Tyler Technologies Annual Report 2008

FY2008 Annual Report · Tyler Technologies

Loading PDF…

Throughout time, great inventions and discoveries have been born out
of the diligent, focused eﬀorts of some of the best minds. Engaging
in countless hours of methodical planning, inventors like Leonardo
da Vinci, Galileo and Thomas Edison have produced some of the world’s
most astounding designs. Like these innovators, Tyler Technologies is
revolutionizing how local governments operate—delivering a broad
portfolio of software solutions to streamline their many complex business
functions. Posting another record year in 2008, Tyler Technologies proves
once again that our success is no accident. It’s by design.

p2Since Tyler entered the public sector information management business, we have carefully designed and executed a strategy that provides reliable, consistent growth by delivering the innovative software solutions local governments need to manage their business processes. Year after year, Tyler demonstrates that our design works for our shareholders, employees and customers. Despite an unpredictable economic climate, Tyler Technologies surpassed its record-setting year in 2007 to post very strong results again in 2008.Exceeding ExpectationsBy virtually every measure, Tyler Technologies outperformed our own internal targets and market expectations for 2008. For the year, Tyler’s revenues grew 21 percent to $265 million, with software-related revenues up 25 percent. License revenue growth of 18 percent was very solid, even as our software-as-a-service (SaaS) model continued to gain traction, resulting in a 38 percent increase in subscription revenues. Tyler built momentum in the local government marketplace in 2008, and our brand awareness and competitive position are now stronger than ever. To Our Shareholders(a) excludes capital expenditures for ofﬁce facilities of $16 million in 2008Total Annual RevenuesIN MILLIONS0405060708172.3170.5195.3219.8265.1Free Cash FlowIN MILLIONS0405060715.3 18.522.530.342.3BacklogIN MILLIONS0405060708142.2165.4205.9250.1243.408aJoh n S. Marr, Jr.
Preside nt and

Ch ief Executive Officer

Joh n M. Yeaman
Chairman of th e Board

For the year, our gross margin improved by 300
basis points and Tyler posted non-GAAP operating
income for 2008 of $37.1 million, up 39 percent over
the previous year. Non-GAAP earnings per share
rose 45 percent to 61 cents. The fourth quarter of
2008 marked our 31st consecutive proﬁtable quarter.
GAAP operating income, including the non-cash
charge for a legal settlement related to warrants, was
$28.1 million. GAAP earnings per share was 38 cents.

Once again, free cash ﬂow exceeded earnings.
Cash provided by operations in 2008 reached $48
million, and free cash ﬂow, excluding oﬃce facility
investments, hit $42.3 million—an increase of 40
percent over 2007.

Over the years, we have built a foundation of more
than 8,000 customers and we enjoy an exceptionally
high customer retention rate. These relationships
provide us a steady stream of recurring revenues
through maintenance and subscription agreements,
which, together with services for existing customers,
accounted for over half our revenue in 2008.

Without question, our performance in 2008 was
encouraging—but equally important, we maintained
our long-term record of sustainable growth. Tyler’s
software-related revenues have a compound annual
growth rate (CAGR) of 17 percent since 2001. Free

cash ﬂow, excluding capital expenditures for oﬃce
facilities, has a CAGR of 43 percent over the same
period, and non-GAAP earnings per share has
grown at a compounded rate of 95 percent over
the last seven years.

Stronger Than Ever

Tyler built momentum in the local government
marketplace in 2008, and our brand awareness
and competitive position are now stronger than
ever. We continue to enjoy success thanks to the
growth strategy that we have carefully designed and
consistently executed over the years. We believe this
strategy not only provides the type of steady growth
we seek, but it also serves all of our constituents well.
We are speciﬁcally focused on four key areas of
growth: expanding geographically, securing larger
opportunities, broadening our product oﬀerings, and
expanding existing customer relationships.

For the second consecutive
year, Tyler was named
one of “America’s 200 Best
Small Companies” by
Forbes magazine.

p4Tyler is unique in that we serve only the public sector, but with an unmatched breadth of products and services. As a vertical software company, this enables us to focus all of our resources on delivering the software solutions and services that help states, cities, counties, schools and other agencies streamline the many facets of their operations. While Tyler’s technology solutions are best in class, we believe our employee team is what truly sets us apart. Our more than 2,000 employees demonstrate a high level of technical knowledge, as well as incredible domain expertise in the many unique aspects of local government operations. This enables us to extend an unparalleled level of innovation and service to our customers.A Solid InvestmentAt Tyler, we know that building a company that works for shareholders, employees, and customers is just the beginning. That’s why we are always looking for new ways to deliver the best return on investment, create the best work environment, and develop and support the best products possible. Although Tyler’s common stock price—like that of most companies—declined signiﬁcantly from our 2008 high achieved in July, our stock performed better than most, ending the year down 7 percent. We believe that Tyler has a number of characteristics that make it an attractive investment—including consistent above-market growth, a broad and relatively stable market, strong cash ﬂow, a high proportion of recurring revenues, and a very solid balance sheet. For the second consecutive year, Tyler was named one of “America’s 200 Best Small Companies” by Forbes magazine. Reﬂecting our conﬁdence in the company’s long-term prospects, in 2008 we invested $59 million of our cash to repurchase 4.3 million shares of stock, under our ongoing repurchase program that has been in place since 2002. From 2002 through 2008, we (a) includes restructuring charge of $0.02(b) includes non-cash stock compensation expense of $0.04 in 2006, $0.05 in 2007 and $0.08 in 2008(c) 2008 EPS is non-GAAP and excludes non-cash legal settlement charge related to warrants of $0.23(a) 2008 EPS is non-GAAP and excludes non-cash legal settlement charge related to warrants of $0.16 in Q2, $0.04 in Q3 and $0.03 in Q4040.230.190.340.420.61Diluted Annual EPS IN DOLLARS2007-2008 Quarterly EPSaIN DOLLARS0.060.080.090.170.120.200.150.17Q1Q2Q3Q408b,c07b06b05a20082007repurchased approximately 18 million shares of our
common stock at an average cost of about $8 per
share, for a total of nearly $144 million.

Although Tyler’s common
stock price—like that of
most companies—declined
significantly from our 2008
high achieved in July, our
stock performed better than
most, ending the year down
just 7 percent.

We also used $24 million of cash to complete three
acquisitions during 2008, each of which expanded
our oﬀerings for the K-12 schools market. We
continue to look for attractive acquisitions that
can supplement our growth by broadening our
product oﬀerings and customer base. We maintain
a disciplined approach to acquisitions, particularly
with respect to valuations, as we identify quality
companies that ﬁt well with Tyler’s existing
operations. Finally, in order to support our current
facility requirements and planned needs in areas
where we have signiﬁcant growing workforces, we
purchased an oﬃce building in Yarmouth, Maine,
and began construction of a facility in Lubbock,
Texas. When the building in Lubbock is completed
in 2009, we will have a total of approximately $26
million invested in these assets, which we may
leverage to free up cash for other uses.

While Tyler enjoys a strong market position today,
we know that our long-term success requires a
signiﬁcant commitment on our part to ensure our
solutions remain at the forefront competitively and
meet the ever-changing needs of the public sector.

In 2008, we added more than 300 new employees,
primarily in development, implementation, and
support. Never in our history have we had so many
resources committed to improving our current
oﬀerings, while at the same time investing in
new products for the future, including our joint
development of Microsoft Dynamics AX for the
public sector.

Looking Ahead

Despite the tough economic climate in 2008, Tyler
notched a record-setting year—a testament, we
believe, to our proven strategy, exceptional employee
team, and market-leading portfolio of solutions. The
broad economic conditions are clearly troubling.
While Tyler has to this point performed well in
this environment, there is certainly the possibility
that these conditions will put some pressure on our
business and aﬀect short-term results.

We will continue to take a long-term approach to
managing our business, and in the long run, we
expect demand for our products to be strong and
our execution to be sound. We are conﬁdent in our
ability to extend the historical trends that we have
established over the last several years, leveraging
our top-line growth and expanding margins. Just as
the best inventors blended the right mix of strategy,
wisdom and determination, Tyler is ready to build
on our rich history of success.

John S. Marr, Jr.

President and Chief Executive Officer

Th e ldeal City

Leonardo da Vinci

ske tch ed several plans

for a more organized

city with dwellings,

castles, ch urch es,

garde ns and canals.

With more than 8,000 customers and a portfolio of
leading-edge software solutions, Tyler Tech nologies has
crafted a proven blueprint for success.

The Ideal City

Over many years, Tyler Technologies has consistently proven that its methodical
planning, sound growth strategy, and rich portfolio of solutions work for clients,
employees and shareholders. With a clear vision, Tyler has established itself as
a market leader—helping city, county, and state agencies of all sizes eﬀectively
manage the intricate network of services they deliver. In 2008, Tyler once
again posted a record-setting year by virtually every measure.

Designed for Success

Designed to Endure

At Tyler Technologies, we understand that building
a successful company requires methodical planning,
consistent execution, and an unwavering commitment
to clients, employees and shareholders. And in 1998,
Tyler brought together under a single brand leading
companies serving the local government market.

When Tyler ﬁrst entered the public sector software
market, the competitive landscape was even more
fragmented than it is today. Now, there are fewer
competitors serving our market—and good companies
are always vying for market share with us. That means we
must focus intently on maintaining a competitive edge.

In the years since, Tyler has established a proven model
for success. This starts with our clearly deﬁned market
segment—serving only the public sector. Given this
focus, we know local governments’ unique day-to-day
business operations and how to help them keep pace
with their constituents’ changing demands.

While our focus may be narrow, our vision for what’s
possible is not. Tyler delivers a robust portfolio of
software solutions that span the breadth and depth
of the mission-critical services that government
entities must address every day—including ﬁnancial
management, education, courts and justice, pension,
public safety, tax and appraisal, citizen services and
public records. In fact, no other company oﬀers the same
breadth of solutions for the public sector.

Today, Tyler has installations in all 50 states, Puerto
Rico, the U.S. Virgin Islands, Canada, and the United
Kingdom. Yet despite our growth over recent years, we
still approach each client with the same level of attentive
service and focused commitment. That’s one reason why
we’ve consistently maintained a customer retention rate
of 98 percent or greater.

For Tyler, this means providing the robust solutions
that local governments need. It also means ensuring we
have the best possible team in place to create and deliver
these solutions and services—and support and enhance
them long past implementation. And Tyler’s team brings
the right balance of domain experience, technology and
innovation to ensure clients are satisﬁed from start to
ﬁnish. While many companies faced the challenging
task of reducing their workforce in 2008, Tyler’s strong
cash ﬂow and above-market growth provided us the
opportunity to continue to expand our teams.

Unlike organizations in the private sector, it’s not
uncommon for local governments to keep their
information technology infrastructure in place for 10
years or more. And in some cases, they run a potpourri
of software and hardware solutions that are no longer
viable, including systems developed in-house years ago
or software from vendors that are no longer in business
or that haven’t invested in new technology. We believe
that these in-house systems and systems from vendors
who do not have a competitive oﬀering in the market
today make up the majority of systems currently
installed broadly across local governments.

p8Because local governments are heavily dependent on their IT systems to deliver mission-critical services over many years, they largely view technology as a necessary investment—rather than a discretionary purchase. Yet given how quickly technology evolves and the complexity of local governments’ business operations, it’s imperative that when governments purchase new systems, their investment delivers the best possible return now—and over the long term. At Tyler, we know that no matter the size of a government agency or school, every dollar allocated must be used wisely. And that’s why we are always looking for ways to enhance our existing software portfolio—giving customers access to improved technologies, as well as new features and functionality. Measures of SuccessAlthough 2008 was a challenging year for the United States economy, most communities throughout the nation continue to experience growth. In fact, local governments’ annual spending on software and external technology services is currently estimated at approximately $13.8 billion, growing at approximately 5 percent annually over the next three years. With this growth, it is incumbent upon local authorities and agencies to have the right systems in place to respond accordingly. Whether assessing property taxes or routing school buses, every facet of local government operation demands a high level of eﬃcacy and eﬃciency. Given our record-setting performance in 2008 and our exceptionally high customer retention rate, it’s clear Tyler’s solutions deliver. In 2008, Tyler once again posted organic growth greater than two times the overall market growth rate, which was supplemented by targeted acquisitions. Our total revenues grew 21 percent in 2008, with 14 percent organic growth and 7 percent from acquisitions. Our recurring revenues from maintenance and subscriptions—which increased by 27 percent—continue to add the type of reliable revenue base we need to ensure our growth is sustainable over time. Charting New GrowthWhile some companies are quick to change strategies, Tyler has taken a disciplined approach to our growth. With approximately 3,100 counties, 14,200 school districts, 36,000 cities and towns, and over 35,000 other local government agencies in the United States, Tyler has ample opportunity to drive new growth. And as we have in years past, we are leveraging new opportunities by focusing speciﬁcally on four key growth drivers: taking our products into new geographic areas, expanding our product oﬀerings, securing larger contracts, and cross-selling our portfolio of solutions to existing clients. 41%28%3%7%16%5%Revenue MixSoftware LicensesSubscriptionsSoftware ServicesMaintenanceAppraisal ServicesOtherReflec ting Telescope

Sir Isaac Newton was

th e greatest English

math ematician of h is

ge neration. He establish ed

th e modern study of

optics and built th e first

reflec ting telescope that

used mirrors, rath er than

le nses, to bring th e

ligh t to a focus.

Tyler Tech nologies is uniquely focused on helping
governments at the state, county and local level.

Lewis and Clark
Expedition

ln 1803, th e Louisiana

Purchase sparked interest

in expansion to th e west

coast. Th omas Jefferson

dispatch ed Lewis and

Clark to find a water

route across North

America and explore th e

uncharted West.

Year after year, Tyler Tech nologies has expanded its
geographic reach and secured larger opportunities to
become a clear leader in the public sector software market.

p10

Supporting Tyler’s strategy is an ongoing eﬀort by our
sales and marketing teams to build a cohesive brand
identity for Tyler. In recent years, we have centralized
our marketing eﬀorts—creating a more eﬃcient
approach to branding, marketing and advertising.
We have also restructured and expanded our sales
organization to improve Tyler’s visibility in regions
where our products previously had little or no presence.

Extending Our Reach

Thanks to these eﬀorts, today virtually all of our
software solutions are marketed nationwide. And in
2008, Tyler continued to extend our reach into new
areas—illustrated by the fact that in any given quarter,
Tyler may sign deals in 20 or more diﬀerent states.

For example, Tyler’s municipal court product also
expanded into several new states, including moving
into Ohio and signing a deal with Licking County,
a special jurisdiction court.

Tyler also gained additional presence in Ohio in the
city of Wyoming, which required an income tax module
we did not support. There, we collaborated with the city
of Wyoming and ﬁve other cities to design and develop
the module they needed. Now that we have moved
into these new markets, we anticipate our presence will
continue to expand in the years ahead.

Securing Larger Deals

At Tyler, we understand that no matter a
government’s size, each of our clients wants to ensure
the technology investments they make produce a
solid return—while also providing a high degree
of customization and scalability. We know that for
many customers this means having access to highly
functional solutions that take into account their
unique needs in terms of budget, implementation
schedule, and service customization.

Historically, Tyler focused primarily on serving the
nation’s many small and mid-sized governments. In
recent years, however, we have also gained market
share in larger markets, which create considerable

revenue and margin expansion potential. Central to
our ability to serve larger governments and school
districts is the focus of all our resources on the speciﬁc
needs of the public sector—enabling us to make
key investments in scalable solutions incorporating
leading-edge technology and best-of-class
functionality. And it’s this commitment to delivering
the most innovative solutions possible for our market
that gives us a competitive edge.

In 2008, we continued to secure larger deals to
gain market share. With our ﬁnancial management
solutions, for example, Tyler won several multi-million
dollar contracts, including a $4.9 million deal with
the Northside Independent School District in San
Antonio, Texas. And with our student transportation
management solution, we signed a contract with
the San Diego Uniﬁed School District, the nation’s
eighth largest urban district.

In 2008, we added new customers in key markets
for our Odyssey courts and justice solution,
including two as part of the license agreement we
signed in 2006 with the Texas Conference of Urban
Counties—a consortium of the 34 largest counties
in the state. We also added our ﬁfth statewide
contract for Odyssey, a $6.4 million deal with the
state of New Mexico.

Tyler also entered into signiﬁcant agreements for our
municipal court solution, including a $2.5 million
contract with the city of Arlington, Texas, as well
as major contracts with Birmingham, Alabama, and
St. Louis County, Missouri. And Tyler built upon its
more than 23-year relationship with Bucks County,
Pennsylvania, by securing a $2.4 million deal for our
property tax software.

Based on our extensive experience in serving the
public sector and our steady performance in 2008,
we believe Tyler is navigating the right course for
success well into the future.

p11

Ticker Tape Machine

Th omas Edison provided

th e first mechanical

means of conveying stock

price quotes over a long

distance across telegraph

wiring. Th e increase in

speed provided by th e

ticker allowed for faster

and more efficie nt sales.

Tyler Tech nologies’ broad solutions portfolio helps
local governments streamline their mission critical
business operations, wh ile effectively maximizing
the value of their tech nology investments.

Maximizing Results

Enhancing Our Products

Now more than ever, it’s imperative that public sector
agencies act judiciously with their resources to ensure
citizens have easy access to a full range of services.
From managing court cases and providing easy ways
to pay utility bills to ensuring school districts can
safeguard students’ information, Tyler’s software
solutions help governments maximize the value they
provide to constituents.

And in turn, because our solutions work for our
customers, Tyler is gaining greater market visibility
both in areas where we have a signiﬁcant presence and
in penetrating new markets. Thus, we are creating even
greater returns for our shareholders, and in 2008, we
continued exploring ways to maximize these results.

With technology in a constant state of evolution,
Tyler understands that creating the best return on our
customers’ investment heavily depends on our ability
to provide value over the long term. That’s why we
are keenly focused on making constant improvements
to Tyler’s existing oﬀerings, providing customers
with product updates incorporating new features,
functionalities and technologies. We actively seek the
best talent to help us develop, implement and support
our solutions, and we added more than 300 new
employees to our team in 2008.

Over the course of the last year, we also invested
further in adding new products and clients through
strategic acquisitions. We added several new solutions
speciﬁcally for the education market, including the

p12p12

acquisition of St. Louis-based School Information
Systems, which develops and sells a full suite of student
information and ﬁnancial management systems for K-12
schools. Early in 2008, we completed the acquisition
of VersaTrans Solutions which creates and supports
school transportation solutions including bus routing,
ﬂeet management and trip planning. Additionally, we
purchased Schoolmaster, a student information system
used in more than 1,900 schools in 40 states, with a
particularly strong presence in the western United States.

In addition to expanding our oﬀerings through
acquisition, in 2008 Tyler continued to invest in
developing new products, including a new business
management solution we’re jointly developing with
Microsoft. This solution, Microsoft Dynamics AX for
the public sector is slated for release in late 2010 and
will bring about opportunities to expand into new
markets, including federal and state agencies and
international governments.

As we look ahead, we will continue making the necessary
investments to enhance and expand Tyler’s product
family and improve our competitive position, leveraging
our strong free cash ﬂow to bolster our product oﬀerings
through acquisition and internal development.

Increasing Access to Solutions

Given the complexity and unique needs of each
government entity, Tyler is making it even easier for
local governments to implement the solutions they
need—without having to dedicate in-house personnel
or equipment to manage the software. Our software-as-
a-service (SaaS) model gives clients seamless access to
Tyler’s solutions on a subscription basis. Tyler handles
all the back-end aspects of managing the software,
freeing governments up to focus on other priorities.

In 2008, we saw continued traction in our SaaS
model. Although comprising only 5 percent of our
total revenues, subscriptions represented Tyler’s fastest-
growing revenue stream, increasing at 38 percent. Based
on customer response thus far, this model is proving
to be eﬀective for government agencies of all sizes.

We now have 123 hosted clients with a subscription
renewal rate of 100 percent since we signed our ﬁrst
SaaS customer seven years ago. In addition, 26 existing
customers converted to our SaaS model in 2008.

New SaaS clients for our ﬁnancial management
solutions in 2008 include the Town of Westport,
Connecticut, and the Recovery School District in
New Orleans. Additionally, we signed our ﬁrst SaaS
customers for appraisal and tax solutions with Logan
County, Colorado, and Henry County, Indiana.

Leveraging Our Customer Base

At Tyler, we don’t just deliver dynamic, feature-rich
solutions. We ensure the best possible experience
for each of our customers from start to ﬁnish. From
development and training to consulting and post-
implementation support, Tyler provides turnkey
solutions for our customers. This helps us better render
solutions that meet our customers’ exact speciﬁcations,
with every resource allocated to the public sector.

Tyler enjoys an exceptionally high customer retention
rate, which gives us a stable base of recurring revenue
through maintenance and support renewals, as well as
additional services like consulting and training for
existing customers. Because of our high level of
commitment and responsiveness, we’re considered a
trusted business partner to our customers. That means
when the time comes to invest in new technology,
many of our customers turn to us to provide additional
solutions from our portfolio. This provides us a
prime long-term opportunity to leverage our base of
8,000-plus customers by cross-selling our portfolio
of software solutions.

In 2008, we gained new business by selling into our
existing customer base, such as with Gregg County,
Texas. The county was one of the original customers
of our courts and justice solution and in 2008 added
the Tyler’s public safety product. Likewise, we had an
existing relationship with St. Louis County, Missouri,
for our property tax solution, and in 2008, we signed
a $4.6 million multi-suite agreement adding our

p13

new enhancements to our existing product portfolio,
as well as augmented our oﬀerings through acquisition
and new product development. We also capitalized
on our satisﬁed base of customers to create new
opportunities to cross-sell our portfolio of software
solutions—and secured new deals in key markets to
further expand our presence.

Looking Forward

In 2009, we plan to carry this momentum forward
and continue pursuing opportunities for growth.
We believe we are well positioned within the
marketplace to grow our distribution channels and
expand our product portfolio. We anticipate our
subscription-based model will continue to create
growth potential over the long term as the market
gradually moves toward greater adoption of SaaS
oﬀerings. We believe it’s a great choice for customers
not wanting to make upfront investments in
technology or facing staﬃng challenges.

Over the years, Tyler has established a strong
leadership position within the public sector software
market. We have worked to create—and consistently
execute—the right growth strategy to deliver the right
return for our customers, employees, and shareholders.
Quite simply, like history’s most intricately designed
inventions, Tyler’s design works. And we’re proving
it every day.

ﬁnancial management, municipal court, and enterprise
content manager solutions to their product lineup.

We also saw a number of other clients that signed
multi-suite contracts in 2008, implementing two or
more Tyler products in an integrated solution. For
example, Sandoval County, New Mexico, signed
a $1.1 million contract to implement our ﬁnancial
management and human resource solution, as well
as our tax assessment and appraisal solution.

Navigating the Future

Supporting each of their complex business operations
can be challenging and resource intensive for local
governments. With decades of experience in the public
sector and a robust lineup of solutions, we are solely
focused on helping local governments seamlessly
manage the wide range of challenges they must tend
to every day.

Based on our strong performance in 2008, we believe
Tyler is in a prime competitive position and will emerge
from the current economic cycle stronger than ever. In
many categories, including revenue, operating income,
and operating cash ﬂow, 2008 was our best year ever.
While we are no doubt pleased to report our strong
ﬁnancial results, the real indicator of our success is
the value we oﬀer every day for our shareholders, our
employees, and our customers.

On the Right Path

In 2008, Tyler diligently sought new opportunities
that would spur new revenue generation, market
visibility, and product expansion. Unlike some
competitors that have announced staﬃng reductions
and cutbacks in discretionary spending on research
and development, we have the ability to make key
investments that will beneﬁt us—and our clients—
for years to come.

At Tyler, we know that while we have enjoyed a rich
history of success, our future performance relies on
our ability to create and deliver innovative solutions.
And as in years past, in 2008, we continued adding

p14

Building on Tyler’s strong performance in 2008,
we are moving in the righ t direction to chart
new growth in the years ahead.

Compass

Galileo s compass is useful

for an astonish ing varie ty

of calculations such as

estimating altitudes,

surveying topograph ics,

laying out military

fortifications and aiming

a cannon at th e correc t

angle to ach ieve a

targe t distance.

p15

Tyler Technologies’ success in 2008 is the result of careful planning,
consistent execution, and an unwavering commitment to delivering the
best software solutions available for the public sector. In 2008, Tyler
Technologies’ 21 percent revenue increase surpassed our record-setting
year in 2007 and once again outpaced the overall market growth rate.
While our non-GAAP operating income rose by 39 percent, we also
recorded an increase of 45 percent in non-GAAP EPS, and free cash ﬂow
expansion of 40 percent (excluding capital expenditures for oﬃce facilities).
The following ﬁnancial statements highlight in detail these results.

p16

Stock Market Data 2008 Annual Report

Our common stock is traded on the New York Stock Exchange under the symbol “TYL.” At December 31, 2008, we had
approximately 2,140 stockholders of record. A number of our stockholders hold their shares in street name; therefore, there are
substantially more than 2,140 beneﬁcial owners of our common stock.

The following table shows, for the calendar periods indicated, the high and low sales price per share of our common stock as reported
on the New York Stock Exchange.

2007: First Quarter

Second Quarter
Third Quarter
Fourth Quarter

2008: First Quarter

Second Quarter
Third Quarter
Fourth Quarter

High

Low

$ 14.93
13.28
15.74
16.20

$ 14.70
15.97
18.47
15.17

$ 12.03
11.70
11.39
12.81

$ 12.29
13.33
13.29
9.79

We did not pay any cash dividends in 2008 or 2007. Our bank credit agreement contains restrictions on the payment of cash
dividends. We intend to retain earnings for use in the operation and expansion of our business, and, therefore, we do not anticipate
declaring a cash dividend in the foreseeable future.

During 2008, we purchased approximately 4.3 million shares of our common stock for an aggregate purchase price of $59.0 million.
The repurchase program, which was approved by our board of directors, was announced in October 2002, and was amended in
April and July 2003, October 2004, October 2005, May 2007, May 2008 and October 2008. Our board of directors authorized the
repurchase of an additional 2.0 million shares on both May 15, 2008 and October 23, 2008. As of December 31, 2008, we had
remaining authorization to repurchase up to 1.5 million additional shares of our common stock. There is no expiration date speciﬁed
for the authorization and we intend to repurchase stock under the plan from time to time. Our bank credit agreement contains
restrictions on the amount of common stock we may purchase.

p17

Tyler Technologies Selected Financial Data

SELECTED FINANCIAL DATA

In thousands, except per share data

2008

2007

2006

2005

2004

For the Years Ended December 31,

STATEMENT OF OPERATIONS DATA:

Revenues
Costs and expenses:
Cost of revenues (1)
Selling, general and administrative expenses (1)
Research and development expense
Restructuring charge
Amortization of customer and trade name intangibles
Non-cash legal settlement related to warrants (2)
Operating income
Other income, net
Income from operations before income taxes
Income tax provision
Net income
Net income per diluted share
Weighted average diluted shares

STATEMENT OF CASH FLOWS DATA:

Cash ﬂows provided by operating activities
Cash ﬂows (used by) provided by investing activities
Cash ﬂows used by ﬁnancing activities

BALANCE SHEET DATA:

Total assets
Shareholders’ equity

$ 265,101

$ 219,796

$ 195,303

$ 170,457

$ 172,270

155,314
62,923
7,286
–
2,438
9,045
28,095
1,181
29,276
14,414
$ 14,862
0.38
$
39,184

135,371
51,724
4,443
–
1,478
–
26,780
1,800
28,580
11,079
$ 17,501
0.42
$
41,352

120,499
48,389
3,322
–
1,318
–
21,775
1,080
22,855
8,493
$ 14,362
0.34
$
41,868

108,970
43,821
2,421
1,260
1,266
–
12,719
906
13,625
5,432
$ 8,193
0.19
$
42,075

108,432
42,931
2,520
–
1,267
–
17,120
317
17,437
7,309
$ 10,128
0.23
$
44,566

$ 47,802
(9,554)
(46,128)

$ 34,111
(34,275)
(7,406)

$ 26,804
(24,326)
(5,999)

$ 21,187
1,820
(14,847)

$ 22,159
(9,914)
(9,940)

$ 251,761
114,262

$ 241,508
137,211

$ 220,276
125,875

$ 194,437
112,197

$ 190,487
118,400

(1) Eﬀective January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based

Payment” using the modiﬁed-prospective method. In 2008, 2007 and 2006, respectively, cost of revenues included $364,000, $227,000 and
$147,000 share-based compensation expense. Selling, general and administrative expenses in 2008, 2007 and 2006, respectively, included $3.5
million, $2.1 million and $1.8 million share-based compensation expense. In accordance with the standard, results of operations for the years prior
to 2006 are reported under the previous accounting standard and no expense was recorded.

(2) On June 27, 2008, we settled outstanding litigation related to two Stock Purchase Warrants (the “Warrants”) owned by Bank of America,
N. A. (“BANA”). As disclosed in prior SEC ﬁlings, the Warrants entitled BANA to acquire 1.6 million shares of Tyler common stock at an exercise
price of $2.50 per share. Following court-ordered mediation, in July 2008, BANA paid us $2.0 million and we issued to BANA 801,883 restricted
shares of Tyler common stock. Accordingly, we recorded a non-cash legal settlement related to warrants charge of $9.0 million, which was not
tax deductible.

p18

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations 2008 Annual Report

FORWARDLOOKING STATEMENTS

In addition to historical information, this Annual Report contains forward-looking statements. The forward-looking statements are made
in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to diﬀer materially from those reﬂected in the forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking statements, which reﬂect management’s opinions only as of the
date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers
should carefully review the risk factors described in this Annual Report and other documents we ﬁle from time to time with the SEC.

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 are intended to identify
forward-looking statements.

OVERVIEW

General

We provide integrated information management solutions and services for local governments. We develop and market a broad line of
software products and services to address the information technology (“IT”) needs of cities, counties, schools and other local
government entities. In addition, we provide professional IT services to our customers, including software and hardware installation,
data conversion, training and for certain customers, product modiﬁcations, along with continuing maintenance and support for
customers using our systems. We also provide subscription-based services such as application service provider arrangements and other
hosting services as well as property appraisal outsourcing services for taxing jurisdictions.

Our products are generally grouped into four major areas:

(cid:116) Financial Management and Education;
(cid:116) Courts and Justice;
(cid:116) Property Appraisal and Tax; and
(cid:116) Public Records and Content Management.

We monitor and analyze several key performance indicators in order to manage our business and evaluate our ﬁnancial and operating
performance. These indicators include the following:

(cid:116) Revenues – We derive our revenues from ﬁve primary sources: sale of software licenses; subscription-based services; software

services; appraisal services; and maintenance and support. Because the majority of the software we sell is “oﬀ-the-shelf,” increased
sales of software products generally result in incrementally higher gross margins. Thus, the most signiﬁcant driver to our business
is the number and size of software license sales. In addition, new software license sales generally generate implementation services
revenues as well as future maintenance and support revenues, which we view as a recurring revenue source. We also monitor our
customer base and churn since our maintenance and support revenue should increase due to our historically low customer turnover.

(cid:116) Cost of Revenues and Gross Margins – Our primary cost component is personnel expenses in connection with providing software
implementation, subscription-based services, maintenance and support, and appraisal services to our customers. We can improve
gross margins by controlling headcount and related costs and by expanding our revenue base, especially from those products and
services that produce incremental revenue with minimal incremental cost, such as software licenses, subscription-based services,
and maintenance and support. Our appraisal projects are seasonal in nature, and we often employ appraisal personnel on a short-
term basis to coincide with the life of a project. As of December 31, 2008, our total full-time equivalent employee count increased
to 1,940 from 1,627 at December 31, 2007. The majority of these additions were to our implementation and support staﬀ,
including additions to our capacity to deliver our backlog. Our implementation and support staﬀ at December 31, 2008 includes
102 full-time equivalent employees added as a result of three acquisitions completed in 2008.

p19

Tyler Technologies Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

(cid:116) Selling, General and Administrative (“SG&A”) Expenses – The primary components of SG&A expense are administrative and

sales personnel salaries and commissions, marketing expense, rent and professional fees. Sales commissions generally ﬂuctuate with
revenues but other administrative expenses tend to grow at a slower rate than revenues.

(cid:116) Liquidity and Cash Flows – The primary driver of our cash ﬂows is net income. Uses of cash include acquisitions, capital

investments in property and equipment and software development and the discretionary purchases of treasury stock. In 2008, we
purchased 4.3 million shares of our common stock at an aggregate purchase price of $59.0 million. Almost half of our treasury
stock purchases occurred in the fourth quarter of 2008. During 2008 we also used cash of $23.9 million to acquire three
companies and invested $20.1 million in property and equipment. Our investment in property and equipment included $16.0
million for land, oﬃce buildings and a related tenant lease. Our working capital needs are fairly stable throughout the year with the
signiﬁcant components of cash outﬂows being payment of personnel expenses oﬀset by cash inﬂows representing collection of
accounts receivable and cash receipts from customers in advance of revenue being earned.

(cid:116) Balance Sheet – Cash, accounts receivable and days sales outstanding and deferred revenue balances are important indicators of

our business.

Acquisitions

We completed the acquisitions of School Information Systems, Inc., VersaTrans Solutions Inc. and certain assets of Olympia
Computing Company, Inc. d/b/a Schoolmaster to expand our presence in the education market. The combined purchase price,
excluding cash acquired and including transaction costs, was approximately $23.9 million in cash and approximately 196,000
shares of Tyler common stock valued at $2.9 million. In connection with these transactions we acquired total tangible assets of
approximately $3.5 million and assumed total liabilities of approximately $8.2 million.

Outlook

The ﬁnancial market crisis has continued to disrupt credit and equity markets worldwide and has led to continued weakening in the
global economic environment during the ﬁrst quarter of 2009. Local and state governments may face ﬁnancial pressures that could in
turn aﬀect our growth rate in the ﬁrst quarter of 2009 and for the calendar year. Consistent with our historical trends, we expect that
ﬁrst quarter 2009 earnings will not reach the level achieved in the fourth quarter of 2008; however, we currently do not anticipate a
material negative impact for the 2009 ﬁrst quarter due to the current economic downturn.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of ﬁnancial condition and results of operations is based upon our ﬁnancial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these ﬁnancial
statements requires us to make estimates and judgments that aﬀect the reported amounts of assets and liabilities at the date of the
ﬁnancial statements, the reported amounts of revenues, cost of revenues and expenses during the reporting period, and related disclosure
of contingent assets and liabilities. The Notes to the Financial Statements included as part of this Annual Report describe our signiﬁcant
accounting policies used in the preparation of the ﬁnancial statements. Signiﬁcant items subject to such estimates and assumptions
include the application of the percentage-of-completion and proportionate performance methods of revenue recognition, the carrying
amount and estimated useful lives of intangible assets, determination of share-based compensation expense and valuation allowance for
receivables. We base our estimates on historical experience and on various other assumptions that we believe 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.

We believe the following critical accounting policies aﬀect signiﬁcant judgments and estimates used in the preparation of our
ﬁnancial statements.

Revenue Recognition. We recognize revenues in accordance with the provisions of Statement of Position (“SOP”) 97-2, “Software
Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, as well as Technical Practice Aids issued from time to time by the

p20

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations 2008 Annual Report

American Institute of Certiﬁed Public Accountants, and in accordance with the Securities and Exchange Commission Staﬀ Accounting
Bulletin No. 104 “Revenue Recognition.” We recognize revenue on our appraisal services contracts using the proportionate
performance method of accounting, with considerations for the provisions of Emerging Issue Task Force (“EITF”) No. 00-21,
“Revenue Arrangements with Multiple Deliverables.” Our revenues are derived from sales of software licenses, subscription-based
services, appraisal services, maintenance and support, and services that 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 that are considered essential to the functionality of the software, we generally record revenue when
the delivered products or performed services result in a legally enforceable and non-refundable claim. We maintain allowances for
doubtful accounts and sales adjustments, which are provided at the time the revenue is recognized. Because most of our customers are
governmental entities, we rarely incur a loss resulting from the inability of a customer to make required payments. In a limited number
of cases, we encounter a customer who is dissatisﬁed with some aspect of the software product or our service, and we may oﬀer a
“concession” to such customer. In those limited situations where we grant a concession, we rarely reduce the contract arrangement fee,
but alternatively may perform additional services, such as additional training or programming a minor feature the customer had in
their prior software solution. These amounts have historically been considered nominal. In connection with our customer contracts and
the adequacy of related allowances and measures of progress towards contract completion, our project managers are charged with
the responsibility to continually review the status of each customer on a speciﬁc contract basis. Also, we review, on at least a quarterly
basis, signiﬁcant past due accounts receivable and the adequacy of related reserves. Events or changes in circumstances that indicate
that the carrying amount for the allowances for doubtful accounts and sales adjustments may require revision, include, but are not
limited to, deterioration of a customer’s ﬁnancial condition, failure to manage our customer’s expectations regarding the scope of the
services to be delivered, and defects or errors in new versions or enhancements of our software products.

For those software arrangements that involve signiﬁcant production, modiﬁcation or customization of the software, which is
considered essential to its functionality, and for substantially all property appraisal outsourcing projects, we recognize revenue and
proﬁt as the work progresses using the percentage-of-completion method and the proportionate performance method of revenue
recognition. These methods rely on estimates of total expected contract revenue, billings and collections and expected contract costs,
as well as measures of progress toward completion. We believe reasonably dependable estimates of revenue and costs and progress
applicable to various stages of a contract can be made. At times, we perform additional and/or non-contractual services for little to no
incremental fee to satisfy customer expectations. If changes occur in delivery, productivity or other factors used in developing
our estimates of expected costs or revenues, we revise our cost and revenue estimates, and any revisions are charged to income in the
period in which the facts that give rise to that revision ﬁrst become known.

We use contract accounting, primarily the percentage-of-completion method, and apply the provisions of SOP No. 81-1 “Accounting
for Performance of Construction—Type and Certain Production—Type Contracts” for those software arrangements that involve signiﬁcant
production, modiﬁcation or customization of the software, or where our software services are otherwise considered essential to the
functionality of the software. In addition, we recognize revenue using the proportionate performance method of revenue recognition for our
property appraisal projects, some of which can range up to three years. In connection with these and certain other contracts, we may
perform the work prior to when the services are billable and/or payable pursuant to the contract. The termination clauses in most of our
contracts provide for the payment for the fair value of products delivered and services performed in the event of an early termination.

For subscription-based services such as application service provider arrangements and other hosting arrangements, we evaluate
whether each of the elements in these arrangements represents a separate unit of accounting, as deﬁned by EITF 00-21, using all
applicable facts and circumstances, including whether (i) we sell or could readily sell the element unaccompanied by the other
elements, (ii) the element has stand-alone value to the customer, (iii) there is objective reliable evidence of the fair value of the
undelivered item, and (iv) there is a general right of return. We consider the applicability of EITF No. 00-03, “Application of
SOP 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware” on a contract-by-contract
basis. In hosted term-based agreements, where the customer does not have the contractual right to take possession of the software,
hosting fees are recognized on a monthly basis over the term of the contract commencing when the customer has access to the
software. For professional services associated with hosting arrangements that we determine do not have stand-alone value to the

p21

Tyler Technologies Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

customer, we recognize the services revenue ratably over the remaining contractual period once hosting has gone live and we may
begin billing for the hosting services. We record amounts that have been invoiced in accounts receivable and in deferred revenue or
revenues, depending on whether the revenue recognition criteria have been met.

In connection with certain of our contracts, we have recorded retentions receivable or unbilled receivables consisting of costs and
estimated proﬁt in excess of billings as of the balance sheet date. Many of the contracts which give rise to unbilled receivables at a given
balance sheet date are subject to billings in the subsequent accounting period. Management reviews unbilled receivables and related
contract provisions to ensure we are justiﬁed in recognizing revenue prior to billing the customer and that we have objective evidence
which allows us to recognize such revenue. In addition, we have a sizable amount of deferred revenue which represents billings in
excess of revenue earned. The majority of this liability consists of maintenance billings for which payments are made in advance and
the revenue is ratably earned over the maintenance period, generally one year. We also have deferred revenue for those contracts in
which we receive a deposit and the conditions in which to record revenue for the service or product has not been met. On a periodic
basis, we review by customer the detail components of our deferred revenue to ensure our accounting remains appropriate.

Intangible Assets and Goodwill. Our business acquisitions typically result in the creation of goodwill and other intangible asset
balances, and these balances aﬀect the amount and timing of future period amortization expense, as well as expense we could possibly
incur as a result of an impairment charge. The cost of acquired companies is allocated to identiﬁable tangible and intangible assets
based on estimated fair value, with the excess allocated to goodwill. Accordingly, we have a signiﬁcant balance of acquisition date
intangible assets, including software, customer related intangibles, trade name and goodwill. In addition, we capitalize software
development costs incurred subsequent to the establishment of technological feasibility. These intangible assets are amortized over
their estimated useful lives. All intangible assets with deﬁnite and indeﬁnite lives are reviewed for impairment annually or whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of goodwill is generally measured by a comparison of the carrying amount of an asset to its fair value, generally
determined by estimated future net cash ﬂows expected to be generated by the asset. We evaluate goodwill for impairment annually
as of April, or more frequently if impairment indicators arise. An impairment loss is recognized to the extent that the carrying
amount exceeds the asset’s fair value. The fair values calculated in our impairment tests are determined using discounted cash ﬂow
models involving several assumptions. These assumptions include, but are not limited to, anticipated operating income growth rates,
our long-term anticipated operating income growth rate and the discount rate. The assumptions that are used are based upon what
we believe a hypothetical marketplace participant would use in estimating fair value. We have identiﬁed two reporting units for
impairment testing. The appraisal services and appraisal software stand-alone business unit qualiﬁed as a reporting unit since it is one
level below an operating segment, discrete ﬁnancial information exists for the business unit and the executive management group
directly reviews this business unit. The other software business units were aggregated into the other single reporting unit. The
appraisal services and appraisal software stand-alone business unit is organized in such a manner that both of its revenue sources are
tightly integrated with each other and discrete ﬁnancial information at the operating proﬁt level does not exist for this business unit’s
respective revenue sources. Recoverability of other intangible assets is generally measured by comparison of the carrying amount to
estimated undiscounted future cash ﬂows.

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 is not achieved. Events or changes in circumstances that indicate the carrying amount may
not be recoverable include, but are not limited to, a signiﬁcant decrease in the market value of the business or asset acquired, a
signiﬁcant adverse change in the extent or manner in which the business or asset acquired is used, or a signiﬁcant adverse change in
the business climate. In addition, products, capabilities, or technologies developed by others may render our software products
obsolete or non-competitive.

Share-Based Compensation. We have a stock option plan that provides for the grant of stock options to key employees, directors and
non-employee consultants. We estimate the fair value of share-based awards on the date of grant using the Black-Scholes option
valuation model. Share-based compensation expense includes the estimated eﬀects of forfeitures, which will be adjusted over
the requisite service period to the extent actual forfeitures diﬀer, or are expected to diﬀer from such estimates. Changes in estimated

p22

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations 2008 Annual Report

forfeitures are recognized in the period of change and will also impact the amount of expense to be recognized in future periods.
Forfeiture rate assumptions are derived from historical data. We estimate stock price volatility at the date of grant based on the
historical volatility of our common stock. Estimated option life is determined using the “simpliﬁed method” in accordance with Staﬀ
Accounting Bulletin No. 110. Determining the appropriate fair-value model and calculating the fair value of share-based awards at
the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates.

ANALYSIS OF RESULTS OF OPERATIONS AND OTHER

The following discussion compares the historical results of operations on a basis consistent with GAAP for the years ended
December 31, 2008, 2007 and 2006.

2008 Compared to 2007

Revenues

The following table sets forth a comparison of the key components of our revenues for the following years ended December 31:

($ in thousands)

Software licenses
Subscriptions
Software services
Maintenance
Appraisal services
Hardware and other
Total revenues

Change

2008

% of Total

2007

% of Total

$ 41,490
14,374
74,997
107,458
19,098
7,684
$ 265,101

16%
5
28
41
7
3
100%

$ 35,063
10,406
60,283
85,411
21,318
7,315
$ 219,796

16%
5
27
39
10
3
100%

$ 6,427
3,968
14,714
22,047
(2,220)
369
$ 45,305

18%
38
24
26
(10)
5
21%

Software licenses. Software license revenues consist of the following components for the following years ended December 31:

($ in thousands)

2008

% of Total

2007

% of Total

Financial management and education
Courts and justice
Appraisal and tax and other
Total software license revenues

$ 27,323
10,128
4,039
$ 41,490

66%
24
10
100%

$ 24,988
5,987
4,088
$ 35,063

71%
17
12
100%

$ 2,335
4,141
(49)
$ 6,427

9%
69
(1)
18%

Change

In 2008 we signed 72 material new contracts with average software license fees of approximately $311,000, compared to 86 material
new contracts signed in 2007 with average software license fees of approximately $434,000. We consider contracts with a license fee
component of $100,000 or more to be material. Average software license fees in 2007 included the impact of one courts and justice
statewide contract that contained an unusually large amount of software license fees. Although a contract is signed in a particular
year, the year in which the revenue is recognized may be diﬀerent because we recognize revenue according to our revenue recognition
policy as described in Note 1 in the Notes to Financial Statements.

Changes in software license revenues consist of the following components:

(cid:116) Software license revenue related to our ﬁnancial management and education solutions for 2008 increased 9% compared to the
prior year. Revenue from student information management solutions as well as student transportation management solutions
acquired in the last twelve months contributed substantially to the increase. The remaining increase was mainly due to contract
arrangements that included more software license revenue than in the past.

(cid:116) Software license revenue related to our courts and justice software solutions increased 69% for 2008 compared to the prior year.

New statewide contracts in Indiana and New Mexico contributed approximately two-thirds of the increase. The remaining increase was
primarily due to an expanded presence in the markets for municipal courts software solutions and public safety software solutions.

p23

Tyler Technologies Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

Subscriptions. Subscription-based services revenue primarily consists of revenues derived from application service provider (“ASP”)
arrangements and other hosted service oﬀerings, software subscriptions and disaster recovery services. ASP and other software
subscriptions agreements are typically for periods of three to six years and automatically renew unless either party cancels the
agreement. Disaster recovery and miscellaneous other hosted service agreements are typically renewable annually. New ASP customers
and existing customers converting to ASP arrangements provided the majority of the subscription revenue increase with the
remaining increase due to new disaster recovery customers and slightly higher rates for disaster recovery services.

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

(cid:116) Software services revenue related to ﬁnancial management and education solutions, which comprises approximately half of our
software services revenue in the years presented, increased substantially compared to 2007. This increase was driven in part by
increased capacity to deliver backlog following additions to our implementation and support staﬀ since 2007 and due to larger and
more complex contracts, which include more programming and project management services. In addition, we acquired a student
transportation management solution in January 2008 which contributed approximately $3.9 million to software service revenues
in 2008. Excluding the impact of acquisitions, we have added approximately 95 full-time equivalent employees to our ﬁnancial
management and education implementation and training staﬀ since 2007.

(cid:116) Software services revenue related to our courts and justice solutions experienced strong increases compared to 2007, reﬂecting
increased capacity to deliver backlog following additions to our implementation and support staﬀ since mid-2007. In addition,
increased contract volume for municipal courts software solutions and public safety software solutions also generated higher related
services revenue. We have added approximately 12 full-time equivalent employees to our courts and justice implementation and
training staﬀ since 2007.

Maintenance. We provide maintenance and support services for our software products and third party software. Maintenance
revenues increased 26% in 2008 compared to 2007. Maintenance and support services grew 16% in 2008, excluding the impact of
acquisitions completed in the prior twelve months. This increase was due to growth in our installed customer base and slightly higher
maintenance rates on most of our product lines.

Appraisal services. Appraisal services revenue declined 10% in 2008 compared to 2007. The appraisal services business is driven in
part by revaluation cycles in various states. In late 2007, we substantially completed several projects related to the Ohio revaluation
cycle, which occurs every six years, as well as a few other large contracts. Appraisal revenues for the ﬁrst six months of 2008 were
down 23% compared to the ﬁrst six months of 2007. In mid-2008 we began a complete reappraisal of real property in Orleans
Parish, Louisiana. This contract is valued at approximately $12.0 million and consists of two separate phases expected to be complete
by late 2010. As a result of this contract and an overall increase in contract volume, appraisal revenues for the last six months of 2008
increased 4% over the last six months of 2007. In 2009, we expect appraisal revenue to increase over 2008 by a modest amount.

Cost of Revenues and Gross Margins

The following table sets forth a comparison of the key components of our cost of revenues and those components stated as a
percentage of related revenues for the following years ended December 31:

($ in thousands)

Software licenses
Acquired software
Software services, maintenance and subscriptions
Appraisal services
Hardware and other
Total cost of revenues

2008

$ 9,224
1,799
126,247
12,251
5,793
$ 155,314

% of Related
Revenues

22%
4
64
64
75
59%

2007

$ 7,953
2,279
104,993
14,467
5,679
$ 135,371

% of Related
Revenues

Change

23%
7
67
68
78
62%

$ 1,271
(480)
21,254
(2,216)
114
$ 19,943

16%
(21)
20
(15)
2
15%

p24

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations 2008 Annual Report

The following table sets forth a comparison of gross margin percentage by revenue type for the periods presented for the following
years ended December 31:

Gross Margin Percentages

Software licenses and acquired software
Software services, maintenance and subscriptions
Appraisal services
Hardware and other
Overall gross margin

2008

2007

Change

73.4%
35.9
35.9
24.6
41.4%

70.8%
32.7
32.1
22.4
38.4%

2.6%
3.2
3.8
2.2
3.0%

Software license. Approximately one-half of our cost of software license revenues is amortization expense for capitalized development
costs on certain software products, with third party software costs making up the balance. Once a product is released, we begin to
amortize, over the estimated useful life of the product, any capitalized costs associated with its development. Amortization expense is
determined on a product-by-product basis at an annual rate not less than straight-line basis over the product’s estimated life, which
is generally ﬁve years. Development costs consist mainly of personnel costs, such as salary and beneﬁts paid to our developers, and rent
for related oﬃce space.

In 2008, our software license gross margin percentage rose compared to the prior year mainly due to strong license fee revenue
increases. Because approximately one-half of our cost of software license revenues is comprised of amortization of capitalized
development costs, increased license fee revenues inherently result in higher gross margins.

Software services, maintenance and subscription-based services. Cost of software services, maintenance and subscriptions primarily
consists of personnel costs related to installation of our software, conversion of customer data, training customer personnel and
support activities and various other services such as ASP and disaster recovery. In 2008, the software services, maintenance and
subscriptions gross margin increased compared to the prior year partly because maintenance and various other services such as ASP
and disaster recovery costs typically grow at a slower rate than related revenues due to leverage in the utilization of our support
and maintenance staﬀ and economies of scale. We have increased our implementation and support staﬀ by 215 full-time equivalent
employees since 2007 in order to expand our capacity to implement our contract backlog. This increase includes 102 full-time
equivalent employees related to acquisitions completed since 2007.

Appraisal services. A high proportion of the costs of appraisal services revenue are variable, as we often hire temporary employees to
assist in appraisal projects whose term of employment generally ends with the projects’ completion. Our appraisal gross margin for
2008 is higher than the prior year due to cost savings associated with a signiﬁcant complex reappraisal project.

Our blended gross margin in 2008 was higher than the prior year in large part due to leverage in the utilization of our support and
maintenance staﬀ and economies of scale, with resulting increases in gross margin for each revenue category.

Selling, General and Administrative Expenses

The following table sets forth a comparison of our selling, general and administrative (“SG&A”) expenses for the following years
ended December 31:

($ in thousands)

2008

% of
Revenues

2007

% of
Revenues

Change

Selling, general and administrative expenses

$ 62,923

24%

$ 51,724

24%

$ 11,199

22%

Excluding the impact of acquisitions, our full-time equivalent SG&A employee count increased 9% from 2007.

p25

Tyler Technologies Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

Research and Development Expense

The following table sets forth a comparison of our research and development expense for the following years ended December 31:

($ in thousands)

Research and development expense

2008

$ 7,286

% of
Revenues

2007

% of
Revenues

Change

$ 4,443

$ 2,843

64%

Research and development expense mainly consist of costs associated with the Microsoft Dynamics AX project, in addition to costs
associated with other new product development eﬀorts. In January 2007, we entered into a strategic alliance with Microsoft
Corporation to jointly develop core public sector functionality for Microsoft Dynamics AX to address the accounting needs of public
sector organizations worldwide. Research and development costs increased over the prior year because the Microsoft Dynamics AX
development eﬀort was not fully staﬀed until mid-2007. In 2008 and 2007, we oﬀset our research and development expense by $1.8
million and $1.6 million, respectively, which were the amounts earned under the terms of our research and development agreement
with Microsoft. We amended this agreement in September 2008 to deﬁne the scope of reimbursable development through the
balance of the project and now expect to oﬀset research and development expense by approximately $850,000 each quarter through
the end of 2010. The actual amount and timing of future research and development costs and related reimbursements and whether
they are capitalized or expensed may vary.

Non-Cash Legal Settlement Related to Warrants

On June 27, 2008, we settled outstanding litigation related to the Warrants owned by BANA. As disclosed in prior SEC ﬁlings, the
Warrants entitled BANA to acquire 1.6 million shares of Tyler common stock at an exercise price of $2.50 per share. Following court-
ordered mediation, in July 2008, BANA paid us $2.0 million and we issued to BANA 801,883 restricted shares of Tyler common stock.
Accordingly, we recorded a non-cash legal settlement related to warrants charge of $9.0 million, which is not tax deductible.

Amortization of Customer and Trade Name Intangibles

Acquisition intangibles are comprised of the excess of the purchase price over the fair value of net tangible assets acquired that is
allocated to acquired software and customer and trade name intangibles. The remaining excess purchase price is allocated to goodwill
that is not subject to amortization. Amortization expense related to acquired software is included with cost of revenues, while
amortization expense of customer and trade name intangibles is recorded as a non-operating expense. The estimated useful lives of
both customer and trade name intangibles are 5 to 25 years. The following table sets forth a comparison of amortization of customer
and trade name intangibles for the following years ended December 31:

($ in thousands)

2008

2007

Change

Amortization of customer and trade name intangibles

$ 2,438

$ 1,478

$ 960

65%

In 2008, we completed three acquisitions, which increased amortizable customer and trade name intangibles by $12.3 million. This
amount will be amortized over approximately 11 years.

Estimated annual amortization expense relating to customer and trade name acquisition intangibles, excluding acquired software for
which the amortization expense is recorded as cost of revenues, for the next ﬁve years is as follows (in thousands):

2009
2010
2011
2012
2013

$ 2,591
2,591
2,575
2,508
2,365

p26

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations 2008 Annual Report

Other

Interest income was the main component of other income in both 2008 and 2007. Other income in 2008 also includes non-usage
and other fees associated with a credit agreement entered into in October 2008. Interest income in 2008 was $1.1 million compared
to $1.8 million in 2007. Interest income declined due to lower invested cash balances and slightly lower interest rates. Our
invested cash balances declined due to increased purchases of treasury stock and investments in oﬃce buildings and land in 2008.

Income Tax Provision

The following table sets forth a comparison of our income tax provision for the following years ended December 31:

($ in thousands)

Income tax provision
Eﬀective income tax rate

Change

2008

2007

$ 14,414

$ 11,079

$ 3,335

30%

49.2%

38.8%

Our eﬀective income tax rate increased approximately twelve points compared to the prior year due to a non-cash legal settlement
related to warrants charge of $9.0 million, which was not deductible. The eﬀective income tax rates were diﬀerent from the statutory
United States federal income tax rate of 35% primarily due to non-cash legal settlement related to warrants charge which was not
deductible, as well as state income taxes, non-deductible share-based compensation expense, the qualiﬁed manufacturing activities
deduction, and non-deductible meals and entertainment costs.

Slightly less than half of our stock option awards qualify as an incentive stock option (“ISO”) for income tax purposes. As such, a tax
beneﬁt is not recorded at the time the compensation cost related to the options is recorded for book purposes due to the fact that
an ISO does not ordinarily result in a tax beneﬁt unless there is a disqualifying disposition. Non-qualiﬁed stock options result in the
creation of a deferred tax asset, which is a temporary diﬀerence, until the time that the option is exercised. Due to the treatment of
ISOs for tax purposes, our eﬀective tax rate from year to year is subject to variability.

2007 Compared to 2006

Revenues

The following table sets forth a comparison of the key components of our revenues for the following years ended December 31:

($ in thousands)

Software licenses
Subscriptions
Software services
Maintenance
Appraisal services
Hardware and other
Total revenues

Change

2007

% of Total

2006

% of Total

$ 35,063
10,406
60,283
85,411
21,318
7,315
$ 219,796

16%
5
27
39
10
3
100%

$ 37,247
7,298
50,861
73,413
19,755
6,729
$ 195,303

19%
4
26
38
10
3
100%

$ (2,184)
3,108
9,422
11,998
1,563
586
$ 24,493

(6)%
43
19
16
8
9
13%

Software licenses. Software license revenues consist of the following components for the following years ended December 31:

($ in thousands)

2007

% of Total

2006

% of Total

Financial management and education
Courts and justice
Appraisal and tax and other
Total software license revenues

$ 24,988
5,987
4,088
$ 35,063

71%
17
12
100%

$ 27,292
4,756
5,199
$ 37,247

73%
13
14
100%

$ (2,304)
1,231
(1,111)
$ (2,184)

(8)%
26
(21)
(6)%

Change

p27

Tyler Technologies Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

Changes in software license revenues consist of the following components:

(cid:116) Software license revenue related to our ﬁnancial management and education solutions for 2007 decreased 8% compared to the

prior year. Over half the decline was due to product mix in 2007 that required less third party software. A portion of the
remaining decline was mainly due to a number of customers in 2007 choosing our subscription-based options, rather than
purchasing the software under a traditional perpetual software license arrangement. Although these customers represented
a relatively small percentage of new customers, the size of those contracts was larger than in the prior year. Subscription-based
arrangements result in lower software license revenues in the initial year as compared to traditional perpetual software license
arrangement but generate higher overall subscription-based services revenue over the term of the contract.

(cid:116) Software license revenue related to our courts and justice software solutions increased 26% for 2007 compared to the prior year.

In the fourth quarter of 2007 we recorded software license revenue of approximately $1.3 million from a contract which had been
deferred in accordance with the terms of the contract.

(cid:116) Appraisal and tax and other software license declined 21% in 2007 compared to the prior year primarily due to the deferral
of software license revenue on a customer arrangement pending establishment of a revised timeline for the completion of certain
development and implementation services.

Subscriptions. In 2007, new ASP customers provided approximately two-thirds of the subscription revenue increase due to further
expansion into existing markets and new markets such as Pennsylvania and Texas.

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

(cid:116) Software services revenue related to ﬁnancial management and education solutions, which comprises approximately half of our

software services revenue in the years presented, experienced modest increases in 2007 compared to the prior year due to increased
contract volume and additions to implementation and training staﬀ which enabled us to deliver our backlog at a faster rate.
Excluding the impact of acquisitions we added approximately 40 people to our ﬁnancial management and education
implementation and training staﬀ during 2007.

(cid:116) Software services revenue related to our courts and justice solutions experienced substantial increases in 2007 compared to the prior
year, reﬂecting increased contract volume. We had approximately 34 active Odyssey contracts in 2007 compared to approximately
25 active Odyssey contracts in 2006, primarily due to continued expansion in Texas and Florida and a new contract with Indiana.
We added approximately 50 people to our courts and justice implementation and training staﬀ during 2007.

(cid:116) Software services revenue related to appraisal and tax and other solutions, which comprise approximately 25% of our software

services revenue in the periods presented, had moderate increases for 2007 compared to 2006. The majority of the increase
is related to one large appraisal and tax software implementation, which was substantially completed by December 31, 2007.

Maintenance. Maintenance revenues increased over the prior year due to growth in our installed customer base and slightly higher
maintenance rates on most of our solutions.

Appraisal services. Appraisal services revenue for 2007 was 8% higher than 2006. The increase was due to activity related to Ohio’s
revaluation cycle, which occurs every six years, and a $4.0 million contract with Fulton County, Georgia, which began late in 2006.
The Ohio revaluation projects began with smaller counties late in the ﬁrst quarter of 2006 and expanded to larger counties by the
third quarter of 2006. A substantial portion of the Ohio revaluation projects was complete by December 31, 2007.

p28

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations 2008 Annual Report

Cost of Revenues and Gross Margins

The following table sets forth a comparison of the key components of our cost of revenues and those components stated as a
percentage of related revenues for the following years ended December 31:

($ in thousands)

Software licenses
Acquired software
Software services, maintenance and subscriptions
Appraisal services
Hardware and other
Total cost of revenues

2007

$ 7,953
2,279
104,993
14,467
5,679
$ 135,371

% of Related
Revenues

23%
7
67
68
78
62%

2006

$ 9,968
1,360
90,601
13,563
5,007
$ 120,499

% of Related
Revenues

Change

27%
4
69
69
74
62%

$ (2,015)
919
14,392
904
672
$ 14,872

(20)%
68
16
7
13
12%

The following table sets forth a comparison of gross margin percentage by revenue type for the periods presented for the following
years ended December 31:

Gross Margin Percentages

Software licenses and acquired software
Software services, maintenance and subscriptions
Appraisal services
Hardware and other
Overall gross margin

2007

70.8%
32.7
32.1
22.4
38.4%

2006

69.6%
31.1
31.3
25.6
38.3%

Change

1.2%
1.6
0.8
(3.2)
0.1%

Software license. In 2007, our software license gross margin percentage increased slightly compared to the prior year because our
product mix in 2007 included less third party software, which has higher associated costs than proprietary software. The gross margin
also beneﬁted from lower amortization expense of software development costs because some products became fully amortized during
the ﬁrst quarter of 2006.

Software services, maintenance and subscription-based services. In 2007, the software services, maintenance and subscription gross
margin percentage increased 1.6% over the prior year because maintenance and various other services such as ASP and disaster
recovery costs typically grow at a slower rate than related revenues due to leverage in the utilization of our support and maintenance
staﬀ and economies of scale. We increased our implementation and support staﬀ by 162 full-time equivalent employees since
December 31, 2006. This increase includes 73 additional employees related to acquisitions completed in 2007. The remaining
additions were to increase our capacity to train and deliver our contract backlog, particularly for our courts and justice solutions.

Appraisal services. In 2007, higher revenues associated with increased activity on the Ohio revaluation projects contributed to the
slight appraisal services gross margin percentage increase.

Our blended gross margin for 2007 was ﬂat compared to the prior year due to a revenue mix that included less software license and
signiﬁcant additions to our development and implementation staﬀ to deliver our growing backlog. Software license revenue
inherently has higher gross margins than other revenues such as professional services and hardware. Although the revenue mix for
2007 also included less software license than the prior year, the negative impact on the gross margin was oﬀset by lower third party
software costs as well as lower amortization expense of software development costs described above.

p29

Tyler Technologies Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

Selling, General and Administrative Expenses

The following table sets forth a comparison of our selling, general and administrative (“SG&A”) expenses for the following years
ended December 31:

($ in thousands)

2007

% of Revenues

2006

% of Revenues

Selling, general and administrative expenses

$ 51,724

24%

$ 48,389

25%

$ 3,335

Change

SG&A costs grew at a slower rate than revenues in 2007 due to leverage in the utilization of our administrative and sales staﬀ.

Research and Development Expense

The following table sets forth a comparison of our research and development expense for the following years ended December 31:

($ in thousands)

2007

% of Revenues

2006

% of Revenues

Research and development expense

$ 4,443

$ 3,322

$ 1,121

34%

Change

For 2007, research and development expense included costs associated with the Microsoft Dynamics AX project, in addition to costs
associated with other new product development eﬀorts. In 2007, we reduced our research and development expense by $1.6 million,
which was the amount earned under the terms of our strategic alliance with Microsoft.

Other

In 2007 interest income was the main component of other income. Other income in 2006 also includes non-usage and other fees
associated with a credit agreement we terminated in January 2007 and gains and losses on risk management liabilities and assets
associated with a foreign exchange contract. Interest income in 2007 was $1.8 million compared to $1.4 million in 2006. The increase
in interest income was due to higher invested cash balances as the result of positive cash ﬂow in 2007.

Income Tax Provision

The following table sets forth a comparison of our income tax provision for the following years ended December 31:

($ in thousands)

Income tax provision
Eﬀective income tax rate

Change

2007

2006

$ 11,079

38.8%

$ 8,493
37.2%

$ 2,586

30%

The eﬀective income tax rates were diﬀerent from the statutory United States federal income tax rate of 35% primarily due to state
income taxes, non-deductible share-based compensation expense, the qualiﬁed manufacturing activities deduction, and
non-deductible meals and entertainment costs.

The eﬀective rate for 2006 was lower than the 2007 eﬀective tax rate mainly due to changes in the Texas franchise tax law and rates
enacted in the second quarter of 2006 and favorable state income tax audit results.

FINANCIAL CONDITION AND LIQUIDITY

As of December 31, 2008, we had cash and cash equivalents (including restricted cash equivalents) of $6.8 million and current
and non-current investments of $4.6 million, compared to cash and cash equivalents (including restricted cash equivalents) of
$14.1 million and short-term investments of $41.6 million at December 31, 2007. As of December 31, 2008, we had outstanding
borrowings of $8.0 million and outstanding letters of credit totaling $5.1 million to secure surety bonds required by some of our
customer contracts.

p30

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations 2008 Annual Report

The following table sets forth a summary of cash ﬂows for the years ended December 31:

($ in thousands)

Cash ﬂows provided by (used by):
Operating activities
Investing activities
Financing activities
Net decrease in cash and cash equivalents

2008

2007

2006

$ 47,802
(9,554)
(46,128)
$ (7,880)

$ 34,111
(34,275)
(7,406)
$ (7,570)

$ 26,804
(24,326)
(5,999)
$ (3,521)

Net cash provided by operating activities continues to be our primary source of funds to ﬁnance operating needs and capital
expenditures. Other capital resources include cash on hand, public and private issuances of debt and equity securities, and bank
borrowings. The capital and credit markets have become more volatile and tight as a result of adverse conditions that have caused the
failure and near failure of a number of large ﬁnancial services companies. It is possible that our ability to access the capital and credit
markets may be limited by these or other factors. Notwithstanding the foregoing, at this time, we believe that cash provided by
operating activities, cash on hand and our revolving credit agreement are suﬃcient to fund our working capital requirements, capital
expenditures, income tax obligations, and share repurchases for the foreseeable future.

In 2008, operating activities provided net cash of $47.8 million, primarily generated from net income of $14.9 million, non-cash
legal settlement related to warrants charge of $9.0 million, non-cash depreciation and amortization charges of $12.6 million,
non-cash share-based compensation expense of $3.8 million, and a decrease in net operating assets of $8.5 million. Net operating
assets declined mainly due to several advance payments from customers oﬀset somewhat by an increase in annual maintenance
billings processed in December.

Our short-term and non-current investments available-for-sale consist of auction rate municipal securities (“ARS”) which are
collateralized debt obligations supported by municipal and state agencies and do not include mortgage-backed securities. Short-term
investments available-for-sale consist of ARS which were sold at par during the period January 1, 2009 through February 20, 2009.

In association with this estimate of fair value, we have recorded an after tax temporary unrealized loss on our non-current ARS of
$387,000, net of related tax eﬀects of $209,000 in 2008, which is included in accumulated other comprehensive loss on our balance
sheet. As of December 31, 2008, we have continued to earn and collect interest on all of our ARS. We believe that this temporary
decline in fair value is due entirely to liquidity issues, because the underlying assets of these securities are supported by municipal and
state agencies and do not include mortgage-backed securities, have redemption features which call for redemption at 100% of par
value and have a current credit rating of A or AAA. The ratings on the ARS take into account credit support through insurance
policies guaranteeing each of the bonds’ payment of principal and accrued interest, if it becomes necessary. In addition, we do not
plan to sell any of the ARS prior to maturity at an amount below the original purchase value and, at this time, do not deem it
probable that we will receive less than 100% of the principal and accrued interest. Based on our cash and cash equivalents balance of
$6.8 million, expected operating cash ﬂows and the liquidation of $775,000 of ARS subsequent to the period ending December 31,
2008, we do not believe a lack of liquidity associated with our ARS will adversely aﬀect our ability to conduct business, and believe
we have the ability to hold the securities throughout the currently estimated recovery period. We have classiﬁed these securities as
non-current because we believe the market for these securities may take in excess of twelve months to fully recover. We will continue
to evaluate any changes in the market value of our non-current ARS and in the future, depending upon existing market conditions,
we may be required to record an other-than-temporary decline in market value.

p31

Tyler Technologies Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

At December 31, 2008, our days sales outstanding (“DSOs”) were 99 days compared to DSOs of 95 days at December 31, 2007.
DSOs are calculated based on accounts receivable (excluding long-term receivables) divided by the quotient of annualized quarterly
revenues divided by 360 days. The increase in DSOs is primarily due to an increase in maintenance billings processed in December.

Investing activities used cash of $9.6 million in 2008 compared to $34.3 million in 2007. In 2008, we liquidated $36.4 million of
ARS investments for cash at par, and we completed the acquisitions of School Information Systems, Inc., VersaTrans Solutions Inc.
and certain assets of Olympia Computing Company, Inc. d/b/a Schoolmaster to expand our presence in the education market. The
combined purchase price, excluding cash acquired and including transaction costs, was approximately $23.9 million in cash and
approximately 196,000 shares of Tyler common stock valued at $2.9 million. In connection with plans to consolidate workforces and
support planned long-term growth, we paid $3.3 million, which included $2.1 million for land, for an oﬃce development in
Lubbock, Texas. We also paid $12.7 million for an oﬃce building, land, and a related tenant lease in Yarmouth, Maine. Capital
expenditures and acquisitions were funded from cash generated from operations.

Investing activities in 2007 included cash payments of $9.0 million for the acquisitions of EDP Enterprises, Inc., Advanced Data
Systems, Inc. and certain other software assets. Other investing activities during 2007 were $22.1 million, net of sales, to purchase
ARS investments and $3.7 million in property and equipment. The property and equipment expenditures were related to computer
hardware and software and other asset additions to support internal growth. Investing activities in 2006 include cash payments
of $12.2 million and 325,000 shares of Tyler common stock for the acquisitions of MazikUSA, Inc. and TACS, Inc. and certain
maintenance and support agreements associated with one of our ﬁnancial solutions. Other investing activities during 2006 were
capital expenditures of $4.3 million, including $4.1 million for computer hardware and purchased software for internal use,
including a new enterprise-wide customer relationship management system, and other asset additions to support internal growth.

Cash used in ﬁnancing activities was primarily comprised of purchases of treasury shares, net of proceeds from stock option exercises
and contributions from our employee stock purchase plan. During 2008, we purchased 4.3 million shares of our common stock for
an aggregate purchase price of $59.0 million. Common stock purchases were funded primarily from cash from operations as well as
borrowings of $8.0 million under a revolving bank credit agreement entered into in late October. At December 31, 2008, we had
authorization to repurchase up to 1.5 million additional shares of Tyler common stock.

During 2007, we purchased approximately 1.3 million shares of our common stock for an aggregate purchase price of $16.2 million
($14.1 million in cash and $2.1 million in accrued liabilities at December 31, 2007.) In 2006 we purchased approximately
1.0 million shares of our common stock for an aggregate cash purchase price of $10.5 million.

In 2008 we received $1.8 million from the exercise of options to purchase approximately 379,000 shares of our common stock under
our employee stock option plan. During 2007, we received $3.6 million from the exercise of options to purchase approximately
878,000 shares of our common stock under our employee stock option plan and during 2006 we issued 623,000 shares of common
stock and received $2.9 million in aggregate proceeds upon exercise of stock options. In 2008 we received $1.2 million from
contributions to the Tyler Technologies, Inc. Employee Stock Purchase Plan (“ESPP”). In 2007 and 2006, we received $1.2 million
and $1.0 million, respectively, from contributions to the ESPP.

Subsequent to December 31, 2008 and through February 20, 2009 we purchased approximately 419,000 shares of our common
stock for an aggregate cash purchase price of $5.1 million.

On October 20, 2008, we entered into a revolving bank credit agreement (the “Credit Facility”) and a related pledge and security
agreement. The Credit Facility matures October 19, 2009 and provides for total borrowings of up to $25.0 million and a
$6.0 million Letter of Credit facility under which the bank will issue cash collateralized letters of credit. Borrowings under the Credit
Facility bear interest at a rate of either LIBOR plus 1% or prime rate minus 1.5%. As of December 31, 2008, our eﬀective interest
rate was 1.47% under the Credit Facility. The eﬀective average interest rate for borrowings during the period October 20 through
December 31, 2008 was 2.1%. The Credit Facility is secured by substantially all of our personal property. The Credit Facility requires
us to maintain certain ﬁnancial ratios and other ﬁnancial conditions and prohibits us from making certain investments, advances,
cash dividends or loans, restricts the amount of our common stock we may purchase and the limits incurrence of additional

p32

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations 2008 Annual Report

indebtedness and liens. We expect borrowings to fund discretionary purchases of our common stock or fund acquisitions and these
covenants are not expected to impact our ﬁnancial condition or operating performance. As of December 31, 2008, we were in
compliance with those covenants.

As of December 31, 2008, we had outstanding borrowings of $8.0 million and unused available borrowing capacity of $17.0 million
under the Credit Facility. In addition, as of December 31, 2008, our bank had issued outstanding letters of credit totaling
$5.1 million to secure surety bonds required by some of our customer contracts. These letters of credit have been collateralized by
restricted cash balances invested in a certiﬁcate of deposit. These letters of credit expire through mid-2009.

Excluding acquisitions, we anticipate that 2009 capital spending will be between $14.0 million and $16.0 million. Approximately
$11.0 million of these expenditures will be incurred to complete the construction of an oﬃce development in Lubbock, Texas. The
remainder of our 2009 expenditures are primarily related to computer equipment and software for infrastructure expansions. We
currently do not expect to capitalize signiﬁcant amounts related to software development in 2009, but the actual amount and timing
of those costs, and whether they are capitalized or expensed may result in additional capitalized software development. Capital
spending in 2009 is expected to be funded from existing cash balances and cash ﬂows from operations.

From time to time we engage in discussions with potential acquisition candidates. In order to pursue such opportunities, which could
require signiﬁcant commitments of capital, we may be required to incur debt or to issue additional potentially dilutive securities in
the future. No assurance can be given as to our future acquisition opportunities and how such opportunities will be ﬁnanced.

We lease oﬃce facilities, as well as transportation, computer and other equipment used in our operations under non-cancelable
operating lease agreements expiring at various dates through 2013. Most leases contain renewal options and some contain purchase
options. Following are the future obligations under non-cancelable leases at December 31, 2008 (in thousands):

Future rental payments under operating leases

$ 5,931

$ 4,489

$ 3,271

$ 2,153

$ 567

–

$ 16,411

2009

2010

2011

2012

2013 Thereafter

Total

As of December 31, 2008, we do not have any oﬀ-balance sheet arrangements, guarantees to third parties or material purchase
commitments, except for the operating lease commitments listed above.

CAPITALIZATION

At December 31, 2008, our capitalization consisted of $8.0 million of short-term debt and $114.3 million of shareholders’ equity.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2007, the Financial Accounting Standards Board issued SFAS No. 141R “Business Combinations.” SFAS No. 141R
changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business
combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the
recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the
treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance.
SFAS No. 141R is eﬀective for ﬁscal years beginning after December 15, 2008, with early adoption prohibited. The adoption of
SFAS No. 141R is not expected to have a material impact on our ﬁnancial statements or related disclosures.

In April 2008, the FASB issued FASB Staﬀ Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets.”
FSP No. 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the
useful life of recognized intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” This new
guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business
combinations and asset acquisitions. FSP No. 142-3 is eﬀective for ﬁnancial statements issued for ﬁscal years and interim periods
beginning after December 15, 2008. Early adoption is prohibited. The adoption of FSP No. 142-3 is not expected to have a material
impact on our ﬁnancial statements or related disclosures.

p33

Tyler Technologies Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may aﬀect us due to adverse changes in ﬁnancial market prices and interest rates. Our
short-term and non-current investments available-for-sale consist of ARS which are collateralized debt obligations supported by
municipal and state agencies and do not include mortgage-backed securities. Short-term investments available-for-sale consist of ARS
which were sold at par during the period January 1, 2009 through February 20, 2009.

p34

Report of Independent Registered Public Accounting Firm 2008 Annual Report

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Tyler Technologies, Inc.

We have audited the accompanying balance sheets of Tyler Technologies, Inc. as of December 31, 2008 and 2007, and the related
statements of operations, shareholders’ equity, and cash ﬂows for each of the three years in the period ended December 31, 2008.
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 the standards of the Public Company Accounting Oversight Board (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 ﬁnancial position of Tyler
Technologies, Inc. at December 31, 2008 and 2007, and the results of its operations and its cash ﬂows for each of the three years in
the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Tyler
Technologies, Inc.’s internal control over ﬁnancial reporting as of December 31, 2008, based on criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 25, 2009 expressed an unqualiﬁed opinion thereon.

Dallas, Texas
February 25, 2009

p35

Tyler Technologies Report of Independent Registered Public Accounting Firm

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Tyler Technologies, Inc.

We have audited Tyler Technologies, Inc.’s internal control over ﬁnancial reporting as of December 31, 2008, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Tyler Technologies, Inc.’s management is responsible for maintaining eﬀective internal control
over ﬁnancial reporting, and for its assessment of the eﬀectiveness of internal control over ﬁnancial reporting included in the
accompanying “Managements’ Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on
the company’s internal control over ﬁnancial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether eﬀective internal control
over ﬁnancial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over ﬁnancial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating eﬀectiveness
of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over ﬁnancial reporting is a process designed to provide reasonable assurance regarding the reliability of
ﬁnancial reporting and the preparation of ﬁnancial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over ﬁnancial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reﬂect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of ﬁnancial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
eﬀect on the ﬁnancial statements.

Because of its inherent limitations, internal control over ﬁnancial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of eﬀectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Tyler Technologies, Inc. maintained, in all material respects, eﬀective internal control over ﬁnancial reporting as of
December 31, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
balance sheets of Tyler Technologies, Inc. as of December 31, 2008 and 2007, and the related statements of operations, shareholders’
equity, and cash ﬂows for each of the three years in the period ended December 31, 2008 and our report dated February 25, 2009
expressed an unqualiﬁed opinion thereon.

Dallas, Texas
February 25, 2009

p36

Management’s Report on Internal Control Over Financial Reporting 2008 Annual Report

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Evaluation of Disclosure Controls and Procedures – We maintain disclosure controls and procedures (as deﬁned in Rule 13a-15(e)
of the Securities Exchange Act) designed to provide reasonable assurance that the information required to be disclosed by us in the
reports we ﬁle or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods
speciﬁed in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated
and communicated to our management, including our chief executive oﬃcer and chief ﬁnancial oﬃcer, as appropriate to allow
timely decisions regarding required disclosures. Management, with the participation of the chief executive oﬃcer and chief ﬁnancial
oﬃcer, evaluated the eﬀectiveness of our disclosure controls and procedures as of December 31, 2008. Based on this evaluation
the chief executive oﬃcer and chief ﬁnancial oﬃcer have concluded that our disclosure controls and procedures were eﬀective as of
December 31, 2008.

Management’s Report on Internal Control Over Financial Reporting – Tyler’s management is responsible for establishing and
maintaining eﬀective internal control over ﬁnancial reporting as deﬁned in Securities Exchange Act Rule 13a-15(f). Tyler’s internal
control over ﬁnancial reporting is designed to provide reasonable assurance to Tyler’s management and board of directors regarding
the preparation and fair presentation of published ﬁnancial statements.

Because of its inherent limitations, internal control over ﬁnancial reporting may not prevent or detect misstatements. Therefore,
even those systems determined to be eﬀective can provide only reasonable assurance with respect to ﬁnancial statement preparation
and presentation.

Management assessed the eﬀectiveness of Tyler’s internal control over ﬁnancial reporting as of December 31, 2008. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control – Integrated Framework. Based on our assessment, we believe that, as of December 31, 2008, Tyler’s
internal control over ﬁnancial reporting is eﬀective based on those criteria.

Management’s assessment of the eﬀectiveness of internal control over ﬁnancial reporting as of December 31, 2008 has been
audited by Ernst & Young, LLP, the independent registered public accounting ﬁrm who also audited Tyler’s ﬁnancial statements.
Ernst & Young’s attestation report on management’s assessment of Tyler’s internal control over ﬁnancial reporting appears on
page 36 hereof.

Changes in Internal Control Over Financial Reporting – During the quarter ended December 31, 2008, there were no changes
in our internal controls over ﬁnancial reporting, as deﬁned in Securities Exchange Act Rule 13a-15(f), that has materially aﬀected, or
is reasonably likely to materially aﬀect, our internal control over ﬁnancial reporting.

p37

2008

2007

2006

$ 41,490
14,374
74,997
107,458
19,098
7,684
265,101

9,224
1,799
126,247
12,251
5,793
155,314

109,787
62,923
7,286
2,438
9,045

$ 35,063
10,406
60,283
85,411
21,318
7,315
219,796

7,953
2,279
104,993
14,467
5,679
135,371

84,425
51,724
4,443
1,478
–

$ 37,247
7,298
50,861
73,413
19,755
6,729
195,303

9,968
1,360
90,601
13,563
5,007
120,499

74,804
48,389
3,322
1,318
–

28,095

26,780

21,775

1,181
29,276
14,414
$ 14,862

0.39
$
$
0.38
37,714
39,184

1,800
28,580
11,079
$ 17,501

0.45
$
$
0.42
38,735
41,352

1,080
22,855
8,493
$ 14,362

$ 0.37
$ 0.34
38,817
41,868

Tyler Technologies Statements of Operations

Statements of Operations

For the years ended December 31

In thousands, except per share amounts

Revenues:
Software licenses
Subscriptions
Software services
Maintenance
Appraisal services
Hardware and other
Total revenues

Cost of revenues:
Software licenses
Acquired software
Software services, maintenance and subscriptions
Appraisal services
Hardware and other

Total cost of revenues

Gross proﬁt
Selling, general and administrative expenses
Research and development expense
Amortization of customer and trade name intangibles
Non-cash legal settlement related to warrants

Operating income

Other income, net
Income before income taxes
Income tax provision
Net income

Earnings per common share:
Basic
Diluted
Basic weighted average common shares outstanding
Diluted weighted average common shares outstanding

See accompanying notes.

p38

Balance Sheets

December 31

In thousands, except share and per share amounts

ASSETS

Current assets:
Cash and cash equivalents
Restricted cash equivalents
Short-term investments available-for-sale
Accounts receivable (less allowance for losses of $2,115 in 2008 and $1,851 in 2007)
Prepaid expenses
Other current assets
Deferred income taxes
Total current assets

Accounts receivable, long-term portion
Property and equipment, net
Non-current investments available-for-sale

Other assets:
Goodwill
Customer related intangibles, net
Software, net
Other intangibles, net
Sundry

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable
Accrued liabilities
Short-term obligation
Deferred revenue

Income taxes payable
Total current liabilities

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 shares issued in 2008 and 2007
Additional paid-in capital
Accumulated other comprehensive loss, net of tax
Retained earnings
Treasury stock, at cost; 12,333,549 and 9,528,467 shares in 2008 and 2007, respectively

Total shareholders’ equity

See accompanying notes.

Balance Sheets 2008 Annual Report

2008

2007

$ 1,762
5,082
775
76,989
8,602
1,444
2,570
97,224

197
26,522
3,779

88,791
27,438
5,112
2,471
227
$ 251,761

$ 2,617
22,913
8,000
95,773
166
129,469

$ 9,642
4,462
41,590
63,965
7,726
1,324
2,355
131,064

398
9,826
–

71,677
17,706
9,588
1,074
175
$ 241,508

$ 3,323
18,905
–
73,714
632
96,574

8,030

7,723

–
481
151,245
(387)
50,494
(87,571)
114,262
$ 251,761

–
481
149,568
–
35,632
(48,470)
137,211
$ 241,508

p39

Tyler Technologies Statements of Shareholders’ Equity

Statements of Shareholders’ Equity

For the years ended December 31, 2008, 2007 and 2006

Common Stock

Amount

Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Income (Loss)

Retained
Earnings

Treasury Stock

Amount

Total
Shareholders’
Equity

48,148

$ 481

$ 151,515

–

$ 3,769

(9,273)

$ (43,568)

$ 112,197

–

–
–
–

–

–
–
–

–

(3,158)
1,960
–

–

14,362

(10)

–
–
–

–

–
–
–

–

623
–
(1,033)

6,074
–
(10,531)

14,362

(10)
14,352

2,916
1,960
(10,531)

102

918

940

1,150
2,891
125,875

17,501

10
17,511

–
–
48,148

–
–
481

1,150
138
151,627

–
–
(10)

–
–
18,131

–
325
(9,256)

–
2,753
(44,354)

–

–
–
–

–

–
–
–

–

(7,339)
2,365
–

(2)

–
48,148

–
481

2,917
149,568

–

–
–
–

–

–
–
–

–

(3,495)
3,820
–

(186)

822

–

17,501

–

–
–
–

–

–
–

–

(387)

–
–
–

–

–
–
–

–

878
–
(1,250)

10,928
–
(16,163)

3,589
2,365
(16,163)

100

1,119

1,117

–
35,632

–
(9,528)

–
(48,470)

2,917
137,211

14,862

–

–
–
–

–

379
–
(4,283)

5,310
–
(58,984)

14,862

(387)
14,475

1,815
3,820
(58,984)

101

1,376

1,190

–

822

–
–
48,148

–
–
$ 481

455
261
$ 151,245

–
–
$ (387)

–
–
$ 50,494

802
196
(12,333)

10,595
2,602
$ (87,571)

11,050
2,863
$ 114,262

In thousands

Balance at December 31, 2005
Comprehensive income:

Net income
Unrealized loss on investment
securities, net of tax

Total comprehensive income
Issuance of shares pursuant to stock
compensation plan

Stock compensation
Treasury stock purchases

Issuance of shares pursuant to Employee
Stock Purchase Plan

Federal income tax beneﬁt related to

exercise of stock options
Issuance of shares for acquisitions

Balance at December 31, 2006
Comprehensive income:

Net income
Unrealized gain on investment

securities, net of tax

Total comprehensive income
Issuance of shares pursuant to stock
compensation plan

Stock compensation
Treasury stock purchases

Issuance of shares pursuant to Employee
Stock Purchase Plan

Federal income tax beneﬁt related to

exercise of stock options
Balance at December 31, 2007
Comprehensive income:

Net income
Unrealized loss on investment
securities, net of tax

Total comprehensive income
Issuance of shares pursuant to stock
compensation plan

Stock compensation
Treasury stock purchases

Issuance of shares pursuant to
Employee Stock Purchase Plan
Federal income tax beneﬁt related
to exercise of stock options
Issuance of shares in connection
with legal settlement
Issuance of shares for acquisitions

Balance at December 31, 2008

See accompanying notes.

p40

Statements of Cash Flows

For the years ended December 31

In thousands

Cash ﬂows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization
Non-cash legal settlement related to warrants
Share-based compensation expense
Purchased in-process research and development charge
Non-cash interest and other charges
Provision for losses – accounts receivable
Excess tax beneﬁt from exercises of share-based arrangements
Deferred income tax beneﬁt
Changes in operating assets and liabilities, exclusive of eﬀects of acquired companies:

Accounts receivable
Income tax payable

Prepaid expenses and other current assets
Accounts payable
Accrued liabilities
Deferred revenue

Net cash provided by operating activities

Cash ﬂows from investing activities:
Proceeds from sales of investments
Purchases of investments
Cost of acquisitions, net of cash acquired
Additions to property and equipment

Investment in software development costs

Acquired lease

(Increase) decrease in restricted investments

Decrease in other

Net cash used by investing activities

Cash ﬂows from ﬁnancing activities:
Purchase of treasury shares
Net borrowings on revolving credit facility
Contributions from employee stock purchase plan
Proceeds from exercise of stock options
Excess tax beneﬁts from exercise of share-based arrangements
Warrant exercise in connection with legal settlement
Net cash used by ﬁnancing activities

Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year

See accompanying notes.

Statements of Cash Flows 2008 Annual Report

2008

2007

2006

$ 14,862

$ 17,501

$ 14,362

12,611
9,045
3,820
–
–
1,764
(666)
(2,151)

(11,853)
827
(338)
(870)
3,420
17,331
47,802

45,065
(8,625)
(23,868)
(20,143)
–
(1,387)
(620)
24
(9,554)

(59,847)
8,000
1,233
1,815
666
2,005
(46,128)

(7,880)
9,642
$ 1,762

11,211
–
2,365
–
–
753
(1,891)
(1,598)

(1,575)
3,919
(304)
(1,955)
(1,619)
7,304
34,111

45,480
(67,545)
(9,005)
(3,678)
(167)
–
500
140
(34,275)

(14,037)
–
1,151
3,589
1,891
–
(7,406)

(7,570)
17,212
$ 9,642

10,102
–
1,960
140
220
2,077
(614)
(2,520)

(10,400)
536
(1,496)
1,626
972
9,839
26,804

19,016
(26,825)
(12,237)
(4,088)
(236)
–
38
6
(24,326)

(10,531)
–
1,002
2,916
614
–
(5,999)

(3,521)
20,733
$ 17,212

p41

Tyler Technologies Notes to Financial Statements

(Tables in thousands, except per share data)

1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

We provide integrated software systems and related services for local governments. We develop and market a broad line of software
solutions and services to address the information technology (“IT”) needs of cities, counties, schools and other local government
entities. In addition, we provide professional IT services, including software and hardware installation, data conversion, training, and
for certain customers, product modiﬁcations, along with continuing maintenance and support for customers using our systems.
We also provide subscription-based services such as application service provider arrangements and other hosting services as well as
property appraisal outsourcing services for taxing jurisdictions.

Tyler’s business is subject to risks and uncertainties including dependence on IT spending by customers, general economic
conditions, ﬂuctuations of quarterly results, a lengthy and variable sales cycle, dependence on key personnel, dependence on principal
products and third-party technology and rapid technological change. In addition, our products are complex and we run the risk of
errors or defects with new product introductions or enhancements.

CASH AND CASH EQUIVALENTS

Cash in excess of that necessary for operating requirements is invested in short-term, highly liquid, income-producing investments.
Investments with original maturities of three months or less are classiﬁed as cash and cash equivalents, which primarily consist of
money market funds. Cash and cash equivalents are stated at cost, which approximates market value.

We maintain a $6.0 million Letter of Credit facility under which the bank issues cash collateralized letters of credit. As of December 31,
2008, approximately $5.1 million of our cash equivalents are restricted and designated as collateral for our letters of credit issued in
connection with our surety bond program. These letters of credit expire through mid-2009.

INVESTMENTS

Investments consist of auction rate municipal securities. These investments are classiﬁed as available-for-sale securities and are stated
at fair value in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.”
Unrealized holding gains and losses, net of the related tax eﬀect, if any, are not reﬂected in earnings but are reported as a separate
component of other comprehensive income until realized. The cost basis of securities sold is determined using the average cost
method. We account for the transactions as “Proceeds from sales of investments” for the security relinquished, and a “Purchase of
investments” for the security purchased, in the accompanying Statement of Cash Flows.

REVENUE RECOGNITION

Software Arrangements:

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

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

p42

Notes to Financial Statements 2008 Annual Report

If the arrangement does not require signiﬁcant production, modiﬁcation or customization or where the software services are
not considered essential to the functionality of the software, revenue is recognized when all of the following conditions are met:

i. persuasive evidence of an arrangement exists;
ii. delivery has occurred;
iii. our fee is ﬁxed or determinable; and
iv. collectibility is probable.

For multiple element arrangements, each element of the arrangement is analyzed and we allocate a portion of the total arrangement
fee to the elements based on the fair value of the element using vendor-speciﬁc objective evidence of fair value (“VSOE”), regardless
of any separate prices stated within the contract for each element. Fair value is considered the price a customer would be required to
pay if the element was sold separately based on our historical experience of stand-alone sales of these elements to third parties. For
PCS, we use renewal rates for continued support arrangements to determine fair value. For software services, we use the fair value we
charge our customers when those services are sold separately. We monitor our transactions to insure we maintain and periodically
revise VSOE to reﬂect fair value. In software arrangements in which we have the fair value of all undelivered elements but not of a
delivered element, we apply the “residual method” as allowed under SOP 98-9 in accounting for any element of a multiple element
arrangement involving software that remains undelivered such that any discount inherent in a contract is allocated to the delivered
element. Under the residual method, if the fair value of all undelivered elements is determinable, the fair value of the undelivered
elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element(s) and is recognized as
revenue assuming the other revenue recognition criteria are met. In software arrangements in which we do not have VSOE for all
undelivered elements, revenue is deferred until fair value is determined or all elements for which we do not have VSOE have been
delivered. Alternatively, if suﬃcient VSOE does not exist and the only undelivered element is services that do not involve signiﬁcant
modiﬁcation or customization of the software, the entire fee is recognized over the period during which the services are expected to
be performed.

Software Licenses

We recognize the revenue allocable to software licenses and speciﬁed upgrades upon delivery of the software product or upgrade to
the customer, unless the fee is not ﬁxed or determinable or collectibility is not probable. If the fee is not ﬁxed or determinable,
including new customers whose payment terms are three months or more from shipment, revenue is generally recognized as payments
become due from the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected.
Arrangements that include software services, such as training or installation, are evaluated to determine whether those services are
essential to the product’s functionality.

A majority of our software arrangements involve “oﬀ-the-shelf” software. We consider software to be oﬀ-the-shelf software if it can be
added to an arrangement with minor changes in the underlying code and it can be used by the customer for the customer’s purpose
upon installation. For oﬀ-the-shelf software arrangements, we recognize the software license fee as revenue after delivery has occurred,
customer acceptance is reasonably assured, that portion of the fee represents a non-refundable enforceable claim and is probable of
collection, and the remaining services such as training are not considered essential to the product’s functionality.

For arrangements that involve signiﬁcant production, modiﬁcation or customization of the software, or where software services are
otherwise considered essential, we recognize revenue using contract accounting. We generally use the percentage-of-completion
method to recognize revenue from these arrangements. We measure progress-to-completion primarily using labor hours incurred, or
value added. The percentage-of-completion method generally results in the recognition of reasonably consistent proﬁt margins over
the life of a contract because we have the ability to produce reasonably dependable estimates of contract billings and contract
costs. We use the level of proﬁt margin that is most likely to occur on a contract. If the most likely proﬁt margin cannot be precisely
determined, the lowest probable level of proﬁt in the range of estimates is used until the results can be estimated more precisely.
These arrangements are often implemented over an extended time period and occasionally require us to revise total cost estimates.
Amounts recognized in revenue are calculated using the progress-to-completion measurement after giving eﬀect to any changes in our

p43

Tyler Technologies Notes to Financial Statements

cost estimates. Changes to total estimated contract costs, if any, are recorded in the period they are determined. Estimated losses on
uncompleted contracts are recorded in the period in which we ﬁrst determine that a loss is apparent.

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

Subscription-Based Services

Subscription-based services primarily consist of revenues derived from application service provider (“ASP”) arrangements and other
hosted service oﬀerings, software subscriptions and disaster recovery services.

We recognize revenue for ASP and other hosting services, software subscriptions, term license arrangements with renewal periods of
twelve months or less and disaster recovery ratably over the period of the applicable agreement as services are provided. Disaster
recovery agreements and other hosting services are typically renewable annually. ASP and software subscriptions are typically for
periods of three to six years and automatically renew unless either party cancels the agreement. The majority of the ASP and other
hosting services and software subscriptions also include professional services as well as maintenance and support. In certain ASP
arrangements, the customer also acquires a license to the software.

For ASP and other hosting arrangements, we evaluate whether each of the elements in these arrangements represents a separate unit of
accounting, as deﬁned by Emerging Issues Task Force (“EITF”) No. 00-21, using all applicable facts and circumstances, including
whether (i) we sell or could readily sell the element unaccompanied by the other elements, (ii) the element has stand-alone value to the
customer, (iii) there is objective reliable evidence of the fair value of the undelivered item, and (iv) there is a general right of return. We
consider the applicability of EITF No. 00-03, “Application of SOP 97-2 to Arrangements That Include the Right to Use Software
Stored on Another Entity’s Hardware” on a contract-by-contract basis. In hosted term-based agreements, where the customer does not
have the contractual right to take possession of the software, hosting fees are recognized on a monthly basis over the term of the contract
commencing when the customer has access to the software. For professional services associated with hosting arrangements that we
determine do not have stand-alone value to the customer, we recognize the services revenue ratably over the remaining contractual
period once hosting has gone live and we may begin billing for the hosting services. We record amounts that have been invoiced in
accounts receivable and in deferred revenue or revenues, depending on whether the revenue recognition criteria have been met.

If we determine that the customer has the contractual right to take possession of our software at any time during the hosting period
without signiﬁcant penalty, and can feasibly maintain the software on the customer’s hardware or enter into another arrangement with
a third party to host the software, we recognize the license, professional services and hosting services revenues pursuant to SOP 97-2.

Software Services

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

Computer Hardware Equipment

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

Postcontract Customer Support

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

p44

Notes to Financial Statements 2008 Annual Report

Allocation of Revenue in Statement of Operations

In our statements of operations, we allocate revenue to software licenses, software services, maintenance and hardware and other
based on the VSOE of fair value for elements in each revenue arrangement and the application of the residual method for
arrangements in which we have established VSOE of fair value for all undelivered elements. In arrangements where we are not able to
establish VSOE of fair value for all undelivered elements, revenue is ﬁrst allocated to any undelivered elements for which VSOE of
fair value has been established. We then allocate revenue to any undelivered elements for which VSOE of fair value has not been
established based upon management’s best estimate of fair value of those undelivered elements and apply a residual method to
determine the license fee. Management’s best estimate of fair value of undelivered elements for which VSOE of fair value has not
been established is based upon the VSOE of similar oﬀerings and other objective criteria.

Appraisal Services:

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

Other:

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

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

USE OF ESTIMATES

The preparation of our ﬁnancial statements in conformity with accounting principles generally accepted in the United States
(“GAAP”) requires us to make estimates and 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. Signiﬁcant items subject to such estimates and assumptions include the application of the percentage-of-
completion and proportionate performance methods of revenue recognition, the carrying amount and estimated useful lives
of intangible assets, determination of share-based compensation expense and valuation allowance for receivables. Actual results could
diﬀer from estimates.

p45

Tyler Technologies Notes to Financial Statements

PROPERTY AND EQUIPMENT, NET

Property, equipment and purchased software are recorded at original cost and increased by the cost of any signiﬁcant improvements
after purchase. We expense maintenance and repairs when incurred. Depreciation and amortization is calculated using the straight-line
method over the shorter of the asset’s estimated useful life or the term of the lease in the case of leasehold improvements. For
income tax purposes, we use accelerated depreciation methods as allowed by tax laws.

RESEARCH AND DEVELOPMENT COSTS

We expensed research and development costs of $7.3 million during 2008, $4.4 million during 2007 and $3.3 million during 2006.
In 2008 and 2007, we reduced our research and development expense by approximately $1.8 million and $1.6 million, respectively,
which was the amount earned under the terms of our strategic alliance with a development partner.

INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred taxes arise because of diﬀerent treatment between
ﬁnancial statement accounting and tax accounting, known as “temporary diﬀerences.” We record the tax eﬀect of these temporary
diﬀerences as “deferred tax assets” (generally items that can be used as a tax deduction or credit in the future periods) and “deferred
tax liabilities” (generally items that we received a tax deduction for, which have not yet been recorded in the income statement). The
deferred tax assets and liabilities are measured using enacted tax rules and laws that are expected to be in eﬀect when the temporary
diﬀerences are expected to be recovered or settled. A valuation allowance would be established to reduce deferred tax assets if it is
likely that a deferred tax asset will not be realized.

SHARE-BASED COMPENSATION

We have a stock option plan that provides for the grant of stock options to key employees, directors and non-employee consultants.
Stock options vest after three to ﬁve years of continuous service from the date of grant and have a contractual term of ten years.
We account for share-based compensation utilizing the fair value recognition provisions of SFAS No. 123R, “Share-Based Payment.”
See Note 10 – “Share-Based Compensation” for further information.

SEGMENT AND RELATED INFORMATION

Although we have a number of operating divisions, separate segment data has not been presented as they meet the criteria for
aggregation as permitted by SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.”

GOODWILL AND OTHER INTANGIBLE ASSETS

We have used the purchase method of accounting for all of our business combinations. Our business acquisitions result in the
allocation of the purchase price to goodwill and other intangible assets. We ﬁrst allocate the cost of acquired companies to
identiﬁable assets based on estimated fair values. The excess of the purchase price over the fair value of identiﬁable assets acquired, net
of liabilities assumed, is recorded as goodwill.

Under SFAS No. 142, “Goodwill and Other Intangible Assets,” we evaluate goodwill for impairment annually as of April, or more
frequently if impairment indicators arise. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s
fair value. The fair values calculated in our impairment tests are determined using discounted cash ﬂow models involving several
assumptions. These assumptions include, but are not limited to, anticipated operating income growth rates, our long-term anticipated
operating income growth rate and the discount rate. The assumptions that are used are based upon what we believe a hypothetical
marketplace participant would use in estimating fair value. In the implementation of SFAS No. 142, we identiﬁed two reporting
units for impairment testing. The appraisal services and appraisal software stand-alone business unit qualiﬁed as a reporting unit since
it is one level below an operating segment, discrete ﬁnancial information exists for the business unit and the executive management
group directly reviews this business unit. The other software business units were aggregated into the other single reporting unit. The

p46

Notes to Financial Statements 2008 Annual Report

appraisal services and appraisal software stand-alone business unit is organized in such a manner that both of its revenue sources are
tightly integrated with each other and discrete ﬁnancial information at the operating proﬁt level does not exist for this business unit’s
respective revenue sources. There have been no signiﬁcant impairments of goodwill or other intangibles.

IMPAIRMENT OF LONG-LIVED ASSETS

We periodically evaluate whether current facts or circumstances indicate that the carrying value of our property and equipment or
other long-lived assets to be held and used may not be recoverable. If such circumstances are determined to exist, we measure the
recoverability of assets to be held and used by a comparison of the carrying amount of the asset or appropriate grouping of assets and
the estimated undiscounted future cash ﬂows expected to be generated by the assets. If the carrying amount of the assets exceeds their
estimated future cash ﬂows, an impairment charge is recognized for the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of
the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group
classiﬁed as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. There have
been no signiﬁcant impairments of long-lived assets.

COSTS OF COMPUTER SOFTWARE

Software development costs have been accounted for in accordance with SFAS No. 86, “Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed.” Under SFAS No. 86, capitalization of software development costs begins upon
the establishment of technological feasibility and prior to the availability of the product for general release to customers. We did not
capitalize any software development costs in 2008. We capitalized software development costs of approximately $167,000 during
2007, and $236,000 during 2006. Software development costs primarily consist of personnel costs and rent for related oﬃce space.
We begin to amortize capitalized costs when a product is available for general release to customers. Amortization expense is
determined on a product-by-product basis at a rate not less than straight-line basis over the product’s remaining estimated economic
life, but not to exceed ﬁve years. Amortization of software development costs was approximately $4.7 million in 2008, $4.6 million
in 2007, and $5.1 million in 2006 and is included in cost of software license revenue in the accompanying statements of operations.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash and cash equivalents, accounts receivables, accounts payables, short-term obligations, deferred revenues and certain other assets
at cost approximate fair value because of the short maturity of these instruments. In accordance with SFAS No. 157 “Fair Value
Measurements,” our investments available-for-sale are recorded at fair value as of December 31, 2008 based upon the level of judgment
associated with the inputs used to measure their fair value. See Note 3 – “Fair Value of Financial Instruments” for further information.

CONCENTRATIONS OF CREDIT RISK AND UNBILLED RECEIVABLES

Concentrations of credit risk with respect to receivables are limited due to the size and geographical diversity of our customer base.
Historically, our credit losses have not been signiﬁcant. As a result, we do not believe we have any signiﬁcant concentrations of credit
risk as of December 31, 2008.

We maintain allowances for doubtful accounts and sales adjustments, which are provided at the time the revenue is recognized. Since
most of our customers are domestic governmental entities, we rarely incur a loss resulting from the inability of a customer to make
required payments. Events or changes in circumstances that indicate that the carrying amount for the allowances for doubtful
accounts and sales adjustments may require revision, include, but are not limited to, deterioration of a customer’s ﬁnancial condition,
failure to manage our customer’s expectations regarding the scope of the services to be delivered, and defects or errors in new versions
or enhancements of our software products. The following table summarizes the changes in the allowances for doubtful accounts and
sales adjustments:

p47

Tyler Technologies Notes to Financial Statements

Years ended December 31,

Balance at beginning of year
Provisions for losses – accounts receivable
Collection of accounts previously written oﬀ
Deductions for accounts charged oﬀ or credits issued
Balance at end of year

2008

2007

2006

$ 1,851
1,764
10
(1,510)
$ 2,115

$ 2,971
753
–
(1,873)
$ 1,851

$ 1,991
2,077
11
(1,108)
$ 2,971

The termination clauses in most of our contracts provide for the payment for the fair value of products delivered or services
performed in the event of early termination. Our property appraisal outsourcing service contracts can range up to three years and, in
a few cases, as long as ﬁve years in duration. In connection with these contracts, as well as certain software service contracts, we may
perform work prior to when the software and services are billable and/or payable pursuant to the contract. We have historically
recorded such unbilled receivables (costs and estimated proﬁt in excess of billings) in connection with (1) property appraisal services
contracts accounted for using proportionate performance accounting in which the revenue is earned based upon activities performed
in one accounting period but the billing normally occurs shortly thereafter and may span another accounting period; (2) software
services contracts accounted for using the percentage-of-completion method of revenue recognition using labor hours as a measure of
progress towards completion in which the services are performed in one accounting period but the billing for the software element of
the arrangement may be based upon the speciﬁc phase of the implementation; (3) software revenue for which we have objective
evidence that the customer-speciﬁed objective criteria has been met but the billing has not yet been submitted to the customer; and
(4) in a limited number of cases, we may grant extended payment terms generally to existing customers with whom we have a
long-term relationship and favorable collection history. In addition, certain of our property appraisal outsourcing contracts are
required by law to have an amount withheld from a progress billing (generally a 10% retention) until ﬁnal and satisfactory project
completion is achieved, typically upon the completion of ﬁeldwork or formal hearings.

In connection with this activity, we have recorded unbilled receivables of $13.7 million and $11.2 million at December 31, 2008 and
2007, respectively. We also have recorded retention receivable of $1.5 million and $3.9 million at December 31, 2008 and 2007,
respectively, and these retentions become payable upon the completion of the contract or completion of our ﬁeld work and formal
hearings. Unbilled receivables and retention receivables expected to be collected in excess of one year have been classiﬁed as accounts
receivable, long-term portion in the accompanying balance sheets.

INDEMNIFICATION

Most of our software license agreements indemnify our customers in the event that the software sold infringes upon the intellectual
property rights of a third party. These agreements typically provide that in such event we will either modify or replace the software
so that it becomes non-infringing or procure for the customer the right to use the software. We have recorded no liability associated
with these indemniﬁcations, as we are not aware of any pending or threatened infringement actions that are possible losses. We
believe the estimated fair value of these intellectual property indemniﬁcation clauses is minimal.

We have also agreed to indemnify our oﬃcers and board members if they are named or threatened to be named as a party to any
proceeding by reason of the fact that they acted in such capacity. A form of the indemniﬁcation agreement was ﬁled as Exhibit 10.1
to our Form 10-K for the year ended December 31, 2002. We maintain directors’ and oﬃcers’ insurance coverage to protect against
any such losses. We have recorded no liability associated with these indemniﬁcations. Because of our insurance coverage, we believe
the estimated fair value of these indemniﬁcation agreements is minimal.

p48

Notes to Financial Statements 2008 Annual Report

NEW ACCOUNTING PRONOUNCEMENTS

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141R “Business Combinations.” SFAS
No. 141R changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for
a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies,
the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals,
the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance.
SFAS No. 141R is eﬀective for ﬁscal years beginning after December 15, 2008, with early adoption prohibited. The adoption of
SFAS No. 141R is not expected to have a material impact on our ﬁnancial statements or related disclosures.

In April 2008, the FASB issued FASB Staﬀ Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets.”
FSP No. 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the
useful life of recognized intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” This new
guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations
and asset acquisitions. FSP No. 142-3 is eﬀective for ﬁnancial statements issued for ﬁscal years and interim periods beginning after
December 15, 2008. Early adoption is prohibited. The adoption of FSP No. 142-3 is not expected to have a material impact on our
ﬁnancial statements or related disclosures.

2 ACQUISITIONS

In August 2008, we completed the acquisition of all the capital stock of School Information Systems, Inc. (“SIS”) which develops
and sells a full suite of student information and ﬁnancial management systems for K-12 schools. The purchase price, including
transaction costs and excluding cash balances acquired, was approximately $9.9 million in cash and approximately 70,000 shares of
Tyler common stock valued at $1.2 million.

In the ﬁrst quarter of 2008, we completed the acquisitions of all of the capital stock of VersaTrans Solutions Inc. (“VersaTrans”)
and certain assets of Olympia Computing Company, Inc. d/b/a Schoolmaster (“Schoolmaster”). VersaTrans is a provider of student
transportation management software solutions for school districts and school transportation providers across North America,
including solutions for school bus routing and planning, redistricting, GPS ﬂeet tracking, ﬂeet maintenance and ﬁeld trip planning.
Schoolmaster provides a full suite of student information systems, which manage such functions as grading, attendance, scheduling,
guidance, health, admissions and fund raising. The combined purchase price for these transactions excluding cash acquired and
including transaction costs, was approximately $13.9 million in cash and approximately 126,000 shares of Tyler common stock
valued at $1.7 million.

Our balance sheet as of December 31, 2008 reﬂects the allocation of the purchase price to the assets acquired and liabilities assumed
based on their estimated fair values at the dates of acquisition. In connection with these three transactions we acquired total tangible
assets of approximately $3.5 million and assumed total liabilities of approximately $8.2 million. We recorded goodwill of
$17.1 million, $7.8 million of which is expected to be deductible for tax purposes, and other intangible assets of $14.3 million. The
$14.3 million of intangible assets is attributable to acquired software, customer relationships and trade name that will be amortized
over a weighted average period of approximately 10 years.

The operating results of these acquisitions are included in our results of operations since their respective dates of acquisition. We
believe these acquisitions will complement our business model by expanding our presence in the education market and will give us
additional opportunities to provide our customers with solutions tailored speciﬁcally for local governments.

In September 2007, we completed the acquisition of all the capital stock of EDP Enterprises, Inc. (“EDP”), which develops and sells
ﬁnancial and student information and management systems for public school districts in Texas. In February 2007, we completed the
acquisition of all of the capital stock of Advanced Data Systems, Inc. (“ADS”), which develops and sells fund accounting solutions,
primarily in New England. The combined purchase price, including transaction costs along with an oﬃce building used in ADS’s business
and excluding cash balances acquired, for these acquisitions as well as miscellaneous other software asset purchases was $9.0 million.

p49

Tyler Technologies Notes to Financial Statements

3 FAIR VALUE OF FINANCIAL INSTRUMENTS

In 2006 the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 does not establish requirements for any new
fair value measurements, but it does apply to existing accounting pronouncements in which fair value measurements are already
required. SFAS No. 157 deﬁnes fair value, establishes a framework for measuring fair value in accordance with accounting principles
generally accepted in the United States, and expands disclosures about fair value measurements. We adopted the principles of SFAS
No. 157 as of January 1, 2008, for ﬁnancial instruments.

SFAS No. 157 establishes a three-tier fair value hierarchy, which prioritize the inputs used in measuring fair value. These tiers include
the following:

Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2 – Inputs other than Level 1 inputs that are either directly or indirectly observable; and

Level 3 – Unobservable inputs, for which little or no market data exist, therefore requiring an entity to develop its own

assumptions.

As of December 31, 2008 we held certain items that are required to be measured at fair value on a recurring basis. The fair value of
these ﬁnancial assets was determined using the following inputs at December 31, 2008:

Quoted Prices

Signiﬁcant

Cash and cash equivalents
Short–term investments available-for-sale
Non–current investments available-for-sale

Total

$ 6,844
775
3,779
$ 11,398

in Active Markets Other Observable Unobservable
for Identical Assets
(Level 1)

Inputs
(Level 2)

Inputs
(Level 3)

$ 6,844
775
–
$ 7,619

–
–
–
–

–
–
3,779
$ 3,779

Cash and cash equivalents consist primarily of money market funds with original maturity dates of three months or less, for which we
determine fair value through quoted market prices.

Investments available-for-sale consist of auction rate municipal securities (“ARS”) which are collateralized debt obligations supported
by municipal and state agencies and do not include mortgage-backed securities. Short-term investments available-for-sale consists of
ARS which were sold at par during the period January 1, 2009 through February 20, 2009.

All of our non-current ARS are reﬂected at estimated fair value in the balance sheet at December 31, 2008. In prior periods, due to
the auction process which took place every 28 to 35 days for most ARS, quoted market prices were readily available, which would
have qualiﬁed as Level 1 under SFAS No. 157. However, due to recent events in credit markets beginning during the ﬁrst quarter of
2008, the auction events for most of these securities failed. Therefore, quoted prices in active markets are no longer available and we
determined the estimated fair values of these securities utilizing a discounted trinomial model. The model considers the probability of
three potential occurrences for each auction event through the maturity date of each ARS. The three potential outcomes for each
auction are (i) successful auction/early redemption, (ii) failed auction and (iii) issuer default. Inputs in determining the probabilities
of the potential outcomes include but are not limited to, the securities’ collateral, credit rating, insurance, issuer’s ﬁnancial standing,
contractual restrictions on disposition and the liquidity in the market. The fair value of each ARS is determined by summing the
present value of the probability-weighted future principal and interest payments determined by the model.

p50

Notes to Financial Statements 2008 Annual Report

policies guaranteeing each of the bonds’ payment of principal and accrued interest, if it becomes necessary. In addition, we do not
plan to sell any of the ARS prior to maturity at an amount below the original purchase value and, at this time, do not deem it
probable that we will receive less than 100% of the principal and accrued interest. Based on our cash and cash equivalents balance of
$6.8 million, expected operating cash ﬂows and the liquidation of $775,000 of ARS subsequent to the period ending December 31,
2008, we do not believe a lack of liquidity associated with our ARS will adversely aﬀect our ability to conduct business, and believe
we have the ability to hold the securities throughout the currently estimated recovery period. We have classiﬁed these securities as
non-current because we believe the market for these securities may take in excess of twelve months to fully recover. We will continue
to evaluate any changes in the market value of our non-current ARS and in the future, depending upon existing market conditions,
we may be required to record an other-than-temporary decline in market value.

The following table reﬂects the activity for assets measured at fair value using Level 3 inputs for the year ended December 31, 2008:

Balance as of December 31, 2007
Transfers into level 3
Transfers out of level 3
Unrealized losses included in accumulated other comprehensive loss
Balance as of December 31, 2008

4 PROPERTY AND EQUIPMENT, NET

Property and equipment, net consists of the following at December 31:

Land
Computer equipment and purchased software
Furniture and ﬁxtures
Building and leasehold improvements
Transportation equipment

Accumulated depreciation and amortization
Property and equipment, net

$
–
5,150
(775)
(596)
$ 3,779

Useful Lives
(years)

2008

2007

–
3–5
5
5–35
5

$ 3,349
19,553
5,103
16,248
266
44,519
(17,997)
$ 26,522

$
179
18,502
4,625
4,099
279
27,684
(17,858)
$ 9,826

Depreciation expense was $3.5 million during 2008, $2.8 million during 2007, and $2.4 million during 2006.

We purchased an oﬃce building in Yarmouth, Maine in mid-2008 which is leased to third-party tenants. These leases expire between
2011 and 2013 and are expected to provide rental income of approximately $1.3 million during both 2009 and 2010, $877,000
during 2011, $406,000 during 2012 and $169,000 during 2013. Upon expiration of these agreements we expect to begin occupying
the facility. Rental income associated with these leases in 2008 was $662,000 and was included as a reduction of selling, general and
administrative expenses.

p51

Tyler Technologies Notes to Financial Statements

5 GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets and related accumulated amortization consists of the following at December 31:

Gross carrying amount of acquisition intangibles:
Goodwill
Customer related intangibles
Software acquired
Trade name
Lease acquired

Accumulated amortization
Acquisition intangibles, net

Post acquisition software development costs
Accumulated amortization
Post acquisition software costs, net

2008

2007

$ 88,791
38,887
22,143
1,971
1,387
153,179
(30,825)
$ 122,354

$ 36,701
(35,243)
$ 1,458

$ 71,677
26,858
20,093
1,681
–
120,309
(26,450)
$ 93,859

$ 36,701
(30,515)
$ 6,186

Total amortization expense for acquisition related intangibles and post acquisition software development costs was $9.1 million
during 2008, $8.4 million during 2007, and $7.7 million during 2006.

The allocation of acquisition intangible assets is summarized in the following table:

Non-amortizable intangibles:
Goodwill
Amortizable intangibles:
Customer related intangibles
Software acquired
Trade name
Lease acquired

December 31, 2008

December 31, 2007

Gross
Carrying
Amount

Weighted
Average
Amortization
Period

Accumulated
Amortization

Gross
Carrying
Amount

Weighted
Average
Amortization
Period

Accumulated
Amortization

$ 88,791

–

$ 71,677

–

38,887
22,143
1,971
1,387

18 years
5 years
19 years
5 years

11,449
18,489
749
138

26,858
20,093
1,681
–

21 years
5 years
21 years
–

9,152
16,691
607
–

The changes in the carrying amount of goodwill for the two years ended December 31, 2008 are as follows:

Balance as of December 31, 2006
Goodwill acquired during the year related to the purchase of ADS
Goodwill acquired during the year related to the purchase of EDP
Other

Balance as of December 31, 2007
Goodwill acquired during the year related to the purchase of VersaTrans
Goodwill acquired during the year related to the purchase of SIS
Goodwill acquired during the year related to the purchase of Schoolmaster
Other
Balance as of December 31, 2008

$ 66,127
2,240
3,187
123

71,677
9,278
6,351
1,475
10
$ 88,791

p52

Notes to Financial Statements 2008 Annual Report

Estimated annual amortization expense relating to acquisition intangibles, including acquired software for which the amortization
expense is recorded as cost of revenues and acquired leases for which amortization expense is recorded as selling, general and
administrative expenses, is as follows:

Years ending December 31,

2009
2010
2011
2012
2013

6 ACCRUED LIABILITIES

Accrued liabilities consist of the following at December 31:

Accrued wages, bonuses and commissions
Other accrued liabilities
Accrued treasury stock purchases
Accrued health claims
Accrued third party contract costs

7 SHORTTERM OBLIGATION

$ 4,093
4,093
3,510
3,228
2,679

2008

$ 13,908
4,474
1,263
1,921
1,347
$ 22,913

2007

$ 10,029
3,744
2,126
1,806
1,200
$ 18,905

On October 20, 2008, we entered into a revolving bank credit agreement (the “Credit Facility”) and a related pledge and security
agreement. The Credit Facility matures October 19, 2009 and provides for total borrowings of up to $25.0 million and a $6.0
million Letter of Credit facility under which the bank will issue cash collateralized letters of credit. Borrowings under the Credit
Facility bear interest at a rate of either LIBOR plus 1% or prime rate minus 1.5%. As of December 31, 2008, our eﬀective interest
rate was 1.47% under the Credit Facility. The eﬀective average interest rate for borrowings during the period October 20 through
December 31, 2008 was 2.1%. The Credit Facility is secured by substantially all of our personal property. The Credit Facility requires
us to maintain certain ﬁnancial ratios and other ﬁnancial conditions and prohibits us from making certain investments, advances,
cash dividends or loans, restricts the amount of our common stock we may purchase and limits incurrence of additional indebtedness
and liens. As of December 31, 2008, we were in compliance with those covenants.

p53

Tyler Technologies Notes to Financial Statements

8 INCOME TAX

The income tax provision (beneﬁt) on income from operations consists of the following:

Years ended December 31,

2008

2007

2006

Current:
Federal
State

Deferred

$ 14,320
2,245
16,565
(2,151)
$ 14,414

$ 10,593
2,084
12,677
(1,598)
$ 11,079

Reconciliation of the U.S. statutory income tax rate to our eﬀective income tax expense rate for operations follows:

Years ended December 31,

Income tax expense at statutory rate
State income tax, net of federal income tax beneﬁt
Non-deductible business expenses
Qualiﬁed manufacturing activities
Other, net

2008

2007

$ 10,247
1,089
3,988
(700)
(210)
$ 14,414

$ 10,003
1,321
608
(490)
(363)
$ 11,079

$ 9,701
1,312
11,013
(2,520)
$ 8,493

2006

$ 7,999
430
518
(263)
(191)
$ 8,493

In 2008, non-deductible business expenses include the impact of a non-cash legal settlement related to warrants charge of $9.0 million,
which was not tax deductible. See Note 14 – “Commitments and Contingencies” for more information.

Slightly less than half of our unvested stock option awards qualify as an incentive stock option (“ISO”) for income tax purposes.
As such, a tax beneﬁt is not recorded at the time the compensation cost related to the options is recorded for book purposes due to
the fact that an ISO does not ordinarily result in a tax beneﬁt unless there is a disqualifying disposition. Stock option grants of
non-qualiﬁed options result in the creation of a deferred tax asset, which is a temporary diﬀerence, until the time that the option is
exercised. Due to the treatment of ISOs for tax purposes, our eﬀective tax rate from year to year is subject to variability.

The tax eﬀects of the major items recorded as deferred tax assets and liabilities as of December 31 are:

Deferred income tax assets:
Operating expenses not currently deductible
Employee beneﬁt plans
Capital loss carryforward
Property and equipment

Total deferred income tax assets

Deferred income tax liabilities:

Intangible assets

Other

Total deferred income tax liabilities

Net deferred income tax liabilities

2008

2007

$ 1,466
2,528
221
203
4,418

(9,697)
(181)
(9,878)
$ (5,460)

$ 1,502
1,687
–
114
3,303

(8,504)
(167)
(8,671)
$ (5,368)

Although realization is not assured, we believe it is more likely than not that all the deferred tax assets at December 31, 2008 and 2007
will be realized. Accordingly, we believe no valuation allowance is required for the deferred tax assets. 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.

No reserves for uncertain income tax positions have been recorded pursuant to Financial Standards Accounting Board Interpretation
(“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes.”

p54

Notes to Financial Statements 2008 Annual Report

We are subject to U.S. federal tax as well as income tax of multiple state and local jurisdictions. We are no longer subject to United
States federal income tax examinations for years before 2006 and are no longer subject to state and local income tax examinations by
tax authorities for the years before 2004.

We paid income taxes, net of refunds received, of $15.7 million in 2008, $8.7 million in 2007, and $10.4 million in 2006.

9 SHAREHOLDERS’ EQUITY

The following table details activity in our common stock:

2008

2007

2006

Years ended December 31,

Amount

Purchases of common stock
Stock option exercises
Employee stock plan purchases
Shares issued for acquisitions
Shares issued in connection with legal settlement

(4,283)
379
101
196
802

$ (58,984)
1,815
1,190
2,863
11,050

(1,250)
878
100
–
–

$ (16,163)
3,589
1,117
–
–

(1,033)
623
102
325
–

$ (10,531)
2,916
940
2,891
–

Subsequent to December 31, 2008 and through February 20, 2009, we repurchased 419,000 shares for an aggregate purchase price
of $5.1 million. As of February 20, 2009 we had authorization from our board of directors to repurchase up to 1.1 million additional
shares of our common stock.

On June 27, 2008, we settled outstanding litigation related to two Stock Purchase Warrants owned by Bank of America, N. A.
(“BANA”). In July 2008, as a result of this settlement, BANA paid us $2.0 million and we issued to BANA 801,883 restricted shares
of Tyler common stock. See Note 14 – “Commitments and Contingencies” for further information.

10 SHAREBASED COMPENSATION

Share-Based Compensation Plan

We have a stock option plan that provides for the grant of stock options to key employees, directors and non-employee consultants.
Stock options vest after three to ﬁve years of continuous service from the date of grant and have a contractual term of ten years.
Once options become exercisable, the employee can purchase shares of our common stock at the market price on the date we granted
the option. We account for share-based compensation utilizing the fair value recognition provisions of SFAS No. 123R, “Share-
Based Payment.”

As of December 31, 2008, there were 996,000 shares available for future grants under the plan from the 11.0 million shares
previously approved by the stockholders.

Determining Fair Value Under SFAS No. 123R

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

Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. In
December 2007, Staﬀ Accounting Bulletin (“SAB”) No. 110 was issued which extends the use of the “simpliﬁed” method for those
companies that conclude that it is not reasonable to base its estimate of expected life of options on its historical share option exercise
experience. We have used the “simpliﬁed” method to estimate expected life since adopting SFAS No. 123R due to insuﬃcient
historical exercise data. In the late 1990s we made signiﬁcant changes to our business and growth strategy and as a result our current
optionee group has not been in place long enough to generate suﬃcient historical data to estimate the expected period of time an
option award would be expected to be outstanding.

p55

Tyler Technologies Notes to Financial Statements

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

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

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

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

The following weighted average assumptions were used for options granted:

Years ended December 31,

Expected life (in years)
Expected volatility
Risk-free interest rate
Expected forfeiture rate

2008

2007

2006

6.5
40.9%
3.5%
3%

6.5
42.6%
4.5%
3%

6
45.0%
4.9%
3%

Share-Based Compensation Under SFAS No. 123R

The following table summarizes share-based compensation expense related to share-based awards under SFAS No. 123R which is
recorded in the statement of operations:

Years ended December 31,

Cost of software services, maintenance and subscriptions
Selling, general and administrative expense
Total share-based compensation expense
Tax beneﬁt
Net decrease in net income

Stock Option Activity

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

2008

2007

2006

$ 364
3,456
3,820
(846)
$ 2,974

$ 227
2,138
2,365
(451)
$ 1,914

$ 147
1,813
1,960
(336)
$ 1,624

Number
of Shares

Weighted Average Contractual Life

Exercise Price

(Years)

Weighted Average
Remaining

Aggregate
Intrinsic
Value

Outstanding at December 31, 2005
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2006
Granted
Exercised
Forfeited
Outstanding at December 31, 2007
Granted
Exercised
Forfeited
Outstanding at December 31, 2008
Exercisable at December 31, 2008

p56

4,608
237
(623)
(127)
(8)
4,087
773
(878)
(10)
3,972
1,750
(379)
(34)
5,309
2,463

$ 4.99
10.76
4.68
6.42
5.21
5.32
13.42
4.09
8.29
7.16
14.38
4.79
10.82
9.69
$ 5.71

7
5

$ 17,474
$ 15,656

Notes to Financial Statements 2008 Annual Report

As of December 31, 2008, we had unvested options to purchase 2.8 million shares with a weighted average grant date fair value of
$6.28. As of December 31, 2008, we had $14.3 million of total unrecognized compensation cost related to unvested options, net of
expected forfeitures, which is expected to be amortized over a weighted average amortization period of 3.9 years.

Other information pertaining to option activity was as follows during the twelve months ended December 31:

Weighted average grant-date fair value of stock options granted
Total fair value of stock options vested
Total intrinsic value of stock options exercised

Employee Stock Purchase Plan

2008

$ 6.73
2,600
3,929

2007

$ 6.69
1,710
8,793

2006

$ 6.13
1,757
4,227

Under our Employee Stock Purchase Plan (“ESPP”) participants may contribute up to 15% of their annual compensation to
purchase common shares of Tyler. The purchase price of the shares is equal to 85% of the closing price of Tyler shares on the last day
of each quarterly oﬀering period. As of December 31, 2008, there were 446,000 shares available for future grants under the ESPP
from the 1.0 million shares originally reserved for issuance.

11 EARNINGS PER SHARE

Basic earnings and diluted earnings per share data were computed as follows:

Years ended December 31,

Numerator for basic and diluted earnings per share
Net income
Denominator:
Weighted-average basic common shares outstanding
Assumed conversion of dilutive securities:

Stock options
Warrants

Potentially dilutive common shares
Denominator for diluted earnings per share – Adjusted weighted-average shares
Earnings per common share:

Basic
Diluted

2008

2007

2006

$ 14,862

$ 17,501

$ 14,362

37,714

38,735

38,817

1,470
–
1,470
39,184

$ 0.39
$ 0.38

1,715
902
2,617
41,352

$ 0.45
$ 0.42

1,799
1,252
3,051
41,868

$ 0.37
$ 0.34

Stock options representing the right to purchase common stock of 1.6 million shares in 2008, 128,000 shares in 2007, and 13,000
shares in 2006, were not included in the computation of diluted earnings per share because their inclusion would have had an
antidilutive eﬀect.

12 LEASES

We lease oﬃce facilities for use in our operations, as well as transportation, computer and other equipment. We also have an oﬃce
facility lease agreement with a shareholder. Most of our leases are noncancelable operating lease agreements and they expire at various
dates through 2013. In addition to rent, the leases generally require us to pay taxes, maintenance, insurance and certain other
operating expenses.

Rent expense was approximately $5.9 million in 2008, and $4.9 million in both 2007 and 2006, which included rent expense
associated with related party lease agreements of $1.8 million in both 2008 and in 2007, and $1.7 million in 2006.

p57

Tyler Technologies Notes to Financial Statements

Future minimum lease payments under all noncancelable leases at December 31, 2008 are as follows:

Years ending December 31,

2009
2010
2011
2012
2013
Thereafter

$ 5,931
4,489
3,271
2,153
567
–
$ 16,411

Included in future minimum lease payments are noncancelable payments due to related parties of $1.7 million in 2009, $579,000 in
2010 and none thereafter.

13 EMPLOYEE BENEFIT PLANS

We provide a deﬁned contribution plan for the majority of our employees meeting minimum service requirements. The employees
can contribute up to 30% of their current compensation to the plan subject to certain statutory limitations. We contribute up to a
maximum of 2.5% of an employee’s compensation to the plan. We made contributions to the plan and charged operations $2.0
million during 2008, $1.7 million during 2007, and $1.6 million during 2006.

14 COMMITMENTS AND CONTINGENCIES

On November 3, 2008, a putative collective action complaint was ﬁled against us in the United States District Court for the Eastern
District of Texas on behalf of current and former “customer support analysts,” “client liaisons,” “engineers,” “trainers,” and
“education services specialists.” The petition alleges that we misclassiﬁed these groups of employees as “exempt” rather than
“non-exempt” under the Fair Labor Standards Act; therefore, the petition alleges that we failed to properly pay overtime wages. The
suit was initiated by six former employees working out of our Longview, Texas, oﬃce and seeks to recover damages in the form of
lost overtime pay since October 31, 2005, liquidated damages equal to the amount of lost overtime pay, interest, costs, and attorneys’
fees. We intend to vigorously defend the action. Given the preliminary nature of the alleged claims and the inherent unpredictability
of litigation, we cannot at this time estimate the possible outcome of any such action.

On June 27, 2008, we settled outstanding litigation related to two Stock Purchase Warrants (the “Warrants”) owned by Bank of
America, N. A. (“BANA”). As disclosed in prior SEC ﬁlings, the Warrants entitled BANA to acquire 1.6 million shares of Tyler
common stock at an exercise price of $2.50 per share. The Warrants expired on September 10, 2007. Prior to their expiration, BANA
attempted to exercise the Warrants; however, the parties disputed whether or not BANA’s exercise was eﬀective. We ﬁled suit for
declaratory judgment seeking a court’s determination on the matter, and BANA asserted numerous counterclaims against us,
including breach of contract and misrepresentation.

Following court-ordered mediation, in July 2008, BANA paid us $2.0 million and we issued to BANA 801,883 restricted shares of
Tyler common stock. Accordingly, as a result of the settlement, we recorded a non-cash legal settlement related to warrants charge of
$9.0 million, which is not tax deductible.

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

p58

Notes to Financial Statements 2008 Annual Report

15 QUARTERLY FINANCIAL INFORMATION UNAUDITED

The following table contains selected ﬁnancial information from unaudited statements of operations for each quarter of 2008
and 2007.

2008

2007

Quarters ended

Dec. 31

Sept. 30

June 30 (1) Mar. 31

Dec. 31

Sept. 30

June 30 Mar. 31

Revenues
Gross proﬁt
Income before income taxes
Net income
Earnings per diluted share

$ 69,544
28,945
9,845
5,131
0.14

$ 68,637
29,950
12,335
6,359
0.16

$ 67,569
29,089
2,026
246
0.01

$ 59,351
21,803
5,070
3,126
0.08

$ 60,420
24,436
10,128
6,190
0.15

$ 54,932
21,630
8,369
5,160
0.12

$ 54,112 $ 50,332
18,022
20,337
3,923
6,160
2,401
3,750
0.06
0.09

Shares used in computing diluted earnings
per share

37,604

40,019

39,633

39,527

40,358

41,395

41,448

42,066

(1) On June 27, 2008, we settled outstanding litigation related to Warrants owned by BANA. As disclosed in prior SEC ﬁlings, the Warrants entitled
BANA to acquire 1.6 million shares of Tyler common stock at an exercise price of $2.50 per share. Following court-ordered mediation, in July
2008, BANA paid us $2.0 million and we issued to BANA 801,883 restricted shares of Tyler common stock. Accordingly, we recorded a non-cash
legal settlement related to warrants charge of $9.0 million, which is not tax deductible, during the three months ended June 30, 2008.

p59

Tyler Technologies Performance Graph

PERFORMANCE GRAPH

The following table compares total Shareholder returns for Tyler over the last ﬁve years to the Standard and Poor’s 500 Stock Index
and the Standard and Poor’s 600 Information Technology Index assuming a $100 investment made on December 31, 2003. Each
of the three measures of cumulative total return assumes reinvestment of dividends. The stock performance shown on the graph below
is not necessarily indicative of future price performance.

Comparison of Cumulative Five Year Total Return

$200

$150

$100

$50

p60

2003

100

2004

86.81

110.88

106.65

2005

91.17

116.33

106.39

2006

146.00

134.70

116.42

2007

133.85

142.10

127.25

2008

124.40

89.53

75.88

Tyler

S&P 500 Index

S&P 600 Information
Technology Index

Corporate Headquarters
5949 Sherry Lane
Suite 1400
Dallas, Texas 75225
972.713.3700
www.tylertech.com

Transfer Agent and Registrar
American Stock Transfer & Trust Company
59 Maiden Lane
Plaza Level
New York, New York 10038
800.937.5449 tel
718.236.2641 fax
www.amstock.com

Independent Registered Public
Accounting Firm
Ernst & Young LLP
Dallas, Texas

Annual Meeting of Stockholders
Our Annual Meeting will be held on Thursday,
May 14, 2009, at 9:30 a.m. Central time at The
Park City Club, 5956 Sherry Lane, Suite 1700
Dallas, Texas 75225.

Certifications
We submitted an unqualiﬁed Annual CEO Certiﬁcation
to the New York Stock Exchange (NYSE) as required by
the NYSE Listed Company rules. We also ﬁled with the
Securities and Exchange Commission the Chief Executive
Oﬃcer and Chief Financial Oﬃcer certiﬁcations required
under Section 302 of the Sarbanes-Oxley Act as exhibits
to our Annual Report on Form 10-K.

Investor Information
Our Annual Report on Form 10-K is available on the
Company’s website at www.tylertech.com. A copy of the
Form 10-K or other information may also be obtained
by contacting the Investor Relations Department at
corporate headquarters.

Investor Relations
Tyler Technologies, Inc.
972.713.3714
info@tylertech.com

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

Corporate Officers
John M. Yeaman
Chairman of the Board

John S. Marr, Jr.
President and Chief Executive Officer

Dustin R. Womble
Executive Vice President

Brian K. Miller
Executive Vice President
Chief Financial Officer and Treasurer

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

Rick L. Hoff
Vice President
Chief Technology Officer

Robert J. Sansone
Vice President
Human Resources

W. Michael Smith
Vice President
Chief Accounting Officer

Terri L. Alford
Controller

Board of Directors
John M. Yeaman1
Chairman of the Board
Tyler Technologies, Inc.
John S. Marr, Jr.1
President and Chief Executive Oﬃcer
Tyler Technologies, Inc.
Donald R. Brattain2,3
President
Brattain and Associates, LLC
J. Luther King, Jr.2,4
Chief Executive Oﬃcer
Luther King Capital Management
G. Stuart Reeves2,3,4
Retired Executive Vice President
Electronic Data Systems Corporation
Michael D. Richards3,4
Executive Vice President
Republic Title of Texas, Inc.
Dustin R. Womble1
Executive Vice President
Tyler Technologies, Inc.

1 Executive Committee
2 Audit Committee
3 Nominating and Governance Committee
4 Compensation Committee

5949 Sherry Lane

Suite 1400

Dallas, Texas 75225

972.713.3700