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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2010
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-10485
TYLER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
     
DELAWARE
(State or other jurisdiction
of incorporation or
organization)
  75-2303920
(I.R.S. employer
identification no.)
     
5949 Sherry Lane, Suite 1400
Dallas, Texas

(Address of principal
executive offices)
  75225
(Zip code)
Registrant’s telephone number, including area code: (972) 713-3700
 
Securities registered pursuant to Section 12(b) of the Act:
     
    Name of each exchange
Title of each class   on which registered
COMMON STOCK, $0.01 PAR VALUE   NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
 
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o   NO þ
     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES o   NO þ
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ   NO o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o      No o
     Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. YES o   NO þ
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ 
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) YES o   NO þ
     The aggregate market value of the voting stock held by non-affiliates of the registrant was $508,185,000 based on the reported last sale price of common stock on June 30, 2010, which is the last business day of the registrant’s most recently completed second fiscal quarter.
     The number of shares of common stock of the registrant outstanding on February 22, 2011 was 31,987,000.
DOCUMENTS INCORPORATED BY REFERENCE
     Certain information required by Part III of this annual report is incorporated by reference from the registrant’s definitive proxy statement for its annual meeting of stockholders to be held on May 10, 2011.
 
 

 


 

TYLER TECHNOLOGIES, INC.
FORM 10-K
TABLE OF CONTENTS
         
        PAGE
PART I
  Business   3
 
       
  Risk Factors   10
 
       
  Unresolved Staff Comments   16
 
       
  Properties   17
 
       
  Legal Proceedings   17
 
       
  Submission of Matters to a Vote of Security Holders   17
 
       
PART II
 
       
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   18
 
       
  Selected Financial Data   21
 
       
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   22
 
       
  Quantitative and Qualitative Disclosures about Market Risk   40
 
       
  Financial Statements and Supplementary Data   40
 
       
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   40
 
       
  Controls and Procedures   40
 
       
  Other Information   41
 
       
PART III
 
       
  Directors, Executive Officers and Corporate Governance   41
 
       
  Executive Compensation   41
 
       
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   41
 
       
  Certain Relationships and Related Transactions, and Director Independence   41
 
       
  Principal Accounting Fees and Services   41
 
       
PART IV
 
       
  Exhibits, Financial Statement Schedules   42
 
       
Signatures   45
 EX-23
 EX-31.1
 EX-31.2
 EX-32

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PART I
ITEM 1. BUSINESS.
DESCRIPTION OF BUSINESS
Tyler Technologies, Inc. (“Tyler”) is a major provider of integrated information management solutions and services for the public sector, with a focus on local governments. We partner with clients to make local government more accessible to the public, more responsive to the needs of citizens and more efficient in its operations. We have a broad line of software solutions and services to address the information technology (“IT”) needs of virtually every major area of operation for cities, counties, schools and other local government entities. Most of our customers have our software installed in-house. For customers who prefer not to physically acquire the software and hardware, we provide some of our applications under subscription-based applications service provider (“ASP”) arrangements. We provide professional IT services to our customers, including software and hardware installation, data conversion, training and, at times, product modifications. In addition, we are the nation’s largest provider of outsourced property appraisal services for taxing jurisdictions. We also provide continuing customer support services to ensure proper product performance and reliability, which provides us with long-term customer relationships and a significant base of recurring maintenance revenue.
Tyler was founded in 1966. Prior to 1998, we operated as a diversified industrial conglomerate, with operations in various industrial, retail and distribution businesses, all of which have been divested. In 1997, we embarked on a multi-phase growth plan focused on serving the specialized information management needs of local governments nationwide. In 1998 and 1999, we entered the local government IT market through a series of strategic acquisitions of companies in the local government IT market.
MARKET OVERVIEW
The state and local government market is one of the largest and most decentralized IT markets in the country, consisting of all 50 states, approximately 3,000 counties, 36,000 cities and towns and 13,900 school districts. This market is also comprised of approximately 35,000 special districts and other agencies, each with specialized delegated responsibilities and unique information management requirements.
Traditionally, local government bodies and agencies performed state-mandated duties, including property assessment, record keeping, road maintenance, law enforcement, administration of election and judicial functions, and the provision of welfare assistance. Today, a host of emerging and urgent issues are confronting local governments, each of which demands a service response. These areas include criminal justice and corrections, administration and finance, public safety, health and human services, and public works. Transfers of responsibility from the federal and state governments to county and municipal governments and agencies in these and other areas also place additional service and financial requirements on these local government units. In addition, constituents of local governments are increasingly demanding improved service and better access to information from public entities. As a result, local governments recognize the increasing value of information management systems and services to, among other things, improve revenue collection, provide increased access to information, and streamline delivery of services to their constituents. Local government bodies are now recognizing that “e-government” is an additional responsibility for community development. From integrated tax systems to integrated civil and criminal justice information systems, many counties and cities have benefited significantly from the implementation of jurisdiction-wide systems that allow different agencies or government offices to share data and provide a more comprehensive approach to information management. Many city and county governmental agencies also have unique individual information management requirements, which must be tailored to the specific functions of each particular office.
Many local governments also have difficulties attracting and retaining the staff necessary to support their IT functions. As a result, they seek to establish long-term relationships with reliable providers of high quality IT products and services such as Tyler.
Although local governments generally face budgetary constraints in their operations, their primary revenue sources are usually property taxes, and to a lesser extent, utility billings and other fees, which historically tend to be relatively stable. In addition, the acquisition of new technology typically enables local governments to operate more efficiently, and often provides a measurable return on investment that justifies the purchase of software and related services.
Gartner estimates that state and local government software applications and vertical specific software spending will grow from $8.6 billion in 2011 to $10.0 billion in 2014. The professional services and support segments of the market, where our business is primarily focused, is expected to expand from $32.5 billion in 2011 to $37.9 billion in 2014. Software sales in the primary and

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secondary education segments of the market is expected to expand from $1.1 billion in 2011 to $1.4 billion in 2014 while professional services and support are expected to grow from $2.2 billion in 2011 to $2.6 billion in 2014.
PRODUCTS AND SERVICES
We provide a comprehensive and flexible suite of products and services that address the information technology needs of cities, counties, schools and other local government entities. We derive our revenues from five primary sources:
    sales of software licenses;
 
    subscription-based arrangements;
 
    software services;
 
    maintenance and support; and
 
    appraisal services.
We design, develop and market a broad range of software solutions to serve mission-critical “back-office” functions of local governments. Many of our software applications include Internet-accessible solutions that allow for real-time public access to a variety of information or that allow the public to transact business with local governments via the Internet. Our software solutions and services are generally grouped in three major areas:
    Financial Management and Education;
 
    Courts and Justice; and
 
    Property Appraisal and Tax and Other.
Each of our core software systems consists of several fully integrated application modules. For customers who acquire the software for use in-house, we generally license our systems under standard perpetual license agreements that provide the customer with a fully paid, nonexclusive, nontransferable right to use the software. In some of the product areas, such as financial management and education and property appraisal and tax, we offer multiple solutions designed to meet the needs of different sized governments.
We also offer certain software solutions on a “software as a service” basis for customers who do not wish to maintain, update and operate these systems or to make large up-front capital expenditures to implement these advanced technologies. For these customers, we host the applications and data at our data centers or at third-party locations. Customers typically pay monthly fees under multi-year contracts for these subscription-based services.
Historically, we have had a greater proportion of our annual revenues in the second half of our fiscal year due to governmental budget and spending cycles and the timing of system implementations for customers desiring to “go live” at the beginning of the calendar year.
A description of our suites of products and services follows:
Software Licenses
Financial Management and Education
Our financial management and education solutions are Enterprise Resource Planning systems for local governments, which integrate information across all facets of a client organization. Our financial management solutions include modular fund accounting systems that can be tailored to meet the needs of virtually any government agency or not-for-profit entity. Our financial management systems include modules for general ledger, budget preparation, fixed assets, requisitions, purchase orders, bid management, accounts payable, contract management, accounts receivable, investment management, inventory control, project and grant accounting, work orders, job costing, GASB 34 reporting, payroll and human resources. All of our financial management systems are intended to conform to government auditing and financial reporting requirements and generally accepted accounting principles.
We sell utility billing systems that support the billing and collection of metered and non-metered services, along with multiple billing cycles. Our Web-enabled utility billing solutions allow customers to access information online such as average consumption and transaction history. In addition, our systems can accept secured Internet payments via credit cards and checks.

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We also offer specialized products that automate numerous city functions, including municipal courts, parking tickets, equipment and project costing, animal licenses, business licenses, permits and inspections, code enforcement, citizen complaint tracking, ambulance billing, fleet maintenance, and cemetery records management.
In addition to providing financial management systems to K-12 schools, we sell student information systems for K-12 schools, which manage such activities as scheduling, grades and attendance. We also offer student transportation solutions to manage school bus routing optimization, fleet management, field trips and other related functions. We also sell software applications to manage public sector pension funds.
Tyler’s financial management and education solutions include Web components that enhance local governments’ service capabilities by facilitating online access to information for both employees and citizens and enabling online transactions.
Courts and Justice
We offer a complete, fully integrated suite of judicial solutions designed to handle complex, multi-jurisdictional county or statewide implementations as well as single county systems. Our solutions help eliminate duplicate data entry, promote more effective business procedures and improve efficiency across the entire justice process.
Our unified court case management system is designed to automate the tracking and management of information involved in all case types, including criminal, traffic, civil, family, probate and juvenile courts. It also tracks the status of cases, processes fines and fees and generates the specialized judgment and sentencing documents, notices and forms required in the court process. Documents received by the court can be scanned into the electronic case file and easily retrieved for viewing. Documents generated by the court can be electronically signed and automatically attached to the electronic case file. Additional modules automate the management of court calendars, coordinate judge’s schedules and generate court dockets. Our targeted courtroom technologies allow courts to rapidly review calendars, cases and view documents in the courtroom. Courts may also take advantage of our related jury management system.
Our law enforcement systems automate police and sheriff functions from dispatch and records management through booking and jail management. Searching, reporting and tracking features are integrated, allowing reliable, up-to-date access to current arrest and incarceration data, including digital mug shots. Our systems also provide warrant checks for visitors or book-ins, inmate classification and risk assessment, commissary, property and medical processing, and automation of statistics and state and federal reporting. Our computer-aided dispatch/emergency 911 system tracks calls and the availability of emergency response vehicles, interfaces with local and state searches, and assists dispatchers with processing emergency situations. The law enforcement and jail management systems are fully integrated with prosecution and other court products that manage the entire judicial process.
Our court and law enforcement systems allow the public to access, via the Internet, a variety of information, including non-confidential criminal and civil court records, jail booking and release information, bond and bondsmen information, and court calendars and dockets. In addition, our systems allow cities and counties to accept payments for traffic and parking tickets over the Internet, with a seamless and automatic interface to back-office justice and financial systems.
Our prosecutor system enables state attorney offices to track and manage criminal cases, including detailed victim information and private case notes. Investigative reports and charging instrument documents can be generated and stored for later viewing. Prosecutors can schedule and record the outcome of grand jury hearings. When integrated with the court system, prosecutors can view the electronic case file and related documents, as well as manage witness lists and subpoenas needed for court hearings.
Our supervision system allows pre-trial and probation offices to manage offender caseloads. Supervision officers can track contact schedules, risk/needs assessments and reassessments, detailed drug test results, employment histories, compliance with conditions and payments of fees and restitution. Documents and forms, like pre-sentence investigations or revocation orders, can be generated and stored for easy viewing. When integrated with the jail and court systems, supervision officers can have easy access and quick notification of offenders that have court hearings scheduled, are arrested locally and have new warrants issued.
We also offer a court case management solution that automates and tracks all aspects of municipal courts and offices. It is a fully integrated, graphical application that provides effective case management, document processing and cash/bond management. This system complies with all state reporting and conviction reports and includes electronic reporting and also integrates with certain of our financial management solutions and public safety solutions. Our public safety solution for municipalities includes more than thirty essential law enforcement, criminal investigation, and administration record management modules. The public safety solution

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manages information such as arrests and field interviews, traffic reports and citations, and incident and offense reports. It also supports multimedia files, photo lineups, multi-agency security and incident workflow and streamlines mandatory reporting to local, state and federal offices.
Property Appraisal and Tax and Other
We provide systems and software that automate the appraisal and assessment of real and personal property, including record keeping, mass appraisal, inquiry and protest tracking, appraisal and tax roll generation, tax statement processing, and electronic state-level reporting. These systems are image and video-enabled to facilitate the storage of and access to the many property-related documents and for the online storage of digital photographs of properties for use in defending values in protest situations. Other related tax applications are available for agencies that bill and collect taxes, including cities, counties, school tax offices, and special taxing and collection agencies. These systems support billing, collections, lock box operations, mortgage company electronic payments, and various reporting requirements.
We also offer a number of specialized software applications designed to help county governments enhance and automate courthouse operations. These systems record, scan and index information for the many documents maintained at the courthouse, such as deeds, mortgages, liens, UCC financing statements and vital records (birth, death and marriage certificates). These applications include fully integrated imaging systems with batch and scan processing capabilities and fully integrated receipting and cashiering systems as well as Web-enabled public access.
Subscription-Based Services
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. Our ASP arrangements and other hosted service offerings, provide certain software solutions on a “software as a service” basis for customers who do not wish to maintain, update and operate these systems or to make large up-front capital expenditures to implement these advanced technologies.
ASP arrangements and other hosting services are typically for a period of three to six years and automatically renew unless either party cancels the agreement. Other software subscriptions and disaster recovery service arrangements are typically under annual contracts. The majority of the ASP and other hosting services and software subscriptions also include professional services and maintenance and support services. In certain ASP arrangements, the customer also acquires a license to the software.
We also provide electronic document filing solutions (e-filings) for courts and law offices which simplify the filing and management of court related documents. Revenues for e-filings are included in subscription-based revenues and are generally derived from transaction fees.
Software Services
We provide a variety of professional IT services to customers who utilize our software products. Virtually all of our customers contract with us for installation, training, and data conversion services in connection with their purchase of Tyler’s software solutions. The complete implementation process for a typical system includes planning, design, data conversion, set-up and testing. At the culmination of the implementation process, an installation team travels to the customer’s facility to ensure the smooth transfer of data to the new system. Installation fees are charged separately to customers on either a fixed-fee or hourly charge basis, depending on the contract.
Both in connection with the installation of new systems and on an ongoing basis, we provide extensive training services and programs related to our products and services. Training can be provided in our training centers, onsite at customers’ locations, or at meetings and conferences, and can be customized to meet customers’ requirements. The vast majority of our customers contract with us for training services, both to improve their employees’ proficiency and productivity and to fully utilize the functionality of our systems. Training services are generally billed on an hourly basis, along with travel and other expenses.

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Maintenance and Support
Following the implementation of our software systems, we provide ongoing software support services to assist our customers in operating the systems and to periodically update the software. Support is provided over the phone to customers through help desks staffed by our customer support representatives. For more complicated issues, our staff, with the customers’ permission, can log on to customers’ systems remotely. We maintain our customers’ software largely through releases that contain improvements and incremental additions, along with updates necessary because of legislative or regulatory changes.
Virtually all of our software customers contract with us for maintenance and support, which provides us with a significant source of recurring revenue. We generally provide maintenance and support under annual contracts, with a typical fee based on a percentage of the software product’s license fee. These fees can be increased annually and may also increase as new license fees increase. Maintenance and support fees are generally paid in advance for the entire maintenance contract period. Most maintenance contracts automatically renew unless the customer or Tyler gives notice of termination prior to expiration. Similar support is provided to our ASP customers, and is included in their overall monthly fees which are classified as subscription-based revenues.
Appraisal Services
We are the nation’s largest provider of property appraisal outsourcing services for local government taxing authorities. These services include:
    the physical inspection of commercial and residential properties;
 
    data collection and processing;
 
    sophisticated computer analyses for property valuation;
 
    preparation of tax rolls;
 
    community education regarding the assessment process; and
 
    arbitration between taxpayers and the assessing jurisdiction.
Local government taxing authorities normally reappraise properties from time to time to update values for tax assessment purposes and to maintain equity in the taxing process. In some jurisdictions, reassessment cycles are mandated by law; in others, they are discretionary. While some taxing jurisdictions perform reappraisals in-house, many local governments outsource this function because of its cyclical nature and because of the specialized knowledge and expertise requirements associated with it. Our appraisal services business unit has been in this business since 1938.
In some instances, we also sell property tax and/or appraisal software products in connection with appraisal outsourcing projects, while other customers may only engage us to provide appraisal services. Appraisal outsourcing services are somewhat seasonal in nature to the extent that winter weather conditions reduce the productivity of data collection activities in connection with those projects.
STRATEGY
Our objective is to grow our revenue and earnings internally, supplemented by focused strategic acquisitions. The key components of our business strategy are to:
    Provide high quality, value—added products and services to our clients. We compete on the basis of, among other things, delivering to customers our deep domain expertise in local government operations through the highest value products and services in the market. We believe we have achieved a reputation as a premium product and service provider to the local government market.
 
    Continue to expand our product and service offerings. While we already have what we believe to be the broadest line of software products for local governments, we continually upgrade our core software applications and expand our complementary product and service offerings to respond to technological advancements and the changing needs of our clients. For example, we offer solutions that allow the public to access data and conduct transactions with local governments, such as paying traffic tickets, property taxes and utility bills, and filing court documents via the Internet. We believe that the addition of such features enhances the market appeal of our core products. Since 2001, we have also offered many of our software products under an ASP or other software as a subscription-based service model which we believe will, over time, have

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      increasing appeal to local governments and will be expanded to include more applications. We have also increased our offerings of consulting and business process reengineering services.
    Expand our customer base. We seek to establish long-term relationships with new customers primarily through our sales and marketing efforts. While we currently have customers in all 50 states, Canada, Caribbean, and the United Kingdom, not all of our solutions have achieved nationwide geographic penetration. We intend to continue to expand into new geographic markets by adding sales staff and targeting marketing efforts by solutions in those areas. We also intend to continue to expand our customer base to include more large governments. While our traditional market focus has primarily been on small and mid-sized governments, our increased size and market presence, together with the technological advances and improved scalability of certain of our solutions, are allowing us to achieve success in selling to larger customers.
 
    Expand our existing customer relationships. Our existing customer base offers significant opportunities for additional sales of IT solutions and services that we currently offer, but that existing customers do not fully utilize. Add-on sales to existing customers typically involve lower sales and marketing expenses than sales to new customers.
 
    Grow recurring revenues. We have a large recurring revenue base from maintenance and support and subscription-based services, which generated revenues of $159.0 million, or 55% of total revenues, in 2010. We have historically experienced very low customer turnover (approximately 3% annually) and recurring revenues continue to grow as the installed customer base increases. In addition, subscription-based revenues have been our fastest growing revenue category over the past five years and have grown from $5.9 million in 2005 to $23.3 million in 2010.
 
    Maximize economies of scale and take advantage of financial leverage in our business. We seek to build and maintain a large client base to create economies of scale, enabling us to provide value-added products and services to our customers while expanding our operating margins. Because we sell primarily “off-the-shelf” software, increased sales of the same solutions result in incrementally higher gross margins. In addition, we believe that we have a marketing and administrative infrastructure in place that we can leverage to accommodate significant long-term growth without proportionately increasing selling, general and administrative expenses.
 
    Attract and retain highly qualified employees. We believe that the depth and quality of our operating management and staff is one of our significant strengths, and that the ability to retain such employees is crucial to our continued growth and success. We believe that our stable management team, financial strength and growth opportunities, as well as our leadership position in the local government market, enhance our attractiveness as an employer for highly skilled employees.
 
    Pursue selected strategic acquisitions. While we expect to primarily grow internally, from time to time we selectively pursue strategic acquisitions that provide us with one or more of the following:
    products and services to complement our existing offerings;     
 
    entry into new markets related to local governments; and     
 
    new customers and/or geographic expansion.     
    Establish strategic alliances. In January 2007 we announced a strategic alliance with Microsoft Corporation to jointly develop core public sector functionality for Microsoft Dynamics AX to address the unique accounting needs of public sector organizations worldwide. As part of this alliance we are enhancing Microsoft Dynamics AX with public sector-specific functionality. The arrangement will broaden the functionality of Microsoft Dynamics AX, providing both Tyler and Microsoft with a public sector accounting platform to support their existing and prospective clients well into the future. In the fourth quarter of 2009 we expanded our arrangement with Microsoft to include payroll, human resource and budget functionality. Microsoft Dynamics AX with public sector functionality will be sold in the United States and internationally through Microsoft’s distribution channels and is expected to be released in 2011. Tyler will also become an authorized Microsoft reseller for the Microsoft Dynamics solutions developed under this arrangement, and will sell the solutions directly into the government market. Tyler will receive license and maintenance royalties on direct and indirect sales of the solutions co-developed under this multi-year term relationship.

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SALES, MARKETING, AND CUSTOMERS
We market our products and services through direct sales and marketing personnel located throughout the United States. Other in-house sales staff focuses on add-on sales, professional services and support.
Sales of new systems are typically generated from referrals from other government offices or departments within a county or municipality, referrals from other local governments, relationships established between sales representatives and county or local officials, contacts at trade shows, direct mailings, and direct contact from prospects already familiar with us. We are active in numerous national, state, county, and local government associations, and participate in annual meetings, trade shows, and educational events.
Customers consist primarily of county and municipal agencies, school districts and other local government offices. In counties, customers include the auditor, treasurer, tax assessor/collector, county clerk, district clerk, county and district court judges, probation officers, sheriff, and county appraiser. At municipal government sites, customers include directors from various departments, including administration, finance, utilities, public works, code enforcement, personnel, purchasing, taxation, municipal court, and police. Contracts for software products and services are generally implemented over periods of three months to one year, with annually renewing maintenance and support update agreements thereafter. Although either the customer or we can terminate these agreements, historically almost all support and maintenance agreements are automatically renewed annually. Contracts for appraisal outsourcing services are generally one to three years in duration. During 2010, approximately 47% of our revenue was attributable to ongoing support and maintenance agreements.
COMPETITION
We compete with numerous local, regional, and national firms that provide or offer some or many of the same solutions and services that we provide. Most of these competitors are smaller companies that may be able to offer less expensive solutions than ours. Many of these firms operate within a specific geographic area and/or in a narrow product or service niche. We also compete with national firms, some of which have greater financial and technical resources than we do, including Oracle Corporation, Lawson Software, Inc., SAP AG, Affiliated Computer Services, Inc., SunGard Data Systems, Inc., New World Systems, American Cadastre, LLC (AmCad), Constellation Software, Inc. and Manatron, Inc. In addition, we sometimes compete with consulting and systems integration firms, such as Deloitte LLP, which develop custom systems, primarily for larger governments. We also occasionally compete with central internal information service departments of local governments, which require us to persuade the end-user department to discontinue service by its own personnel and outsource the service to us. We compete on a variety of factors, including price, service, name recognition, reputation, technological capabilities, and the ability to modify existing products and services to accommodate the individual requirements of the customer. Our ability to offer an integrated system of applications for several offices or departments is often a competitive strength. Local governmental units often are required to seek competitive proposals through a request for proposal process.
SUPPLIERS
Substantially all of the computers, peripherals, printers, scanners, operating system software, office automation software, and other equipment necessary for the implementation and provision of our software systems and services are presently available from several third-party sources. Hardware is purchased on original equipment manufacturer or distributor terms at discounts from retail. We have not experienced any significant supply problems.
BACKLOG
At December 31, 2010, our estimated revenue backlog was approximately $281.4 million, compared to $233.1 million at December 31, 2009. The backlog represents signed contracts under which the revenue has not been recognized as of year-end. Approximately $197.1 million of the backlog is expected to be recognized during 2011.

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INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS, AND LICENSES
We regard certain features of our internal operations, software, and documentation as confidential and proprietary and rely on a combination of contractual restrictions, trade secret laws and other measures to protect our proprietary intellectual property. We generally do not rely on patents. We believe that, due to the rapid rate of technological change in the computer software industry, trade secrets and copyright protection are less significant than factors such as knowledge, ability and experience of our employees, frequent product enhancements, and timeliness and quality of support services. We typically license our software products under non-exclusive license agreements which are generally non-transferable and have a perpetual term.
EMPLOYEES
At December 31, 2010, we had 2,054 employees. Appraisal outsourcing projects are cyclical in nature and can be widely dispersed geographically. We often hire temporary employees to assist in these projects whose term of employment generally ends with the project’s completion. None of our employees are represented by a labor union or are subject to collective bargaining agreements. We consider our relations with our employees to be positive.
INTERNET WEBSITE AND AVAILABILITY OF PUBLIC FILINGS
We file annual, quarterly, current and other reports, proxy statements and other information with the Securities and Exchange Commission, or SEC, pursuant to the Securities Exchange Act. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and other information statements, and other information regarding issuers, including us, that file electronically with the SEC. The address of this site is http://www.sec.gov.
We also maintain an Internet site at www.tylertech.com. We make available free of charge through this site our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Forms 4 and 5, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, copies of our annual report will be made available, free of charge upon written request.
Our “Code of Business Conduct and Ethics” is also available on our Web site. We intend to satisfy the disclosure requirements regarding amendments to, or waivers from, a provision of our Code of Business Conduct and Ethics by posting such information on our Web site.
ITEM 1A. RISK FACTORS
An investment in our common stock involves a high degree of risk. Investors evaluating our company should carefully consider the factors described below and all other information contained in this Annual Report. Any of the following factors could materially harm our business, operating results, and financial condition. Additional factors and uncertainties not currently known to us or that we currently consider immaterial could also harm our business, operating results, and financial condition. This section should be read in conjunction with the Financial Statements and related Notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report. We may make forward-looking statements from time to time, both written and oral. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements. Our actual results may differ materially from those projected in any such forward-looking statements due to a number of factors, including those set forth below and elsewhere in this Annual Report.
Risks Associated with Selling Products and Services into the Public Sector Marketplace
Declining general economic conditions and uncertainties in the global credit crisis and equity markets may adversely affect our operating results and financial condition.
The financial market crisis has continued to disrupt credit and equity markets worldwide. Local and state governments may face financial pressures that could in turn affect our growth rate in 2011. We cannot assure you local and state spending levels will be unaffected by the global credit crisis and if budget shortfalls occur they may negatively impact local and state information technology spending and could have a material adverse effect upon our business, operating results, and financial condition.

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Selling products and services into the public sector poses unique challenges.
We derive substantially all of our revenues from sales of software and services to state, county and city governments, other municipal agencies, and other public entities. We expect that sales to public sector customers will continue to account for substantially all of our revenues in the future. We face many risks and challenges associated with contracting with governmental entities, including:
    limitations on governmental resources placed by budgetary constraints, which in some circumstances, may provide for a termination of executed contracts because of a lack of future funding;
 
    the sales cycle of governmental agencies may be complex and lengthy;
 
    payments under some public sector contracts are subject to achieving implementation milestones, and we have had, and may in the future have, differences with customers as to whether milestones have been achieved;
 
    political resistance to the concept of government agencies contracting with third parties to provide information technology solutions;
 
    changes in legislation authorizing government’s contracting with third parties;
 
    the internal review process by governmental agencies for bid acceptance;
 
    changes to the bidding procedures by governmental agencies;
 
    changes in governmental administrations and personnel; and
 
    the general effect of economic downturns and other changes on local governments’ ability to spend public funds on outsourcing arrangements.
Each of these risks is outside our control. If we fail to adequately adapt to these risks and uncertainties, our financial performance could be adversely affected.
A decline in information technology spending may result in a decrease in our revenues or lower our growth rate.
A decline in the demand for information technology among our current and prospective customers may result in decreased revenues or a lower growth rate for us because our sales depend, in part, on our customers’ level of funding for new or additional information technology systems and services. Moreover, demand for our solutions may be reduced by a decline in overall demand for computer software and services. Accordingly, we cannot assure you that we will be able to increase or maintain our revenues.
The open bidding process for governmental contracts creates uncertainty in predicting future contract awards.
Many governmental agencies purchase products and services through an open bidding process. Generally, a governmental entity will publish an established list of requirements requesting potential vendors to propose solutions for the established requirements. To respond successfully to these requests for proposals, we must accurately estimate our cost structure for servicing a proposed contract, the time required to establish operations for the proposed client, and the likely terms of any other third party proposals submitted. We cannot guarantee that we will win any bids in the future through the request for proposal process, or that any winning bids will ultimately result in contracts on favorable terms. Our failure to secure contracts through the open bidding process, or to secure such contracts on favorable terms, may adversely affect our business, financial condition, and results of operations.

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We face significant competition from other vendors and potential new entrants into our markets.
We believe we are a leading provider of integrated solutions for the public sector. However, we face competition from a variety of software vendors that offer products and services similar to those offered by us, as well as from companies offering to develop custom software. We compete on the basis of a number of factors, including:
    the attractiveness of the business strategy and services we offer;
 
    the breadth of products and services we offer;
 
    features and functionality of our software;
 
    price;
 
    quality of products and service;
 
    technological innovation;
 
    name recognition;
 
    our ability to modify existing products and services to accommodate the particular needs of our customers; and
 
    our financial strength and stability.
We believe the market is highly fragmented with a large number of competitors that vary in size, primary computer platforms, and overall product scope. Our competitors include consulting firms, publicly held companies that focus on selected segments of the public sector market, and a significant number of smaller, privately held companies. Certain competitors have greater technical, marketing, and financial resources than we do. We cannot assure you that such competitors will not develop products or offer services that are superior to our products or services or that achieve greater market acceptance.
We also compete with internal, centralized information service departments of governmental entities, which require us to persuade the end-user to stop the internal service and outsource to us. In addition, our customers may elect in the future to provide information management services internally through new or existing departments, which could reduce the market for our services.
We could face additional competition as other established and emerging companies enter the public sector software application market and new products and technologies are introduced. Increased competition could result in pricing pressure, fewer customer orders, reduced gross margins, and loss of market share. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third-parties, thereby increasing the ability of their products to address the needs of our prospective customers. It is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Further, competitive pressures could require us to reduce the price of our software licenses and related services. We cannot assure you that we will be able to compete successfully against current and future competitors, and the failure to do so would have a material adverse effect upon our business, operating results, and financial condition.
Fixed- price contracts may affect our profits.
Some of our present contracts are on a fixed-priced basis, which can lead to various risks, including:
    the failure to accurately estimate the resources and time required for an engagement;
 
    the failure to effectively manage governmental agencies’ and other customers’ expectations regarding the scope of services to be delivered for an estimated price; and
 
    the failure to timely complete fixed-price engagements within budget to the customers’ satisfaction.
If we do not adequately assess these and other risks, we may be subject to cost overruns and penalties, which may harm our business, financial condition, or results of operations.

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Changes in the insurance markets may affect our ability to win some contract awards and may lead to increased expenses.
Some of our customers, primarily those for our property appraisal services, require that we secure performance bonds before they will select us as their vendor. The number of qualified, high-rated insurance companies that offer performance bonds has decreased in recent years, while the costs associated with securing these bonds has increased dramatically. In addition, we are generally required to issue a letter of credit as security for the issuance of a performance bond. Our current credit facility contains a $25.0 million sublimit for letters of credit. We cannot guarantee that we will be able to secure such performance bonds in the future on terms that are favorable to us, if at all. Our inability to obtain performance bonds on favorable terms or at all could impact our future ability to win some contract awards, particularly large property appraisal services contracts, which could have a material adverse effect on our business, financial condition, and results of operations.
Recent volatility in the stock markets, increasing shareholder litigation, the adoption of expansive legislation that redefines corporate controls (in particular, legislation adopted to prevent future corporate and accounting scandals), as well as other factors have recently led to significant increases in premiums for directors’ and officers’ liability insurance. The number of insurers offering directors and officers insurance at competitive rates has also decreased in recent years. Volatility of the insurance market may result in future increases in our general and administrative expenses, which may adversely affect future operating results.
Risks Associated with Our Periodic Results and Stock Price
As with other software vendors, we may be required to delay revenue recognition into future periods, which could adversely impact our operating results.
We have in the past had to, and in the future may have to, defer revenue recognition for license fees due to several factors, including whether:
    license agreements include applications that are under development or other undelivered elements;
 
    we must deliver services that are considered essential to the functionality of the software, including significant modifications, customization, or complex interfaces, which could delay product delivery or acceptance;
 
    the transaction involves acceptance criteria;
 
    the transaction involves contingent payment terms or fees;
 
    we are required to accept a fixed-fee services contract; or
 
    we are required to provide extended payment terms.
Because of the factors listed above and other specific requirements under generally accepted accounting principles in the United States for software revenue recognition, we must have very precise terms in our license agreements in order to recognize revenue when we initially deliver and install software or perform services. Negotiation of mutually acceptable terms and conditions can extend the sales cycle, and sometimes we do not obtain terms and conditions that permit revenue recognition at the time of delivery or even as work on the project is completed.
We may experience fluctuations in quarterly revenue that could adversely impact our stock price and our operating results.
Our actual revenues in a quarter could fall below expectations, which could lead to a decline in our stock price. Our revenues and operating results are difficult to predict and may fluctuate substantially from quarter to quarter. Revenues from license fees in any quarter depend substantially upon our contracting activity and our ability to recognize revenues in that quarter in accordance with our revenue recognition policies. Our quarterly revenue may fluctuate and may be difficult to forecast for a variety of reasons, including the following:
    a significant number of our prospective customers’ decisions regarding whether to enter into license agreements with us may be made within the last few weeks of each quarter;
 
    the size of license transactions can vary significantly;
 
    customers may unexpectedly postpone or cancel procurement processes due to changes in their strategic priorities, project objectives, budget or personnel;
 
    customer purchasing processes vary significantly and a customer’s internal approval, expenditure authorization and contract negotiation processes can be difficult and time consuming to complete, even after selection of a vendor;

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    the number, timing, and significance of software product enhancements and new software product announcements by us and our competitors may affect purchase decisions;
    we may have to defer revenues under our revenue recognition policies; and
 
    customers may choose our subscription-based arrangements which result in lower software license revenues in the initial year as compared to traditional perpetual software license arrangements but generate higher overall subscription-based revenues over the term of the contract.
Fluctuation in our quarterly revenues may adversely affect our operating results. In each fiscal quarter our expense levels, operating costs, and hiring plans are based to some extent on projections of future revenues and are relatively fixed. If our actual revenues fall below expectations, we could experience a reduction in operating results.
Increases in service revenue as a percentage of total revenues could decrease overall margins and adversely affect our operating results.
We realize lower margins on software and appraisal service revenues than on license revenue. The majority of our contracts include both software licenses and professional services. Therefore, an increase in the percentage of software service and appraisal service revenue compared to license revenue could have a detrimental impact on our overall gross margins and could adversely affect operating results.
Our stock price may be volatile.
The market price of our common stock may be volatile and may be significantly affected by many different factors. Some examples of factors that can have a significant impact on our stock price include:
    actual or anticipated fluctuations in our operating results;
 
    announcements of technological innovations, new products, or new contracts by us or our competitors;
 
    developments with respect to patents, copyrights, or other proprietary rights;
 
    conditions and trends in the software and other technology industries;
 
    adoption of new accounting standards affecting the software industry;
 
    changes in financial estimates by securities analysts; and
 
    general market conditions and other factors.
In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the common stock of technology companies. These broad market fluctuations may adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. We cannot assure you that similar litigation will not occur in the future with respect to us. Such litigation could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect upon our business, operating results, and financial condition.
Financial Outlook.
From time to time in press releases and otherwise, we may publish forecasts or other forward-looking statements regarding our results, including estimated revenues or net earnings. Any forecast of our future performance reflects various assumptions. These assumptions are subject to significant uncertainties, and as a matter of course, any number of them may prove to be incorrect. Further, the achievement of any forecast depends on numerous risks and other factors (including those described in this discussion), many of which are beyond our control. As a result, we cannot be certain that our performance will be consistent with any management forecasts or that the variation from such forecasts will not be material and adverse. Current and potential stockholders are cautioned not to base their entire analysis of our business and prospects upon isolated predictions, but instead are encouraged to utilize our entire publicly available mix of historical and forward-looking information, as well as other available information regarding us, our products and services, and the software industry when evaluating our prospective results of operations.

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Risks Associated with Our Software Products
Our products are complex and we run the risk of errors or defects with new product introductions or enhancements.
Software products as complex as those developed by us may contain errors or defects, especially when first introduced or when new versions or enhancements are released. Although we have not experienced material adverse effects resulting from any such defects or errors to date, we cannot assure you that material defects and errors will not be found after commencement of product shipments. Any such defects could result in loss of revenues or delay market acceptance.
Our license agreements with our customers typically contain provisions designed to limit our exposure to potential liability claims. It is possible, however, that we may not always be able to negotiate such provisions in our contracts with customers or that the limitation of liability provisions contained in our license agreements may not be effective as a result of existing or future federal, state or local laws, ordinances, or judicial decisions. Although we maintain errors and omissions and general liability insurance, and we try to structure our contracts to include limitations on liability, we cannot assure you that a successful claim could not be made or would not have a material adverse effect on our business, financial condition, and results of operations.
We must respond to rapid technological changes to be competitive.
The market for our products is characterized by rapid technological change, evolving industry standards in computer hardware and software technology, changes in customer requirements, and frequent new product introductions and enhancements. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. As a result, our future success will depend, in part, upon our ability to continue to enhance existing products and develop and introduce in a timely manner or acquire new products that keep pace with technological developments, satisfy increasingly sophisticated customer requirements, and achieve market acceptance. We cannot assure you that we will successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner. Further, we cannot assure you that the products, capabilities, or technologies developed by others will not render our products or technologies obsolete or noncompetitive. If we are unable to develop or acquire on a timely and cost-effective basis new software products or enhancements to existing products, or if such new products or enhancements do not achieve market acceptance, our business, operating results, and financial condition may be materially adversely affected.
We may be unable to protect our proprietary rights.
Many of our product and service offerings incorporate proprietary information, trade secrets, know-how, and other intellectual property rights. We rely on a combination of contracts, copyrights, and trade secret laws to establish and protect our proprietary rights in our technology. We cannot be certain that we have taken all appropriate steps to deter misappropriation of our intellectual property. In addition, there has been significant litigation in the United States in recent years involving intellectual property rights. We are not currently involved in any material intellectual property litigation. We may, however, be a party to intellectual property litigation in the future to protect our proprietary information, trade secrets, know-how, and other intellectual property rights. Further, we cannot assure you that third parties will not assert infringement or misappropriation claims against us in the future with respect to current or future products. Any claims or litigation, with or without merit, could be time-consuming and result in costly litigation and diversion of management’s attention. Further, any claims and litigation could cause product shipment delays or require us to enter into royalty or licensing arrangements. Such royalty or licensing arrangements, if required, may not be available on terms acceptable to us, if at all. Thus, litigation to defend and enforce our intellectual property rights could have a material adverse effect on our business, financial condition, and results of operations, regardless of the final outcome of such litigation.
Risks Associated with Our Growth Strategy and Other General Corporate Risks
We may experience difficulties in executing our acquisition strategy.
In addition, a significant portion of our growth has resulted from strategic acquisitions in new product and geographic markets. Although our focus is on internal growth, we will continue to identify and pursue strategic acquisitions and alliances with suitable candidates. Our future success will depend, in part, on our ability to successfully integrate future acquisitions and other strategic alliances into our operations. Acquisitions may involve a number of special risks, including diversion of management’s attention, failure to retain key acquired personnel, unanticipated events or circumstances, legal liabilities, and amortization of certain acquired intangible assets. Some or all of these risks could have a material adverse effect on our business, financial condition, and results of operations. Although we conduct due diligence reviews of potential acquisition candidates, we may not identify all material liabilities

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or risks related to acquisition candidates. There can be no assurance that any such strategic acquisitions or alliances will be accomplished on favorable terms or will result in profitable operations.
Our failure to properly manage growth could adversely affect our business.
We have expanded our operations since 1998, when we entered the business of providing software solutions and services to the public sector. We intend to continue expansion in the foreseeable future to pursue existing and potential market opportunities. This growth places a significant demand on management and operational resources. In order to manage growth effectively, we must implement and improve our operational systems, procedures, and controls on a timely basis. We must also identify, hire, train, and manage key managerial and technical personnel. If we fail to implement these systems or employ and retain such qualified personnel, our business, financial condition, and results of operations may be materially adversely affected.
We may be unable to hire, integrate, and retain qualified personnel.
Our continued success will depend upon the availability and performance of our key management, sales, marketing, customer support, and product development personnel. The loss of key management or technical personnel could adversely affect us. We believe that our continued success will depend in large part upon our ability to attract, integrate, and retain such personnel. We have at times experienced and continue to experience difficulty in recruiting qualified personnel. Competition for qualified software development, sales, and other personnel is intense, and we cannot assure you that we will be successful in attracting and retaining such personnel.
Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.
Changing laws, regulations, and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission regulations and New York Stock Exchange rules, are creating uncertainty for companies such as ours. The costs required to comply with such evolving laws are difficult to predict. To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonably necessary resources to comply with evolving standards. This investment may result in an unforeseen increase in general and administrative expenses and a diversion of management time and attention from revenue-generating activities, which may harm our business, financial condition, or results of operations.
Historically, we have not paid dividends on our common stock.
We have not declared or paid a cash dividend since we entered the business of providing software solutions and services to the public sector in 1998. Additionally, 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. We do not anticipate paying any cash dividends on our common stock in the foreseeable future.
Provisions in our certificate of incorporation, bylaws, and Delaware law could deter takeover attempts.
Our board of directors may issue up to 1,000,000 shares of preferred stock and may determine the price, rights, preferences, privileges, and restrictions, including voting and conversion rights, of these shares of preferred stock. These determinations may be made without any further vote or action by our stockholders. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock may make it more difficult for a third party to acquire a majority of our outstanding voting stock. In addition, some provisions of our Certificate of Incorporation, Bylaws, and of the Delaware General Corporation Law could also delay, prevent, or make more difficult a merger, tender offer, or proxy contest involving us.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.

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ITEM 2. PROPERTIES.
We occupy a total of approximately 529,000 square feet of office space, 209,000 square feet of which we own. One of the office buildings we own (approximately 84,000 square feet) has been leased to third-party tenants. The lease agreements with respect to approximately 70% of this leased space expire in July 2011 and the remaining agreement expires in June 2013. Upon expiration of these agreements we expect to begin occupying the facility. We lease our principal executive office located in Dallas, Texas, and own or lease offices for our major operations in Colorado, Iowa, Maine, Ohio, Texas and Washington.
ITEM 3. LEGAL PROCEEDINGS.
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 (the “Court”) on behalf of current and former telephone and remote customer support personnel (“Category 1”), computer hardware and software set up and maintenance personnel (“Category 2”), implementation personnel (“Category 3”), sales support personnel (“Category 4”), and quality assurance analysts (“Category 5”). The petition alleges that we misclassified these groups of employees as “exempt” rather than “non-exempt” under the Fair Labor Standards Act and that we therefore 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, liquidated damages equal to the amount of lost overtime pay, interest, costs, and attorneys’ fees. On June 23, 2009, the Court issued an Order granting plaintiffs’ motion for conditional certification for the purpose of providing notice to potential plaintiffs about the litigation. Accordingly, notice was sent to all current and former employees who worked in the foregoing job classifications during the applicable time periods. On October 26, 2009, the “opt in” period for plaintiffs and potential plaintiffs closed. Since that time, a number of plaintiffs voluntarily withdrew their petition. During a mediation which occurred during the second quarter of 2010, we reached a conditional settlement in principle with all of the plaintiffs in Categories 1, 2, 4, and 5 (24 plaintiffs in the aggregate). The terms of the settlement agreement, which are immaterial and confidential, were approved by the Court during the fourth quarter of 2010. In addition, during a mediation that occurred in January 2011, we reached a conditional settlement in principle with the remaining plaintiffs in Category 3 (30 plaintiffs in the aggregate). The terms of the settlement agreement, which are immaterial and confidential, are subject to Court approval.
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 was 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.

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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on the New York Stock Exchange under the symbol “TYL.” At December 31, 2010, we had approximately 2,037 stockholders of record. A number of our stockholders hold their shares in street name; therefore, there are substantially more than 2,037 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.
                         
            High   Low
  2009:    
First Quarter
  $ 14.79     $ 11.35  
       
Second Quarter
    17.76       14.17  
       
Third Quarter
    17.62       14.51  
       
Fourth Quarter
    21.09       16.76  
       
 
               
  2010:    
First Quarter
  $ 21.52     $ 17.13  
       
Second Quarter
    19.83       15.44  
       
Third Quarter
    20.46       15.00  
       
Fourth Quarter
    22.19       19.49  
       
 
               
  2011:    
First Quarter (through February 22, 2011)
  $ 21.55     $ 19.99  
We did not pay any cash dividends in 2010 or 2009. 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.
The following table summarizes certain information related to our stock option plan and our Employee Stock Purchase Plan (“ESPP”). There are no warrants or rights related to our equity compensation plans as of December 31, 2010.
                         
                    Number of securities
                    remaining available for
                    future issuance under equity
    Number of securities to be   Weighted average   compensation plans
    issued upon exercise of   exercise price of   (excluding securities
    outstanding options,   outstanding   reflected in initial
    warrants and rights as of   options, warrants   column as
Plan Category   December 31, 2010   and rights   of December 31, 2010)
Equity compensation plans approved by security shareholders:
                       
Stock options
    5,835,465     $ 12.74       4,267,700  
ESPP
    26,782       17.65       222,244  
Equity compensation plans not approved by security shareholders
                 
 
                       
 
    5,862,247     $ 12.76       4,489,944  
 
                       

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During 2010, we purchased approximately 3.6 million shares of our common stock for an aggregate purchase price of $65.8 million. A summary of the repurchase activity during 2010 is as follows:
                                 
            Additional           Maximum
            number of           number of shares
            shares           that may be
    Total number   authorized that   Average   repurchased
    of shares   may be   price paid   under current
Period   repurchased   repurchased   per share   authorization
Three months ended March 31
    129,000           $ 18.75       2,134,000  
Three months ended June 30
    739,000             16.85       1,395,000  
Additional authorization by the board of directors
          2,000,000               3,395,000  
Three months ended September 30
    2,482,000             18.81       913,000  
Additional authorization by the board of directors
          2,000,000               2,913,000  
October 1 through October 31
                      2,913,000  
November 1 through November 30
    188,000             20.28       2,725,000  
December 1 through December 31
    21,000             20.52       2,704,000  
 
                               
Total year ended December 31, 2010
    3,559,000       4,000,000     $ 18.49          
 
                               
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, October 2008, May 2009, July 2010 and October 2010. Our board of directors authorized the repurchase of an additional 2.0 million shares on July 27, 2010 and an additional 2.0 million shares on October 26, 2010. As of December 31, 2010, we had remaining authorization to repurchase up to 2.7 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.

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Performance Graph
The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
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, 2005. 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.
(PERFORMANCE GRAPH)
                                                 
Company / Index   12/31/05   12/31/06   12/31/07   12/31/08   12/31/09   12/31/10
 
Tyler Technologies, Inc.
    100       160.14       146.81       136.45       226.77       236.45  
S&P 500 Index
    100       115.79       122.16       76.96       97.33       111.99  
S&P 600 Information Technology Index
    100       109.43       119.61       71.32       105.67       131.66  

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ITEM 6. SELECTED FINANCIAL DATA.
(In thousands, except per share data)
                                         
    FOR THE YEARS ENDED DECEMBER 31,  
    2010     2009     2008     2007     2006  
STATEMENT OF OPERATIONS DATA:
                                       
Revenues
  $ 288,628     $ 290,286     $ 265,101     $ 219,796     $ 195,303  
Costs and expenses:
                                       
Cost of revenues
    160,311       161,523       155,314       135,371       120,499  
Selling, general and administrative expenses
    69,480       70,115       62,923       51,724       48,389  
Research and development expense
    13,971       11,159       7,286       4,443       3,322  
Amortization of customer and trade name intangibles
    3,225       2,705       2,438       1,478       1,318  
Non-cash legal settlement related to warrants (1)
                9,045              
 
                             
Operating income
    41,641       44,784       28,095       26,780       21,775  
Other (expense) income, net
    (1,742 )     (146 )     1,181       1,800       1,080  
 
                             
Income from operations before income taxes
    39,899       44,638       29,276       28,580       22,855  
Income tax provision
    14,845       17,628       14,414       11,079       8,493  
 
                             
Net income
  $ 25,054     $ 27,010     $ 14,862     $ 17,501     $ 14,362  
 
                             
 
                                       
Net income per diluted share
  $ 0.71     $ 0.74     $ 0.38     $ 0.42     $ 0.34  
 
                             
 
                                       
Weighted average diluted shares
    35,528       36,624       39,184       41,352       41,868  
 
                                       
STATEMENT OF CASH FLOWS DATA:
                                       
Cash flows provided by operating activities
  $ 35,350     $ 42,941     $ 47,802     $ 34,111     $ 26,804  
Cash flows used by investing activities
    (8,694 )     (13,658 )     (9,554 )     (34,275 )     (24,326 )
Cash flows used by financing activities
    (34,238 )     (21,349 )     (46,128 )     (7,406 )     (5,999 )
 
                                       
BALANCE SHEET DATA:
                                       
Total assets
  $ 264,032     $ 270,670     $ 251,761     $ 241,508     $ 220,276  
Revolving line of credit
    26,500                          
Shareholders’ equity
    106,972       134,358       114,262       137,211       125,875  
 
(1)   On June 27, 2008, we settled outstanding litigation related to two Stock Purchase Warrants (the “Warrants”) owned by Bank of America, N. A. (“BANA”). 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.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical in nature and typically address future or anticipated events, trends, expectations or beliefs with respect to our financial condition, results of operations or business. Forward-looking statements often contain words such as “believes,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates,” “plans,” “intends,” “continues,” “may,” “will,” “should,” “projects,” “might,” “could” or other similar words or phrases. Similarly, statements that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. We believe there is a reasonable basis for our forward-looking statements, but they are inherently subject to risks and uncertainties and actual results could differ materially from the expectations and beliefs reflected in the forward-looking statements. We presently consider the following to be among the important factors that could cause actual results to differ materially from our expectations and beliefs: (1) changes in the budgets or regulatory environments of our customers, primarily local and state governments, that could negatively impact information technology spending; (2) our ability to achieve our financial forecasts due to various factors, including project delays by our customers, reductions in transaction size, fewer transactions, delays in delivery of new products or releases or a decline in our renewal rates for service agreements; (3) economic, political and market conditions, including the global economic and financial crisis, and the general tightening of access to debt or equity capital; (4) technological and market risks associated with the development of new products or services or of new versions of existing or acquired products or services; (5) our ability to successfully complete acquisitions and achieve growth or operational synergies through the integration of acquired businesses, while avoiding unanticipated costs and disruptions to existing operations; (6) competition in the industry in which we conduct business and the impact of competition on pricing, customer retention and pressure for new products or services; (7) the ability to attract and retain qualified personnel and dealing with the loss or retirement of key members of management or other key personnel; and (8) costs of compliance and any failure to comply with government and stock exchange regulations. A detailed discussion of these factors and other risks that affect our business are described in Item 1A, “Risk Factors.” We expressly disclaim any obligation to publicly update or revise our forward-looking statements.
OVERVIEW
General
We provide integrated information management solutions and services for the public sector, with a focus on 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 hosted solutions as well as property appraisal outsourcing services for taxing jurisdictions.
Our products generally automate three major functional areas (1) financial management and education, (2) courts and justice and (3) property appraisal and tax and we report our results in two segments. The Enterprise Software Solutions (“ESS”) segment provides municipal and county governments and schools with software systems to meet their information technology and automation needs for mission-critical “back-office” functions such as financial management and courts and justice processes. The Appraisal and Tax Software Solutions and Services (“ATSS”) segment provides systems and software that automate the appraisal and assessment of real and personal property as well as property appraisal outsourcing services for local governments and taxing authorities. Property appraisal outsourcing services include: the physical inspection of commercial and residential properties; data collection and processing; computer analysis for property valuation; preparation of tax rolls; community education; and arbitration between taxpayers and the assessing jurisdiction.
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:
    Revenues — We derive our revenues from five primary sources: sale of software licenses; subscription-based services; software services; maintenance and support; and appraisal services. 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

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      generate implementation services revenues as well as future maintenance and support revenues, which are 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. During 2010, approximately 47% of our revenue was attributable to ongoing support and maintenance agreements and our customer turnover was approximately 3%.
    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, 2010, our total employee count increased to 2,054 from 2,018 at December 31, 2009. Most of these additions were to our appraisal staff which is cyclical and in part driven by statutory revaluation cycles in various states. Additions to our appraisal staff were offset somewhat by a smaller implementation and support staff as we manage costs and staff to ensure they are in line with demand in professional services.
 
    Selling, General and Administrative (“SG&A”) Expenses — The primary components of SG&A expenses are administrative and sales personnel salaries and commissions, marketing expense, share-based compensation expense, rent and professional fees. Sales commissions typically fluctuate with revenues and share-based compensation expense generally increases when the market price of our stock increases. Other administrative expenses tend to grow at a slower rate than revenues.
 
    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 discretionary purchases of treasury stock. In 2010, we purchased 3.6 million shares of our common stock for an aggregate purchase price of $65.8 million. During 2010 we used cash of $9.5 million to acquire one company and invested $4.9 million in property and equipment. Our investment in property and equipment included $1.3 million related to construction of an office building. We also borrowed $26.5 million on our revolving line of credit mainly to assist in funding discretionary purchases of treasury stock. 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.
 
    Balance Sheet — Cash, accounts receivable and days sales outstanding and deferred revenue balances are important indicators of our business.
Acquisitions
In January 2010 we acquired all the assets of Wiznet, Inc. (“Wiznet”) for a cash purchase price of $9.5 million. Wiznet provides electronic document filing solutions for courts and law offices throughout the United States and is integrated with our primary courts and justice solution.
In connection with this transaction we acquired total tangible assets of approximately $867,000. We recorded goodwill of approximately $2.6 million, all of which is expected to be deductible for tax purposes, and other intangible assets of approximately $6.1 million. The $6.1 million of intangible assets is attributable to customer relationships and acquired software that will be amortized over a weighted average period of approximately nine years. Our balance sheet as of December 31, 2010 reflects the allocation of the purchase price to the assets acquired based on their estimated fair values at the date of acquisition.
The operating results of this acquisition are included in our results of operations since the date of acquisition.
Outlook
Consistent with 2010, we expect to continue to invest aggressively in product development in 2011. We believe that our competitive position is strong and that we are well-positioned to take advantage of an eventual return to a stronger economic environment. However, until we see signs of sustained improvement, we expect that the new business environment in 2011 will continue to be both challenging and unpredictable, and that growth will again come primarily from recurring revenues.

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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 contingencies. 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 require significant judgments and estimates used in the preparation of our financial statements.
Revenue Recognition. We recognize revenues in accordance with the provisions of Accounting Standards Codification (“ ASC”) 605, Revenue Recognition and ASC 985-605, Software Revenue Recognition. 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 creating additional custom reports. These amounts have historically been 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.
We use contract accounting, primarily the percentage-of-completion method, as discussed in ASC 605-35, 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. We measure progress-to-completion primarily using labor hours incurred, or value added. 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 five years. 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. 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 ASP and other hosting arrangements, we evaluate whether the customer has the contractual right to take possession of our software at any time during the hosting period without significant penalty and whether the customer can feasibly maintain the software on the customer’s hardware or enter into another arrangement with a third party to host the software. 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

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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 ASC 985-605, Software Revenue Recognition. For ASP and other hosting arrangements that do not meet the criteria for recognition under ASC 985-605, we account for the elements under ASC 605-25, Multiple Element Arrangements using all applicable facts and circumstances, including whether (i) the element has stand-alone value, (ii) there is a general right of return and (iii) the revenue is contingent on delivery of other elements. We allocate revenue to each element of the arrangement that qualifies for treatment as a separate element based on VSOE, and if VSOE is not available, third party evidence, and if third party evidence is unavailable, estimated selling price. For professional services associated with ASP and hosting arrangements that we determine do not have stand-alone value to the customer or are contingent on delivery of other elements, 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. Our cash flow forecasts are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying businesses. 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. Our reporting units are the same as our reportable segments and consistent with the reporting units tested for impairment in prior years. Assets, liabilities and goodwill have been assigned to reporting units based on assets acquired and liabilities assumed as of the date of acquisition. We evaluate the reasonableness of the fair value calculations of our reporting units by comparing the total of the fair value of all of our reporting units to our total market capitalization. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain.
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. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; and reductions in growth rates. In addition, products, capabilities, or technologies developed by others may render our software products obsolete or non-competitive. Any adverse change in these factors could have a significant impact on the recoverability of goodwill or other intangible assets.
Our annual goodwill impairment analysis, which we performed during the second quarter of 2010, did not result in an impairment charge. During 2010 we did not identify any triggering events which would require an update to our annual impairment review. A

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hypothetical 10% decrease in the fair value of either of our reporting units as of December 31, 2010 would have had no impact on the carrying value of our goodwill.
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 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 ASC 718-10, Stock Compensation. 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, 2010, 2009 and 2008.
                         
    Percentage of Total Revenues
    Years ended December 31,
    2010   2009   2008
     
Revenues:
                       
Software licenses
    12.1 %     14.5 %     15.7 %
Subscriptions
    8.1       5.9       5.4  
Software services
    23.7       27.7       28.3  
Maintenance
    47.0       42.9       40.5  
Appraisal services
    7.1       6.5       7.2  
Hardware and other
    2.0       2.5       2.9  
 
                       
Total revenues
    100.0       100.0       100.0  
Operating Expenses:
                       
Cost of software licenses and acquired software
    1.8       2.4       4.2  
Cost of software services, maintenance and subscriptions
    47.8       47.3       47.6  
Cost of appraisal services
    4.5       4.0       4.6  
Cost of hardware and other
    1.5       2.0       2.2  
Selling, general and administrative expenses
    24.1       24.2       23.7  
Research and development expense
    4.8       3.8       2.8  
Amortization of customer base and trade name intangibles
    1.1       0.9       0.9  
Non-cash legal settlement related to warrants
                3.4  
 
                       
Operating income
    14.4       15.4       10.6  
Other (expenses) income, net
    (0.6 )     0.0       0.4  
 
                       
Income before income taxes
    13.8       15.4       11.0  
Income tax provision
    5.1       6.1       5.4  
 
                       
Net income
    8.7 %     9.3 %     5.6 %
 
                       

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2010 Compared to 2009
     Revenues
Software licenses.
The following table sets forth a comparison of our software license revenues for the years ended December 31:
                                 
                    Change
($ in thousands)   2010   2009   $   %
     
Enterprise Software Solutions
  $ 32,757     $ 39,484     $ (6,727 )     (17 )%
Appraisal and Tax Software Solutions and Services
    2,156       2,647       (491 )     (19 )
             
Total software license revenues
  $ 34,913     $ 42,131     $ (7,218 )     (17 )%
             
In 2010 we signed 58 large new contracts with average software license fees of approximately $440,000, compared to 74 large new contracts signed in 2009 with average software license fees of approximately $307,000. We consider contracts with a license fee component of $100,000 or more to be large. 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.
In 2010, ESS software license revenues recognized declined substantially compared to the prior year period. The decrease in software license revenues is mainly attributable to longer sales cycles to negotiate and close contracts that have reached the request for proposal phase and postponement of customer purchasing decisions mainly due to budgetary constraints related to economic conditions. The software installation period for a substantial number of our ESS solutions is relatively short and delays in the timing of signing new contracts will impact our results in the short term. In addition, a portion of the decline was due to a number of customers choosing our subscription-based options, rather than purchasing the software under a traditional perpetual software license arrangement. Subscription-based arrangements result in lower software license revenues in the initial year as compared to traditional perpetual software license arrangements but generate higher overall subscription-based services revenue over the term of the contract. We expect ESS software license revenues in 2011 to be flat compared to 2010.
ATSS software license revenue is substantially dependent on revaluation cycles which are cyclical and in part driven by statutory revaluation cycles in various states. In addition, local government taxing authorities generally do not purchase a new software license for each revaluation cycle.
Subscriptions.
The following table sets forth a comparison of our subscription revenues for the years ended December 31:
                                 
                    Change
($ in thousands)   2010   2009   $   %
     
Enterprise Software Solutions
  $ 22,975     $ 16,870     $ 6,105       36 %
Appraisal and Tax Software Solutions and Services
    323       311       12       4  
             
Total subscription revenues
  $ 23,298     $ 17,181     $ 6,117       36 %
             
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. In January 2010, we acquired Wiznet, which provides primarily subscription-based electronic document filing solutions for courts and law offices and is included in our ESS segment. Excluding the impact of this acquisition, ESS and total subscription revenues grew by 18% in 2010. ASP and other software subscription 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

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renewable annually. Existing customers who converted to our ASP model as well as new customers for ASP and other hosted service offerings provided the majority of the subscription revenue increase with the remaining increase due to slightly higher rates for disaster recovery services. In 2010, 50 existing customers elected to transfer to our ASP model and we added 19 new customers.
Software services.
The following table sets forth a comparison of our software services revenues for the years ended December 31:
                                 
                    Change
($ in thousands)   2010   2009   $   %
     
Enterprise Software Solutions
  $ 58,371     $ 70,041     $ (11,670 )     (17 )%
Appraisal and Tax Software Solutions and Services
    9,969       10,364       (395 )     (4 )
             
Total software services revenues
  $ 68,340     $ 80,405     $ (12,065 )     (15 )%
             
Software services revenues primarily consists of professional services billed in connection with the installation of our software, conversion of customer data, training customer personnel and consulting. New customers who purchase our proprietary software licenses generally also contract with us to provide for the related software services as well. Existing customers also periodically purchase additional training, consulting and minor programming services. The decline in software services revenues in 2010 is principally due to lower new software license contract activity in recent quarters due to weak economic conditions. In addition, the increase in the mix of customers choosing our subscription-based solutions was a factor in lower software services revenues.
Maintenance.
The following table sets forth a comparison of our maintenance revenues for the years ended December 31:
                                 
                    Change
($ in thousands)   2010   2009   $   %
     
Enterprise Software Solutions
  $ 120,764     $ 110,404     $ 10,360       9 %
Appraisal and Tax Software Solutions and Services
    14,891       14,108       783       6  
             
Total maintenance revenues
  $ 135,655     $ 124,512     $ 11,143       9 %
             
We provide maintenance and support services for our software products and third party software. Maintenance revenues increased 9% in 2010 compared to 2009. This increase was due to growth in our installed customer base and slightly higher maintenance rates on most of our product lines. Our annual maintenance and support growth rate has declined compared to previous year’s growth rate due to a number of customers converting to ASP arrangements as well as new customers choosing our subscription-based options, rather than purchasing the software under a traditional perpetual software license arrangement.
Appraisal services.
The following table sets forth a comparison of our appraisal service revenues for the years ended December 31:
                                 
                    Change
($ in thousands)   2010   2009   $   %
     
Enterprise Software Solutions
  $     $     $        %
Appraisal and Tax Software Solutions and Services
    20,554       18,740       1,814       10  
             
Total appraisal services revenues
  $ 20,554     $ 18,740     $ 1,814       10 %
             

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Appraisal services revenue increased 10% in 2010 compared to 2009. The appraisal services business is somewhat cyclical and driven in part by statutory revaluation cycles in various states. We substantially completed several large appraisal projects mid-2009. We began several new revaluation contracts in late 2009 which contributed to the revenue growth in 2010. We expect appraisal revenues for 2011 will be moderately higher than 2010.
          Cost of Revenues and Gross Margins
The following table sets forth a comparison of the key components of our cost of revenues for the years ended December 31:
                                 
                    Change
($ in thousands)   2010   2009   $   %
     
Software licenses
  $ 3,456     $ 5,440     $ (1,984 )     (36 )%
Acquired software
    1,592       1,411       181       13  
Software services, maintenance and subscriptions
    138,085       137,199       886       1  
Appraisal services
    12,910       11,518       1,392       12  
Hardware and other
    4,268       5,955       (1,687 )     (28 )
             
Total cost of revenues
  $ 160,311     $ 161,523     $ (1,212 )     (1 )%
             
The following table sets forth a comparison of gross margin percentage by revenue type for the years ended December 31:
                         
                    Change
Gross margin percentage   2010   2009   %
     
Software license and acquired software
    85.5 %     83.7 %     1.8 %
Software services, maintenance and subscriptions
    39.2       38.2       1.0  
Appraisal services
    37.2       38.5       (1.3 )
Hardware and other
    27.3       18.6       8.7  
 
                       
Overall gross margin
    44.5 %     44.4 %     0.1 %
Software license and acquired software. Cost of software license and acquired software is comprised of third party software costs, amortization of acquired software and amortization expense for capitalized development costs on certain software products. Cost of third party software comprised approximately 60% of our cost of software license revenues in 2010 compared to approximately 69% of our cost of software license in 2009. Third party software sales declined due to lower proprietary software sales. New software license sales are a significant driver of third party license sales. Costs of acquired software comprises approximately 32% of our cost of software license revenues in 2010 compared to approximately 21% of our cost of software license in 2009. Cost of acquired software includes amortization expense for software acquired through acquisitions. We completed several acquisitions in the period 2007 through 2010 and these costs are being amortized over a weighted average period of approximately five years. The balance is made up of amortization of capitalized development costs on other software products. Amortization expense for capitalized development cost 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. We did not capitalize any internal software development costs in 2010 or 2009.
In 2010, our software license gross margin percentage increased compared to the prior year period because our product mix included less third party software. Third party software has a lower gross margin than proprietary software solutions.
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 2010, 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, as well as annual rate increases on certain services. We are also managing costs and staff levels to ensure they are in line with demand for professional services. Our implementation and support staff has declined by 61 employees since December 31, 2009.

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Appraisal services. Our appraisal services gross margin declined compared to 2009. Our appraisal services gross margin in 2009 included the positive impact of cost savings and operational efficiencies experienced on an unusually complex reappraisal project that ended in mid-2009. In addition, 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 blended gross margin for 2010 increased compared to 2009 due to lower third party software expense which offset the impact of a revenue mix that included less software license revenues. The gross margin also benefited from leverage in the utilization of our support and maintenance staff and economies of scale and slightly higher rates on certain services.
     Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses consist primarily of salaries, employee benefits, travel, share-based compensation expense, commissions and related overhead costs for administrative and sales and marketing employees as well as, professional fees, trade show activities, advertising costs and other marketing related costs. The following table sets forth a comparison of our SG&A expenses for the following years ended December 31:
                                 
                    Change
($ in thousands)   2010   2009   $   %
     
Selling, general and administrative expenses
  $ 69,480     $ 70,115     $ (635 )     (1 )%
SG&A expenses declined in 2010 compared to 2009 due to lower commission costs and marketing expenses which were offset somewhat by higher share-based compensation expense. Marketing expenses in 2009 include costs associated with the launch of a new corporate branding initiative.
     Research and Development Expense
Research and development expense consists primarily of salaries, employee benefits and related overhead costs associated with product development and enhancements and upgrades provided to existing customers under maintenance plans. The following table sets forth a comparison of our research and development expense for the following years ended December 31:
                                 
                    Change
($ in thousands)   2010   2009   $   %
     
Research and development expense
  $ 13,971     $ 11,159     $ 2,812       25 %
Research and development expense consists of costs associated with development of new products and new software platforms from which we do not currently generate revenue. These include the Microsoft Dynamics AX project, as well as other new product development efforts. In 2010 approximately two-thirds of the increase in gross research and development expense relates to investments in new product development other than Microsoft Dynamics AX. We have increased our research and development efforts as we continue to make investments in existing and new products that we believe will enhance our competitive position and drive long-term revenue growth. We have increased our development staff by 27 employees since December 31, 2009. In January 2007, we entered into a Software Development and License Agreement, which provides for a strategic alliance with Microsoft Corporation (“Microsoft”) to jointly develop core public sector functionality for Microsoft Dynamics AX to address the accounting needs of public sector organizations worldwide. In September 2007, Tyler and Microsoft signed an amendment to the Software Development and License Agreement, which grants Microsoft intellectual property rights in and to certain portions of the software code provided and developed by Tyler into Microsoft Dynamics AX products to be marketed and sold outside of the public sector in exchange for reimbursement payments to partially offset the research and development costs.
In 2010 and 2009, we offset our research and development expense by $5.1 million and $3.5 million, respectively, which were the amounts earned under the terms of our agreement with Microsoft. In September 2008, Tyler and Microsoft signed a statement of work under the Amended Software Development and License Agreement for which we expected to recognize offsets to our research and development expense by approximately $850,000 each quarter through the end of 2010. In addition, in October 2009, the scope of the project was further expanded which will result in additional offsets to research and development expense, varying in amount from quarter to quarter through mid-2012 for a total of approximately $6.2 million. As of December 31, 2010, we have received $1.1

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million and expect to receive the remaining $5.1 million through mid-2012. The actual amount and timing of future research and development costs and related reimbursements and whether they are capitalized or expensed may vary. We currently expect that for 2011, we will recognize less reimbursement from Microsoft than we did in 2010 due to changes in the timing of deployment of resources.
     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 other operating expense. The estimated useful lives of both customer and trade name intangibles are five 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:
                                 
                    Change
($ in thousands)   2010   2009   $   %
     
Amortization of customer and trade name intangibles
  $ 3,225     $ 2,705     $ 520       19 %
In January 2010 we completed one acquisition, which increased amortizable customer and trade name intangibles by approximately $5.5 million. This amount will be amortized over 10 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):
         
2011
  $ 3,186  
2012
    3,134  
2013
    2,975  
2014
    2,974  
2015
    2,974  
     Other
The following table sets forth a comparison of other expense, net for the following years ended December 31:
                                 
                    Change
($ in thousands)   2010   2009   $   %
     
Other (expense) income, net
  $ (1,742 )   $ (146 )   $ (1,596 )   NA
In 2010, over half of other expense is comprised of interest expense, non-usage and other fees associated with a credit agreement entered into in August 2010. Other expense in 2009 is mainly comprised of interest expense, non-usage fees and other bank fees. Interest expense was higher in 2010 than 2009 due to higher debt levels associated with our stock repurchases. In addition the effective interest rate in 2010 was 3.4% compared to 1.8% in 2009.

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     Income Tax Provision
The following table sets forth a comparison of our income tax provision for the following years ended December 31:
                                 
                    Change
($ in thousands)   2010   2009   $   %
     
Income tax provision
  $ 14,845     $ 17,628     $ (2,783 )     (16 )%
 
                               
Effective income tax rate
    37.2 %     39.5 %                
Our effective income tax rate declined compared to 2009 mainly due to a $579,000 research and development tax credit in 2010. In addition to the impact of the research and development tax credit in 2010, the effective income tax rate for both years were different from the statutory United States federal income tax rate of 35% due to state income taxes, non-deductible share-based compensation expense, the qualified manufacturing activities deduction, and non-deductible meals and entertainment costs.
Approximately 35% of our stock option expense is derived from incentive stock options (“ISOs”). 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.
2009 Compared to 2008
     Revenues
Software licenses.
The following table sets forth a comparison of our software license revenues for the years ended December 31:
                                 
                    Change
($ in thousands)   2009   2008   $   %
     
Enterprise Software Solutions
  $ 39,484     $ 39,215     $ 269       1 %
Appraisal and Tax Software Solutions and Services
    2,647       2,275       372       16  
             
Total software license revenues
  $ 42,131     $ 41,490     $ 641       2 %
             
We acquired several student information and financial management solutions for K-12 schools from January through August 2008. Excluding the impact of these acquisitions, ESS software license revenue would have declined approximately $900,000. In mid-2009 our sales cycle to negotiate and close contracts which have reached the request for proposal phase lengthened slightly mainly due to budgetary constraints related to declining economic conditions. As a result the purchasing processes for some of our customers were extended to include more approval and documentation requirements. In addition, a few contracts included requirements to construct interfaces to existing systems or other essential functionality which results in recognizing revenue over a longer period of time.
ATSS software license revenue is substantially dependent on revaluation cycles which are cyclical and in part driven by statutory revaluation cycles in various states. In addition, local government taxing authorities generally do not purchase a new software license for each revaluation cycle.

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Subscriptions.
The following table sets forth a comparison of our subscription revenues for the years ended December 31:
                                 
                    Change
($ in thousands)   2009   2008   $   %
     
Enterprise Software Solutions
  $ 16,870     $ 14,352     $ 2,518       18 %
Appraisal and Tax Software Solutions and Services
    311       22       289     NA
             
Total subscription revenues
  $ 17,181     $ 14,374     $ 2,807       20 %
             
Excluding the impact of acquisitions, ESS subscription revenues grew 16% in 2009 compared to 2008. This increase was due to new customers for ASP and other hosted service offerings as well as existing customers converting to ASP arrangements and slightly higher rates for disaster recovery services.
Software services.
The following table sets forth a comparison of our software service revenues for the years ended December 31:
                                 
                    Change
($ in thousands)   2009   2008   $   %
     
Enterprise Software Solutions
  $ 70,041     $ 63,508     $ 6,533       10 %
Appraisal and Tax Software Solutions and Services
    10,364       11,489       (1,125 )     (10 )
             
Total software services revenues
  $ 80,405     $ 74,997     $ 5,408       7 %
             
Excluding the impact of acquisitions, ESS software services revenue increased 9% compared to 2008. This increase was mainly due to additions to our implementation and support staff as well as leverage in the utilization of our implementation and support staff and slightly higher rates on some arrangements.
Maintenance.
The following table sets forth a comparison of our maintenance revenues for the years ended December 31:
                                 
                    Change
($ in thousands)   2009   2008   $   %
     
Enterprise Software Solutions
  $ 110,404     $ 94,546     $ 15,858       17 %
Appraisal and Tax Software Solutions and Services
    14,108       12,912       1,196       9  
             
Total maintenance revenues
  $ 124,512     $ 107,458     $ 17,054       16 %
             
Excluding the impact of acquisitions, total maintenance revenues increased 14% in 2009 compared to 2008. Excluding the impact of acquisitions, ESS maintenance and support services grew 15% and ASTT maintenance and support services grew 8% in 2009 compared to 2008. This increase was due to growth in our installed customer base and slightly higher maintenance rates on most of our product lines.

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Appraisal services.
The following table sets forth a comparison of our appraisal service revenues for the years ended December 31:
                                 
                    Change
($ in thousands)   2009   2008   $   %
     
Enterprise Software Solutions
  $     $     $       %
Appraisal and Tax Software Solutions and Services
    18,740       19,098       (358 )     (2 )
             
Total appraisal services revenues
  $ 18,740     $ 19,098     $ (358 )     (2 )%
             
Appraisal services revenue declined 2% in 2009 compared to 2008. The appraisal services business is somewhat cyclical and driven in part by statutory revaluation cycles in various states. We substantially completed several large appraisal projects mid- 2009.
          Cost of Revenues and Gross Margin
The following table sets forth a comparison of the key components of our cost of revenues for the years ended December 31:
                                 
                    Change
($ in thousands)   2009   2008   $   %
     
Software licenses
  $ 5,440     $ 9,224     $ (3,784 )     (41 )%
Acquired software
    1,411       1,799       (388 )     (22 )
Software services, maintenance
                               
and subscriptions
    137,199       126,247       10,952       9  
Appraisal services
    11,518       12,251       (733 )     (6 )
Hardware and other
    5,955       5,793       162       3  
             
Total cost of revenues
  $ 161,523     $ 155,314     $ 6,209       4 %
             
The following table sets forth a comparison of gross margin percentage by revenue type for the years ended December 31:
                         
                    Change
Gross margin percentage   2009   2008   %
     
Software license and acquired software
    83.7 %     73.4 %     10.3 %
Software services, maintenance and subscriptions
    38.2       35.9       2.3  
Appraisal services
    38.5       35.9       2.6  
Hardware and other
    18.6       24.6       (6.0 )
 
                       
Overall gross margin
    44.4 %     41.4 %     3.0 %
Software license and acquired software. Amortization expense for capitalized development costs on certain software products comprised approximately 15% of our cost of software license revenues in 2009 compared to approximately 50% of our cost of software license in 2008. The remaining balance is made up of third party software costs.
Cost of acquired software includes amortization expense for software acquired through acquisitions. In late 2008 software associated with one significant acquisition completed in December 2003 became fully amortized.
In 2009, our software license gross margin percentage rose significantly compared to the prior year period because several products became fully amortized in late 2008, as did software acquired related to a significant acquisition in December 2003.
Software services, maintenance and subscription-based services. In 2009, 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

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economies of scale. The software services, maintenance and subscription-based services gross margin also benefited from slightly higher rates for certain services.
Appraisal services. Our appraisal gross margin increased compared to 2008 as the result of cost savings and operational efficiencies experienced on an unusually complex project. 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 blended gross margin for 2009 was higher than 2008 due to lower amortization expense of software development costs described above. The gross margin also benefited from leverage in the utilization of our support and maintenance staff and economies of scale and slightly higher rates on certain services.
     Selling, General and Administrative Expenses
The following table sets forth a comparison of our SG&A expenses for the following years ended December 31:
                                 
                    Change
($ in thousands)   2009   2008   $   %
     
Selling, general and administrative expenses
  $ 70,115     $ 62,923     $ 7,192       11 %
The increase in SG&A expenses included higher share-based compensation expense, commission costs and marketing expenses. Marketing expenses in 2009 include costs associated with the launch of a new corporate branding initiative.
     Research and Development Expense
The following table sets forth a comparison of our research and development expense for the following years ended December 31:
                                 
                    Change
($ in thousands)   2009   2008   $   %
     
Research and development expense
  $ 11,159     $ 7,286     $ 3,873       53 %
Research and development expense consist of costs associated with the Microsoft Dynamics AX project, in addition to costs associated with other new product development efforts. In 2009 and 2008, we offset our research and development expense by $3.5 million and $1.8 million, respectively, which were the amounts earned under the terms of our agreement with Microsoft.
     Amortization of Customer and Trade Name Intangibles
The following table sets forth a comparison of amortization of customer and trade name intangibles for the following years ended December 31:
                                 
                    Change
($ in thousands)   2009   2008   $   %
     
Amortization of customer and trade name intangibles
  $ 2,705     $ 2,438     $ 267       11 %
In 2009 we completed several acquisitions and purchased certain software assets to complement our tax and appraisal solutions and our student information management solutions.

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     Non-Cash Legal Settlement Related to Warrants
On June 27, 2008, we settled outstanding litigation related to 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.
     Other
Other (expense) income in 2009 and 2008 includes non-usage and other fees associated with a credit agreement entered into in October 2008. Other income in 2008 also included $1.1 million of interest income which declined due to significantly lower invested cash balances in 2009. Our invested cash balances declined due to purchases of treasury stock and investments in office facilities in late 2008 and 2009.
     Income Tax Provision
The following table sets forth a comparison of our income tax provision for the following years ended December 31:
                                 
                    Change
($ in thousands)   2009   2008   $   %
     
Income Tax Provision
  $ 17,628     $ 14,414     $ 3,214       22 %
 
                               
Effective income tax rate
    39.5 %     49.2 %                
Our 2009 effective income tax rate declined compared to 2008 mainly due to a non-cash legal settlement related to warrants charge of $9.0 million in 2008, which was not deductible. In addition to the impact of the non-deductible non-cash legal settlement charge in 2008, the effective income tax rate for both years were different from the statutory United States federal income tax rate of 35% due to state income taxes, non-deductible share-based compensation expense, the qualified manufacturing activities deduction, and non-deductible meals and entertainment costs.
FINANCIAL CONDITION AND LIQUIDITY
As of December 31, 2010, we had cash and cash equivalents of $2.1 million and current and non-current investments of $2.2 million, compared to cash and cash equivalents (including restricted cash equivalents) of $15.7 million and current and non-current investments of $2.0 million at December 31, 2009. As of December 31, 2010, we had $26.5 million outstanding borrowings and outstanding letters of credit totaling $8.3 million to secure surety bonds required by some of our customer contracts. These letters of credit expire through mid-2011.
The following table sets forth a summary of cash flows for the years ended December 31:
                         
($ in thousands)   2010     2009     2008  
Cash flows provided by (used by):
                       
Operating activities
  $ 35,350     $ 42,941     $ 47,802  
Investing activities
    (8,694 )     (13,658 )     (9,554 )
Financing activities
    (34,238 )     (21,349 )     (46,128 )
 
 
                 
Net(decrease) increase in cash and cash equivalents
  $ (7,582 )   $ 7,934     $ (7,880 )
 
                 
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. It is possible that our ability to access the capital and credit markets in the future may be limited by economic conditions or other factors. We currently believe that cash provided by operating activities, cash on hand and available credit are sufficient to fund our working capital requirements, capital expenditures, income tax obligations, and share repurchases for the foreseeable future.

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In 2010, operating activities provided net cash of $35.4 million, primarily generated from net income of $25.1 million, non-cash depreciation and amortization charges of $10.8 million, non-cash share-based compensation expense of $6.1 million offset by an increase in working capital of $4.8 million. The increase in working capital was due to lower accounts payable and accrued liabilities pertaining to the timing of payments on vendor invoices and income tax liabilities. In 2010 we adopted a new company-wide vacation policy and as a result paid approximately $1.8 million to reduce accrued vacation balances in 2010 in connection with changing the policy. In addition, accrued bonus liabilities are smaller in 2010 compared to 2009 as a result of financial performance. Our accounts receivable and deferred revenue balances were also higher than 2009 due to an increase in annual software maintenance billings as a result of growth in our installed customer base.
In general, changes in the balance of deferred revenue are cyclical and primarily driven by the timing of our maintenance renewal billings. Our renewal dates occur throughout the year but our heaviest renewal cycles occur in the second and fourth quarters.
Non-current investments available-for-sale consist of two auction rate municipal securities (“ARS”) which are collateralized debt obligations supported by municipal agencies and do not include mortgage-backed securities. Short-term investments available-for-sale consists of a portion of one of these ARS which was partially redeemed at par during the period January 1, 2011 through February 24, 2011. These ARS are debt instruments with stated maturities ranging from 21 to 32 years, for which the interest rate is designed to be reset through Dutch auctions approximately every 30 days. However, due to events in the credit markets, auctions for these securities have not occurred since February 2008. Both of our ARS have had very small partial redemptions at par in the period from July 2009 through February 2011. As of December 31, 2010 we have continued to earn and collect interest on both of our ARS. Because quoted prices in active markets are no longer available 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. Since there can be no assurances that auctions for these securities will be successful in the near future, we have classified our ARS as non-current investments.
In association with this estimate of fair value, we have recorded an after-tax temporary unrealized gain on our non-current ARS of $130,000, net of related tax effects of $70,000 in 2010, which is included in accumulated other comprehensive loss on our balance sheet.
We consider the impairment in our ARS as temporary because we do not have the intent to sell, nor is it more-likely-than-not that we will be required to sell these securities before recovery of their cost basis. 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 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 AA. 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, both ARS have had very small partial redemptions at par in the period July 2009 through February 2011. Based on our cash and cash equivalents balance of $2.1 million, expected operating cash flows and a $150.0 million revolving credit line, 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 will continue to evaluate any changes in the fair value of our ARS and in the future, depending upon existing market conditions, we may be required to record an other-than-temporary decline in market value.
At December 31, 2010, our days sales outstanding (“DSOs”) were 102 days compared to DSOs of 98 days at December 31, 2009. DSOs are calculated based on accounts receivable (excluding long-term receivables, but including unbilled receivables) divided by the quotient of annualized quarterly revenues divided by 360 days.
Investing activities used cash of $8.7 million in 2010 compared to $13.7 million in 2009. In January 2010, we completed the acquisition of the assets of Wiznet, Inc. for $9.5 million in cash. Also, in connection with plans to consolidate workforces and support planned long-term growth, we paid $1.3 million in 2010 compared to $9.4 million in 2009, for construction of an office building in Lubbock, Texas. The impact of these investing activities was offset somewhat by the release of $6.0 million of restricted cash. In August 2010, we elected to replace our cash-collateralized letters of credit with ones issued under our revolving line of credit. Capital expenditures and acquisitions were funded from cash generated from operations.
In 2009, we liquidated $2.5 million of investments in ARS for cash at par. In 2009 we also completed the acquisition of all of the capital stock of Assessment Evaluation Services, Inc. for $1.1

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million in cash, paid $700,000 in cash for certain assets of KPL, Inc. d/b/a Parker-Lowe & Associates and acquired various software assets for $1.1 million in cash
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. We paid $3.3 million, which included $2.1 million for land, for an office development. We also paid $12.7 million for an office building, land, and a related tenant lease in Yarmouth, Maine.
Cash used in financing activities was primarily comprised of purchases of treasury shares, net of proceeds from stock option exercises, borrowings and payments on our revolving credit line and contributions from our employee stock purchase plan. During 2010, we purchased 3.6 million shares of our common stock for an aggregate purchase price of $65.8 million. These purchases were funded by borrowings of $26.5 million under our revolving credit line and cash from operations.
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, October 2008, May 2009, July 2010 and October 2010. Our board of directors authorized the repurchase of an additional 2.0 million shares on July 27, 2010 and an additional 2.0 million shares on October 26 2010. As of December 31, 2010, we had remaining authorization to repurchase up to 2.7 million additional shares of our common stock. Our share repurchase program allows us to repurchase shares at our discretion and market conditions influence the timing of the buybacks and the number of shares repurchased. These share repurchases are funded using our existing cash balances as well as borrowings under our revolving credit agreement and may occur through open market purchases and transactions structured through investment banking institutions, privately negotiated transactions and/or other mechanisms. There is no expiration date specified for the authorization and we intend to repurchase stock under the plan from time to time.
During 2009, we purchased 1.2 million shares of our common stock for an aggregate purchase price of $17.0 million and during 2008, we purchased 4.3 million shares of our common stock for an aggregate purchase price of $59.0 million.
In 2010 we issued 615,000 shares of common stock and received $3.2 million in aggregate proceeds upon exercise of stock options. In 2009 we received $2.3 million from the exercise of options to purchase approximately 425,000 shares of our common stock under our employee stock option plan and during 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. In 2010, 2009 and 2008 we received $1.9 million, $1.5 million and $1.2 million, respectively, from contributions to the Tyler Technologies, Inc. Employee Stock Purchase Plan.
Subsequent to December 31, 2010 and through February 22, 2011 we purchased approximately 335,000 shares of our common stock for an aggregate cash purchase price of $6.8 million.
On August 11, 2010, we terminated our revolving bank credit agreement and a related pledge and security agreement which had been scheduled to mature October 19, 2010 and entered into a new $150.0 million Credit Agreement (the “Credit Facility”) and a related pledge and security agreement with a group of seven financial institutions with Bank of America, N.A., as Administrative Agent. The Credit Facility provides for a revolving credit line of $150.0 million (which may be increased up to $200.0 million subject to our obtaining commitments for such increase), with a $25.0 million sublimit for letters of credit. The Credit Facility matures on August 11, 2014. Borrowings under the Credit Facility may be used for general corporate purposes, including working capital requirements, acquisitions and share repurchases. In 2010 we paid $2.0 million in related debt issuance costs, which are included with sundry assets on the accompanying balance sheet.
Borrowings under the Credit Facility bear interest at a rate of either (1) the Bank of America’s prime rate plus a margin of 1.50% to 2.75% or (2) the 30, 60, 90 or 180-day LIBOR rate plus a margin of 2.50% to 3.75%, with the margin determined by our consolidated leverage ratio. In 2010 and 2009 our effective average interest rate for borrowings was 3.4% and 1.8%, respectively. As of December 31, 2010 our interest rate was 2.7%. The Credit Facility is secured by substantially all of our assets, excluding real 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, and limits incurrence of additional indebtedness and liens. As of December 31, 2010, we were in compliance with those covenants.
As of December 31, 2010, we had $26.5 million in outstanding borrowings and unused available borrowing capacity of $115.2 million under the Credit Facility. In addition, as of December 31, 2010, our bank had issued outstanding letters of credit totaling $8.3 million

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to secure surety bonds required by some of our customer contracts. These letters of credit have been collateralized by $8.3 million of our available borrowing capacity and expire through mid-2011.
We paid income taxes, net of refunds received, of $15.8 million in 2010, $18.1 million in 2009, and $15.7 million in 2008.
Excluding acquisitions and investments in land or office buildings, we anticipate that 2011 capital spending will be between $5.0 million and $5.5 million. We expect the majority of our capital spending in 2011 will consist of computer equipment and software for infrastructure replacements and expansion. We currently do not expect to capitalize significant amounts related to software development in 2011, 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 2011 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 2018. Most leases contain renewal options and some contain purchase options. Following are the future obligations under non-cancelable leases at December 31, 2010 (in thousands):
                                                         
    2011   2012   2013   2014   2015   Thereafter   Total
Future rental payments under operating leases
  $ 5,643     $ 4,659     $ 2,997     $ 2,323     $ 605     $ 1,204     $ 17,431  
As of December 31, 2010, 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, 2010, our capitalization consisted of $26.5 million in long-term obligations and $107.0 million of shareholders’ equity. Our total debt-to-capital ratio was 19.9% at December 31, 2010.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2010, we adopted the provisions of Accounting Standards Update (ASU) 2009-13, Multiple Element Arrangements. ASU 2009-13 updates the existing multiple-element revenue arrangements guidance currently included in ASC 605-25, Multiple Element Arrangements. The revised guidance provides for two significant changes to the existing multiple-element revenue guidance for arrangements that are not accounted for under ASC 985-605, Software Revenue Recognition. The first change relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. The second change modifies the manner in which the transaction consideration is allocated across the separately identified deliverables. Together, these changes will result in earlier recognition of service revenue for certain of our ASP and hosting arrangements than under previous guidance. The adoption of this ASU did not have a material impact on our financial condition or results of operations.

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ITEM 7A. 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 investments available-for-sale consist of auction rate municipal securities (“ARS”) which are collateralized debt obligations supported by municipal agencies and do not include mortgage-backed securities.
As of December 31, 2010 we had $26.5 million in outstanding borrowings under the Credit Facility. These borrowings bear interest at a rate of either (1) the Bank of America’s prime rate plus a margin of 1.50% to 2.75% or (2) the 30, 60, 90 or 180-day LIBOR rate plus a margin of 2.50% to 3.75%, with the margin determined by our consolidated leverage ratio. In 2010 and 2009 our effective average interest rate for borrowings was 3.4% and 1.8%, respectively. As of December 31, 2010 our interest rate was 2.7%. Assuming borrowings of $26.5 million, a hypothetical 10% increase in our interest rate at December 31, 2010 for a one year period would result in approximately $72,000 of additional interest rate expense.
Non-current investments available-for-sale consist of two ARS with stated maturities ranging from 21 to 32 years, for which the interest rate is designed to be reset through Dutch auctions approximately every 30 days which would have qualified as Level 1 under ASC 820, Fair Value Measurements. However, due to events in the credit markets, auctions for these securities have not occurred since February 2008. Therefore, quoted prices in active markets are no longer available and we determined the estimated fair values of these securities as of December 31, 2010, utilizing a discounted trinomial model.
In association with this estimate of fair value, we have recorded an after-tax temporary unrealized gain on our non-current ARS of $130,000, net of related tax effects of $70,000 in 2010, which is included in accumulated other comprehensive loss on our balance sheet. We consider the impairment in our ARS as temporary because we do not have the intent to sell, nor is it more-likely-than-not that we will be required to sell these securities before recovery of their cost basis. 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 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 AA. 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, both ARS have had very small partial redemptions at par in the period July 2009 through February 2011. Based on our cash and cash equivalents balance of $2.1 million, expected operating cash flows and a $150.0 million revolving credit line, 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 will continue to evaluate any changes in the fair value of our ARS and in the future, depending upon existing market conditions, we may be required to record an other-than-temporary decline in market value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The reports of our independent registered public accounting firm and our financial statements, related notes, and supplementary data are included as part of this Annual Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
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, 2010. 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, 2010.

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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, 2010. 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 concluded that, as of December 31, 2010, Tyler’s internal control over financial reporting was effective based on those criteria.
Tyler’s internal control over financial reporting as of December 31, 2010 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 Tyler’s internal control over financial reporting appears on page F-2 hereof.
Changes in Internal Control Over Financial Reporting — During the quarter ended December 31, 2010, there were no changes in our internal control over financial reporting, as defined in Securities Exchange Act Rule 13a-15(f), that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
See the information under the following captions in Tyler’s definitive Proxy Statement, which is incorporated herein by reference. Only those sections of the Proxy Statement that specifically address the items set forth herein are incorporated by reference. Such incorporation by reference does not include the Compensation Discussion and Analysis, the Compensation Committee Report or the Audit Committee Report which are included in the Proxy Statement.
     
    Headings in Proxy Statement
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
  “Tyler Management” and “Corporate
Governance Principles and Board Matters”
     
ITEM 11. EXECUTIVE COMPENSATION.
  “Executive Compensation”
     
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
  “Security Ownership of Certain Beneficial
Owners and Management”
     
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
  “Executive Compensation ” and
“Certain Relationships and Related
Transactions”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required under this item may be found under the section captioned “Proposals For Consideration — Proposal Two — Ratification of Ernst & Young LLP as Our Independent Auditors for Fiscal Year 2011” in our Proxy Statement and is incorporated herein by reference.

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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
     The following documents are filed as part of this Annual Report:
(a)   (1) The financial statements are filed as part of this Annual Report.
     
    Page
 
   
  F-1
 
   
  F-3
 
   
  F-4
 
   
  F-5
 
   
  F-6
 
   
  F-7
  (2)   Financial statement schedules:
 
      There are no financial statement schedules filed as part of this Annual Report, since the required information is included in the financial statements, including the notes thereto, or the circumstances requiring inclusion of such schedules are not present.
 
  (3)   Exhibits
 
      Certain of the exhibits to this Annual Report are hereby incorporated by reference, as specified:
     
Exhibit    
Number   Description
3.1
  Restated Certificate of Incorporation of Tyler Three, as amended through May 14, 1990, and Certificate of Designation of Series A Junior Participating Preferred Stock (filed as Exhibit 3.1 to our Form 10-Q for the quarter ended June 30, 1990, and incorporated by reference herein).
 
   
3.2
  Certificate of Amendment to the Restated Certificate of Incorporation (filed as Exhibit 3.1 to our Form 8-K, dated February 19, 1998, and incorporated by reference herein).
 
   
3.3
  Amended and Restated By-Laws of Tyler Corporation, dated November 4, 1997 (filed as Exhibit 3.3 to our Form 10-K for the year ended December 31, 1997, and incorporated by reference herein).

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Exhibit    
Number   Description
3.4
  Certificate of Amendment dated May 19, 1999 to the Restated Certificate of Incorporation (filed as Exhibit 3.4 to our Form 10-K for the year ended December 31, 2000, and incorporated by reference herein).
 
   
4.1
  Specimen of Common Stock Certificate (filed as Exhibit 4.1 to our registration statement no. 33-33505 and incorporated by reference herein).
 
   
4.2
  Credit Agreement dated August 11, 2010, among Tyler Technologies, Inc. and Bank of America, N. A. as Administrative Agent and other lenders party hereto (filed as Exhibit 4.1 to our Form 8-K dated August 12, 2010, and incorporated by reference herein).
 
   
10.1
  Form of Indemnification Agreement for directors and officers (filed as Exhibit 10.1 to our Form 10-K for the year ended December 31, 2002 and incorporated by reference herein).
 
   
10.2
  Tyler Technologies, Inc 2010 Stock Option Plan effective as of May 13, 2010 (filed as Exhibit 4.1 to our registration statement no. 333-168499 and incorporated by reference herein).
 
   
10.3
  Employment and Non-Competition Agreement between Tyler Technologies, Inc. and John S. Marr Jr. dated February 26, 2008 (filed as Exhibit 10.5 to our Form 10-K for the year ended December 31, 2007 and incorporated by reference herein).
 
   
10.4
  Employment and Non-Competition Agreement between Tyler Technologies, Inc. and Dustin R. Womble dated February 26, 2008 (filed as Exhibit 10.6 to our Form 10-K for the year ended December 31, 2007 and incorporated by reference herein).
 
   
10.5
  Employment and Non-Competition Agreement between Tyler Technologies, Inc. and Brian K. Miller, dated February 26, 2008 (filed as Exhibit 10.7 to our Form 10-K for the year ended December 31, 2007 and incorporated by reference herein).
 
   
10.6
  Employment and Non-Competition Agreement between Tyler Technologies, Inc. and H. Lynn Moore dated February 26, 2008 (filed as Exhibit 10.8 to our Form 10-K for the year ended December 31, 2007 and incorporated by reference herein).

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Exhibit    
Number   Description
10.7
  Employee Stock Purchase Plan (filed as Exhibit 4.1 to our registration statement 333-116406 dated June 10, 2004 and incorporated by reference herein).
 
   
*23
  Consent of Independent Registered Public Accounting Firm
 
   
*31.1
  Rule 13a-14(a) Certification by Principal Executive Officer.
 
   
*31.2
  Rule 13a-14(a) Certification by Principal Financial Officer.
 
   
*32
  Section 1350 Certification of Principal Executive Officer and Principal Financial Officer.
 
*   — Filed herewith.
A copy of each exhibit may be obtained at a price of 15 cents per page, with a $10.00 minimum order, by writing Investor Relations, 5949 Sherry Lane, Suite 1400, Dallas, Texas, 75225.

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SIGNATURES
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  TYLER TECHNOLOGIES, INC.
 
 
Date: February 24, 2011  By:   /s/ John S. Marr    
    John S. Marr   
    Chief Executive Officer and President
(principal executive officer) 
 
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
         
     
Date: February 24, 2011  By:   /s/ John S. Marr    
    John S. Marr   
    Chief Executive Officer and President Director
(principal executive officer) 
 
 
     
Date: February 24, 2011  By:   /s/ John M. Yeaman    
    John M. Yeaman   
    Chairman of the Board   
 
     
Date: February 24, 2011  By:   /s/ Brian K. Miller    
    Brian K. Miller   
    Executive Vice President and Chief Financial Officer
(principal financial officer) 
 
 
     
Date: February 24, 2011  By:   /s/ W. Michael Smith    
    W. Michael Smith   
    Vice President and Chief Accounting Officer (principal accounting officer)   

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Date: February 24, 2011  By:   /s/ Donald R. Brattain    
    Donald R. Brattain   
    Director   
 
     
Date: February 24, 2011  By:   /s/ J. Luther King    
    J. Luther King   
    Director   
 
     
Date: February 24, 2011  By:   /s/ G. Stuart Reeves    
    G. Stuart Reeves   
    Director   
 
     
Date: February 24, 2011  By:   /s/ Michael D. Richards    
    Michael D. Richards   
    Director   
 
     
Date: February 24, 2011  By:   /s/ Dustin R. Womble    
    Dustin R. Womble   
    Director   

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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, 2010 and 2009, and the related statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. 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, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, 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, 2010, 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 24, 2011 expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Dallas, Texas
February 24, 2011

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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, 2010, 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 “Management’s 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, 2010, 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, 2010 and 2009, and the related statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010 and our report dated February 24, 2011 expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Dallas, Texas
February 24, 2011

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Tyler Technologies, Inc.
Statements of Operations
For the years ended December 31
In thousands, except per share amounts
                         
    2010     2009     2008  
Revenues:
                       
Software licenses
  $ 34,913     $ 42,131     $ 41,490  
Subscriptions
    23,298       17,181       14,374  
Software services
    68,340       80,405       74,997  
Maintenance
    135,655       124,512       107,458  
Appraisal services
    20,554       18,740       19,098  
Hardware and other
    5,868       7,317       7,684  
 
                 
Total revenues
    288,628       290,286       265,101  
 
                       
Cost of revenues:
                       
Software licenses
    3,456       5,440       9,224  
Acquired software
    1,592       1,411       1,799  
Software services, maintenance and subscriptions
    138,085       137,199       126,247  
Appraisal services
    12,910       11,518       12,251  
Hardware and other
    4,268       5,955       5,793  
 
                 
Total cost of revenues
    160,311       161,523       155,314  
 
                 
 
                       
Gross profit
    128,317       128,763       109,787  
 
                       
Selling, general and administrative expenses
    69,480       70,115       62,923  
Research and development expense
    13,971       11,159       7,286  
Amortization of customer and trade name intangibles
    3,225       2,705       2,438  
Non-cash legal settlement related to warrants
                9,045  
 
                 
 
                       
Operating income
    41,641       44,784       28,095  
 
                       
Other (expense) income, net
    (1,742 )     (146 )     1,181  
 
                 
Income before income taxes
    39,899       44,638       29,276  
Income tax provision
    14,845       17,628       14,414  
 
                 
Net income
  $ 25,054     $ 27,010     $ 14,862  
 
                 
 
                       
Earnings per common share:
                       
Basic
  $ 0.74     $ 0.77     $ 0.39  
 
                 
Diluted
  $ 0.71     $ 0.74     $ 0.38  
 
                 
 
                       
Basic weighted average common shares outstanding
    34,075       35,240       37,714  
Diluted weighted average common shares outstanding
    35,528       36,624       39,184  
See accompanying notes.

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Tyler Technologies, Inc.
Balance Sheets
December 31
In thousands, except share and per share amounts
                 
    2010     2009  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 2,114     $ 9,696  
Restricted cash equivalents
          6,000  
Short-term investments available-for-sale
    25       50  
Accounts receivable (less allowance for losses of $1,603 in 2010 and $2,389 in 2009)
    81,860       81,245  
Prepaid expenses
    7,801       7,921  
Other current assets
    3,543       1,437  
Deferred income taxes
    3,106       3,338  
 
           
Total current assets
    98,449       109,687  
 
               
Accounts receivable, long-term portion
    1,231       1,018  
Property and equipment, net
    34,851       35,750  
Non-current investments available-for-sale
    2,126       1,976  
 
               
Other assets:
               
Goodwill
    92,831       90,258  
Other intangibles, net
    32,307       31,771  
Sundry
    2,237       210  
 
           
 
  $ 264,032     $ 270,670  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 2,626     $ 3,807  
Accrued liabilities
    19,433       26,110  
Deferred revenue
    102,590       99,116  
Income taxes payable
          220  
 
           
Total current liabilities
    124,649       129,253  
 
               
Revolving line of credit
    26,500        
Deferred income taxes
    5,911       7,059  
 
               
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 2010 and 2009
    481       481  
Additional paid-in capital
    153,576       153,734  
Accumulated other comprehensive loss, net of tax
    (275 )     (405 )
Retained earnings
    102,558       77,504  
Treasury stock, at cost; 15,854,205 and 13,027,838 shares in 2010 and 2009, respectively
    (149,368 )     (96,956 )
 
           
Total shareholders’ equity
    106,972       134,358  
 
           
 
  $ 264,032     $ 270,670  
 
           
See accompanying notes.

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Tyler Technologies, Inc.
Statements of Shareholders’ Equity
For the years ended December 31, 2010, 2009 and 2008
In thousands
                                                                 
                            Accumulated                                
                    Additional     Other                             Total  
    Common Stock     Paid-in     Comprehensive     Retained     Treasury Stock     Shareholders’  
    Shares     Amount     Capital     Income (Loss)     Earnings     Shares     Amount     Equity  
 
                                                               
Balance at December 31, 2007
    48,148     $ 481     $ 149,568     $     $ 35,632       (9,528 )   $ (48,470 )   $ 137,211  
Comprehensive income:
                                                               
Net income
                            14,862                   14,862  
Unrealized loss on investment securities, net of tax
                      (387 )                       (387 )
 
                                                             
Total comprehensive income
                                                            14,475  
 
                                                             
Issuance of shares pursuant to stock compensation plan
                (3,495 )                 379       5,310       1,815  
Stock compensation
                3,820                               3,820  
Treasury stock purchases
                                  (4,283 )     (58,984 )     (58,984 )
Issuance of shares pursuant to Employee Stock Purchase Plan
                (186 )                 101       1,376       1,190  
Federal income tax benefit related to exercise of stock options
                822                               822  
Issuance of shares in connection with legal settlement
                455                   802       10,595       11,050  
Issuance of shares for acquisitions
                261                   196       2,602       2,863  
 
                                               
Balance at December 31, 2008
    48,148       481       151,245       (387 )     50,494       (12,333 )     (87,571 )     114,262  
Comprehensive income:
                                                               
Net income
                            27,010                   27,010  
Unrealized loss on investment securities, net of tax
                      (18 )                       (18 )
 
                                                             
Total comprehensive income
                                                            26,992  
 
                                                             
Issuance of shares pursuant to stock compensation plan
                (3,774 )                 425       6,069       2,295  
Stock compensation
                5,045                               5,045  
Treasury stock purchases
                                  (1,235 )     (17,000 )     (17,000 )
Issuance of shares pursuant to Employee Stock Purchase Plan
                (118 )                 115       1,546       1,428  
Federal income tax benefit related to exercise of stock options
                1,336                               1,336  
 
                                               
Balance at December 31, 2009
    48,148       481       153,734       (405 )     77,504       (13,028 )     (96,956 )     134,358  
Comprehensive income:
                                                               
Net income
                            25,054                   25,054  
Unrealized gain on investment securities, net of tax
                      130                         130  
 
                                                             
Total comprehensive income
                                                            25,184  
 
                                                             
Issuance of shares pursuant to stock compensation plan
                (8,157 )                 615       11,338       3,181  
Stock compensation
                6,132                               6,132  
Treasury stock purchases
                                  (3,559 )     (65,793 )     (65,793 )
Issuance of shares pursuant to Employee Stock Purchase Plan
                (218 )                 118       2,043       1,825  
Federal income tax benefit related to exercise of stock options
                2,085                               2,085  
 
                                               
Balance at December 31, 2010
    48,148     $ 481     $ 153,576     $ (275 )   $ 102,558       (15,854 )   $ (149,368 )   $ 106,972  
 
                                               
See accompanying notes.

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Tyler Technologies, Inc.
Statements of Cash Flows
For the years ended December 31
In thousands
                         
    2010     2009     2008  
Cash flows from operating activities:
                       
Net income
  $ 25,054     $ 27,010     $ 14,862  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    10,788       9,497       12,611  
Non-cash legal settlement related to warrants
                9,045  
Share-based compensation expense
    6,132       5,045       3,820  
Provision for losses — accounts receivable
    1,161       1,538       1,764  
Excess tax benefit from exercises of share-based arrangements
    (2,000 )     (1,125 )     (666 )
Deferred income tax benefit
    (959 )     (1,730 )     (2,151 )
Changes in operating assets and liabilities, exclusive of effects of acquired companies:
                       
Accounts receivable
    (1,989 )     (6,277 )     (11,853 )
Income tax payable
    (34 )     1,391       827  
Prepaid expenses and other current assets
    104       1,377       (338 )
Accounts payable
    (1,181 )     1,190       (870 )
Accrued liabilities
    (5,200 )     1,960       3,420  
Deferred revenue
    3,474       3,065       17,331  
 
                 
Net cash provided by operating activities
    35,350       42,941       47,802  
 
                 
 
                       
Cash flows from investing activities:
                       
Proceeds from sales of investments
    75       2,500       45,065  
Purchases of investments
                (8,625 )
Cost of acquisitions, net of cash acquired
    (9,661 )     (2,934 )     (23,868 )
Additions to property and equipment
    (4,930 )     (12,352 )     (20,143 )
Acquired lease
                (1,387 )
Decrease (increase) in restricted investments
    6,000       (918 )     (620 )
(Increase) decrease in other
    (178 )     46       24  
 
                 
Net cash used by investing activities
    (8,694 )     (13,658 )     (9,554 )
 
                 
 
                       
Cash flows from financing activities:
                       
Increase (decrease) in net borrowings on revolving line of credit
    26,500       (8,000 )     8,000  
Purchase of treasury shares
    (65,793 )     (18,263 )     (59,847 )
Contributions from employee stock purchase plan
    1,901       1,494       1,233  
Proceeds from exercise of stock options
    3,181       2,295       1,815  
Debt issuance costs
    (2,027 )            
Excess tax benefits from exercise of share-based arrangements
    2,000       1,125       666  
Warrant exercise in connection with legal settlement
                2,005  
 
                 
Net cash used by financing activities
    (34,238 )     (21,349 )     (46,128 )
 
                 
 
                       
Net (decrease) increase in cash and cash equivalents
    (7,582 )     7,934       (7,880 )
Cash and cash equivalents at beginning of year
    9,696       1,762       9,642  
 
                 
Cash and cash equivalents at end of year
  $ 2,114     $ 9,696     $ 1,762  
 
                 
See accompanying notes.

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Tyler Technologies, Inc.
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 the public sector, with a focus on 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.
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. As of December 31, 2010, we had issued outstanding letters of credit totaling $8.3 million in connection with our surety bond program. These letters of credit are issued under our revolving line of credit and reduce our available borrowing capacity. We do not believe these letters of credit will be required to be drawn upon. These letters of credit expire through mid-2011.
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 Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. 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 the specific cost of the auction rate municipal security. We account for the transactions as “proceeds from sales of investments” for the security relinquished, and a “purchases of investments” for the security purchased, in the accompanying Statements 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 the Construction — Type and Production — Type Contracts as discussed in ASC 605-35.
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.   collectability is probable.

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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 relative 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 determine that 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,” in compliance with ASC 985-605, Software Revenue Recognition, 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 collectability 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 collectability 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 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.

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For ASP and other hosting arrangements, we evaluate whether the customer has the contractual right to take possession of our software at any time during the hosting period without significant penalty and whether the customer can feasibly maintain the software on the customer’s hardware or enter into another arrangement with a third party to host the software. 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 ASC 985-605, Software Revenue Recognition. For ASP and other hosting arrangements that do not meet the criteria for recognition under ASC 985-605, we account for the elements under ASC 605-25, Multiple Element Arrangements using all applicable facts and circumstances, including whether (i) the element has stand-alone value, (ii) there is a general right of return and (iii) the revenue is contingent on delivery of other elements. We allocate revenue to each element of the arrangement that qualifies for treatment as a separate element based on VSOE, and if VSOE is not available, third party evidence, and if third party evidence is unavailable, estimated selling price. For professional services associated with ASP and hosting arrangements that we determine do not have stand-alone value to the customer or are contingent on delivery of other elements, 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.
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 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.
Allocation of Revenue in Statement of Income
In our statements of income, 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

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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 our contracts generally 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.
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 $14.0 million during 2010, $11.2 million during 2009 and $7.3 million during 2008. We reduced our research and development expense by approximately $5.1 million in 2010, $3.5 million in 2009 and $1.8 million in 2008, 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 four to six 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 pursuant to ASC 718, Stock Compensation. See Note 10 — “Share-Based Compensation” for further information.

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GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
We have used the acquisition 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.
We review goodwill impairment annually as of April or more frequently whenever events or changes in circumstances indicate its carrying value may not be recoverable. We have identified two reporting units for impairment testing. Our reporting units are the same as our reportable segments and consistent with the reporting units tested for impairment in prior years. Assets, liabilities and goodwill have been assigned to reporting units based on assets acquired and liabilities assumed as of the date of acquisition.
The provisions of ASC 350, Intangibles — Goodwill and Other, require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not considered impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds the asset’s implied fair value, then we would record an impairment loss equal to the difference. 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. Our cash flow forecasts are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying businesses. The assumptions that are used are based upon what we believe a hypothetical marketplace participant would use in estimating fair value. We evaluate the reasonableness of the fair value calculations of our reporting units by comparing the total of the fair value of all of our reporting units to our total market capitalization. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. A significant amount of judgment is involved in determining if an indicator of impairment has occurred between testing dates. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; and reductions in growth rates. In addition, products, capabilities, or technologies developed by others may render our software products obsolete or non-competitive. Any adverse change in these factors could have a significant impact on the recoverability of goodwill. Our annual goodwill impairment analysis, which we performed during the second quarter of 2010, did not result in an impairment charge.
Other Intangible Assets
We make judgments about the recoverability of purchased intangible assets other than goodwill whenever events or changes in circumstances indicate that an impairment may exist. Customer base constitutes approximately 85% of our purchased intangible assets other than goodwill. We review our customer turnover each year for indications of impairment. Our customer turnover has historically been very low. If indications of impairment are determined to exist, we measure the recoverability of assets by a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. 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. There have been no significant impairments of intangible assets in any of the periods presented.
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 in any of the periods presented.

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COSTS OF COMPUTER SOFTWARE
We capitalize software development costs upon the establishment of technological feasibility and prior to the availability of the product for general release to customers. We did not capitalize any internal software development costs in 2010, 2009 or 2008. 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 $430,000 in 2010, $743,000 in 2009, and $4.7 million in 2008, 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 and certain other assets at cost approximate fair value because of the short maturity of these instruments. Our investments available-for-sale are recorded at fair value as of December 31, 2010 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
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents, investments in auction rate securities and accounts receivable from trade customers. Our cash and cash equivalents primarily consists of money market fund investments which are maintained at one major financial institution and the balances often exceed insurable amounts. As of December 31, 2010 we had cash and cash equivalents of $2.1 million. We perform periodic evaluations of the credit standing of this financial institution.
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, 2010.
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:
                         
    Years ended December 31,  
    2010     2009     2008  
Balance at beginning of year
  $ 2,389     $ 2,115     $ 1,851  
Provisions for losses — accounts receivable
    1,161       1,538       1,764  
Collection of accounts previously written off
    4             10  
Deductions for accounts charged off or credits issued
    (1,951 )     (1,264 )     (1,510 )
 
                 
Balance at end of year
  $ 1,603     $ 2,389     $ 2,115  
 
                 
We occasionally make small adjustments to invoices. In order to process these adjustments we issue a credit memo for the entire amount and issue a new invoice with the adjustments. A substantial portion of credit memos issued during the year include these transactions. 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

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have objective evidence that the customer-specified objective criteria has been met but the billing has not yet been submitted to the customer; (4) some of our contracts provide for an amount to be withheld from a progress billing (generally a 10% retention) until final and satisfactory project completion is achieved; and (5) 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 connection with this activity, we have recorded unbilled receivables of $11.7 million and $13.8 million at December 31, 2010 and 2009, respectively. We also have recorded retention receivable of $2.4 million and $4.0 million at December 31, 2010 and 2009, 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 included with accounts receivable, long-term portion in the accompanying balance sheets.
As of December 31, 2010 our accounts receivable balance includes $4.2 million associated with one customer that terminated its arrangement with us for convenience and, in addition, has disputed certain amounts we invoiced the customer prior to the termination of the arrangement. We believe the receivable is a valid and enforceable claim under the terms of the arrangement, and we intend to aggressively pursue collection.
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. 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.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2010, we adopted the provisions of Accounting Standards Update (ASU) 2009-13, Multiple Element Arrangements. ASU 2009-13 updates the existing multiple-element revenue arrangements guidance currently included in ASC 605-25, Multiple Element Arrangements. The revised guidance provides for two significant changes to the existing multiple-element revenue guidance for arrangements that are not accounted for under ASC 985-605, Software Revenue Recognition. The first change relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. The second change modifies the manner in which the transaction consideration is allocated across the separately identified deliverables. Together, these changes will result in earlier recognition of service revenue for certain of our ASP and hosting arrangements than under previous guidance. The adoption of this ASU did not have a material impact on our financial condition or results of operations.
(2) ACQUISITIONS
2010
On January 1, 2010 we acquired all of the assets of Wiznet, Inc. (“Wiznet”) for a cash purchase price of $9.5 million. Wiznet provides electronic document filing solutions for courts and law offices throughout the United States and is integrated with our primary courts and justice solution.
In connection with this transaction we acquired total tangible assets of approximately $867,000. We recorded goodwill of approximately $2.6 million, all of which is expected to be deductible for tax purposes, and other intangible assets of approximately $6.1 million. The $6.1 million of intangible assets is attributable to customer relationships and acquired software that will be amortized over a weighted average period of approximately nine years. Our balance sheet as of December 31, 2010 reflects the allocation of the purchase price to the assets acquired based on their estimated fair values at the date of acquisition.
The operating results of this acquisition are included in our results of operations from the date of acquisition.

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2009
On July 16, 2009, we completed the acquisition of certain assets of KPL, Inc. d/b/a Parker-Lowe & Associates (“Parker-Lowe”) for $700,000 in cash. Parker-Lowe provides scanning and retrieval software and related services for land record and social services offices in local governments primarily in the North Carolina area. This acquisition was accounted for as a purchase of a business.
On April 3, 2009, we completed the acquisition of all of the capital stock of Assessment Evaluation Services, Inc. (“AES”). AES develops integrated property appraisal solutions and specializes in applications that deal with the unique provisions of the California Revenue and Taxation Code. The purchase price was approximately $1.1 million in cash.
In connection with these 2009 transactions we acquired total tangible assets of approximately $480,000 and assumed total liabilities of approximately $835,000, including $450,000 for contingent consideration for which we have paid $198,000 as of December 31, 2010. The remaining contingent consideration is expected to be paid through 2011. We recorded goodwill of approximately $1.3 million, all of which is expected to be deductible for tax purposes, and other intangible assets of approximately $820,000. The $820,000 of intangible assets is attributable to acquired software and customer relationships that will be amortized over a weighted average period of approximately nine years.
In 2009, we also paid approximately $1.1 million for certain software assets to complement our tax and appraisal solutions and our student information management solutions.
2008
In August 2008, we completed the acquisition of all the capital stock of School Information Systems, Inc., 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.
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS
Assets recorded at fair value in the balance sheet as of December 31, 2010 are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820, Fair Value Measurements and Disclosures, are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets, are as follows:
  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.

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As of December 31, 2010 we held certain items that are required to be measured at fair value on a recurring basis. The following tables summarize the fair value of these financial assets:
                                 
    December 31, 2010  
            Quoted prices in              
            active markets for     Significant other     Significant  
            identical assets     observable inputs     unobservable inputs  
    Total     (Level 1)     (Level 2)     (Level 3)  
Cash and cash equivalents
  $ 2,114     $ 2,114     $     $  
Short-term investments available-for-sale
    25       25              
Non-current investments available-for-sale
    2,126                   2,126  
 
                       
 
  $ 4,265     $ 2,139     $     $ 2,126  
 
                       
                                 
    December 31, 2009  
            Quoted prices in              
            active markets for     Significant other     Significant  
            identical assets     observable inputs     unobservable inputs  
    Total     (Level 1)     (Level 2)     (Level 3)  
Cash and cash equivalents
  $ 15,696     $ 15,696     $     $  
Short-term investments available-for-sale
    50       50              
Non-current investments available-for-sale
    1,976                   1,976  
 
                       
 
  $ 17,722     $ 15,746     $     $ 1,976  
 
                       
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. These money market funds did not experience any declines in fair value in 2010.
Non-current investments available-for-sale consist of two auction rate municipal securities (“ARS”) which are collateralized debt obligations supported by municipal agencies and do not include mortgage-backed securities. Short-term investments available-for-sale consists of a portion of one of these ARS which was partially redeemed at par during the period January 1, 2011 through February 24, 2011. These ARS are debt instruments with stated maturities ranging from 21 to 32 years, for which the interest rate is designed to be reset through Dutch auctions approximately every 30 days. However, due to events in the credit markets, auctions for these securities have not occurred since February 2008. Both of our ARS have had very small partial redemptions at par in the period from July 2009 through February 2011. As of December 31, 2010 we have continued to earn and collect interest on both of our ARS.
Because quoted prices in active markets are no longer available 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. Since there can be no assurances that auctions for these securities will be successful in the near future, we have classified our ARS as non-current investments.
The par and carrying values, and related cumulative unrealized loss for our non-current ARS as of December 31, 2010 are as follows:
                         
            Temporary   Carrying
    Par Value   Impairment   Value
Non-current investments available-for-sale
  $ 2,550     $ 424     $ 2,126  
In association with this estimate of fair value, we have recorded an after-tax temporary unrealized gain on our non-current ARS of $130,000, net of related tax effects of $70,000 in 2010, which is included in accumulated other comprehensive loss on our balance sheet.

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We consider the impairment in our ARS as temporary because we do not have the intent to sell, nor is it more-likely-than-not that we will be required to sell these securities before recovery of their cost basis. 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 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 AA. 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, both ARS have had very small partial redemptions at par in the period July 2009 through February 2011. Based on our cash and cash equivalents balance of $2.1 million, expected operating cash flows, and a $150.0 million credit line, 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 will continue to evaluate any changes in the fair value of our 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 years ended December 31:
         
Balance as of December 31, 2007
  $  
Transfers into level 3
    5,150  
Transfers out of level 3
    (775 )
Unrealized losses included in accumulated other comprehensive loss
    (596 )
 
     
Balance as of December 31, 2008
    3,779  
Transfers into level 3
     
Transfers out of level 3
    (75 )
Purchases, sales, issuances and settlements
    (1,700 )
Unrealized losses included in accumulated other comprehensive loss
    (28 )
 
     
Balance as of December 31, 2009
    1,976  
Transfers into level 3
     
Transfers out of level 3
    (25 )
Purchases, sales, issuances and settlements
    (25 )
Unrealized gain included in accumulated other comprehensive loss
    200  
 
     
Balance as of December 31, 2010
  $ 2,126  
 
     
(4) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following at December 31:
                         
    Useful              
    Lives              
    (years)     2010     2009  
Land
        $ 3,959     $ 3,349  
Building and leasehold improvements
    5-39       26,396       26,208  
Computer equipment and purchased software
    3-5       23,408       21,394  
Furniture and fixtures
    5       7,601       6,467  
Transportation equipment
    5       305       329  
 
                   
 
            61,669       57,747  
Accumulated depreciation and amortization
            (26,818 )     (21,997 )
 
                   
Property and equipment, net
          $ 34,851     $ 35,750  
 
                   
Depreciation expense was $5.1 million during 2010, $4.4 million during 2009, and $3.5 million during 2008.
We own an office building in Yarmouth, Maine, which is currently leased to third-party tenants, and a building in Lubbock, Texas, of which a small portion is leased to a third-party tenant. These leases expire between 2011 and 2015 and are expected to provide rental income of approximately $1.2 million during 2011, $628,000 during 2012, $391,000 during 2013, $222,000 during 2014, $74,000 during 2015 and none thereafter. The lease agreements in Yarmouth, Maine, expire between 2011 and 2013, at which time we expect to begin occupying the facility. Rental income associated with third party tenants was $1.4 million in 2010, $1.3 million in 2009 and $662,000 in 2008, respectively and was included as a reduction of selling, general and administrative expenses.

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(5) GOODWILL AND OTHER INTANGIBLE ASSETS
Other intangible assets and related accumulated amortization consists of the following at December 31:
                 
    2010     2009  
Gross carrying amount of acquisition intangibles:
               
Customer related intangibles
  $ 44,992     $ 39,512  
Software acquired
    23,983       23,403  
Trade name
    1,971       1,971  
Lease acquired
    1,387       1,387  
 
           
 
    72,333       66,273  
Accumulated amortization
    (40,311 )     (35,217 )
 
           
Acquisition intangibles, net
  $ 32,022     $ 31,056  
 
           
 
               
Post acquisition software development costs
  $ 36,701     $ 36,701  
Accumulated amortization
    (36,416 )     (35,986 )
 
           
Post acquisition software costs, net
  $ 285     $ 715  
 
           
 
               
Total other intangibles
  $ 32,307     $ 31,771  
 
           
Total amortization expense, for acquisition related intangibles and post acquisition software development costs, was $5.5 million during 2010, $5.1 million during 2009, and $9.1 million during 2008.
The allocation of acquisition intangible assets is summarized in the following table:
                                                 
    December 31, 2010     December 31, 2009  
            Weighted                     Weighted        
    Gross     Average             Gross     Average        
    Carrying     Amortization     Accumulated     Carrying     Amortization     Accumulated  
    Amount     Period     Amortization     Amount     Period     Amortization  
Non-amortizable intangibles:
                                               
Goodwill
  $ 92,831           $     $ 90,258           $  
Amortizable intangibles:
                                               
Customer related intangibles
    44,992     17 years       17,163       39,512     18 years       14,022  
Software acquired
    23,983     5 years       21,492       23,403     5 years       19,900  
Trade name
    1,971     19 years       963       1,971     19 years       879  
Lease acquired
    1,387     5 years       693       1,387     5 years       416  
The changes in the carrying amount of goodwill for the two years ended December 31, 2010 are as follows:
                         
    Enterprise     Appraisal and Tax        
    Software     Software Solutions        
    Solutions     and Services     Total
Balance as of December 31, 2008
  $ 84,080     $ 4,711     $ 88,791  
Goodwill acquired during the year related to the purchase of AES
          879       879  
Goodwill acquired during the year related to the purchase of Parker-Lowe
    430             430  
Other
    158             158  
 
       
Balance as of December 31, 2009
    84,668       5,590       90,258  
Goodwill acquired during the year related to the purchase of Wiznet
    2,573             2,573  
 
                 
Balance as of December 31, 2010
  $ 87,241     $ 5,590     $ 92,831  
 
                 

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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,        
2011
  $ 4,468  
2012
    4,202  
2013
    3,637  
2014
    3,162  
2015
    2,983  
(6) ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31:
                 
    2010     2009  
Accrued wages, bonuses and commissions
  $ 11,762     $ 15,945  
Other accrued liabilities
    5,433       7,194  
Accrued health claims
    1,304       1,551  
Accrued third party contract costs
    934       1,420  
 
           
 
  $ 19,433     $ 26,110  
 
           
(7) REVOLVING LINE OF CREDIT
On August 11, 2010, we terminated our revolving bank credit agreement and a related pledge and security agreement which had been scheduled to mature October 19, 2010 and entered into a new $150.0 million Credit Agreement (the “Credit Facility”) and a related pledge and security agreement with a group of seven financial institutions with Bank of America, N.A., as Administrative Agent. The Credit Facility provides for a revolving credit line of $150.0 million (which may be increased up to $200.0 million subject to our obtaining commitments for such increase), with a $25.0 million sublimit for letters of credit. The Credit Facility matures on August 11, 2014. Borrowings under the Credit Facility may be used for general corporate purposes, including working capital requirements, acquisitions and share repurchases.
Borrowings under the Credit Facility bear interest at a rate of either (1) the Bank of America’s prime rate plus a margin of 1.50% to 2.75% or (2) the 30, 60, 90 or 180-day LIBOR rate plus a margin of 2.50% to 3.75%, with the margin determined by our consolidated leverage ratio. In 2010 and 2009, our effective average interest rate for borrowings was 3.4% and 1.8%, respectively. As of December 31, 2010, our interest rate was 2.7%. The Credit Facility is secured by substantially all of our assets, excluding real 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, and limits incurrence of additional indebtedness and liens. As of December 31, 2010, we were in compliance with those covenants.
As of December 31, 2010, we had $26.5 million in outstanding borrowings and unused available borrowing capacity of $115.2 million under the Credit Facility. In addition, as of December 31, 2010, our bank had issued outstanding letters of credit totaling $8.3 million to secure surety bonds required by some of our customer contracts. These letters of credit reduce our available borrowing capacity and expire through mid-2011.
We paid interest of $689,000 in 2010 and $174,000 in 2009.

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(8) INCOME TAX
The income tax provision (benefit) on income from operations consists of the following:
                         
    Years ended December 31,  
    2010     2009     2008  
Current:
                       
Federal
  $ 13,552     $ 16,822     $ 14,320  
State
    2,252       2,536       2,245  
 
                 
 
    15,804       19,358       16,565  
Deferred
    (959 )     (1,730 )     (2,151 )
 
                 
 
  $ 14,845     $ 17,628     $ 14,414  
 
                 
Reconciliation of the U.S. statutory income tax rate to our effective income tax expense rate for operations follows:
                         
    Years ended December 31,  
    2010     2009     2008  
Income tax expense at statutory rate
  $ 13,965     $ 15,623     $ 10,247  
State income tax, net of federal income tax benefit
    1,218       1,634       1,089  
Non-deductible business expenses
    976       965       3,988  
Qualified manufacturing activities
    (728 )     (586 )     (700 )
Research and development credit
    (579 )            
Other, net
    (7 )     (8 )     (210 )
 
                 
 
  $ 14,845     $ 17,628     $ 14,414  
 
                 
In 2008, non-deductible business expenses included 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.
Approximately 35% of our stock option expense is derived from incentive stock options (“ISOs”). 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:
                 
    2010     2009  
Deferred income tax assets:
               
Operating expenses not currently deductible
  $ 2,642     $ 2,068  
Employee benefit plans
    4,020       3,628  
Capital loss carryforward
    160       230  
Property and equipment
    195       230  
 
           
Total deferred income tax assets
    7,017       6,156  
 
               
Deferred income tax liabilities:
               
Intangible assets
    (9,673 )     (9,720 )
Other
    (149 )     (157 )
 
           
Total deferred income tax liabilities
    (9,822 )     (9,877 )
 
           
Net deferred income tax liabilities
  $ (2,805 )   $ (3,721 )
 
           

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Although realization is not assured, we believe it is more likely than not that all the deferred tax assets at December 31, 2010 and 2009 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 ASC 740-10, Income Taxes.
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 2007. We are no longer subject to state and local income tax examinations by tax authorities for the years before 2006.
We paid income taxes, net of refunds received, of $15.8 million in 2010, $18.1 million in 2009, and $15.7 million in 2008.
(9) SHAREHOLDERS’ EQUITY
The following table details activity in our common stock:
                                                 
    Years ended December 31,
    2010   2009   2008
    Shares   Amount   Shares   Amount   Shares   Amount
Purchases of common stock
    (3,559 )   $ (65,793 )     (1,235 )   $ (17,000 )     (4,283 )   $ (58,984 )
Stock option exercises
    615       3,181       425       2,295       379       1,815  
Employee stock plan purchases
    118       1,825       115       1,428       101       1,190  
Shares issued for acquisitions
                            196       2,863  
Shares issued in connection with legal settlement
                            802       11,050  
Subsequent to December 31, 2010 and through February 22, 2011, we repurchased 335,000 shares for an aggregate purchase price of $6.8 million. As of February 22, 2011 we had authorization from our board of directors to repurchase up to 2.4 million additional shares of our common stock.
In 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 four to six 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 pursuant to ASC 718, Stock Compensation.
As of December 31, 2010, there were 4.3 million shares available for future grants under the plan from the 16.0 million shares previously approved by the stockholders.
     Determining Fair Value of Stock Compensation
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. As provided by ASC 718-10, Stock Compensation, we use the “simplified” method which is allowed for those companies that cannot reasonably estimate expected life of options based on its historical share option exercise experience. We use the “simplified” method to estimate expected life due to insufficient historical exercise data for the current optionee group. In 2005 we established a practice of granting options to a consistent optionee group. This 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.

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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 share-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,
    2010   2009   2008
Expected life (in years)
    6.7       6.5       6.5  
Expected volatility
    35.0 %     37.2 %     40.9 %
Risk-free interest rate
    2.7 %     3.1 %     3.5 %
Expected forfeiture rate
    3 %     3 %     3 %
The following table summarizes share-based compensation expense related to share-based awards which is recorded in the statement of operations:
                         
    Years ended December 31,  
    2010     2009     2008  
Cost of software services, maintenance and subscriptions
  $ 739     $ 540     $ 364  
Selling, general and administrative expense
    5,393       4,505       3,456  
 
                 
Total share-based compensation expense
    6,132       5,045       3,820  
Tax benefit
    (1,475 )     (1,233 )     (846 )
 
                 
Net decrease in net income
  $ 4,657     $ 3,812     $ 2,974  
 
                 

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Stock Option Activity
Options granted, exercised, forfeited and expired are summarized as follows:
                                 
                    Weighted Average    
            Weighted   Remaining   Aggregate
    Number of   Average   Contractual Life   Intrinsic
    Shares   Exercise Price   (Years)   Value
Outstanding at December 31, 2007
    3,972     $ 7.16                  
Granted
    1,750       14.38                  
Exercised
    (379 )     4.79                  
Forfeited
    (34 )     10.82                  
 
                               
Outstanding at December 31, 2008
    5,309       9.69                  
Granted
    835       17.25                  
Exercised
    (425 )     5.40                  
Forfeited
    (15 )     7.80                  
 
                               
Outstanding at December 31, 2009
    5,704       11.12                  
Granted
    765       18.82                  
Exercised
    (615 )     5.17                  
Forfeited
    (18 )     16.59                  
 
                               
Outstanding at December 31, 2010
    5,836       12.74       7     $ 46,949  
Exercisable at December 31, 2010
    3,045     $ 9.64       5     $ 33,846  
As of December 31, 2010, we had unvested options to purchase 2.7 million shares with a weighted average grant date value of $16.04. As of December 31, 2010, we had $16.7 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 four years.
Other information pertaining to option activity was as follows during the twelve months ended December 31:
                         
    2010   2009   2008
Weighted average grant-date fair value of stock options granted
  $ 7.70     $ 7.38     $ 6.73  
Total intrinsic value of stock options exercised
    8,119       4,656       3,929  
     Employee Stock Purchase Plan
Under our Employee Stock Purchase Plan (“ESPP”) participants may contribute up to 15% of their annual compensation to purchase common shares of Tyler. The purchase price of the shares is equal to 85% of the closing price of Tyler shares on the last day of each quarterly offering period. As of December 31, 2010, there were 222,000 shares available for future grants under the ESPP from the 1.0 million shares originally reserved for issuance.

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(11) EARNINGS PER SHARE
Basic earnings and diluted earnings per share data were computed as follows:
                         
    Years Ended December 31,  
    2010     2009     2008  
Numerator for basic and diluted earnings per share
                       
Net income
  $ 25,054     $ 27,010     $ 14,862  
Denominator:
                       
Weighted-average basic common shares outstanding
    34,075       35,240       37,714  
Assumed conversion of dilutive securities:
                       
Stock options
    1,453       1,384       1,470  
 
                 
Denominator for diluted earnings per share — Adjusted weighted-average shares
    35,528       36,624       39,184  
 
                 
Earnings per common share:
                       
Basic
  $ 0.74     $ 0.77     $ 0.39  
 
                 
Diluted
  $ 0.71     $ 0.74     $ 0.38  
 
                 
Stock options representing the right to purchase common stock of 1.8 million shares in 2010, 2.6 million shares in 2009, and 1.6 million shares in 2008 were not included in the computation of diluted earnings per share because their inclusion would have had an anti-dilutive 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 non-cancelable operating lease agreements and they expire at various dates through 2018. In addition to rent, the leases generally require us to pay taxes, maintenance, insurance and certain other operating expenses.
Rent expense was approximately $5.4 million in 2010, $6.3 million in 2009, and $5.9 million in 2008, which included rent expense associated with related party lease agreements of $1.9 million in 2010, $2.0 million in 2009 and $1.8 million in 2008.
Future minimum lease payments under all non-cancelable leases at December 31, 2010 are as follows:
         
Years ending December 31,        
2011
  $ 5,643  
2012
    4,659  
2013
    2,997  
2014
    2,323  
2015
    605  
Thereafter
    1,204  
 
     
 
  $ 17,431  
 
     
Included in future minimum lease payments are non-cancelable payments due to related parties of $1.8 million in 2011, $1.7 million in 2012, $1.7 million in 2013, $1.7 million in 2014, 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 3% of an employee’s compensation to the plan. We made contributions to the plan and charged operations $2.8 million during 2010, $2.6 million during 2009, and $2.0 million during 2008.

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(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 (the “Court”) on behalf of current and former telephone and remote customer support personnel (“Category 1”), computer hardware and software set up and maintenance personnel (“Category 2”), implementation personnel (“Category 3”), sales support personnel (“Category 4”), and quality assurance analysts (“Category 5”). The petition alleges that we misclassified these groups of employees as “exempt” rather than “non-exempt” under the Fair Labor Standards Act and that we therefore 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, liquidated damages equal to the amount of lost overtime pay, interest, costs, and attorneys’ fees. On June 23, 2009, the Court issued an Order granting plaintiffs’ motion for conditional certification for the purpose of providing notice to potential plaintiffs about the litigation. Accordingly, notice was sent to all current and former employees who worked in the foregoing job classifications during the applicable time periods. On October 26, 2009, the “opt in” period for plaintiffs and potential plaintiffs closed. Since that time, a number of plaintiffs voluntarily withdrew their petition. During a mediation which occurred during the second quarter of 2010, we reached a conditional settlement in principle with all of the plaintiffs in Categories 1, 2, 4, and 5 (24 plaintiffs in the aggregate). The terms of the settlement agreement, which are immaterial and confidential, were approved by the Court during the fourth quarter of 2010. In addition, during a mediation that occurred in January 2011, we reached a conditional settlement in principle with the remaining plaintiffs in Category 3 (30 plaintiffs in the aggregate). The terms of the settlement agreement, which are immaterial and confidential, are subject to Court approval.
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 was 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.
(15) SEGMENT AND RELATED INFORMATION
We are a major provider of integrated information management solutions and services for the public sector, with a focus on local governments.
We provide our software systems and services and appraisal services through four business units which focus on the following products:
    financial management and education software solutions;
 
    financial management and municipal courts software solutions;
 
    courts and justice software solutions; and
 
    appraisal and tax software solutions and property appraisal services.
In accordance with ASC 280-10, Segment Reporting, the financial management and education software solutions unit, financial management and municipal courts software solutions unit and the courts and justice software solutions unit meet the criteria for aggregation and are presented in one segment, Enterprise Software Solutions (“ESS”). The ESS segment provides municipal and county governments and schools with software systems to meet their information technology and automation needs for mission-critical “back-office” functions such as financial management and courts and justice processes. The Appraisal and Tax Software Solutions and Services (“ATSS”) segment provides systems and software that automate the appraisal and assessment of real and personal property as well as property appraisal outsourcing services for local governments and taxing authorities. Property appraisal outsourcing services include: the physical inspection of commercial and residential properties; data collection and processing; computer analysis for property valuation; preparation of tax rolls; community education; and arbitration between taxpayers and the assessing jurisdiction.
We evaluate performance based on several factors, of which the primary financial measure is business segment operating income. We define segment operating income as income before noncash amortization of intangible assets associated with their acquisition, share-based compensation expense, interest expense and income taxes. Segment operating income includes intercompany transactions. The

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majority of intercompany transactions relate to contracts involving more than one unit and are valued based on the contractual arrangement. Segment operating income for corporate primarily consists of compensation costs for the executive management team and certain accounting and administrative staff and share-based compensation expense for the entire company. The accounting policies of the reportable segments are the same as those described in Note 1, “Summary of Significant Accounting Policies.”
Segment assets include net accounts receivable, prepaid expenses and other current assets, net property and equipment and intangibles associated with their acquisition. Corporate assets consist of cash and investments, prepaid insurance, deferred income taxes and net property and equipment mainly related to unallocated information and technology assets.
ESS segment capital expenditures in 2009 and 2008 include $11.2 million and $16.0 million, respectively for the purchase of buildings in connection with plans to consolidate workforces and support long-term growth.
In 2009 and 2008 the ATSS segment had one appraisal services customer which accounted for 10.4% and 12.6%, respectively, of this segment’s total revenues. The ATSS segment did not have any customers in 2010 that accounted for 10% or more of their total revenues.
In 2010 we transferred a small tax and appraisal software solution from the ESS segment to the ATSS segment and reclassified segment revenues and segment operating profit in 2009 and 2008 to conform to current year presentation.
As of and year ended December 31, 2010
                                 
    Enterprise   Appraisal and Tax        
    Software   Software Solutions        
    Solutions   and Services   Corporate   Totals
     
Revenues
                               
Software licenses
  $ 32,757     $ 2,156     $     $ 34,913  
Subscriptions
    22,975       323             23,298  
Software services
    58,371       9,969             68,340  
Maintenance
    120,764       14,891             135,655  
Appraisal services
          20,554             20,554  
Hardware and other
    5,727       6       135       5,868  
Intercompany
    1,978             (1,978 )      
     
Total revenues
  $ 242,572     $ 47,899     $ (1,843 )   $ 288,628  
Depreciation and amortization expense
    8,903       683       1,202       10,788  
Segment operating income
    51,942       8,883       (14,367 )     46,458  
Capital expenditures
    2,960       350       310       3,620  
Segment assets
  $ 373,432     $ 45,957     $ (155,357 )   $ 264,032  

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As of and year ended December 31, 2009
                                 
    Enterprise   Appraisal and Tax        
    Software   Software Solutions        
    Solutions   and Services   Corporate   Totals
     
Revenues
                               
Software licenses
  $ 39,484     $ 2,647     $     $ 42,131  
Subscriptions
    16,870       311             17,181  
Software services
    70,041       10,364             80,405  
Maintenance
    110,404       14,108             124,512  
Appraisal services
          18,740             18,740  
Hardware and other
    6,113       135       1,069       7,317  
Intercompany
    1,618             (1,618 )      
     
Total revenues
  $ 244,530     $ 46,305     $ (549 )   $ 290,286  
Depreciation and amortization expense
    8,031       608       858       9,497  
Segment operating income
    54,825       7,763       (13,688 )     48,900  
Capital expenditures
    13,361       192       614       14,167  
Segment assets
  $ 220,135     $ 25,597     $ 24,938     $ 270,670  
As of and year ended December 31, 2008
                                 
    Enterprise   Appraisal and Tax        
    Software   Software Solutions        
    Solutions   and Services   Corporate   Totals
     
Revenues
                               
Software licenses
  $ 39,215     $ 2,275     $     $ 41,490  
Subscriptions
    14,352       22             14,374  
Software services
    63,508       11,489             74,997  
Maintenance
    94,546       12,912             107,458  
Appraisal services
          19,098             19,098  
Hardware and other
    6,354       26       1,304       7,684  
Intercompany
    777       181       (958 )      
     
Total revenues
  $ 218,752     $ 46,003     $ 346     $ 265,101  
Depreciation and amortization expense
    11,596       510       505       12,611  
Segment operating income
    49,298       3,847       (11,768 )     41,377  
Capital expenditures
    17,563       420       2,160       20,143  
Segment assets
  $ 208,868     $ 24,409     $ 18,484     $ 251,761  
                         
Reconciliation of reportable segment operating            
income to the Company’s consolidated totals:   2010   2009   2008
     
     
Total segment operating income
  $ 46,458     $ 48,900     $ 41,377  
Amortization of acquired software
    (1,592 )     (1,411 )     (1,799 )
Amortization of customer and trade name intangibles
    (3,225 )     (2,705 )     (2,438 )
Non-cash legal settlement related to warrants
                (9,045 )
Other (expense) income
    (1,742 )     (146 )     1,181  
     
Income before income taxes
  $ 39,899     $ 44,638     $ 29,276  
     

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(16) QUARTERLY FINANCIAL INFORMATION (unaudited)
The following table contains selected financial information from unaudited statements of operations for each quarter of 2010 and 2009.
                                                                 
    Quarters Ended
    2010   2009
    Dec. 31   Sept. 30   June 30   Mar. 31   Dec. 31   Sept. 30   June 30   Mar. 31
Revenues
  $ 72,439     $ 73,769     $ 72,600     $ 69,820     $ 74,217     $ 74,332     $ 72,172     $ 69,565  
Gross profit
    32,616       33,207       32,475       30,019       33,239       33,235       31,997       30,292  
Income before income taxes
    10,159       11,263       10,383       8,094       10,922       12,421       11,334       9,961  
Net income
    7,210       6,723       6,249       4,872       6,656       7,475       6,873       6,006  
Earnings per diluted share
    0.21       0.19       0.17       0.13       0.18       0.20       0.19       0.16  
 
                                                               
Shares used in computing diluted earnings per share
    33,895       35,410       36,203       36,655       36,600       36,487       36,723       36,747  

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