UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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.

For the quarterly period ended ~~March 31,~~June 30, 2006

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.

Commission File Number 1-10485

TYLER TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)


DELAWARE		~~75-2303920~~
(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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filerþ Non-accelerated filero

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yeso Noþ

Number of shares of common stock of registrant outstanding at ~~April~~July 25, 2006: ~~39,174,509~~
38,649,931

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	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 ~~1350~~906
Certification Pursuant to ~~18 U.S.C.~~ Section ~~1350~~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				Three months ended				Six months ended
	March 31,				June 30,				June 30,
	2006		2005		2006		2005		2006		2005
Revenues:
Software licenses	$	7,571	$	6,337	$	9,824	$	7,872	$	17,395	$	14,209
Software services		13,120		12,252		15,061		13,469		28,181		25,721
Maintenance		17,657		15,421		17,716		15,806		35,373		31,227
Appraisal services		4,699		5,149		5,108		4,635		9,807		9,784
Hardware and other		1,811		1,500		1,442		1,403		3,253		2,903

Total revenues		44,858		40,659		49,151		43,185		94,009		83,844

Cost of revenues:
Software licenses		2,676		2,249		2,416		2,275		5,092		4,524
Acquired software		301		198		353		199		654		397
Software services and maintenance		21,745		19,913		22,949		19,963		44,694		39,876
Appraisal services		3,406		4,312		3,454		3,706		6,860		8,018
Hardware and other		1,268		1,072		1,033		992		2,301		2,064

Total cost of revenues		29,396		27,744		30,205		27,135		59,601		54,879


Gross profit		15,462		12,915		18,946		16,050		34,408		28,965

Selling, general and administrative expenses		11,878		11,944		12,993		11,263		24,871		23,207
Restructuring charge						—		1,260		—		1,260
Amortization of customer and trade name intangibles		322		317		325		316		647		633


Operating income		3,262		654		5,628		3,211		8,890		3,865

Other income, net		97		146		200		233		297		379

Income before income taxes		3,359		800		5,828		3,444		9,187		4,244
Income tax provision		1,347		330		2,068		1,423		3,415		1,753

Net income	$	2,012	$	470	$	3,760	$	2,021	$	5,772	$	2,491


Earnings per common share:
Basic	$	0.05	$	0.01	$	0.10	$	0.05	$	0.15	$	0.06

Diluted	$	0.05	$	0.01	$	0.09	$	0.05	$	0.14	$	0.06


Basic weighted average common shares outstanding		39,114		40,229		39,026		39,615		39,070		39,920
Diluted weighted average common shares outstanding		41,894		42,735		41,946		41,943		41,920		42,337

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


	March 31,						June 30,
	2006			December 31,			2006			December 31,
	(Unaudited)			2005			(Unaudited)			2005
ASSETS
Current assets:
Cash and cash equivalents	$	18,595		$	20,733		$	11,974		$	20,733
Short-term investments available-for-sale		10,270			11,750			10,470			11,750
Restricted certificate of deposit		5,000			4,750			5,000			4,750
Accounts receivable (less allowance for losses of $1,886 in 2006 and $1,991 in 2005)		38,750			49,644
Accounts receivable (less allowance for losses of $1,979 in 2006 and $1,991 in 2005)								52,289			49,644
Prepaid expenses		5,776			5,158			5,829			5,158
Other current assets		2,150			2,201			1,741			2,201
Deferred income taxes		2,128			2,128			2,128			2,128

Total current assets		82,669			96,364			89,431			96,364

Accounts receivable, long-term portion		626			1,547			837			1,547
Property and equipment, net		6,193			5,759			6,948			5,759

Other assets:
Restricted certificate of deposit		—			250			—			250
Goodwill		65,610			53,709			65,771			53,709
Customer related intangibles, net		17,617			17,696			17,319			17,696
Software, net		19,051			17,645			17,514			17,645
Trade name, net		1,235			1,262			1,246			1,262
Sundry		176			205			187			205

	$	193,177		$	194,437		$	199,253		$	194,437


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,724		$	3,330		$	3,687		$	3,330
Accrued liabilities		13,698			16,027			14,361			16,027
Deferred revenue		48,429			51,304			55,719			51,304
Income taxes payable		913			289			—			289

Total current liabilities		65,764			70,950			73,767			70,950

Deferred income taxes		10,797			11,290			10,153			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 2006 and 2005		481			481			481			481
Additional paid-in capital		151,123			151,515			151,508			151,515
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	)
Accumulated earnings								9,541			3,769
Treasury stock, at cost; 9,433,413 and 9,273,342 shares in 2006 and 2005, respectively								(46,197	)		(43,568	)

Total shareholders’ equity		116,616			112,197			115,333			112,197

	$	193,177		$	194,437		$	199,253		$	194,437

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


	Three months ended March 31,						Six months ended June 30,
	2006			2005			2006			2005
Cash flows from operating activities:
Net income	$	2,012		$	470		$	5,772		$	2,491
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		2,647			2,772			5,121			5,339
Share-based compensation		471			—			975			—
Purchased in-process research and development charge		140			—			140			—
Non cash item		159			—			287			—
Deferred income taxes		(493	)		—			(141	)		—
Gain on disposal of assets								—			(62	)
Changes in operating assets and liabilities, exclusive of effects of acquired companies		5,068			4,231			(1,525	)		(564	)

Net cash provided by operating activities		10,004			7,473			10,629			7,204


Cash flows from investing activities:
Proceeds from sale of short-term investments		6,330			8,401			11,930			11,926
Purchase of short-term investments		(4,850	)		(6,032	)
Purchases of short-term investments								(10,650	)		(7,532	)
Cost of acquisitions		(11,613	)		—			(11,653	)		—
Investment in software development costs		(73	)		(482	)		(113	)		(777	)
Additions to property and equipment		(955	)		(621	)		(2,320	)		(885	)
Other		34			54			(15	)		63

Net cash (used by) provided by investing activities		(11,127	)		1,320			(12,821	)		2,795


Cash flows from financing activities:
Purchase of treasury shares		(2,191	)		(8,106	)		(8,261	)		(10,768	)
Proceeds from employee stock purchase plan		222			343			480			625
Proceeds from exercise of stock options		859			184			1,083			284
Other		95			—			131			(31	)

Net cash used by financing activities		(1,015	)		(7,579	)		(6,567	)		(9,890	)


Net (decrease) increase in cash and cash equivalents		(2,138	)		1,214	��		(8,759	)		109
Cash and cash equivalents at beginning of period		20,733			12,573			20,733			12,573


Cash and cash equivalents at end of period	$	18,595		$	13,787		$	11,974		$	12,682

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 ~~March 31,~~June 30, 2006 and December 31, 2005 and operating result amounts are for the three and six months ended ~~March 31,~~June 30, 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 objective 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 SOP 98-9 in accounting for any 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

		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~~$14.6 million, which was comprised of ~~$11.6~~$11.7 million in cash and 325,000 shares of Tyler common stock valued at $2.9 million.

	•		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.

~~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~~$400,000 and assumed liabilities of approximately $1.4 million. We recorded goodwill of ~~$11.9~~$12.1 million, all of which is expected to be deductible for tax purposes, and other 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,~~June 30, 2006 reflects the allocation of the purchase price to the assets acquired and liabilities assumed based on their ~~preliminary~~ estimated

(4)		Restructuring Charge

~~(4)~~		Because of unsatisfactory financial performance early in 2005, 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 reorganized our appraisal services business 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 eliminated approximately 120 positions, including management, staff and project-related personnel.

		In connection with the reorganization, we incurred certain charges which were primarily comprised of employee severance costs and related fringe benefits, and totaled approximately $1.3 million before income taxes. The related payments were paid in 2005.

(5)		Shareholders’ Equity

		The following table details activity in our common stock:


	Three months ended March 31,												Six months ended June 30,
	2006						2005						2006						2005
	Shares			Amount			Shares			Amount			Shares			Amount			Shares			Amount
Repurchases of common stock		(250	)	$	(2,191	)		(1,169	)	$	(8,106	)		(833	)	$	(8,261	)		(1,580	)	$	(10,768	)
Stock option exercises		249			859			112			184			295			1,083			140			284
Employee stock plan purchases		30			222			48			343			53			443			92			625
Shares issued for acquisitions		325			2,891			—			—			325			2,891			��			—

		~~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 the state income taxes, the qualified manufacturing activities deduction, ~~and~~ non-deductible meals and entertainment ~~costs.~~costs and in 2006 the rate is also impacted by non-deductible share-based compensation expense. The effective income tax rate in 2006 is ~~also impacted by non-deductible share-based compensation expense.~~expected to be 39.9%. For the three and six months ended June 30, 2006 the effective rate declined compared to the prior years mainly due to changes in the Texas franchise tax law and rates enacted in the second quarter of 2006 and lower state income taxes as a result of a change in our corporate structure implemented in early 2005.

		We made federal and state income tax payments, net of refunds, of ~~$1.1~~$4.9 million in the ~~three~~six months ended ~~March 31,~~June 30, 2006, compared to ~~$585,000~~$3.2 million in net payments for the same period of the prior year.

~~(7)~~(8)		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 options become 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~~Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment”, 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~~three and six months ended ~~March 31,~~June 30, 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, “Accounting for Stock-Based Compensation”, 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~~Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations, and provided the required pro forma disclosures under SFAS No. ~~123, “Accounting for Shared-Based Compensation.”~~123.

		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	%

		~~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
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.

		~~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:

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.

2006 $ 1,151
2007 1,348
2008 1,007
2009 708
2010 423
2011 4
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 following table presents the impact of our adoption of SFAS No. 123R on selected line items from our condensed consolidated financial statements for the three months ended March 31, 2006:~~

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model. We granted options for 97,590 shares and 45,000 shares for the three months ended June 30, 2006 and 2005, respectively. A summary of the weighted average assumptions and results for options granted during the three and six months ended June 30, 2006 is as follows:

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 )


	Three months ended						Six months ended
	June 30						June 30
	2006			2005			2006			2005
Expected life (in years)		5.0			5.0			5.0			5.0
Expected volatility		45.3	%		72.6	%		45.4	%		72.6	%
Risk-free interest rate		4.9	%		3.8	%		4.8	%		3.8	%
Expected dividend yield		0	%		0	%		0	%		0	%
Expected forfeiture rate		3	%		0	%		3	%		0	%

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 and six months ended June 30, 2006, which is recorded in the statement of operations:


	Three months ended		Six months ended
	June 30, 2006		June 30, 2006
Cost of software services and maintenance	$	42	$	73
Selling, general and administrative expense		462		902

Total share-based compensation expense	$	504	$	975

The amount included in selling, general and administrative expense includes share-based compensation expense related to a non-employee consultant of $65,000 for three months ended June 30, 2006 and $112,000 for six months ended June 30, 2006.

At June 30, 2006 we had unvested options to purchase 1.8 million shares with a weighted average grant date fair value of $3.56. As of June 30, 2006, we had $4.8 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 (last six months)	$	844
2007		1,502
2008		1,152
2009		790
2010		492
2011		29

As a result of adopting SFAS No. 123R on January 1, 2006, our income before income taxes and net income for the six months ended June 30, 2006, are $863,000 and $447,000 lower, respectively, than if we had continued to account for share-based compensation under APB No. 25. Basic and diluted earnings per share for the six months ended June 30, 2006 are both $0.01 lower than if we had continued to account for share-based compensation under APB No. 25.

Stock Option Activity

As of ~~March 31,~~June 30, 2006, we had options to purchase an aggregate of 4.4 million shares outstanding, and options to purchase an additional ~~53,000~~959,000 shares were authorized for future grants under the plan.

Options granted, exercised, forfeited and expired are summarized as follows:


						Weighted
				Weighted		Average
				Average		Remaining		Aggregate							Weighted Average
	Number of			Exercise		Contractual		Intrinsic							Remaining
	Shares			Price		Life (Years)		Value					Weighted Average		Contractual Life		Aggregate Intrinsic
										Number of Shares			Exercise Price		(Years)		Value
Outstanding at December 31, 2005		4,608		$	4.99						4,608			4.99
Options granted		20			9.92						117			10.20
Options exercised		(249	)		3.45						(295	)		3.68
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
Outstanding at June 30, 2006											4,430			5.21		6	$	26,523
Exercisable at June 30, 2006											2,649			4.07		5	$	18,891

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


	Options Outstanding						Options Exercisable
			Weighted
			Average
			Remaining		Weighted				Weighted
	Number		Contractual Life		Average		Number		Average
Range of Exercise Prices	Outstanding		(Years)		Exercise Price		Exercisable		Exercise Price
$1.09 — $ 2.19		796		4.8	$	1.63		796	$	1.63
$2.19 — $ 3.28		23		5.0		2.62		23		2.62
$3.28 — $ 4.38		434		4.1		3.92		431		3.93
$4.38 — $ 5.47		1,610		5.5		4.86		1,121		4.96
$5.47 — $ 6.56		120		4.9		5.89		87		5.88
$6.56 — $ 7.66		1,100		8.6		7.53		75		7.63
$7.66 — $ 8.75		91		8.5		8.04		12		7.80
$8.75 — $ 9.84		112		7.6		9.15		74		9.15
$9.84 — $10.26	144			8.2		10.20		30		10.19

	4,430			6.2	$	5.21		2,649	$	4.07

		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 and six months ended June 30, 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 six months ended June 30, 2005:

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 months ended March 31, 2005:


	Three months			Six months
	ended June 30,			ended June 30,
	2005			2005
Net income as reported	$	2,021		$	2,491
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		(218	)		(477	)

Pro forma net income	$	1,803		$	2,014


Basic net income per share:
As reported	$	0.05		$	0.06

Pro forma	$	0.05		$	0.05


Diluted net income per share:
As reported	$	0.05		$	0.06

Pro forma	$	0.04		$	0.05

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 our Employee Stock Purchase Plan (“ESPP”) participants may contribute up to 15% of their annual compensation to purchase common shares of Tyler. The purchase price of the shares is equal to 85% of the closing price of Tyler shares on the last day of each quarterly offering period. As of June 30, 2006, there were 732,000 shares available for future grants under the ESPP from the 1.0 million shares originally reserved for issuance.

(9)		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 (“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 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 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-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

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 (“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 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 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-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.

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 1A. Risk Factors

No material changes.

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 government customers; competition in the industry in which we conduct business and the impact of competition on pricing, revenues and margins; with respect to customer contracts accounted for under the percentage-of-completion method of accounting, the performance of such contracts in accordance with our cost and revenue estimates; our ability to maintain health and other insurance coverage and capacity due to changes in the insurance market and the impact of increasing insurance costs on the results of operations; the costs to attract and retain qualified personnel, changes in product demand, the availability of products, economic conditions, costs of compliance with corporate governance and public disclosure requirements as issued by the Sarbanes-Oxley Act of 2002 and New York Stock Exchange rules, changes in tax risks and other risks indicated in our filings with the Securities and Exchange Commission. The factors described in this paragraph and other factors that may affect Tyler, its management or future financial results, as and when applicable, are discussed in Tyler’s filings with the Securities and Exchange Commission, on its Form 10-K for the year ended December 31, 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 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~~$14.6 million, comprised of approximately ~~$11.6~~$11.7 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 78 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~~three and six months ended ~~March 31,~~June 30, 2006, the total share-based compensation expense was ~~$471,000,~~$504,000 and $975,000, respectively, or 1% of total ~~revenue.~~revenue for both periods. The distribution of this expense for the six months ended June 30, 2006 was ~~$440,000~~$902,000 to selling, general and administrative expense and ~~$31,000~~$73,000 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”) 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 ongoing 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, 2005 regarding expanded information about our critical accounting policies and estimates.

ANALYSIS OF RESULTS OF OPERATIONS

Revenues

~~The following table sets forth the key components of our revenues for the periods presented as of March 31:~~

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


	First Quarter										First Quarter 2006 vs.						Second Quarter										%			Six Months										%
			% of					% of			First Quarter 2005								% of					% of			Increase/					% of					% of			Increase/
($ in thousands)	2006		Total			2005		Total			Amount			%			2006		Total			2005		Total			(Decrease)			2006		Total			2005		Total			(Decrease)
Software licenses	$	7,571		17	%	$	6,337		15	%	$	1,234			19	%	$	9,824		20	%	$	7,872		18	%		25	%	$	17,395		19	%	$	14,209		17	%		22	%
Software services		13,120		29			12,252		30			868			7			15,061		31			13,469		31			12			28,181		30			25,721		31			10
Maintenance		17,657		39			15,421		38			2,236			15			17,716		36			15,806		37			12			35,373		38			31,227		37			13
Appraisal services		4,699		11			5,149		13			(450	)		(9	)		5,108		10			4,635		11			10			9,807		10			9,784		12			—
Hardware and other		1,811		4			1,500		4			311			21			1,442		3			1,403		3			3			3,253		3			2,903		3			12


Total revenues	$	44,858		100	%	$	40,659		100	%	$	4,199			10	%	$	49,151		100	%	$	43,185		100	%		14	%	$	94,009		100	%	$	83,844		100	%		12	%

	•		Software license revenue related to financial products, which ~~comprise~~comprises over 75% of our software license revenues, was up ~~moderately~~significantly for the three and six months ended June 30, 2006 compared to the ~~three months ended March 31, 2005. Our financial products division also includes public safety products, which provided almost half~~prior year periods. Two-thirds of the year-to-date increase ~~over the prior year period. In the past year we have added sales personnel and a product specialist to expand our presence~~occurred in the ~~public safety market.~~second quarter. The increase includes revenues from a new contract to install our MUNIS financial software applications in the United States Virgin Islands. This contract is valued at approximately $3.6 million and includes a wide range of fully integrated financial, revenue, human resource and productivity software applications. We expect to complete this installation over an eighteen month period. Third party software revenue also increased over the comparable prior year period because we sold more financial software modules that utilize third party software. Also, in late 2005 we simplified the implementation process for ~~a certain~~one of our financial ~~product line~~products, which has enabled us to deliver the product more rapidly.

	•		Software license revenue related to our other products in the aggregate experienced strong increases for the three months and six months ended June 30, 2006 compared to the ~~three months ended March 31, 2005~~prior year periods. These increases were 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 products.~~

acceptance of our Odyssey courts and justice products as a result of the product maturing, successful early implementations and leveraging our existing customer base.

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

	•		Software services revenue related to financial products, which ~~comprise~~comprises more than half of our software services revenue, ~~were~~was up moderately compared to the three and six months ended ~~March 31, 2005. This~~June 30, 2005, as a result of a general increase ~~was driven primarily by additions~~in the volume of software license transactions. Typically, contracts for software licenses include services such as installation of the software, converting the customers’ data to ~~our implementation staff over~~be compatible with the ~~last twelve months, which has enabled us~~software and training customer personnel to deliver our backlog at a faster rate. In addition, we have continued to expand our application service provider hosting customer base which provided service revenue increases. These increases were offset somewhat by lower software services revenue related to one financial product line for which we simplifieduse the ~~implementation process in late 2005.~~software.

	•		Software services revenue related to Odyssey courts and justice products was up significantly compared to the three and six months ended ~~March 31,~~June 30, 2005, reflecting increased contract volume. Since March 31, 2005, we have increased our presence with Odyssey in Texas and Florida and added one contract in ~~Nevada.~~both Nevada and Michigan.

Maintenance. We provide maintenance and support services for our software products and third party software. Maintenance revenues increased ~~15%~~over the prior year periods due to growth in our installed customer base and slightly higher maintenance rates on certain product lines.

Appraisal services. The ~~decrease in appraisal services revenue is due to the completion of one significant appraisal contract in the first quarter of 2005. The~~ appraisal services business is driven in part by revaluation cycles in various ~~states and based on our current~~

~~business pipeline, we expect that~~states. Appraisal services revenue increased over the prior year periods due to a large existing customer entering their next appraisal ~~services revenues in~~cycle as well as the ~~foreseeable future will remain at historically low levels consistent with 2005.~~addition of new customers.

Cost of Revenues and Gross Margins

The following table sets forth a comparison of the key components of our cost of revenues, and those components stated as a percentage of related revenues for the periods presented as of ~~March 31:~~June 30:


	First Quarter																Second Quarter												Six Months
			% of					% of			First Quarter 2006 vs.									% of						% of						% of						% of
			Related					Related			First Quarter 2005									Related						Related						Related						Related
($ in thousands)	2006		Revenues			2005		Revenues			Amount			%			2006			Revenues			2005			Revenues			2006			Revenues			2005			Revenues
Software licenses	$	2,676		35	%	$	2,249		35	%	$	427			19	%	$	2,416			25	%	$	2,275			29	%	$	5,092			29	%	$	4,524			32	%
Acquired software		301		4			198		3			103			52			353			4			199			3			654			4			397			3
Software services and maintenance		21,745		71			19,913		72			1,832			9			22,949			70			19,963			68			44,694			70			39,876			70
Appraisal services		3,406		72			4,312		84			(906	)		(21	)		3,454			68			3,706			80			6,860			70			8,018			82
Hardware and other		1,268		70			1,072		71			196			18			1,033			72			992			71			2,301			71			2,064			71


Total cost of revenues	$	29,396		65	%	$	27,744		68	%	$	1,652			6	%
Total cost of revenue																	$	30,205			61	%	$	27,135			63	%	$	59,601			63	%	$	54,879			65	%


Overall gross margin																		38.5	%					37.2	%					36.6	%					34.5	%

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 increased compared to the prior year because we completed two ~~small~~ acquisitions in late January 2006.

Cost of software services and maintenance revenues. ~~Cost~~For the three months ended June 30, 2006, cost of software services and maintenance grew 9%15% while the related software services and maintenance revenues increased ~~11%~~12% compared to the prior year period. For the six months ended June 30, 2006, cost of software services and maintenance and the related software services and maintenance revenues both increased 12% 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. Costs grew at a slower rate than related software services and maintenance revenues for the same periods, which is mainly due to significant organizational changes we made in the second quarter of 2005 to reduce costs in our appraisal services and our appraisal and tax software business.

Cost of appraisal services revenues. The ~~decline in the cost of~~ appraisal services ~~revenues and related increase in~~ gross margin isincreased for the three and six months ended June 30, 2006, mainly due to significant organizational changes and headcount reductions we made in the second quarter of 2005 to our appraisal services business to bring costs in line with expected levels of ~~revenue, which eliminated levels of management and reduced overhead expense.~~revenue.

Gross margin.Our overall gross margin for the quarter ended ~~March 31,~~June 30, 2006 was ~~34.5%~~38.5%, compared to ~~31.8%~~37.2% in the quarter ended ~~March 31,~~June 30, 2005. For the six months ended June 30, 2006 our overall gross margin was 36.6% compared to 34.5% in the prior year period. The gross margin rose mainly due to a revenue mix that included more software license revenues, as well as lower costs as a result of the restructuring of our appraisal services business in the second quarter of 2005. Software license revenue inherently has higher gross margins than other revenues such as software services and hardware.

In connection with the reorganization, we incurred certain charges which were primarily comprised of employee severance costs and related fringe benefits, and totaled approximately $1.3 million before income taxes. The related payments were paid in 2005.

Amortization of Customer and Trade Name Intangibles

Acquisition intangibles are ~~composed~~comprised 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 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~~operating expense. The following table sets forth a comparison of amortization of customer and trade name intangibles for the periods presented as of ~~March 31:~~June 30:


					First Quarter 2006 vs.					Second Quarter									Six Months
	First Quarter				First Quarter 2005									Change									Change
($ in thousands)	2006		2005		Amount		%			2006		2005		$		%			2006		2005		$		%
Amortization of customer and trade name intangibles	$	322	$	317	$	5		2	%	$	325	$	316	$	9		3	%	$	647	$	633	$	14		2	%

FINANCIAL CONDITION AND LIQUIDITY

As of ~~March 31,~~June 30, 2006, we had cash and cash equivalents of ~~$18.6~~$12.0 million and ~~we had~~ short-term investments of ~~$10.3~~$10.5 million, compared to cash and cash equivalents of $20.7 million and short-term investments of $11.7 million at December 31, 2005. Cash provided by operating activities was ~~$10.0~~$10.6 million in the ~~first three~~six months ofended June 30, 2006 compared to ~~$7.5~~$7.2 million for the same period in 2005.

At ~~March 31,~~June 30, 2006, our days sales outstanding (“DSO”) was 7796 days compared to DSO of 101 days at December 31, 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. DSO is calculated based on total accounts receivable divided by the quotient of annualized quarterly revenues divided by 360 days.

Investing activities used cash of ~~$11.1~~$12.8 million in the first ~~three~~six months of 2006 compared to ~~$1.3~~$2.8 million cash provided from investing activities for the same period in 2005. In January 2006, we acquired two companies, MazikUSA, Inc. and TACS, Inc. The combined purchase price for the two companies was approximately ~~$14.5~~$14.6 million, comprised of approximately ~~$11.6~~$11.7 million in cash and 325,000 shares of Tyler common stock. Other investing activities in the ~~first quarter of~~six months ended June 30, 2006 were primarily comprised of a liquidation of ~~$1.5~~$1.3 million of short term investments and investments of $2.3 million in property and equipment. The property and equipment increase was due to expenditures related to computer hardware and software, including a new enterprise-wide customer relationship management system, and other asset additions to support internal growth. In the comparable prior year period, investing activities were comprised of a liquidation of ~~$2.4~~$4.4 million of short term investments and

investments of $777,000 in software development and $885,000 in property and 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 decline was due to 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 other products, in 2005. The other expenditures related to computer 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 revolving bank credit agreement (the “Credit Facility”). The Credit Facility matures February 11, 2008 and provides for total borrowings of up to $30.0 million and a $10.0 million Letter of Credit facility under which the banks will issue cash collateralized letters of credit. As of ~~March 31,~~June 30, 2006, our effective interest rate was ~~6.3%~~6.8% under the Credit Facility. As of ~~March 31,~~June 30, 2006 we had no debt and outstanding letters of credit totaling ~~$4.1~~$4.5 million to secure surety bonds required by some of our customer contracts. These letters of credit expire during 2006 and early 2007.

Financing activities used cash of ~~$1.0~~$6.6 million in the first ~~three~~six months of 2006 compared to ~~$7.6~~$9.9 million in the same period 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 activity.

During the ~~three~~six months ended ~~March 31,~~June 30, 2006, we purchased ~~250,000~~833,000 shares of our common stock for an aggregate purchase price of ~~$2.2~~$8.3 million. We currently have authorization to repurchase up to ~~1.8~~1.2 million additional shares of Tyler common stock. A summary of the repurchase activity during the ~~first quarter~~six months ended June 30, 2006 is as follows:


											Maximum number of
					Maximum number of						shares that may be
	Total number				shares that may be						purchased under
	of shares		Average price paid		purchased under current		Total number of		Average cost per		current
Period	purchased		per share		authorization		shares purchased		share		authorization
January 1 through January 31		250	$	8.75		1,814		250	$	8.75		1,814
February 1 through February 28		—		—		1,814		—		—		1,814
March 1 through March 31		—		—		1,814		—		—		1,814
April 1 through April 30								86		10.74		1,728
May 1 through May 31								291		10.35		1,437
June 1 through June 30								206		10.39		1,231

Total first quarter		250	$	8.75		1,814
Total six months ended June 30, 2006								833	$	9.92		1,231

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 acquisitions and how such acquisitions may be financed. In the absence of future acquisitions, ~~of other businesses,~~ we believe our current cash balances and expected future cash flows from operations will be sufficient to meet our anticipated cash needs for working capital, capital expenditures and other activities through the next twelve months. If operating cash flows are not sufficient to meet our needs, we may borrow under our credit agreement.

ITEM 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 ~~March 31,~~June 30, 2006, we had funds invested in auction rate municipal bonds, 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 this investment, we are not subject to significant market rate risk.

We have no outstanding debt at ~~March 31,~~June 30, 2006, and are therefore not subject to any interest rate risk.

In order to enhance our ability to manage foreign currency risk associated with a contract denominated in Canadian dollars we contracted in December 2005 with a commercial bank to enter into a series of forward contracts, at no material cost to us, to acquire Canadian dollars through 2009 at fixed prices. These forward contracts have been entered into for periods consistent with the related underlying exposure in this contract and do not constitute positions independent of this exposure. If the applicable exchange rate was to increase or decrease 10% from the rate at ~~March 31,~~June 30, 2006, our current risk management liabilities/assets would increase or decrease approximately ~~$300,000.~~$220,000. We do not enter into derivative contracts for speculative purposes, nor are we a party to any leveraged derivative instrument.

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 Officer and the Chief Financial Officer, the Chief Executive Officer 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

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.

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.

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~~We held our annual meeting of stockholders on May 18, 2006. The results of the matters voted on at the meeting are as follows:

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


	Number of		Number of Votes
Nominee	Votes For		Withheld
Donald R. Brattain		33,582,293		93,568
J. Luther King, Jr.		33,485,762		190,099
John S. Marr, Jr.		33,383,196		292,665
G. Stuart Reeves		33,490,356		185,505
Michael D. Richards		33,480,126		195,735
Dustin R. Womble		33,539,900		135,961
John M. Yeaman		33,133,159		542,702

With respect to the amendment to our stock option plan to increase the number of shares of our stock that may be issued under the stock option plan from 7,500,000 shares to 8,500,000 shares, votes were as follows:


For		Against		Abstain
	25,448,241		1,411,228		66,956

With respect to the ratification of Ernst & Young LLP as our independent auditors for fiscal year 2006, votes were as follows:


For		Against		Abstain
	33,598,202		64,529		13,130

ITEM 5. Other Information

None

ITEM 6. Exhibits


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

2019


	TYLER TECHNOLOGIES, INC.
	By:	/s/ Brian K. Miller
		Brian K. Miller
		Senior Vice President and Chief Financial Officer ~~(principal~~ (principal financial officer and an authorized signatory)

		As of ~~March 31,~~June 30, 2006 we have authorization from our board of directors to repurchase up to ~~1.8~~1.2 million additional shares of Tyler common stock.

~~(5)~~		~~Income Tax Provision~~


~~(6)~~(7)		Earnings Per Share

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


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

Total share-based compensation expense	$	471


	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	)