			(13,063	)		(13,750	)		-			-			(13,750	)
Long term debt, net of current portion	$	60,640		$	38,775		$	2,800		$	102,215		$	56,538		$	38,832		$	800		$	96,170

Weighted average interest rate at December 31, 2011 (1)		4.47	%		13.00	%		-			7.32	%		4.47	%		13.00	%		-			7.32	%
Weighted average interest rate at March 31, 2012 (1)		3.94	%		13.00	%		5.75	%		6.87	%
Weighted average interest rate at June 30, 2012 (1)														3.99	%		13.00	%		5.75	%		7.15	%

(1)	The weighted average interest rate includes the effect of the interest rate swap agreements. See Note 7 for additional information.

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DYNAMICS RESEARCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share amounts)

Effective June 30, 2012, the Company amended its credit agreements to exclude non-cash expenses resulting from any impairment or write-off of goodwill during the Company’s 2012 fiscal year from the definition of ‘Consolidated Earnings Before Interest, Tax and Amortization (“EBITDA”)’ as presented in the Company’s financial covenants. At ~~March 31,~~June 30, 2012, the Company was in compliance with its loan covenants.

NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS

Effective September 30, 2011, the Company entered into an interest rate swap agreement with an initial notional amount of $40.0 million to manage its exposure to interest rate changes on that portion of the senior term loan. The swap effectively converts a portion of the Company’s variable rate debt under the ~~new~~senior term loan to a fixed rate for a period of two years and without exchanging the notional principal amounts.

Under this agreement, the Company receives a floating rate based on the 90-day LIBOR rate and pays a fixed rate of 4.18% (including the applicable margin of 3.50%) on the outstanding notional amount. The swap fixed rate was structured to mirror the payment terms of the senior term loan for the period hedged. The fair value of the swap at inception was zero. It is not expected that any gains or losses will be reported in the statement of operations during the term of the agreement as the swap is expected to be highly effective through its maturity based on the matching terms of the swap and facility agreements. The interest rate swap agreement matures on September 30, 2013.

If, at any time, the swap is determined to be ineffective, in whole or in part, due to changes in the interest rate swap or underlying debt agreements, the fair value of the portion of the swap determined to be ineffective will be recognized as a gain or loss in the statement of operations for the applicable period.

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~~DYNAMICS RESEARCH CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

~~(Dollars in thousands, except per share amounts)~~

The fair value effect on the financial statements from the interest rate swap designated as a cash flow hedge is as follows:

March 31, December 31, Three Months Ended March 31,
2012 2011 2012 2011
Other long-term liabilities $ 68 $ -
Other noncurrent assets $ - $ 6
Gain (loss) recognized in other comprehensive income, net of tax $ (44 ) $ 54

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012			2011
Gain (loss) recognized in other comprehensive income, net of tax	$	7	$	228	$	(37	)	$	282

	June 30,		December 31,
	2012		2011
Other long-term liabilities	$	57	$	-
Other noncurrent assets	$	-	$	6

NOTE 8. FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present our assets and liabilities that are measured at fair value on a recurring basis:

		Fair Value Measurements									Fair Value Measurements
		At March 31, 2012 Using									At June 30, 2012 Using
	Balance Sheet Classification	Level 1		Level 2		Level 3		Total		Balance Sheet Classification	Level 1		Level 2		Level 3		Total
Assets:
Investments held in Rabbi Trusts	Other noncurrent assets	$	1,410	$	-	$	-	$	1,410	Other noncurrent assets	$	1,374	$	-	$	-	$	1,374

Liabilities:
Interest rate swap	Other long-term liabilities	$	-	$	68	$	-	$	68	Other long-term liabilities	$	-	$	57	$	-	$	57

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DYNAMICS RESEARCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share amounts)

		Fair Value Measurements
		At December 31, 2011 Using
	Balance Sheet Classification	Level 1		Level 2		Level 3		Total
Assets:
Investments held in Rabbi Trusts	Other noncurrent assets	$	1,395	$	-	$	-	$	1,395
Interest rate swap	Other noncurrent assets	$	-	$	6	$	-	$	6

The following is a description of the valuation methodologies used for these items, as well as the general classification of such items:

Investments Held in Rabbi Trusts — The investments include exchange-traded equity securities and mutual funds. Fair values for these investments were based on quoted prices in active markets and were therefore classified within Level 1 of the fair value hierarchy.

Interest Rate Swap — The derivative is a receive-variable, pay-fixed interest rate swap based on the LIBOR rate and is designated as a cash flow hedge. Fair value was based on a model-driven valuation using the LIBOR rate, which was observable at commonly quoted intervals for the full term of the swap. Therefore, our interest rate swap was classified within Level 2 of the fair value hierarchy.

Changes to a financial asset’s or liability’s level within the fair value hierarchy are determined as of the end of a reporting period. There were no changes to these levels during the quarter ended ~~March 31,~~June 30, 2012.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

All other nonfinancial assets and liabilities measured at fair value in the financial statements on a nonrecurring basis are subject to fair value measurements and disclosures. Nonfinancial assets and liabilities included in our condensed consolidated balance sheets and measured on a nonrecurring basis consist of goodwill and long-lived assets, including other acquired intangibles. Goodwill and long-lived assets are measured at fair value to test for and measure impairment, if any, at least annually for goodwill or when necessary for both goodwill and long-lived assets.

We estimate fair value for our goodwill impairment test by employing three different methodologies to calculate a fair value and then weighting the outputs to arrive at an estimated fair value. The valuation methods utilized include an income approach, a comparison to comparable industry companies and a market approach. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. The fair value measurement was calculated using unobservable inputs in both the income approach and the comparable industry approach. In the income approach, the value of a business depends on its prospective economic income. This approach looks at what a business will do in the future and not what it has done in the past. The key inputs used in this approach include risk adjusted discount rates and estimated future cash flows, which include estimates of future revenues, operating costs and operating capital related cash flows. The estimate of future cash flows takes into consideration factors such as growth rates and economic and market information. The key inputs in the comparable industry approach include our historical financial results and multiples that were selected based on data observed from publicly traded comparable companies. The market value approach is primarily driven by the underlying value of our common stock, which can vary significantly depending upon a number of factors, such as overall market conditions and our estimated future profitability. The control premium, applied to the market and comparable industry company approaches, is based on the premium paid in transactions occurring in the past years by acquirers of publicly traded companies who provide management and information technology services to the federal government, which are similar to the services provided by the Company.

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DYNAMICS RESEARCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share amounts)

The following tables present our assets and liabilities that are measured at fair value on a non-recurring basis:

		Fair Value Measurements
		At June 30, 2012 Using
	Balance Sheet Location	Level 1		Level 2		Level 3		Total
Assets:
Goodwill	Goodwill	$	-	$	-	$	199,805	$	199,805

A goodwill impairment charge was recorded in the amount of $12.0 million in the second quarter of 2012.

Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, contract receivables and accounts payable at ~~March 31,~~June 30, 2012 approximate fair value because of the short-term nature of these instruments. The carrying value of the senior term loan at ~~March 31,~~June 30, 2012 approximates fair value because the interest rate is variable and therefore deemed to reflect a market rate of interest. At ~~March 31,~~June 30, 2012, based on a review of similar financing arrangements, the Company determined the fair value of the subordinated debt did not change significantly during the quarter and therefore continues to approximate its carrying value.

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~~DYNAMICS RESEARCH CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

~~(Dollars in thousands, except per share amounts)~~

NOTE 9. DEFINED BENEFIT PENSION PLAN

The components of net periodic pension expense for the Company’s defined benefit pension plan are as follows:

	Three Months Ended						Three Months Ended						Six Months Ended
	March 31,						June 30,						June 30,
	2012			2011			2012			2011			2012			2011
Interest cost on projected benefit obligation	$	998		$	1,030		$	997		$	1,030		$	1,995		$	2,060
Expected return on plan assets		(1,197	)		(1,275	)		(1,197	)		(1,275	)		(2,394	)		(2,550	)
Recognized actuarial loss		424			303			424			302			848			605
Net periodic pension expense	$	225		$	58		$	224		$	57		$	449		$	115

During the first ~~quarter~~half of 2012, the Company contributed ~~$0.4~~$1.1 million to fund the pension plan.

NOTE 10. SHARE-BASED COMPENSATION

Share-Based Compensation Costs

Total share-based compensation recorded in the Condensed Consolidated Statements of Operations was as follows:

	Three Months Ended				Three Months Ended				Six Months Ended
	March 31,				June 30,				June 30,
	2012		2011		2012		2011		2012		2011
Cost of products and services	$	100	$	87	$	95	$	99	$	195	$	186
Selling, general and administrative		76		100		80		43		156		143
Total share-based compensation expense	$	176	$	187	$	175	$	142	$	351	$	329

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DYNAMICS RESEARCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share amounts)

Stock Option Award Activity

The following table summarizes stock option activity under all plans:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value		Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2011		90,840		$	15.04		4.8	$	-		90,840		$	15.04		4.8	$	-
Granted		-		$	-						-		$	-
Exercised		-		$	-						-		$	-
Cancelled		(10,340	)	$	18.59						(13,840	)	$	19.71
Outstanding at March 31, 2012		80,500		$	14.58		5.1	$	-
Outstanding at June 30, 2012											77,000		$	14.20		5.1	$	-

Exercisable at December 31, 2011		64,173		$	15.73		3.2	$	-		64,173		$	15.73		3.2	$	-
Exercisable at March 31, 2012		53,833		$	15.18		3.6	$	-
Exercisable at June 30, 2012											60,333		$	14.41		4.3	$	-

As of ~~March 31,~~June 30, 2012 the total unrecognized compensation cost related to stock option awards was $0.1 million which is expected to be amortized over a weighted-average period of ~~1.3~~1.1 years.

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~~DYNAMICS RESEARCH CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

~~(Dollars in thousands, except per share amounts)~~

Cash proceeds received, the intrinsic value and the total tax benefits realized resulting from stock option exercises were as follows:

	Three Months Ended				Three Months Ended				Six Months Ended
	March 31,				June 30,				June 30,
	2012		2011		2012		2011		2012		2011
Amounts realized or received from stock option exercises:
Cash proceeds received	$	-	$	300	$	-	$	1,241	$	-	$	1,541
Intrinsic value realized	$	-	$	530	$	-	$	1,885	$	-	$	2,415
Income tax benefit realized	$	-	$	159	$	-	$	687	$	-	$	846

Restricted Stock Award Activity

The following table summarizes restricted stock activity:

	Number of Shares			Weighted Average Grant-Date Fair Value		Number of Shares			Weighted Average Grant-Date Fair Value
Nonvested at December 31, 2011		80,079		$	11.89		80,079		$	11.89
Granted		129,334		$	10.34		131,334		$	10.32
Vested		(42,618	)	$	10.61		(58,750	)	$	10.82
Cancelled		(600	)	$	14.72		(6,634	)	$	11.89
Nonvested at March 31, 2012		166,195		$	11.05
Nonvested at June 30, 2012							146,029		$	10.97

The total fair value of restricted shares vested during the ~~three~~six months ended ~~March 31,~~June 30, 2012 and 2011 was ~~$0.5~~$0.6 million and ~~$0.2~~$0.4 million, respectively. As of ~~March 31,~~June 30, 2012, the total unrecognized compensation cost related to restricted stock awards was ~~$1.6~~$1.4 million, which is expected to be amortized over a weighted-average period of ~~2.6~~2.4 years.

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DYNAMICS RESEARCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share amounts)

NOTE 11. EARNINGS PER SHARE

For the three and six months ended ~~March 31,~~June 30, 2012 and 2011, basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Unexercised stock options and unvested restricted shares are excluded from this calculation but are included in the diluted earnings per share calculation using the treasury stock method so long as their effect is not anti-dilutive.

For the three and six months ended ~~March 31,~~June 30 2012, the diluted effect of stock options and restricted stock grants of approximately 246,700 and 202,300 shares, respectively, were not included in the computation of diluted loss per share as the net loss would have made their effect anti-dilutive. For the three and six months ended June 30, 2011, diluted earnings per share are determined by using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Due to the anti-dilutive effect, approximately ~~149,400 and~~ 86,500 options to purchase common stock and restricted stock awards were excluded from the calculation of diluted earnings per share for the three and six months ended ~~March 31, 2012 and 2011, respectively.~~June 30, 2011.

The following table illustrates the reconciliation of the weighted average shares outstanding:

	Three Months Ended				Three Months Ended				Six Months Ended
	March 31,				June 30,				June 30,
	2012		2011		2012		2011		2012		2011
Weighted average shares outstanding - Basic		10,419,343		9,973,442		10,319,901		10,050,545		10,330,851		9,971,411
Diluted effect of stock options and restricted stock grants		44,782		200,744		-		143,626		-		174,327
Weighted average shares outstanding - Diluted		10,464,125		10,174,186		10,319,901		10,194,171		10,330,851		10,145,738

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~~DYNAMICS RESEARCH CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

~~(Dollars in thousands, except per share amounts)~~

NOTE 12. BUSINESS SEGMENT, MAJOR CUSTOMERS AND RELATED PARTY INFORMATION

Business Segment

The Company has concluded that it operates in one segment based upon the information used by its chief operating decision maker in evaluating the performance of its business and allocating resources. This single segment represents the Company’s core business, professional services primarily for government clients.

Major Customers

No individual customer accounted for more than 10% of revenue in the three and six months ended ~~March 31,~~June 30, 2012 and 2011 and no individual customer accounted for more than 10% of total contract receivables at ~~March 31,~~June 30, 2012 and December 31, 2011.

Related Party

The Company has a 40% interest in HMRTech which is accounted for using the equity method. Revenues from HMRTech for the three and six months ended ~~March 31,~~June 30, 2012 and 2011 and amounts due from HMRTech at ~~March 31,~~June 30, 2012 and December 31, 2011 were immaterial. In addition, HMRTech charged the Company ~~$0.6~~$0.4 million and $0.5 million in the three months ended ~~March 31,~~June 30, 2012 and 2011, respectively, relating to contract ~~work.~~work, and $0.9 million and $1.1 million, respectively, for the six months then ended. At ~~March 31,~~June 30, 2012 and December 31, 2011, the Company had a related payable of ~~$0.3~~$0.4 million and $0.5 million, respectively.

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DYNAMICS RESEARCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share amounts)

NOTE 13. COMMITMENTS AND CONTINGENCIES

As a defense contractor, the Company is subject to many levels of audit and review from various government agencies, including the Defense Contract Audit Agency, various inspectors general, the Defense Criminal Investigation Service, the Government Accountability Office, the Department of Justice and Congressional committees. Both related to and unrelated to its defense industry involvement, the Company is, from time to time, involved in audits, lawsuits, claims, administrative proceedings and investigations. The Company accrues for liabilities associated with these activities when it becomes probable that future expenditures will be made and such expenditures can be reasonably estimated. Except as noted below, the Company does not presently believe it is reasonably likely that any of these matters would have a material adverse effect on the Company’s business, financial position, results of operations or cash flows. The Company’s evaluation of the likelihood of expenditures related to these matters is subject to change in future periods, depending on then current events and circumstances, which could have material adverse effects on the Company’s business, financial position, results of operations and cash flows.

On June 28, 2005, a class action employee suit was filed in the U.S. District Court for the District of Massachusetts alleging violations of the Fair Labor Standards Act and certain provisions of Massachusetts General Laws. In July 2010, the Company and the plaintiffs agreed upon principal terms of settlement, the cost of which was recorded in the second quarter of 2010.

Issuances of our securities require registration under federal and state securities laws or an exemption therefrom, and certain holders of common stock issued by us may be entitled to rescind their purchases. Approximately 148,000 shares issued through DRC's employee stock purchase plan between July 2007 and May 2011, at purchase prices ranging from $6.63 to $14.12 per share, were not registered under the federal securities law. We intend to offer to ~~repurchase~~rescind the sales of approximately ~~119,000~~78,000 shares that ~~continue~~retain rights of rescission pursuant to ~~be held by the original purchasers.~~applicable statutes of limitations. The amount of cash expected to be paid to the original purchasers for the repurchase of these shares is approximately ~~$1.2~~$0.7 million, plus interest. The cost to repurchase these shares, based on the ~~March 30,~~June 29, 2012 stock price of ~~$9.64,~~$5.81, exceeded market value by ~~$0.1~~$0.3 million, ~~and~~of which $0.2 million was ~~charge~~charged to ~~expense.~~

expense in the second quarter of 2012.

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

The following discussion and analysis of our financial condition and results of operations should be read together with the consolidated financial statements and the notes to those statements that appear elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with the Securities Exchange Commission on March 13, 2012.

Some of the statements in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and elsewhere in this Quarterly Report on Form 10-Q, contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, regarding future events and the future results of DRC that are based on our current expectations, estimates, forecasts, and projections about the industries in which DRC operates and the beliefs and assumptions of the management of DRC. Words such as “anticipates”, “believes”, “estimates”, “expects”, “intends”, “plans”, “projects”, “may”, “will”, “should”, and other similar expressions are intended to identify these forward-looking statements. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. Such factors include but are not limited to, the following:

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

A shift in pricing structure for government contracts;

Risks associated with actual and potential goodwill impairment;

An increased focus on the elimination of overhead within the Department of Defense;

Failure to obtain new government contracts or retain existing contracts;

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

The loss of skilled personnel;

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

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

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

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

Competition with competitors who may have advantages due to having greater resources or qualifying for special statuses;

Failure to obtain or maintain necessary security clearances;

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

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

Failure to adequately safeguard confidential information;

An adverse outcome related to ongoing legal proceedings;

Incurrence of expenditures prior to final receipt of contracts;

Competitive conditions in current markets and difficulties in entering new markets; and

Our ability to maintain sufficient sources of financing and the risk that our financing requirements should increase.

These and other risk factors are more fully described in our Annual Report on Form 10-K for the year ended December 31, 2011 under the section entitled “Risk Factors”, and from time to time, in other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. Actual results may differ materially and adversely from those expressed in any forward-looking statements. Except to the extent required by applicable law or regulation, DRC undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

Unless the context otherwise requires, references in this Form 10-Q to “DRC”, “we”, “us”, or “our” refer to Dynamics Research Corporation and its subsidiaries.

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OVERVIEW

Business

Dynamics Research Corporation, headquartered in Andover, Massachusetts, is a leading provider of innovative management consulting, engineering, and information technology services and solutions to federal and state governments.

Our go-to-market strategy is sharply focused within each of four dimensions:

Solutions. We deliver five high-value, differentiated solutions to our clients: business transformation, information technology, training and performance support, management services, and science and engineering services. We believe our solutions align well with the needs of our government customers today who require improved efficiencies and effectiveness, and face procurement reform, transformational and technology based changes, and ongoing, changing security threats.

Markets and Customers. We target markets which are based on long-term market force drivers that have sustained demand for our services. We select specific customers from government agencies in our target growth markets with needs that well match the solutions we provide. Currently our target growth markets include homeland security, healthcare, cyber security, intelligence, and financial/regulatory reform.

·��

Prime Government and Agency-Wide Contracts. We hold a portfolio of government and agency-wide multiple award schedule ID/IQ task order contracts. Today, these types of contracts are the federal government’s preferred means of procurement for services.

Acquisitions. We use acquisitions, funded through both operationally generated cash and leverage, to strengthen our position in our target growth markets.

On June 30, 2011, we completed the merger of ~~HPTi~~High Performance Technologies, Inc. (“HPTi”) for $143 million in cash plus net working capital of $3.4 million. HPTi is a leading provider of high-end technology services to the federal healthcare and military technology markets. The merger strengthens and expands the Company’s market presence as a provider of high-end services and solutions in the federal market.

Market

In the first ~~quarter~~half of 2012 as well as in 2011, we generated 95% of our revenue from contracts with the United States government, either as a prime contractor or as a subcontractor. As a result we are significantly impacted by trends and changes in federal expenditures and procurement policies. The U.S. government deficit, budgetary challenges, and efforts to curtail expenditures are on-going and reflected in (i) the Budget Control Act of 2011, which increased the debt ceiling and enacted 10-year discretionary spending caps and automatic spending cuts, referred to as sequestration, which will require $1.2 trillion of spending cuts over 10 years, if not amended by Congress and the President, (ii) the Defense Strategic Guidance, issued on January 5, 2012, which outlines fundamental changes in the strategy of United States armed forces, which is smaller and leaner but agile, flexible, and technologically advanced, and (iii) the President’s budget submission for the fiscal year beginning October 1, 2012. Additionally, sizeable mandatory outlays for social security and medical programs in the face of large budget deficits indicate that federal discretionary spending will remain under pressure.

Overall, the President’s information technology budget request of $78.9 billion for fiscal year 2013 is down slightly from the fiscal year 2012 enacted budget, reflecting reductions in defense and intelligence budgets and increases in civilian agencies such as the Departments of Treasury, Veterans Affairs, and Education.

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We have seen and anticipate continued impacts from government budget management initiatives, the specific timing and effects of which may not be predictable, such as:

Program delays, cuts, and terminations,

fewer new program starts,

intensified price competition for new business and re-competes of current business, and

pressure to reduce dependency on service contractors and set more work aside for small and socially disadvantaged businesses.

These events may result in (i) new business contract wins being lower than expected or needed to sustain growth, (ii) ending of or reductions to current programs and contracts, and (iii) lower profit margins as a result of pricing pressure and the need to invest in winning new and retaining existing business – all of which may adversely affect our results of operations and financial condition.

NON-GAAP FINANCIAL MEASURES

In evaluating our operating performance, management uses certain non-GAAP financial measures to supplement the consolidated financial statements prepared under generally accepted accounting principles in the United States (“GAAP”).

Management believes these non-GAAP measures help indicate our operating performance before charges that are considered by management to be outside our ongoing operating results. Accordingly, management uses these non-GAAP measures to gain a better understanding of our comparative operating performance from period-to-period and as a basis for planning and forecasting future periods. Management believes these non-GAAP measures, when read in conjunction with our GAAP financials, provide useful information to investors by offering:

the ability to make more meaningful period-to-period comparisons of our ongoing operating results, net of the effect of goodwill impairment;

the ability to better identify trends in our underlying business and perform related trend analysis;

a higher degree of transparency for certain expenses (particularly when a specific charge impacts multiple line items);

a better understanding of how management plans and measures our underlying business; and

an easier way to compare our most recent results of operations against investor and analyst financial models.

The non-GAAP measures we use exclude the estimated preliminary goodwill impairment charge incurred in the second quarter of 2012 and its related tax effect that management believes is outside of our ongoing operations for the periods presented.

These non-GAAP measures have limitations; however, because they do not include all items of expense that impact our operations. Management compensates for these limitations by also considering our GAAP results. The non-GAAP financial measures we use are not prepared in accordance with, and should not be considered an alternative to, measurements required by GAAP, such as operating loss, net loss and loss per share, and should not be considered measures of our liquidity. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP measures. In addition, these non-GAAP financial measures may not be comparable to similar measures reported by other companies.

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Non-GAAP financial measures, together with a reconciliation with the most direct comparable financial measures under GAAP for the three and six months ended June 30, 2012 were as follows:

	Three Months Ended					Six Months Ended
(in thousands)	June 30, 2012					June 30, 2012
Operating loss	$	(6,914	)	(8.6	)%	$	(1,240	)	(0.7	)%
Impairment of goodwill		12,000		14.8	%		12,000		7.2	%
Non-GAAP operating income	$	5,086		6.3	%	$	10,760		6.5	%

Loss before benefit for income taxes	$	(9,606	)	(11.9	)%	$	(6,576	)	(3.9	)%
Impairment of goodwill		12,000		14.8	%		12,000		7.2	%
Non-GAAP income before provision for income taxes	$	2,394		3.0	%	$	5,424		3.3	%

Benefit for income taxes	$	(3,527	)	36.7	%	$	(2,288	)	34.8	%
Tax benefit for impairment of goodwill		4,500		37.5	%		4,500		37.5	%
Non-GAAP provision for income taxes	$	973		40.6	%	$	2,212		40.8	%

Net loss	$	(6,079	)	(7.5	)%	$	(4,288	)	(2.6	)%
Impairment of goodwill, net of tax benefit		7,500		9.3	%		7,500		4.5	%
Non-GAAP net income	$	1,421		1.8	%	$	3,212		1.9	%

Earnings (loss) per common share
Basic	$	(0.59	)			$	(0.42	)
Per share effect of impairment of goodwill		0.73					0.73
Non-GAAP Basic	$	0.14				$	0.31

Diluted	$	(0.59	)			$	(0.42	)
Per share effect of impairment of goodwill		0.72					0.72
Non-GAAP Diluted (1)	$	0.14				$	0.31

Weighted average shares outstanding
Basic (GAAP diluted)		10,319,901					10,330,851
Diluted (Non-GAAP)		10,352,869					10,372,116

(1)	May not add due to rounding.

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RESULTS OF OPERATIONS

Operating results expressed as a percentage of total revenue are as follows:

	Three Months Ended March 31,
	2012					2011					Three Months Ended June 30,
(in millions)											2012					2011
Revenue	$	85.9				$	69.5				$	80.8				$	68.5

Gross profit	$	13.6		15.8	%	$	10.8		15.5	%	$	12.5		15.5	%	$	10.4		15.2	%
Selling, general and administrative		6.9		8.0	%		5.7		8.2	%		6.4		7.9	%		6.8		9.9	%
Amortization of intangible assets		1.0		1.2	%		0.4		0.5	%		1.0		1.3	%		0.4		0.5	%
Operating income		5.7		6.6	%		4.7		6.8	%
Impairment of goodwill												12.0		14.8	%		-		0	%
Operating income (loss)												(6.9	)	(8.6	)%		3.2		4.7	%
Interest expense, net		(2.8	)	(3.2	)%		(0.3	)	(0.4	)%		(2.6	)	(3.2	)%		(0.8	)	(1.1	)%
Other income, net		0.1		0.2	%		0.1		0.1	%
Provision for income taxes(1)		1.2		40.9	%		1.9		40.7	%
Net income(2)	$	1.8		2.1	%	$	2.7		3.9	%
Other income (expense), net												(0.1	)	(0.1	)%		0.1		0.1	%
Provision (benefit) for income taxes(1)												(3.5	)	36.7	%		1.1		43.5	%
Net income (loss)(2)											$	(6.1	)	(7.5	)%	$	1.4		2.1	%

	Six Months Ended June 30,
(in millions)	2012					2011
Revenue	$	166.7				$	138.0

Gross profit	$	26.1		15.7	%	$	21.2		15.4	%
Selling, general and administrative		13.3		8.0	%		12.5		9.0	%
Amortization of intangible assets		2.1		1.2	%		0.7		0.5	%
Impairment of goodwill		12.0		7.2	%		-		0	%
Operating income (loss)		(1.2	)	(0.7	)%		8.0		5.8	%
Interest expense, net		(5.4	)	(3.2	)%		(1.0	)	(0.7	)%
Other income, net		0.1		0.0	%		0.2		0.1	%
Provision (benefit) for income taxes(1)		(2.3	)	34.8	%		3.0		41.7	%
Net income (loss)(2)	$	(4.3	)	(2.6	)%	$	4.1		3.0	%

(1)	The percentage of provision for income taxes relates to a percentage of income ~~from continuing operations~~(loss) before income taxes.

(2)	Net income ~~does~~(loss) may not add due to rounding.

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Revenues

Revenues were earned from the following sectors:

	Three Months Ended March 31,								Three Months Ended June 30,
	2012				2011				2012				2011
(in millions)
National defense and intelligence agencies	$	50.5	58.8	%	$	47.8	68.8	%	$	46.5	57.6	%	$	47.5	69.3	%
Homeland security		11.4	13.3			12.3	17.7			11.1	13.7			11.3	16.5
Federal civilian agencies		20.0	23.3			5.8	8.4			19.2	23.8			5.8	8.4
Total revenue from federal agencies(1)		82.1	95.4			65.9	94.8			76.8	95.0			64.6	94.3
State and local government agencies		3.9	4.6			3.6	5.2			4.0	5.0			3.9	5.7
Other		0.0	-			0.0	-
Total revenue	$	85.9	100.0	%	$	69.5	100.0	%	$	80.8	100.0	%	$	68.5	100.0	%

	Six Months Ended June 30,
	2012				2011
(in millions)
National defense and intelligence agencies	$	97.1	58.2	%	$	95.3	69.0	%
Homeland security		22.5	13.5			23.6	17.1
Federal civilian agencies		39.2	23.5			11.6	8.4
Total revenue from federal agencies(1)		158.8	95.2			130.5	94.6
State and local government agencies		7.9	4.7			7.5	5.4
Total revenue	$	166.7	100.0	%	$	138.0	100.0	%

(1)	Totals may not add due to rounding.

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We reported total revenue of ~~$85.9~~$80.8 million and ~~$69.5~~$68.5 million in the ~~three months ended March 31,~~second quarter of 2012 and 2011, respectively, and $166.7 million and $138.0 million in the first half of 2012 and 2011, respectively. Total revenues for the second quarter of 2012 and the first ~~quarter~~half of 2012 represent an increase of ~~$16.3 million, or 23.5%~~18.1% and 20.8%, respectively, from the same period in 2011. The increase in revenue for ~~the first quarter~~both periods of 2012 compared with the ~~first quarter of~~same periods in 2011 resulted from the inclusion of HPTi in current year ~~results.~~results, partially offset by approximately $15 million in contract erosion. For the second quarter and first ~~quarter~~half of 2011, HPTi ~~revenue was $25.9 million.~~revenues were $27.6 million and $53.6 million, respectively. We calculate organic revenue growth by adding revenue of the acquired operations prior to the acquisition date to the ~~company’s~~Company’s reported revenue for the period. Accordingly, pro-forma revenue for the second quarter and first ~~quarter~~half of 2011 ~~revenue~~ was ~~$95.4~~$96.1 million and $191.6 million, respectively, and organic revenue declined 15.9% and 13.0% for the ~~Company for the~~second quarter and first ~~quarter~~half of 2012, ~~by 10%.~~respectively.

During the fourth quarter of 2011, we saw evidence of aggressive government cost-cutting initiatives that impacted several successful programs, which were completed in the fourth quarter of 2011, where clients deferred or cancelled follow-on awards due to cost-cutting efforts. The reduction in annual revenue from these completed programs totaled approximately $30 million, which has impacted the first ~~quarter~~half of 2012 and our outlook for the remainder of 2012.

In the first ~~quarter~~half of 2012 we continued to see a shortage of new business awards, as well as adverse contract actions. The total contract value of our new business wins in the first ~~quarter~~half of 2012 totaled ~~$5.6~~$29.4 million. Regarding competitions to re-win existing business we won ~~$50.7~~$100.3 million, or ~~79%~~83%, of the award decisions made in the first ~~quarter,~~half of 2012, down from a ~~win~~re-win rate of 98% for the 2011 fiscal year.

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In the second quarter of 2012, we were adversely impacted by two contracts which were subject to re-compete or extension. One of the contracts was not extended or re-competed due to a lack of funds, and the other, which was scheduled for a competitive procurement, was awarded on a sole source basis to a small, socially disadvantaged business. The contracts generated approximately $11 million in annual revenue with 75 employees.

Revenues by contract type as a percentage of revenues were as follows:

	Three Months Ended				Three Months Ended						Six Months Ended
	March 31,				June 30,						June 30,
	2012		2011		2012			2011			2012			2011
Fixed price, including service type contracts	46	%	49	%		47	%		51	%		46	%		50	%
Time and materials	34		29			33			30			34			30
Cost reimbursable	20		22			20			19			20			20
	100	%	100	%		100	%		100	%		100	%		100	%

Prime contract	85	%	74	%		85	%		76	%		85	%		75	%
Sub-contract	15		26			15			24			15			25
	100	%	100	%		100	%		100	%		100	%		100	%

Backlog and Bookings

Our backlog position was as follows:

(in millions)	March 31, 2012		December 31, 2011		June 30, 2012		December 31, 2011
Backlog:
Funded	$	151.9	$	183.3	$	150.6	$	183.3
Unfunded		565.5		618.6		519.3		618.6
Total backlog	$	717.4	$	801.9	$	669.9	$	801.9

During the second quarter we received funding for option year 2, which runs from May 2012 through May 2013 on the Veterans Relationship Management contract of $22.6 million. This contract runs through May 2015.

We expect that substantially all of our funded backlog at ~~March 31,~~June 30, 2012 will generate revenue during the subsequent twelve month period. The funded backlog generally is subject to possible termination at the convenience of the contracting party. Contracts are typically funded on an annual basis or incrementally for shorter time periods. The funded backlog as of ~~March 31,~~June 30, 2012 and December 31, 2011 covered approximately ~~5.3~~5.6 months and 6.2 months of revenue, respectively. Funded bookings were ~~$58.3~~$85.3 million and $61.5 million in the three months ended ~~March 31,~~June 30, 2012 and December 31, 2011, respectively, and generated a book-to-bill ratio of approximately ~~0.7~~1.1 to 1.0 and 1.0 to 1.0 for each respective period.

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Gross Profit

~~Total gross~~Gross profit was ~~$13.6~~$12.5 million and ~~$10.8~~$10.4 million for the ~~three months ended March 31,~~second quarter of 2012 and 2011, respectively, resulting in a gross margin of ~~15.8%~~15.5% and ~~15.5% for~~15.2%, respectively. For the first ~~quarter~~half of 2012 and 2011, gross profit was $26.1 million and $21.2 million, respectively, resulting in a gross margin of 15.7% and 15.4%, respectively. The increase in gross profit margin was composed ~~primarily~~ of ~~lower~~a one point increase from direct margin on billed services and 7 tenths of a point decrease from higher overhead costs as a percentage of ~~revenue, partially offset by a 0.4 point decline in direct margin on billed services.~~revenue.

Direct margin on billed services was ~~38.0%~~39.2% of revenue for the ~~first~~second quarter of 2012 compared with ~~38.4%~~38.2% for the same period of 2011, respectively, and 38.6% and 38.3% for the first ~~quarter~~half of ~~2011.~~2012 and 2011, respectively. The change in direct margin as a percentage of revenue was composed of a ~~2.2~~2.3 point increase as a result of the inclusion of higher margin HPTi services in results for the most recent quarter, and a decline of ~~2.6~~1.3 points resulting from lower margins on legacy DRC business in the most recent quarter compared with the same period in 2011.

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Selling, general and administrative expenses

Selling, general and administrative expenses were ~~$6.9~~$6.4 million and ~~$5.7~~$6.8 million in the three months ended ~~March 31,~~June 30, 2012 and 2011, ~~respectively.~~respectively, and $13.3 million and $12.5 million, respectively, in the first half then ended. Selling, general and administrative expenses as a percent of total revenue ~~decreased to~~in the second quarter of 2012 and 2011 were 7.9% and 9.9%, respectively, and 8.0% and 9.0% in the first ~~quarter~~half of 2012 ~~from 8.2% in the same period in 2011.~~and 2011, respectively. The ~~increase~~decrease in selling, general and administrative expenses in the first ~~quarter~~half of 2012 was due to transaction-related costs of $1.7 million recorded in the second quarter of 2011, partially offset by added costs from ~~HPTi,~~the merger, and the second quarter decrease as a percent of total revenue was attributable to an increase in administrative efficiencies driven by higher levels of revenue.

~~Goodwill and amortization of intangible~~Intangible assets

The Company’s market capitalization continued to be below book at March 31, 2012. Accordingly, management updated its fair value assessment as of March 31, 2012. Based on the analysis performed, management determined that the Company’s fair value exceeded the carrying value of its equity as of March 31, 2012 resulting in the Company passing the first step of the impairment test. Accordingly, the second step of the impairment testing was not required, and no impairment charges were recorded.

The determination of valuation for goodwill impairment testing is sensitive to (i) changes in the market price of DRC’s stock, and (ii) changes in premium paid in excess of market price for public companies in our industry sector, which are acquired. A significant decrease in the market price of DRC’s stock would cause a decline in valuation and increase the risk of impairment. At March 30, 2012 and December 30, 2011, the price of our common stock was $9.64 per share and $11.34 per share, respectively. Since the end of the first quarter, the market price of the Company’s stock has declined significantly, and we are unable to assure that goodwill will not be impaired in subsequent periods. Also, a decline in premium paid by acquirers’ of public companies in our sector would cause a decline in valuation and increase the risk of impairment.

Amortization expense was $1.0 million and $0.4 million in the second quarter of 2012 and 2011, respectively, and $2.1 million and $0.7 million in the first ~~quarter~~half of 2012 and 2011, respectively. The increase in amortization expense ~~in the first quarter of 2012 compared to the same period in 2011~~ was due to $20 million of acquired intangible assets from the HPTi merger. The remaining amortization expense for the current fiscal year is expected to be approximately ~~$3.1~~$2.1 million.

Impairment of goodwill

The Company’s market capitalization continued to be below book value at June 30, 2012. Accordingly, management updated its fair value assessment as of June 30, 2012. Based on the step 1 analysis performed, management, with the assistance of a third party valuation specialist, determined on August 2, 2012 that the Company’s fair value was below the carrying value of its equity as of June 30, 2012. As a result, the Company estimated the range of impairment to be between $12.0 million and $212.0 million and has recorded in the second quarter of 2012 an estimated preliminary impairment charge of $12.0 million. Due to the timing and complexity of step 2 of the impairment test, which is required to determine the actual impairment, we were unable to finalize the amount of impairment prior to filing form 10-Q for the quarter ended June 30, 2012. Step 2 of the impairment test will be completed in the third quarter of 2012. Any adjustment to the estimated impairment charge made in the second quarter of 2012 will be recorded in the third quarter of 2012.

The determination of valuation for goodwill impairment testing is sensitive to (i) changes in the market price of DRC’s stock, (ii) changes in premiums paid in excess of market price for public companies in our industry sector which are acquired, (iii) estimated future cash flows, (iv) weighted average cost of capital, and (v) market multiples. A significant decrease in any of these assumptions would cause a decline in valuation and increase the risk of impairment. At June 29, 2012 and December 30, 2011, the price of our common stock was $5.81 per share and $11.34 per share, respectively.

Interest expense, net

~~We incurred net~~Net interest expense ~~of $2.8~~was $2.6 million and ~~$0.3~~$0.8 million in the ~~three months ended March 31,~~second quarter of 2012 and 2011, respectively, and $5.4 million and $1.0 million in the first half of 2012 and 2011, respectively. The increase in interest expense ~~in the first quarter of 2012 compared to the same period in 2011~~ was due to the higher outstanding debt borrowings incurred in connection with the HPTi merger and higher interest ~~rates.~~rates in 2012. During the second quarter of 2011, interest expense included a charge of $0.5 million due to the payoff of the interest rate swap and the write-off of deferred financing cost associated with our previous credit facility.

Other income (expense), net

Other income (expense) consists of our portion of earnings and losses in HMRTech, gains and losses realized from our deferred compensation plan and results from other non-operating transactions, all of which were immaterial to our results.

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Income tax provision (benefit)

We recorded income tax ~~provisions~~benefits of ~~$1.2~~$3.5 million and ~~$1.9~~$2.3 million in the second quarter and first ~~quarter~~half of 2012, respectively, and income tax provisions of $1.1 million and $3.0 million in the second quarter and first half of 2011, respectively. The effective income tax rate was ~~40.9%~~34.8% and ~~40.7%~~41.7% in the first ~~quarter~~half of 2012 and 2011, ~~and 2010,~~ respectively. Excluding the goodwill impairment charge, the effective income tax rate for the first half of 2012 was 40.8%.

Net Income (Loss)

The net loss for the three and six month periods ended June 30, 2012 was $6.1 and $4.3 million, or $0.59 and $0.42 per diluted share, respectively. Results for the second quarter of 2012 included an impairment charge of $12.0 million, or $7.5 million net of income tax benefits. Excluding the impairment charge net income for the quarter ended June 30, 2012 was $1.4 million or $0.14 per diluted share, as compared with $1.4 million, or $0.14 per diluted share for the quarter ended June 30, 2011. Excluding the impairment charge net income for the six months ended June 30, 2012 was $3.2 million or $0.31 per diluted share, as compared with $4.1 million, or $0.41 per diluted share for the quarter ended June 30, 2011.

LIQUIDITY AND CAPITAL RESOURCES

The following discussion analyzes liquidity and capital resources by operating, investing, and financing activities as presented in our Consolidated Statements of Cash Flows. Our principal sources of liquidity are cash flows from operations and borrowings from our revolving credit agreement.

Our results of operations, cash flows, and financial condition are subject to trends, events, and uncertainties, including demands for capital to support growth, economic conditions, government payment practices, and contractual matters. Our need for access to funds is dependent on future operating results, our growth and acquisition activity, and external conditions.

We have evaluated our future liquidity needs, both from a short-term and long-term basis. ~~The first quarter of each fiscal year is seasonally the weakest quarter of the year from a cash flow viewpoint.~~ Our cash flows in the past and for the remainder of 2012 are expected to exceed our fixed costs and debt service requirements. ~~Accordingly we anticipate using excess cash flow in~~During the ~~remainder~~first half of 2012 ~~to pre-pay~~we repaid a total of $6.5 million of our senior ~~debt.~~term loan, of which $1.0 million was prepaid. Additionally, we maintain a $20 million revolving credit facility, of which ~~$16.3~~$19.1 million was available at ~~March 31,~~June 30, 2012. At ~~March 31,~~June 30, 2012 we used available cash to ~~minimize~~pay a portion of the outstanding balance on the revolving credit facility. Based on these circumstances, we believe we have sufficient funds to meet our working capital and capital expenditure needs for the short-term.

To provide for long-term liquidity, we believe we can generate substantial positive cash flow, as well as obtain additional capital, if necessary, from the use of debt or equity. In the event that our current capital resources are not sufficient to fund requirements, we believe our access to additional capital resources would be sufficient to meet our needs.

With the HPTi merger, we have utilized our access to capital resources to acquire a business that aligns with our growth strategy. In the long-term, we believe that selective acquisitions are an important component of our growth strategy and we may acquire, from time to time, businesses or contracts that are aligned with our core capabilities and which complement our customer base.

Operating activities

Net cash ~~used in operating activities of $1.6~~provided by contract receivables was $2.4 million ~~during~~for the first ~~quarter~~half of 2012 compared with ~~$9.5~~net cash used of $7.4 million for the first quarter of 2011. The first quarter of each fiscal year is seasonally the weakest quarter of each year from a cash flow viewpoint as a result of payments made in the first quarter of each year for annual incentive compensation, taxes, and increases in prepayments of rents and other expenses.

Net cash used on contract receivables was $4.4 million for the first quarter of 2012 compared with $9.6 million for the first quarter of 2011. Receivables collections, which are seasonally weak in the first quarter of each year were stronger in the first quarter of 2012 compared with the first quarterhalf of 2011. The federal budget for the current fiscal year was finalized earlier than in the previous year. We believe this factor contributed to the improvement in collections in the first ~~quarter~~half of this year. Overall, contract receivables days sales outstanding (“DSO”) ~~at March 31, 2012 increased 6 days in the quarter, compared with an increase of 13 days in the first quarter of 2011. DSO~~ was 7471 days at ~~March 31,~~June 30, 2012 compared to 68 days at December ~~31, 2011 and 75 days at March~~ 31, 2011. Federal business DSO, which excludes the effect of state contracts, was 6763 days at ~~March 31,~~June 30, 2012 compared to 60 days at December 31, ~~2011 and 66 days at March 31,~~ 2011.

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Our net deferred tax liability was ~~$4.3~~$1.5 million and $2.9 million at ~~March 31,~~June 30, 2012 and December 31, 2011, respectively. The ~~increase~~decrease in ~~the~~ net deferred tax liability was primarily due to ~~an increase in intangibles~~$4.5 million of deferred taxes associated with the impairment charge partially offset by $2.1 million of deferred tax liabilities associated with amortization of certain intangible assets and ~~unbilled receivables.~~goodwill balances as well as a deferred tax liability of $1.0 million for pension funding. During the first ~~quarter~~half of 2012 and 2011, we paid ~~$0.5~~$0.7 million and $2.2 million in income taxes, net of refunds, and currently anticipate net income tax payments of ~~$1.0~~$0.3 million in the remaining ~~three quarters~~half of 2012. ~~During the first quarter of 2011, we received a net refund of $0.1 million.~~

The IRS has challenged the deferral of income for tax reporting purposes related to unbilled receivables including the applicability of a Letter Ruling issued by the IRS to DRC in January 1976 which granted us deferred tax treatment of the unbilled receivables. This issue was elevated to the IRS National Office for determination. On October 23, 2008, we received a notification of ruling from the IRS National Office. This ruling provided clarification regarding the IRS position relating to revenue recognition for tax purposes regarding our unbilled receivables. During September 2009, the IRS completed its examination of our tax returns for 2004 through 2007 and issued a Revenue Agent Report, which reduced the deferral of income for tax reporting purposes. As a result we reclassified approximately $1.0 million from deferred to current taxes payable. The IRS report also included an assessment of interest of $0.5 million. We have filed a protest with the IRS to appeal the assessment. We believe the appeal will be successful and have therefore made no provision for the interest associated with the assessment. The IRS has also initiated an exam of the 2009 tax year which is ongoing.

Share-based compensation was ~~$0.2~~$0.4 million and $0.3 million in the first ~~quarter~~half of 2012 and 2011. As of ~~March 31,~~June 30, 2012 the total unrecognized compensation cost related to restricted stock awards was ~~$1.6~~$1.4 million which is expected to be amortized over a weighted-average period of ~~2.6~~2.4 years, and the unrecognized compensation cost related to stock option awards was $0.1 million which is expected to be amortized over a weighted-average period of ~~1.3~~1.1 years.

Non-cash amortization expense of our acquired intangible assets was ~~$1.0~~$2.1 million and ~~$0.4~~$0.7 million in the first ~~quarters~~half of 2012 and 2011, respectively. This increase was as a result of the acquisition of HPTi, in which we acquired a significant amount of additional intangible assets. We anticipate that non-cash expense for the amortization of intangible assets will remain at a comparable quarterly level for the remainder of 2012.

Our defined benefit pension plan was underfunded by $26.9 million and $27.1 million at ~~March 31,~~June 30, 2012 and December 31, 2011, respectively. We contributed ~~$0.4~~$1.1 million and ~~$3.5~~$3.9 million to fund the pension plan in the first ~~quarter~~half of 2012 and 2011, respectively, and recorded pension expense of ~~$0.2~~$0.4 million and $0.1 million in the first ~~quarter~~half of 2012 and 2011, respectively. We expect to contribute an additional ~~$5.1~~$4.4 million to fund the pension plan in 2012 and anticipate pension expense to be approximately $0.9 million in 2012.

Investing activities

Net cash used in investing activities ~~from continuing operations of $2.4 million~~ in the first ~~quarter~~half of 2012 primarily consisted of the settlement of the HPTi merger working capital payment of $2.4 million and payments for capital expenditures of ~~$0.1~~$0.2 million. Net cash used in investing activities ~~from continuing operations was $0.3 million~~ in the first ~~quarter~~half of 2011 was primarily ~~consisted~~for the merger of HPTi of $142.8 million and investing of capital ~~expenditures.~~expenditures of $0.9 million. We expect discretionary capital expenditures in 2012 to be ~~in the range of~~approximately $2 ~~million to $3~~ million.

Financing activities

During the first ~~quarter~~half of 2012, net cash ~~provided by~~used in financing activities of ~~$0.2~~$5.5 million was primarily due to repayments under our senior term loan of $6.5 million, partially offset by net borrowing under our revolver of $0.8 million and proceeds from the issuance of common stock through stock plan ~~transactions.~~transactions of $0.2 million. Net cash ~~used in~~provided by financing activities was ~~$1.7~~$122.1 million in the first ~~quarter~~half of ~~2011and primarily represented payments under~~2011 which consisted of net borrowings of $144.0 million, partially offset by repayments of $22.0 million on our then existing term loan and $1.9 million in deferred financing costs, associated with the HPTi merger.

Table of ~~$2.0 million.~~Contents

Concurrent with the merger of HPTi, we replaced our then-existing credit facility with a new secured credit facility with a $110 million five-year senior term loan and a $20 million revolving credit facility, and entered into a $40 million unsecured subordinated facility with a six-year term.

We are considering the possibility of a partial or total pay off of the $40 million subordinated debt. If completed, the transaction would include a make-whole payment to the subordinated debt holder of up to $5 million to $6 million and would result in a reduction in interest expense going forward.

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During the first ~~quarter~~half of 2012, we repaid ~~$2.8~~$6.5 million of the senior term loan, of which $1.0 million was prepaid, and received net borrowings of ~~the same amount~~$0.8 million under our revolver. For the remainder of 2012 our senior term loan requires quarterly repayments totaling ~~$9.6~~$6.9 million. We expect operating cash flows will exceed these required repayments. ~~We will continue to consider prepaying senior debt with excess cash flow.~~ At ~~March 31,~~June 30, 2012, the borrowing capacity available under our revolver was ~~$16.3~~$19.1 million.

Effective June 30, 2012, we amended our credit agreements to exclude non-cash expenses resulting from any impairment or write-off of goodwill during DRC’s 2012 fiscal year from the definition of Consolidated Earnings Before Interest, Tax and Amortization (“EBITDA”) as presented in our financial covenants. At ~~March 31,~~June 30, 2012, we were in compliance with our loan covenants. Our most stringent financial covenant is the fixed charge coverage ratio. This covenant requires us to maintain a ratio of adjusted consolidated EBITDA to adjusted consolidated interest expense of not less than 1.25 to 1.00. At ~~March 31,~~June 30, 2012, our fixed charge coverage ratio was ~~1.86~~1.78 to 1.00. This fixed charge coverage ratio is tested on a quarterly basis and is measured on a trailing four fiscal quarter basis.

Effective September 30, 2011, we entered into an interest rate swap agreement with an initial notional amount of $40.0 million of the term loan to manage its exposure to interest rate changes. The swap effectively converts a portion of our variable rate debt under the term loan to a fixed rate, without exchanging the notional principal amounts.

Under this agreement, we receive a floating rate based on the 90-day LIBOR rate and pay a fixed rate of 4.18% (including the applicable margin of 3.50%) on the outstanding notional amount. The swap fixed rate was structured to mirror the payment terms of the term loan for the two-year period. The fair value of the swap at inception was zero. It is not expected that any gains or losses will be reported in the statement of operations during the term of the agreement as the swap is expected to be highly effective through its maturity based on the matching terms of the swap and facility agreements.

Approximately 148,000 shares issued through DRC's employee stock purchase plan between July 2007 and May 2011, at purchase prices ranging from $6.63 to $14.12 per share, were not registered under the federal securities law. We intend to offer to ~~repurchase~~rescind the sales of approximately ~~119,000~~78,000 shares that ~~continue~~retain rights of rescission pursuant to ~~be held by the original purchasers.~~applicable statutes of limitations. The amount of cash expected to be paid to the original purchasers for the repurchase of these shares is approximately ~~$1.2~~$0.7 million, plus interest. The cost to repurchase these shares, based on the ~~March 30,~~June 29, 2012 stock price of ~~$9.64,~~$5.81, exceeded market value by ~~$0.1~~$0.3 million, ~~and~~of which $0.2 million was ~~charge to expense. Since the end of the first quarter, our stock price has decreased, which if sustained could result in an additional charge~~charged to expense ~~and a corresponding reduction to equity estimated at $0.3 to $0.4 million.~~in the second quarter of 2012. If the fair market value of our common stock decreases before such repurchase, it may materially increase the cost to us for such repurchase, impacting our financial condition and cash flows.

In December 2010, DRC’s board of directors authorized a share repurchase program, which allowed us to buy back up to 700,000 shares of our common stock through June 6, 2011. During the first ~~quarter~~half of 2011, we repurchased 20,728 shares at a weighted average price of $14.97. The timing, price and amount of repurchases were determined by management based on its evaluation of market conditions and other factors. These repurchases were made through the open market, including block purchases, or in private negotiated transactions, or otherwise. The buyback was funded through available cash balances and or borrowings.

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During the first ~~quarter~~half of 2012, the average outstanding balance of our senior term ~~loans~~loan was ~~$80.0~~$78.3 million at a weighted average interest rate of ~~4.47%~~4.18% compared to the then existing term loan of ~~$22.0~~$21.0 million at a weighted average interest rate of ~~3.44%~~3.45% in the first ~~quarter~~half of 2011. In addition, the interest rate of our $40.0 million subordinated loan was 13.0% which was outstanding during the first ~~quarter~~half of 2012. At ~~March 31,~~June 30, 2012, our revolver balance was ~~$2.8~~$0.8 million at an interest rate of 5.75%.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~RISK~~

We are subject to interest rate risk associated with our revolver and senior term loan, where interest payments are tied to either the LIBOR or prime rate. At ~~March 31,~~June 30, 2012, the interest rate on our senior term loan was ~~3.74%~~3.84%. Our interest rate swap agreement mitigates the floating interest rate risk on a portion of our outstanding senior term loan. The swap agreement effectively fixes the interest rate on a portion of our outstanding term loan at 4.18%, which includes the applicable margin of 3.50% at ~~March 31,~~June 30, 2012. The blended interest rate of our term loan and swap agreement was ~~3.94%~~3.99% at ~~March 31,~~June 30, 2012. At any time, a sharp rise in interest rates could have an adverse effect on net interest expense as reported in our Consolidated Statements of Operations. Our potential loss over one year that would result in a hypothetical and instantaneous increase of one full percentage point in the interest rate on the variable portion of the senior term loan would increase annual interest expense by approximately ~~$0.1~~$0.4 million.

In addition, our historical investment positions have been relatively small and short-term in nature. We typically invest excess cash in money market accounts with original maturities of three months or less with no exposure to market interest rates. We have no significant exposure to foreign currency fluctuations. Foreign sales, which are nominal, are primarily denominated in U.S. dollars.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s principal executive officer (“CEO”) and principal financial officer (“CFO”) evaluated, together with other members of senior management, the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of ~~March 31,~~June 30, 2012; and, based on this review, the Company’s CEO and CFO concluded that, as of ~~March 31,~~June 30, 2012, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by it in the reports that it files or submits under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarterly period ended ~~March 31,~~June 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As a defense contractor, we are subject to many levels of audit and review from various government agencies, including the Defense Contract Audit Agency, various inspectors general, the Defense Criminal Investigation Service, the Government Accountability Office, the Department of Justice and Congressional committees. Both related to and unrelated to our defense industry involvement, we are, from time to time, involved in audits, lawsuits, claims, administrative proceedings and investigations. We accrue for liabilities associated with these activities when it becomes probable that future expenditures will be made and such expenditures can be reasonably estimated.

We ~~are a party to litigation referenced in Note 13 of the Notes to Condensed Consolidated Financial Statements included in this Form 10-Q. Except as noted therein we~~ do not presently believe it is reasonably likely that any ~~of these matters~~legal proceedings in which we are involved would have a material adverse effect on our business, financial position, results of operations or cash flows.

Our evaluation of the likelihood of expenditures related to these matters is subject to change in future periods, depending on then current events and circumstances, which could have a material adverse effect on our business, financial position, results of operations and cash flows.

ITEM 1A. RISK FACTORS

For information regarding factors that could affect our results of operations, financial condition and liquidity, refer to the section titled “Risk Factors” in Part I, Item 1A of our 2011 Form 10-K. Except as noted below, there have been no material changes from the risk factors previously disclosed in our most recent Form 10-K.

The Company Has Substantial Investments in Recorded Goodwill as a Result of Acquisitions, and Changes in Future Business Conditions Could Cause These Investments to Become Impaired, Requiring Substantial Write-Downs That Would Reduce the Company’s Operating Income.

~~As of March 31,~~At June 30, 2012, goodwill accounted for ~~$211.8~~$200.0 million, or approximately 66%, of the Company’s recorded total assets. The Company’s goodwill increased significantly as a result of the HPTi merger. Under Accounting Principles Generally Accepted in the United States of America, the Company reviews its goodwill for impairment annually or when events or changes in circumstances indicate the carrying value may not be recoverable. A significant and sustained decrease in expected reporting unit cash flows or changes in market conditions would increase the risk of impairment of recorded goodwill. If goodwill becomes impaired, the Company would record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill is determined, which may significantly reduce or eliminate our profits.

During the ~~first~~second quarter of 2012, due to a decline in the market price of the Company’s stock, the market capitalization of the Company was below the carrying value, which we considered a triggering event and therefore performed an interim impairment test. Based on the analysis performed, management determined that the Company’s fair value ~~exceeded~~was below the carrying value of its equity as of ~~March 31, 2012 resulting in~~June 30, 2012. As a result, the Company ~~passing~~estimated the ~~first~~range of impairment to be between $12.0 million and $212.0 million and recorded an estimated preliminary impairment charge of $12.0 million. Due to the timing and complexity of this analysis, step 2 of the impairment ~~test. Accordingly,~~test to determine the ~~second step~~actual impairment will be completed in the third quarter of ~~the~~2012 and any necessary adjustments to this impairment ~~testing was not required, and no impairment charges were recorded.~~charge will be recorded at that time.

The determination of valuation for goodwill impairment testing is sensitive to (i) changes in the market price of DRC’s stock, ~~and~~ (ii) changes in ~~premium~~premiums paid in excess of market price for public companies in our industry sector which are ~~acquired.~~acquired, (iii) estimated future cash flows, (iv) weighted average cost of capital, and (v) market multiples. A significant decrease in ~~the market price~~any of ~~DRC’s stock~~these assumptions would cause a decline in valuation and increase the risk of impairment. At ~~March 30,~~June 29, 2012 and December 30, 2011, the price of our common stock was ~~$9.64~~$5.81 per share and $11.34 per share, respectively. Since the end of the first quarter, the market price of the Company’s stock has declined significantly, and we are unable to assure that goodwill will not be impaired in subsequent periods. Also, a decline in premium paid by acquirers’ of public companies in our sector would cause a decline in valuation and increase the risk of impairment.

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

The following table sets forth all purchases made by us or on our behalf by any "affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Exchange Act, of shares of our common stock during each month in the first quarter of 2012.

Period
Total Number of Shares Purchased(1) Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Programs Approximate Dollar Value Of Shares that May Yet Be Purchased Under the Programs(2)
January 1, 2012 to January 31, 2012 - $ - - $ -
February 1, 2012 to February 28, 2012 5,302 $ 10.97 - -
March 1, 2012 to March 31, 2012 8,589 $ 10.26 - -
Total 13,891 $ 10.53 - $ -

Period	Total Number of Shares Purchased(1)		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs		Approximate Dollar Value Of Shares that May Yet Be Purchased Under the Programs
April 1, 2012 to April 30, 2012		486	$	7.53		-	$	-
May 1, 2012 to May 31, 2012		790	$	7.12		-		-
June 1, 2012 to June 30, 2012		227	$	5.74		-		-
Total		1,503	$	7.05		-	$	-

(1)	Represents shares repurchased to cover payroll withholding taxes in connection with the vesting of restricted stock awards.

ITEM 5. OTHER INFORMATION

On August 8, 2012, we amended our credit agreement with Bank of America and our senior subordinated loan agreement with Ares Mezzanine Partners to exclude non-cash expenses resulting from any impairment or write-off of goodwill during DRC’s 2012 fiscal year from the definition of Consolidated Earnings Before Interest, Tax and Amortization (“EBITDA”) as presented in our financial covenants, in each case effective as of June 30, 2012.

ITEM 6. EXHIBITS

The following Exhibits are filed or furnished, as applicable, ~~herewith:~~herewith except as otherwise provided:

3.1	Amended and restated by-laws of Dynamics Research Corporation, dated June 13, 2012.

10.1	Amendment No. 2 to Credit Agreement, dated as of June 29, 2012, among Dynamics Research Corporation, the Borrower, the Guarantors, each Lender party and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 3, 2012 (File no. 001-34135).

10.2	Amendment No. 1 to Senior Subordinated Loan Agreement, dated as of June 29, 2012, among Dynamics Research Corporation, the Borrower, the Guarantors, Ares Mezzanine Partners, L.P., as a Lender and Lead Investor and the other lenders from time to time party thereto (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 3, 2012 (File no. 001-34135).

10.3	Amendment No. 3 to Credit Agreement, dated as of August 8, 2012, among Dynamics Research Corporation, the Borrower, the Guarantors, each Lender party and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer.

10.4	Amendment No. 2 to Senior Subordinated Loan Agreement, dated as of August 8, 2012, among Dynamics Research Corporation, the Borrower, the Guarantors, Ares Mezzanine Partners, L.P., as a Lender and Lead Investor and the other lenders from time to time party thereto.

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

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

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

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

~~101.INS~~	XBRL Instance Document.*

~~101.SCH~~	XBRL Taxonomy Extension Schema Document.*

~~101.CAL~~	XBRL Taxonomy Extension Calculation Linkbase Document.*

~~101.DEF~~	XBRL Taxonomy Extension Definition Linkbase Document.*

~~101.LAB~~	XBRL Taxonomy Extension Label Linkbase Document.*

~~101.PRE~~	XBRL Taxonomy Extension Presentation Linkbase Document.*

XBRL (eXtensible Business Reporting Language) information is furnished and not filed of part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these Sections.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	DYNAMICS RESEARCH CORPORATION
	(Registrant)


Date: ~~May 10,~~August 9, 2012	/s/ David Keleher
	Senior Vice President, Chief Financial Officer and Treasurer
	(Principal Financial Officer)

Date: ~~May 10,~~August 9, 2012	/s/ Shaun N. McCarthy
	Vice President, Corporate Controller and Chief Accounting Officer
	(Principal Accounting Officer)