TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	~~Item~~ITEM 1. Financial Statements
	ITEM 1A. Risk Factors
	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
SIGNATURES
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to 18 U.S.C. Section ~~906~~1350
Certification Pursuant to 18 U.S.C. Section ~~906~~1350

PART I. FINANCIAL INFORMATION

~~Item~~ITEM 1.Financial Statements

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


	Three months ended				Nine months ended				Three months ended
	September 30,				September 30,				March 31,
	2005		2004		2005		2004		2006		2005
Revenues:
Software licenses	$	7,153	$	6,955	$	21,362	$	21,210	$	7,571	$	6,337
Software services		13,103		12,256		38,824		37,132		13,120		12,252
Maintenance		16,655		14,589		47,882		42,827		17,657		15,421
Appraisal services		4,147		6,406		13,931		21,405		4,699		5,149
Hardware and other		1,248		1,605		4,151		4,962		1,811		1,500

Total revenues		42,306		41,811		126,150		127,536		44,858		40,659

Cost of revenues:
Software licenses		2,159		2,318		6,683		6,564		2,676		2,249
Acquired software										301		198
Software services and maintenance		20,171		18,450		60,047		54,305		21,745		19,913
Appraisal services		3,027		4,432		11,045		15,659		3,406		4,312
Hardware and other		929		1,315		2,993		3,787		1,268		1,072

Total cost of revenues		26,286		26,515		80,768		80,315		29,396		27,744


Gross profit		16,020		15,296		45,382		47,221		15,462		12,915

Selling, general and administrative expenses		11,445		11,312		34,652		33,251		11,878		11,944
Restructuring charge		—		—		1,260		—
Amortization of acquisition intangibles		515		583		1,545		2,175
Amortization of customer and trade name intangibles										322		317


Operating income		4,060		3,401		7,925		11,795		3,262		654

Other income, net		224		138		603		281		97		146

Income before income taxes		4,284		3,539		8,528		12,076		3,359		800
Income tax provision		1,703		1,507		3,456		4,978		1,347		330

Net income	$	2,581	$	2,032	$	5,072	$	7,098	$	2,012	$	470


Earnings per common share:
Basic	$	0.07	$	0.05	$	0.13	$	0.17	$	0.05	$	0.01

Diluted	$	0.06	$	0.05	$	0.12	$	0.16	$	0.05	$	0.01


Basic weighted average common shares outstanding		39,104		41,307		39,659		41,397		39,114		40,229
Diluted weighted average common shares outstanding		41,771		44,350		42,160		44,737		41,894		42,735

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


	September 30,						March 31,
	2005			December 31,			2006			December 31,
	(Unaudited)			2004			(Unaudited)			2005
ASSETS
Current assets:
Cash and cash equivalents	$	16,070		$	12,573		$	18,595		$	20,733
Short-term investments available-for-sale		10,675			13,832			10,270			11,750
Accounts receivable (less allowance for losses of $1,695 in 2005 and $986 in 2004)		40,291			45,801
Prepaid expenses and other current assets		5,796			5,042
Restricted certificate of deposit								5,000			4,750
Accounts receivable (less allowance for losses of $1,886 in 2006 and $1,991 in 2005)								38,750			49,644
Prepaid expenses								5,776			5,158
Other current assets								2,150			2,201
Deferred income taxes		1,611			1,611			2,128			2,128
Income taxes receivable		1,410			—

Total current assets		75,853			78,859			82,669			96,364

Accounts receivable, long-term portion								626			1,547
Property and equipment, net		5,841			6,624			6,193			5,759

Other assets:
Certificate of deposit		7,500			7,500
Restricted certificate of deposit								—			250
Goodwill		53,709			53,709			65,610			53,709
Customer related intangibles, net		17,986			18,855			17,617			17,696
Software, net		19,260			23,385			19,051			17,645
Trade name and other acquisition intangibles, net		1,288			1,369
Trade name, net								1,235			1,262
Sundry		251			186			176			205

	$	181,688		$	190,487		$	193,177		$	194,437


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,529		$	2,890		$	2,724		$	3,330
Accrued liabilities		13,096			13,660			13,698			16,027
Deferred revenue		43,697			41,541			48,429			51,304
Income taxes payable		—			1,023			913			289

Total current liabilities		59,322			59,114			65,764			70,950

Deferred income taxes		12,973			12,973			10,797			11,290

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
Common stock, $0.01 par value; 100,000,000 shares authorized; 48,147,969 shares issued in 2006 and 2005								481			481
Additional paid-in capital		152,019			152,870			151,123			151,515
Retained earnings (deficit)		648			(4,424	)
Treasury stock, at cost; 9,300,615 shares in 2005 and 7,423,361 shares in 2004, respectively		(43,755	)		(30,527	)
Retained earnings								5,781			3,769
Treasury stock, at cost; 8,920,332 and 9,273,342 shares in 2006 and 2005, respectively								(40,769	)		(43,568	)

Total shareholders’ equity		109,393			118,400			116,616			112,197

	$	181,688		$	190,487		$	193,177		$	194,437

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 September 30, 2005 and December 31, 2004 and operating result amounts are for the three and nine months ended September 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 divisions, 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) Revenue Recognition~~

~~We recognize revenue related to our software arrangements pursuant to the provisions of Statement of Position (SOP) 97-2,~~~~Software Revenue Recognition~~, as amended by SOP 98-4 and SOP 98-9, and related interpretations, as well as the SEC Staff Accounting Bulletin No. 104 “Revenue Recognition.” We recognize revenue on our appraisal services contracts using the proportionate performance method of accounting, with considerations for the provisions of Emerging Issues Task Force (“EITF”) No. 00-21,~~Revenue Arrangements with Multiple Deliverables.~~

~~Software related revenue recognition:~~

We earn revenue from software licenses, post-contract customer support (“PCS” or “maintenance”), hardware, and software related services. PCS includes telephone support, bug fixes, and rights to upgrades on a when-and-if available basis. We provide services that range from installation, training, and basic consulting to software modification and customization to meet specific customer needs. In software arrangements that include rights to multiple software products, specified upgrades, PCS, and/or other services, we allocate the total arrangement fee among each deliverable based on the relative fair value of each.

We typically enter into multiple element arrangements, which include software licenses, software services, PCS and occasionally hardware. The majority of our software arrangements are multiple element arrangements, but for those arrangements that include customization or significant modification of the software, or where software services are otherwise considered essential to the functionality of the software in the customer’s environment, we use contract accounting and apply the provisions of SOP 81-1.

(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, 2006 and December 31, 2005 and operating result amounts are for the three months ended March 31, 2006 and 2005, 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, 2005. 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 divisions, 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.

		In addition, certain other amounts for the previous year have been reclassified to conform to the current year presentation.

(2)		Revenue Recognition

		We recognize revenue related to our software arrangements pursuant to the provisions of Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, and related interpretations, as well as the SEC Staff Accounting Bulletin No. 104, “Revenue Recognition.” We recognize revenue on our appraisal services contracts using the proportionate performance method of accounting, with considerations for the provisions of Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables.”

		Software Arrangements:

		We earn revenue from software licenses, post-contract customer support (“PCS” or “maintenance”), software related services and hardware. PCS includes telephone support, bug fixes, and rights to upgrades on a when-and-if available basis. We provide services that range from installation, training, and basic consulting to software modification and customization to meet specific customer needs. In software arrangements that include rights to multiple software products, specified upgrades, PCS, and/or other services, we allocate the total arrangement fee among each deliverable based on the relative fair value of each.

		We typically enter into multiple element arrangements, which include software licenses, software services, PCS and occasionally hardware. The majority of our software arrangements are multiple element arrangements, but for those arrangements that include customization or significant modification of the software, or where software services are otherwise considered essential to the functionality of the software in the customer’s environment, we use contract accounting and apply the provisions of SOP 81-1 “Accounting for Performance of Construction — Type and Certain Production — Type Contracts.”

		If the arrangement does not require significant modification or customization, revenue is recognized when all of the following conditions are met:

	i.		persuasive evidence of an arrangement exists;

	ii.		delivery has occurred;

	iii.		our fee is fixed or determinable; and

	iv.		collectibility is probable.

For multiple element arrangements, each element of the arrangement is analyzed and we allocate a portion of the total arrangement fee to the elements based on the fair value of the element using vendor-specific evidence of fair value (“VSOE”), regardless of any separate prices stated within the contract for each element. Fair value is considered the price a customer would be required to pay if the element was sold separately based on our historical experience of stand-alone sales of these elements to third parties. For PCS, we use renewal rates for continued support arrangements to determine fair value. For software services, we use the fair value we charge our customers when those services are sold separately. In software arrangements in which we have the fair value of all undelivered elements but not of a delivered element, we apply the “residual method” as allowed under

		third parties. For PCS, we use renewal rates for continued support arrangements to determine fair value. For software services, we use the fair value we charge our customers when those services are sold separately. In software arrangements in which we have the fair value of all undelivered elements but not of a delivered element, we apply the “residual method” as allowed under SOP 98-9 in accounting for any element of a multiple element ~~of a multiple-element~~ arrangement involving software that remains undelivered such that any discount inherent in a contract is allocated to the delivered element. Under the residual method, if the fair value of all undelivered elements is determinable, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element(s) and is recognized as revenue assuming the other revenue recognition criteria are met. In software arrangements in which we do not have VSOE for all undelivered elements, revenue is deferred until fair value is determined or all elements for which we do not have VSOE have been delivered. Alternatively, if sufficient VSOE does not exist and the only undelivered element is services that do not involve significant modification or customization of the software, the entire fee is recognized over the period during which the services are expected to be performed. ~~Software Licenses~~ We recognize the revenue allocable to software licenses and specified upgrades upon delivery of the software product or upgrade to the customer, unless the fee is not fixed or determinable or collectibility is not probable. If the fee is not fixed or determinable, including new customers whose payment terms are three months or more from shipment, revenue is generally recognized as payments become due from the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected. Arrangements that include software services, such as training or installation, are evaluated to determine whether those services are essential to the product’s functionality. A majority of our software arrangements involve “off-the-shelf” software. We consider software to be off-the-shelf software if it can be added to an arrangement with minor changes in the underlying code and it can be used by the customer for the customer’s purpose upon installation. For off-the-shelf software arrangements, we recognize the software license fee as revenue after delivery has occurred, customer acceptance is reasonably assured, that portion of the fee represents a non-refundable enforceable claim and is probable of collection, and the remaining services such as training are not considered essential to the product’s functionality. For arrangements that include customization or modification of the software, or where software services are otherwise considered essential, we recognize revenue using contract accounting. We generally use the percentage-of-completion method to recognize revenue from these arrangements. We measure progress-to-completion primarily using labor hours incurred, or value added. The percentage-of-completion methodology generally results in the recognition of reasonably consistent profit margins over the life of a contract since we have the ability to produce reasonably dependable estimates of contract billings and contract costs. We use the level of profit margin that is most likely to occur on a contract. If the most likely profit margin cannot be precisely determined, the lowest probable level of profit in the range of estimates is used until the results can be estimated more precisely. These arrangements are often implemented over an extended time period and occasionally require us to revise total cost estimates. Amounts recognized in revenue are calculated using the progress-to-completion measurement after giving effect to any changes in our cost estimates. Changes to total estimated contract costs, if any, are recorded in the period they are determined. Estimated losses on uncompleted contracts are recorded in the period in which we first determine that a loss is apparent. ~~Software Services~~ Some of our software arrangements include services considered essential for the customer to use the software for the customer’s purposes. For these software arrangements, both the software license revenue and the services revenue are recognized as the services are performed using the percentage-of-completion contract accounting method. When software services are not considered essential, the fee allocable to the service element is recognized as revenue as we perform the services. ~~Appraisal Services:~~ For our real estate appraisal projects, we recognize revenue using the proportionate performance method of revenue recognition since many of these projects are implemented over one to three year periods and consist of various unique activities. Under this method of revenue recognition, we identify each activity for the appraisal project, with a typical project generally calling for bonding, office set up, training, routing of map information, data entry, data collection, data verification, informal hearings, appeals and project management. Each activity or act is specifically identified and assigned an estimated cost. Costs which are considered to be associated with indirect activities, such as bonding costs and office set up, are expensed as incurred. These costs are typically billed as incurred and are recognized as revenue equal to cost. Direct contract fulfillment activities and related supervisory costs such as data collection, data entry and verification are expensed as incurred. The direct costs for these activities are determined and the total contract value is then allocated to each activity based on a consistent profit margin. Each activity is assigned a consistent unit of measure to determine progress towards completion and revenue is recognized for each activity based upon the percentage complete as applied to the estimated revenue for that activity. Progress for the fulfillment activities is allocated to the delivered element. Under the residual method, if the fair value of all undelivered elements is determinable, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element(s) and is recognized as revenue assuming the other revenue recognition criteria are met. In software arrangements in which we do not have VSOE for all undelivered elements, revenue is deferred until fair value is determined or all elements for which we do not have VSOE have been delivered. Alternatively, if sufficient VSOE does not exist and the only undelivered element is services that do not involve significant modification or customization of the software, the entire fee is recognized over the period during which the services are expected to be performed.

		Software Licenses

		A majority of our software arrangements involve “off-the-shelf” software. We consider software to be off-the-shelf software if it can be added to an arrangement with minor changes in the underlying code and it can be used by the customer for the customer’s purpose upon installation. For off-the-shelf software arrangements, we recognize the software license fee as revenue after delivery has occurred, customer acceptance is reasonably assured, that portion of the fee represents a non-refundable enforceable claim and is probable of collection, and the remaining services such as training are not considered essential to the product’s functionality. If the fee is not fixed or determinable, including new customers whose payment terms are three months or more from shipment, revenue is generally recognized as payments become due from the customer.

		For arrangements that include significant customization or modification of the software, or where software services are otherwise considered essential, we recognize revenue using contract accounting. We generally use the percentage-of-completion method to recognize revenue from these arrangements. We measure progress-to-completion primarily using labor hours incurred, or value added. The percentage-of-completion methodology generally results in the recognition of reasonably consistent profit margins over the life of a contract since we have the ability to produce reasonably dependable estimates of contract billings and contract costs. We use the level of profit margin that is most likely to occur on a contract. If the most likely profit margin cannot be precisely determined, the lowest probable level of profit in the range of estimates is used until the results can be estimated more precisely. These arrangements are often implemented over an extended time period and occasionally require us to revise total cost estimates. Amounts recognized in revenue are calculated using the progress-to-completion measurement after giving effect to any changes in our cost estimates. Changes to total estimated contract costs, if any, are recorded in the period they are determined. Estimated losses on uncompleted contracts are recorded in the period in which we first determine that a loss is apparent. Certain contracts that include significant customization or modification of the software may contain a general right of return that lapses upon customer acceptance. For these contracts we generally recognize revenue upon customer acceptance. This may result in revenue being recognized in irregular increments.

		For arrangements that include new product releases for which it is difficult to estimate final profitability except to assume that no loss will ultimately be incurred, we recognize revenue under the completed contract method. Under the completed contract method, revenue is recognized only when a contract is completed or substantially complete. Historically these amounts have been immaterial.

		Software Services

		Some of our software arrangements include services considered essential for the customer to use the software for the customer’s purposes. For these software arrangements, both the software license revenue and the services revenue are recognized as the services are performed using the percentage-of-completion contract accounting method. When software services are not considered essential, the fee allocable to the service element is recognized as revenue as we perform the services.

		Computer Hardware Equipment

		Revenue allocable to computer hardware equipment, which is based on VSOE, is recognized when we deliver the equipment and collection is probable.

		Postcontract Customer Support

		Our customers generally enter into PCS agreements when they purchase our software licenses. Our PCS agreements are typically renewable annually. Revenue allocated to PCS is recognized on a straight-line basis over the period the PCS is provided. All significant costs and expenses associated with PCS are expensed as incurred. Fair value for the maintenance and support obligations for software licenses is based upon the specific sale renewals to customers or upon renewal rates quoted in the contracts.

		Appraisal Services:

		For our property appraisal projects, we recognize revenue using the proportionate performance method of revenue recognition since many of these projects are implemented over one to three year periods and consist of various unique activities. Under this method of revenue recognition, we identify each activity for the appraisal project, with a typical project generally calling for bonding, office set up, training, routing of map information, data entry, data collection, data verification, informal hearings, appeals and project management. Each activity or act is specifically identified and assigned an estimated cost. Costs which are considered to be associated with indirect activities, such as bonding costs and office set up, are expensed as incurred. These costs are typically billed as incurred and are recognized as revenue equal to cost. Direct contract fulfillment activities and related supervisory costs such as data collection, data entry and verification are expensed as incurred. The direct costs for these activities are determined and the total contract value is then allocated to each activity based on a consistent profit margin. Each activity is assigned a consistent unit of measure to determine progress towards completion and revenue is recognized for each activity based upon the percentage complete as applied to the estimated revenue for that activity. Progress for the fulfillment activities is typically based on labor hours or an output measure such as the number of parcel counts completed for that activity. Estimated losses on uncompleted contracts are recorded in the period in which we first determine that a loss is apparent.

		Other:

		Deferred revenue consists primarily of unearned support and maintenance revenue that has been billed based on contractual terms in the underlying arrangement with the remaining balance consisting of payments received in advance of revenue being earned under software licensing, software services and hardware installation. Unbilled revenue is not billable at the balance sheet date but is recoverable over the remaining life of the contract through billings made in accordance with contractual agreements. The termination clauses in most of our contracts provide for the payment for the fair value of products delivered and services performed in the event of an early termination.

		Prepaid expenses and other current assets include direct and incremental costs, consisting primarily of third party subcontractor payments and commissions associated with arrangements for which revenue recognition has been deferred. Such costs are expensed at the time the related revenue is recognized.

(3)		Acquisitions

		In late January 2006, we completed the acquisitions of all of the capital stock of MazikUSA, Inc. (“Mazik”) and TACS, Inc. (“TACS”). The total value of these transactions, including transaction costs, was approximately $14.5 million which was comprised of $11.6 million in cash and 325,000 shares of Tyler common stock valued at $2.9 million.

~~Computer Hardware Equipment:~~

	•		Mazik provides an integrated software solution for schools that combines the functionalities of student performance monitoring, student tracking, financial accounting, human resources and reporting.

	•		TACS provides pension and retirement software solutions that assist public and private pension institutions in increasing operational efficiency and accuracy.

~~Revenue allocable to computer hardware equipment, which is based on VSOE, is recognized when we deliver the equipment and collection is probable.~~

~~Postcontract Customer Support:~~

Our customers generally enter into PCS agreements when they purchase our software licenses. Our PCS agreements are generally renewable every year. Revenue allocated to PCS is recognized on a straight-line basis over the period the PCS is provided. All significant costs and expenses associated with PCS are expensed as incurred. Fair value for the maintenance and support obligations for software licenses is based upon the specific sale renewals to customers or upon renewal rates quoted in the contracts.

~~Other:~~

Deferred revenue consists primarily of payments received in advance of revenue being earned under software licensing, software services, hardware installation and support and maintenance contracts. Unbilled revenue is not billable at the balance sheet date but is recoverable over the remaining life of the contract through billings made in accordance with contractual agreements. The termination clauses in most of our contracts provide for the payment for the fair value of products delivered and services performed in the event of an early termination.

Prepaid expenses and other current assets include direct and incremental costs, consisting primarily of third party sub-contractor payments and commissions associated with arrangements for which revenue recognition has been deferred. Such costs are expensed at the time the related revenue is recognized.

~~(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 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 September 30, 2005:~~

Cost Unrealized Gains Unrealized Losses Estimated Fair Value
Auction rate securities $ 10,675 $ — $ — $ 10,675

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

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

$ 13,832 $ — $ — $ 13,832

The purchase price for each of the acquisitions was allocated to assets acquired and liabilities assumed based on preliminary estimated fair values as of the date of acquisition. We acquired assets of approximately $500,000 and assumed liabilities of approximately $1.4 million. We recorded goodwill of $11.9 million, all of which is expected to be deductible for tax purposes, and intangible assets of $3.4 million. The $3.4 million of intangible assets is attributable to acquired software and customer relationships that will be amortized over a weighted average period of approximately five years and purchased in-process research and development of $140,000 which we expensed during the first quarter of 2006. Our consolidated balance sheet as of March 31, 2006 reflects the allocation of the purchase price to the assets acquired and liabilities assumed based on their preliminary estimated

(7)		Share-Based Compensation

		Share-based compensation plan

		We have a stock option plan that provides for the grant of stock options to key employees, directors and non-employee consultants. Options become fully exercisable after three to five years of continuous employment and expire ten years after the grant date. Once exercisable, the employee can purchase shares of our common stock at the market price on the date we granted the option. Effective January 1, 2006, we adopted the provisions of SFAS No. 123R, which establishes accounting for share-based awards exchanged for employee services, using the modified prospective application transition method. Under this transition method, compensation cost recognized in the quarter ended March 31, 2006, includes the applicable amounts of: (a) compensation cost of all share-based payments granted prior to, but not yet vested as of, January 1, 2006 (based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123 and previously presented in the pro forma footnote disclosures), and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006 (based on the grant-date fair value estimated in accordance with the new provisions of SFAS No. 123R). Results for prior periods have not been restated. For prior periods we applied APB No. 25 and related Interpretations, and provided the required pro forma disclosures under SFAS No. 123, “Accounting for Shared-Based Compensation.”

		Determining Fair Value Under SFAS No. 123R

		Valuation and Amortization Method. We estimate the fair value of share-based awards granted using the Black-Scholes option valuation model. We amortize the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods.

		Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. We determine the expected life using the “simplified method” in accordance with Staff Accounting Bulletin No. 107.

		Expected Volatility. Using the Black-Scholes option valuation model, we estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock.

		Risk-Free Interest Rate. We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award.

		Expected Dividend Yield. We have not paid any cash dividends on our common stock in the last ten years and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model.

		Expected Forfeitures. We use historical data to estimate pre-vesting option forfeitures. We record stock-based compensation only for those awards that are expected to vest.

		The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. We did not grant any options during the first quarter 2005. A summary of the weighted average assumptions and results for options granted during the first quarter 2006 is as follows:


	Three months ended
	March 31, 2006
Expected life (in years)		6.5
Expected volatility		46.0	%
Risk-free interest rate		4.7	%
Expected dividend yield		0	%
Expected forfeiture rate		3	%

Prior Period Pro Forma Presentations

Prior to 2006, our share-based compensation plan was accounted for using the intrinsic value method prescribed in APB No. 25 and related Interpretations. No share-based compensation was reflected in net income in the three months ended March 31, 2005, as all stock options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation cost for the plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS No. 123R, our net income and basic and diluted net income per share would have been changed to the pro forma amounts indicated below for the three ~~and nine~~ months ended ~~September 30, 2005 and generated immaterial realized losses for~~March 31, 2005:


Net income as reported	$	470
Add: share-based compensation included in net income, net of tax		—
Deduct: total share-based compensation determined under fair value based method for all awards, net of tax		(259	)


Pro forma net income	$	211


Basic net income per share:
As reported	$	0.01
Pro forma	$	0.01

Diluted net income per share:
As reported	$	0.01
Pro forma	$	0.01

Employee Stock Purchase Plan

Under the ~~three and nine months ended September 30, 2004.~~

As of September 30, 2005, we had $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 was restricted to collateralize letters of credit required under our surety bond program. These letters of credit expire in 2006. In October 2005 we redeemed the certificate of deposit and reinvested $5.0 million in a certificate of deposit with a maturity date of one year of which $4.8 million is restricted to collateralize letters of credit. The remaining balance was reinvested in short term investments.

~~(4) Shareholders’ Equity~~

~~The following table details activity in our common stock:~~

Nine months ended September 30,
2005 2004
Shares Amount Shares Amount
Purchases of common stock 2,181 $ 15,429 851 $ 7,559
Stock option exercises 169 349 602 1,788
Employee stock plan purchases 134 896 — 331

As of September 30, 2005, we have authorization from our board of directors to repurchase up to 340,000 additional shares of Tyler common stock. On October 25, 2005 our board of directors authorized the repurchase of up to an additional 2.0 million shares of Tyler common stock. In October 2005, we repurchased approximately 143,000 shares of Tyler common stock resulting in a total authorization of $2.2 million as of October 25, 2005.

~~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. ~~On March 8, 2005, the board of directors amended the plan to the effect that the~~The purchase price of the shares is equal to 85% of the closing price of Tyler ~~common stock~~shares on the last day of each quarterly offering period. ~~Previously,~~As of March 31, 2006, there were 755,000 shares available for future grants under 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. Employee contributions are received during the quarter and the related Tyler common shares are issued in the month after the quarter ends. In October 2005 and October 2004, respectively, we issued 37,000 and 44,000 shares of common stock to the ESPP.

Comprehensive income is comprised of net income and unrealized gains and losses on investment securities. For the three and nine months ended September 30, 2004 comprehensive income was $2.0 million and $7.1 million, respectively, which included minimal unrealized losses, on investment securities. In 2005, we had no unrealized gains or losses and comprehensive income was the same as net income.

~~(5) Income Tax Provision~~

~~The following table sets forth a comparison of our income tax provision for the following periods:~~

Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
Income tax provision $ 1,703 $ 1,507 $ 3,456 $ 4,978
Effective income tax rate 39.8 % 42.6 % 40.5 % 41.2 %

We made federal and state income tax payments, net of refunds, of $5.9 million in the nine months ended September 30, 2005, compared to $5.5 million in net payments for the same period of the prior year. The effective income tax rates were differentESPP 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. During the third quarter of 2005, we lowered our estimated annual effective income tax rate from 41.3% that was initially used1.0 million shares originally reserved for the six months ended June 30, 2005 to 40.5%. The reduction in the effective income tax rate reflects a corporate reorganization in 2005 which favorably impacted our state income tax provision, lower estimated non-deductible meals and entertainment costs and higher estimated tax-free interest income.

~~(6) Earnings Per Share~~issuance.

~~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,
2005 2004 2005 2004
Numerator for basic and diluted earnings per share:

Net income $ 2,581 $ 2,032 $ 5,072 $ 7,098

Denominator:

Weighted-average basic common shares outstanding 39,104 41,307 39,659 41,397

Assumed conversion of dilutive securities:
Stock options 1,567 1,895 1,446 2,166
Warrants 1,100 1,148 1,055 1,174

Potentially dilutive common shares 2,667 3,043 2,501 3,340

Weighted-average common shares outstanding, assuming full dilution 41,771 44,350 42,160 44,737

Basic earnings per share $ 0.07 $ 0.05 $ 0.13 $ 0.17

Diluted earnings per share $ 0.06 $ 0.05 $ 0.12 $ 0.16

~~(7) 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 Nine months ended
September 30, September 30,
2005 2004 2005 2004
Net income $ 2,581 $ 2,032 $ 5,072 $ 7,098
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 (230 ) (292 ) (706 ) (828 )

Pro forma net income $ 2,351 $ 1,740 $ 4,366 $ 6,270

Basic earnings per share:
As reported $ 0.07 $ 0.05 $ 0.13 $ 0.17

Pro forma $ 0.06 $ 0.04 $ 0.11 $ 0.15

Diluted earnings per share:
As reported $ 0.06 $ 0.05 $ 0.12 $ 0.16

Pro forma $ 0.06 $ 0.04 $ 0.10 $ 0.14

(8) ~~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 had been set for the first reporting period beginning after June 15, 2005, which is the third quarter 2005 for calendar year companies. However, on April 14, 2005, the SEC announced that the effective date of SFAS No. 123R was suspended until January 1, 2006 for calendar year companies. Early adoption is allowed.

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 it 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 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.

~~(9) Restructuring Charge~~

Because of unsatisfactory financial performance early in the fiscal year, we made significant organizational changes in the second quarter of 2005 to those areas of our business that were not performing to our expectations. Our goal was 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 we reorganized that division to eliminate levels of management and reduce overhead expense. We also took actions to reduce headcount and costs in our appraisal and tax software division, and we consolidated certain senior management positions at the corporate office. 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.

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 related payments were substantially paid during the quarter ended June 30, 2005, with the remainder paid during the quarter ended September 30, 2005.

~~The following is a summary of the restructuring liability:~~

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

Total $ 1,260 $ 1,146 $ 114 $ 114 $ —

~~(10)~~ Commitments and Contingencies

On September 9, 2005, Affiliated Computer Services, Inc. (“ACS”) filed litigation in Dallas County, Texas against thirty-three defendants, including Tyler and John M. Yeaman, our Chairman of the ~~Board.~~Board (“Yeaman”). The other named defendants include entities affiliated with William D. Oates (“Oates”), a former director of ours, and certain individuals employed by such entities. The lawsuit alleges, among other things, that we breached the non-competition and non-solicitation covenants set forth in the Stock Purchase Agreement dated December 29, 2000 (the “SPA”) between ACS and us pursuant to which we sold to ACS for cash all of the issued and outstanding capital stock of Business Resources Corporation (“BRC”), which comprised a significant portion of our then existing property records business. In the SPA, we agreed to certain five-year non-competition and non-solicitation covenants, which ~~are due to expire~~expired on December 29, 2005. In addition, the SPA contained a closing condition pursuant to which Oates agreed to amend his then existing three-year non-competition and non-solicitation covenants so that the restricted activities would conform to the language of our restricted activities, which covenants ~~would expire~~expired on December 29, 2003. The lawsuit alleges that Oates (or entities owned by Oates) solicited ACS employees and re-entered the land records business after the expiration of his three-year covenants, but prior to the expiration of our five-year covenants, and further alleges that we, through our ~~non-competition covenants,~~non-compete, are legally responsible for Oates’ actions. The lawsuit further alleges that Oates “controlled Tyler”, “manipulated Tyler”, and was a “legal representative” of ours for a significant, but unspecified, period of time following the sale of BRC, even though Oates has not been a member of our board since 2001, has not been employed by us since the sale of BRC, has had limited contact with our management since the sale of BRC, and to our knowledge, has not owned any stock in us since May 2003. The lawsuit further alleges that we fraudulently induced ACS to enter into the SPA because we allegedly knew that Oates (or entities owned by Oates) would re-enter the land records business after three years, even though the SPA specifically contained different covenants with respect to Oates and us. ACS entered into a settlement agreement with all of the defendants other than Yeaman and us, the terms of which are currently confidential; however, management believes that the settlement agreement extends the non-compete for Oates and his related entities for some period of time.

for under the percentage-of-completion ~~and proportionate performance methods~~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 (“SEC”).~~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 ~~our~~Tyler’s filings with the Securities and Exchange Commission, on its Form 10-K ~~filed with the SEC,~~ for the year ended December 31, ~~2004.~~2005. 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~~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.

In January 2006, we acquired two companies, MazikUSA, Inc. and TACS, Inc. The combined purchase price for the two companies was approximately $14.5 million, comprised of approximately $11.6 million in cash and 325,000 shares of Tyler common stock. See Note 3 in the Notes to the Unaudited Condensed Consolidated Financial Statements.

As disclosed in Note 7 in the Notes to the Unaudited Condensed Consolidated Financial Statements we implemented the Financial Accounting Standards Board’s Statement of Financial Accounting Standard No. 123R, “Share-Based Payments.” In the quarter ended March 31, 2006, the total share-based compensation expense was $471,000, or 1% of total revenue. The distribution of this expense was $440,000 to selling, general and administrative expense and $31,000 to cost of software services and maintenance.

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)~~(“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~~ongoing basis, we evaluate our estimates, including those related to revenue recognition and amortization


§•		Software license ~~revenue~~ related to our other products in the aggregate experienced strong increases compared to the three months ended March 31, 2005 mainly due to a Java-based tax and appraisal and document management product released in mid-2005, several large contracts signed since mid-2005 for another appraisal product and continued market acceptance of our Odyssey courts and justice product declined significantly for the three and nine months ended September 30, 2005 compared to the corresponding prior year periods. The three months ended September 30, 2004 was unusually high because it included approximately $600,000 of license fees earned upon final acceptance for two original Odyssey installation sites.products.

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

	§•		Software ~~service~~services revenue related to financial products, which comprise more than half of our software ~~service~~services revenue, ~~in the periods presented,~~ were up moderately ~~for~~compared to the three months ended ~~September 30, 2005 compared~~March 31, 2005. This increase was driven primarily by additions to our implementation staff over the ~~prior year period. Approximately one-half of~~last twelve months, which has enabled us to deliver our ~~financial software services revenue increase related~~backlog at a faster rate. In addition, we have continued to ~~training and the remaining increases were due to new customers for~~expand our application service provider hosting ~~and disaster recovery~~customer base which provided service revenue increases. These increases were offset somewhat by lower software services ~~and other miscellaneous services. Software service~~ revenue related to one financial ~~products~~product line for which we simplified the ~~nine months ended September 30, 2005 increased substantially over the comparable prior year period due to higher contract volume~~implementation process in ~~the second and third quarter of~~late 2005.

	§•		Software ~~service~~services revenue related to ~~our~~ Odyssey courts and justice product increased significantly for the three and nine months ended September 30, 2005 compared to the prior year periods mainly due to a new $1.4 million contract for follow- on services to an existing software customer that had previously implemented and accepted the software.

	§		~~Software service revenue related to appraisal and tax~~ products was ~~flat for~~up significantly compared to the three months ended ~~September 30,~~March 31, 2005, compared to three months ended September 30, 2004. For the nine months ended September 30, 2005 compared to the prior year period, appraisal and tax software service revenues declined substantially. This decline was mainly associated with the completion of several legacy appraisal and tax contracts in 2004 and early 2005. Inreflecting increased contract volume. Since March 31, 2005, we have increased our ~~sales focus on our new appraisal~~presence with Odyssey in Texas and ~~tax software product, Orion.~~Florida and added one contract in Nevada.

Maintenance. We provide maintenance and support services for our software products and third party software. Maintenance revenues increased 15% due to growth in our installed customer base ~~as evidenced by our software license revenue~~ and slightly higher maintenance rates on certain product lines.

Appraisal services. The decrease in appraisal services ~~revenues~~revenue is due to the ~~recent~~ completion of ~~certain~~one significant appraisal ~~contracts. These larger projects are often relatively discretionary~~contract 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.~~first quarter of 2005. The appraisal services business is driven in part by revaluation cycles in various states and based on our ~~new~~ current

Cost of software license revenues. The main component of our cost of software license revenues is amortization expense for capitalized development costs on certain software products, with third party software costs making up the ~~remaining~~ balance. Once a ~~new~~ product is released, we begin to amortize the costs associated with its ~~development.~~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, ~~but not to exceed~~which is generally five years. Development costs consist mainly of personnel costs, such as salary and benefits paid to our ~~developers. Amortization~~developers and rent for related office space.

Our software license sales mix in the quarter ended March 31, 2006 included more third party software revenue compared to the prior year period. As a result, the cost of third party software also rose consistent with the related sales increase. This increase was offset slightly by lower amortization expense ~~for capitalized~~of software ~~products declined from $1.6 million for the three months ended September 30, 2004 to $1.4 million for the three months ended September 30, 2005,~~development costs because ~~certain software~~some products became fully amortized during ~~2005, which offset new~~the first quarter of 2006.

Cost of acquired software.When we complete an acquisition we allocate the excess purchase price over the fair value of net tangible assets acquired to amortizable software, customer and trade name intangibles, with the remainder allocated to goodwill that is not subject to amortization. Amortization expense of acquired software is recorded as cost of revenues while amortization expense of other acquisition intangibles is recorded as amortization of customer and trade name intangibles. The estimated useful life of acquired software ranges from three to five years. In 2006, cost of acquired software ~~products released in 2004. Amortization expense for capitalized software products for the nine months ended September 30, 2005 was flat~~increased compared to the ~~corresponding~~ prior year ~~period.~~because we completed two small acquisitions in late January 2006.

Cost of software services and maintenance revenues. ~~For the three month period ended September 30, 2005 cost~~Cost of software services and maintenance grew 9% while the related software services and maintenance revenues increased 11% compared to the prior year period. For the nine months ended September 30, 2005 cost of software services and maintenance grew 11% while the related software services and maintenance revenues increased 8% 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 licenses, conversion of customer data, training customer personnel and support activities. ~~For the nine months ended September 30, 2005, costs increased~~Costs grew at a ~~faster~~slower rate than related software services and maintenance revenues for the same ~~period,~~periods, which ~~reflects lower utilization~~is mainly due to significant organizational changes we made in the second quarter of ~~personnel~~2005 to reduce costs in our appraisal services and our appraisal and tax software division, efforts and costs to support our recently released Orion products, 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, and higher health care costs.business.

Cost of appraisal services revenues. The decline in the cost of appraisal services revenues and related increase in gross margin is ~~consistent with lower appraisal services revenues. We often hire temporary employees~~mainly due to ~~assist in appraisal projects whose term of employment generally ends with the projects’ completion. In addition,~~significant organizational changes we made in the second quarter of 2005 ~~we made significant organizational changes~~ to our appraisal services ~~division. See “Restructuring Charge.”~~business to bring costs in line with expected levels of revenue, which eliminated levels of management and reduced overhead expense.

Gross margin.~~The~~Our overall gross margin for the quarter ended ~~September 30, 2005~~March 31, 2006 was ~~37.9%~~34.5%, compared to ~~36.6%~~31.8% in the quarter ended ~~September 30, 2004. This increase was~~March 31, 2005. The gross margin rose mainly due to ~~slightly~~ lower ~~amortization expense for capitalized software products which became fully amortized in 2005 and~~costs as a ~~decline in~~result of the restructuring of our appraisal services ~~as a proportion of total revenues. The overall gross margin for the nine months ended September 30, 2005 was 36.0%, compared to 37.0% for the nine months ended September 30, 2004. This decline~~business in the year-to-date gross margin was due to cost inefficiencies associated with lower appraisal services revenues and efforts and costs to support our recently released Orion products, as well as a shift in the rolessecond quarter of ~~certain of our development personnel whose costs were capitalized in 2004 to projects that are being expensed in~~ 2005.

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 overheadnon-cash share-based compensation expense. We did not have ~~also taken actions~~any in-process research and development or shared-based compensation expenses in 2005. Offsetting these charges was lower SG&A expense relating 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~~due to 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 atrestructuring of those ~~business units and have reorganized our corporate structure to consolidate certain senior management positions.~~

~~In connection with the reorganization, we incurred certain charges~~businesses 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 related payments were substantially paid during the quarter ended June 30, 2005, with the remainder paid during the quarter ended September 30, 2005.

Amortization of ~~Acquisition~~Customer and Trade Name Intangibles

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

Third Quarter Nine Months
Change Change
($ in thousands) 2005 2004 $ % 2005 2004 $ %
Amortization of acquisition intangibles $ 515 $ 583 ($68 ) (12 )% $ 1,545 $ 2,175 ($630 ) (29 )%

~~Amortization expense of acquisition intangibles declined due to certain intangible assets recorded for previous acquisitions which became fully amortized in 2004.~~ Acquisition intangibles are ~~comprised~~composed of the excess of the purchase price over the fair value of net tangible assets acquired ~~which~~that is allocated to acquired and amortizable software, customer ~~base~~ and trade name intangibles with the remainder allocated to goodwill that is not subject to amortization. However, amortization expense related to acquired software is included with cost of revenues while amortization expense of customer and trade name intangibles is recorded as a non-operating expense. The following table sets forth a comparison of amortization of customer and trade name for the periods presented as of March 31:

~~Other~~


					First Quarter 2006 vs.
	First Quarter				First Quarter 2005
($ in thousands)	2006		2005		Amount		%
Amortization of customer and trade name intangibles	$	322	$	317	$	5		2	%

In ~~May 2005,~~January 2006 we sold certain assets of our appraisal and tax software division for $75,000 in cash plus future contingent consideration. Proceeds consisted of $75,000 cash at closing and sixteen quarterly payments of $25,000,completed two acquisitions which ~~are subject~~increased amortizable customer intangibles by $217,000. This amount will be amortized over five 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 we are recording 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 and an additional gain of $23,000 in the quarter ended September 30, 2005 upon receipt of cash.seven years.

Income Tax Provision

The following table sets forth a comparison of our income tax ~~provision:~~provision for the periods presented as of March 31:


	Third Quarter											Nine Months																		First Quarter 2006 vs.
							Change											Change						First Quarter						First Quarter 2005
($ in thousands)	2005			2004			$		%			2005			2004			$			%			2006			2005			Amount		%
Income tax provision	$	1,703		$	1,507		$	196		13	%	$	3,456		$	4,978			($1,522	)		(31	)%	$	1,347		$	330		$	1,017		308	%
Effective income tax rate		39.8	%		42.6	%							40.5	%		41.2	%								40	%		41	%

~~Net Income~~

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

Third Quarter Nine Months
Change Change
2005 2004 $ % 2005 2004 $ %
Net income $ 2,581 $ 2,032 $ 549 27 % $ 5,072 $ 7,098 ($2,026 ) (29 )%
Earnings per diluted share $ 0.06 $ 0.05 $ .01 20 $ 0.12 $ 0.16 ($0.04 ) (25 )

Diluted weighted shares outstanding 41,771 44,350 (2,579 ) (6 ) 42,160 44,737 (2,577 ) (6 )

FINANCIAL CONDITION AND LIQUIDITY

As of ~~September 30, 2005, our balance in~~March 31, 2006, we had cash and cash equivalents ~~was $16.0~~of $18.6 million and we had short-term investments of ~~$10.7~~$10.3 million, compared to cash and cash equivalents of ~~$12.6~~$20.7 million and short-term investments of ~~$13.8~~$11.7 million at December 31, ~~2004.~~2005. Cash provided by operating activities was ~~$16.7~~$10.0 million in the ~~nine~~first three months ~~ended September 30, 2005~~of 2006 compared to ~~$18.6~~$7.5 million for the same period in 2004. The decline in cash provided by operating activities is attributable primarily to lower net earnings, including the restructuring charge. 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. 2005.

At ~~September 30, 2005,~~March 31, 2006, our days sales outstanding (“DSO”) ~~were 86~~was 77 days compared to DSO of 92101 days at December 31, ~~2004.~~2005. Our maintenance billing cycle is at one of its highest points in December and the majority of the related cash payments are received in the first quarter of each year. As a result our DSO decreased in the first quarter compared to the fourth ~~quarter because of annual maintenance billing collections. Our maintenance billings typically peak in December and June each year and are followed by collections in the subsequent~~ quarter. DSO is calculated based on accounts receivable divided by the quotient of annualized quarterly revenues divided by 360 days.

Investing activities ~~provided~~used cash of ~~$1.0~~$11.1 million in the ~~nine~~first three months ~~ended September 30, 2005~~of 2006 compared to ~~$10.7~~$1.3 million ~~used for~~cash provided from investing activities for the same period in ~~2004.~~2005. In ~~both years~~January 2006, we acquired two companies, MazikUSA, Inc. and TACS, Inc. The combined purchase price for the two companies was approximately $14.5 million, comprised of approximately $11.6 million in cash and 325,000 shares of Tyler common stock. Other investing activities in the first quarter of 2006 were primarily comprised of ~~changes~~a liquidation of $1.5 million of short term investments and investments in property and equipment. In the comparable prior year period, investing activities were comprised of a liquidation of $2.4 million of short term investments and investments in software development and property and ~~equipment, while 2004 also included certain post closing acquisition payments.~~equipment. During the three months ended March 31, 2006, we had capital expenditures of $1.0 million compared to $1.1 million during the three months ended March 31, 2005. The ~~increase in cash provided from investing activities~~decline was due to ~~a small liquidation of short term investments and~~ lower investments in software development costs in 2006 because we completed development of a major appraisal and tax product, as well as an enhancement to ~~certain financial~~other products, in ~~2004.~~2005. The other expenditures related to computer ~~equipment~~hardware and software 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.~~agreement (the “Credit Facility”). The ~~credit agreement~~Credit Facility 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 September 30, 2005, our effective interest rate was 5.4%. The credit agreement is secured by substantially all of our personal propertymillion 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 and limits the amount of Tyler common stock we can repurchase. As of September 30, 2005, we are in compliance with those covenants. The credit agreement also includes a $10.0 million Letter of Credit facility under which the banks will issue cash collateralized letters of credit.

~~At September 30, 2005,~~ As of March 31, 2006, our effective interest rate was 6.3% under the Credit Facility. As of March 31, 2006 we had no ~~outstanding borrowings under the credit agreement~~debt and ~~our bank had issued~~outstanding letters of credit totaling ~~$4.8~~$4.1 million to secure surety bonds required by some of our customer contracts. ~~All of the outstanding~~These letters of credit ~~were collateralized with a certificate of deposit; thus, we had available credit of $30.0 million under the credit agreement.~~expire during 2006 and early 2007.

Financing activities used cash of ~~$14.2~~$1.0 million in the ~~nine~~first three months ~~ended September 30, 2005~~of 2006 compared to ~~$5.5~~$7.6 million ~~used for financing activities for~~in the same period ~~in 2004.~~for 2005. Cash used in financing activities was primarily comprised of purchases of treasury shares, net of proceeds from stock option exercises and employee stock purchase plan ~~purchases.~~activity.

AsDuring the three months ended March 31, 2006, we purchased 250,000 shares of ~~September 30, 2005 we~~our common stock for an aggregate purchase price of $2.2 million. We currently have ~~board~~ authorization to repurchase up to ~~340,000~~1.8 million additional shares of Tyler common stock. On October 25, 2005 our board of directors authorized the repurchase of up to an additional 2.0 million shares of Tyler common stock. In October 2005, we repurchased approximately 143,000 shares of Tyler common stock resulting in a total authorization of $2.2 million as of October 25, 2005. A summary of the repurchase activity during the ~~nine months ended September 30, 2005~~first quarter 2006 is as follows:

Maximum number of
shares that may be
Total number purchased under
of shares Average price 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
July 1 through July 31 122,000 7.54 819,000
August 1 through August 31 416,000 7.78 403,000
September 1 through September 30 63,000 8.03 340,000

Total nine months ended September 30, 2005 2,181,000 $ 7.07


					Maximum number of
	Total number				shares that may be
	of shares		Average price paid		purchased under current
Period	purchased		per share		authorization
January 1 through January 31		250	$	8.75		1,814
February 1 through February 28		—		—		1,814
March 1 through March 31		—		—		1,814

Total first quarter		250	$	8.75		1,814

The repurchase program, which was approved by our board of directors, was announced in October 2002, and was amended in April and July 2003, October 2004 and October 2005. 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~~$20 million in any trailing twelve month period beginning after February 11, 2005.

We made federal and state income tax payments, net of refunds of ~~$5.9~~$1.1 million in the ~~nine~~three months ended ~~September 30, 2005,~~March 31, 2006 compared to ~~$5.5 million~~$585,000 in the comparable prior year.

Part II. OTHER INFORMATION

ITEM 1. Legal Proceedings

We vehemently deny all allegations contained in the lawsuit. Management believes that we have not breached any non-competition covenants, have not solicited ACS employees, and have not misappropriated ACS confidential information. Management further believes that the “factual” allegations made against us are false and inaccurate and that the legal theories asserted by ACS are without merit. Management further believes based on discovery that has taken place to date that even if the allegations as currently set forth in the petition were true, that ACS has suffered no or nominal damage, particularly in light of the settlement agreement with Oates and his related entities.

We have filed counterclaims against ACS, including claims for business disparagement and defamation, alleging that ACS has published factually inaccurate and defamatory statements about us to third parties, including our customers and prospective customers, with malice and/or negligence regarding the truth of those statements. We intend to defend the lawsuit and pursue our counterclaims vigorously. The future costs associated with such defense and in pursuit of the counterclaims are uncertain and difficult to predict and may be material.

Other than routine litigation incidental to our business and except as described herein, there are no material legal proceedings pending to which we are party or to which any of our properties are subject.

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

None


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


	Nine months ended September 30,						Three months ended March 31,
	2005			2004			2006			2005
Cash flows from operating activities:
Net income	$	5,072		$	7,098		$	2,012		$	470
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		7,857			8,587			2,647			2,772
Gain on disposal of assets		(85	)		—
Share-based compensation								471			—
Purchased in-process research and development charge								140			—
Non cash item								159			—
Deferred income taxes								(493	)		—
Changes in operating assets and liabilities, exclusive of effects of acquired companies		3,856			2,905			5,068			4,231

Net cash provided by operating activities		16,700			18,590			10,004			7,473


Cash flows from investing activities:
Proceeds from sales of short-term investments		13,176			4,000
Purchases of short-term investments		(10,032	)		(8,747	)
Post closing acquisition payments		—			(946	)
Proceeds from sale of short-term investments								6,330			8,401
Purchase of short-term investments								(4,850	)		(6,032	)
Cost of acquisitions								(11,613	)		—
Investment in software development costs		(951	)		(3,453	)		(73	)		(482	)
Additions to property and equipment		(1,196	)		(1,634	)		(955	)		(621	)
Other		15			101			34			54

Net cash provided (used) by investing activities		1,012			(10,679	)
Net cash (used by) provided by investing activities								(11,127	)		1,320


Cash flows from financing activities:
Purchase of treasury shares		(15,429	)		(7,559	)		(2,191	)		(8,106	)
Employee stock plan purchases		896			331
Proceeds from employee stock purchase plan								222			343
Proceeds from exercise of stock options		349			1,788			859			184
Other		(31	)		(33	)		95			—

Net cash used by financing activities		(14,215	)		(5,473	)		(1,015	)		(7,579	)


Net increase in cash and cash equivalents		3,497			2,438
Net (decrease) increase in cash and cash equivalents								(2,138	)		1,214	��
Cash and cash equivalents at beginning of period		12,573			10,268			20,733			12,573


Cash and cash equivalents at end of period	$	16,070		$	12,706		$	18,595		$	13,787


2006	$	1,151
2007		1,348
2008		1,007
2009		708
2010		423
2011		4


	Three months ended March 31, 2006
	As Reported			If Reported
	Following SFAS No. 123R			Following APB No. 25
Operating income	$	3,262		$	3,686
Income before benefit for income taxes		3,359			3,783
Net income		2,012			2,329

Net income per share:
Basic earnings per share		0.05			0.06
Diluted earnings per share		0.05			0.06

Condensed consolidated statement of cash flows:
Net cash provided by operating activities		10,004			10,099
Net cash used in financing activities		(1,015	)		(1,110	)


						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Shares			Price		Life (Years)		Value

Outstanding at December 31, 2005		4,608		$	4.99
Options granted		20			9.92
Options exercised		(249	)		3.45
Options forfeited		—			—
Options expired		—			—

Outstanding at March 31, 2006		4,379		$	5.10		6	$	25,832
Exercisable at March 31, 2006		2,660		$	4.04		5	$	18,516


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


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


	Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Auction rate securities	$	10,675	$	—	$	—	$	10,675

		fair values at the date of acquisition. The operating results of the acquired business are included in our results of operations since their respective dates of acquisition in late January 2006.

(4)		Shareholders’ Equity

		The following table details activity in our common stock:

		As of March 31, 2006 we have authorization from our board of directors to repurchase up to 1.8 million additional shares of Tyler common stock.

(5)		Income Tax Provision

		For the three months ended March 31, 2006, we had an income tax provision of $1.3 million compared to $330,000 for the three months ended March 31, 2005. 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 state income taxes, the qualified manufacturing activities deduction and non-deductible meals and entertainment costs. The effective income tax rate in 2006 is also impacted by non-deductible share-based compensation expense.

		We made federal and state income tax payments, net of refunds, of $1.1 million in the three months ended March 31, 2006, compared to $585,000 in net payments for the same period of the prior year.

(6)		Earnings Per Share

		The following table details the reconciliation of basic earnings per share to diluted earnings per share:

		Share-Based Compensation Under SFAS No. 123R

		The following table summarizes share-based compensation expense related to share-based awards under SFAS No. 123R for the three months ended March 31, 2006 which is recorded in the statement of operations as follows:


	Three months ended
	March 31, 2006
Cost of software services and maintenance	$	31
Selling, general and administrative expenses		440

Total share-based compensation expense	$	471

		The amount included in selling, general and administrative expense includes $47,000 of share-based compensation expense related to a non-employee consultant.

		At March 31, 2006 we had unvested options to purchase 1.7 million shares with a weighted average grant date fair value of $3.51. As of March 31, 2006, we had $4.6 million of total unrecognized compensation cost related to unvested options, net of expected forfeitures, which is expected to be amortized over the following periods:


		2006		2005

Weighted average grant-date fair value of stock options granted		$	5.23	$	—
Total fair value of stock options vested			45		156
Total intrinsic value of stock options exercised	��		1,444		620


	Options Outstanding						Options Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
	Number		Contractual Life		Exercise		Number		Exercise
Range of Exercise Prices	Outstanding		(Years)		Price		Exercisable		Price
$1.09 - $2.19		802		5.1	$	1.63		802	$	1.63
$2.19 - $3.28		23		5.2		2.62		23		2.62
$3.28 - $4.38		441		4.4		3.93		435		3.94
$4.38 - $5.47		1,630		5.7		4.86		1,141		4.96
$5.47 - $6.56		123		5.2		5.88		78		5.86
$6.56 - $7.66		1,107		8.8		7.53		82		7.63
$7.66 - $8.75		91		8.8		8.04		12		7.80
$8.75 - $9.84		112		7.9		9.15		57		9.09
$9.84 - $10.18		50		5.2		10.08		30		10.19

		4,379		6.3	$	5.10		2,660	$	4.04


	Three months ended						Nine months ended
	September 30						September 30
	2005			2004			2005			2004
Income tax provision	$	1,703		$	1,507		$	3,456		$	4,978
Effective income tax rate		39.8	%		42.6	%		40.5	%		41.2	%


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

Total	$	1,260	$	1,146	$	114	$	114	$	—


	First Quarter										First Quarter 2006 vs.
			% of					% of			First Quarter 2005
($ in thousands)	2006		Revenues			2005		Revenues			Amount			%
Selling, general and administrative expenses	$	11,878		27	%	$	11,944		29	%	$	(66	)		(1	)%


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


				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)