operations. The pro forma information does not purport to represent what our results of operations actually would have been had such transaction or event occurred on the dates specified, or to project our results of operations for any future period.


	Three months ended
	March 31, 2003
Revenues	$	34,863
Net income	$	17,257
Net income per diluted share	$	0.36

Pro forma results of operations for the three months ended March 31, 2003, include the realized gain on these funds are reinvested in the funds. During the three and nine months ended September 30, 2003, we have made investments in the aforementioned funds of $12.6 million and $27.7 million, respectively. In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", we determine the appropriate classification of debt and equity securities at the time of purchase and re-evaluate the classification as of each balance sheet date. At September 30, 2003, we classified these investments in bond funds as available-for-sale securities pursuant to SFAS No. 115. Investments which are classified as available-for-sale are recorded at fair value and unrealized holding gains and losses, net of the related tax effect, if any, are not reflected in earnings but are reported as a separate component of other comprehensive income (loss) until realized. Unrealized gains were $24,000, which is after income taxes of $13,000, for the three and nine months ended September 30, 2003. 4 (4) Investment in H.T.E., Inc. On March 25, 2003, we received cash proceeds of $39.3 million in connection with a transaction to sell all of our 5.6 million shares of H.T.E., Inc. ("HTE") common stock to SunGard Data Systems Inc. for $7.00 cash per share, pursuant to a Tender and Voting Agreement dated February 4, 2003. Our original cost basis in the HTE shares was $15.8 million. After transaction and other costs, we recorded a realized gross gain of $23.2 million ($16.2 million after income taxes of $7.0 million, including the utilization for tax purposes and reduction in valuation allowance for accounting purposes related to a capital loss carryforward amounting to $1.1 million on a tax effected basis). Our 5.6 million shares of HTE represented an ownership interest of approximately 35%. Under GAAP a 20% investment in the voting stock of another company creates the presumption that the investor has significant influence over the operating and financial policies of that company, unless there is evidence to the contrary. As disclosed in our previous filings, Tyler's management concluded that no such influence existed. Thus, we accounted for our investment in HTE pursuant to the provisions of SFAS No. 115 and our investment in HTE was previously classified as an available-for-sale security. As of December 31, 2002, we had an unrealized holding gain of $11.4 million ($7.4 million after income tax of $4.0 million), which was included as a component of other comprehensive income. (5) Shareholders' Equity In April 2003, we commenced a modified "Dutch Auction" tender offer to purchase up to 4.2 million shares of our common stock at a price not greater than $4.00 and not less than $3.60 per share. In accordance with the SEC rules, we had the right to purchase an additional amount of shares not to exceed 2% of our outstanding shares (approximately 907,000 shares) without amending or extending our offer. Approximately 6.0 million shares of common stock were properly tendered and not withdrawn at prices at or below $4.00 per share. We exercised our right to purchase an additional 2% of our outstanding shares without amending or extending our offer. As a result, in May 2003, we purchased 5.1 million shares of our common stock at a cash purchase price of $4.00 per share and estimated transaction costs of approximately $150,000, for a total cost of $20.6 million. The final shares purchased reflect a pro-ration factor equal to 85% of the shares tendered. During the nine months ended September 30, 2003, we also repurchased 912,800 shares of our common stock for an aggregate purchase price of $3.5 million. We currently have authorization from our Board of Directors to repurchase up to 1.98 million additional shares of Tyler common stock. In August 2003, Sanders Morris Harris Inc. (SMH) exercised its warrant to purchase 333,380 shares of our common stock. The exercise price per share was $3.60 payable either in cash or by the surrender of shares subject to the warrant with a value equal to the aggregate exercise price as determined by the market price of our stock on the date of exercise. On August 27, 2003, SMH exercised the full amount of the warrant by way of cashless exercise and was issued, on a net basis, 145,413 shares of our common stock from our treasury. (6) Income Tax Provision For the three and nine months ended September 30, 2003, we had an income tax provision of $2.0 million and $11.0 million, respectively. The income tax provision for the nine months ended September 30, 2003, included $7.0 million (after utilization of a capital loss carryforward amounting to $1.1 million on a tax effected basis) related to the realized gain from the sale of our investment in HTE. See Note 4 - Investment in H.T.E., Inc. We had an effective income tax rate of 38.5% and 32.7% for the three months and nine months ended September 30, 2003, respectively, compared to an effective income tax rate of 40.5% and 39.7% for the three and nine months ended September 30, 2002. The effective income tax rates are estimated based on projected pre-tax income for the entire fiscal year and the resulting amount of income taxes. The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 35% primarily due to the utilization of the capital loss carryforward in 2003, state income taxes and non-deductible meals and entertainment costs. 5 ~~(7) Earnings Per Share The following table details the reconciliation of basic earnings per share to diluted earnings per share:~~
Three months ended Nine months ended September 30, September 30, ----------------------- ----------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Numerator for basic and diluted earnings per share: Net income ................................................... $ 3,233 $ 1,739 $ 22,510 $ 3,591 ========== ========== ========== ========== Denominator: Weighted-average basic common shares outstanding ................. 40,464 47,173 43,078 47,401 Assumed conversion of dilutive securities: Employee stock options ..................................... 1,576 1,290 1,251 1,430 Warrants ................................................... 1,141 909 889 1,002 ---------- ---------- ---------- ---------- Potentially dilutive common shares ............................... 2,717 2,199 2,140 2,432 ---------- ---------- ---------- ---------- Weighted-average common shares outstanding, assuming full dilution 43,181 49,372 45,218 49,833 ========== ========== ========== ========== Basic earnings per share ......................................... $ 0.08 $ 0.04 $ 0.52 $ 0.08 ========== ========== ========== ========== Diluted earnings per share ....................................... $ 0.07 $ 0.04 $ 0.50 $ 0.07 ========== ========== ========== ==========
(8) Stock Compensation In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," we elected to account for our stock-based compensation under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," as amended and related interpretations including FIN 44 (FASB Interpretation No. 44), "Accounting for Certain Transactions Involving Stock Compensation," an interpretation of APB Opinion No. 25, issued in June 2000. In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" was issued to amend SFAS No. 123. This statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Accordingly, under APB No. 25's intrinsic value method, compensation expense is determined on the measurement date; that is, the first date on which both the number of shares the option holder is entitled to receive, and the exercise price, if any, are known. Compensation expense, if any, is measured based on the award's intrinsic value - the excess of the market price of the stock over the exercise price on the measurement date. The exercise price of all of our stock options granted equals the market price on the measurement date. Therefore we have not recorded any compensation expense related to grants of stock options. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 for awards granted after December 31, 1994, as if we had accounted for our stock-based awards to employees under the fair value method of SFAS No. 123, and is as follows:
Three months ended Nine months ended September 30, September 30, ----------------------------- ----------------------------- 2003 2002 2003 2002 ------------- ------------- ------------- ------------- Net income ................................................ $ 3,233 $ 1,739 $ 22,510 $ 3,591 Add stock-based employee compensation cost included in net income, net of related tax benefit .............. -- -- -- -- Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of related tax benefit ............ 581 562 1,514 1,550 ------------- ------------- ------------- ------------- Pro forma net income ...................................... $ 2,652 $ 1,177 $ 20,996 $ 2,041 ============= ============= ============= ============= Pro forma net income per basic share ...................... $ 0.07 $ 0.02 $ 0.49 $ 0.04 ============= ============= ============= ============= Pro forma net income per diluted share .................... $ 0.06 $ 0.02 $ 0.46 $ 0.04 ============= ============= ============= =============
6 ~~(9) Comprehensive Income The components of comprehensive income (loss) are as follows:~~
Three months ended Nine months ended September 30, September 30, ------------------- -------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Net income ...................................................................... $ 3,233 $ 1,739 $ 22,510 $ 3,591 Other comprehensive income: Change in fair value of short-term investments (net of deferred tax expense of $13) ....................................... 24 -- 24 -- Reclassification adjustment for unrealized gain related to investment in H.T.E., Inc. of $16.2 million (net of ~~deferred tax expense~~income taxes of ~~$3,995) ....................... -- -- (7,418) -- Change in fair value of investment~~$7.0 million), or $0.34 per diluted share. See Note 4 – Investment in H.T.E., Inc. ~~(net~~
(3) Cash, Cash Equivalents, Short-term Investments and Other
Cash equivalents include items almost as liquid as cash, such as money market investments and certificates of ~~deferred~~deposits with insignificant interest rate risk and original maturities of three months or less at the time of purchase. For purposes of the statements of cash flows, we consider all investments with original maturities of three months or less to be cash equivalents.
In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, we determine the appropriate classification of debt and equity securities at the time of purchase and re-evaluate the classification as of each balance sheet date. We have classified these investments in bond funds as available-for-sale securities pursuant to SFAS No. 115. Investments which are classified as available-for-sale are recorded at fair value and unrealized holding gains and losses, net of the related tax ~~benefit~~effect, if any, are not reflected in earnings but are reported as a separate component of ~~$2,222~~other comprehensive income until realized. Interest and dividends earned on these securities are reinvested in the securities. The cost basis of the securities is determined using the average cost method.
Short-term investments, classified as available-for-sale, are summarized as follows as of March 31, 2004:

Unrealized Unrealized Estimated
Cost
Gains
Losses
Fair Value
State and municipal bond mutual fund $ 5,860 $ 23 $ — $ 5,883
Fixed income securities mutual fund 5,907 — (43 ) 5,864

$ 11,767 $ 23 $ (43 ) $ 11,747

Short-term investments, classified as available-for-sale, are summarized as follows as of December 31, 2003:

Unrealized Unrealized Estimated
Cost
Gains
Losses
Fair Value
State and municipal bond mutual fund $ 5,843 $ — $ (6 ) $ 5,837
Fixed income securities mutual fund 5,875 — (43 ) 5,832

$ 11,718 $ — $ (49 ) $ 11,669

There were no realized gains or losses during the three months ended March 31, 2004 and 2003. During the three months ended March 31, 2004, the aforementioned short-term investments earned interest income and dividends of $49,000. No interest or dividends were earned during the three months ended March 31, 2003.
We have $7.5 million invested in a certificate of deposit with a maturity date in excess of one year included in other assets of which $5.3 million is restricted to collateralize letters of credit required under our surety bond program. These letters of credit expire in 2004.
(4) Investment in H.T.E., Inc.
On March 25, 2003, we received cash proceeds of $39.3 million in connection with a transaction to sell all of our 5.6 million shares of H.T.E., Inc. (“HTE”) common stock to SunGard Data Systems Inc. for $7.00 cash per share, pursuant to a Tender and
5
Voting Agreement dated February 4, 2003. Our original cost basis in the HTE shares was $15.8 million. After transaction and other costs, we recorded a realized gross gain of $23.2 million ($16.2 million after income taxes of $7.0 million, including the utilization for tax purposes and reduction in valuation allowance for accounting purposes related to a capital loss carryforward amounting to $1.1 million on a tax effected basis).
(5) Shareholders’ Equity
During the three months ended March 31, 2004, we purchased 191,300 shares of our common stock for an aggregate purchase price of $1.8 million. We currently have authorization from our board of directors to repurchase up to 1.8 million additional shares of Tyler common stock.
We also issued 181,729 shares of common stock and received $611,000 in aggregate proceeds, upon exercise of stock options during the first three months of 2004.
In March 2004, one of our warrant holders exercised his warrant to purchase 21,234 shares of our common stock by way of cashless exercise and was issued on a net basis, 15,780 shares of our common stock from our treasury. As of March 31, 2004, we have warrants outstanding to purchase 1.6 million shares of common stock at $2.50 per share. These warrants expire in September 2007.
(6) Income Tax Provision
For the three months ended March 31, 2004 we had an income tax provision of $1.4 million compared to $7.7 million for the three months ended ~~September 30, 2002 and deferred~~March 31, 2003. The income tax ~~expense of $1,556~~provision for the ~~nine~~three months ended September 30, 2002) ........... -- (4,127) -- 7,435 -------- -------- -------- -------- TotalMarch 31, 2003, included $7.0 million (after utilization of a capital loss carryforward amounting to $1.1 million on a tax effected basis) related to the realized gain from the sale of our investment in HTE. See Note 4 – Investment in H.T.E., Inc. We had an effective income tax rate of 39.9% for the three months ended March 31, 2004, compared to an effective income tax rate of 30.8% for the same period in the prior year. The effective income tax rates are estimated based on projected pre-tax income for the entire fiscal year and the resulting amount of income taxes. The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 35% primarily due to the utilization of the capital loss carryforward in 2003, state income taxes and non-deductible meals and entertainment costs.
We made federal and state income tax payments, net of refunds of $1.2 million in the first three months ended March 31, 2004 compared to $150,000 in the prior year.
6
(7) Earnings Per Share
The following table details the reconciliation of basic earnings per share to diluted earnings per share:

Three months ended
March 31,
2004
2003
Numerator for basic and diluted earnings per share:
Net income $ 2,091 $ 17,296
Denominator:
Weighted-average basic common shares outstanding 41,468 45,951
Assumed conversion of dilutive securities:
Employee stock options 2,389 1,089
Warrants 1,205 698

Potentially dilutive common shares 3,594 1,787

Weighted-average common shares outstanding, assuming full dilution 45,062 47,738

Basic earnings per share $ 0.05 $ 0.38

Diluted earnings per share $ 0.05 $ 0.36

(8) Stock Compensation
In accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” we elected to account for our stock-based compensation under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” as amended and related interpretations including FIN 44 (FASB Interpretation No. 44), “Accounting for Certain Transactions Involving Stock Compensation,” an interpretation of APB Opinion No. 25, issued in June 2000. Under APB No. 25’s intrinsic value method, compensation expense is determined on the measurement date; that is, the first date on which both the number of shares the option holder is entitled to receive, and the exercise price, if any, are known. Compensation expense, if any, is measured based on the award’s intrinsic value – the excess of the market price of the stock over the exercise price on the measurement date. The exercise price of all of our stock options granted equals the market price on the measurement date. Therefore we have not recorded any compensation expense related to grants of stock options.
Pro forma information regarding net income and earnings per share is required by SFAS No. 123 for awards granted after December 31, 1994, as if we had accounted for our stock-based awards to employees under the fair value method of SFAS No. 123, and is as follows:

Three months ended
March 31,
2004
2003
Net income $ 2,091 $ 17,296
Add stock-based employee compensation cost included in net income, net of related tax benefit — —
Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of related tax benefit 446 456

Pro forma net income $ 1,645 $ 16,840

Basic earnings per share:
As reported $ 0.05 $ 0.38

Pro forma $ 0.04 $ 0.37

Diluted earnings per share:
As reported $ 0.05 $ 0.36

Pro forma $ 0.04 $ 0.35

7
(9) Comprehensive Income
The components of comprehensive income (loss) ............................................... $ 3,257 $ (2,388) $ 15,116 $ 11,026 ======== ======== ======== ======== are as follows:
(10) Commitments and Contingencies One of our non-operating subsidiaries, Swan Transportation Company ("Swan"), has been and is currently involved in various claims raised by hundreds of former employees of a foundry that was once owned by an affiliate of Swan and Tyler. These claims are for alleged work related injuries and physical conditions resulting from alleged exposure to silica, asbestos, and/or related industrial dusts during the plaintiff's employment at the foundry. We sold the operating assets of the foundry on December 1, 1995. As a non-operating subsidiary of Tyler, the assets of Swan consist primarily of various insurance policies issued to Swan during the relevant time periods and restricted cash of $330,000 at September 30, 2003. Swan tendered the defense and indemnity obligations arising from these claims to its insurance carriers, who, prior to December 20, 2001, entered into settlement agreements with approximately 275 of the plaintiffs, each of whom agreed to release Swan, Tyler, and its subsidiaries and affiliates from all such claims in exchange for payments made by the insurance carriers. On December 20, 2001, Swan filed a petition under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The bankruptcy filing by Swan was the result of extensive negotiations between Tyler, Swan, their respective insurance carriers, and an ad hoc committee of plaintiff attorneys representing substantially all of the then known plaintiffs. Swan filed its plan of reorganization in February 2002. The principal features of the plan of reorganization include: (a) the creation of a trust, which is to be funded principally by fifteen insurance carriers pursuant to certain settlement agreements executed pre-petition between Swan, Tyler, and such carriers; (b) the implementation of a claims resolution procedure pursuant to which all present and future claimants may assert claims against such trust for alleged injuries; (c) the issuance of certain injunctions under the federal bankruptcy laws requiring any such claims to be asserted against the trust and barring such claims from being asserted, either now or in the future, against Swan, Tyler, all of Tyler's affected affiliates, and the insurers participating in the funding of the trust; and (d) the full and final release of each of Swan, Tyler, all of Tyler's affected affiliates, and the insurers participating in the funding of the trust from any and all claims associated with the once-owned foundry by all claimants that assert a claim against, and receive compensation from, the trust. The confirmation hearings on Swan's plan of reorganization were held on December 9, 2002. The plan of reorganization received the affirmative vote of approximately 99% of the total votes cast. All objections to the plan were resolved prior to the confirmation hearing, and the terms and conditions of the plan (including the issuance of the injunctions) are therefore not subject to appeal. The confirmation order for the plan of reorganization was signed by the bankruptcy court and district court judges and entered by the United States Bankruptcy Court for the District of Delaware on July 22, 2003. The confirmation order discharges, releases, and extinguishes all of the foundry-related obligations and liabilities of Tyler, Swan, their affected affiliates, and the insurers participating in the funding of the trust. Further, the confirmation order includes the issuance of injunctions that channel all present and future foundry-related claims into the trust and forever bar any such claims from being asserted, either now or in the future, against Swan, Tyler, their affected affiliates, and the participating insurers. In order to receive the benefits described above, we have agreed, among other things, to transfer all of the capital stock of Swan to the trust (net assets of Swan at September 30, 2003 were $309,000) so that the trust can directly pursue claims against insurers who have not participated in the funding of the trust. The original confirmation order required us to contribute $1.5 million in cash to the trust, payable as follows: $750,000 within ten days of the confirmation order becoming a final order; $500,000 on the first anniversary date that 7 the confirmation order became a final order; and $250,000 on the second anniversary date that the confirmation order became a final order. In the third quarter of 2003 we reached an agreement with the creditors' committee to revise the funding arrangement and satisfy our funding obligations to the trust with a lump sum payment of $1.48 million in cash to the trust, which is due within ten days of the confirmation order becoming a final order. The confirmation order became final on August 21, 2003; however, the creditors' committee has requested that all parties delay funding of the trust until such time as it receives a favorable ruling from the IRS that the trust is a qualified settlement fund, which is expected to occur during the fourth quarter of 2003. Accordingly, we expect to transfer the stock of Swan and make our cash contribution to the trust during the fourth quarter of 2003. (11) Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board ("FASB") issued FIN 46, "Consolidation of Variable Interest Entities", which requires the consolidation of variable interest entities. FIN 46 is applicable to variable interest entities created after January 31, 2003. Variable interest entities created prior to February 1, 2003 must be consolidated effective July 1, 2003. We adopted FIN 46 in the quarter ended June 30, 2003, and it did not have a material impact on our financial position or results of our operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 was adopted in the quarter ended June 30, 2003 and it did not have any impact on our financial position or results of our operations.

Three months ended
March 31,
2004
2003
Net income $ 2,091 $ 17,296
Other comprehensive income:
Change in fair value of short-term investments available-for-sale (net of taxes of $10) 15 —
Reclassification adjustment for unrealized gain related to investment in H.T.E., Inc. (net of deferred tax expense of $3,995) — (7,418 )

Total comprehensive income $ 2,106 $ 9,878

8
ITEM 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS The statements in this discussion that are not historical statements are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about our business, financial condition, business strategy, plans and the objectives of our management, and future prospects. In addition, we have made in the past and may make in the future other written or oral forward-looking statements, including statements regarding future operating performance, short- and long-term revenue and earnings growth, the timing of the revenue and earnings impact for new contracts, backlog, the value of new contract signings, business pipeline, and industry growth rates and our performance relative thereto. Any forward-looking statements may rely on a number of assumptions concerning future events and be subject to a number of uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from such statements. These include, but are not limited to: our ability to improve productivity and achieve synergies from acquired businesses; technological risks associated with the development of new products and the enhancement of existing products; changes in the budgets and regulating environments of our government customers; competition in the industry in which we conduct business and the impact of competition on pricing, revenues and margins; with respect to customer contracts accounted for under the percentage-of-completion method of accounting, the performance of such contracts in accordance with our cost and revenue estimates; our ability to maintain health and other insurance coverage and capacity due to changes in the insurance market and the impact of increasing insurance costs on the results of operations; the costs to attract and retain qualified personnel, changes in product demand, the availability of products, economic conditions, changes in tax risks and other risks indicated in our filings with the Securities and Exchange Commission. The factors described in this paragraph and other factors that may affect Tyler, its management or future financial results, as and when applicable, are discussed in Tyler's filings with the Securities and Exchange Commission, on its Form 10-K for the year ended December 31, 2002. Except to the extent required by law, we are not obligated to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. When used in this Quarterly Report, the words "believes," "plans," "estimates," "expects," "anticipates," "intends," "continue," "may," "will," "should", "projects", "forecast", "might", "could" or the negative of such terms and similar expressions as they relate to Tyler or our management are intended to identify forward-looking statements. GENERAL Tyler provides integrated software systems and related services for local governments. We develop and market a broad line of software products and services to address the information technology (IT) needs of cities, counties, schools and other local government entities. We provide professional IT services to our customers, including software and hardware installation, data conversion, training and product modifications, along with continuing maintenance and support for customers using our systems. We also provide property appraisal outsourcing services for taxing jurisdictions. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements. These condensed consolidated financial statements have been prepared following the requirements of accounting principles generally accepted in the United States (GAAP) for interim periods and require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on going basis, we evaluate our estimates, including those related to revenue recognition and amortization and potential impairment of intangible assets and goodwill. As these are condensed financial statements, one should also read our Form 10-K for the year ended December 31, 2002 regarding expanded information about our critical accounting policies and estimates.
FORWARD-LOOKING STATEMENTS
The statements in this discussion that are not historical statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about our business, financial condition, business strategy, plans and the objectives of our management, and future prospects. In addition, we have made in the past and may make in the future other written or oral forward-looking statements, including statements regarding future operating performance, short- and long-term revenue and earnings growth, the timing of the revenue and earnings impact for new contracts, backlog, the value of new contract signings, business pipeline, and industry growth rates and our performance relative thereto. Any forward-looking statements may rely on a number of assumptions concerning future events and be subject to a number of uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from such statements. These include, but are not limited to: our ability to improve productivity and achieve synergies from acquired businesses; technological risks associated with the development of new products and the enhancement of existing products; changes in the budgets and regulating environments of our government customers; competition in the industry in which we conduct business and the impact of competition on pricing, revenues and margins; with respect to customer contracts accounted for under the percentage-of-completion method of accounting, the performance of such contracts in accordance with our cost and revenue estimates; our ability to maintain health and other insurance coverage and capacity due to changes in the insurance market and the impact of increasing insurance costs on the results of operations; the costs to attract and retain qualified personnel, changes in product demand, the availability of products, economic conditions, costs of compliance with corporate governance and public disclosure requirements as issued by the Sarbanes-Oxley Act of 2002 and New York Stock Exchange rules, changes in tax risks and other risks indicated in our filings with the Securities and Exchange Commission. The factors described in this paragraph and other factors that may affect Tyler, its management or future financial results, as and when applicable, are discussed in Tyler’s filings with the Securities and Exchange Commission, on its Form 10-K for the year ended December 31, 2003. Except to the extent required by law, we are not obligated to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. When used in this Quarterly Report, the words “believes,” “plans,” “estimates,” “expects,” “anticipates,” “intends,” “continue,” “may,” “will,” “should”, “projects”, “forecast”, “might”, “could” or the negative of such terms and similar expressions as they relate to Tyler or our management are intended to identify forward-looking statements.
GENERAL
We provide integrated software systems and related services for local governments. We develop and market a broad line of software products and services to address the information technology (IT) needs of cities, counties, schools and other local government entities. In addition, we provide professional IT services to our customers, including software and hardware installation, data conversion, training and for certain customers, product modifications, along with continuing maintenance and support for customers using our systems. We also provide property appraisal outsourcing services for taxing jurisdictions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements. These condensed consolidated financial statements have been prepared following the requirements of accounting principles generally accepted in the United States (GAAP) for interim periods and require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on going basis, we evaluate our estimates, including those related to revenue recognition and amortization and potential impairment of intangible assets and goodwill. As these are condensed financial statements, one should also read our Form 10-K for the year ended December 31, 2003 regarding expanded information about our critical accounting policies and estimates.
9 ANALYSIS OF RESULTS OF OPERATIONS The following table sets forth items from our unaudited condensed consolidated financial statements and the percentage change in the amounts between the periods presented. The amounts shown in the table are in thousands, except per share data. Revenues and expenses can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.
~~Three~~
ANALYSIS OF RESULTS OF OPERATIONS
The following discussion compares the historical results of operations on a basis consistent with GAAP for the three months ended ~~September 30, Nine~~March 31, 2004 and 2003. On December 2, 2003, we acquired 95% ownership of Eden Systems, Inc (“Eden”) and their operating results have been included in our consolidated financial statements since the date of acquisition. Accordingly, the three months ended September 30, ------------------------------------ ----------------------------------- % % 2003 2002 Change 2003 2002 Change --------- --------- --------- --------- --------- --------- Revenues: Software licenses $ 8,400 $ 6,469 30 % $ 20,017 $ 17,047 17 % Software services 9,191 7,064 30 26,438 17,888 48 Maintenance 11,704 10,204 15 34,337 29,788 15 Appraisal services 7,440 9,309 (20) 21,547 28,080 (23) Hardware and other 1,139 1,928 (41) 3,995 4,698 (15) --------- --------- --------- --------- Total revenues 37,874 34,974 8 106,334 97,501 9 CostMarch 31, 2004 includes the operating results of revenues: Software licenses 2,041 1,349 51 5,104 3,812 34 Software services and maintenance 14,090 13,161 7 41,937 36,912 14 Appraisal services 5,422 6,637 (18) 15,309 19,299 (21) Hardware and other 851 1,515 (44) 3,007 3,724 (19) --------- --------- --------- --------- Total cost of revenues 22,404 22,662 (1) 65,357 63,747 3 % of revenues 59.2% 64.8% 61.5% 65.4% Gross profit 15,470 12,312 26 40,977 33,754 21 % of revenues 40.8% 35.2% 38.5% 34.6% Selling, general and administrative expenses 9,678 8,181 18 28,840 24,672 17 % of revenues 25.6% 23.4% 27.1% 25.3% Amortization of acquisition intangibles 680 832 (18) 2,190 2,497 (12) --------- --------- --------- --------- Operating income 5,112 3,299 55 9,947 6,585 51 Realized gain on sale of investment in H.T.E., Inc. -- -- 23,233 -- Legal fees associated with investment in H.T.E., Inc. -- (365) -- (650) Interest income (expense) 141 (12) 287 20 --------- --------- --------- --------- Income before income tax provision 5,253 2,922 33,467 5,955 Income tax provision 2,020 1,183 10,957 2,364 --------- --------- --------- --------- Effective income tax rate 38.5% 40.5% 32.7% 39.7% Net income $ 3,233 $ 1,739 $ 22,510 $ 3,591 ========= ========= ========= ========= Diluted earnings per share $ 0.07 $ 0.04 $ 0.50 $ 0.07 ========= ========= ========= ========= Cash flows provided by operating activities $ 13,876 $ 7,448 $ 19,627 $ 14,343 Cash, cash equivalents and short-term investments at September 30 $ 39,262 $ 10,534 Capital expenditures: Software development costs $ 1,767 $ 1,931 $ 5,217 $ 5,493 Property and equipment $ 414 $ 545 $ 1,237 $ 2,017
10 ~~REVENUES The following table compares the components of revenue as a percent of total revenues for the periods presented:~~
~~Three~~Eden, while the three months ended ~~September 30, Nine~~March 31, 2003 does not. This information should be considered when comparing to financial results of 2003. See Note 2 in the Notes to the Condensed Consolidated Financial Statements.
Revenues
The following table sets forth, for the periods indicated, a year-over-year comparison of the key components of our revenues:

First Quarter
First Quarter 2004 vs.
% of % of First Quarter 2003
($ in thousands)
2004
Total
2003
Total
$
%
Software licenses $ 6,852 17 % $ 5,460 17 % $ 1,392 25 %
Software services 11,602 28 7,706 24 3,896 51
Maintenance 13,581 33 10,935 34 2,646 24
Appraisal services 7,954 19 6,751 21 1,203 18
Hardware and other 1,473 3 1,473 4 — —

Total revenues $ 41,462 100 % $ 32,325 100 % $ 9,137 28 %

Software licenses. The increase in software license revenues is due to the following factors:
• Increased sales of our financial and city solutions software licenses (excluding Eden) of approximately $460,000. This increase was due to a combination of geographic expansion on the west coast, Florida and South Carolina and to a larger implementation staff, which has allowed us to install software licenses more quickly. In addition, during the first three months of 2003, we released a new version of one of our county tax products for our customers in the Midwest, which is generating slightly larger contracts than the previous county tax product;
• Our property appraisal and tax division installed an Automated Valuation Model (“AVM”) at the Valuation Office Agency of the United Kingdom under a subcontract agreement. The amount of the license totaled approximately $450,000 which we recorded upon customer acceptance in the first quarter of 2004. The AVM will assist the United Kingdom’s Valuation Office in valuing over 21 million domestic properties in preparation for the assessment of the Valuation Office’s Council Tax, which is similar to local property taxes in the United States;
• In March 2004, we released Orion, our newly developed n-tier web-based tax collections product. Orion is built on the same technology platform as our Odyssey Courts product. During March, after receiving customer acceptance, we recognized Orion licenses of approximately $330,000 at three initial sites; and
• Eden generated approximately $300,000 of license revenue during the three months ended September 30, ---------------------------------- ---------------------------------- 2003 2002 2003 2002 --------------- --------------- --------------- --------------- Software licenses 22.2% 18.5% 18.8% 17.5% Software services 24.3% 20.2% 24.9% 18.3% Maintenance 30.9% 29.2% 32.3% 30.6% Appraisal services 19.6% 26.6% 20.3% 28.8% HardwareMarch 31, 2004, primarily consisting of financial and other 3.0% 5.5% 3.7% 4.8% --------------- --------------- --------------- --------------- 100.0% 100.0% 100.0% 100.0% =============== =============== =============== =============== city solutions software.
Software license revenues. Software license revenues increased $1.9 million, or 30% for the three months ended September 30, 2003, compared to the same period last year. In addition, the third quarter of 2003 was the eighth consecutive quarter in which our software license revenues increased compared to the same period in the prior year. Software license revenues increased $3.0 million, or 17%, for the nine months ended September 30, 2003, compared to the same period last year. Third quarter and year-to-date software license revenues benefited by the successful first phase installation of our new Odyssey Case Management system ("Odyssey Courts") in the State of Minnesota and Lee County, Florida. Software license revenue from these two contracts totaled $3.4 million for the three and nine months ended September 30, 2003 compared to none in the prior year periods. In addition, our financial and city solutions products provided approximately $400,000 and $700,000 of our software license revenue increases for the quarter and year-to-date periods, respectively. We increased revenues from our financial and city solutions products by increasing sales and implementation staff and releasing a new version of one of our county tax products for customers in the Midwest. Increases in our Odyssey Courts and financial and city solutions products were offset by a decline in property appraisal and tax software license revenues of $1.2 million for the quarter and $900,000 for the year-to-date period. Most of this decline related to one large property appraisal and tax software installation in the third quarter of 2002. Our property appraisal and tax software license volume varies from period to period depending on the special needs and timing of our customers. Local government taxing entities normally reappraise real properties from time to time to update values for tax assessment purposes and to maintain equity in the taxing process. While some of these taxing jurisdictions contract with our property appraisal and tax division to perform these reappraisals, it is not always necessary for the customer to purchase new software in order to process the appraisals. In some cases, a customer may simply add smaller appraisal software modules to enhance the functionality of its existing software. 11
Software services revenues. For the three months ended September 30, 2003, software services revenues increased $2.1 million, or 30%, compared to the same period in 2002. For the nine months ended September 30, 2003, software services revenue increased $8.6 million, or 48%, compared to the same period in 2002.. Higher software services revenues were attributable to the following factors: o Services related to implementation of Odyssey Courts, our new courts and justice product. The following table contains a summary of revenue recognized from our Odyssey Courts contracts:
~~Three~~
• Software services related to property appraisal and tax software rose $1.4 million which included $700,000 related to the installation of an AVM at the Valuation Office Agency of the United Kingdom. Property appraisal and tax software services also included approximately $300,000 related to Orion.
• Higher software license sales in the first quarter 2004 compared to the first quarter 2003. Typically, contracts for software license include services such as installation of the software, converting the customers’ data to be compatible with the software and training customer personnel to use the software. Increased training staff also allowed for faster implementation of our backlog; and
• Eden recorded $1.9 million of software services revenue for the three months ended ~~Nine~~March 31, 2004.
10
Maintenance. We provide maintenance and support services for our software products and third party software. Maintenance revenues for the three months ended ~~Total September 30, September 30, software Software ----------------------- -----------------------~~March 31, 2004 included $890,000 from Eden. Excluding the impact from Eden, maintenance revenues increased 16% due to growth in our installed customer base and slightly higher rates on certain product lines.
Appraisal services ~~services revenues~~. The increase is related to the progression of several major appraisal contracts. In March 2003, ~~2002 2003 2002 per contracts recognized to date ---------- ---------- ---------- ---------- --------------- ------------------~~ ~~Odyssey Courts $ 700 $ 600 $ 2,700 $ 600 $ 7,400 $ 4,600~~
The $7.4 million total contract amount for Odyssey Courts includes approximately $1.1 million of software services that are at the discretion of the customer but we currently expect the customer to exercise this option. o Software services related to the increase in software contracts signed in late 2002 and in the first half of 2003. Typically, contracts for software licenses include services such as installation of the software, converting the customers' data to be compatible with the software and training customer personnel to use the software. Increased training staff has also allowed for faster implementation of our backlog. Services related to financial and city solutions software and property appraisal and tax software each contributed approximately 40% and 33% of the quarter and year-to-date increases, respectively. Maintenance revenues. Maintenance revenues for the quarter ended September 30, 2003 increased $1.5 million, or 15%, compared to the prior year quarter. Maintenance revenues for the nine months ended September 30, 2003, increased $4.5 million, or 15%, compared to the nine months ended September 30, 2002. We provide maintenance and support services for our software products and third party software. The maintenance revenue increase was due to growth in our installed customer base and slightly higher rates on certain product lines. Appraisal services revenues. For the three and nine months ended September 30, 2003, appraisal services revenues decreased $1.9 million, or 20%, and $6.5 million, or 23%, respectively, compared to the same periods of 2002. The decrease is related to the completion and progression of several major appraisal contracts. During the nine months ended September 30, 2003, we signed a new six yearwe signed a new six-year contract to provide Nassau County, New York Board of Assessors (Nassau County Extension) with updated property assessments and additional property appraisal and tax software. The following table contains the appraisal services revenues for significant contracts for the periods presented:
Appraisal revenue recorded ----------------------------------------------------- Three months ended Nine months ended Total Appraisal September 30, September 30, appraisal revenues ------------------------- ------------------------- revenues recognized Contract 2003 2002 2003 2002 per contract to date completion date ----------- ----------- ----------- ----------- ----------- ----------- --------------------- Nassau County, New York Board of Assessors $ -- $ 3,500 $ 300 $ 9,500 $ 29,500 $ 29,500 First quarter 2003 Lake County, Indiana 1,600 2,200 6,200 5,200 15,300 15,200 Estimated late 2003 Indiana Revaluations 100 1,000 1,000 4,100 10,700 10,400 Estimated late 2003 (“Nassau County Extension 1,500 -- 3,100 -- 25,300 3,100 Estimated fiscal 2009 Franklin County, Ohio 1,100 -- 1,300 -- 9,100 1,300 Estimated mid-2005 Extension”) with updated property assessments and additional property appraisal and tax software. The following table contains the appraisal services revenues for significant contracts for the periods presented:

Appraisal revenue recorded
First Quarter
Total appraisal Appraisal revenues
revenues recognized Anticipated Contract
($ in thousands)
2004
2003
per contract
to date
completion date
Lake County, Indiana $ — $ 2,600 $ 15,300 $ 15,300 Third quarter 2003
Lake County Hearings 860 — 2,950 2,700 Estimated June 2004
Nassau County Extension 1,700 375 25,300 7,000 Estimated December 2008
Franklin County, Ohio 1,600 — 9,100 4,300 Estimated mid-2005
Cost of Revenues and Gross Margins
The following table sets forth, for the periods indicated, a comparison of the key components of our cost of revenues and gross margins, and those components stated as a percentage of related revenues:

First Quarter
First Quarter 2004 vs.
% of
related % of
related First Quarter 2003
($ in thousands)
2004
revenues
2003
revenues
$
%
Software licenses $ 2,017 29 % $ 1,544 28 % $ 473 31 %
Software services and maintenance 17,324 69 13,282 71 4,042 30
Appraisal services 6,332 80 4,748 70 1,584 33
Hardware and other 964 65 1,107 75 (143 ) (13 )

Total cost of revenues $ 26,637 64 % $ 20,681 64 % $ 5,956 29 %

Overall gross margin 36 % 36 %

Cost of software license revenues. The increase is related to the general release of several software development products and the commencement of the related amortization expense. Once a product is released, we begin to amortize the costs associated with its development over the estimated useful life of the product. Amortization expense is determined on a product-by-product basis at an annual rate not less than straight-line basis over the product’s estimated life. Development costs consist mainly of personnel costs, such as salary and benefits paid to our developers, rent for related office space and capitalized interest costs. During the three months ended March 31, 2004, we recorded approximately $419,000 of amortization expense related to our Odyssey Courts product compared to none during the same period in 2003, as the product was released in September 2003. In addition, we released the Orion product in late March 2004 and so the amortization reflected in these financial statements was nominal.
Cost of software services and maintenance revenues. Cost of software services and maintenance primarily consists of expenses, such as personnel costs related to installation of our software licenses, conversion of customer data, training customer personnel and support activities. Cost of software services and maintenance for the three months ended March 31, 2004 includes $1.9
11
million related to Eden. Excluding Eden, cost of software services and maintenance increased $2.2 million or 16%. The increase in costs is consistent with higher software services and maintenance revenues for the same periods, although software services and maintenance revenues grew at a more rapid rate than the cost of those revenues, which is reflective of more efficient utilization of our support and maintenance staff and economies of scale.
Cost of appraisal services revenues.
The increase in the cost of appraisal revenue is due to the use of sub-contractors to supplement our appraisal staff on some of our larger contracts. The nature and timing of these contracts required us to retain staff on either short notice or with specific qualifications which increased the associated costs as a percentage of appraisal revenue.
Gross margin.
Our overall gross margin remained constant compared to the prior year. Gross margin on software services and maintenance revenues improved slightly reflecting a more efficient utilization of our support and maintenance staff and economies of scale. The improvement in software services and maintenance gross margin was slightly offset by a decline in appraisal margin due to the use of sub-contractors since the margins on work performed by sub-contractors are inherently lower.
Selling, General and Administrative Expenses
The following table sets forth, for the periods indicated, quarter-over-quarter comparison of our selling, general and administrative expenses (SG&A):

First Quarter
First Quarter 2004 vs.
First Quarter 2003
% of % of
($ in thousands)
2004
revenues
2003
revenues
$
%
Selling, general and administrative expenses $ 10,527 25 % $ 9,101 28 % $ 1,426 16 %
The increase in selling, general and administrative expenses is a result of the following factors:
• Cost to comply with corporate governance and public disclosure requirements of the Sarbanes Oxley Act of 2002 and New York Stock Exchange rules, including those associated with documenting and testing internal controls;
• Increased advertising and marketing expenses, primarily related to new sales territories such as the western United States; and
• Higher research and development costs.
During the first quarter of 2004, SG&A included $1.0 million incurred by Eden. Excluding those costs, SG&A increased 5% for the three months ended March 31, 2004 compared to the same period in 2003 and was also 25% of revenues excluding Eden revenues. SG&A expenses as a percent of sales comparisons were positively impacted by higher sales volume.
Amortization of Acquisition Intangibles
The following table sets forth, for the periods indicated, a year-over-year comparison of amortization of acquisition intangibles:

First Quarter 2004 vs.
First Quarter
First Quarter 2003
($ in thousands)
2004
2003
$
%
Amortization of acquisition intangibles $ 922 $ 785 $ 137 17 %
The increase in amortization is related to the acquisition intangibles recorded related to the acquisition of Eden in December 2003. This increase was offset somewhat by certain intangible assets recorded for previous acquisitions which became fully amortized in 2003. Acquisition intangibles are composed of the excess of the purchase price over the fair value of net tangible assets acquired that is allocated to acquired and amortizable software, customer base and trade name with the remainder allocated to goodwill that is not subject to amortization.
12 COST OF REVENUES Cost of software license revenues. For the three and nine months ended September 30, 2003, cost of software license revenues increased $692,000, or 51%, and $1.3 million, or 34%, respectively, compared to the same prior year periods. During the third quarter, we commenced amortizing the software development costs of our Odyssey Courts product, as it was complete and ready for general release to the public. Once a product is released, we begin to expense the costs associated with its development over the estimated useful life of the product. Amortization expense is determined on a product-by-product basis at an annual rate not less than straight-line basis over the product's estimated life. Development costs consist mainly of personnel costs, such as salary and benefits paid to our developers, rent for related office space and capitalized interest costs. Odyssey Courts amortization is calculated using the straight-line method of amortization over an estimated five-year useful life. However, we allocate the annual straight-line amortization expense within the year using the revenue-based amortization method, which is based on the percentage of current quarter software revenues for Odyssey Courts to the estimated annual software revenues for Odyssey Courts. In accordance with the revenue-based method of amortization we are not allowed to record less than the straight-line method on a cumulative basis within the year. Since we estimate all 2003 Odyssey Courts software license revenue to be recorded in the third quarter of 2003 we also recorded the related amortization expense of approximately $559,000 in the third quarter for the period September 1, 2003 (general release date) through December 31, 2003. We do not anticipate recording any additional Odyssey software license revenue in the fourth quarter of 2003. In addition, during 2002, we had several products in the development stage, which were released late 2002 and early 2003 and contributed to the increase in amortization expense. Cost of software services and maintenance revenues. For the three months and nine months ended September 30, 2003, cost of software services and maintenance revenues increased $929,000, or 7%, and $5.0 million, or 14%, respectively, compared to the same periods of 2002. These increases are consistent with the higher software services and maintenance revenues for the same periods, although software services and maintenance revenues grew at a more rapid rate than the cost of those revenues, which is reflective of more efficient utilization of our support and maintenance staff and economies of scale. As a percentage of related revenues, cost of software services and maintenance was 67% for the third quarter of 2003 compared to 76% for the third quarter of 2002. Cost of software services and maintenance was 69% of related revenues for the nine months ended September 30, 2003, compared to 77% for the same period of 2002. Cost of appraisal services revenues. Costs of appraisal services revenues decreased $1.2 million, or 18%, for the three months ended September 30, 2003, compared to the same prior year period. For the nine months ended September 30, 2003, cost of appraisal services revenues decreased $4.0 million, or 21%, compared to the same period in 2002. The decrease is consistent with the decrease in appraisal services revenues, which declined 20% and 23% for the three and nine months ended September 30, 2003, respectively. We often hire temporary employees to assist in appraisal projects whose term of employment generally ends with the projects' completion. As a percentage of related revenues, cost of appraisal services was 73% and 71% for the three and nine months ended September 30, 2003 compared to 71% and 69% for the same periods of 2002. GROSS MARGIN For the three and nine months ended September 30, 2003, our overall gross margin increased to 41% and 39%, respectively, from 35% for the same periods of 2002. This increase is mainly due to higher software license revenues as a proportion of total revenues. Software license revenue inherently has higher gross margins than other revenues such as professional services and hardware. In addition, our overall gross margin improved over the prior year periods due to higher software services and maintenance revenues without a corresponding increase in related personnel costs reflecting a more efficient utilization of our support and maintenance staff and economies of scale. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses, or SG&A, increased $1.5 million, or 18%, and $4.2 million, or 17%, for the three and nine months ended September 30, 2003, respectively, compared to the same periods in the prior year. For the three months ended September 30, 2003, SG&A as a percent of revenue increased to 26% from 23% for the same prior year period. SG&A as a percent of revenue increased to 27% from 25% for the nine months ended September 30, 2003, compared to the same prior year period. SG&A in the third quarter of 2003 includes increased bonus expense for key management personnel as a result of our improved operating performance. Commission expense was also higher than the prior year periods due to increased revenues. In addition, annual salary adjustments, bonuses related to installation of Odyssey Courts, additional advertising and marketing expenses and higher research and development costs contributed to higher SG&A.
Realized Gain on Sale of Investment in H.T.E., Inc.
On March 25, 2003, we received cash proceeds of $39.3 million in connection with a transaction to sell all of our 5.6 million shares of H.T.E., Inc. (“HTE”) common stock to SunGard Data Systems Inc. for $7.00 cash per share. Our original cost basis in the HTE shares was $15.8 million. After transaction and other costs, we recorded a gross realized gain of $23.2 million ($16.2 million or $0.34 per diluted share after income taxes of $7.0 million) for the three months ended March 31, 2003.
Other Income (Expense), Net
The following table sets forth, for the periods indicated, a comparison of the key components of other income (expense), net:

First Quarter 2004 vs.
First Quarter
First Quarter 2003
($ in thousands)
2004
2003
$
%
Interest income $ 141 $ 48 $ 93 194 %
Interest expense (51 ) (39 ) (12 ) 31
Minority interest 8 — 8 100
Other 4 — 4 100

$ 102 $ 9

The increase in interest income is related to higher invested cash balances during the three months ended March 31, 2004 compared to the same period in 2003. In late March 2003, we received $39.3 million in cash upon the sale of our investment in HTE. In addition, throughout 2003, we collected proceeds from the exercise of stock options and cash generated from operations. During 2003, those increases in cash were offset by payments of $24.1 million for repurchase of a total of approximately 6.0 million shares of our common stock and cash payments of approximately $12.5 million for two acquisitions made in December 2003, the most significant of which is Eden.
Income Tax Provision
The following table sets forth, for the periods indicated, a year-over-year comparison of our income tax provision:

First Quarter 2004 vs.
First Quarter
First Quarter 2003
($ in thousands)
2004
2003
$
%
Income tax provision $ 1,387 $ 7,704 $ (6,317 ) (82 )%
Effective income tax rate 39.9 % 30.8 %
The income tax provision for the first quarter of 2003 includes income tax expense of approximately $7.0 million relating to the realized gain from the sale of our investment in HTE (after reduction in valuation allowance related to the utilization of a capital loss carryforward amounting to $1.1 million on a tax-effected basis). For the three months ended March 31, 2003, we had an effective income tax rate of 38.8% (excluding the effect of the HTE gain). The effective income tax rates for the three months ended March 31, 2004 and 2003, were different from the statutory United States federal income tax rate of 35% primarily due to the utilization of the capital loss carryforward in 2003, state income taxes and non-deductible meals and entertainment costs.
13 AMORTIZATION OF ACQUISITION INTANGIBLES For the three and nine months ended September 30, 2003, amortization of acquisition intangibles was approximately $680,000 and $2.2 million, respectively, compared to $832,000 and $2.5 million for the same periods in 2002. The decrease in amortization from the prior year is related to certain of our acquisition intangibles becoming fully amortized during the first nine months of 2003. Acquisition intangibles are composed of the excess of the purchase price over the fair value of net tangible assets acquired that is allocated to acquired and amortizable software and customer base, with the remainder allocated to goodwill that is not subject to amortization. The estimated useful lives of acquired software and customer base are 5 years and 20 to 25 years, respectively. REALIZED GAIN ON SALE OF INVESTMENT IN H.T.E., INC. On March 25, 2003, we received cash proceeds of $39.3 million in connection with a transaction to sell all of our 5.6 million shares of H.T.E., Inc. ("HTE") common stock to SunGard Data Systems Inc. for $7.00 cash per share. Our original cost basis in the HTE shares was $15.8 million. After transaction and other costs, we recorded a gross realized gain of $23.2 million ($16.2 million or $0.36 per diluted share after income taxes of $7.0 million for the nine months ended September 30, 2003). See Note 4 in the Notes to the Condensed Consolidated Financial Statements. LEGAL FEES ASSOCIATED WITH INVESTMENT IN H.T.E., INC. During the three and nine months ended September 30, 2002, we incurred approximately $365,000 and $650,000, respectively, of legal and other costs associated with legal matters concerning various tort claims HTE alleged against us and HTE's attempted redemption of our 5.6 million shares for $1.30 per share. In September 2002, HTE released us from all tort claims and a court declared HTE's reported redemption of our shares was invalid. In March 2003, we sold for cash our entire investment in HTE for $7.00 per share. INTEREST INCOME (EXPENSE) For the three months ended September 30, 2003, we had net interest income of $141,000, compared to net interest expense of $12,000 for same period of 2002. For the nine months ended September 30, 2003 and September 30, 2002 we had net interest income of $287,000, and $20,000, respectively. The increase in interest income is related to higher invested cash balances, including $39.3 million in cash received upon the sale of our investment in HTE in late March 2003, as well as cash generated from operations. The cash received from the sale of HTE was offset by payments totaling $24.1 million for repurchase of our common stock in a modified Dutch Auction in May 2003 and on the open market throughout 2003. INCOME TAX PROVISION For the three months ended September 30, 2003, we had an income tax provision of $2.0 million. For the nine months ended September 30, 2003, we had an income tax provision of $11.0 million, which included $7.0 million (after reduction in valuation allowance related to the utilization of a capital loss carryforward amounting to $1.1 million on a tax effected basis) relating to the realized gain from the sale of our investment in HTE. We had an effective income tax rate of 38.5% for the three months ended September 30, 2003 compared to an effective income tax rate of 40.5% for the three months ended September 30, 2002. For the nine months ended September 30, 2003, we had an effective income tax rate of 38.5% (excluding the effect of the HTE gain) compared to an effective rate of 39.7% for the same prior year period. The effective income tax rates are estimated based on projected pre-tax income for the entire fiscal year and the resulting amount of income taxes. The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 35% primarily due to the utilization of the capital loss carryforward in 2003, state income taxes and non-deductible meals and entertainment costs.
Net Income
The following table sets forth, for the periods indicated, a comparison of our net income, earnings per diluted share, and diluted weighted average shares outstanding:

First Quarter 2004 vs.
First Quarter
First Quarter 2003
($ and shares in thousands, except
per share data)
2004
2003
$
%
Net income $ 2,091 $ 17,296 $ (15,205 ) (88 )%
Earnings per diluted share 0.05 0.36 (0.31 ) (86 )
Diluted weighted shares outstanding 45,062 47,738 (2,676 ) (6 )
Net income for the three months ended March 31, 2003 included a $16.2 million realized gain after income taxes relating to the sale of our investment in HTE, which had a diluted earnings per share effect of $0.34 per share.
The decrease in the diluted weighted average shares outstanding is the result of the repurchase of approximately 5.1 million shares of our common stock through our modified Dutch Auction tender offer in May 2003. This repurchase was offset by the exercise of 1.1 million employee stock options and warrants between March 31, 2003 and March 31, 2004 and the issuance of approximately 300,000 shares for acquisitions in December 2003.
FINANCIAL CONDITION AND LIQUIDITY
As of March 31, 2004, our balance in cash and cash equivalents was $12.5 million and we had short-term investments of $11.7 million, compared to cash and cash equivalents of $10.3 million and short-term investments of $11.7 million at December 31, 2003. Cash increased primarily due to continued strong collections of receivables, specifically those related to maintenance contracts that were billed early in the first quarter of 2004. At March 31, 2004, our days sales outstanding (“DSOs”) were 80 compared to DSOs of 88 at December 31, 2003. The decrease in DSOs is due primarily to the collection of several large invoices from our property appraisal and tax clients. DSOs are determined based on accounts receivable divided by the quotient of annualized quarterly revenues divided by 360 days.
On March 5, 2002, we entered into a $10.0 million revolving credit agreement with a bank, which matures January 1, 2005. Our borrowings are limited to 80% of eligible accounts receivable and interest is charged at either the prime rate or at the London Interbank Offered Rate plus a margin of 3%. The credit agreement is secured by our personal property and the common stock of our operating subsidiaries. The credit agreement is also guaranteed by our operating subsidiaries. In addition, the credit agreement contains covenants that require us to maintain certain financial ratios and other financial conditions and prohibits us from making certain investments, advances, cash dividends or loans. As of March 31, 2004, we were in compliance with those covenants.
At March 31, 2004, we had no outstanding bank borrowings under the credit agreement and our bank had issued letters of credit totaling $5.3 million to secure surety bonds required by some of our customer contracts. All of the outstanding letters of credit were collateralized with a certificate of deposit; thus, we had available credit of $10.0 million under the credit agreement.
During the three months ended March 31, 2004, we purchased 191,300 shares of our common stock for an aggregate purchase price of $1.8 million. We currently have authorization to repurchase up to 1.8 million additional shares of Tyler common stock. A summary of the repurchase activity during the first quarter 2004 is as follows:

Maximum number
Total number Average of shares that may
of shares price paid be purchased under
Period
purchased
per share
current authorization
January 1 through January 31 32,500 $ 10.02 1,948,000
February 1 through February 29 137,800 9.22 1,810,000
March 1 through March 31 21,000 9.03 1,789,000

Total first quarter 191,300 $ 9.33 1,789,000

14 NET INCOME Net income was $3.2 million in the three months ended September 30, 2003, compared to $1.7 million for the three months ended September 30, 2002. Net income was $22.5 million in the nine months ended September 30, 2003, including a $16.2 million realized gain after income taxes relating to the sale of our investment in HTE. This compares to net income of $3.6 million in the nine months ended September 30, 2002. For the third quarter of 2003, diluted earnings per share was $0.07 compared to $0.04 for the third quarter of 2002. For the nine months ended September 30, 2003 and 2002, diluted earnings per share was $0.50 and $0.07, respectively. Diluted earnings per share for the nine months ended September 30, 2003 included $0.36 per share related to our net realized gain on the sale of our investment in HTE, after income taxes. During the three and nine months, diluted earnings per share was positively impacted by the repurchase of our shares of common stock on the open market and through our modified Dutch Auction tender offer. FINANCIAL CONDITION AND LIQUIDITY As of September 30, 2003, our balance in cash and cash equivalents was $14.6 million and we had short-term investments of $24.7 million, compared to a cash balance of $13.7 million at December 31, 2002. Cash and short-term investments increased primarily due to the $39.3 million cash received in March 2003 as consideration in connection with the transaction to sell our 5.6 million shares of HTE common stock to SunGard Data Systems Inc. In addition, we have experienced strong collections of our trade receivables, specifically the collection of annual maintenance contract billings. A significant portion of our financial and city solutions annual maintenance contracts are billed in June and collected in the third quarter. At September 30, 2003, our days sales outstanding ("DSOs") (accounts receivable divided by the quotient of annualized quarterly revenues divided by 360 days) were 71 compared to DSOs of 84 at September 30, 2002. On March 5, 2002, we entered into a $10.0 million revolving credit agreement with a bank, which matures January 1, 2005. Our borrowings are limited to 80% of eligible accounts receivable and interest is charged at either the prime rate or at the London Interbank Offered Rate plus a margin of 3%. The credit agreement is secured by our personal property and the common stock of our operating subsidiaries. The credit agreement is also guaranteed by our operating subsidiaries. In addition, the credit agreement contains covenants that require us to maintain certain financial ratios and other financial conditions and prohibits us from making certain investments, advances, cash dividends or loans. As of September 30, 2003, we are in compliance with those covenants. As of September 30, 2003, our bank has issued outstanding letters of credit totaling $7.5 million under our credit agreement to secure performance bonds required by some of our customer contracts. Our borrowing base under the credit agreement is limited by the amount of eligible receivables and was reduced by the letters of credit at September 30, 2003. At September 30, 2003, we had no outstanding bank borrowings under the credit agreement and after consideration of our letters of credit we had an available borrowing base of $2.3 million. In May 2003, we completed a modified "Dutch Auction" tender offer whereby we purchased 5.1 million shares of our common stock at a cash purchase price of $4.00 per share and incurred estimated transaction costs of approximately $150,000, for a total cost of $20.6 million. In addition, during the nine months ended September 30, 2003, we repurchased in the open market 912,800 shares for an aggregate purchase price of $3.5 million. We currently have authorization from our Board of Directors to repurchase up to 1.98 million shares of Tyler common stock. During the third quarter of 2003, we repurchased approximately 37,600 shares of our common stock. During the three and nine months ended September 30, 2003, we purchased $12.6 million and $27.7 million, respectively, of short-term investments. The investments are principally low-risk funds that consist primarily of short-term mutual corporate and municipal bond funds. During the second quarter of 2003, we sold $3.0 million of our short-term investments. In August 2003, we received $127,000 to fully settle a promissory note. The promissory note was received as consideration for the disposition of a subsidiary in May 2001 that was included in our discontinued information and property records services segment. On March 28, 2003, we retired an outstanding $2.5 million 10% promissory note payable. The note was due in January 2005 and paid interest quarterly. In June 2003, we made an estimated federal income tax payment in the amount of $5.0 million. The payment was made primarily due to the $23.2 million realized gain on the sale of our investment in HTE common stock, and also because of the increase in our estimated taxable income for the tax year ending December 31, 2003. During the nine months ended September 30, 2003, we received $653,000 from the exercise of options to purchase 339,500 shares of our common stock under our employee stock option plan. 15 At September 30, 2003, our capitalization consisted entirely of $110.4 million of shareholders' equity, since we have no long-term debt outstanding at September 30, 2003. During the first nine months of 2003, we made capital expenditures of $6.4 million, including $5.2 million for software development costs. The other expenditures related to computer equipment and expansions related to internal growth. Capital expenditures were funded from cash generated from operations. For the remainder of 2003 we anticipate capital spending will be approximately $2.6 million. As part of the plan of reorganization of Swan Transportation Company, one of our non-operating subsidiaries, we had agreed to contribute approximately $1.5 million over the next three years to a trust that was set up as a part of the reorganization. In the third quarter of 2003 we reached an agreement to revise the funding arrangement to fully satisfy our funding obligations with a lump sum payment of $1.48 million in cash. We expect to make the payment during the fourth quarter of 2003. See Note 10 in the Notes to the Condensed Consolidated Financial Statements. Absent acquisitions, we believe our current cash balances and expected future cash flows from operations will be sufficient to meet our anticipated cash needs for working capital, capital expenditures and other activities through the next twelve months. If operating cash flows are not sufficient to meet our needs, we may borrow under our credit agreement. Item
The repurchase program, which was approved by our board of directors, was announced in October 2002, and was amended in April and July 2003. There is no expiration date specified for the authorization and we intend to repurchase stock under the plan from time to time in the future.
During the three months ended March 31, 2004, we made capital expenditures of $1.8 million, including $1.5 million for software development costs. The other expenditures related to computer equipment and expansions related to internal growth. Capital expenditures were funded from cash generated from operations.
We made federal and state income tax payments, net of refunds of $1.2 million in the first three months ended March 31, 2004 compared to $150,000 in the comparable prior year.
During the three months ended March 31, 2004, we received $611,000 from the exercise of options to purchase 182,000 shares of our common stock under our employee stock option plan.
Pursuant to our purchase agreement with Eden, two of the shareholders of Eden were granted the right to “put” their remaining shares to Tyler and we were also granted the right to “call” the remaining shares. In January 2004, we purchased 500 shares for $145,000. The remaining option becomes effective for thirty days beginning July 1, 2004 to purchase the remaining 2,000 shares at a purchase price of $580,000.
On March 28, 2003, we retired an outstanding $2.5 million, 10% promissory note payable. The note was originally due in January 2005 and required quarterly interest payments.
From time to time we will engage in discussions with potential acquisition candidates. In order to pursue such opportunities, which could require significant commitments of capital, we may be required to incur debt or to issue additional potentially dilutive securities in the future. No assurance can be given as to our future acquisition opportunities and how such opportunities will be financed. In the absence of future acquisitions of other businesses, we believe our current cash balances and expected future cash flows from operations will be sufficient to meet our anticipated cash needs for working capital, capital expenditures and other activities through the next twelve months. If operating cash flows are not sufficient to meet our needs, we may borrow under our credit agreement.
ITEM 4. Evaluation of Disclosure Controls and Procedures Based on their evaluation as of the end of the period covered by this quarterly report, our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") believe, based on an evaluation performed under the supervision and with the participation of management, including our CEO and CFO, that the design and operation of our disclosure controls and procedures (as defined in Rules 13a - 15(e) under the Securities Exchange Act of 1934, as amended) are effective to ensure that material information relating to Tyler Technologies, Inc. is made known to them by others within our Company during the period in which this Report on Form 10-Q was being prepared. There have been no material changes in our internal controls over financial reporting that occurred during the period covered by the quarterly report which materially affected, or would be reasonably likely to affect, our internal control over financial reporting. PART
Based on their evaluation as of the end of the period covered by this quarterly report, our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) believe, based on an evaluation performed under the supervision and with the participation of management, including our CEO and CFO, that the design and operation of our disclosure controls and procedures (as defined in Rules 13a – 15(e) under the Securities Exchange Act of 1934, as amended) are effective to ensure that material information relating to Tyler Technologies, Inc. is made known to them by others within our Company during the period in which this Report on Form 10-Q was being prepared. There have been no material changes in our internal controls over financial reporting that occurred during the period covered by the quarterly report which materially affected, or would be reasonably likely to affect, our internal control over financial reporting.
Part II. OTHER INFORMATION Item 1. Legal Proceedings For a discussion of legal proceedings see Part I, Item 1. "Financial Statements - Notes to Condensed Consolidated Financial Statements - "Commitments and Contingencies" on page 7 of this document. Item
ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibit 31.1 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 Certifications Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 16 ~~(b)~~
(a) Exhibit 31.1 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certifications Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certifications Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15
(b) Reports on ~~Form 8-K filed during the three months ended September 30, 2003:~~
Form 8-K filed during the three months ended March 31, 2004:
Form 8-K Item
Report Date
Reported
Exhibits Filed ~~----------- -------- --------------~~ ~~8/1/03~~
2/26/04 5 News release issued by Tyler Technologies, Inc. dated ~~August 1, 2003~~February 25, 2004 announcing our operating results for the three months and ~~six months~~year ended ~~June 30,~~December 31, 2003
Item 3 of Part I and Items 1, 2, 3, 4 and 5 of Part II were not applicable and have been omitted. 17
16
SIGNATURES
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. TYLER TECHNOLOGIES, INC. By: /s/ Theodore L. Bathurst ----------------------------------------- Theodore L. Bathurst Vice President and Chief Financial Officer (principal financial officer and an authorized signatory) By: /s/ Terri L. Alford ----------------------------------------- Terri L. Alford Controller (principal accounting officer and an authorized signatory)
TYLER TECHNOLOGIES, INC.
By: /s/ Theodore L. Bathurst
Theodore L. Bathurst
Vice President and Chief Financial Officer (principal financial officer and an authorized signatory)
By: /s/ Terri L. Alford
Terri L. Alford
Controller (principal accounting officer and an authorized signatory)
Date: ~~October 28, 2003 18~~ April 29, 2004
17


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED INCOME STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		Notes to Condensed Consolidated Financial Statements
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 4. Evaluation of Disclosure Controls and Procedures
Part II. OTHER INFORMATION
	ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906
Certification Pursuant to Section 906


	March 31,
	2004			December 31,
	(Unaudited)			2003
ASSETS
Current assets:
Cash and cash equivalents	$	12,539		$	10,268
Short-term investments available-for-sale		11,747			11,669
Accounts receivable (less allowance for losses of $1,108 in 2004 and $1,094 in 2003)		36,727			38,411
Prepaid expenses and other current assets		4,681			4,237
Deferred income taxes		1,536			1,536

Total current assets		67,230			66,121
Property and equipment, net		6,238			6,505
Other assets:
Certificate of deposit		7,500			7,500
Goodwill		53,197			53,932
Customer base, net		19,724			20,014
Software, net		25,880			26,390
Trade name, net		1,450			1,476
Sundry		331			314

	$	181,550		$	182,252

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,637		$	2,378
Accrued liabilities		11,613			14,220
Deferred revenue		34,489			34,020
Income taxes payable		552			530

Total current liabilities		49,291			51,148
Deferred income taxes		13,182			13,182
Minority interest		4			15
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $10.00 par value; 1,000,000 shares authorized, none issued		—			—
Common stock, $0.01 par value; 100,000,000 shares authorized; 48,147,969 shares issued in 2004 and 2003		481			481
Additional paid-in capital		155,673			156,201
Accumulated deficit		(12,461	)		(14,552	)
Accumulated other comprehensive loss, net of income taxes		(17	)		(32	)
Treasury stock, at cost; 6,697,554 and 6,703,763 shares in 2004 and 2003, respectively		(24,603	)		(24,191	)

Total shareholders’ equity		119,073			117,907

	$	181,550		$	182,252


	Three months ended March 31,
	2004			2003
Cash flows from operating activities:
Net income	$	2,091		$	17,296
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		2,901			2,154
Realized gain on sale of investment in H.T.E., Inc.		—			(23,233	)
Discontinued operations – non-cash charges and changes in operating assets and liabilities		—			(37	)
Changes in operating assets and liabilities, exclusive of effects of acquired companies and discontinued operations		662			3,925

Net cash provided by operating activities		5,654			105

Cash flows from investing activities:
Proceeds from sale of investment in H.T.E., Inc.		—			39,333
Purchases of short-term investments		(49	)		(15,001	)
Cost of acquisitions		(303	)		—
Investment in software development costs		(1,451	)		(1,782	)
Additions to property and equipment		(357	)		(319	)
Other		(32	)		(126	)

Net cash (used) provided by investing activities		(2,192	)		22,105

Cash flows from financing activities:
Payments on notes payable		(18	)		(2,662	)
Purchase of treasury shares		(1,784	)		(3,298	)
Proceeds from exercise of stock options		611			50

Net cash used by financing activities		(1,191	)		(5,910	)

Net increase in cash and cash equivalents		2,271			16,300
Cash and cash equivalents at beginning of period		10,268			13,744

Cash and cash equivalents at end of period	$	12,539		$	30,044

(1)		Basis of Presentation

		We prepared the accompanying condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States, or GAAP, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted for interim periods. Balance sheet amounts are as of March 31, 2004 and December 31, 2003 and operating result amounts are for the three months ended March 31, 2004 and 2003, and include all normal and recurring adjustments that we considered necessary for the fair summarized presentation of our financial position and operating results. As these are condensed financial statements, one should also read the financial statements and notes included in our latest Form 10-K for the year ended December 31, 2003. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.

		Although we have a number of operating subsidiaries, separate segment data has not been presented as they meet the criteria set forth in SFAS (Statement of Financial Accounting Standards) No. 131, “Disclosures About Segments of an Enterprise and Related Information” to be presented as one segment.

(2)		Acquisitions

		During December 2003 we acquired one company, Eden Systems, Inc. (“Eden”) and certain assets of a business that provides forms software to users of some of our software products. The results of these acquisitions have been included in our condensed consolidated financial statements since their respective dates of acquisition. We acquired 95% of the outstanding common stock of Eden on December 2, 2003. Eden provides financial, personnel and citizen services applications software for local governments similar to our financial and city solutions products. We believe Eden’s products and expertise will complement our business model and give us additional opportunities to provide our customers with solutions tailored specifically for local governments. In particular, the addition of Eden considerably increases our presence in the western part of the United States.

		Following is a summary of our 2003 acquisitions:


DELAWARE (State or other jurisdiction of incorporation or organization)		75-2303920 (I.R.S. employer identification no.)


	Three months ended
	March 31,
	2004		2003
Revenues:
Software licenses	$	6,852	$	5,460
Software services		11,602		7,706
Maintenance		13,581		10,935
Appraisal services		7,954		6,751
Hardware and other		1,473		1,473

Total revenues		41,462		32,325
Cost of revenues:
Software licenses		2,017		1,544
Software services and maintenance		17,324		13,282
Appraisal services		6,332		4,748
Hardware and other		964		1,107

Total cost of revenues		26,637		20,681

Gross profit		14,825		11,644
Selling, general and administrative expenses		10,527		9,101
Amortization of acquisition intangibles		922		785

Operating income		3,376		1,758
Realized gain on sale of investment in H.T.E., Inc.		—		23,233
Other income (expense), net		102		9

Income before income taxes		3,478		25,000
Income tax provision		1,387		7,704

Net income	$	2,091	$	17,296

Earnings per common share:
Basic	$	0.05	$	0.38

Diluted	$	0.05	$	0.36

Basic weighted average common shares outstanding		41,468		45,951
Diluted weighted average common shares outstanding		45,062		47,738


			Shares of		Value of								Customer Related
Company	Cash		Common Stock		Common Stock		Goodwill		Software		Trade Name		Intangibles
Eden	$	10,064		237	$	1,938	$	4,913	$	3,710	$	1,180	$	6,281
Other		2,400		60		500		1,985		155		300		—

Total	$	12,464		297	$	2,438	$	6,898	$	3,865	$	1,480	$	6,281

		Cash paid for acquisitions excludes acquired Eden cash balances of approximately $2.1 million and includes a payment in cash of $303,000 paid during the three months ended March 31, 2004 and $52,000 to be paid subsequent to March 31, 2004. The value of the Tyler common stock was determined based on the average market price of Tyler’s common shares over the ten-day period before the terms of the acquisition were agreed to and announced.

		Pursuant to the agreement with Eden, two of the shareholders of Eden were granted the right to “put” their remaining shares to Tyler and Tyler was also granted the right to “call” the remaining shares. In January 2004, Tyler purchased 500 shares for $145,000, which increased our ownership of the outstanding common stock of Eden from 95% to 96%. The remaining option becomes effective for thirty days beginning July 1, 2004 to purchase the remaining 2,000 shares at a purchase price of $580,000.

		The decline in goodwill of $736,000 to $6.9 million at March 31, 2004, from $7.6 million at December 31, 2003, reflects adjustments relating to results of our valuation of intangible assets, additional purchase of shares pursuant to our call right and the valuation at estimated fair value of our other obligations assumed.

		The following unaudited pro forma information presents the consolidated results of operations as if our acquisition of Eden occurred as of the beginning of 2003, after giving effect to certain adjustments, including amortization of intangibles, interest and income tax effects. Pro forma information does not include acquisitions that are not considered material to our results of