During the last several decades, investigations of the operation of internal combustion engines utilizing exhaust gas recirculation (EGR) have increased. This increased interest has been driven by the advantages of the use of EGR with respect to emissions and, in some cases, thermal efficiency. The current study uses a thermodynamic engine cycle simulation to explore the fundamental reasons for the changes of thermal efficiency as functions of EGR. EGR with various levels of cooling is studied. Both a conventional (throttled) operating condition and a high efficiency (HE) operating condition are examined. With no EGR, the net indicated thermal efficiencies were 32.1% and 44.6% for the conventional and high efficiency engines, respectively. For the conditions examined, the cylinder heat transfer is a function of the gas temperatures and convective heat transfer coefficient. For increasing EGR, the gas temperatures generally decrease due to the lower combustion temperatures. For increasing EGR, however, the convective heat transfer coefficient generally increases due to increasing cylinder pressures and decreasing gas temperatures. Whether the cylinder heat transfer increases or decreases with increasing EGR is the net result of the gas temperature decreases and the heat transfer coefficient increases. For significantly cooled EGR, the efficiency increases partly due to decreases of the heat transfer. On the other hand, for less cooled EGR, the efficiency decreases due at least partly to the increasing heat transfer. Two other considerations to explain the efficiency changes include the changes of the pumping work and the specific heats during combustion.