Tyler (TYL) 10-Q 2005 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(x) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2005

OR

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

Commission File Number 1-10485

TYLER TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

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

5949 SHERRY LANE, SUITE 1400
DALLAS, TEXAS
75225
(Address of principal executive offices)
(Zip code)

(972) 713-3700
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesx Noo

Number of shares of common stock of registrant outstanding at July 26, 2005: 39,317,215

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1.Financial Statements
TYLER TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
TYLER TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value and share amounts)
TYLER TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Tyler Technologies, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (Tables in thousands, except per share data)
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
	ITEM 4. Evaluation of Disclosure Controls and Procedures
Part II. OTHER INFORMATION
	ITEM 1. Legal Proceedings
	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
	ITEM 3. Defaults Upon Senior Securities
	ITEM 4. Submission of Matters to a Vote of Security Holders
	ITEM 5. 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

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

	Three months ended				Six months ended
	June 30,				June 30,
	2005		2004		2005		2004
Revenues:
Software licenses	$	7,872	$	7,403	$	14,209	$	14,255
Software services		13,469		13,274		25,721		24,876
Maintenance		15,806		14,657		31,227		28,238
Appraisal services		4,635		7,045		9,784		14,999
Hardware and other		1,403		1,884		2,903		3,357
Total revenues		43,185		44,263		83,844		85,725
Cost of revenues:
Software licenses		2,275		2,229		4,524		4,246
Software services and maintenance		19,963		18,662		39,876		35,855
Appraisal services		3,706		4,895		8,018		11,227
Hardware and other		992		1,377		2,064		2,472
Total cost of revenues		26,936		27,163		54,482		53,800
Gross profit		16,249		17,100		29,362		31,925
Selling, general and administrative expenses		11,263		11,412		23,207		21,939
Restructuring charge		1,260		—		1,260		—
Amortization of acquisition intangibles		515		670		1,030		1,592
Operating income		3,211		5,018		3,865		8,394
Other income, net		233		41		379		143
Income before income taxes		3,444		5,059		4,244		8,537
Income tax provision		1,423		2,084		1,753		3,471
Net income	$	2,021	$	2,975	$	2,491	$	5,066
Earnings per common share:
Basic	$	0.05	$	0.07	$	0.06	$	0.12
Diluted	$	0.05	$	0.07	$	0.06	$	0.11
Basic weighted average common shares outstanding		39,615		41,420		39,920		41,443
Diluted weighted average common shares outstanding		41,943		44,803		42,337		44,931

     See accompanying notes.

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TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)

	June 30,
	2005			December 31,
	(Unaudited)			2004
ASSETS
Current assets:
Cash and cash equivalents	$	12,682		$	12,573
Short-term investments available-for-sale		9,425			13,832
Accounts receivable (less allowance for losses of $1,581 in 2005 and $986 in 2004)		46,436			45,801
Prepaid expenses and other current assets		5,423			5,042
Deferred income taxes		1,611			1,611
Income taxes receivable		457			—
Total current assets		76,034			78,859
Property and equipment, net		6,147			6,624
Other assets:
Certificate of deposit		7,500			7,500
Goodwill		53,709			53,709
Customer related intangibles, net		18,276			18,855
Software, net		20,690			23,385
Trade name and other acquisition intangibles, net		1,315			1,369
Sundry		205			186
	$	183,876		$	190,487
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,762		$	2,890
Accrued liabilities		13,482			13,660
Deferred revenue		43,562			41,541
Income taxes payable		—			1,023
Total current liabilities		59,806			59,114
Deferred income taxes		12,973			12,973
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 2005 and 2004		481			481
Additional paid-in capital		152,188			152,870
Accumulated deficit		(1,933	)		(4,424	)
Treasury stock, at cost; 8,771,682 shares in 2005 and 7,423,361 shares in 2004, respectively		(39,639	)		(30,527	)
Total shareholders’ equity		111,097			118,400
	$	183,876		$	190,487
See accompanying notes.

2

TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	Six months ended June 30,
	2005			2004
Cash flows from operating activities:
Net income	$	2,491		$	5,066
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		5,339			5,768
Gain on disposal of assets		(62	)		—
Changes in operating assets and liabilities, exclusive of effects of acquired companies		(564	)		2,116
Net cash provided by operating activities		7,204			12,950
Cash flows from investing activities:
Proceeds from sale of short-term investments		11,926			2,000
Purchases of short-term investments		(7,532	)		(99	)
Post closing acquisition payments		—			(366	)
Investment in software development costs		(777	)		(2,530	)
Additions to property and equipment		(885	)		(1,122	)
Other		63			69
Net cash provided (used) by investing activities		2,795			(2,048	)
Cash flows from financing activities:
Purchase of treasury shares		(10,768	)		(4,708	)
Employee stock plan purchases		625			—
Proceeds from exercise of stock options		284			1,546
Other		(31	)		(27	)
Net cash used by financing activities		(9,890	)		(3,189	)
Net increase in cash and cash equivalents		109			7,713
Cash and cash equivalents at beginning of period		12,573			10,268
Cash and cash equivalents at end of period	$	12,682		$	17,981
See accompanying notes.

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Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)

(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 June 30, 2005 and December 31, 2004 and operating result amounts are for the three and six months ended June 30, 2005 and 2004, 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, 2004. 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 Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures About Segments of an Enterprise and Related Information” to be presented as one segment.
(2)	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 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 auction rate securities and 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 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.
	The following table summarizes short-term investments, classified as available-for-sale, as of June 30, 2005:

			Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Auction rate securities	$	9,425	$	—	$	—	$	9,425

     The following table summarizes short-term investments, classified as available-for-sale, as of December 31, 2004:

			Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Auction rate securities	$	8,925	$	—	$	—	$	8,925
State and municipal bond mutual fund		4,907		—		—		4,907
	$	13,832	$	—	$	—	$	13,832

We had no realized losses for the three and six months ended June 30, 2005, respectively, compared to $14,000 and $10,000 during the three and six months ended June 30, 2004 in connection with the disposition of certain of our short term investments.

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 $4.8 million is restricted to collateralize letters of credit required under our surety bond program. These letters of credit expire in 2006.

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(3)	Shareholders’ Equity
	The following tables detail activity in our common stock:

			Six months ended June 30,
	2005				2004
	Shares		Amount		Shares		Amount
Purchases of common stock		1,580	$	10,768		518	$	4,708
Stock option exercises		140		284		475		1,546
Employee stock plan purchases		92		625		—		—

As of June 30, 2005, we have authorization from our board of directors to repurchase up to 941,000 additional shares of Tyler common stock.

In May 2004, the shareholders of Tyler voted to adopt the Tyler Technologies, Inc. Employee Stock Purchase Plan (“ESPP”). Under the ESPP, participants may contribute up to 15% of their annual compensation to purchase common shares of Tyler. In January, April and July 2005, Tyler issued approximately 48,000, 44,000, and 42,000 shares of common stock, respectively to the ESPP. On March 8, 2005, the board of directors amended the plan to the effect that the purchase price of the shares is equal to 85% of the closing price of Tyler common stock on the last day of each quarterly offering period. Previously, the purchase price of the shares was equal to 85% of the closing price of Tyler common stock on either the first or last day of each quarterly offering period, whichever was lower.

Comprehensive income is comprised of net income and unrealized gains and losses on investment securities. For the three and six months ended June 30, 2004 comprehensive income is $2.9 million and $5.1 million which includes unrealized losses, net of income tax benefit, on investment securities of $30,000 and $15,000, respectively. In 2005 we had no unrealized gains or losses and comprehensive income was the same as net income.

(4)	Income Tax Provision
	The following table sets forth a comparison of our income tax provision for the following periods:

	Three months ended						Six months ended
	June 30						June 30
	2005			2004			2005			2004
Income tax provision	$	1,423		$	2,084		$	1,753		$	3,471
Effective income tax rate		41.3	%		41.2	%		41.3	%		40.7	%

We made federal and state income tax payments, net of refunds, of $3.2 million in the six months ended June 30, 2005, compared to $3.3 million in net payments for the same period of the prior year. The effective income tax rates were different from the statutory United States federal income tax rate of 35% primarily due to the state income taxes and non-deductible meals and entertainment costs.

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(5)	Earnings Per Share
	The following table details the reconciliation of basic earnings per share to diluted earnings per share:

	Three months ended				Six months ended
	June 30,				June 30,
	2005		2004		2005		2004
Numerator for basic and diluted earnings per share:
Net income	$	2,021	$	2,975	$	2,491	$	5,066
Denominator:
Weighted-average basic common shares outstanding		39,615		41,420		39,920		41,443
Assumed conversion of dilutive securities:
Stock options		1,315		2,213		1,385		2,301
Warrants		1,013		1,170		1,032		1,187
Potentially dilutive common shares		2,328		3,383		2,417		3,488
Weighted-average common shares outstanding, assuming full dilution		41,943		44,803		42,337		44,931
Basic earnings per share	$	0.05	$	0.07	$	0.06	$	0.12
Diluted earnings per share	$	0.05	$	0.07	$	0.06	$	0.11

(6)	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 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						Six months ended
	June 30,						June 30,
	2005			2004			2005			2004
Net income	$	2,021		$	2,975		$	2,491		$	5,066
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		(218	)		(197	)		(477	)		(536	)
Pro forma net income	$	1,803		$	2,778		$	2,014		$	4,530
Basic earnings per share:
As reported	$	0.05		$	0.07		$	0.06		$	0.12
Pro forma	$	0.05		$	0.07		$	0.05		$	0.11
Diluted earnings per share:
As reported	$	0.05		$	0.07		$	0.06		$	0.11
Pro forma	$	0.04		$	0.06		$	0.05		$	0.10

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(7)	Recently Issued Accounting Standards
	In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”. SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB No. 25. Among other items, SFAS No. 123R eliminates the use of APB No. 25 and the intrinsic value method of accounting, and requires the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, to be recorded in the financial statements. The effective date of SFAS No. 123R was the first reporting period beginning after June 15, 2005, which is the third quarter 2005 for calendar year companies, although early adoption is allowed. However, on April 14, 2005, the SEC announced that the effective date of SFAS No. 123R will be suspended until January 1, 2006 for calendar year companies.
	SFAS No. 123R permits companies to adopt its requirements using either a “modified prospective” method or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS No. 123R for all share-based payments granted after that date, and based on the requirements of SFAS No. 123 for all unvested awards granted prior to the effective date of SFAS No. 123R. Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but also permits entities to restate financial statements of previous periods based on proforma disclosures made in accordance with SFAS No. 123.
	We currently utilize a standard option pricing model (Black-Scholes) to measure the fair value of stock options granted to employees and directors. While SFAS No. 123R permits entities to continue to use such a model, the standard also permits the use of a “lattice” model. We have not yet determined which model we will use to measure the fair value of stock options upon the adoption of SFAS No. 123R.
	SFAS No. 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated, because they depend on, among other things, when employees exercise stock options.
	SFAS No. 123R also requires employee stock purchase plans (ESPP) with purchase price discounts greater than 5% to be compensatory. Our ESPP has a 15% purchase price discount and we expect to record a related compensatory charge after SFAS No. 123R becomes effective January 1, 2006.
	We currently expect to adopt SFAS No. 123R effective January 1, 2006, based on the new effective date announced by the SEC; however, we have not yet determined which of the aforementioned adoption methods we will use. In addition, we have not yet determined the financial statement impact of adopting SFAS No. 123R for 2006.
(8)	Restructuring Charge
	Because of the recent unsatisfactory financial performance, in the second quarter of 2005 we made significant organizational changes to those areas of our business that were not performing to our expectations. Our goal is to bring costs in line with expected levels of revenue while improving the efficiency of our organizational structure to ensure that clients continue to receive superior service.
	We currently anticipate that revenues in our appraisal services business are likely to remain at historically low levels in the coming quarters and have reorganized that division to eliminate levels of management and reduce overhead expense. We have also taken actions to reduce headcount and costs in our appraisal and tax software division. These cost reductions were made in the second quarter of 2005. As a result, we reduced headcount in the appraisal services and appraisal and tax software businesses, as well as in the corporate office by eliminating approximately 120 positions, including management, staff and project-related personnel. Additionally we have made changes in both management personnel and organizational structures at those business units and have reorganized our corporate structure to consolidate certain senior management positions.
	In connection with the reorganization, we incurred certain charges in the second quarter of 2005. Those charges, which are primarily comprised of employee severance costs and related fringe benefits, totaled approximately $1.3 million before income taxes. The majority of the related payments were made during the quarter ended June 30, 2005, and we expect substantially all the remaining liability will be paid by September 2005.
	The following is a summary of the restructuring liability for the three months ended June 30, 2005:

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	Charged to expense
	in the quarter ended				Liability as of
	June 30, 2005		Cash Payments		June 30, 2005
Severance and related fringe benefits	$	1,237	$	1,124	$	113
Other		23		22		1
Total	$	1,260	$	1,146	$	114

ITEM 2. 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 governmental 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 and proportionate performance methods 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, 2004. 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 information management solutions and 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 governmental 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, 2004 regarding expanded information about our critical accounting policies and estimates.

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ANALYSIS OF RESULTS OF OPERATIONS

          Revenues

The following table sets forth the key components of our revenues for the periods presented as of June 30:

	Second Quarter										%			Six Months										%
			% of					% of			Increase/					% of					% of			Increase/
($ in thousands)	2005		Total			2004		Total			(Decrease)			2005		Total			2004		Total			(Decrease)
Software licenses	$	7,872		18	%	$	7,403		17	%		6	%	$	14,209		17	%	$	14,255		17	%		0	%
Software services		13,469		31			13,274		30			2			25,721		31			24,876		29			3
Maintenance		15,806		37			14,657		33			8			31,227		37			28,238		33			11
Appraisal services		4,635		11			7,045		16			(34	)		9,784		12			14,999		17			(35	)
Hardware and other		1,403		3			1,884		4			(26	)		2,903		3			3,357		4			(14	)
Total revenues	$	43,185		100	%	$	44,263		100	%		(2	)%	$	83,844		100	%	$	85,725		100	%		(2	)%

Software licenses. Software license revenues for the three months ended June 30, 2005 increased $469,000 compared to the prior year period due to small increases across all product lines. Although software license revenues for the six months ended June 30, 2005 were flat compared to the prior year period, we experienced a moderate increase in revenues from our Odyssey courts and justice software product which was offset by lower license revenues from appraisal and tax software products. Since March 2004, we have added eight new Odyssey contracts totaling an estimated $11.8 million, for which we are recognizing revenue using the percentage of completion method of contract accounting in which the contract revenues are spread over the service period. Appraisal and tax product software license in the first quarter of 2004 included $450,000 related to the installation of our Automated Valuation Model (“AVM”) at the Valuation Office Agency of the United Kingdom. We had no comparable AVM sales in the first six months of 2005. During March through December 2004 we introduced additional modules of our Orion appraisal and tax products and the acceptance of these new products in the marketplace is on-going. While we have signed a number of contracts for our new Orion software, certain of the installations of that product have taken longer than we initially anticipated and, therefore, we have been unable to recognize revenue on those contracts. In addition, we are recognizing revenue on our Orion contracts using contract accounting.

In June 2005, we entered into a contract with the state of New Jersey to implement a statewide Property Assessment Management System valued at nearly $10.0 million. The contract includes ouriasWorld assessment and tax software, along with related professional services and is expected to be completed by mid — 2008. We recorded only a minor amount of software license revenue related to this contract in June 2005.

Software services. Changes in software services revenues consist of the following components:

• Software service revenue related to financial products, which comprise the majority of our sales in the periods presented, were up significantly for the three and six months ended June 30, 2005 compared to the prior year periods. These increases were due to geographic expansion as well as accommodating our financial customers who have June 30 fiscal year ends and prefer to complete software installations prior to their new budget year. Approximately one-half of our financial software services revenue increase related to training and the remaining increases were due to new customers for our ASP and disaster recovery services and other miscellaneous services.

• Software service revenue related to our Odyssey courts and justice product increased significantly for the three and six months ended June 30, 2005 compared to the prior year periods. Since late March 2004 we have entered into eight Odyssey contracts totaling approximately $11.8 million. We are recognizing revenue on these contracts using contract accounting.

• Software service revenue related to legacy appraisal and tax products experienced a significant decrease for both the three and six months ended June 30, 2005 compared to the prior year periods. In 2004, we substantially completed several legacy appraisal and tax contracts which accounted for most of the decline in 2005. In 2005, we are continuing to shift more significant portions of our sales focus to our new appraisal and tax software product, Orion.

Maintenance. We provide maintenance and support services for our software products and third party software. Maintenance revenues increased due to growth in our installed customer base and slightly higher maintenance rates on certain product lines.

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Appraisal services. The decrease in appraisal services revenues is due to the recent completion of certain significant appraisal contracts. These larger projects are often relatively discretionary in nature compared to smaller projects which tend to occur on a more consistent basis, and the larger projects we recently completed have not been replaced by similar projects. The appraisal services business is driven in part by revaluation cycles in various states and based on our new business pipeline, we expect that appraisal services revenues will remain at historically low levels for several quarters.

          Cost of Revenues and Gross Margins

The following table sets forth a comparison of the key components of our cost of revenues and gross margins, and those components stated as a percentage of related revenues:

	Second Quarter															Six Months
				% of						% of			%						% of						% of
				Related						Related			Increase/						Related						Related			Increase/
($ in thousands)	2005			Revenues			2004			Revenues			(Decrease)			2005			Revenues			2004			Revenues			(Decrease)
Software licenses	$	2,275			29	%	$	2,229			30	%		2	%	$	4,524			32	%	$	4,246			30	%		7	%
Software services and maintenance		19,963			68			18,662			67			7			39,876			70			35,855			68			11
Appraisal services		3,706			80			4,895			69			(24	)		8,018			82			11,227			75			(29	)
Hardware and other		992			71			1,377			73			(28	)		2,064			71			2,472			74			(17	)
Total cost of revenues	$	26,936			62	%	$	27,163			61	%		(1	)%	$	54,482			65	%	$	53,800			63	%		1	%
Overall gross margin		37.6	%					38.6	%								35.0	%					37.2	%

Cost of software license revenues. The six months ended June 30, 2005 includes a full six months of amortization expense for several capitalized software products that were released during 2004, primarily Orion. This increase in amortization expense was offset somewhat by certain other software products that became fully amortized during 2005. Once a product is released, we begin to amortize the costs associated with its development over the estimated useful life of the product, but not exceeding five years. 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.

Cost of software services and maintenance revenues. For the three month period ended June 30, 2005 cost of software services and maintenance grew 7% while the related software services and maintenance revenues increased 5% compared to the prior year period. For the six months ended June 30, 2005 cost of software services and maintenance grew 11% while the related software services and maintenance revenues increased 7% compared to the prior year period. Cost of software services and maintenance primarily consists of expenses such as personnel costs related to installation of our software, conversion of customer data, training customer personnel and support activities. Costs increased at a faster rate than related software services and maintenance revenues for the same periods, which are reflective of lower utilization of personnel in our appraisal and tax software division, efforts and costs to support our recently released Orion products, as well as a shift in the roles of certain of our development personnel whose costs were capitalized in 2004 to projects that are being expensed in 2005.

Cost of appraisal services revenues. The decline in the cost of appraisal services revenues is consistent with lower appraisal services revenues. We often hire temporary employees to assist in appraisal projects whose term of employment generally ends with the projects’ completion. In addition, in the second quarter of 2005 we made significant organizational changes to those areas of our business that were not performing to our expectations, including our appraisal services division. See “Restructuring Charge.”

Gross margin.The overall gross margin for the quarter ended June 30, 2005 was 37.6%, compared to 38.6% in the quarter ended June 30, 2004. The overall gross margin for the six months ended June 30, 2005 was 35.0%, compared to 37.2% for the six months ended June 30, 2004. These decreases were due to cost inefficiencies associated with the decline in our appraisal services revenues, efforts to support our recently released Orion products, as well as additional amortization expense related to new software products released in 2004.

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          Selling, General and Administrative Expenses

The following table sets forth a comparison of our selling, general and administrative expenses:

	Second Quarter												Six Months
							Change												Change
($ in thousands)	2005			2004			$			%			2005			2004			$		%
Selling, general and administrative expenses	$	11,263		$	11,412			($149	)		(1	)%	$	23,207		$	21,939		$	1,268		6	%
Percent of revenues		26	%		26	%								28	%		26	%

Selling, general and administrative expenses as a percent of revenues increased 2% for the six months ended June 30, 2005 compared to the prior year period, mainly due to the level of costs associated with the appraisal and tax business, where revenues have declined. In late April 2005, we made significant organizational changes to areas of our business that were not performing to our expectations in an effort to bring costs in line with expected levels of revenue. See “Restructuring Charge.”

          Restructuring Charge

Because of the recent unsatisfactory financial performance, in the second quarter of 2005 we made significant organizational changes to those areas of our business that were not performing to our expectations. Our goal is to bring costs in line with expected levels of revenue while improving the efficiency of our organizational structure to ensure that clients continue to receive superior service.

We currently anticipate that revenues in our appraisal services business are likely to remain at historically low levels in the coming quarters and have reorganized that division to eliminate levels of management and reduce overhead expense. We have also taken actions to reduce headcount and costs in our appraisal and tax software division. These cost reductions were made in the second quarter of 2005. As a result, we reduced headcount in the appraisal services and appraisal and tax software businesses, as well as in the corporate office by eliminating approximately 120 positions, including management, staff and project-related personnel. Additionally we have made changes in both management personnel and organizational structures at those business units and have reorganized our corporate structure to consolidate certain senior management positions.

In connection with the reorganization, we incurred certain charges in the second quarter of 2005. Those charges, which are primarily comprised of employee severance costs and related fringe benefits totaled approximately $1.3 million before income taxes. The majority of the related payments were made during the quarter ended June 30, 2005, and we expect substantially all the remaining amount of $114,000 to be paid by September 2005.

          Amortization of Acquisition Intangibles

The following table sets forth a comparison of amortization of acquisition intangibles:

	��	Second Quarter										Six Months
						Change										Change
($ in thousands)		2005		2004		$			%			2005		2004		$			%
Amortization of acquisition intangibles		$	515	$	670		($155	)		(23	)%	$	1,030	$	1,592		($562	)		(35	)%

Amortization expense of acquisition intangibles declined due to certain intangible assets recorded for previous acquisitions which became fully amortized in 2004. 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.

          Other

In May 2005, we sold certain assets of our appraisal and tax software division to a private investor for $75,000 in cash plus future contingent consideration. Proceeds consisted of $75,000 cash at closing and the remainder is payable in sixteen quarterly payments of $25,000, which are subject to reduction in the event of customer contract losses. Because the collection of the remaining proceeds is highly dependent upon future operations of the buyer and due to certain capitalization characteristics of the

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buyer, we are unable to estimate the degree of recoverability and will record the value of the contingent payments as cash is received. We recorded a gain on sale of $62,000 during the quarter ended June 30, 2005. Revenues and expenses related to these assets were insignificant.

          Income Tax Provision

The following table sets forth a comparison of our income tax provision:

	Second Quarter												Six Months
							Change												Change
($ in thousands)	2005			2004			$			%			2005			2004			$			%
Income tax provision	$	1,423		$	2,084			($661	)		(32	)%	$	1,753		$	3,471			($1,718	)		(49	)%
Effective income tax rate		41	%		41	%								41	%		41	%

The effective income tax rates for the six months ended June 30, 2005 and 2004 were different from the statutory United States federal income tax rate of 35% primarily due to the state income taxes and non-deductible meals and entertainment costs.

          Net Income

The following table sets forth a comparison of our net income, earnings per diluted share, and diluted weighted average shares outstanding:

	Second Quarter										Six Months
					Change										Change
($ in thousands, except
per share)	2005		2004		$			%			2005		2004		$			%
Net income	$	2,021	$	2,975		($954	)		(32	)%	$	2,491	$	5,066		($2,575	)		(51	)%
Earnings per diluted share		0.05		0.07		(0.02	)		(29	)		0.06		0.11		(0.05	)		(45	)
Diluted weighted shares outstanding		41,943		44,803		(2,860	)		(6	)		42,337		44,931		(2,594	)		(6	)

FINANCIAL CONDITION AND LIQUIDITY

As of June 30, 2005, our balance in cash and cash equivalents was $12.7 million and we had short-term investments of $9.4 million, compared to cash and cash equivalents of $12.6 million and short-term investments of $13.8 million at December 31, 2004. Cash provided by operating activities was $7.2 million in the six months ended June 30, 2005 compared to $13.0 million for the same period in 2004. Cash provided by operations in the six months ended June 30, 2005 decreased compared to the prior year period. This decline is attributable primarily to lower net earnings, including a restructuring charge, and cash from operations in the prior year period included substantial collections of accounts receivable primarily due to the completion of two large appraisal contracts. Cash provided from operations in both years is strong primarily due to continued strong collections of receivables, specifically those related to maintenance contracts that were billed near the end of the calendar year. At June 30, 2005, our days sales outstanding (“DSO”) were 97 days compared to DSO of 92 days at December 31, 2004. DSO increased compared to the fourth quarter because the second quarter receivables included approximately $2.8 million more for annual maintenance billings than the fourth quarter 2004 period. DSO are calculated based on accounts receivable divided by the quotient of annualized quarterly revenues divided by 360 days.

Investing activities provided cash of $2.8 million in the six months ended June 30, 2005 compared to $2.0 million used for investing activities for the same period in 2004. In both years investing activities were primarily comprised of a net liquidation of short term investments and investments in software development and property and equipment while 2004 also included post closing acquisition payments. The increase in cash provided from investing activities was due to a small liquidation of short term investments and lower investments in software development costs because we completed development of a major appraisal and tax product, as well as an enhancement to certain financial products, in 2004. The other expenditures related to computer equipment and expansions to support internal growth. Capital expenditures were funded from cash generated from operations.

On February 11, 2005, we entered into a new revolving bank credit agreement. The credit agreement matures February 11, 2008 and provides for total borrowings of up to $30.0 million. Borrowings bear interest at either prime rate or at LIBOR plus a margin of 1.5%. As of June 30, 2005, our effective interest rate was 4.8%. The credit agreement is secured by substantially all of our

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personal property and 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 June 30, 2005, we are in compliance with those covenants. The new credit agreement also includes a $10.0 million Letter of Credit facility under which the banks will issue cash collateralized letters of credit.

At June 30, 2005, we had no outstanding bank borrowings under the credit agreement and our bank had issued letters of credit totaling $4.8 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 $30.0 million under the credit agreement.

Financing activities used cash of $9.9 million in the six months ended June 30, 2005 compared to $3.2 million used for financing activities for the same period in 2004. Cash used in financing activities was primarily comprised of purchases of treasury shares, net of proceeds from stock option exercises and employee stock plan purchases.

As of June 30, 2005 we have board authorization to repurchase up to 941,000 additional shares of Tyler common stock. A summary of the repurchase activity during the six months ended June 30, 2005 is as follows:

					Maximum number of
	Total number				shares that may be
	of shares		Average price		purchased under current
Period	purchased		paid per share		authorization
January 1 through January 31		98,000	$	7.59		2,423,000
February 1 through February 28		817,000		6.81		1,606,000
March 1 through March 31		254,000		7.09		1,352,000
April 1 through April 30		-		-		1,352,000
May 1 through May 31		238,000		6.11		1,114,000
June 1 through June 30		173,000		6.97		941,000
Total six months ended June 30, 2005		1,580,000	$	6.81

The repurchase program, which was approved by our board of directors, was announced in October 2002, and was amended in April and July 2003 and October 2004. 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. Our credit agreement includes covenants which limit repurchases of our common stock to $20.0 million in any trailing twelve month period beginning after February 11, 2005.

We made federal and state income tax payments, net of refunds of $3.2 million in the six months ended June 30, 2005 compared to $3.3 million in the comparable prior year.

In May 2005, we sold certain assets of our appraisal and tax software division to a private investor for $75,000 in cash plus future contingent consideration. Proceeds consisted of $75,000 cash at closing and the remainder is payable in sixteen quarterly payments of $25,000, which are subject to reduction in the event of customer contract losses. Because the collection of the remaining proceeds is highly dependent upon future operations of the buyer and due to certain capitalization characteristics of the buyer, we are unable to estimate the degree of recoverability and will record the value of the contingent payments as cash is received. We recorded a gain on sale of $62,000 during the quarter ended June 30, 2005.

Pursuant to our purchase agreement with Eden Systems, Inc (“Eden”), two of the shareholders of Eden were granted the right to “put” their remaining shares to Tyler and we were granted the right to “call” the remaining shares. In January 2004, we purchased 500 shares for $145,000 and paid $221,000 in other post closing settlement adjustments. In July 2004, we purchased the remaining 2,000 shares for a cash purchase price of $580,000.

From time to time we engage in discussions with potential acquisition candidates. In order to consummate any 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.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and interest rates. As of June 30, 2005, we had funds invested in auction rate securities, which we accounted for in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” These investments were treated as available-for-sale under SFAS No. 115. The carrying value of these investments approximates fair market value. Due to the nature of the auction rate securities, we are not subject to significant market rate risk.

We have no outstanding debt at June 30, 2005, and we therefore are not subject to any interest rate risk.

ITEM 4. Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the Securities and Exchange Commission (“SEC”), and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this report conducted by our management, with the participation of the Chief Executive and the Chief Financial Officer, the Chief Executive and Chief Financial Officer believe that these controls and procedures are effective to ensure that we are able to collect, process and disclose the information we are required to disclose in the reports we file with the SEC within the required time periods.

Part II. OTHER INFORMATION

ITEM 1. Legal Proceedings

None

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

ITEM 3. Defaults Upon Senior Securities

None

ITEM 4. Submission of Matters to a Vote of Security Holders

We held our annual meeting of stockholders on May 19, 2005. The results of the matters voted on at the meeting are as follows:

          With respect to the election of directors, our shares were voted as follows:

	Number of		Number of Votes
Nominee	Votes For		Withheld
Donald R. Brattain		31,064,865		240,990
J. Luther King, Jr.		31,049,511		256,344
John S. Marr, Jr.		30,992,903		312,952
Michael D. Richards		31,051,783		254,072
G. Stuart Reeves		31,063,397		242,458
Dustin R. Womble		31,013,877		291,978
John M. Yeaman		30,722,420		583,435

          With respect to the ratification of Ernst & Young LLP as our independent auditors for fiscal year 2005, the votes were as follows:

For	Against		Abstain
31,111,314		41,772		152,769

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ITEM 5. Other Information

None

ITEM 6. Exhibits and Reports on Form 8-K

(a)	Exhibit 31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	Exhibit 32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K filed during the three months ended June 30, 2005:

Form 8-K	Item
Report Date	Reported		Exhibits Filed
4/28/05		5	News release issued by Tyler Technologies, Inc. dated April 27, 2005 announcing our operating results for the three months ended March 31, 2005
4/28/05	1.02, 2.05 and, 5.02		Termination of a material definitive agreement, costs associated with exit or disposal activities and departure of director or principal officers

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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/ Brian K. Miller
	Brian K. Miller
	Senior Vice President and Chief Financial Officer (principal financial officer and an authorized signatory)

Date: July 26, 2005

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