Tyler Technologies

T h e   F u t u r e  

I

s

  H e r e .

2 0 0 1 A n n u a l   R e p o r t

I

n 1997,we charted a new course for the future of Tyler Technologies. It was

a future that seemed far away then, with many challenges standing between

what we were and what we wanted to be—a premier provider of end-to-

end, integrated  solutions  and  information  technology  services  for  the  local

government marketplace.

That future is here. We have achieved what we set out to do. We have built a

company that has the people,the products and the resources to serve the wide-

ranging technology needs of local governments nationwide. We have improved

our  financial  position, strengthened  our  balance  sheet  and  repaid  our

acquisition debt. And we have achieved profitability.

Increasingly, local  governments  are  recognizing  the  need  to  make  their

services  more  accessible  and  more  responsive  to  the  public. That  is  where

their future lies…and that future is here, in the innovative, single-source products

and services we can provide for all their information technology needs.

We now have the infrastructure in place to build a great company. The future

is here—in the experience and resourcefulness of our people. In the loyalty

and  long-standing  trust  of  our  customers.

In  the  quality  and  breadth  of  our

products and services. And in the vast opportunity of our marketplace.

L E T T E R   T O   S H A R E H O L D E R S

The year 2001 was a pivotal year for Tyler Technologies.

It was a year

Our revenue growth is the result of gains in each of our three major

of accomplishment, as we worked to reach critical goals that we had

revenue categories during 2001. Software license revenues

set for ourselves.

In the midst of a difficult economic environment, we

increased in every quarter. Revenue from professional services grew 

met or exceeded those goals and completed our transition into a

by more than 41 percent. Growth in recurring revenues was

position of strength. The future we have planned and worked

strong, with a 23 percent increase in maintenance and support

toward is here.

Our goals were ambitious. On the heels of a year characterized by

post-Y2K industry slowdowns and disappointing results, we targeted

revenue growth of more than 20 percent in 2001. We aimed for

quarter-by-quarter improvement in our EBITDA. We wanted to

generate free cash flow for the year. And we said that we would

attain profitability. These were high expectations from 

where we stood a year ago.

We are pleased to report that we not only met these specific goals,

but also strengthened the company in many ways during 2001.

•  Revenues increased 26 percent to $117.9 million for the year—all

from internal growth.

•  We achieved profitability. Ending the year with three consecutive

profitable quarters, we reported pretax income from continuing

operations of $1.8 million for 2001, compared with a pretax loss of

$10.3 million in 2000.

•  EBITDA increased with each quarter in 2001. EBITDA totaled

$13.0 million for the year, or 27 cents per share, more than triple

the EBITDA of $4.3 million, or 9 cents per share recorded in 2000.

•  We generated free cash flow after capital expenditures.

•  SG&A expense was reduced from 35 percent of revenues in 2000

to 26 percent of our 2001 revenues.

•  Tyler repaid all its bank debt in 2001. Recently we entered into an

agreement for a new $10 million bank revolving credit facility for

working capital needs, although we do not anticipate borrowing

against this credit line. We have a comfortable cash position and

expect our cash flow from operations to be significantly greater

than our planned capital expenditures.

revenues compared to 2000. At the end of 2001, our backlog of 

signed contracts and deferred revenue balance—both indicators 

of future revenues—remained strong. The total backlog of signed

contracts was $96.3 million at year-end, and we expect nearly 80

percent of that to be realized as revenue within 2002.

John M. Yeaman

Louis A. Waters

2

The result is a stronger company, an improved balance sheet and a

Our performance in 2001 demonstrates that our plan is working and

growing cash position that paves the way for a promising future.

that our company has the ability to execute its strategies. The

That brings us to one of the most important accomplishments of

2001. We believe that in the year 2001 we achieved a level of critical

mass in our business that will make our future growth increasingly

profitable. Over the past few years, we have successfully aligned our

infrastructure to provide the kind of leverage that generates increasing

profitability. We have assembled a complement of business units that

represent the leading providers of products and services for a broad

range of IT applications for local government, addressing customer

needs in the areas of financials, justice and courts, property tax and

appraisal, and recording systems. The company has a large and growing

customer base, with nearly 6,000 local government installations across

successful achievement of our goals can be attributed to several key

factors. One is the ever-increasing demand for technology in the 

local government market, creating a robust and ready market for the

expertise we offer. Tyler is meeting that market squarely, with the

most extensive offering of products and services in the industry. We

also have an exceptionally loyal base of customers who give us high

marks for our products and services and work with us to build

long-lasting relationships. Most significantly, we have a hard-working

team of 1,200 employees whose expertise in the information

technology industry is matched in full measure by their drive and

dedication to building a great company.

the U.S., Canada and Puerto Rico.

In place are the administrative and

Most certainly, the future we have envisioned is here at Tyler

support systems, coupled with the staff and management, to serve an

Technologies. We appreciate the confidence of our shareholders,

expanding customer base. At the heart of the company is the financial

customers and employees as we work together to make it a future 

foundation to fund continuing capital expenditure and development

of continuing achievement and increasing value.

goals, with a nearly debt-free balance sheet and sustained cash flow

prospects. Put simply, we have reached the point of critical mass—in

our financial position, our customer base, our products and

services and our operating infrastructure—where the rate of future

revenue growth can significantly outstrip the corresponding increase

in our basic costs and expenses. As we grow, adding new customers

and migrating existing customers to new technology, we believe this

new operating and financial leverage will have a tremendous impact

on the bottom line.

Building on this foundation, we are looking forward to continued

improvement in our results in 2002. We anticipate solid revenue growth

that reflects our strong market position and our ability to continue

to gain market share. Because of the tremendous leverage in our business

model, we expect that future growth will be increasingly profitable,

with EBITDA and earnings per share growing at a substantially greater

rate than revenues.

Louis A. Waters
Chairman

John M.Yeaman
President

3

G R O W I N G   N E E D S , G R O W I N G   O P P O R T U N I T Y.

Tyler Technologies has a vast and receptive

convenience of the Internet for many day-to-day

Against the backdrop of this large and growing

marketplace for its products and services.

activities, they want local governments to offer

market is a varied array of service providers.

As a leading provider of information

them the ability to obtain information, conduct

There are numerous small companies which

technology (IT) solutions and services for local

transactions and even pay utility bills, fines and

compete in regional or niche markets, and

governments, the company answers the need

taxes online.

for advanced technology in virtually every area

of operation for cities, counties, schools and

other local government entities.

In addition to providing better service to

constituents, local governments see internal

needs for improved information technology.

The state, local and municipal government

Local governments are responsible for a wide

market is one of the largest and most

range of public services, from property taxes,

decentralized markets for information technology

public safety and utilities to courts, criminal

in the United States.

In addition to the 50

justice and welfare services—each area generating

states, it includes approximately 3,200 counties

huge numbers of transactions, records and

and more than 40,000 cities, towns and other

data.

Improving the speed and efficiency of

local government agencies with specialized

processing these translates into improved

functions. According to industry estimates,

revenue collection, faster access to information,

these government agencies are expected to

and streamlined delivery of services.

It also

there are large companies which serve the

local government market as only one of many 

different markets. Tyler Technologies stands 

out as the largest company solely focused 

on providing software and IT services to the

local government market.

It has the broadest

product line in the industry, a strong national

presence and a large, loyal customer base.

With a long-standing reputation for quality

products and customer service,Tyler’s business

units have provided software and services 

to local governments for an average of well

over 20 years.

spend $44.4 billion on IT products and services

means that information can be shared between

This is a large market with growing needs.

It 

in 2002, growing to $56.4 billion by 2005.

different agencies and government offices,

is a market with tremendous opportunity for 

There are a number of reasons for the strong

and steady growth in this market. Local

shortening the time frame for obtaining data

a company that can provide the products 

or documents from days to minutes.

and services, the technological support, the

customer service, the long-term commitment 

to working relationships, and continuing advances

in information technology solutions that local

governments need. Tyler Technologies is uniquely

positioned to do just that.

governments are experiencing pressure from

Faced with budget constraints and increasing

all sides for more advanced information

workloads, local governments are depending on

management systems. A technology-savvy

technology to streamline and automate processes

public increasingly demands better service

and to provide Internet access. Utilizing a

from local governments, including improved

provider of high quality IT products and services

access to information as well as interactive

not only results in improved productivity

capability. Accustomed to the speed and 

and cost savings, but also reduces the need to

compete with the private sector in attracting

and retaining highly skilled IT personnel. All

these factors come together  to make the

investment in information technology a cost-

efficient solution with a solid return.

“Going from manual document re c o rding to an automated system was a huge undertaking for our

department.  Tyler made it a smooth and very successful transition, backing up a great product

with exceptional customer service and training.  With  the  new  system,  we  were able to re c o rd

m o re than 300 additional documents per day, reduce the staff needed to support the operations

and cut the time  required  for  document  processing  from months to days.  As a result,  we  can

p rovide better service to the business and financial community, and that is good for our city.”

Joan T. Decker
Commissioner of Records
City of Philadelphia, Pennsylvania

4

M A R K E T

The future is here in a large and growing market comprised of local government

entities in 50 states, approximately 3,200 counties and more than 40,000

municipalities and other local government agencies. Responding to the demand

for improved service and better access to information, these local governments

look to companies like Tyler to provide the solutions and services that will

streamline and automate their operations while improving productivity and

reducing costs.

M E E T I N G   T H E   M A R K E T.

With the broadest product line in the industry,

Providing products and services to virtually

Property Appraisal and Tax. Bringing effective

Tyler Technologies is the premier provider of

every area of local government,Tyler’s extensive

information management to the appraisal and

state-of-the-art information management solutions

offerings are grouped into four major areas.

assessment administration of real and personal

to local governments nationwide. Over the

years, its business units have earned a reputation

for bringing greater efficiency, productivity

and cost-effectiveness to the counties, cities,

schools and other local government agencies

they serve.

Financial and City Solutions. As municipalities

look for ways to enhance financial, payroll and

administration operations with Web-enabled

technology solutions,Tyler provides the answers

with modular fund accounting systems tailored

to meet the needs of cities, counties, school

Tyler’s expertise at providing end-to-end

districts, public utilities and not-for-profit

solutions is rooted in a thorough understanding

organizations of any size. Focused on automating

of the critical back-office functions of local

all aspects of financial management, Tyler’s

governments. This knowledge, coupled with

systems include modules for general ledger,

its singular focus on the local government

budget preparation, fixed assets, purchasing,

market, enables Tyler to deliver exceptional

accounts payable, investment management,

proper ty, Tyler provides software and

professional appraisal services to help local

governments nationwide fairly administer

their major source of revenues—property taxes.

Its tax collection systems are fully integrated

with appraisal and assessment applications for

seamless management of all processes.

In

addition,Tyler Technologies is the nation’s largest

provider of real property appraisal outsourcing

services for taxing jurisdictions, performing physical

inspection, data collection and processing,

computer analysis and arbitration services.

expertise through a core of application

tax collection, payroll and human resources.

Recording. To help county governments

software that meets the market with precision

and focus. The company’s comprehensive and

flexible suite of professional services includes

software and hardware installation, network

design, management, installation, data conversion,

training and support. Most of its customers

purchase software solutions for use in-house,

while others retain Tyler to maintain hardware

and software on-site. Tyler also offers outsourced

hosting of applications and data at its own

data center. Additionally, the company is the

leading provider of real property appraisal

outsourcing services, which contributes

substantially to its revenue base.

In every

instance, Tyler provides ongoing customer

service and technological support to ensure

optimum product performance.

Justice and Courts. Timely access to information

and data is essential in today’s justice and law

enforcement processes. Tyler offers a complete,

integrated suite of products that automate,

track and manage the law enforcement and

judicial processes from beginning to end.

In 

law enforcement, it offers systems that automate

police and sheriff functions, from computer-aided

dispatch/emergency 911 call management and

records management through booking and jail

management. For efficient court administration,

it offers Web-enabled systems to manage all

information involved in criminal and civil court

cases. These fully integrated systems allow

Internet access to a wide range of information,

including criminal and civil court records, jail

booking and release information.

streamline document recording and access,

Tyler offers specialized applications to record

and index information for public records.

Its

advanced indexing and retrieval software

systems provide accurate recording of

documents such as deeds, mortgages, liens,

UCC financing statements and vital records,

and also utilize the Internet to provide

electronic recording and public access to

records filed with the county.

In 2001, Tyler introduced a revolutionary unified court case management system that merg e s

case management, calendaring, document imaging and financial management into a single

package.  The new product, called Odyssey, marks the beginning of a new generation of national

Tyler-branded  solutions  that  will  leverage  a  common  framework  of  n-tier,  bro w s e r - b a s e d

technology. Many of Odyssey’s design concepts are unique to the court automation marketplace,

and initial response to the product has been overwhelmingly positive.

Odyssey
Court Case Management System

6

P R O D U C T S

The future is here in the industry’s broadest line of information technology

products for local governments, with solutions and services that span nearly

every aspect of local government operations. Innovation and excellence are 

the hallmarks of Tyler’s product line, as it works to provide customers with

technology that makes government processes more efficient, accessible and

cost-effective.

K N O W L E D G E   A N D   E X P E R I E N C E   M A K E   T H E   D I F F E R E N C E .

Tyler Technologies is a company known for

shared vision for operating as a unified company

technology, but it is first and foremost a company

with common goals for performance and

built on people.

Serving the technology needs of local

government requires far more than offering

the right products in the right markets.

In

this marketplace, success hinges on a company’s

ability to build and nurture customer relationships,

achievement. The management and directors

of Tyler collectively own more than 10 million

shares of the company’s common stock,

excluding options and warrants, giving them 

an additional shared stake in growing the

company and increasing shareholder value.

to understand customer needs and to provide

A strong financial foundation, a loyal customer

the best technological solutions to those needs.

base, a competitive contingent of products 

Tyler has brought together a cadre of people

and services—all these are vital to a company’s

with just those capabilities: people who possess

success. But the true measure of Tyler’s

deep domain expertise in the operations of

strength can be found in the quality of the

local government, are highly skilled in information

people who work day in and day out to

technology, and are committed to making the

contribute to the continuing growth and

technology work for the customer. The strength

performance of the company.

of its people permeates the entire organization,

and is evident in the present management of

Tyler’s business units, where the entrepreneurs

who originally built the operating units are still

managing those businesses.

Bringing together people of this caliber has

given Tyler exceptional strength throughout its

ranks of 1,200 people. At the helm is a strong

corporate management team with successful

experience in large and high-growth companies.

Across all business units, there are people with

decades of experience in specific technology

solutions for local government. And there is a

“We have worked with Tyler since 1990, purchasing its software after a prior experience with

poor  service,  support  and  maintenance  from  another  company.    We  learned at that time

h o w  important  support  services  are in relation  to  an  overall  software   p roduct.  We c h o s e

Tyler not only because it has excellent products, but also because it has a staff and a system

devoted  to  software support.  Over the years, they have been very responsive to our needs.”

Bill Herzog, CPA
County Auditor
Hays County, Texas

8

P E O P L E

The future is here in the 1,200 employees of Tyler Technologies who possess

an exceptional level of deep domain expertise and technological experience.

Tyler’s business units are managed by the entrepreneurs who built them into

successful enterprises, bringing a legacy of strength to the management team.

B U I L D I N G   R E L A T I O N S H I P S   T H A T   L A S T.

It’s a fact of business: Customers have a choice.

established which keep Tyler in tune with the

They choose one product over another, one

changing needs of its customers. Over the

company over another, based on the value

course of time,Tyler’s customers often migrate

they receive for their investment. Tyler

to new and improved products or make

Technologies respects that choice and works

modifications that bring added functionality

hard to merit the confidence of its 6,000

to existing systems. This, too, translates into

customers by consistently delivering the highest

added value for the customer.

quality products and services.

Because of its extensive product line,Tyler offers

It is a philosophy that has served Tyler

customers a distinct advantage by serving as

Technologies well. Doing business for an

a single-source provider for multiple solutions.

average of more than 20 years, Tyler’s 

As the largest provider of technology solutions

major operating units have maintained an 

to local governments, the company offers focused

annual customer retention rate of over

solutions for virtually every area of operations,

99 percent.

There are good reasons for that remarkable

customer retention rate. Tyler provides its

customers with real-world solutions that help

make the business of running local government

more efficient and effective. With products

and services that are second to none,Tyler offers

from justice and law enforcement to tax and

appraisal, records and financial administration.

This contributes to long-term relationships as

customers come to depend on Tyler for

continual improvement, technological updates

and innovative solutions that span all aspects 

of local government.

customers the assurance of quality and

There is no substitute for business relationships

performance across a wide range of applications.

that are founded on proven trust and 

It also offers a singular focus on the local

mutual benefit. When needs are met,

government market, putting all its time and

promises are kept and exceptional value 

resources into understanding the way local

is realized, customers stay. For those reasons,

government operates and developing solutions

they stay with Tyler Technologies.

that work. That’s value to the customer.

Tyler earns the trust of its customers by

providing superior ongoing support and

service, long after the installation is complete.

As a result, close working relationships are

“In the 12 years that we’ve used Tyler’s MUNIS® system, we have found the financial and payroll
solutions to be outstanding at meeting our needs.  We also find that working with a single

p rovider for multiple applications offers many advantages.  We know we can pick up the phone

and call anyone from the technician to top management, any time.  They are  always  there ,

with ideas, input and solutions that address our issues and demonstrate a true understanding

of  how  we operate and what we need.”

Ruth Lewis 
Comptroller
Town of Arlington, Massachusetts

10

C U S T O M E R S

The future is here in Tyler’s long-standing and loyal customer base. Tyler delivers

exceptional value and quality to the 6,000 local government offices it serves

nationwide, ensuring that customers are well-served and needs are met. The

result is long-lasting customer relationships. Over an average of more than 20

years,Tyler’s major business units have maintained an annual customer retention

rate of more than 99 percent.

Tyler’s mission has always been to make

flow and solid prospects for increasing

government more accessible to the public,

profitability in the years ahead.

It has a large,

more responsive to the needs of citizens 

growing base of longtime customers, providing

and more efficient through the migration to

the potential to generate high volume in

an integrated technology environment. That

recurring and additional revenues for the

remains the goal of the company, as it continues

future.

It has deep domain expertise in its

to bring products to the marketplace that

management and staff, which will drive its

generate increased productivity and budget

continuing success as a company focused on

savings for local governments.

being the premier provider of information

Never has the company been in a better

technology solutions for local government.

position to capitalize on the opportunities of

The past few years have been a time of building

the future. The marketplace for its products 

for Tyler Technologies. The coming years will 

and services is large and growing, as local

be a time of growth, as the company leverages

governments increasingly turn to technology 

its new position of financial and operational

to help them manage present and future needs.

strength to drive increasingly greater profitability

Tyler has a solid national presence, serving

from future revenues.

6,000 customers in 49 states, Canada and

Puerto Rico.

It has the most extensive line 

of IT products and services for local government

in the industry, and a strategy to continually

bring new, evolving solutions to the market.

It has a strong financial foundation, with a

nearly debt-free balance sheet, excellent cash

The future is here at Tyler Technologies.

And it is a future filled with opportunity.

T H E   F U T U R E  

I S   H E R E

12

This page does not print.
It is for placement only.

F I N A N C I A L  

I N F O R M A T I O N

Consolidated Statements of Operations 14

Report of Ernst & Young LLP, Independent Auditors 32

Selected Financial Data 33

Management’s Discussion and Analysis of Financial

Condition and Results of Operations 34

Consolidated Statements of Operations

For the years ended December 31

In thousands, except per share amounts

2001

2000

1999

Revenues:

Software licenses
Professional services
Maintenance
Hardware and other

Total revenues

Cost of revenues:

Software licenses
Professional services and maintenance
Hardware and other

Total cost of revenues

Gross margin

Selling, general and administrative expense
Costs (recovery) of  certain acquisition opportunities
Amortization of acquisition intangibles

Operating income (loss)

Interest expense
Interest income

Income (loss) from continuing operations before income taxes
Income tax provision (benefit)

Income (loss) from continuing operations

Discontinued operations:

Income (loss) from operations, after income taxes
Loss on disposal, after income taxes

Loss from discontinued operations

Net income (loss)

Basic and diluted income (loss) per common share:

Continuing operations
Discontinued operations

Net income (loss) per common share

Basic weighted average common shares outstanding
Diluted weighted average common shares outstanding

See accompanying notes.

$ 18,899
52,858
39,915
6,216

$ 18,615
37,412
32,537
4,636

$ 20,252
21,679
19,721
9,764

117,888

93,200

71,416

3,982
69,272
4,615

77,869

2,172
53,193
3,560

58,925

2,515
27,159
7,353

37,027

40,019

34,275

34,389

31,065
(235)
6,898

32,805
—
6,903

27,553
1,851
4,966

2,291

(5,433)

19

(630)
151

(4,914)
30

(2,096)
299

1,812
1,540

272

(10,317)
(2,810)

(7,507)

—
(3)

(3)

(4,251)
(12,839)

(17,090)

(1,778)
188

(1,966)

1,902
(2,760)

(858)

269  $ (24,597)

$ (2,824)

0.01
(0.00)

0.01

$

$

(0.17)
(0.37)

(0.54)

$

$

(0.05)
(0.02)

(0.07)

47,181
47,984

45,380
45,380

39,105
39,105

$

$

$

14

Tyler Technologies, Inc.

Consolidated Balance Sheets 

December 31 

In thousands, except share and per share amounts

2001

2000

ASSETS
Current assets:

Cash and cash equivalents
Accounts receivable (less allowance for losses of $1,275 in 2001 and  $1,505 in 2000)
Income tax receivable
Prepaid expenses and other current assets
Deferred income taxes

Total current assets

Net assets of discontinued operations

Property and equipment, net

Other assets:

Investment security available - for - sale
Goodwill and other intangibles, net
Sundry

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:

Accounts payable
Accrued liabilities
Current portion of long-term obligations
Net current liabilities of discontinued operations
Deferred revenue

Total current liabilities

Long-term obligations, less current portion
Deferred income taxes

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 and 48,042,969

shares issued in 2001 and 2000, respectively

Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Treasury stock, at cost; 920,205 and 863,522 shares in 2001and 2000, respectively

Total shareholders’ equity

See accompanying notes.

Tyler Technologies, Inc.

15

$

5,271
35,256
356
3,318
1,329

45,530

1,000

6,967

11,238
82,211
234

$

8,217
36,599
323
2,465
1,469

49,073

5,095

6,175

5,092
84,700
577

$ 147,180

$ 150,712

$

2,036
9,651
123
786
27,215

39,811

2,910
3,575

$

4,299
11,745
353
5,187
21,066

42,650

7,747
4,193

—

—

481
157,242
(48,943)
(4,545)
(3,351)

480
158,776
(49,212)
(10,691)
(3,231)

100,884  

96,122  

$ 147,180   $ 150,712  

Consolidated Statements of Shareholders’ Equity 

For the years ended December 31, 2001, 2000 and 1999 

In thousands

Balance at December 31, 1998

Comprehensive income:

Common  Stock

Shares

Amount

Additional
Paid-in
Capital

Accumulated
Other

Comprehensive Accumulated
Income (Loss)

Deficit

Treasury Stock

Shares

Amount

Total
Shareholders’
Equity

35,913

$

359

$ 103,985

$

— $ (21,791)

(1,423) $ (6,207)

$ 76,346

Net loss
Unrealized gain on investment 

security

—

—

Total comprehensive income

Issuance of treasury shares pursuant
to stock compensation plans
Investment security available-for-sale
Shares issued for acquisitions
Revision of federal income tax

benefit related to exercise of
stock options

Balance at December 31, 1999

Comprehensive loss:
Net loss
Unrealized loss on investment 

security

Total comprehensive loss

Issuance of treasury shares pursuant
to stock compensation plans
Shares issued for private investment

Balance at December 31, 2000

Comprehensive income:
Net income
Unrealized gain on investment 

security

Total comprehensive income

Issuance of common stock pursuant
to stock compensation plans
Federal income tax benefit related

to exercise of stock options

Shares received from sale of

discontinued business
Adjustment in connection with
previous acquisition

—
2,810
5,986

—

44,709

—

—

—
3,334

48,043

—

—

105

—

—

—

—

—

—
28
60

—

447

—

—

—
33

480

—

—

1

—

—

—

—

—

(31)
15,754
31,728

(138)

—

(2,824)

17,931

—
—
—

—

—

—
—
—

—

—

—

5
—
—

—

—

—

50
—
—

—

(2,824)

17,931

15,107

19
15,782
31,788

(138)

151,298

17,931

(24,615)

(1,418)

(6,157)

138,904

—

(24,597)

—

—

(28,622)

—

—

—

—

(24,597)

(28,622)

(53,219)

555
—

2,926
—

1,167
9,270

—

—
—

(1,759)
9,237

—
—

158,776

(10,691)

(49,212)

(863)

(3,231)

96,122

—

—

221

33

—

(1,788)

—

6,146

—

—

—

— 

269

—

—

—

—

— 

—

—

3

—

(60)

— 

—

—

8

—

269

6,146

6,415

230

33

(128)

(128)

— 

(1,788)

Balance at December 31, 2001

48,148

$

481

$ 157,242 

$ (4,545)

$ (48,943)

(920) $ (3,351)

$ 100,884 

See accompanying notes.

16

Tyler Technologies, Inc.

Consolidated Statements of Cash Flows 

For the years ended December 31 

In thousands

2001

2000

1999

Cash flows from operating activities:

Net income (loss)
Adjustments to reconcile net income (loss)

to net cash provided (used) by operations:
Depreciation and amortization
Non-cash interest charges
Impairment of notes receivable
Provision for doubtful accounts receivable
Deferred income tax provision (benefit)
Discontinued operations - noncash charges and

changes in operating assets and liabilities

Changes in operating assets and liabilities, exclusive of

effects of acquired companies and discontinued operations:

Accounts receivable
Income tax receivable
Prepaid expenses and other current assets
Other receivables
Accounts payable
Accrued liabilities
Deferred revenue

Net cash provided (used) by operating activities

Cash flows from investing activities:

Additions to property and equipment
Software development costs
Cost of acquisitions, net of cash acquired
Cost of acquisitions subsequently discontinued
Capital expenditures of discontinued operations
Proceeds from disposal of discontinued operations,

net of transaction costs
Issuance of notes receivable
Other

Net cash (used) provided by investing activities

Cash flows from financing activities:

Net (payments) borrowings on revolving credit facility
Payments on notes payable
Payment of debt of discontinued operations
Issuance of common stock
Net sale of common shares to employee benefit plans
Debt issuance costs

Net cash (used) provided by financing activities

Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year

$

269

$ (24,597)

$ (2,824)

10,910
361
—
1,681
1,258

9,686
2,069
—
1,438
(2,890)

6,111
468
1,851
388
(753)

(2,385)

8,215

5,614

(258)
(33)
(853)
—
(2,263)
(2,092)
6,149 

12,744 

(3,101)
(6,225)
(2,750)
—
(1,353)

3,675
—
48

(9,706)

(4,750)
(354)
(992)
—
230
(118)

(5,984)

(2,946)
8,217 

(7,052)
2,571
48
85
697
1,370
1,234 

(7,126)

(2,645)
(6,714)
—
(3,073)
(2,201)

79,821
—
213

65,401

(56,250)
(836)
(2,925)
9,270
19
(1,300)

(52,022)

(12,934)
(2,673)
629
1,477
(67)
1,304
2,124 

715 

(2,244)
(1,368)
(25,087)
(862)
(9,613)

15,114
(1,335)
652 

(24,743)

30,190
(3,916)
—
—
19
(1,338)

24,955 

6,253
1,964 

927
1,037 

Cash and cash equivalents at end of year

$ 5,271  $

8,217 

$

1,964 

See accompanying notes.

Tyler Technologies, Inc.

17

Notes to Consolidated Financial Statements

December 31, 2001 and 2000
(Tables in thousands, except per share data)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

DESCRIPTION OF BUSINESS 

Tyler Technologies, Inc. (“Tyler” or the “Company”) provides
integrated software systems and related services for local
governments. Tyler develops and markets a broad line of software
products and services to address the information technology
(“IT”) needs of cities, counties, schools and other local government
entities. Tyler also provides professional IT services to its
customers, including software and hardware installation, data
conversion, training and product modifications, along with
continuing maintenance and support for customers using its
systems. The Company also provides property appraisal
outsourcing services for taxing jurisdictions.  

The Company discontinued the operations of its information
and property records services segment in 2000.  See Note 3 for
discussion of discontinued businesses.

PRINCIPLES OF CONSOLIDATION 

The consolidated financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly-owned.
All significant intercompany balances and transactions have
been eliminated in consolidation. 

CASH AND CASH EQUIVALENTS 

Cash and cash equivalents of $5.3 million and $8.2 million at
December 31, 2001 and 2000, respectively, consist of money
market investments with an initial term of less than three
months.  For purposes of the statements of cash flows, the
Company considers all investments with original maturities 
of three months or less to be cash equivalents.

REVENUE RECOGNITION 

The Company derives revenue from software licenses, postcontract
customer support/maintenance (“PCS”), and services. PCS includes
telephone support, bug fixes, and rights to upgrade on a
when-and-if available basis.  Services 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, the Company
allocates the total arrangement fee among each deliverable based
on the relative fair value of each of the deliverables, determined
based on vendor-specific objective evidence.

The Company recognizes revenue in accordance with Statement
of Position (“SOP”) 97-2, “Software Revenue Recognition,” as
amended, as follows:

Software Licenses - The Company recognizes the revenue
allocable to software licenses and specified upgrades upon
delivery of the software product or upgrade to the end user,

unless the fee is not fixed or determinable or collectibility is
not probable. If the fee is not fixed or determinable, revenue is
recognized as payments become due from the customer. If
collectibility is not considered probable, revenue is recognized
when the fee is collected. Arrangements that include software
services, such as training or installation, are evaluated to determine
whether those services are essential to the functionality of
other elements of the arrangement.

A majority of the Company’s software arrangements involve
“off-the-shelf” software and the other elements are not considered
essential to the functionality of the software. For those software
arrangements in which services are not considered essential,
the software license fee is recognized as revenue after delivery
has occurred, customer acceptance is reasonably assured, the
fee represents an enforceable claim and is probable of collection
and the remaining services such as training are considered nominal.

Software Services - When software services are considered
essential, revenue under the entire arrangement is 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 the services are performed.

Computer Hardware Equipment - Revenue allocable to equipment
based on vendor specific evidence of fair value is recognized
when the equipment is delivered and collection is probable.

Postcontract Customer Support - PCS agreements are generally
entered into in connection with initial license sales and subsequent
renewals. 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.

Contract Accounting - For arrangements that include customization
or modification of the software, or where software services are
otherwise considered essential, or for real estate appraisal projects,
revenue is recognized using contract accounting. Revenue from
these arrangements is recognized using the percentage-of-
completion method with progress-to-completion measures based
primarily upon labor hours incurred or units completed.  Revenue
earned is based on the progress-to-completion percentage after
giving effect to the most recent estimates of total cost.  Changes
to total estimated contract costs, if any, are recognized in the
period they are determined.  Provisions for estimated losses on
uncompleted contracts are made in the period in which such
losses are determined.

Deferred revenue consists primarily of payments received in
advance of revenue being earned under software licensing, software
and hardware installation, support and maintenance contracts.

USE OF ESTIMATES 

The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in
the United States requires management to make estimates and

18

Tyler Technologies, Inc.

assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

PROPERTY AND EQUIPMENT 

Property, equipment and purchased software are recorded at cost.
Depreciation and amortization are computed for financial reporting
purposes primarily utilizing the straight-line method over the
estimated useful lives of the related assets, or for leasehold
improvements and capital leases, the shorter of the base lease
term or estimated useful life. For income tax purposes, accelerated
depreciation methods are primarily used with the establishment of
deferred income tax liabilities for the resulting temporary differences.

Maintenance and repairs are charged to expense as incurred.
Costs of renewals and betterments are capitalized. The cost and
accumulated depreciation and amortization applicable to assets
sold or otherwise disposed of are removed from the asset
accounts, and any net gain or loss is included in the statement
of operations.

INTEREST COST

The Company capitalizes interest cost as a component of
capitalized software development costs.  During the years ended
December 31, 2001 and 2000, the Company capitalized $578,000
and $586,000, respectively, of interest cost.  No interest cost was
capitalized in 1999.

RESEARCH AND DEVELOPMENT COSTS 

The Company expenses all research and development costs 
as incurred. The Company expensed $412,000, $973,000 and
$1.6 million of research and development costs in 2001, 2000
and 1999, respectively.

INCOME TAXES 

Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.

STOCK COMPENSATION 

As permitted by Statement of Financial Accounting Standards
(“SFAS”) No. 123, “Accounting for Stock-Based Compensation,”
the Company continues to apply the provisions of Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock
Issued to Employees,” as amended.  Under APB Opinion No. 25,
compensation expense is recorded on the date of grant only if
the current market price of the underlying common stock exceeds
the exercise price.

COMPREHENSIVE INCOME (LOSS) 

The following table sets forth the components of total
comprehensive income (loss) for the periods presented:

Years ended December 31,

2001

2000

1999

Net income (loss)
Other comprehensive 
income (loss):
Unrealized gain (loss) 

on investment 
securities 
available-for-sale

Total comprehensive 
income (loss)

$

269

$ (24,597)

$ (2,824)

6,146  

(28,622)  

17,931

$ 6,415 

$ (53,219) 

$ 15,107

There was no tax effect in connection with the change in the
unrealized gain (loss) for each of the years presented since
management could not conclude it was more likely than not that
the tax benefit would be realized on the cumulative unrealized
holding loss.

SEGMENT AND RELATED INFORMATION 

Although the Company has a number of operating subsidiaries,
separate segment data has not been presented as they meet the
criteria for aggregation set forth in SFAS No. 131, “Disclosures
About Segments of an Enterprise and Related Information.”

GOODWILL AND OTHER INTANGIBLE ASSETS 

The cost of acquired companies is allocated first to identifiable
assets based on estimated fair values. Costs allocated to
identifiable intangible assets are amortized on a straight-line
basis over the remaining estimated useful lives of the assets,
as determined principally by underlying contract terms or
independent appraisals. The excess of the purchase price over
the fair value of identifiable assets acquired, net of liabilities
assumed, is recorded as goodwill and amortized on a straight-line
basis over the estimated useful life. The useful life is determined
based on the individual characteristics of the acquired entity and
ranges from twenty to twenty-five years.

Tyler Technologies, Inc.

19

Notes to Consolidated Financial Statements 

(Continued)

In June 2001, the Financial Accounting Standards Board (the
“FASB”) issued SFAS No. 142, “Goodwill and Other Intangible
Assets.”  SFAS No. 142 addresses the accounting and reporting
of acquired goodwill and other intangibles assets.  SFAS No. 142
discontinues amortization of acquired goodwill and instead
requires annual impairment testing of acquired goodwill.
Intangible assets will be amortized over their useful economic
life and tested for impairment in accordance with SFAS No. 142.
Intangible assets with an indefinite useful economic life should
not be amortized until their life is determined to be finite.

The provisions of SFAS No. 142 will be effective for fiscal years
beginning after December 31, 2001 and will be adopted effective
January 1, 2002.  SFAS No. 142 will have a significant impact
on the Company’s financial results based on the historical
amortization of goodwill (including workforce).  During 2001,
2000 and 1999, the Company reported after-tax goodwill
amortization expense of approximately $3.0 million, $2.9 million,
and $2.2 million, respectively, which, beginning January 1, 2002,
will no longer be expensed under SFAS No. 142.  The Company
does not anticipate the adoption of SFAS No. 142 to generate an
impairment charge in 2002.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company accounts for its long-lived assets in accordance
with the provisions of SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of.” SFAS No. 121 requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets, including goodwill, to be held and used 
is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets.  Assets
to be disposed of are reported at the lower of carrying amount
or fair value less costs to sell.

COSTS OF COMPUTER SOFTWARE 

SFAS No. 86, “Accounting for the Costs of Computer Software
to be Sold, Leased, or Otherwise Marketed,” requires capitalization
of software development costs incurred subsequent to
establishment of technological feasibility and prior to the
availability of the product for general release to customers. In
2001, 2000 and 1999, the Company capitalized approximately
$6.2 million, $6.7 million and $1.4 million, respectively, of
software development costs, which primarily include personnel
costs.  Systematic amortization of capitalized costs begins when
a product is available for general release to customers and is
computed on a product-by-product basis at a rate not less than
straight-line basis over the product’s remaining estimated
economic life. Amortization of software development costs in

2001, 2000 and 1999 was approximately $1.7 million, $622,000
and $75,000, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS 

The following methods and assumptions were used to estimate
the fair value of each class of financial instruments:

Cash and cash equivalents, accounts receivables, trade accounts
payables and certain other assets: The carrying amounts
approximate fair value because of the short maturity of these
instruments. The Company’s available-for-sale investments are
carried at fair value based on quoted market prices.

Long-term obligations: The carrying amount of long-term
obligations approximates fair value either due to the variable
nature of their stated interest rates or the stated interest rates
approximate market rates.  These estimated fair value amounts
have been determined using available market information or
other appropriate valuation methodologies.  

The Company has no involvement with derivative financial
instruments, including those for speculative or trading purposes.

CONCENTRATIONS OF CREDIT RISK AND UNBILLED RECEIVABLES 

Concentrations of credit risk with respect to receivables are limited
due to the wide variety of customers and markets into which the
Company’s products and services are provided, as well as their
dispersion across many different geographic areas. As a result,
as of December 31, 2001, the Company does not consider itself
to have any significant concentrations of credit risk.  

The Company’s property appraisal outsourcing service contracts
can range up to three years in duration. In connection with these
percentage of completion contracts and for certain software
service contracts, the Company may perform the work prior to
when the services are billable and/or payable pursuant to the
contract. The Company has recorded retentions and unbilled
receivables (costs and estimated profit in excess of billings) of
approximately $7.5 million and $4.7 million at December 31, 2001
and 2000, respectively, in connection with such contracts.
Retentions are included in trade accounts receivable and current
assets and amounted to $4.5 million at December 31, 2001, of which
$3.1 million is expected to be collected in excess of one year.

For the year ended December 31, 2001, the Company had one
customer that accounted for approximately 13% of the Company’s
total consolidated revenues.  For the years ended December 31,
2000 and 1999, the Company did not have a single customer
that accounted for greater than 10% of total consolidated revenues.

RECLASSIFICATIONS 

The Company reclassified certain prior year accounts of
discontinued operations as of December 31, 2000 to conform to
the current year presentation.

20

Tyler Technologies, Inc.

2. ACQUISITIONS 

Effective March 1, 1999, the Company acquired Eagle Computer
Systems, Inc. (“Eagle”). Eagle is a leading supplier of networked
computing solutions for county governments.

Effective April 1, 1999, the Company completed its acquisition
of Micro Arizala Systems, Inc. d/b/a FundBalance, a company
which develops and markets fund accounting software and
other applications for local governments, not-for-profit
organizations and cemeteries.

On April 21, 1999, the Company acquired Process Incorporated
d/b/a Computer Center Software, which designs and develops
integrated financial and land management information systems
for counties, cities, schools and not-for-profit organizations. 

Effective May 1, 1999, the Company acquired Gemini Systems,
Inc., which develops and markets software products for
municipal governments and utilities.

On July 16, 1999, the Company acquired Pacific Data
Technologies, Inc., which was included in the information and
property records services segment which has been discontinued.

On November 4, 1999, the Company acquired selected assets
and assumed selected liabilities of Cole Layer Trumble Company
(“CLT”) from a privately held company (“Seller”).  A portion of
the consideration consisted of the issuance of 1.0 million
restricted shares of Tyler common stock and included a price
protection on the sale of the stock.  The price protection, which
expired November 4, 2001, was equal to the difference between
the actual sale proceeds of the Tyler common stock and $6.25
on a per share basis, but was limited to $2.75 million.  During
the year ended December 31, 2001, the Seller submitted to Tyler
a claim under the price protection provision which qualified for
the maximum amount of the price protection.  Contingent
consideration of this nature does not change the recorded
costs of the acquisition and the claim is first recorded when
submitted. Accordingly, the claim submitted during the year of
$2.75 million net of the deferred tax benefit of $963,000, has
been charged to paid-in capital during the year.  The purchase
agreement contained a number of post-closing adjustments
which resulted in a receivable of approximately $1.4 million
due Tyler from the Seller.  During the year ended December 31,
2001 and concurrent with the settlement of the price protection
provision, Tyler paid the Seller $1.35 million in cash on a net
basis and eliminated the aforementioned receivable.  The two
parties entered into a mutual release agreement to fully settle
the price protection and related purchase agreement provisions.

On January 3, 2000, the Company acquired Capitol Commerce
Reporter, Inc. (“CCR”).  CCR was included in the information
and property records services segment which has been
discontinued.  CCR provided public records research, document
retrieval, filing and information services.  The Company 
paid cash of $3.0 million; assumed notes with a fair value of
$4.0 million; and paid transaction costs of $90,000 in connection
with this acquisition.

Tyler Technologies, Inc.

21

The Company accounted for all of the aforementioned
acquisitions using the purchase method of accounting for
business combinations.  Under this method of accounting, the
aggregate purchase price is allocated to assets acquired and
liabilities assumed based on their estimated fair values.  Results 
of operations of the acquired entities are included in the
Company’s consolidated financial statements from the respective
dates of acquisition. The excess purchase price over the fair
value of the net identifiable assets of the acquired companies
(goodwill) is amortized using the straight-line method of
amortization over their respective estimated useful lives.

During the year ended December 31, 1999, the Company paid
cash of $25.6 million; issued 6.0 million shares of Tyler common
stock with a fair value of $31.8 million and assumed debt of
$2.3 million in connection with its 1999 acquisitions.  In addition
to consideration paid in cash and common stock for the 1999
acquisitions, the Company provided other consideration which
totaled approximately $3.2 million and consisted of assignment
of certain notes.  Cash paid for acquisitions does not reflect cash
paid for transaction costs related to the execution of the
acquisitions, such as legal, accounting and consulting fees, of
approximately $673,000 in 1999 and excludes acquired cash
balances of approximately $338,000 in 1999.

3. DISCONTINUED OPERATIONS 

I n f o rmation and Pro p e r t y   R e c o rds Services Segment

On September 29, 2000, the Company sold for a cash sale price
of $14.4 million certain net assets of Kofile, Inc. and another
subsidiary, the Company’s interest in a certain intangible work
product, and a building and related building improvements
(“Kofile Sale”).  Effective December 29, 2000, the Company sold
for cash its land records business unit, consisting of Business
Resources Corporation (“Resources”), to an affiliate of Affiliated
Computer Services, Inc. (“ACS”) (the “Resources Sale”).  The
Resources Sale was valued at approximately $71.0 million.
Concurrent with the Resources Sale, management of the
Company with the Board of Directors’ approval adopted a formal
plan of disposal for the remaining businesses and assets of the
information and property records services segment.  This
restructuring program was designed to focus the Company’s
resources on its software systems and services segment and to
reduce debt.  The businesses and assets divested or identified
for divesture were classified as discontinued operations in the
accompanying consolidated financial statements in 2000 and
the prior periods’ financial statements were restated to report
separately their operations in compliance with APB Opinion
No. 30.  The net gain on the Kofile Sale and the Resources Sale
amounted to approximately $1.5 million (net of an income tax
benefit of $2.4 million).

Notes to Consolidated Financial Statements 

(Continued)

The Company’s formal plan of disposal provided for the remaining
businesses and assets of the information and property records
services segment to be disposed of by December 29, 2001.  At
the time management elected to discontinue the remaining
businesses in this segment, its remaining assets included a
start-up company engaged in constructing a Web-enabled
national repository of public records data, and Capitol Commerce
Reporter, Inc. (“CCR”), which provided public records research,
principally in Texas.  The interdependency of these operations
with those of Resources resulted in the Company’s decision to
discontinue the development of the repository and other related
products and exit the land records business following the
Resources Sale.  

The estimated loss on the disposal of these remaining
businesses and assets at December 29, 2000 amounted to
$13.6 million (after an income tax benefit of $3.8 million),
consisting of an estimated loss on disposal of the businesses
of $11.5 million (net of an income tax benefit of $2.7 million)
and a provision of $2.1 million (after an income tax benefit of 
$1.1 million) for anticipated operating losses from the
measurement date of December 29, 2000 to the estimated
disposal dates.  Although the actual proceeds on the subsequent
sales of businesses and assets and the related income tax
treatment of the various disposals differed from the individual
components of each as originally estimated at December 29, 2000,
no adjustment to the net loss reserve is considered appropriate
at this time. The anticipated operating losses to the disposal
dates include the effects of the settlement of certain employment
contracts, losses on real property leases, severance costs and
similar closing related costs.  The provision for anticipated
operating costs which was provided in 2000 approximates
actual operating costs incurred since the measurement date 
of December 29, 2000.

On May 16, 2001, the Company sold all of the common stock
of another business which had previously been designated as a
discontinued operation. In connection with the sale, the Company
received cash proceeds of $575,000, approximately 60,000 shares
of Company common stock, a promissory note of $750,000
payable in 58 monthly installments at an interest rate of 9%, and
other contingent consideration.  Because the note receivable is
highly dependent upon future operations of the buyer, the
Company is recording its value as cash is received.  On
September 21, 2001, the Company sold all of the common stock 
of CCR which also had been previously designated as a
discontinued operation.  The sale price of the common stock
consisted of $3.1 million in cash and future payments contingent

on the retention of certain customers subsequent to the sale.
Since the gains or losses on these sales were estimated as of the
measurement date of December 29, 2000, no additional adjustments
to the estimated loss on the disposals of the discontinued
businesses are considered appropriate at this time.

The income tax expense or benefit associated with the gains or
losses on the respective sales of the businesses in the information
and property records services segment and the planned
dispositions of the remaining assets and businesses differs from
the statutory income tax rate of 35% due to the elimination of
deferred taxes related to the basis difference between amounts
reported for income taxes and financial reporting purposes
and the utilization of available capital loss carryforwards which
were fully reserved in the valuation account prior to the
respective sales.

The condensed components of net assets of discontinued
operations of the information and property records services
segment and one of the Company’s non-operating subsidiaries
included in the consolidated balance sheets as of December 31,
2001 and 2000 are as follows:

Restricted cash
Accounts receivable
Other current assets
Deferred taxes
Other current liabilities
Less reserve for estimated loss on 
disposition including post 
balance sheet operating losses 
and transactions costs

Net current liabilities

Property and equipment
Goodwill and other intangibles
Other liabilities

Net noncurrent assets

2001

2000

$

2,310 
100 
— 
2,192 
(5,268) 

$

—
588  
369  
(898)  
(1,995)  

(120) 

(786) 

(3,251) 

(5,187)     

1,000 
— 
— 

1,000 

2,873  
4,129  
(1,907)     

5,095

Net assets (liability)

$

214 

$

(92)

22

Tyler Technologies, Inc.

The condensed statements of operations relating to the
information and property records services segment for the years
ended December 31, 2000 and 1999 are presented below:

2000

1999

$ 39,680 
44,635 

$ 36,914
32,796

(4,955) 
(704) 

4,118
2,216

$ (4,251) 

$ 1,902

Revenues
Costs and expenses

(Loss) income before income 
tax (benefit) provision
Income tax (benefit) provision

Net (loss) income

O t h e r

In December 1998, the Company entered into a letter of intent
to sell its non-core automotive parts segment. Accordingly, this
segment has been accounted for as a discontinued operation in
1998 with prior years’ financial statements restated to report
separately their operations in compliance with APB Opinion
No. 30.  The Company originally estimated the net loss on
disposal to be $8.9 million, which was recorded in the fourth
quarter of 1998.  The estimated loss included anticipated
operating losses from the measurement date of December 1998
to the date of disposal and associated transaction costs.  On
March 26, 1999, the Company sold all of the outstanding
common stock of the company comprising the automotive parts
segment and received $15.8 million in cash during 1999 prior
to transactions costs.  In 1999, the Company recorded
additional losses of $907,000 (including income taxes of $183,000)
to reflect adjusted estimated transaction costs, funded operating
losses which were higher than originally estimated, adjustments
to amounts previously provided for income taxes in connection
with the sale and to write down to estimated net realizable
value a post-closing receivable in connection with a dispute
with the purchaser.

One of the Company’s non-operating subsidiaries is involved 
in various claims for work-related injuries and physical
conditions relating to a formerly owned subsidiary that was 
sold in 1995.  During 2001, 2000 and 1999, the Company
recorded net losses, net of related tax effect, of $3,000, $748,000
and $1.9 million, respectively (see Note 17 in Notes to
Consolidated Financial Statements).

4. RELATED PARTY TRANSACTIONS 

On September 29, 2000, the Company sold for cash certain net
assets of Kofile and another subsidiary, the Company’s interest
in a certain intangible work product, and a building and related
building improvements to investment entities beneficially owned
by a principal shareholder of the Company, who was also a
director at the time.

From time to time, the Company charters aircraft from
businesses in which either a former director and/or member 
of management of the Company is an owner or part owner.
For the years ended December 31, 2001, 2000 and 1999 the
Company incurred rental expense related to such arrangements
to a non-corporate officer management member of $83,000,
$81,000 and $116,000 respectively.

During 1999 through mid-2000, the Company chartered an
aircraft from a former director.  The Company incurred rental
expense related to these charters of $325,000 and $133,000 in
2000 and 1999, respectively.

The Company has three office building lease agreements with
various shareholders and a non-corporate officer management
member of the Company. Total rental expense related to such
leases for the years ended December 31, 2001, 2000 and 1999
was $1.1 million, $679,000 and $525,000, respectively.

Total future minimum rental under noncancelable related
party operating leases as of December 31, 2001, are as follows:

2002
2003
2004
2005
2006
Thereafter

$

1,244
1,215
1,217  
1,147  
1,160  
3,994  

Tyler Technologies, Inc.

23

Notes to Consolidated Financial Statements 

(Continued)

5. PROPERTY AND EQUIPMENT 

Property and equipment consists of the following at December 31:

Useful
Lives
(years)

2001

2000

Land
Transportation equipment
Computer equipment and 

purchased software

Furniture and fixtures
Building and leasehold 
improvements

Accumulated depreciation 
and amortization

— $

5

3-7
3-7

3-35

$

115 
390 

115  
414  

7,542 
3,515 

1,338 

12,900 

5,428  
2,612  

1,315

9,884  

(5,933) 

(3,709)     

Property and equipment, net

$

6,967

$ 6,175

Depreciation expense totaled $2.3 million, $2.0 million and $1.1
million during the years ended December 31, 2001, 2000 and
1999, respectively. 

6. INVESTMENT SECURITY AVAILABLE-FOR-SALE 

Pursuant to an agreement with two major shareholders of
H.T.E., Inc. (“HTE”), the Company acquired approximately 32%
of HTE’s common stock in two separate transactions in 1999. 
On August 17, 1999, the Company exchanged 2.3 million shares
of its common stock for 4.7 million shares of HTE common
stock. This initial investment was recorded at $14.0 million. The
second transaction occurred on December 21, 1999, in which
the Company exchanged 484,000 shares of its common stock for
969,000 shares of HTE common stock.  The additional investment
was recorded at $1.8 million. The investment in HTE common
stock is classified as a non-current asset since it was made 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, which restrictions may be removed by a
vote of the shareholders. 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 the
Company constitute “control shares” and therefore do not have
voting rights until such time as shareholders of HTE, other than
the Company, restore voting rights to those shares. Management
of the Company believes that only the shares acquired in excess
of 20% of the outstanding shares of HTE constitute “control
shares” and therefore believes it has the right to vote all HTE
shares it owns 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 the Company its right to vote the
“control shares” of HTE.

24

On October 29, 2001, HTE notified the Company that it had
attempted a cash redemption of all of the 5.6 million shares of
HTE common stock currently owned by the Company at a price
of $1.30 per share.  Management of the Company believes that
the attempted redemption of the Company-owned HTE shares
was invalid and takes exception to the manner in which fair
value was calculated.  Management of HTE contends that its
ability to redeem the shares of common stock owned by the
Company and the manner of calculation of fair value by HTE is
in accordance with Florida state statutes for “control shares.”
On October 29, 2001, the Company notified HTE that its
purported redemption of the shares owned by the Company
was invalid and contrary to Florida law, and in any event, the
calculation by 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 that HTE’s purported redemption
of all of the Company-owned shares at a redemption price of
$1.30 per share was lawful and to effect the redemption and
cancel the Company-owned shares.  The Company 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, (a) that HTE’s
purported redemption of any or all of the shares held by the
Company was illegal under Florida law, (b) in the alternative,
that HTE’s right of redemption, if any, under Florida law only
applies to the “control shares” owned by the Company (i.e.,
those shares in excess of 20% of the issued and outstanding
shares of common stock of HTE as of the date that the Company
acquired such shares), (c) in the alternative, that HTE’s
calculation of fair value for the redemption of any or all of the
shares owned by the Company was grossly understated, and 
(d) that the Company maintains the ability to vote up to 20%
of the issued and outstanding shares of HTE common stock
owned by the Company.  Although the Company believes that
the attempted stock redemption by HTE is invalid there can be
no assurance that the court will rule in favor of the positions
asserted by the Company.

Under accounting principles generally accepted in the United
States, an investment of 20% or more of the voting stock of an
investee should lead to a presumption that in absence of evidence
to the contrary, an investor has the ability to exercise significant
influence over the operating and financial policies of an
investee. Management of the Company has concluded that it
currently does not have such influence as evidenced by the
following key factors:

• Inability to resolve the different interpretations regarding

the ability to vote the shares;

• Inability to obtain additional financial information not

otherwise available to other shareholders; and

• Inability to obtain certain confirmations and consents from

the investee’s independent auditors.

Accordingly, the Company accounts for its investment in HTE
pursuant to the provisions of SFAS No. 115, “Accounting for
Certain Investments in Debt and Equity Securities.”  Although
these shares are held for a continuing business purpose, these

Tyler Technologies, Inc.

HTE. Under the equity method, the original investment is
recorded at cost and is adjusted periodically to recognize the
investor’s share of earnings or losses after the respective dates of
acquisition. The Company’s investment in HTE would include
the unamortized excess of the Company’s investment over its
equity in the net assets of HTE.  

Because of the effects of such a future change, the following
information has been provided or derived from publicly filed
financial information which has not been independently
confirmed to the Company and is considered unaudited. HTE
reported net income of $865,000 and net losses of $3.4 million
and $14.9 million for the years ended December 31, 2001, 2000
and 1999, respectively. Subsequent to the Company’s initial
acquisition of HTE’s shares in August 1999, HTE recorded charges
of approximately $7.9 million, net of tax, related to write-offs
of software development costs, certain accounts receivables
and employee-termination benefits that were recorded by HTE
as a result of changes in management and charges for
litigation settlements.  During 2000, HTE recovered a portion
of these costs, which totaled $1.1 million. These costs would
be considered pre-acquisition costs by the Company in
determining its share of HTE’s loss from the respective dates
of acquisition. Had the Company’s investment in HTE been
accounted for under the equity method, the Company would
have recorded equity in losses of HTE of $548,000, $2.3 million
and $1.4 million for the years ended December 31, 2001, 2000
and 1999, respectively.

7. COSTS (RECOVERY) OF CERTAIN ACQUISITION 

OPPORTUNITIES 

In March 1999, the Company entered into a merger agreement
pursuant to which the Company contemplated the acquisition of
all of the outstanding common stock of CPS Systems, Inc. (“CPS”).
In connection with that agreement, the Company provided CPS
with bridge financing in the form of notes secured by a second
lien on substantially all of the assets of CPS, including accounts
receivable, inventory, intangibles, equipment and intellectual
property.  In January 2000, CPS filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code.
On March 24, 2000, the bankruptcy court conducted a public
auction of the assets of CPS.  

Accordingly, the aggregate bridge financings and related
accrued interest receivable and costs amounting to $1.9 million
were expensed in the 1999 consolidated financial statements.
In 2001, the Company received cash of approximately $235,000
through CPS bankruptcy proceedings in connection with the
notes.  The Company anticipates no further recovery of amounts
due under its secured notes. 

securities are classified as “available-for-sale” and are recorded at
fair value as determined by quoted market prices as required
pursuant to SFAS No. 115. Unrealized holding gains and losses,
net of the related tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component
of shareholders’ equity until realized. 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 is deemed to be
other than temporary, results in a reduction in the carrying
amount to fair value.  The impairment is charged to earnings
and a new cost basis for the security is established.
Management of Tyler continues to conclude it has both the
intent and the ability to hold the investment for a period of time
sufficient to allow for the anticipated recovery in fair value.  At
this time, management of the Company does not believe the
decline in the market value is other than temporary.  In making
this determination, management considered, among other items,
the conditions in the local government software industry, the
financial condition of the issuer, and recent public statements by
the issuer concerning its future prospects.  In addition, for a
period of time during 2001 and February 2002, the quoted
market value price per share of HTE was above Tyler’s average
per share cost basis of $2.81 per share.

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, the Company 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 the Company
could realize because of its significant investment could vary
materially from the amount presented.

Quoted Market
Price Per Share  Cost 

Gross 
Unrealized
Holding

Fair Value Gains (Losses) 

December 31, 2001
December 31, 2000 
February 21, 2002 

$  2.00 
0.91 
4.36 

$  15.8 
15.8 
15.8 

$  11.2 
5.1 
24.5 

$ 

(4.6)
(10.7)
8.7  

If the uncertainty regarding the voting shares is resolved in the
Company’s favor, the Company will retroactively adopt the
equity method of accounting for this investment. Therefore, the
Company’s results of operations and retained earnings for
periods beginning with the 1999 acquisition will be retroactively
restated to reflect the Company’s investment in HTE for all
periods in which it held an investment in the voting stock of

Tyler Technologies, Inc.

25

Notes to Consolidated Financial Statements 

(Continued)

8. GOODWILL AND OTHER INTANGIBLE ASSETS 

Goodwill, other intangible assets and related accumulated
amortization consists of the following at December 31:

Useful
Lives
(years)

20-25
20-25
5
3-5
5-10
4

2001

2000

$ 51,063
17,997
12,158
17,369
6,191
163

$ 51,145

17,997  
12,158  
11,144  
6,191

101  

104,941
(22,730)

98,736
(14,036)

$ 82,211

$ 84,700

Goodwill
Customer base
Software acquired
Software development costs
Workforce
Non-compete agreements

Accumulated amortization

Goodwill and other 
intangibles, net

Amortization expense totaled $8.6 million, $7.5 million and
$5.0 million for the years ended December 31, 2001, 2000 and
1999, respectively.

9. ACCRUED LIABILITIES 

Accrued liabilities consists of the following at December 31:

2001

2000

Accrued wages and commissions
Other accrued liabilities

Total accrued liabilities

$ 7,071 
2,580 

$ 5,564
6,181

$ 9,651 

$ 11,745

The aggregate maturities of long-term obligations for each 
of the years subsequent to December 31, 2001, are as 
follows: 2002 - $123,000; 2003 - $74,000; 2004 - $36,000; 
2005 - $2.8 million; 2006 - $0.

Interest paid in 2001, 2000 and 1999 was $814,000, $8.8 million
and $4.1 million, respectively.

During the year ended December 31, 2001, the Company had a
revolving credit agreement with a group of banks (the “Senior
Credit Facility”), which initially provided for borrowings up to
$15.0 million and had a maturity date of July 1, 2002.  After
amendments to the Senior Credit Facility in May and September
related to the sale of certain assets, the available borrowings
were reduced to $7.0 million.  Borrowings under the Senior
Credit Facility bore interest at the lead bank’s prime rate plus a
margin of 3%.  The borrowings were limited to 80% of eligible
receivables.  In December 2001, the Company terminated the
Senior Credit Facility.  The effective average interest rates for
borrowings under the Senior Credit Facility during 2001 and
2000 were 10.3% and 10.2%, respectively.

On March 5, 2002, the Company entered into a new revolving
credit agreement with a bank (the “2002 Credit Facility”) which
has a maturity date of January 1, 2005 and provides for total
availability of up to $10.0 million.  Borrowings under the 2002
Credit Facility bear interest at either prime rate or at the London
Interbank Offered Rate plus a margin of 3% and are limited to
80% of eligible accounts receivable.  The 2002 Credit Facility is
secured by substantially all of the Company’s personal property,
by a pledge of the common stock of the Company’s operating
subsidiaries, and is also guaranteed by such subsidiaries. Under
the terms of the 2002 Credit Facility, the Company is required
to maintain certain financial ratios and other financial conditions
and is prohibited from making certain investments, advances,
cash dividends or loans.

11. INCOME TAX 

The income tax provision (benefit) included in continuing
operations consists of the following:

10. LONG-TERM OBLIGATIONS

Long-term obligations consists of the following at December 31:

Years ended December 31,

2001

2000

1999

Revolving senior credit facility
10% promissory notes payable 

due January 2005

Other

Total obligations
Less current portion

2001

2000

$ — 

$ 4,750

2,800 
233 

3,033 
123 

2,800  
550

8,100 
353

Total long-term obligations

$ 2,910 

$ 7,747  

Current:

Federal
State

Deferred

Income tax 

$ — 
282 

$

— 
80 

$ 565
376

282 
1,258 

80 
(2,890) 

941 
(753)   

provision (benefit)

$ 1,540

$ (2,810) 

$ 188  

26

Tyler Technologies, Inc.

The income tax provision (benefit) differs from amounts
computed by applying the federal statutory tax rate of 35% to
income (loss) from continuing operations before income taxes
as follows:

Years ended December 31,

2001

2000 

1999

Income tax expense (benefit)

at statutory rate
State income tax, net of 

federal income tax benefit

Non-deductible amortization
Non-deductible business 

expenses

Other, net

Income tax 

$ 634 

$ (3,611)

$ (622)

183 
635 

83 
5 

52 
640 

110 
(1) 

245  
559  

80  
(74)

expense (benefit)

$ 1,540 

$ (2,810) 

$ 188

Significant components of deferred tax assets and liabilities as
of December 31 are as follows:

Deferred income tax assets:
Net operating loss 

carryforward

Basis difference on 

investment security
Operating expenses not 
currently deductible

Employee benefit plans
Minimum tax credits
Research tax credits
Other

Net deferred income 
tax assets before 
valuation allowance

Less valuation allowance

Net deferred income 
tax assets

Deferred income tax liabilities:
Tax-benefit transfer lease
Property and equipment
Intangible assets
Other

Total deferred income 
tax liabilities

2001 

2000

$

3,667 

$ 4,054

1,591 

3,557

967 
299 
268 
78 
100 

999
391
268
78
100

6,970 
(1,690) 

9,447
(3,657)

5,280 

5,790

— 
(1,069) 
(6,442) 
(15) 

(713)
(1,107)
(6,681)
(13)

(7,526) 

(8,514)

Net deferred income tax liabilities

$ (2,246)

$ (2,724)  

At December 31, 2001, the Company had available approximately
$10.5 million of net tax operating loss carryforwards for federal

Tyler Technologies, Inc.

27

income tax purposes.  These carryforwards, which may provide
future tax benefits, expire from 2012 through 2021.  Based upon
the periods in which taxable temporary differences are
anticipated to reverse, management believes it is more likely
than not that the Company will realize the benefits of these
deductible differences, including the net operating loss
carryforwards, at December 31, 2001.  However, the amount of
the deferred tax asset considered realizable could be adjusted in
the future if estimates of reversing taxable temporary
differences are revised.

Although realization is not assured, management believes it is
more likely than not that all the deferred tax assets will be
realized except for the asset relating to the basis difference on
investment security available-for-sale and other minor temporary
differences. Accordingly, the Company believes that no valuation
allowance is required for the remaining deferred tax assets. 

During the year ended December 31, 2000, the Company sold
Resources, Kofile and certain other businesses (see Note 3).  In
connection with these respective sales, the Company utilized
approximately $45.9 million of available capital loss carryforwards
which were fully reserved in the valuation allowance account
at December 31, 1999.

The Company paid income taxes, net of refunds received, of
$273,000 in 2001 and $2.8 million in 1999, and received a
refund of prior years’ income taxes of $2.7 million in 2000. 

12. SHAREHOLDERS’ EQUITY 

In May 2000, the Company sold 3.3 million shares of 
common stock and 333,380 warrants pursuant to a private
placement agreement with Sanders Morris Harris for
approximately $10.0 million in gross cash proceeds, before
deducting commissions and offering expenses of approximately
$730,000.  Each warrant is convertible into one share of common
stock at an exercise price of $3.60 per share.  The warrants
expire in May 2005.  The common stock sold in this transaction 
is not registered and may only be sold pursuant to Rule 144
under the Securities Act of 1933, generally after being held for
at least one year.

As of December 31, 2001, the Company had an additional
warrant outstanding to purchase 2.0 million shares of the
Company’s common stock at $2.50 per share that expires in
September 2007.  The warrant was issued in September 1997
to Richmond Partners, Ltd. for which the Chairman of the Board 
of the Company is deemed to have beneficial ownership.

13. STOCK OPTION PLAN 

The Company’s stock option plan provides for the granting of
non-qualified and incentive stock options, as defined by the
Internal Revenue Code, to key employees and directors of the
Company and its subsidiaries of up to 5.5 million shares of the
Company’s common stock at prices which represent fair market

Notes to Consolidated Financial Statements 

(Continued)

value at dates of grant. All options granted have ten-year terms
and generally vest over, and become fully exercisable at the end
of, three to eight years of continued employment.

The following table summarizes the transactions of the
Company’s stock option plan for the three-year period ended
December 31, 2001:

Number of
Shares

Weighted-
Average
Exercise 
Prices

1,918 

$ 6.03

1,583 
(78) 
(5) 

3,418 

498 
(417) 
(5) 

3,494

2,185 
(933) 
(108) 

4.87
3.67
4.29

5.55

2.76
6.16
3.88

5.08

1.70
5.18
2.13

4,638

$ 3.54

207

706 
1,385 
1,504 

$ 4.94
5.04
5.20

Options outstanding at 
December 31, 1998

Granted
Forfeited
Exercised

Options outstanding at 
December 31, 1999

Granted
Forfeited
Exercised

Options outstanding at 
December 31, 2000

Granted
Forfeited
Exercised

Options outstanding at 
December 31, 2001

Reserved for future grants 
at December 31, 2001 

Exercisable options:

December 31, 1999
December 31, 2000
December 31, 2001

As allowed by SFAS No. 123, the Company has continued to
follow APB Opinion No. 25, “Accounting for Stock Issued to
Employees,” which does not recognize compensation expense
on the issuance of its stock options because the option terms
are fixed and the exercise price equals the market price of the
underlying stock on the grant date.

As required by SFAS No. 123, the Company has determined the
pro forma information as if the Company had accounted for
stock options granted since January 1, 1995, under the fair value
method of SFAS No. 123. The Black-Scholes option pricing
model was used with the following weighted-average
assumptions for 2001, 2000 and 1999, respectively: risk-free
interest rates of 5.1%, 6.1% and 5.6%; dividend yield of 0%;
expected common stock market price volatility factor of .78,
.73 and .70; and a weighted-average expected life of the options
of seven years. The weighted-average fair value of options
granted in 2001, 2000 and 1999 was $1.28, $2.02 and $3.47 per
share, respectively.

Had compensation expense been recorded based on the fair
values of the stock option grants, the Company’s 2001, 2000 and
1999 pro forma net loss would have been $919,000, $26.0
million and $4.6 million, or $0.02, $0.57 and $0.12 per diluted
share, respectively. 

During the year ended December 31, 2000, the Company
granted to an employee 50,000 shares of restricted common
stock with a fair value of $303,000 at the grant date.  The
Company recorded annual compensation expense of $151,500
during each of the years ended December 31, 2000 and 1999,
based on the service period provided for in the agreement and
the vesting period over which the restrictions lapse.

The following table summarizes information concerning outstanding and exercisable options at December 31, 2001:

Range of Exercise
Prices

Weighted Average
Remaining
Contractual Life

Number of
Outstanding
Options

Average Price of
Outstanding
Options

Number of
Exercisable
Options

Weighted Average
Price of Exercisable
Options

$ 0.00 - $ 2.19 
2.19 -  3.28 
3.28 -  4.38 
4.38 -  5.47 
5.47 -  6.56 
6.56 -  7.66 
7.66 -  8.75 
9.84 -  10.94 

9.3 years 
9.4  
6.8  
6.9  
7.1  
6.2  
6.8  
6.3  

2,163 
160 
835 
593 
575 
236 
6 
70 

$ 1.64 
2.62 
3.86 
5.24 
6.12 
7.63 
7.75 
10.62 

28

61 
2 
573 
315 
349 
142 
4 
58 

$ 1.58
2.75
3.81
5.27
6.13
7.63
7.75
10.70  

Tyler Technologies, Inc.

14. EARNINGS (LOSS) PER SHARE 

15. LEASES 

Basic earnings per common share data is computed using the
weighted-average number of common shares outstanding for the
relevant period.  Diluted earnings per common share data is
computed using the weighted-average number of common shares
outstanding plus common share equivalents represented by
stock options and stock warrants, if such stock options and stock
warrants have a dilutive effect in the aggregate.

The Company leases certain offices, and transportation,
computer and other equipment used in its operations under
noncancelable operating lease agreements expiring at various
dates through 2011. Most leases contain renewal options and
some contain purchase options. The leases generally provide 
that the Company pay taxes, maintenance, insurance and
certain other operating expenses.

The following table sets forth the computation of basic and
diluted earnings (loss) per share:

Rent expense was approximately $2.8 million in 2001, $2.1 million
in 2000 and $1.1 million in 1999.

Years Ended December 31,

2001

2000

1999

Future minimum lease payments under noncancelable leases
at December 31, 2001 are as follows:

272

$ (7,507)

$ (1,966)

Fiscal Year

2002
2003
2004
2005
2006
2007 and thereafter

47,181

45,380  

39,105   

Total future minimum lease payments

Operating 
Leases

$ 3,111  
2,614
2,328
1,892
1,617
5,357

$ 16,919

Numerator:

Income (loss) from 

continuing operations 
for basic and 
diluted earnings 
per share 

$

Denominator:

Denominator for basic 

earnings per share – 
Weighted-average 
shares
Effect of dilutive 

securities:
Employee stock 
options

Warrants

Potentially dilutive 

common shares

Denominator for diluted 
earnings per share – 
Adjusted weighted
average share

593  
210  

803  

—  
—  

—  

—   
—   

—   

47,984  

45,380  

39,105

Basic and diluted earnings 

(loss) per common 
share from continuing 
operations

$

0.01

$

(0.17)

$

(0.05)  

For the years ended December 31, 2001, 2000 and 1999, 
2.3 million, 3.5 million and 3.4 million options, respectively,
were not included in the computation of diluted earnings per
share because the effect would have been antidilutive.
Additionally, warrants to purchase 333,380, 2.3 million and 
2.0 million shares of the Company’s common stock for 2001,
2000, and 1999, respectively, were not included in the
computation of diluted earnings per share because the effect
would have been antidilutive.

Tyler Technologies, Inc.

29

16. EMPLOYEE BENEFIT PLANS 

The Company has a retirement savings plan structured under
Section 401(k) of the Internal Revenue Code (the “Code”).  The
plan covers substantially all employees meeting minimum
service requirements.  Under the plan, employees may elect to
reduce their current compensation by up to 15%, subject to
certain maximum dollar limitations prescribed by the Code, and
have the amount contributed to the plan as salary deferral
contributions.  The Company contributes up to a maximum of
2% of an employee’s compensation to the plan.  The Company
made contributions to the plan and charged continuing
operations $868,000, $761,000 and $396,000 in 2001, 2000 and
1999, respectively.

17. COMMITMENTS AND CONTINGENCIES 

One of the Company’s 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 the Company 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.  The operating assets of the
foundry were sold by the Company on December 1, 1995.  As
a non-operating subsidiary of the Company, the current assets of

Notes to Consolidated Financial Statements 

(Continued)

Swan consist primarily of various insurance policies issued to
Swan during the relevant time periods and restricted cash of
$2.3 million at December 31, 2001.  Swan has tendered the
defense and indemnity obligations arising from these claims to
its insurance carriers, who have entered into settlement
agreements with approximately 275 of the plaintiffs, each of
whom agreed to release Swan, the Company, 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 the
Company, 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, the Company, 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, the Company, all of
its affected affiliates, and the insurers participating in the
funding of the trust; and (d) the full and final release of each of
Swan, the Company, all of its 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, the Company has
agreed, among other things, to make certain cash contributions
to the trust, the amount of which is not expected to be in
excess of the settlement liability previously recorded by the
Company in its consolidated financial statements.       

The Company anticipates that Swan’s plan of reorganization
will be voted on by the creditors of Swan during the second
quarter of 2002.  Because the material terms of the plan of

reorganization have been pre-negotiated between the various
affected parties, the Company anticipates that the plan, as
currently contemplated, will be approved by Swan’s creditors,
at which time it will then be presented to the bankruptcy court
for final approval.  If the plan of reorganization as currently
contemplated is approved, the Company anticipates that all of
the liabilities associated with the foundry formerly owned by
affiliates of the Company will be eliminated at an amount no
greater than the liability reflected in the consolidated financial
statements.  There can be no assurance that the plan of
reorganization as currently contemplated will be approved by
the creditors of Swan, and if approved by such creditors, will
be approved in such form by the bankruptcy court, if at all. 

The Company initially provides for estimated claim settlement
costs when minimum levels can be reasonably estimated. If the
best estimate of claim costs can only be identified within a range
and no specific amount within that range can be determined more
likely than any other amount within the range, the minimum of
the range is accrued. Based on an initial assessment of claims
and contingent claims that may result in future litigation, a reserve
for the minimum amount of $2.0 million for claim settlements
was recorded in 1996. Legal and related professional services costs
to defend litigation of this nature have been expensed as incurred.
During the years ended December 31, 2001, 2000, and 1999, the
Company charged discontinued operations $3,000, $748,000, and
$1.9 million, respectively, in connection with settlement, legal
and related professional costs, and the remaining liability was
approximately $1.9 million at December 31, 2001.  Because of
the inherent uncertainty discussed above, 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 consolidated financial statements.

See Note 6 for discussion of litigation in connection with HTE’s
attempted cash redemption of all shares of HTE common stock
currently owned by the Company.

Other than ordinary course, routine litigation incidental to the
business of the Company and except as described herein, there
are no material legal proceedings pending to which the
Company or its subsidiaries are parties or to which any of its
properties are subject.

30

Tyler Technologies, Inc.

18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following tables contain selected financial information from unaudited consolidated statements of operations for each quarter 
of 2001 and 2000.

Quarter Ended

Dec. 31

Sept. 30

June 30

Mar. 31

Dec. 31

Sept. 30 

June 30

Mar. 31

2001

2000

Revenues

Gross margin

$ 31,204

$ 28,435

$ 30,977 

$ 27,272 

$ 26,018 

$ 23,724

$ 21,661 

$ 21,797

11,346 

9,920 

10,132 

8,621 

9,335 

9,327 

7,583 

8,030

Income (loss) from continuing 

operations before income taxes

1,310 

Income (loss) from continuing operations

163 

614 

251 

745 

372 

(857) 

(514) 

(1,759) 

(1,538) 

(3,741) 

(3,279)

(1,326) 

(1,206) 

(2,638) 

(2,337)   

Income (loss) from discontinued 

operations 

35 

(23) 

(1) 

(14) 

(13,015) 

(1,352) 

(1,341) 

(1,382)

Net income (loss)

$

198 

$

228 

$

371 

$

(528) 

$(14,341) 

$ (2,558) 

$ (3,979)  $ (3,719)

Diluted earnings (loss) from 

continuing operations

Diluted earnings (loss) from 
discontinued operations

$

0.00

$

0.01 

$

0.01 

$ (0.01) 

$ (0.03) 

$ (0.02) 

$ (0.06)  $ (0.06)

0.00 

(0.01) 

(0.00) 

(0.00) 

(0.28) 

(0.03) 

(0.03) 

(0.03)

Net earnings (loss) per diluted share

$

0.00 

$

0.00 

$

0.01 

$ (0.01) 

$ (0.31) 

$ (0.05) 

$ (0.09)  $ (0.09)  

Shares used in computing diluted earnings 

(loss) per share

48,915 

48,396 

47,425 

47,179 

46,665 

46,654 

44,894 

43,291

Tyler Technologies, Inc.

31

Report of Ernst & Young LLP, Independent Auditors

THE BOARD OF DIRECTORS AND SHAREHOLDERS 
TYLER TECHNOLOGIES, INC.

We have audited the accompanying consolidated balance sheets of Tyler Technologies, Inc. as of December 31, 2001 and 2000, and the

related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended

December 31, 2001.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an

opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we

plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An

audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also

includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall

financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tyler

Technologies, Inc. at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the

three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.  

Dallas, Texas 
February 22, 2002, 
except for the last 
paragraph in Note 10 
as to which the date 
is March 5, 2002

32

Tyler Technologies, Inc.

Selected Financial Data
(In thousands, except per share data)

FOR THE YEARS ENDED DECEMBER 31,

2001

2000

1999

1998

1997

STATEMENT OF OPERATIONS DATA: (1)

Revenues
Costs and expenses:

Cost of revenues (2)
Selling, general and administrative expense (2)
Costs (recovery) of certain acquisition opportunities
Amortization of acquisition intangibles
Interest expense (income), net

Income (loss) from continuing operations before income taxes
Income tax provision (benefit)

Income (loss) from continuing operations

Income (loss) from continuing operations per diluted share

$ 117,888

$ 93,200 

$ 71,416  $ 23,440 

$

—  

77,869 
31,065

(235) 
6,898 
479

1,812 
1,540 

58,925 
32,805
— 
6,903 
4,884

(10,317) 
(2,810) 

37,027 
27,553
1,851 
4,966 
1,797

(1,778) 
188 

13,143 
8,534 
3,146 
1,499 
234

(3,116) 
(652) 

—     
2,959     
—     
—     

(822)  

(2,137)  
(918)  

$

$

272 

$ (7,507)  $ (1,966)  $ (2,464)  $ (1,219)  

0.01 

$

(0.17)  $

(0.05)  $

(0.08)  $

(0.06)

Weighted average number of diluted shares

47,984 

45,380 

39,105 

32,612 

20,498  

OTHER DATA:

EBITDA (3)

$ 12,968 

$

4,253 

$

7,981  $

2,256 

$ (2,843)

AS OF AND FOR THE YEARS ENDED DECEMBER 31,

2001

2000

1999

1998

1997

BALANCE SHEET DATA: (1)

Total assets
Long-term obligations, excluding current portion
Shareholders’ equity

STATEMENT OF CASH FLOWS DATA:      

Cash flows from operating activities 
Cash flows from investing activities 
Cash flows from financing activities 

(1) 2001, 2000, 1999 and 1998 include the results of operations of
continuing companies formerly comprising the software systems
and services segment from the acquired companies’ respective
dates of acquisition and excludes the results of operations of the
discontinued information and property records services segment,
automotive parts segment and the fund-raising segment. Prior
years’ selected financial data has been restated to reflect
discontinuation of the information and property records services
segment in 2000, the automotive parts segment in 1998 and the
fund-raising segment in 1997.  For years prior to 1998, selling,
general and administrative expense includes only amounts
relating to the holding company. See Notes 2 and 3 in Notes to
Consolidated Financial Statements.

(2) Depreciation and amortization included in cost of revenues 
and selling, general and administrative expense for 2001, 
2000, 1999, 1998 and 1997 was $4,014, $2,783, $1,145, $493 
and $116, respectively.

Tyler Technologies, Inc.

33

$ 147,180 
2,910 
100,884 

$ 150,712 
7,747
96,122 

$ 243,260  $ 124,328 
37,189 
76,346

61,530
138,904 

$ 39,543  
—  
31,403     

$ 12,744 
(9,706) 
(5,984)

$ (7,126)  $
65,401
(52,022)

715  $

(24,743)
24,955 

1,758 
(36,787) 
27,893

$ (5,829)  
(2,020)  
2,515  

(3) EBITDA consists of income or loss from continuing
operations before interest, costs (recovery) of certain
acquisition opportunities, income taxes, depreciation, and
amortization. Although EBITDA is not calculated in accordance
with accounting principles generally accepted in the United
States, the Company believes that EBITDA is widely used as a
measure of operating performance. Nevertheless, this measure
should not be considered in isolation or as a substitute for
operating income, cash flows from operating activities, or any
other measure for determining the Company’s operating
performance or liquidity that is calculated in accordance with
accounting principles generally accepted in the United States.
EBITDA does not take into account the Company’s debt service
requirements and other commitments and accordingly EBITDA
is not necessarily indicative of amounts that may be available for
reinvestment in the Company’s business or other discretionary
uses. In addition, since all companies do not calculate EBITDA
in the same manner, this measure may not be comparable to
similarly titled measures reported by other companies.

Management’s Discussion and Analysis of Financial
Condition and Results of Operations

FORWARD-LOOKING STATEMENTS 

This Annual Report contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended. All statements other than historical or current
facts, including, without limitation, statements about the
business, financial condition, business strategy, plans and
objectives of management, and prospects of the Company are
forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements
are reasonable, such forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ
materially from these expectations. Such risks and uncertainties
include, without limitation, the ability of the Company to
successfully integrate the operations of acquired companies,
technological risks associated with the acceptance of the
Company’s products by its customers, development of new
products and the enhancement of existing products, changes
in the budgets and regulatory environments of the Company’s
government customers, the ability to attract and retain qualified
personnel, changes in product demand, the availability of products,
changes in competition, changes in economic conditions,
changes in tax risks and other risks indicated in the Company’s
filings with the Securities and Exchange Commission. These
risks and uncertainties are beyond the ability of the Company to
control, and in many cases, the Company cannot predict the
risks and uncertainties that could cause its actual results to differ
materially from those indicated by the forward-looking statements.

When used in this Annual Report, the words “believes,” “plans,”
“estimates,” “expects,” “anticipates,” “intends,” “continue,” “may,”
“will,” “should,” “projects,” “forecasts,” “might,” “could” or the
negative of such terms and similar expressions as they relate to
the Company or its management are intended to identify
forward-looking statements.

GENERAL 

On September 29, 2000, the Company sold for cash certain net
assets of Kofile, Inc. (“Kofile”) and another subsidiary, the
Company’s interest in a certain intangible work product, and 
a building and related building improvements.  Effective
December 29, 2000, the Company sold for cash its land records
business unit, Business Resources Corporation (“Resources”),
including among others, Resources wholly-owned subsidiaries
Government Records Services, Inc. and Title Records
Corporation, to an affiliate of Affiliated Computer Services, Inc.
(“ACS”).  Concurrent with the sale to ACS, management of the
Company with the Board of Director’s approval adopted a
formal plan of disposal for the remaining businesses and assets
of the information and property records services segment.  This
restructuring program was designed to focus the Company’s
resources on its software systems and services segment and to
substantially reduce debt.  In March 1999, the Company sold its
automotive parts segment.  The business and assets divested or

identified for divesture have been classified as discontinued
operations in 2001, 2000 and 1999. All prior year financial
information included herein has been restated to reflect these
dispositions as discontinued operations. Continuing operations
in 2001, 2000, and 1999 are comprised of the results of
operations of the companies formerly comprising the software
systems and services segment.

The following is a summary of significant acquisitions
consummated in prior years that remain in continuing
operations:

On February 19, 1998, the Company acquired The Software
Group and Interactive Computer Designs, Inc., which provide
county, local and municipal governments with software, systems
and services to serve their information technology and
automation needs.

Effective August 1, 1998, the Company completed the purchase
of Computer Management Services, which provides integrated
information management systems and services to county and
municipal governments.

Effective March 1, 1999, the Company acquired Eagle Computer
Systems, Inc., which supplies networked computing solutions
and services for county governments.

Effective April 1, 1999, the Company completed its acquisition
of Micro Arizala Systems, Inc. d/b/a FundBalance, a company
which develops and markets fund accounting software and
other applications for state and local governments, not-for-profit
organizations and cemeteries.

On April 21, 1999, the Company acquired Process Incorporated
d/b/a Computer Center Software, which designs and develops
integrated financial and land management information systems
for counties, cities, schools and not-for-profit organizations.

On November 4, 1999, the Company acquired selected assets
and assumed selected liabilities of Cole Layer Trumble Company,
(“CLT”), a division of a privately held company. CLT provides
property appraisal software and services to governments.

All of the Company’s acquisitions have been accounted for
using the purchase method for business combinations, and the
results of operations of the acquired entities are included in
the Company’s historical consolidated financial statements from
their respective dates of acquisition. 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of its financial condition and
results of operations are based upon the Company’s consolidated
financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United
States.  The preparation of these financial statements requires
the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,

34

Tyler Technologies, Inc.

and related disclosure of contingent assets and liabilities.  On an
on-going basis, the Company evaluates its 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.
The Company bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.  The Company believes the
following critical accounting policies affect its more significant
judgments and estimates used in the preparation of its
consolidated financial statements.

The Company derives revenue from software licenses, hardware,
postcontract customer support/maintenance and services which
typically range from installation, training and basic consulting to
software modification and customization to meet specific
customer needs.  For multiple element software arrangements
which do not entail the performance of services which are
considered essential to the functionality of the software, the
Company records revenue when the delivered products or
performed services result in a legally enforceable claim.  The
Company maintains allowances for doubtful accounts, sales
adjustments and estimated cost of product warranties which
are provided at the time the revenue is recognized.  Because of
the nature of its customers being governmental entities, the
Company rarely incurs a loss resulting from the inability of its
customers to make required payments.  Alternatively, customers
may become dissatisfied with the functionality of the software
products and/or the quality of the services and request a
reduction of the aggregate contract price or similar concession.
While the Company engages in extensive product and service
quality programs and processes, the Company’s allowances for
such contract price reductions may need to be revised in the
future.  In connection with its customer contracts and the related
adequacy of its reserves and measures of progress towards
completion, the Company’s project managers are charged with the
responsibility to continually review the status of each customer
on a specific contract basis.  Also, corporate as well as operating
company management review on a quarterly basis significant
past due account receivables and the related adequacy of the
Company’s reserves.

For software arrangements that include customization of the
software which is considered essential to its functionality and for
real estate appraisal outsourcing projects, the Company recognizes
revenue and profit as the work progresses using the percentage-
of-completion method.  This method relies on estimates of total
expected contract revenue, billings and collections and expected
contract costs.  The Company follows this method since reasonably
dependable estimates of the revenue and costs applicable to
various stages of a contract can be made.  At times, the Company
performs additional and/or non-contractual services for little to
no incremental fee, to satisfy the customer expectations.

Tyler Technologies, Inc.

35

Recognized revenues and profit are subject to revisions such as
the type just described as the contract progresses to completion.
Revisions to future profit estimates are charged to income in the
period in which the facts that give rise to the revision first
become known.

The Company accounts for all of its acquisitions using the purchase
method of accounting for business combinations.  The cost of
acquired companies is allocated to identifiable assets based on
estimated fair value, with the excess allocated to goodwill.
Accordingly, the Company has a significant balance of acquisition
intangible assets, including software, customer base, workforce
and goodwill.  In addition, the Company capitalizes software
development costs incurred subsequent to the establishment
of technological feasibility.  These intangible assets are
amortized over their estimated useful lives and are reviewed for
impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable.  Recoverability of the asset is generally measured
by a comparison of the carrying amount of an asset to estimated
future net cash flows expected to be generated by the asset.
The assessment of recoverability or of the estimated useful life
for amortization purposes will be affected if the timing or the
amount of estimated future operating cash flows are not achieved.

With an original cost basis of $15.8 million, the Company
acquired a 32% interest in HTE, a publicly held company in
which the Company is unable to exert significant influence.
Accordingly, the investment is classified as an available-for-sale
security and is recorded at fair value as determined by quoted
market prices, which have been reasonably volatile.  The
Company’s accounting policy is to record an investment
impairment charge when it believes an investment has
experienced a decline in value other than temporary.  To date, 
the unrealized holding loss in this investment has been excluded
from earnings and has been reported in a separate component
of shareholders’ equity.  During 2001, HTE attempted a cash
redemption for all of the shares held by the Company for an
aggregate redemption price of $7.3 million, which is materially 
less than the carrying value recorded at December 31, 2001 and
the Company’s original cost basis, and litigation between the
two parties has been initiated.  Future adverse changes in market
conditions affecting HTE, poor operating results, or an adverse
court ruling regarding the attempted redemption or a negotiated
settlement could result in a reduction in the original cost basis to
the then current fair value being charged to operations in the future.

The Company records a valuation allowance to reduce its
deferred tax assets to the amount that is more likely than not to
be realized.  While the Company has considered future taxable
income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event
the Company were to determine that it would be able to realize
its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase
income in the period such determination was made.  Likewise,
should the Company determine that it would not be able to

Management’s Discussion and Analysis of Financial
Condition and Results of Operations

(Continued)

realize all or part of its net deferred tax asset in the future, 
an adjustment to the deferred tax asset would be charged to
income in the period such determination was made.

The Company has a reserve for discontinued operations which
includes, among other things, a reserve for estimated claim
settlement costs associated with work related injuries and
physical conditions of former employees resulting from alleged
injuries from silica, asbestos, and/or related industrial dusts
during their employment.  In late 2001, a non-operating subsidiary
of the Company filed a bankruptcy petition, and this subsidiary
was the parent of a company which was the former owner of a
cast iron pipe and fittings foundry where the alleged injuries
occurred.  Because the material terms of the plan of
reorganization have been pre-negotiated between the various
affected parties, the Company anticipates that the plan, as
currently contemplated, will be approved by the subsidiary’s
creditors, at which time it will then be presented to the
bankruptcy court for final approval.  If the plan of
reorganization as currently contemplated is approved, the
Company anticipates that all of the liabilities associated with
the foundry formerly owned by affiliates of the Company will
be eliminated at an amount no greater than the liability reflected
in the consolidated financial statements.  In the event the
proposal plan does not materialize, it is reasonably possible that
the amounts recorded as liabilities for this matter could change
by material amounts.  There can be no assurance that the plan
of reorganization as currently contemplated will be approved by
the creditors and if approved by such creditors, will be
approved in such form by the bankruptcy court, if at all.

2001 COMPARED TO 2000 

REVENUES 

Revenues from continuing operations were $117.9 million 
for the year ended December 31, 2001, a 26% increase from
revenues of $93.2 million for the prior year.  

Software license revenues increased each quarter during 2001
from $3.6 million in the first quarter to $5.8 million in the fourth
quarter.  For the year ended December 31, 2001, software
license revenue was $18.9 million, compared to $18.6 million for
the year ended December 31, 2000.  The increase was due
mainly to sales of third-party software that provided additional
functionality to certain of the Company’s proprietary software,
sales of proprietary software to new customers and in new
geographic areas, primarily the midwestern United States, and
sales of upgraded financial and utility software modules to existing
customers.  The increase was somewhat offset by lower tax and
appraisal software sales.

Professional services revenues grew 41% to $52.9 million for the
year ended December 31, 2001, from $37.4 million for the year
ended December 31, 2000.  Included in professional services
revenues for the year ended December 31, 2001, was appraisal
outsourcing services revenue of $34.3 million, compared to

$20.8 million in the prior year.  The 65% increase for the year in
appraisal outsourcing services revenue was primarily due to the
Company’s continued progress on its contract with Nassau
County, New York Board of Assessors (“Nassau County”).  The
contract to provide outsourced assessment services for Nassau
County, together with tax assessment administration software
and training, is valued at a total of approximately $34.0 million.
Implementation of the Nassau County contract began in
September 2000 and is expected to be completed by the Spring
of 2003.  For the year ended December 31, 2001, the Company
recorded $14.4 million of professional services revenue related
to Nassau County.

For the year ended December 31, 2001, maintenance revenue
increased 23%, to $39.9 million, from $32.5 million for 2000.
Higher maintenance revenue was due to an increase in the
Company’s base of installed software and systems products
and maintenance rate increases for several product lines.
Maintenance and support services are provided for the
Company’s software and related products.

Hardware and other revenues increased $1.6 million for the year
ended December 31, 2001 from $4.6 million for the same period
of 2000.  Approximately $700,000 of the increase relates to the
Nassau County contract.  Other increases are due to timing of
installations of equipment on customer contracts and are
dependent on the contract size and on varying customer
hardware needs.

COST OF REVENUES 

For the year ended December 31, 2001, cost of revenues was
$77.9 million compared to $58.9 million for the year ended
December 31, 2000.  The increase in cost of revenues was
primarily due to the increase in revenues.  

Gross margin was 34% for the year ended December 31, 2001,
compared to 37% for the year ended December 31, 2000.
Overall gross margins were lower because the Company’s 2001
revenue mix included more professional services compared to
2000.  Historically, gross margins are higher for software licenses
than for professional services due to personnel costs associated
with professional services. In addition, software license costs
increased during 2001 compared to 2000, due to increased
amortization of software development costs.  The Company
released several new products during the second and third
quarters of 2001, at which time amortization of the related
software development costs commenced.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 

Selling, general and administrative expense for the year ended
December 31, 2001 was $31.1 million compared to $32.8 million
in the prior year.  Selling, general and administrative expense
as a percentage of revenues declined to 26% in 2001 from 35%
in 2000 because such expenses are primarily fixed and therefore
did not increase in proportion to the Company’s revenue
growth.  The decline in selling, general and administrative expense

36

Tyler Technologies, Inc.

NET INTEREST EXPENSE 

Net interest expense was $479,000 for the year ended December
31, 2001 compared to $4.9 million for the year ended December
31, 2000.  Interest expense declined due to a significant
reduction in bank debt with the proceeds from the disposal of
the Company’s former information and property records services
segment (see Note 2 in Notes to Consolidated Financial
Statements).  In addition, in connection with certain internally
developed software projects, the Company capitalized $578,000
of interest costs during 2001, compared to $586,000 for 2000.

INCOME TAX PROVISION 

For the year ended December 31, 2001, the Company had
income from continuing operations before income taxes of
$1.8 million and an income tax provision of $1.5 million,
resulting in an effective tax rate of 85%. For 2000, the Company
had a loss from continuing operations before income tax benefit
of $10.3 million and an income tax benefit of $2.8 million,
resulting in an effective benefit rate of 27%.  The effective
income tax rate for the year ended December 31, 2001 was
different from the statutory United States federal income tax rate
of 35% primarily due to non-deductible items such as goodwill
amortization as compared to the relative amount of pretax
earnings or loss.

DISCONTINUED OPERATIONS 

On September 29, 2000, the Company sold for a cash sale price
of $14.4 million certain net assets of Kofile, Inc. and another
subsidiary, the Company’s interest in a certain intangible work
product, and a building and related building improvements.
Effective December 29, 2000, the Company sold for cash its
land records business unit, Business Resources Corporation, to
an affiliate of ACS (the “Resources Sale”).  The Resources Sale
was valued at approximately $71.0 million.  Concurrent with
the Resources Sale, management of the Company with the
Board of Directors’ approval adopted a formal plan of disposal
for the remaining businesses and assets of the information and
property records services segment.  This restructuring program
was designed to focus the Company’s resources on its software
systems and services segment and to reduce debt.  The business
and assets divested or identified for divesture have been classified
as discontinued operations in the accompanying consolidated
financial statements with prior periods’ financial statements
restated to report separately their operations in compliance with
Accounting Principles Board (“APB”) Opinion No. 30.  

was due to a reduction in corporate costs following the sale of
the information and property records services segment, lower
acquisition-related costs such as legal and travel expenses and
lower research and development costs which are expensed.

AMORTIZATION OF ACQUISITION AND OTHER INTANGIBLES 

The Company has accounted for all of its past acquisitions using
the purchase method of accounting for business combinations.
The excess of the purchase price over the fair value of the net
identifiable assets of the acquired companies (“goodwill”) is
amortized using the straight-line method of amortization over
their respective estimated useful lives.  See “Accounting
Pronouncements Not Yet Adopted.”

At December 31, 2001 and 2000, the Company had $82.2 million
and $84.7 million, respectively, of goodwill, post-acquisition
software development costs and other intangible assets, net of
accumulated amortization. Such intangibles amounted to 
56% of total assets at December 31, 2001 and 2000; and 81% and
88% of shareholders’ equity at December 31, 2001 and 2000,
respectively.  Goodwill excluding accumulated amortization at
December 31, 2001 and 2000 was $51.1 million.  Amortization
expense of acquisition intangibles was $6.9 million in 2001 and 2000.

The Company considers a variety of factors in estimating the
useful lives and recoverability of goodwill and other intangible
assets.  Determining the appropriate useful life of goodwill and
other intangible assets is a matter of judgment. In making its
determination, the Company considered a number of factors,
including the following:

• position of the acquired enterprise in the market and the

extent of barriers to entry for competitors;

• age, historical operating performance, and quality of

earnings of the acquired enterprise, including the extent
of operating history and the presence or lack of stable
earnings history;

• experience of the acquired enterprise’s management; 

• the future viability of products and services, including the
impact of technological changes and advances and the
level of continued investment necessary to maintain the
acquired enterprise’s technological position;

• estimated future cash flows of the respective assets;

• competition; and 

• industry practice. 

In addition, the Company periodically retains the services of 
an outside appraisal firm to assist in determining the initial value
assigned to newly acquired identifiable intangible assets and
the estimated useful lives. At December 31, 2001 and 2000,
management of the Company believes such assets are recoverable
and the estimated useful lives are reasonable.

Tyler Technologies, Inc.

37

Management’s Discussion and Analysis of Financial
Condition and Results of Operations

(Continued)

The Company’s formal plan of disposal provided for the
remaining businesses and assets of the information and property
records services segment to be disposed of by December 29, 2001.
At the time management elected to discontinue the remaining
businesses in this segment, its remaining assets included a
start-up company engaged in constructing a Web-enabled
national repository of public records data, and Capitol
Commerce Reporter, Inc. (“CCR”), which provides public records
research, principally in Texas.  The interdependency of these
operations with those of Resources resulted in the Company’s
decision to discontinue the development of the repository and
other related products and exit the land records business
following the Resources Sale.

The estimated loss on the disposal of these remaining
businesses and assets at December 29, 2000, amounted to
$13.6 million (after an income tax benefit of $3.8 million),
consisting of an estimated loss on disposal of the businesses of
$11.5 million (net of an income tax benefit of $2.7 million)
and a provision of $2.1 million (after an income tax benefit 
of $1.1 million) for anticipated operating losses from the
measurement date of December 29, 2000 to the estimated
disposal dates.  Although the actual proceeds on the subsequent
sales of businesses and assets and the related income tax
treatment of the various disposals differed from the individual
components of each as originally estimated at the time the
reserve for losses for discontinued operations was first
established, no adjustment to the net loss reserve is considered
appropriate at this time.  The anticipated operating losses to 
the disposal dates include the effects of the settlement of certain
employment contracts, losses on real property leases, severance
costs and similar closing related costs.  The provision for
anticipated operating costs which was provided in 2000
approximates actual operating costs incurred since the
measurement date of December 29, 2000.

On May 16, 2001, the Company sold all of the common stock
of another business that had previously been designated as a
discontinued operation. In connection with the sale, the Company
received cash proceeds of $575,000, approximately 60,000 shares
of Company common stock, a promissory note of $750,000
payable in 58 monthly installments at an interest rate of 9%, and
other contingent consideration.  Because the note receivable is
highly dependent upon future operations of the buyer, the
Company is recording its value as cash is received.  On
September 21, 2001, the Company sold all of the common stock of
CCR for $3.1 million in cash and future payments contingent on
the retention of certain customers subsequent to the sale.  Since
the gains or losses on these sales were estimated as of the
measurement date of December 29, 2000, no additional
adjustments were recorded to the estimated loss on the disposals
of the discontinued businesses.

Revenues from the information and property records 
services segment amounted to $39.7 million for the year 
ended December 31, 2000.

One of the Company’s non-operating subsidiaries is involved in
various claims for work-related injuries and physical conditions
relating to a formerly owned subsidiary that was sold in 1995.
During 2001 and 2000, the Company recorded net losses, net of
related tax effect, of $3,000 and $748,000, respectively (See Note
17 in Notes to Consolidated Financial Statements).

INVESTMENT SECURITY AVAILABLE-FOR-SALE

Pursuant to an agreement with two major shareholders of HTE,
the Company acquired approximately 32% of HTE’s common
stock in two separate transactions in 1999. On August 17, 1999,
the Company exchanged 2.3 million shares of its common
stock for 4.7 million shares of HTE common stock. This initial
investment was recorded at $14.0 million. The second transaction
occurred on December 21, 1999, in which the Company
exchanged 484,000 shares of its common stock for 969,000
shares of HTE common stock.  This additional investment was
recorded at $1.8 million. The investment in HTE common stock
is classified as a non-current asset since it was made 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, which restrictions may be removed by a
vote of the shareholders. The Florida “control share” statute has
not been interpreted by the courts. HTE has taken the position
that, under the Florida statute, all of the shares acquired by
the Company constitute “control shares” and therefore do not
have voting rights until such time as shareholders of HTE,
other than the Company, restore voting rights to those shares.
Management of the Company believes that only the shares
acquired in excess of 20% of the outstanding shares of HTE
constitute “control shares” and therefore believes the Company
currently has the right to vote all HTE shares it owns 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
the Company its right to vote the “control shares” of HTE.

On October 29, 2001, HTE notified the Company that it had
attempted a cash redemption of all of the 5.6 million shares of
HTE common stock currently owned by the Company at a price
of $1.30 per share.  Management of the Company believes that
the attempted redemption of the Company-owned HTE shares
was invalid and takes exception to the manner in which fair
value was calculated.  Management of HTE contends that its
ability to redeem the shares of common stock owned by the
Company and the manner of calculation of fair value by HTE is 
in accordance with Florida state statutes for “control shares.”
On October 29, 2001, the Company notified HTE that its
purported redemption of the shares owned by the Company
was invalid and contrary to Florida law, and in any event, the
calculation by 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 that HTE’s purported redemption

38

Tyler Technologies, Inc.

of all of the Company-owned shares at a redemption price of
$1.30 per share was lawful and to effect the redemption and
cancel the Company-owned shares.  The Company 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, (a) that HTE’s
purported redemption of any or all of the shares held by the
Company was illegal under Florida law, (b) in the alternative,
that HTE’s right of redemption, if any, under Florida law only
applies to the “control shares” owned by the Company (i.e.,
those shares in excess of 20% of the issued and outstanding
shares of common stock of HTE as of the date that the
Company acquired such shares), (c) in the alternative, that
HTE’s calculation of fair value for the redemption of any or all
of the shares owned by the Company was grossly understated,
and (d) that the Company maintains the ability to vote up to
20% of the issued and outstanding shares of HTE common stock
owned by the Company.  Although the Company believes that
the attempted stock redemption by HTE is invalid there can be
no assurance that the court will rule in favor of the positions
asserted by the Company.

Under accounting principles generally accepted in the United
States, an investment of 20% or more of the voting stock of an
investee should lead to a presumption that in absence of
evidence to the contrary, an investor has the ability to exercise
significant influence over the operating and financial policies of
an investee. Management of the Company has concluded that it
currently does not have such influence as evidenced by the
following key factors:

• Inability to resolve the different interpretations regarding

the ability to vote the shares;

• Inability to obtain additional financial information not

otherwise available to other shareholders; and

• Inability to obtain certain confirmations and consents

from the investee’s independent auditors.

Accordingly, the Company accounts for its investment in HTE
pursuant to the provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 115, “Accounting for Certain Investments
in Debt and Equity Securities.”  In accordance with SFAS No.
115, the Company 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 the Company could realize because of its
significant investment could vary materially from the amount
presented.  These securities are classified as available-for-sale
and are recorded at fair value as determined by quoted market
prices. Unrealized holding gains and losses, net of the related
tax effect, on available-for-sale securities are excluded from
earnings and are reported as a separate component of
shareholders’ equity until realized. Realized gains and losses
from the sale of available-for-sale securities (none in each of the
three years ended December 31, 2001) are determined on a
specific identification basis. A decline in the market value of any
available-for-sale security below cost that is deemed to be other

Tyler Technologies, Inc.

39

than temporary results in a reduction in carrying amount to fair
value.  The impairment is charged to earnings and a new cost
basis for the security is established.  Management of Tyler
continues to conclude it has both the intent and the ability to
hold the investment for a period of time sufficient to allow for
the anticipated recovery in fair value.  At this time, management
of the Company does not believe the decline in the market
value is other than temporary.  In making this determination,
management considered, among other items, the conditions in
the local government software industry, the financial condition
of the issuer, and recent public statements by the issuer
concerning its future prospects.  In addition, for a period of time
during 2001 and in February 2002, the quoted market value
price per share of HTE was above Tyler’s average per share cost
basis of $2.81 per share.  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:

Quoted 
Market
Price
Per Share

Gross
Unrealized
Holding Gains 
(Losses)

Cost

Fair Value

December 31, 2001 
December 31, 2000 
February 21, 2002 

$ 2.00 
0.91 
4.36 

$  15.8 
15.8 
15.8 

$ 11.2 
5.1 
24.5 

$ (4.6)  

(10.7)       

8.7  

NET INCOME AND OTHER MEASURES 

Net income was $269,000 in 2001 compared to a net loss of
$24.6 million in 2000.  For 2001, diluted earnings per share was
$0.01 and, for 2000, diluted loss per share was $0.54.  Income
from continuing operations was $272,000, or $0.01 per diluted
share in 2001, compared to a loss from continuing operations
of $7.5 million, or $0.17 per diluted share in 2000.

Earnings before interest, taxes, depreciation and amortization
(“EBITDA”) from continuing operations for the year ended
December 31, 2001, was $13.0 million, compared to EBITDA
of $4.3 million in 2000. EBITDA consists of income or loss from
continuing operations before interest, income taxes, depreciation,
amortization and costs (recovery) of acquisition costs previously
expensed. Although EBITDA is not calculated in accordance
with accounting principles generally accepted in the United
States, the Company believes that EBITDA is widely used as a
measure of operating performance. Nevertheless, the measure
should not be considered in isolation or as a substitute for
operating income, cash flows from operating activities, or any
other measure for determining the Company’s operating
performance or liquidity that is calculated in accordance with
accounting principles generally accepted in the United States.
EBITDA is not necessarily indicative of amounts that may be
available for reinvestment in the Company’s business or other
discretionary uses. In addition, since all companies do not
calculate EBITDA in the same manner, this measure may not be

Management’s Discussion and Analysis of Financial
Condition and Results of Operations

(Continued)

comparable to similarly titled measures reported by other
companies. Cash provided by operating activities for the year
ended December 31, 2001 was $12.7 million compared to cash
used by operating activities of $7.1 million for the year ended
December 31, 2000.

2000 COMPARED TO 1999 

Because of the significance of certain of the Company’s
acquisitions in 1999, in the following analysis of results of
operations, the Company has provided pro forma amounts 
as if all of the Company’s acquisitions and dispositions
previously discussed had occurred as of the beginning of 
1999.  There were no acquisitions since 1999 that remain in
continuing operations.

REVENUES 

On a pro forma basis, revenues were $93.2 million for the year
ended December 31, 2000, compared to $107.4 million in the
comparable prior year period. The decline in revenues on a pro
forma basis was primarily because of post-Year 2000 (“Y2K”)
related factors. Local governments reduced spending for software
applications and systems in 2000 for a variety of reasons,
including the acceleration of some projects into 1999 in
anticipation of Y2K problems and the delay of some new
systems projects in 2000 as they recovered from intensive
efforts to become Y2K compliant in the prior year. Many
customers and potential customers appeared to have instituted
Y2K “lockdowns” and did not install new systems during 2000.
Additionally, the 1999 pro forma revenues benefited somewhat
from accelerated Y2K compliance related sales.

Pro forma software license revenue in 2000 decreased
approximately 25% to $18.6 million from $24.9 million in 
1999.  Pro forma software license revenue comparisons were
negatively impacted by the post-Y2K factors described above. 

Professional service revenue on a pro forma basis decreased
approximately $6.5 million to $37.4 million in 2000 from $43.9
million in 1999. Professional services such as data conversion
and training are often contracted for in conjunction with
software license sales.  Thus, the decline in software license
sales volume in 2000 negatively impacted related professional
services revenues.  Pro forma professional services revenue
declined despite the inclusion of approximately $4.7 million of
appraisal services and software revenue in 2000 from the
Company’s contract with Nassau County.

Pro forma maintenance revenue was $32.5 million for 2000 and
$28.3 million for the comparable prior year period.  The 
15% increase is due to an increase in the Company’s base of
installed software and systems products. Maintenance revenue
was approximately 35% of total revenue in 2000 compared to
approximately 26% in 1999, on a pro forma basis.  Maintenance
and support services are provided for the Company’s software

products, including property appraisal products, and third party
software and hardware. The renewal rates for property appraisal
system maintenance agreements are not as high as other
software and hardware maintenance agreements and will vary
somewhat from period to period. Excluding property appraisal
maintenance agreements, pro forma maintenance revenue
increased approximately 20% for the year ended December 31, 2000
compared to the comparable prior year period. 

Hardware revenue on a pro forma basis decreased $5.7 million
in 2000 compared to 1999 as a result of the Company focusing
its sales effort on higher margin products and services. 

COST OF REVENUES 

For the year ended December 31, 2000, on a pro forma basis,
cost of revenues was $58.9 million compared to $60.9 million in
1999.  Gross margin, on a pro forma basis, decreased to 37% in
2000 from 43% for the same period in the prior year.  Gross
margin decreased because software license revenue was a lower
percentage of the overall product mix in 2000 compared to
1999.  Software license revenue carries higher margins than
other revenue categories.  Another factor contributing to a lower
gross margin in 2000 was higher personnel costs.  Personnel
costs, which are the primary component of cost of service and
maintenance revenue, increased due to higher costs of contract
labor, salary adjustments and higher head count as a result of
staffing increases associated with record high revenues in 1999.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

For the year ended December 31, 2000, selling, general and
administrative expense was $32.8 million, or 35% of revenues.
For the same period in the prior year, selling, general and
administrative expense was $35.1 million, or 33% of revenues,
on a pro forma basis.  Selling, general and administrative expense
include sales commission costs, which declined as a result of
lower sales volume.  This decline was offset somewhat by costs
associated with consolidating certain finance and administrative
functions and higher personnel costs.   

COSTS (RECOVERY) OF CERTAIN ACQUISITION OPPORTUNITIES 

In March 1999, the Company entered into a merger agreement
pursuant to which the Company contemplated the acquisition of
all of the outstanding common stock of CPS Systems, Inc. (“CPS”).
In connection with that agreement, the Company provided CPS
with bridge financing in the form of notes secured by a second
lien on substantially all of the assets of CPS, including accounts
receivable, inventory, intangibles, equipment and intellectual
property.  In January 2000, CPS filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code.
On March 24, 2000, the bankruptcy court conducted a public
auction of the assets of CPS.  

Accordingly, the aggregate bridge financings and related accrued
interest receivable and other costs amounting to $1.9 million

40

Tyler Technologies, Inc.

were expensed in the 1999 consolidated financial statements.
In 2001 the Company received cash of approximately $235,000
through CPS bankruptcy proceedings in connection with the
notes.  The Company anticipates no further recovery of amounts
due under its secured notes.

AMORTIZATION OF ACQUISITION INTANGIBLES 

The Company has accounted for all acquisitions using the
purchase method of accounting for business combinations.
Unallocated purchase price over the fair value of net
identifiable assets of the acquired companies (“goodwill”) and
intangibles associated with acquisition are amortized using the
straight-line method of amortization over their respective useful
lives, commencing at the acquisition date.  Amortization expense
of acquisition intangibles increased $1.9 million from 1999 to
$6.9 million in 2000 as the result of several acquisitions which
occurred mid-year 1999.

NET INTEREST EXPENSE 

Interest expense increased substantially for the year ended
December 31, 2000 compared to the same period in 1999. The
senior credit facility was amended in August 2000 and
December 2000 to, among other things, accelerate repayment
of borrowings under the facility.  Accordingly, a cumulative
$1.4 million charge was recorded in 2000 to accelerate the
amortization of previously capitalized loan costs.  Borrowings
under the senior credit facility were used to finance acquisitions,
as well as capital expenditures, including proprietary software
development costs, resulting in higher interest expense.
Capitalized software development costs were $6.7 million for
2000, as compared to $1.4 million for 1999.  In addition to
higher debt levels, the average effective interest rate for 2000
was 10.2% compared to 7.7% for 1999.

INCOME TAX PROVISION 

In 2000, the Company had a pre-tax loss from continuing operations
of $10.3 million and an income tax benefit of $2.8 million,
resulting in an effective benefit rate of 27%. In 1999, the Company
had a pretax loss from continuing operations of $1.8 million and
an income tax provision of $188,000.  The lower effective
income tax benefit is due to non-deductible items such as goodwill
amortization as compared to the relative amount of pretax loss.

DISCONTINUED OPERATIONS 

The income (loss) from operations (net of income taxes)
amounted to a loss of $4.3 million for the year ended December
31, 2000 and income of $1.9 million for the year ended
December 31, 1999 and represents the operating income or
loss of the information and property records services segment
until their disposal measurement date of December 29, 2000.
The loss on disposal (net of income taxes) amounting to 
$12.8 million for the year ended December 31, 2000 represents
the gain or loss on the disposal of Kofile and of Resources, as 

Tyler Technologies, Inc.

41

well as the estimated loss on the anticipated disposals of the
remaining businesses in this segment.  In addition to the loss on
disposal of information and property records services in 2000,
the Company also recorded loss on disposal in 2000 and 1999 of
$748,000 (net an income tax benefit of $403,000) and $1.9 million
(net of an income tax benefit of $877,000), respectively, in
connection with non-operating subsidiaries involved in various
claims for work related injuries and physical conditions and for
environmental claims relating to a formerly owned subsidiary
that was sold in 1995.  Also, the 1999 loss on disposal includes
an additional loss of $907,000 (net of income taxes of $183,000)
in connection with the automotive parts segment disposal.

NET LOSS AND OTHER MEASURES 

Net loss was $24.6 million in 2000 compared to $2.8 million in
1999. Diluted loss per share was $0.54 and $0.07 for 2000 and
1999, respectively. Net loss from continuing operations was $7.5
million, or $0.17 per diluted share, in 2000 compared to net loss
of $2.0 million, or $0.05 per diluted share, in 1999.  

ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

In June 2001, the Financial Accounting Standards Board (the
“FASB”) issued SFAS No. 142, “Goodwill and Other Intangible
Assets.”  SFAS No. 142 addresses the accounting and reporting
of acquired goodwill and other intangible assets.  SFAS No. 142
discontinues amortization of acquired goodwill and instead
requires annual impairment testing of acquired goodwill.
Intangible assets will be amortized over their useful economic
life and tested for impairment in accordance with SFAS No. 142.
Intangible assets with an indefinite useful economic life should
not be amortized until the life of the asset is determined to be
finite.  The Company is required to adopt the provisions of SFAS
No. 142 effective January 1, 2002.  SFAS No. 142 will have a
significant favorable impact on the Company’s 2002 financial
results and beyond.  See Note 1 in Notes to Consolidated Financial
Statements for further discussion of the impact of SFAS No. 142.

Also in June 2001, the FASB issued SFAS No. 141, “Business
Combinations.”  SFAS No. 141 requires that all business
combinations be accounted for under the purchase method 
and defines the criteria for identifying intangible assets for
recognition apart from goodwill.  SFAS No. 141 applies to all
business combinations initiated after June 30, 2001 and all
business combinations accounted for using the purchase
method for which the acquisition date is July 1, 2001 or later.
The Company is required to adopt the provisions of SFAS 
No. 141 effective January 1, 2002.

In August 2001, the FASB issued SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets.”  SFAS No. 144
addresses financial accounting and reporting for the impairment
of long-lived assets and for long-lived assets to be disposed of.
Under SFAS No. 144, an impairment loss is recognized only if
the carrying amount of a long-lived asset to be held and used is
not recoverable from its undiscounted cash flows and the loss is

Management’s Discussion and Analysis of Financial
Condition and Results of Operations

(Continued)

measured as the difference between the carrying amount and
the fair value of the asset.  Long-lived assets to be disposed of
by sale are to be measured at the lower of their carrying amount
or fair value, less cost to sell, and depreciation related to such
long-lived assets is required to be discontinued.

In addition, SFAS No. 144 retains the basic provisions of APB
Opinion No. 30 for the presentation of discontinued operations
in the income statement but broadens that presentation to
include a component of an entity rather than a segment of a
business.  The provisions of this Statement are effective for
financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal
years, with early application encouraged.  The provisions of
this Statement generally are to be applied prospectively.  The
Company has not determined the effect of this new standard;
however, due to the similarities with existing accounting
standards regarding impairment losses, the impact is not
expected to be material in the determination of carrying
amounts for long-lived assets.

FINANCIAL CONDITION AND LIQUIDITY 

During the year ended December 31, 2001, the Company had a
revolving credit agreement with a group of banks (the “Senior
Credit Facility”), which initially provided for borrowings up to
$15.0 million and had a maturity date of July 1, 2002.  After
amendments to the Senior Credit Facility in May and September
related to the sale of certain assets, the available borrowings
were reduced to $7.0 million.  Borrowings under the Senior
Credit Facility bore interest at the lead bank’s prime rate plus a
margin of 3%.  The borrowings were limited to 80% of eligible
receivables.  In December 2001, the Company terminated the
Senior Credit Facility.  The effective average interest rates for
borrowings under the Senior Credit Facility during 2001 and
2000 were 10.3% and 10.2%, respectively.

On March 5, 2002, the Company entered into a new revolving
credit agreement with a bank (the “2002 Credit Facility”) which
has a maturity date of January 1, 2005 and provides for total
availability of up to $10.0 million.  Borrowings under the 2002
Credit Facility bear interest at either prime rate or at the London
Interbank Offered Rate plus a margin of 3% and are limited to
80% of eligible accounts receivable.  The 2002 Credit Facility is

secured by substantially all of the Company’s personal property,
and by a pledge of the common stock of the Company’s
operating subsidiaries, and is also guaranteed by such subsidiaries.
Under the terms of the 2002 Credit Facility, the Company is
required to maintain certain financial ratios and other financial
conditions and is also prohibited from making certain
investments, advances, dividends or loans.

The Company’s capitalization at December 31, 2001, consisted
of $3.0 million in long-term obligations (including current
portion) and $100.9 million in shareholders’ equity. The total
debt-to-capital ratio was 2.9% at December 31, 2001.

The Company leases certain offices, transportation, computer
and other equipment used in its continuing operations under
noncancelable operating lease agreements expiring at various
dates through 2011.  Most leases contain renewal options 
and some contain purchase options.  Total future obligations
under noncancelable leases and maturities of long-term debt 
at December 31, 2001, are as follows:  2002 - $3.2 million; 
2003 - $2.7 million; 2004 - $2.4 million; 2005 - $4.7 million; 
2006 - $1.6 million; subsequent to 2006 - $5.4 million.
Payments in 2005 include a note payment of $2.8 million.

For the year ended December 31, 2001, the Company made
capital expenditures of $9.3 million for continuing operations.
These expenditures included $6.2 million relating to software
development costs. The remaining expenditures were primarily
for computer equipment and expansions required to support
internal growth.  The Company also purchased a formerly
leased building for $1.3 million in connection with an existing
obligation of the discontinued information and property records
service segment.  Subsequent to December 31, 2001, the Company
entered into a contract to sell the building for approximately
$1.0 million in cash subject to the potential buyer securing
financing for the purchase.  The building is included in net
assets of discontinued operations on the consolidated balance
sheet at December 31, 2001.  Capital expenditures in 2001
were primarily funded with cash generated from operations.

Excluding acquisitions, Tyler anticipates that 2002 capital
spending will be approximately $10.0 million, $6.5 million of
which will be related to software development.  Capital
spending in 2002 is expected to be funded from cash flow
from operations.

42

Tyler Technologies, Inc.

On May 16, 2001, the Company sold all of the common stock 
of one of the remaining businesses that was previously
designated as a discontinued operation. In connection with
the sale, the Company received, among other consideration,
cash proceeds of $575,000, and a promissory note of $750,000
payable in 58 monthly installments at an interest rate of 9%.  
On September 21, 2001, the Company sold all of the common
stock of CCR, which had also been classified as a discontinued
operation.  The sale price of the common stock consisted of
$3.1 million in cash, as well as future payments contingent on
the retention of certain customers subsequent to the sale.  

On November 4, 1999, the Company acquired selected assets
and assumed selected liabilities of Cole Layer Trumble Company
(“CLT”) from a privately held company (“Seller”).  A portion of
the consideration consisted of the issuance of 1.0 million
restricted shares of Tyler common stock and included price
protection on the sale of the stock.  The price protection, which
expired November 4, 2001, was equal to the difference between
the actual sale proceeds of the Tyler common stock and $6.25
on a per share basis, but was limited to $2.75 million.  During
the year ended December 31, 2001, the Seller submitted to Tyler
a claim under the price protection provision which qualified for
the maximum amount of the price protection.  The purchase

agreement contained a number of post-closing adjustments
which resulted in a receivable of approximately $1.4 million due
Tyler from the Seller.  During the year ended December 31,
2001 and concurrent with the settlement of the price protection
provision, Tyler paid the Seller $1.35 million in cash on a net
basis and eliminated the aforementioned receivable.  The two
parties entered into a mutual release agreement to fully settle
the price protection and related purchase agreement provisions.

The Company is from time to time engaged in discussions with
respect to selected acquisitions and expects to continue to
assess these and other strategic acquisition opportunities as they
arise. The Company may also require additional financing if it
decides to make additional acquisitions. There can be no
assurance, however, that any such opportunities will arise, that
any such acquisitions will be consummated or that any needed
additional financing will be available when required on terms
satisfactory to the Company. Absent any acquisitions, the
Company anticipates that cash flows from operations, working
capital and available borrowing capacity under the 2002 Credit
Facility will provide sufficient funds to meet its needs for at least
the next year.

Tyler Technologies, Inc.

43

Corporate Information

C O R P O R A T E   O F F I C E R S

C O R P O R A T E   H E A D Q U A R T E R S

Louis A.Waters
Chairman and Co-Chief Executive Officer

John M.Yeaman
President and Co-Chief Executive Officer

Theodore L. Bathurst
Vice President and Chief Financial Officer

Brian K. Miller
Vice President – Finance and Treasurer

H. Lynn Moore, Jr.
Vice President – General Counsel and Secretary

Rick L. Hoff
Chief Technology Officer

Terri L. Alford
Controller

B O A R D   O F   D I R E C T O R S

Louis A.Waters
Chairman of the Board and Co-Chief Executive Officer

Tyler Technologies, Inc.

Ben T. Morris
President and Chief Executive Officer

Sanders Morris Harris

Ulrich Otto
Chairman and Chief Executive Officer

Otto Holding B.V.

G. Stuart Reeves
Retired Executive Vice President 

Electronic Data Systems Corporation

Glenn A. Smith
President – Courts & Justice Division

Tyler Technologies, Inc.

John D.Woolf
Executive Vice President and Chief Financial Officer

eiStream, Inc.

John M.Yeaman
President and Co-Chief Executive Officer

Tyler Technologies, Inc.

5949 Sherry Lane, Suite 1400
Dallas,Texas 75225
(214) 547-4000
www.tylertechnologies.com

T R A N S F E R   A G E N T   A N D   R E G I S T R A R

EquiServe Trust Company, N.A.
P. O. Box 43023
Providence, Rhode Island 02940-3010
(816) 843-4299
www.equiserve.com

I N D E P E N D E N T   A U D I T O R S

Ernst & Young LLP
Dallas,Texas

L E G A L   C O U N S E L

Gardere Wynne Sewell LLP
Dallas,Texas

C O M M O N   S T O C K

Listed on the New York Stock Exchange under the symbol “TYL”

I N V E S T O R   I N F O R M A T I O N

The Company’s Annual Report on Form 10-K is available on the
Company’s Web site at www.tylertechnologies.com. A copy of the Form
10-K or other information may be obtained by contacting the Investor
Relations department at corporate headquarters.

I N V E S T O R   R E L A T I O N S

Tyler Technologies, Inc.
(214) 547-4000
info@tylertechnologies.com

44

5949 Sherry Lane 
Suite 1400
Dallas, Texas 75225

(214) 547-4000

www.tylertechnologies.com