TYLER TECHNOLOGIES INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2002

OR

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

Commission File Number 1-10485

TYLER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

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

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

(214) 547-4000
(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.

Yes [X] No [ ]

Number of shares of common stock of registrant outstanding at October 30, 2002:
46,216,733

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TYLER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and number of shares)

See accompanying notes.

2

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

See accompanying notes.

3

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

See accompanying notes

4

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 and
GAAP (accounting principles generally accepted in the United States) 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, 2002 and December 31, 2001 and operating result amounts are
for the three and nine months ended September 30, 2002 and 2001 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, 2001. Revenues, expenses, assets and liabilities
can vary during each quarter of the year. Therefore, the results and trends
in these interim financial statements may not be the same as those for the
full year.

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

(2) Discontinued Operations

Discontinued operations include the operating results of the information
and property records services segment of which our Board of Directors
approved a formal plan of disposal in December 2000. Discontinued
operations also include the results of two non-operating subsidiaries
relating to a formerly owned subsidiary that we sold in December 1995. The
business units within the information and property records services segment
were sold in 2000 and 2001. One of the business units previously included
in the information and property records services segment was sold in May
2001 for $575,000 cash, approximately 60,000 shares of Tyler stock, a
promissory note of $750,000 at 9% interest and other contingent
consideration. In 2002, the buyer of this business unit requested to
renegotiate the $750,000 promissory note and the contingent consideration.
As a result of this renegotiation in March 2002, we received additional
cash of approximately $800,000 and a subordinated note receivable amounting
to $200,000, to fully settle the promissory note and other contingent
consideration in connection with this previous sale. The subordinated note
is payable in 16 equal quarterly principal payments with interest at a rate
of 6%. Because the subordinated note receivable is highly dependent upon
future operations of the buyer, we are recording its value when the cash is
received which is our historical practice. During the three and nine months
ended September 30, 2002, we received payments of $15,000 and $30,000,
respectively, on the note. Since the original $750,000 promissory note was
not credited to income when the note was initially received, the cash
proceeds from the accelerated promissory note repayment resulted in a gain
on the disposal of discontinued operations, net of income taxes. However,
this net gain was offset in the first quarter of 2002 due to a similar
increase in the loss reserve. This increase can be attributed to the
inherent uncertainties associated with the ultimate settlement of the
outstanding liabilities associated with discontinued operations, including
the settlement of our facility lease obligations and the bankruptcy filing
of Swan Transportation Company (See Note 3 - Commitments and
Contingencies). In our opinion and based upon information available at this
time, no material adverse adjustment is anticipated to this loss reserve
and we believe the loss reserve for discontinued operations remains
adequate.

Two of our non-operating subsidiaries are involved in various claims for
work-related injuries and physical conditions relating to a formerly-owned
subsidiary that we sold in 1995. For the three and nine months ended
September 30, 2001, we expensed and included in discontinued operations,
net of related tax effect, $23,000 and $38,000, respectively, for trial and
related costs (See Note 3 - Commitments and Contingencies).

(3) Commitments and Contingencies

One of our non-operating subsidiaries, Swan Transportation Company (Swan),
has been and is currently involved in various claims raised by hundreds of
former employees of a foundry that was once owned by an affiliate of Swan
and Tyler. These claims are for alleged work related injuries and physical
conditions resulting from alleged exposure to silica, asbestos, and/or
related industrial dusts during their employment at the foundry. We sold
the operating assets of the foundry on December 1, 1995. As a

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non-operating subsidiary of Tyler, the assets of Swan consist primarily of
various insurance policies issued to Swan during the relevant time periods
and restricted cash of $1.9 million at September 30, 2002. Swan tendered
the defense and indemnity obligations arising from these claims to its
insurance carriers, who, prior to December 20, 2001, entered into
settlement agreements with approximately 275 of the plaintiffs, each of
whom agreed to release Swan, Tyler, and its subsidiaries and affiliates
from all such claims in exchange for payments made by the insurance
carriers.

On December 20, 2001, Swan filed a petition under Chapter 11 of the U.S.
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. The bankruptcy filing by Swan was the result of extensive
negotiations between Tyler, Swan, their respective insurance carriers, and
an ad hoc committee of plaintiff attorneys representing substantially all
of the then known plaintiffs. Swan filed its plan of reorganization in
February 2002. The principal features of the plan of reorganization
include: (a) the creation of a trust, which is to be funded principally by
fifteen insurance carriers pursuant to certain settlement agreements
executed pre-petition between Swan, Tyler, and such carriers; (b) the
implementation of a claims resolution procedure pursuant to which all
present and future claimants may assert claims against such trust for
alleged injuries; (c) the issuance of certain injunctions under the federal
bankruptcy laws requiring any such claims to be asserted against the trust
and barring such claims from being asserted, either now or in the future,
against Swan, Tyler, all of Tyler's affected affiliates, and the insurers
participating in the funding of the trust; and (d) the full and final
release of each of Swan, Tyler, all of Tyler's affected affiliates, and the
insurers participating in the funding of the trust from any and all claims
associated with the once-owned foundry by all claimants that assert a claim
against, and receive compensation from, the trust. In order to receive the
foregoing benefits, we have agreed, among other things, to make certain
cash contributions to the trust, the amount of which is not expected to
exceed the settlement liability previously recorded by Tyler in its
condensed consolidated financial statements.

On September 23, 2002, the bankruptcy court approved the disclosure
statement and plan of reorganization for distribution to Swan's creditors.
The creditors of Swan are required to vote on, or object to, the plan of
reorganization by November 15, 2002. Tyler anticipates the plan, as
currently contemplated, will be approved by Swan's creditors because the
material terms of the plan of reorganization have been pre-negotiated
between the various affected parties.

If the creditors approve the plan of reorganization, it will be presented
to the bankruptcy court for final approval. The bankruptcy court has
currently scheduled hearings to confirm the plan of reorganization on
December 9 and 10, 2002, at which time the bankruptcy court will hear and
determine any objections to the plan of reorganization. If the plan of
reorganization as currently contemplated is approved by final order, we
anticipate that all of the liabilities associated with the foundry formerly
owned by our affiliates will be legally settled at an amount no greater
than the liability reflected in the accompanying condensed consolidated
financial statements.

There can be no assurance that the creditors of Swan will approve the plan
of reorganization as currently contemplated, and if approved by such
creditors, will be approved in such form by the bankruptcy court, if at
all. Because of the inherent uncertainties, it is reasonably possible that
the amounts recorded as liabilities for Swan related matters could change
in the near term by amounts that would be material to the condensed
consolidated financial statements.

See Note 6 - Investment Securities Available for Sale, for discussion of
litigation in connection with H.T.E., Inc. (HTE) attempted cash redemption
of all shares of HTE common stock currently owned by Tyler.

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(4) Earnings Per Share

The following table details the computation of basic and diluted earnings
per share:

(5) Income Tax Provision

We had an effective income tax rate of 40.5% and 39.7% for the three and
nine months ended September 30, 2002, respectively. For the three and nine
months ended September 30, 2001, we had an effective income tax rate of
59.1% and 78.3%, respectively. The effective income tax rates are estimated
based on projected pre-tax income for the entire fiscal year and the
resulting amount of income taxes. The effective income tax rates for the
periods presented were different from the statutory United States federal
income tax rate of 35% primarily due to state income taxes, non-deductible
meals and entertainment costs, and in periods prior to January 1, 2002,
non-deductible goodwill amortization expensed for financial reporting
purposes.

(6) Investment Securities Available-for-Sale

Pursuant to an agreement with two major shareholders of H.T.E., Inc. (HTE),
we acquired approximately 5.6 million shares of HTE's common stock in
exchange for approximately 2.8 million shares of our common stock. The
exchange occurred in two transactions, one in August 1999 and the other in
December 1999. The 5.6 million shares represent a current ownership
interest of approximately 34% of HTE. The cost of the investment was
recorded at $15.8 million and is classified as a non-current asset because
we made the investment for a continuing business purpose.

Florida state corporation law restricts the voting rights of "control
shares", as defined, acquired by a third party in certain types of
acquisitions. These restrictions may be removed by a vote of the
shareholders of HTE. The courts have not interpreted the Florida "control
share" statute. HTE has taken the position that, under the Florida statute,
all of the shares acquired by us constitute "control shares" and therefore
do not have voting rights until such time as shareholders of HTE, other
than Tyler, restore voting rights to those shares. We believe only the
shares acquired in excess of 20% of the outstanding shares of HTE
constitute "control shares". Therefore, we believe we currently have the
right to vote all HTE shares we own up to at least 20% of the outstanding
shares of HTE. On November 16, 2000, the shareholders of HTE, other than
Tyler, voted to deny Tyler its right to vote the "control shares" of HTE.

On October 29, 2001, HTE notified us that, pursuant to the Florida "control
share" statute, it had attempted a cash redemption of all 5.6 million
shares of HTE common stock currently owned by us at price of $1.30 per
share. On October 29, 2001, we notified HTE that its purported redemption
of our HTE shares was invalid and contrary to Florida law, and in any
event, the calculation by

7

HTE of fair value for such shares was incorrect. On October 30, 2001, HTE
filed a complaint in a civil court in Seminole County, Florida requesting
the court to enter a declaratory judgment declaring HTE's purported
redemption of all of our HTE shares at a redemption price of $1.30 per
share was lawful and to effect the redemption and cancel our HTE shares. We
removed the case to the United States District Court, Middle District of
Florida, Orlando Division, and requested a declaratory judgment from the
court declaring, among other things, that HTE's purported redemption of any
or all of our shares was illegal under Florida law and that we maintain the
ability to vote up to 20% of the issued and outstanding shares of HTE
common stock owned by us. On September 18, 2002, the court issued an order
declaring that HTE's purported redemption was invalid. Accordingly, we
continue to own 5.6 million shares of HTE common stock. On September 24,
2002, we entered into a settlement agreement with HTE in which HTE agreed
that it would not attempt any other redemption of the HTE shares owned by
us under the "control share" statute. In addition, HTE agreed to dismiss
and release us from the tort claims it alleged against us as disclosed in
previous filings. The court has not yet ruled on the voting status of our
HTE shares, i.e., our ability to vote up to 20% of the issued and
outstanding shares of HTE common stock owned by us.

Under GAAP, a 20% investment in the voting stock of another company implies
that the investor has significant influence over the operating and
financial policies of that company, unless there is evidence to the
contrary. Management of Tyler has concluded that we do not have such
influence. Accordingly, we account for our investment in HTE pursuant to
the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities". These securities are classified as
available-for-sale and are recorded at fair value as determined by quoted
market prices for HTE common stock. Unrealized holding gains and losses,
net of the related tax effect, are excluded from earnings and are reported
as a separate component of shareholders' equity until the securities are
sold. Realized gains and losses from the sale of available-for-sale
securities are determined on a specific identification basis. A decline in
the market value of any available-for-sale security below cost that we
consider to be other than temporary results in a reduction in the cost
basis to fair value. The impairment is charged to earnings and a new cost
basis for the security is established.

The cost, fair value and gross unrealized holding gains (losses) of the
investment securities available-for-sale, based on the quoted market price
for HTE common stock (amounts in millions, except per share amounts) are
presented below. In accordance with SFAS No. 115, we used quoted market
price per share in calculating fair value to be used for financial
reporting purposes. SFAS No. 115 does not permit the adjustment of quoted
market prices in the determination of fair value and, accordingly, the
ultimate value we could realize because of our significant investment could
vary materially from the amount presented.

If the court rules that we are able to vote up to 20% of the issued and
outstanding shares of HTE common stock owned by us and, if following such a
ruling it is determined that we have the ability to exercise "significant
influence" with respect to HTE, we will retroactively adopt the equity
method of accounting for this investment. Therefore, our results of
operations and retained earnings for periods beginning with the 1999
acquisition will be retroactively restated to reflect our investment in HTE
for all periods in which we held an investment in the common stock of HTE.
Under the equity method, the original investment is recorded at cost and is
adjusted periodically to recognize our share of HTE's earnings or losses
after the respective dates of acquisition. Our investment in HTE would
include the unamortized excess of our investment over our equity in the net
assets of HTE through December 31, 2001. Effective January 1, 2002, under
the newly adopted provisions of SFAS No. 142, the excess investment over
our equity in the net assets would no longer be amortized if it consisted
of goodwill. Had our investment in HTE been accounted for under the equity
method, our investment at September 30, 2002 would have been $13.2 million
and the equity in income of HTE for the three and nine months ended
September 30, 2002 would have been $577,000 and $1.7 million, respectively.
At September 30, 2001, our investment would have been $11.1 million and our
equity in loss of HTE for the three and nine months ended September 30,
2001 would have been $390,000 and $906,000, respectively.

8

(7) Comprehensive Income

The components of comprehensive income (loss) are as follows:

(8) Treasury Stock Purchase

On August 15, 2002, we consummated an agreement to repurchase 1.1 million
of our common shares from William D. Oates, one of our former directors,
for a cash purchase price of $4.0 million. Under the terms of the
agreement, we also have the sole option to assign to eiStream, LLC, an
affiliate of Mr. Oates, our rights and obligations under a Data License and
Update Agreement in exchange for an additional 400,000 shares of our common
stock. On October 30, 2002, we exercised the option to assign the agreement
to Mr. Oates in exchange for 400,000 shares of our common stock. The Data
License and Update Agreement grants one of our affiliates included in our
discontinued property records business the right to receive updates of
certain recorded real property information for an annual fee, subject to
certain restrictions on the use of such information. The past operating
results of our information and property records business are included in
discontinued operations (See Note 2 - Discontinued Operations).

(9) Goodwill and Intangible Assets

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires that all business combinations be
accounted for under the purchase method only and that certain acquired
intangible assets in a business combination be recognized as assets apart
from goodwill. SFAS No. 142 requires that ratable amortization of goodwill
be discontinued and replaced with periodic tests of the goodwill's
impairment and that intangible assets other than goodwill be amortized over
their useful lives. The intangible asset impairment test, which compares
the fair values of our reporting units to their respective carrying values,
was completed during the three months ended June 30, 2002. No impairments
were recognized as a result of this test. SFAS No. 141 is effective for all
business combinations initiated after June 30, 2001 and for all business
combinations accounted for by the purchase method for which the date of
acquisition is after June 30, 2001. We have adopted the provisions of SFAS
No. 141.

Under SFAS No. 142, assembled workforce, net of related deferred taxes, is
subsumed into goodwill upon the adoption of the Statement as of January 1,
2002. In periods prior to January 1, 2002, our effective income tax rate
for determining the quarterly income tax provision varied significantly
because of the significant amount of non-deductible goodwill in relation to
the estimated annual pre-tax income or loss. The adoption of SFAS No. 142,
in which goodwill is no longer amortized for financial reporting purposes,
has resulted in our ability to more accurately estimate our effective
income tax rate on an annual and on a quarterly basis. In determining the
pro forma operating results on a quarterly basis, as shown below, we used
our pro forma annual effective income tax rate as applied to our quarterly
pro forma pretax income or loss in computing our adjusted net income. If we
had accounted for goodwill (including workforce) under the non-amortization
approach of SFAS No. 142, our net income (loss) and related per share
amounts would have been as follows for the periods ended September 30,
2001:

9

The allocation of assets following our adoption of SFAS No. 142 is
summarized in the following table:

The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002 are as follows:

Balance as of December 31, 2001 .................................................................... $43,292

Goodwill adjustments during the first quarter relating to workforce, net of deferred taxes of
$377, being subsumed into goodwill upon the adoption of SFAS No. 142 on January 1, 2002 ......... 3,006
-------

Balance as of September 30, 2002 ................................................................... $46,298
=======

Estimated annual amortization expense relating to acquisition intangibles
is as follows:

(10) New Accounting Standards

In September 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires that the fair value of the
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made.
The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. SFAS No. 143 is effective for
fiscal years beginning after September 15, 2002. We are currently
evaluating the requirements and impact of the Statement, but its adoption
is not expected to have a material impact on our results of operations and
financial position.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". Among other items, this Statement no longer classifies in the
income statement the early extinguishment of debt as an extraordinary item.
We do not anticipate that this Statement will have a material impact on our
results of operations and financial position.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 requires the
recognition of costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The adoption of this Standard
may affect the timing of the recognition of future exit or disposal costs.
However, we do not anticipate that this Statement will have a material
impact on our results of operations and financial position.

10

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 in 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 percentage-of-completion method of accounting, the performance of
such contracts in accordance with our cost and revenue estimates; our
ability to maintain health and other insurance coverage and capacity due to
changes in the insurance market and the impact of increasing insurance
costs on the results of operations; the costs to attract and retain
qualified personnel, changes in product demand, the availability of
products, economic conditions, changes in tax risks and other risks
indicated in our filings with the Securities and Exchange Commission.
Except to the extent required by law, we are not obligated to update or
revise any forward-looking statements whether as a result of new
information, future events or otherwise. When used in this Quarterly
Report, the words "believes," "plans," "estimates," "expects,"
"anticipates," "intends," "continue," "may," "will," "should", "projects",
"forecast", "might", "could" or the negative of such terms and similar
expressions as they relate to Tyler or our management are intended to
identify forward-looking statements.

GENERAL

Tyler provides integrated software systems and related services for local
governments. We develop and market a broad line of software products and
services to address the information technology (IT) needs of cities,
counties, schools and other local government entities. We provide
professional IT services to our customers, including software and hardware
installation, data conversion, training and product modifications, along
with continuing maintenance and support for customers using our systems. We
also provide property appraisal outsourcing services for taxing
jurisdictions.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements.
These condensed consolidated financial statements have been prepared
following the requirements of accounting principles generally accepted in
the United States (GAAP) for interim periods and require us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to investments, intangible assets, bad debts and
long-term service contracts, deferred income tax assets, reserve for
discontinued operations and contingencies and litigation. As these are
condensed financial statements, one should also read our Form 10-K for the
year ended December 31, 2001 regarding expanded information about our
critical accounting policies and estimates.

11

ANALYSIS OF RESULTS OF OPERATIONS

The following table sets forth items from our unaudited condensed
consolidated statements of operations and the percentage change in the
amounts between the periods presented. The amounts shown in the table are
in thousands, except the per share data. Revenues and expenses can vary
during each quarter of the year. Therefore, the results and trends in these
interim financial statements may not be the same as those for the full
year.

# Not meaningful

*EBITDA consists of income from continuing operations before interest,
income taxes, depreciation, amortization and recovery of acquisition costs
previously expensed ($235 in the second quarter of 2001). EBITDA is not
calculated in accordance with GAAP, but we believe that it is widely used
as a measure of operating performance. EBITDA should only be considered
together with other measures of operating performance such as operating
income, cash flows from operating activities, or any other measure for
determining operating performance or liquidity that is calculated in
accordance with GAAP. EBITDA is not necessarily an indication of amounts
that may be available for us to reinvest or for any other discretionary
uses.

12

================================================================================

REVENUES

The following table compares the components of revenue as a percent of
total revenues for the periods presented:

Software license revenues. Software license revenues increased $1.4
million, or 28%, for the three months ended September 30, 2002, compared to
the same quarter in the prior year. For the three months ended September
30, 2002, we recognized approximately $1.3 million in license revenue from
two customers for real estate appraisal software. Our real estate appraisal
software sales cycle is periodic in nature and there were no comparable
sales in 2001. For the nine months ended September 2002, software license
revenues increased $3.5 million, or 27%, compared to the prior year period.
Approximately two-thirds of this increase related to expansion of our
financial and city solutions software products into the Midwest and the
Western United States. Our financial and city solutions software products
automate accounting systems for cities, counties, school districts, public
utilities and not-for-profit organizations. Real estate appraisal software
revenue made up the remaining one-third of the year-to-date software
license revenue increase.

Professional services revenues. For the three months ended September 30,
2002, professional services revenues increased $3.1 million, or 25%,
compared to the same period last year. For the first nine months of 2002,
professional services revenue increased $4.1 million, or 11%, compared to
the same period of 2001. Approximately two-thirds of the quarter and
year-to-date increase over the prior year periods related to professional
services associated with higher software license sales. Typically,
contracts for software license include services such as installation of the
software, converting the customers' data to be compatible with the software
and training customer personnel to use the software. In addition,
professional services revenue for the three months ended September 30, 2002
includes approximately $600,000 for services performed under an $11.0
million contract signed with the State of Minnesota in July 2002 to install
our Odyssey Case Management system. The Minnesota contract includes both
software license and services. Approximately 70% of the installation is
expected to be performed by late 2003. The remainder of the installation is
expected to be performed during 2004 through 2006.

The remaining one-third of the quarter and year-to-date professional
services revenues increase over the prior year periods was due to higher
appraisal services. Approximately $2.2 million was recognized in the third
quarter of 2002 for services performed under our appraisal contract with
Lake County, Indiana, which was first awarded in December 2001. The Lake
County contract to provide professional services and technology to reassess
real property in Lake County is valued at approximately $15.9 million and
is expected to be completed by late 2003. Also included in professional
services revenue for the three and nine months ended September 30, 2002 was
$3.6 million and $10.1 million, respectively, of appraisal revenue related
to our contract with the Nassau County, New York Board of Assessors which
was comparable to the prior year periods. Implementation of the Nassau
County contract began in September 2000 and is expected to be completed by
early 2003.

Maintenance revenues. Maintenance revenues for the three and nine months
ended September 30, 2002 increased $924,000 and $2.6 million, or 9%,
respectively, compared to the same prior year periods. We provide
maintenance and support services for our software products, third party
software and hardware. The maintenance revenue increase was due to growth
in our installed customer base and slightly higher rates. During the first
three months of 2001, we received a one-time settlement of approximately
$650,000 from a third party provider of maintenance services relating to
past services. Excluding this settlement, maintenance revenue increased
approximately 11% for the nine months ended September 30, 2002 compared to
the same period last year.

13

Hardware and other revenues. For the three months ended September 30, 2002,
hardware revenues increased $880,000 compared to the same period of 2001.
For the nine months ended September 30, 2002, hardware revenues decreased
$240,000 compared to the nine months ended September 30, 2001. The change
in hardware revenue is a result of the timing of installations of equipment
on customer contracts and is dependent on the contract size and on varying
customer hardware needs. We have de-emphasized this aspect of our business
in recent periods due to pressures on margins for hardware.

COST OF REVENUES

Cost of software license revenues. For the three and nine months ended
September 30, 2002, cost of software license revenues increased $255,000,
or 25%, and $1.1 million, or 40%, respectively, compared to the prior year
periods, primarily due to higher amortization expense of software
development costs. In 2001, we had several products in the development
stage, which were released beginning in the third quarter of 2001. Once a
product is released, we begin to expense the costs associated with the
development over the estimated useful life of the product. Development
costs mainly consist of personnel costs, such as salary and benefits paid
to our developers.

Cost of professional service and maintenance revenues. For the three and
nine months ended September 30, 2002, cost of professional services and
maintenance revenues increased $2.8 million, or 16%, and $3.9 million, or
8%, respectively, compared to the same periods of 2001. These increases are
consistent with the higher professional services and maintenance revenues
for the same periods. The following table compares cost of professional
service and maintenance revenues as a percentage of professional service
and maintenance revenues for the periods presented:

Cost of hardware and other revenues. Costs of hardware and other revenues
increased $848,000 for the three months ended September 30, 2002 compared
to the same prior year period. For the nine months ended September 30,
2002, costs of hardware and other revenues were flat compared to the same
prior year period. These changes are consistent with the changes in
hardware and other revenue for the same periods.

GROSS MARGIN

For the three months ended September 30, 2002 and 2001, our overall gross
margin was 36% and 35%, respectively. For the nine months ended September
30, 2002, our overall gross margin was 35% compared to 33% for the same
period of 2001. This increase is mainly due to higher software license
sales and maintenance revenues. Software license revenue has lower costs
associated with it than other revenues such as professional services and
hardware. In addition, utilization of our personnel that provide services
and support has improved, which has increased our overall gross margin.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses, or SG&A, increased $1.0
million, or 14%, and $2.7 million, or 12%, for the three and nine months
ended September 30, 2002, respectively. For the third quarter of 2002, SG&A
as a percent of revenue decreased to 25% from 26% for the same prior year
period. For the nine months ended September 30, 2002 and the same period in
the prior year, SG&A as a percent of revenue was 26%. The increase in SG&A
is related primarily to higher costs related to sales commissions,
increases in sales and administrative personnel, increases in health and
other insurance expenses, and HTE matters. During the three and nine months
ended September 30, 2002, we incurred approximately $365,000 and $650,000
of legal and other

14

related costs associated with HTE matters, respectively. See Note 6 to our
condensed consolidated financial statements for discussion of litigation in
connection with HTE's attempted cash redemption of all shares of HTE common
stock currently owned by Tyler.

AMORTIZATION OF ACQUISITION INTANGIBLES

Prior year amortization expense included amortization of goodwill and
workforce. Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and
Other Intangible Assets. As a result of adopting SFAS No. 142, we ceased
amortizing goodwill and workforce after December 31, 2001. Amortization
expense for goodwill and workforce charged to the statement of operations
for the three and nine months ended September 30, 2001 was $895,000 and
$2.7 million, respectively. The remaining amortization consists of those
costs allocated to our customer base and acquisition date software. See
further discussion of the effect of adopting SFAS No. 142 in Note 9 to our
condensed consolidated financial statements.

INTEREST EXPENSE (INCOME)

Our cash balances have increased significantly compared to September 30,
2001 due to cash generated from operations and the proceeds from the sale
of certain discontinued businesses. As a result, we had net interest
expense of $12,000 for the third quarter of 2002 compared to $77,000 for
the same period in 2001. For the nine months ended September 30, 2002, we
had interest income of $20,000, compared to interest expense of $359,000
for the same prior year period. In addition, in the three and nine months
ended September 30, 2002, we capitalized $64,000 and $204,000,
respectively, of interest costs related to capitalized software development
costs.

INCOME TAX PROVISION

We had an effective income tax rate of 40.5% and 39.7% for the three and
nine months ended September 30, 2002, respectively. For the three and nine
months ended September 30, 2001, we had an effective income tax rate of
59.1% and 78.3%, respectively. Our effective income tax rate exceeded the
federal statutory rate of 35% due primarily to the net effect of state
income taxes and items that are non-deductible for federal income tax
purposes.

DISCONTINUED OPERATIONS

Discontinued operations include the operating results of the information
and property records services segment of which our Board of Directors
approved a formal plan of disposal in December 2000. Discontinued
operations also include the results of two non-operating subsidiaries
relating to a formerly owned subsidiary that we sold in December 1995. The
business units within the information and property records services segment
were sold in 2000 and 2001. One of the business units previously included
in the information and property records services segment was sold in May
2001 for $575,000 cash, approximately 60,000 shares of Tyler stock, a
promissory note of $750,000 at 9% interest and other contingent
consideration. In 2002, the buyer of this business unit requested to
renegotiate the $750,000 promissory note and the contingent consideration.
As a result of this renegotiation in March 2002, we received additional
cash of approximately $800,000 and a subordinated note receivable amounting
to $200,000, to fully settle the promissory note and other contingent
consideration in connection with this previous sale. The subordinated note
is payable in 16 equal quarterly principal payments with interest at a rate
of 6%. Because the subordinated note receivable is highly dependent upon
future operations of the buyer, we are recording its value when the cash is
received which is our historical practice. During the three and nine months
ended September 30, 2002, we received payments of $15,000 and $30,000,
respectively, on the note. Since the original $750,000 promissory note was
not credited to income when the note was initially received, the cash
proceeds from the accelerated promissory note repayment resulted in a gain
on the disposal of discontinued operations, net of income taxes. However,
this net gain was offset in the first quarter of 2002 due to a similar
increase in the loss reserve. This increase can be attributed to the
inherent uncertainties associated with the ultimate settlement of the
outstanding liabilities associated with discontinued operations including
the settlement of our facility lease obligations and the bankruptcy filing
of Swan Transportation Company (See Note 3 to our condensed consolidated
financial statements). In our opinion and based upon information available
at this time, no material adverse adjustment is anticipated to this loss
reserve and we believe the loss reserve remains adequate.

Two of our non-operating subsidiaries are involved in various claims for
work-related injuries and physical conditions relating to a formerly-owned
subsidiary that we sold in 1995. For the three and nine months ended
September 30, 2001, we expensed and included in discontinued operations,
net of related tax effect, $23,000 and $38,000, respectively, for trial and
related costs (See Note 3 to our condensed consolidated financial
statements).

15

LIQUIDITY AND CAPITAL RESOURCES

On March 5, 2002, we entered into a new $10.0 million revolving credit
agreement with a bank, which matures January 1, 2005. Our borrowings are
limited to 80% of eligible accounts receivable and interest is charged at
either the prime rate or at the London Interbank Offered Rate plus a margin
of 3%. The credit agreement is secured by our personal property and the
common stock of our operating subsidiaries. The credit agreement is also
guaranteed by our operating subsidiaries. In addition, we must maintain
certain financial ratios and other financial conditions and cannot make
certain investments, advances, cash dividends or loans.

As of September 30, 2002, our bank has issued outstanding letters of credit
totaling $3.7 million under our credit agreement to secure performance
bonds required by some of our customer contracts. Our borrowing base under
the credit agreement is limited by the amount of eligible receivables and
was reduced by the letters of credit at September 30, 2002. At September
30, 2002, we had no outstanding bank borrowings under the credit agreement
and had an available borrowing base of $5.3 million.

At September 30, 2002, our capitalization consisted of $2.6 million of
long-term obligations (including the current portion of that debt) and
$109.7 million of shareholders' equity. Our total debt-to-capital ratio
(total debt divided by the sum of total shareholders' equity and total
debt) was 2% at September 30, 2002.

During the first nine months of 2002, we made capital expenditures of $7.5
million, including $5.5 million for software development costs. The other
expenditures related to computer equipment and expansions related to
internal growth. Capital expenditures were funded principally from cash
generated from operations.

In March 2002, we received cash of approximately $800,000 and a $200,000
subordinated note receivable to fully settle an existing promissory note
and other contingent consideration in connection with the sale in May of
2001 of a business unit previously included in the information and property
records services segment, which had been discontinued.

In June 2002, we sold the building of a business unit previously included
in the information and property records service segment which had been
discontinued. Net proceeds from the sale totaled approximately $961,000.

On August 15, 2002, we consummated an agreement to repurchase 1.1 million
of our common shares from William D. Oates, one of our former directors,
for a cash purchase price of $4.0 million.

During the nine months ended September 30, 2002, we received $1.6 million
from the purchase of 490,000 treasury shares upon the exercise of stock
options under our employee stock option plan.

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

Item 4. Evaluation of Disclosure Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Our chief executive
officer and our chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures"
(as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and
15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before
the filing date of this quarterly report, have concluded that as of
the Evaluation Date, our disclosure controls and procedures were
adequate and designed to ensure that material information relating to
us and our consolidated subsidiaries would be made known to them by
others within those entities.

(b) Changes in internal controls. There were no significant changes in our
internal controls or to our knowledge, in other factors that could
significantly affect our disclosure controls and procedures subsequent
to the Evaluation Date.

16

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For a discussion of legal proceedings see Part I, Item 1. "Financial
Statements - Notes to Condensed Consolidated Financial Statements -
"Commitments and Contingencies" on page 5 of this document.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibit 4.8 Second Amendment to Credit Agreement, First Amendment to
Pledge and Security Agreement, and Lender's Consent and Waiver, by and
between Tyler Technologies, Inc. and Bank of Texas, N.A., dated
effective September 30, 2002.

(b) Exhibit 99 Certifications Pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code

(c) Reports on Form 8-K

Item 3 of Part I and Items 2, 3, 4 and 5 of Part II were not applicable and have
been omitted.

17

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

TYLER TECHNOLOGIES, INC.

By: /s/ Theodore L. Bathurst
-------------------------
Theodore L. Bathurst
Vice President and Chief Financial
Officer (principal financial officer and
an authorized signatory)

By: /s/ Terri L. Alford
-------------------------
Terri L. Alford
Controller
(principal accounting officer and an
authorized signatory)

Date: October 31, 2002

18

CERTIFICATIONS

I, John M. Yeaman, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Tyler
Technologies, Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Dated: October 31, 2002 By: /s/ John M. Yeaman
------------------
John M. Yeaman
President and Chief Executive Officer

19

I, Theodore L. Bathurst, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Tyler
Technologies, Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Dated: October 31, 2002 By: /s/ Theodore L. Bathurst
------------------------
Theodore L. Bathurst
Vice President and Chief Financial Officer

20

EXHIBIT INDEX