##### 









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-Q

|   |  |                                                                                              
|-- |  | ---------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
|  
|   |  | For the quarterly period ended June 30,
    2004                                             
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission file number 000-50784



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Blackboard Inc.

(Exact Name of Registrant as Specified in Its
Charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 52-2081178                              
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (I.R.S. Employer
    Identification No.)
|                                                                  
|1899 L Street, N.W.
    Washington D.C.                            |  | 20036(Zip Code)                         
|(Address of Principal Executive
    Offices)                       |  |                                         

Registrants Telephone Number, Including
Area Code:

(202) 463-4860


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 o          No þ

Indicate
by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange
Act).     Yes o          No þ

|                              |  |                             
|----------------------------- |  | ----------------------------
|Class                         |  | Outstanding at July 31, 2004
|                              |  |                             
|Common Stock, $0.01 par value |  | 25,626,997                  



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##### 



BLACKBOARD INC.

Quarterly Report on Form 10-Q

For the Quarter Ended June 30,
2004


INDEX

|                                   |  |                                                                                                                           |  |        |    | 
|---------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | ------ | -- | 
|                                   |  |                                                                                                                           |  | Page  
|                                   |  |                                                                                                                           |  | Number
|                                   |  |                                                                                                                           |  |       
|PART I.  FINANCIAL
    INFORMATION |  |                                                                                                                           |  |       
|Item 1.                            |  | Consolidated Financial Statements.                                                                                        |  |        |    | 
|                                   |  | Consolidated Balance Sheets as of December 31,
    2003 and June 30, 2004 (unaudited).                                    |  |        | 1  | 
|                                   |  | Unaudited Consolidated Statements of Operations
    for the Three Months and Six Months ended June 30, 2003 and
    2004. |  |        | 3  | 
|                                   |  | Unaudited Consolidated Statements of Cash Flows
    for the Six Months ended June 30, 2003 and 2004.                      |  |        | 4  | 
|                                   |  | Notes to Unaudited Consolidated Financial
    Statements.                                                                 |  |        | 5  | 
|Item 2.                            |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations.                                |  |        | 10 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures About
    Market Risk.                                                           |  |        | 29 | 
|Item 4.                            |  | Controls and Procedures.                                                                                                  |  |        | 29 | 
|PART II.  OTHER
    INFORMATION    |  |                                                                                                                           |  |       
|Item 2.                            |  | Changes in Securities, Use of Proceeds and Issuer
    Purchases of Equity Securities.                                     |  |        | 30 | 
|Item 4.                            |  | Submission of Matters to a Vote of Security
    Holders.                                                                  |  |        | 32 | 
|Item 6.                            |  | Exhibits and Reports on Form 8-K.                                                                                         |  |        | 33 | 
|Signatures                         |  |                                                                                                                           |  |        | 34 | 
|Exhibit Index                      |  |                                                                                                                           |  |        |    | 

Throughout this Quarterly Report on
Form 10-Q, the terms we, us,
our and Blackboard refer to Blackboard
Inc. and its subsidiaries

ii



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##### 



PART I  FINANCIAL
INFORMATION



|        |                                      
|------- | -------------------------------------
|Item 1. | Consolidated Financial
    Statements

BLACKBOARD INC.

CONSOLIDATED BALANCE SHEETS

|                                                   |                                                                                                                                                     |                           |        |             |        |   |         |        |         | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------ | ----------- | ------ | - | ------- | ------ | ------- | 
|                                                   |                                                                                                                                                     | December 31,              |        | June 30,   
|                                                   |                                                                                                                                                     | 2003                      |        | 2004       
|                                                   |                                                                                                                                                     |                           |        |            
|                                                   |                                                                                                                                                     |                           |        | (Unaudited)
|                                                   |                                                                                                                                                     |                          
|                                                   |                                                                                                                                                     | (In thousands)           
|ASSETS                                            
|Current assets:                                    |                                                                                                                                                     |                           |        |             |        |   |         |       
|                                                   | Cash and cash equivalents                                                                                                                           |                           | $      | 30,456      |        |   | $       | 71,715 |        
|                                                   | Accounts receivable, net of allowance for
    doubtful accounts of $1,018,000 and $746,000 at
    December 31, 2003 and June 30, 2004, respectively |                           |        | 22,870      |        |   |         | 36,501 |        
|                                                   | Inventories, net of allowance for obsolescence of
    $115,000 at December 31, 2003 and June 30, 2004                                               |                           |        | 2,050       |        |   |         | 2,053  |        
|                                                   | Prepaid expenses and other current assets                                                                                                           |                           |        | 711         |        |   |         | 1,203  |        
|                                                   | Deferred cost of revenues                                                                                                                           |                           |        | 3,846       |        |   |         | 4,429  |        
|                                                   |                                                                                                                                                     |                           |        |             |        |   |         |       
|                                                   |                                                                                                                                                     | Total current assets      |        |             | 59,933 |   |         |        | 115,901 | 
|Property and equipment, net                        |                                                                                                                                                     |                           | 7,683  |             |        |   | 8,787   |       
|Restricted cash                                    |                                                                                                                                                     |                           | 843    |             |        |   | 653     |       
|Goodwill                                           |                                                                                                                                                     |                           | 10,252 |             |        |   | 10,252  |       
|Intangible assets, net                             |                                                                                                                                                     |                           | 4,343  |             |        |   | 2,584   |       
|                                                   |                                                                                                                                                     |                           |        |             |        |   |         |       
|Total assets                                       |                                                                                                                                                     | $                         | 83,054 |             |        | $ | 138,177 |       
|                                                   |                                                                                                                                                     |                           |        |             |        |   |         |       
|                                                  
|LIABILITIES AND STOCKHOLDERS (DEFICIT)
    EQUITY
|Current liabilities:                               |                                                                                                                                                     |                           |        |             |        |   |         |       
|                                                   | Accounts payable                                                                                                                                    |                           | $      | 1,833       |        |   | $       | 1,855  |        
|                                                   | Accrued expenses                                                                                                                                    |                           |        | 9,900       |        |   |         | 11,060 |        
|                                                   | Line of credit                                                                                                                                      |                           |        | 7,880       |        |   |         |       |        
|                                                   | Equipment note, current portion                                                                                                                     |                           |        | 949         |        |   |         | 769    |        
|                                                   | Note payable                                                                                                                                        |                           |        | 2,000       |        |   |         | 1,000  |        
|                                                   | Deferred revenues, current portion                                                                                                                  |                           |        | 51,215      |        |   |         | 57,987 |        
|                                                   |                                                                                                                                                     |                           |        |             |        |   |         |       
|                                                   |                                                                                                                                                     | Total current liabilities |        |             | 73,777 |   |         |        | 72,671  | 
|Equipment note, noncurrent portion                 |                                                                                                                                                     |                           | 735    |             |        |   | 412     |       
|Deferred rent                                      |                                                                                                                                                     |                           | 1,135  |             |        |   | 1,058   |       
|Deferred revenues, noncurrent portion              |                                                                                                                                                     |                           | 1,727  |             |        |   | 4,312   |       

See notes to unaudited consolidated financial
statements.

1



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##### 



BLACKBOARD INC.

CONSOLIDATED BALANCE SHEETS 
(Continued)

|                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                   |                                                          |        |             |          |   |   |          |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------ | ----------- | -------- | - | - | -------- | ------- | 
|                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                   | December 31,                                             |        | June 30,   
|                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                   | 2003                                                     |        | 2004       
|                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                   |                                                          |        |            
|                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                   |                                                          |        | (Unaudited)
|                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                   |                                                         
|                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                   | (In thousands)                                          
|Commitments and contingencies                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                   |                                                          |        |             |          |   |   |         
|Series A Convertible Preferred Stock, $0.01
    par value; 1,174,484 shares authorized, issued and outstanding
    at December 31, 2003 and no shares authorized, issued or
    outstanding at June 30, 2004; liquidation preference of
    $876,000 at December 31, 2003                                  |                                                                                                                                                                                                   | $                                                        | 868    |             |          | $ |  |         
|Series B Redeemable Convertible Preferred
    Stock, $0.01 par value; 5,025,935 shares authorized, issued and
    outstanding at December 31, 2003 and no shares authorized,
    issued or outstanding at June 30, 2004; liquidation
    preference of $4,403,000 at December 31, 2003                     |                                                                                                                                                                                                   |                                                          | 4,397  |             |          |   |  |         
|Series C Redeemable Convertible Preferred
    Stock, $0.01 par value; 6,220,049 shares authorized; 5,904,788
    shares issued and outstanding at December 31, 2003 and no
    shares authorized, issued or outstanding at June 30, 2004;
    liquidation preference of $21,285,000 at December 31, 2003   |                                                                                                                                                                                                   |                                                          | 21,256 |             |          |   |  |         
|Series D Redeemable Convertible Preferred
    Stock, $0.01 par value; 4,167,333 shares authorized; 3,451,707
    shares issued and outstanding at December 31, 2003 and no
    shares authorized, issued or outstanding at June 30, 2004;
    liquidation preference of $41,248,000 at December 31, 2003   |                                                                                                                                                                                                   |                                                          | 41,215 |             |          |   |  |         
|Series E Redeemable Convertible Preferred
    Stock, $0.01 par value; 13,000,000 shares authorized; 10,236,934
    shares issued and outstanding at December 31, 2003 and no
    shares authorized, issued or outstanding at June 30, 2004;
    liquidation preference of $64,830,000 at December 31, 2003 |                                                                                                                                                                                                   |                                                          | 58,227 |             |          |   |  |         
|Warrants to purchase Series E Redeemable
    Convertible Preferred Stock                                                                                                                                                                                                                                   |                                                                                                                                                                                                   |                                                          | 4,334  |             |          |   |  |         
|Stockholders (deficit) equity:                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                   |                                                          |        |             |          |   |   |         
|                                                                                                                                                                                                                                                                                                           | Preferred stock, $0.01 par value; no shares
    authorized, issued or outstanding at December 31, 2003;
    5,000,000 shares authorized, and no shares issued or outstanding
    at June 30, 2004 |                                                          |        |            |          |   |   |         |        
|                                                                                                                                                                                                                                                                                                           | Common stock, $0.01 par value; 200,000,000 shares
    authorized; 5,536,396 and 25,621,934 shares issued and
    outstanding at December 31, 2003 and June 30, 2004,
    respectively             |                                                          |        | 55          |          |   |   | 256      |        
|                                                                                                                                                                                                                                                                                                           | Additional paid-in capital                                                                                                                                                                        |                                                          |        | 8,020       |          |   |   | 190,499  |        
|                                                                                                                                                                                                                                                                                                           | Deferred stock compensation                                                                                                                                                                       |                                                          |        | (35         | )        |   |   | (211     | )      
|                                                                                                                                                                                                                                                                                                           | Accumulated deficit                                                                                                                                                                               |                                                          |        | (132,657    | )        |   |   | (130,820 | )      
|                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                   |                                                          |        |             |          |   |   |         
|                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                   | Total stockholders (deficit) equity                     |        |             | (124,617 | ) |   |          | 59,724  | 
|                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                   |                                                          |        |             |          |   |   |         
|                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                   | Total liabilities and stockholders
    (deficit) equity |        | $           | 83,054   |   |   | $        | 138,177 | 
|                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                   |                                                          |        |             |          |   |   |         

See notes to unaudited consolidated financial
statements

2



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##### 



BLACKBOARD INC.

UNAUDITED CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                      |                                                                                                                                                                |                                                    |           |                  |   |      |           |        |   |   |           |        |   |   |           |        |  
|------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | --------- | ---------------- | - | ---- | --------- | ------ | - | - | --------- | ------ | - | - | --------- | ------ | -
|                                                                                      |                                                                                                                                                                |                                                    |           |                 
|                                                                                      |                                                                                                                                                                | Three Months Ended                                 |           | Six Months Ended
|                                                                                      |                                                                                                                                                                | June 30,                                           |           | June 30,        
|                                                                                      |                                                                                                                                                                |                                                    |           |                 
|                                                                                      |                                                                                                                                                                | 2003                                               |           | 2004             |   | 2003 |           | 2004  
|                                                                                      |                                                                                                                                                                |                                                    |           |                  |   |      |           |       
|                                                                                      |                                                                                                                                                                |                                                   
|                                                                                      |                                                                                                                                                                | (In thousands, except share and per share amounts)
|Revenues:                                                                             |                                                                                                                                                                |                                                    |           |                  |   |      |           |        |   |   |           |        |   |   |           |       
|                                                                                      | Product                                                                                                                                                        |                                                    | $         | 20,395           |   |      | $         | 23,332 |   |   | $         | 38,992 |   |   | $         | 45,948 |  
|                                                                                      | Professional services                                                                                                                                          |                                                    |           | 2,349            |   |      |           | 3,023  |   |   |           | 3,933  |   |   |           | 5,626  |  
|                                                                                      |                                                                                                                                                                |                                                    |           |                  |   |      |           |        |   |   |           |        |   |   |           |       
|Total revenues                                                                        |                                                                                                                                                                |                                                    | 22,744    |                  |   |      | 26,355    |        |   |   | 42,925    |        |   |   | 51,574    |       
|Operating expenses:                                                                   |                                                                                                                                                                |                                                    |           |                  |   |      |           |        |   |   |           |        |   |   |           |       
|                                                                                      | Cost of product revenues, excludes amortization
    of acquired technology included in amortization of intangibles
    resulting from acquisitions shown below |                                                    |           | 5,697            |   |      |           | 5,957  |   |   |           | 10,908 |   |   |           | 12,017 |  
|                                                                                      | Cost of professional services revenues                                                                                                                         |                                                    |           | 1,585            |   |      |           | 2,073  |   |   |           | 2,899  |   |   |           | 3,626  |  
|                                                                                      | Research and development                                                                                                                                       |                                                    |           | 2,744            |   |      |           | 3,636  |   |   |           | 5,453  |   |   |           | 6,890  |  
|                                                                                      | Sales and marketing                                                                                                                                            |                                                    |           | 8,094            |   |      |           | 9,090  |   |   |           | 14,749 |   |   |           | 17,858 |  
|                                                                                      | General and administrative                                                                                                                                     |                                                    |           | 4,231            |   |      |           | 3,360  |   |   |           | 8,738  |   |   |           | 6,785  |  
|                                                                                      | Amortization of intangibles resulting from
    acquisitions                                                                                                    |                                                    |           | 1,445            |   |      |           | 879    |   |   |           | 2,868  |   |   |           | 1,759  |  
|                                                                                      | Stock-based compensation                                                                                                                                       |                                                    |           | 28               |   |      |           | 28     |   |   |           | 201    |   |   |           | 111    |  
|                                                                                      |                                                                                                                                                                |                                                    |           |                  |   |      |           |        |   |   |           |        |   |   |           |       
|Total operating expenses                                                              |                                                                                                                                                                |                                                    | 23,824    |                  |   |      | 25,023    |        |   |   | 45,816    |        |   |   | 49,046    |       
|                                                                                      |                                                                                                                                                                |                                                    |           |                  |   |      |           |        |   |   |           |        |   |   |           |       
|(Loss) income from operations                                                         |                                                                                                                                                                |                                                    | (1,080    | )                |   |      | 1,332     |        |   |   | (2,891    | )      |   |   | 2,528     |       
|Other income (expense), net:                                                          |                                                                                                                                                                |                                                    |           |                  |   |      |           |        |   |   |           |        |   |   |           |       
|                                                                                      | Interest expense                                                                                                                                               |                                                    |           | (141             | ) |      |           | (50    | ) |   |           | (293   | ) |   |           | (128   | )
|                                                                                      | Interest income                                                                                                                                                |                                                    |           | 23               |   |      |           | 23     |   |   |           | 59     |   |   |           | 49     |  
|                                                                                      |                                                                                                                                                                |                                                    |           |                  |   |      |           |        |   |   |           |        |   |   |           |       
|(Loss) income before provision for income taxes                                       |                                                                                                                                                                |                                                    | (1,198    | )                |   |      | 1,305     |        |   |   | (3,125    | )      |   |   | 2,449     |       
|Provision for income taxes                                                            |                                                                                                                                                                |                                                    | (207      | )                |   |      | (254      | )      |   |   | (314      | )      |   |   | (612      | )     
|                                                                                      |                                                                                                                                                                |                                                    |           |                  |   |      |           |        |   |   |           |        |   |   |           |       
|Net (loss) income                                                                     |                                                                                                                                                                |                                                    | (1,405    | )                |   |      | 1,051     |        |   |   | (3,439    | )      |   |   | 1,837     |       
|Dividends on and accretion of convertible
    preferred stock                         |                                                                                                                                                                |                                                    | (2,507    | )                |   |      | (3,749    | )      |   |   | (4,990    | )      |   |   | (6,344    | )     
|                                                                                      |                                                                                                                                                                |                                                    |           |                  |   |      |           |        |   |   |           |        |   |   |           |       
|Net loss attributable to common stockholders                                          |                                                                                                                                                                | $                                                  | (3,912    | )                |   | $    | (2,698    | )      |   |   | (8,429    | )      |   |   | (4,507    | )     
|                                                                                      |                                                                                                                                                                |                                                    |           |                  |   |      |           |        |   |   |           |        |   |   |           |       
|Net loss attributable to common stockholders per
    common share  basic and diluted |                                                                                                                                                                | $                                                  | (0.71     | )                |   | $    | (0.37     | )      |   | $ | (1.53     | )      |   | $ | (0.71     | )     
|                                                                                      |                                                                                                                                                                |                                                    |           |                  |   |      |           |        |   |   |           |        |   |   |           |       
|Weighted average number of common
    shares  basic and diluted                      |                                                                                                                                                                |                                                    | 5,510,372 |                  |   |      | 7,202,017 |        |   |   | 5,506,836 |        |   |   | 6,374,493 |       
|                                                                                      |                                                                                                                                                                |                                                    |           |                  |   |      |           |        |   |   |           |        |   |   |           |       

See notes to unaudited consolidated financial
statements

3



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##### 



BLACKBOARD INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                             |                                                                                |                                           |        |       |        |   |        |       |         |  
|-------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------------------- | ------ | ----- | ------ | - | ------ | ----- | ------- | -
|                                                                                             |                                                                                |                                          
|                                                                                             |                                                                                | Six Months Ended                         
|                                                                                             |                                                                                | June 30,                                 
|                                                                                             |                                                                                |                                          
|                                                                                             |                                                                                | 2003                                      |        | 2004 
|                                                                                             |                                                                                |                                           |        |      
|                                                                                             |                                                                                |                                          
|                                                                                             |                                                                                | (In thousands)                           
|Cash flows from operating activities                                                         |                                                                                |                                           |        |       |        |   |        |      
|Net (loss) income                                                                            |                                                                                | $                                         | (3,439 | )     |        | $ | 1,837  |      
|Adjustments to reconcile net (loss) income
    to net cash provided by operating activities: |                                                                                |                                           |        |       |        |   |        |      
|                                                                                             | Depreciation and amortization                                                  |                                           |        | 1,986 |        |   |        | 3,046 |        
|                                                                                             | Amortization of intangibles                                                    |                                           |        | 2,868 |        |   |        | 1,759 |        
|                                                                                             | Change in allowance for doubtful accounts                                      |                                           |        | 358   |        |   |        | (272  | )      
|                                                                                             | Change in obsolescence reserve                                                 |                                           |        | (15   | )      |   |        |      |        
|                                                                                             | Noncash stock compensation related to options
    issued to non-employees      |                                           |        |      |        |   |        | 69    |        
|                                                                                             | Noncash stock compensation for modification of
    options                     |                                           |        | 21    |        |   |        |      |        
|                                                                                             | Noncash deferred stock amortization                                            |                                           |        | 40    |        |   |        | 42    |        
|                                                                                             | Changes in operating assets and liabilities, net
    of effect of acquisition: |                                           |        |       |        |   |        |       |        
|                                                                                             |                                                                                | Accounts receivable                       |        |       | (7,492 | ) |        |       | (13,359 | )
|                                                                                             |                                                                                | Inventories                               |        |       | (126   | ) |        |       | (3      | )
|                                                                                             |                                                                                | Prepaid expenses and other current assets |        |       | 2,076  |   |        |       | (492    | )
|                                                                                             |                                                                                | Deferred cost of revenues                 |        |       | 598    |   |        |       | (583    | )
|                                                                                             |                                                                                | Accounts payable                          |        |       | 2,965  |   |        |       | 22      |  
|                                                                                             |                                                                                | Accrued expenses                          |        |       | 962    |   |        |       | 990     |  
|                                                                                             |                                                                                | Deferred rent                             |        |       | (27    | ) |        |       | (77     | )
|                                                                                             |                                                                                | Deferred revenues                         |        |       | 3,350  |   |        |       | 9,357   |  
|                                                                                             |                                                                                |                                           |        |       |        |   |        |      
|Net cash provided by operating activities                                                    |                                                                                |                                           | 4,125  |       |        |   | 2,336  |      
|Cash flows from investing activities                                                         |                                                                                |                                           |        |       |        |   |        |      
|Purchase of property and equipment                                                           |                                                                                |                                           | (2,136 | )     |        |   | (3,980 | )    
|Acquisition of business, net of cash acquired                                                |                                                                                |                                           | (4,500 | )     |        |   |       |      
|                                                                                             |                                                                                |                                           |        |       |        |   |        |      
|Net cash used in investing activities                                                        |                                                                                |                                           | (6,636 | )     |        |   | (3,980 | )    
|Cash flows from financing activities                                                         |                                                                                |                                           |        |       |        |   |        |      
|Proceeds from equipment notes                                                                |                                                                                |                                           | 1,209  |       |        |   |       |      
|Payments on equipment notes                                                                  |                                                                                |                                           | (647   | )     |        |   | (503   | )    
|Proceeds from line of credit                                                                 |                                                                                |                                           | 2,630  |       |        |   |       |      
|Payments on line of credit                                                                   |                                                                                |                                           | (2,000 | )     |        |   | (7,880 | )    
|Payments on note payable                                                                     |                                                                                |                                           |       |       |        |   | (1,000 | )    
|Proceeds from issuance of common stock, net of
    issuance costs                            |                                                                                |                                           |       |       |        |   | 50,896 |      
|Proceeds from exercise of Series D Warrants                                                  |                                                                                |                                           |       |       |        |   | 248    |      
|Release of letters of credit                                                                 |                                                                                |                                           | 210    |       |        |   | 190    |      
|Proceeds from exercise of stock options                                                      |                                                                                |                                           | 26     |       |        |   | 952    |      
|                                                                                             |                                                                                |                                           |        |       |        |   |        |      
|Net cash provided by financing activities                                                    |                                                                                |                                           | 1,428  |       |        |   | 42,903 |      
|                                                                                             |                                                                                |                                           |        |       |        |   |        |      
|Net (decrease) increase in cash and cash
    equivalents                                     |                                                                                |                                           | (1,083 | )     |        |   | 41,259 |      
|Cash and cash equivalents at beginning of period                                             |                                                                                |                                           | 20,372 |       |        |   | 30,456 |      
|                                                                                             |                                                                                |                                           |        |       |        |   |        |      
|Cash and cash equivalents at end of period                                                   |                                                                                | $                                         | 19,289 |       |        | $ | 71,715 |      
|                                                                                             |                                                                                |                                           |        |       |        |   |        |      

See notes to unaudited consolidated financial
statements.

4



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##### 



BLACKBOARD INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

For the Three Months and Six Months Ended
June 30, 2004 and 2003


In these Notes to Unaudited Consolidated
Financial Statements, the terms Company and
Blackboard refer to Blackboard Inc. and its
subsidiaries.

1.     Nature of
Business

Blackboard Inc. is an enterprise software company
for the education markets. The Companys suites of products
include the following five products: Blackboard Learning
System, Blackboard Portal System, Blackboard Content
System, Blackboard Transaction System and
Blackboard One.

2.     Basis of
Presentation

The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim
financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by generally
accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. The
results of operations for the three months and six months ended
June 30, 2004 are not necessarily indicative of the results
that may be expected for the full fiscal year. The balance sheet
at December 31, 2003 has been derived from the audited
consolidated financial statements at that date but does not
include all of the information and notes required by generally
accepted accounting principles for complete financial statements.

These consolidated financial statements should be
read in conjunction with the audited consolidated financial
statements as of December 31, 2002 and 2003 and for each of
the three years in the period ended December 31, 2003
included in the Companys Prospectus dated June 17,
2004 filed with the Securities and Exchange Commission on
June 18, 2004.

On April 23, 2004, the Company effected a
one-for-two reverse stock split of all common stock outstanding.
On May 26, 2004, the Company effected a one-for-1.0594947
reverse stock split of all common stock outstanding. The
accompanying consolidated financial statements give retroactive
effect to the reverse stock splits for all periods presented.

Use of
Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Reclassification

Certain amounts in the prior periods
consolidated financial statements have been reclassified to
conform to the current period presentation.

Basic and
Diluted Net Loss Attributable to Common Stockholders Per Common
Share

Basic net loss attributable to common
stockholders per common share excludes dilution for potential
common stock issuances and is computed by dividing net loss
attributable to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted net
loss attributable to common stockholders per common share
reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or
converted into common stock. Mandatorily

5



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##### 



BLACKBOARD INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

redeemable convertible preferred stock, stock
options and warrants were not considered in the computation of
diluted net loss attributable to common stockholders per common
share for the three and six months ended June 30, 2003 and
2004 as their effect is anti-dilutive.

Comprehensive
Net (Loss) Income

Comprehensive net (loss) income includes net
(loss) income, combined with unrealized gains and losses not
included in earnings and reflected as a separate component of
stockholders (deficit) equity. There were no differences
between net (loss) income and comprehensive net (loss) income
for the three and six months ended June 30, 2003 and 2004.

3.     Stock-Based
Compensation

Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based
Compensation (SFAS 123), as amended by SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment
of SFAS No. 123, allows companies to account for
stock-based compensation using either the provisions of
SFAS 123 or the provisions of Accounting Principles
Bulletin No. 25, Accounting for Stock Issued to
Employees (APB No. 25), but requires pro forma
disclosure in the notes to the financial statements as if the
measurement provisions of SFAS 123 had been adopted. The
Company accounts for its stock-based employee compensation in
accordance with APB No. 25. Stock-based compensation
related to options granted to non-employees is accounted for
using the fair value method in accordance with the SFAS 123 and
Emerging Issues Task Force No. 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or
Services.

The following table illustrates the effect of net
loss attributable to common stockholders and net loss
attributable to common stockholders per common share if the
Company had applied the fair value recognition provisions of
SFAS 123 to stock-based compensation.

|                                                                   |                                                                                                      |                                          |        |                  |   |      |        |        |   |   |         |        |   |   |        |        |  
|------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------- | ---------------------------------------- | ------ | ---------------- | - | ---- | ------ | ------ | - | - | ------- | ------ | - | - | ------ | ------ | -
|                                                                   |                                                                                                      |                                          |        |                 
|                                                                   |                                                                                                      | Three Months Ended                       |        | Six Months Ended
|                                                                   |                                                                                                      | June 30, 2004                            |        | June 30,        
|                                                                   |                                                                                                      |                                          |        |                 
|                                                                   |                                                                                                      | 2003                                     |        | 2004             |   | 2003 |        | 2004  
|                                                                   |                                                                                                      |                                          |        |                  |   |      |        |       
|                                                                   |                                                                                                      |                                         
|                                                                   |                                                                                                      | (Unaudited)                             
|                                                                   |                                                                                                      |                                         
|                                                                   |                                                                                                      | (In thousands, except per share amounts)
|Pro forma net loss attributable to common
    stockholders:        |                                                                                                      |                                          |        |                  |   |      |        |        |   |   |         |        |   |   |        |       
|                                                                   | As reported                                                                                          |                                          | $      | (3,912           | ) |      | $      | (2,698 | ) |   | $       | (8,429 | ) |   | $      | (4,507 | )
|                                                                   | Add: Stock-based compensation included in
    reported net loss attributable to common stockholders  |                                          |        | 28               |   |      |        | 28     |   |   |         | 201    |   |   |        | 111    |  
|                                                                   | Deduct: Stock-based compensation expense
    determined under fair value-based method for all awards |                                          |        | (1,121           | ) |      |        | (1,338 | ) |   |         | (2,360 | ) |   |        | (2,165 | )
|                                                                   |                                                                                                      |                                          |        |                  |   |      |        |        |   |   |         |        |   |   |        |       
|Pro forma net loss attributable to common
    stockholders         |                                                                                                      | $                                        | (5,005 | )                |   | $    | (4,008 | )      |   | $ | (10,588 | )      |   | $ | (6,561 | )     
|                                                                   |                                                                                                      |                                          |        |                  |   |      |        |        |   |   |         |        |   |   |        |       
|Net loss attributable to common stockholders per
    common share: |                                                                                                      |                                          |        |                  |   |      |        |        |   |   |         |        |   |   |        |       
|                                                                   | Basic and diluted  as reported                                                                      |                                          | $      | (0.71            | ) |      | $      | (0.37  | ) |   | $       | (1.53  | ) |   | $      | (0.71  | )
|                                                                   | Basic and diluted  pro forma                                                                        |                                          | $      | (0.91            | ) |      | $      | (0.55  | ) |   | $       | (1.92  | ) |   | $      | (1.03  | )

6



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##### 



BLACKBOARD INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The effect of applying SFAS 123 on pro forma
net loss as stated above is not necessarily representative of
the effects on reported net loss for future years due to, among
other things, the vesting period of the stock options and the
fair value of additional options to be granted in the future
years.

The fair value of each option is estimated on the
date of grant using the Black-Scholes option-pricing model with
the following assumptions used for grants issued during the
three and six months ended June 30, 2003 and 2004: dividend
yield, 0%; expected volatility, 85%; average risk-free interest
rate, 3.00%; and expected term, five years.

During February 2004, the Company granted 363,602
options to employees with an exercise price of $9.98. As a
result of these stock options being granted with an exercise
price less than the fair value of the underlying common stock as
determined by the Company, the Company recorded deferred
compensation of approximately $218,000 in 2004 and will amortize
this amount into expense over the option vesting period of four
years.

In March 2004, the Company adopted the 2004 Stock
Incentive Plan under which 1,887,692 shares of common stock are
reserved. As of June 30, 2004, 111,615 options have been
granted under the Plan with exercise prices equal to the market
value of the underlying common stock on the date of grant. The
Companys officers, employees, directors, outside
consultants and advisors are eligible to receive grants under
the Plan. The Plan expires March 2014.

4.     Inventories

Inventories consist of the following:

|                              |  |                |       |             |  |   |       |  
|----------------------------- |  | -------------- | ----- | ----------- |  | - | ----- | -
|                              |  | December 31,   |       | June 30,   
|                              |  | 2003           |       | 2004       
|                              |  |                |       |            
|                              |  |                |       | (Unaudited)
|                              |  |               
|                              |  | (In thousands)
|Raw materials                 |  | $              | 840   |             |  | $ | 470   |  
|Work-in-process               |  |                | 294   |             |  |   | 608   |  
|Finished goods                |  |                | 1,031 |             |  |   | 1,090 |  
|                              |  |                |       |             |  |   |       |  
|                              |  |                | 2,165 |             |  |   | 2,168 |  
|Less reserve for obsolescence |  |                | (115  | )           |  |   | (115  | )
|                              |  |                |       |             |  |   |       |  
|Total inventories, net        |  | $              | 2,050 |             |  | $ | 2,053 |  
|                              |  |                |       |             |  |   |       |  

7



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##### 



BLACKBOARD INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.     Goodwill and
Intangible Assets

The carrying amount of goodwill and intangible
assets as of December 31, 2003 and June 30, 2004 are
as follows:

|                              |  |                |         |             |  |   |         |  
|----------------------------- |  | -------------- | ------- | ----------- |  | - | ------- | -
|                              |  | December 31,   |         | June 30,   
|                              |  | 2003           |         | 2004       
|                              |  |                |         |            
|                              |  |                |         | (Unaudited)
|                              |  |               
|                              |  | (In thousands)
|Goodwill                      |  | $              | 10,252  |             |  | $ | 10,252  |  
|                              |  |                |         |             |  |   |         |  
|Acquired technology           |  |                | 10,400  |             |  |   | 10,400  |  
|Contracts and customer lists  |  |                | 5,443   |             |  |   | 5,443   |  
|Non-compete agreements        |  |                | 2,043   |             |  |   | 2,043   |  
|Trademarks and domain names   |  |                | 71      |             |  |   | 71      |  
|                              |  |                |         |             |  |   |         |  
|Subtotal                      |  | $              | 17,957  |             |  | $ | 17,957  |  
|                              |  |                |         |             |  |   |         |  
|Less accumulated amortization |  |                | (13,614 | )           |  |   | (15,373 | )
|                              |  |                |         |             |  |   |         |  
|Intangible assets, net        |  | $              | 4,343   |             |  | $ | 2,584   |  
|                              |  |                |         |             |  |   |         |  

Intangible assets from acquisitions are amortized
over three to five years. Amortization expense related to
intangible assets was approximately $2,868,000 and $1,759,000
for the six months ended June 30, 2003 and June 30,
2004, respectively. Amortization expense related to intangible
assets for the years ended December 31, 2004, 2005, 2006,
2007 and 2008 is expected to be approximately $3,523,000,
$266,000, $266,000, $266,000 and $22,000, respectively.

6.     Debt

Working
Capital Line

On July 1, 2004, the Company extended the
maturity of its existing working capital line through
August 30, 2004. As of June 30, 2004, no amount was
outstanding on the working capital line of credit and $8,000,000
was available for borrowing, subject to covenants and
restrictions.

Note
Payable

As of June 30, 2004, the Company had a
remaining principal balance of $1,000,000 on a note payable
entered into with The George Washington University in connection
with the Companys acquisition of Prometheus in January
2002. On July 1, 2004, the Company made the final principal
and interest payment of $1,016,250 to The George Washington
University.

7.     Commitments
and Contingencies

The Company, from time to time, is subject to
litigation relating to matters in the ordinary course of
business. The Company believes that any ultimate liability
resulting from these contingencies will not have a material
adverse effect on the Companys results of operations,
financial position or cash flows.

8.     Stockholders
(Deficit) Equity

In April 2004, the Company issued 27,447 shares
of common stock to The George Washington University pursuant to
an anti-dilution provision in the Prometheus sale agreement from
2002 and as a result of the exercises of certain Series E
Warrants in connection with the IPO.

8



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##### 



BLACKBOARD INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On June 16, 2004, the Company issued 21,372
shares of common stock upon exercise of warrants held by a
certain stockholder.

The Company completed an initial public offering
(IPO) of 6,325,000 shares of common stock in June 2004, which
included the underwriters over-allotment option exercise
of 825,000 shares of common stock. Of the 6,325,000 shares of
common stock sold in the IPO, 2,251,062 shares were sold by
selling shareholders and 4,073,938 shares were sold by
Blackboard Inc. generating approximately $50,896,000 in proceeds
to the Company, net of offering expenses and underwriters
discounts. Upon closing of the IPO, 13,371,980 shares of common
stock were issued upon conversion of the Companys
preferred stock and 2,414,857 shares of common stock were issued
in satisfaction of accrued dividends on the Companys
preferred stock.

Upon closing of the IPO, our Amended and Restated
Certificate of Incorporation became effective. The Amended and
Restated Certificate of Incorporation authorized common stock of
200,000,000 shares and authorized 5,000,000 shares of
undesignated preferred stock. No shares of preferred stock were
outstanding at June 30, 2004.

On June 23, 2004, in connection with the
IPO, the Company issued 1,199,334 shares of common stock upon
cashless exercises of Series E warrants held by certain
stockholders.

On June 30, 2004, the Company issued 23,082
shares of common stock upon a cashless exercise of warrants held
by a certain stockholder.

9



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##### 



BLACKBOARD INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Item 2.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations.

This report contains forward-looking
statements. For this purpose, any statements contained herein
that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the
words believes, anticipates,
plans, expects, intends and
similar expressions are intended to identify forward-looking
statements. The important factors discussed under the caption
Risk Factors, presented below, could cause actual
results to differ materially from those indicated by
forward-looking statements made herein. We undertake no
obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise.

General

We are a leading provider of enterprise software
applications and related services to the education industry. Our
clients use our software to integrate technology into the
education experience and campus life, and to support activities
such as a professor assigning digital materials on a class
website; a student collaborating with peers or completing
research online; an administrator managing a departmental
website; or a merchant conducting cash-free transactions with
students and faculty through pre-funded debit accounts. Our
clients include colleges, universities, schools and other
education providers, as well as textbook publishers and
student-focused merchants who serve these education providers
and their students.

We generate revenues from sales and licensing of
products and professional services. Our product revenues consist
principally of revenues from annual software licenses, client
hosting engagements and the sale of bundled software-hardware
systems. We typically sell our licenses and hosting services
under annually renewable agreements, and our clients generally
pay the annual fees at the beginning of the contract term. We
recognize revenues from these agreements, as well as revenues
from bundled software-hardware systems, which do not recur,
ratably over the contractual term, which is typically
12 months. Billings associated with licenses and hosting
services are recorded initially as deferred revenues and then
recognized ratably into revenues over the contract term. We also
generate product revenues from the sale and licensing of third
party software and hardware that is not bundled with our
software. These revenues are generally recognized upon shipment
of the products to our clients.

We derive professional services revenues
primarily from training, implementation, installation and other
consulting services. Substantially all of our professional
services are performed on a time-and-materials basis. We
recognize these revenues as the services are performed.

We typically license our individual applications
either on a stand-alone basis or bundled as part of either of
two suites, the Blackboard Academic Suite and the
Blackboard Commerce Suite. The Blackboard
Academic Suiteincludes the Blackboard Learning
System, the Blackboard Portal Systemand the
Blackboard Content System. The Blackboard Commerce
Suiteincludes the Blackboard Transaction System, the
Blackboard Portal Systemand Blackboard One. We
generally price our software licenses on the basis of full-time
equivalent students or users. Accordingly, annual license fees
are generally greater for larger institutions.

Our operating expenses consist of cost of product
revenues, cost of professional services revenues, research and
development expenses, sales and marketing expenses, general and
administrative expenses, amortization of intangibles resulting
from acquisitions and stock-based compensation expenses.

Major components of our cost of product revenues
include license and other fees that we owe to third parties upon
licensing software, and the cost of hardware that we bundle with
our software. We initially defer these costs and recognize them
into expense over the period in which the related revenue is
recognized. Cost of product revenues also includes amortization
of internally developed technology available for sale, employee
compensation and benefits for personnel supporting our hosting,
support and production functions, as well as related facility
rent, communication costs, utilities, depreciation expense and
cost of external professional services used in these functions.
All of these costs are expensed as incurred. The costs of
third-party software and hardware that is not bundled with
software are also expensed when incurred, normally upon delivery
to our client. Cost of product revenues excludes the

10



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amortization of acquired technology recognized
from acquisitions, which is included in amortization of
intangibles resulting from acquisitions.


Cost of professional services revenues primarily
includes the costs of compensation and benefits for employees
and external consultants who are involved in the performance of
professional services engagements for our clients, as well as
travel and related costs, facility rent, communication costs,
utilities and depreciation expense used in these functions. All
of these costs are expensed as incurred.

Research and development expenses include the
costs of compensation and benefits for employees who are
associated with the creation and testing of the products we
offer, as well as the costs of external professional services,
travel and related costs attributable to the creation and
testing of our products, related facility rent, communication
costs, utilities and depreciation expense. All of these costs
are expensed as incurred.

Sales and marketing expenses include the costs of
compensation, including bonuses and commissions, and benefits
for employees who are associated with the generation of
revenues, as well as marketing expenses, costs of external
marketing-related professional services, facility rent,
utilities, communications and travel attributable to those sales
and marketing employees in the generation of revenues. All of
these costs are expensed as incurred.

General and administrative expenses include the
costs of compensation and benefits for employees in the human
resources, legal, finance and accounting, management information
systems, facilities management, executive management and other
administrative functions who are not directly associated with
the generation of revenues or the creation and testing of
products. In addition, general and administrative expenses
include the costs of external professional services and
insurance, as well as related facility rent, communication
costs, utilities and depreciation expense used in these
functions.

Amortization of intangibles includes the
amortization of costs associated with products, acquired
technology, customer lists, non-compete agreements and other
identifiable intangible assets. These intangible assets were
recorded at the time of our acquisitions and relate to
contractual agreements, technology and products that we continue
to utilize in our business.

Stock-based compensation expenses relate to
historic stock option grants and have arisen primarily as a
result of options granted below fair market value, modifications
made to outstanding options and options granted to non-employees.

Critical Accounting Policies and
Estimates

The discussion of our financial condition and
results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States,
or GAAP. During the preparation of these consolidated financial
statements, we are required to make estimates and assumptions
that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures of contingent
assets and liabilities. On an ongoing basis, we evaluate our
estimates and assumptions, including those related to revenue
recognition, bad debts, fixed assets, long-lived assets,
including goodwill, and income taxes. We base our estimates on
historical experience and on various other assumptions that we
believe are reasonable under the circumstances. The results of
our analysis form the basis for making assumptions 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, and
the impact of such differences may be material to our
consolidated financial statements. Our critical accounting
policies have been discussed with the audit committee of our
board of directors.

We believe that the following critical accounting
policies affect the more significant judgments and estimates
used in the preparation of our consolidated financial statements:

Revenue recognition.Our revenues are derived from two sources: product sales and
professional services sales. Product revenues include software
license, hardware, premium support and maintenance,

11



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##### 



and hosting revenues. Professional services
revenues include training and consulting services. We recognize
software license and maintenance revenues in accordance with the
American Institute of Certified Public Accountants
Statement of Position, or SOP, 97-2, Software Revenue
Recognition, as modified by SOP 98-9,
Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions. Our
software does not require significant modification and
customization services. Where services are not essential to the
functionality of the software, we begin to recognize software
licensing revenues when all of the following criteria are met:
(1) persuasive evidence of an arrangement exists;
(2) delivery has occurred; (3) the fee is fixed and
determinable; and (4) collectibility is probable.


We do not have vendor-specific objective
evidence, or VSOE, of fair value for our support and maintenance
separate from our software. Accordingly, when licenses are sold
in conjunction with our support and maintenance, we recognize
the license revenue over the term of the maintenance service
period.

We sell hardware in two types of transactions:
sales of hardware in conjunction with our software licenses,
which we refer to as bundled hardware-software systems, and
sales of hardware without software, which generally involve the
resale of third-party hardware. After any necessary installation
services are performed, hardware revenues are recognized when
all of the following criteria are met: (1) persuasive
evidence of an arrangement exists; (2) delivery has
occurred; (3) the fee is fixed and determinable; and
(4) collectibility is probable. We have not determined VSOE
of the fair value for the separate components of bundled
hardware-software systems. Accordingly, when a bundled
hardware-software system is sold, all revenue is recognized over
the term of the maintenance service period. Hardware sales
without software are recognized upon delivery of the hardware to
our client.

Hosting revenues are recorded in accordance with
Emerging Issues Task Force, or EITF, 00-3, Application
of AICPA SOP 97-2 to Arrangements That Include the Right to
Use Software Stored on Another Entitys Hardware.
We recognize hosting fees and set-up fees ratably over the term
of the hosting agreement.

We recognize professional services revenues,
which are generally contracted on a time-and-materials basis and
consist of training, implementation and installation services,
as the services are provided.

We do not offer specified upgrades or
incrementally significant discounts. Advance payments are
recorded as deferred revenue until the product is shipped,
services are delivered or obligations are met and the revenue
can be recognized. Deferred revenues represent the excess of
amounts invoiced over amounts recognized as revenues. We provide
non-specified upgrades of our product only on a
when-and-if-available basis.

Allowance for uncollectible
accounts.We maintain an allowance for
uncollectible accounts for estimated losses resulting from the
inability, failure or refusal of our clients to make required
payments. We analyze accounts receivable, historical percentages
of uncollectible accounts and changes in payment history when
evaluating the adequacy of the allowance for uncollectible
accounts. We use an internal collection effort, which may
include our sales and services groups as we deem appropriate, in
our collection efforts. Although we believe that our reserves
are adequate, if the financial condition of our clients
deteriorates, resulting in an impairment of their ability to
make payments, or if we underestimate the allowances required,
additional allowances may be necessary, which will result in
increased expense in the period in which such determination is
made.

Long-lived assets.We record our long-lived assets, such as property and equipment,
at cost. We review the carrying value of our long-lived assets
for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may
not be recoverable in accordance with the provisions of SFAS
No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. We evaluate these assets by
examining estimated future cash flows to determine if their
current recorded value is impaired. We evaluate these cash flows
by using weighted probability techniques as well as comparisons
of past performance against projections. Assets may also be
evaluated by identifying independent market values. If we
determine that an assets carrying value is impaired, we
will record a write-down of the

12



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carrying value of the identified asset and charge
the impairment as an operating expense in the period in which
the determination is made. Although we believe that the carrying
values of our long-lived assets are appropriately stated,
changes in strategy or market conditions or significant
technological developments could significantly impact these
judgments and require adjustments to recorded asset balances.


Goodwill.We assess
the impairment of goodwill in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets.
Accordingly, we test our goodwill for impairment annually on
October 1, or whenever events or changes in circumstances
indicate an impairment may have occurred, by comparing its fair
value to its carrying value. Impairment may result from, among
other things, deterioration in the performance of the acquired
business, adverse market conditions, adverse changes in
applicable laws or regulations, including changes that restrict
the activities of the acquired business, and a variety of other
circumstances. If we determine that an impairment has occurred,
we are required to record a write-down of the carrying value and
charge the impairment as an operating expense in the period the
determination is made. Although we believe goodwill is
appropriately stated in our consolidated financial statements,
changes in strategy or market conditions could significantly
impact these judgments and require an adjustment to the recorded
balance.

Stock-based
compensation.We account for
stock-based employee compensation arrangements in accordance
with the provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and
related interpretations, and comply with the disclosure
provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, as modified by SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment
of SFAS No. 123. Several companies recently elected to
change their accounting policies and record the fair value of
options as an expense. We currently are not required to record
stock-based compensation charges if the employee stock option
exercise price or restricted stock purchase price equals or
exceeds the deemed fair value of our common stock at the grant
date. Because no market for our common stock existed prior to
our initial public offering, our board of directors determined
the fair value of our common stock based upon several factors,
including our operating performance, anticipated future
operating results, the terms of redeemable convertible preferred
stock issued by us, including the liquidation value and other
preferences of our preferred stockholders, as well as the
valuations of other companies. In addition, we understand that
discussions of potential changes to APB 25 and
SFAS 123 standards are ongoing and the parties responsible
for authoritative guidance in this area may require changes to
the applicable accounting standards, including potentially a
requirement that all companies record the fair value of options
as expense. If we had estimated the fair value of the options on
the date of grant using the Black-Scholes pricing model and then
amortized this estimated fair value over the vesting period of
the options, our net loss attributable to common stockholders
would have increased, as shown in the table below.

|                                                                   |                                                                                                      |                                          |        |                  |   |      |        |        |   |   |         |        |   |   |        |        |  
|------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------- | ---------------------------------------- | ------ | ---------------- | - | ---- | ------ | ------ | - | - | ------- | ------ | - | - | ------ | ------ | -
|                                                                   |                                                                                                      |                                          |        |                 
|                                                                   |                                                                                                      | Three Months Ended                       |        | Six Months Ended
|                                                                   |                                                                                                      | June 30,                                 |        | June 30,        
|                                                                   |                                                                                                      |                                          |        |                 
|                                                                   |                                                                                                      | 2003                                     |        | 2004             |   | 2003 |        | 2004  
|                                                                   |                                                                                                      |                                          |        |                  |   |      |        |       
|                                                                   |                                                                                                      |                                         
|                                                                   |                                                                                                      | (Unaudited)                             
|                                                                   |                                                                                                      | (In thousands, except per share amounts)
|Pro forma net loss attributable to common
    stockholders:        |                                                                                                      |                                          |        |                  |   |      |        |        |   |   |         |        |   |   |        |       
|                                                                   | As reported                                                                                          |                                          | $      | (3,912           | ) |      | $      | (2,698 | ) |   | $       | (8,429 | ) |   | $      | (4,507 | )
|                                                                   | Add: Stock-based compensation included in
    reported net loss attributable to common stockholders  |                                          |        | 28               |   |      |        | 28     |   |   |         | 201    |   |   |        | 111    |  
|                                                                   | Deduct: Stock-based compensation expense
    determined under fair value-based method for all awards |                                          |        | (1,121           | ) |      |        | (1,338 | ) |   |         | (2,360 | ) |   |        | (2,165 | )
|                                                                   |                                                                                                      |                                          |        |                  |   |      |        |        |   |   |         |        |   |   |        |       
|Pro forma net loss attributable to common
    stockholders         |                                                                                                      | $                                        | (5,005 | )                |   | $    | (4,008 | )      |   | $ | (10,588 | )      |   | $ | (6,561 | )     
|                                                                   |                                                                                                      |                                          |        |                  |   |      |        |        |   |   |         |        |   |   |        |       
|Net loss attributable to common stockholders per
    common share: |                                                                                                      |                                          |        |                  |   |      |        |        |   |   |         |        |   |   |        |       
|                                                                   | Basic and diluted  as reported                                                                      |                                          | $      | (0.71            | ) |      | $      | (0.37  | ) |   | $       | (1.53  | ) |   | $      | (0.71  | )
|                                                                   | Basic and diluted  pro forma                                                                        |                                          | $      | (0.91            | ) |      | $      | (0.55  | ) |   | $       | (1.92  | ) |   | $      | (1.03  | )

13



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##### 



Accounting for income
taxes.In preparing our consolidated
financial statements, we assess the likelihood that our deferred
tax assets will be realized from future taxable income. We
establish a valuation allowance if we determine that it is more
likely than not that some portion or all of the net deferred tax
assets will not be realized. We have included changes in the
valuation allowance in our statements of operations as provision
for or benefit from income taxes. We exercise significant
judgment in determining our provisions for income taxes, our
deferred tax assets and liabilities and our future taxable
income for purposes of assessing our ability to utilize any
future tax benefit from our deferred tax assets. Although we
believe that our tax estimates are reasonable, the ultimate tax
determination involves significant judgments that could become
subject to audit by tax authorities in the ordinary course of
business. As of December 31, 2003, we had a valuation
allowance of $33.7 million to reduce our deferred tax
assets. The valuation allowance primarily relates to deferred
tax assets arising from operating loss carryforwards and the
book treatment compared to tax treatment of deferred revenues.
Should we generate taxable income in the future, we may be able
to realize all or part of the operating loss carryforwards
against which we have applied the valuation allowance. In that
event, our current income tax expense would be reduced or our
income tax benefits would be increased, resulting in an increase
in net income or a reduction in net loss.

Important Factors Considered by
Management

We consider several factors in evaluating both
our financial position and our operating performance. These
factors, while primarily focused on relevant financial
information, also include other measures such as general market
and economic conditions, competitor information and the status
of the regulatory environment.

To understand our financial results, it is
important to understand our business model and its impact on our
consolidated financial statements. The accounting for the
majority of our contracts requires us to initially record
deferred revenue on our consolidated balance sheet upon
invoicing the sale and then to recognize revenue in subsequent
periods ratably over the term of the contract in our
consolidated statements of operations. Therefore, to better
understand our operations, one must look at both revenues and
deferred revenues.

In evaluating our product revenues, we analyze
them in three categories: recurring ratable revenues,
non-recurring ratable revenues and other product revenues.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Recurring ratable revenues include those product
    revenues that are recognized ratably over the contract term,
    which is typically one year, and that recur each year assuming
    clients renew their contracts. These revenues include revenues
    from the licensing of all of our software products and from our
    hosting arrangements.                                                                                                           
|
| |  | Non-recurring ratable revenues include those
    product revenues that are recognized ratably over the term of
    the contract, which is typically one year, but that do not
    contractually recur. These revenues include the hardware
    components of our Blackboard Transaction Systemproducts,
    with and without our embedded software, and third-party hardware
    and software sold to our clients in conjunction with our
    software licenses.
|
| |  | Other product revenues include those product
    revenues that are recognized as earned and are not deferred to
    future periods. These revenues include Blackboard Onesales, Blackboard Transaction System supplies and
    commissions we earn from publishers related to digital course
    supplement downloads. Each of these individual revenue streams
    has historically been insignificant.                                                        

In the case of both recurring ratable revenues
and non-recurring ratable revenues, an increase or decrease in
the revenues in one period would be attributable primarily to
increases or decreases in sales in prior periods. Unlike
recurring ratable revenues, which benefit both from new license
sales and from license renewals, non-recurring ratable revenues
primarily reflect one-time sales that do not renew.

Other factors that we consider in making
strategic cash flow and operating decisions include cash flows
from operations, capital expenditures, total operating expenses
and earnings.

14



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##### 



Results of Operations

The following table sets forth selected unaudited
statement of operations data expressed as a percentage of total
revenues for each of the periods indicated.

|                              |                                                             |                          |    |            |     |      |   |      |     |  |    |    |     |  |   |    |     | 
|----------------------------- | ----------------------------------------------------------- | ------------------------ | -- | ---------- | --- | ---- | - | ---- | --- |  | -- | -- | --- |  | - | -- | --- | 
|                              |                                                             |                          |    |           
|                              |                                                             | Three Months             |    | Six Months
|                              |                                                             | Ended                    |    | Ended     
|                              |                                                             | June 30,                 |    | June 30,  
|                              |                                                             |                          |    |           
|                              |                                                             | 2003                     |    | 2004       |     | 2003 |   | 2004
|                              |                                                             |                          |    |            |     |      |   |     
|Revenues:                     |                                                             |                          |    |            |     |      |   |      |     |  |    |    |     |  |   |   
|                              | Product                                                     |                          |    | 90         | %   |      |   | 89   | %   |  |    | 91 | %   |  |   | 89 | %  
|                              | Professional services                                       |                          |    | 10         |     |      |   | 11   |     |  |    | 9  |     |  |   | 11 |    
|                              |                                                             |                          |    |            |     |      |   |      |     |  |    |    |     |  |   |   
|                              |                                                             | Total revenues           |    |            | 100 |      |   |      | 100 |  |    |    | 100 |  |   |    | 100 | 
|Operating expenses:           |                                                             |                          |    |            |     |      |   |      |     |  |    |    |     |  |   |   
|                              | Cost of product revenues                                    |                          |    | 25         |     |      |   | 23   |     |  |    | 25 |     |  |   | 24 |    
|                              | Cost of professional services revenues                      |                          |    | 7          |     |      |   | 8    |     |  |    | 7  |     |  |   | 7  |    
|                              | Research and development                                    |                          |    | 12         |     |      |   | 14   |     |  |    | 13 |     |  |   | 13 |    
|                              | Sales and marketing                                         |                          |    | 36         |     |      |   | 34   |     |  |    | 34 |     |  |   | 35 |    
|                              | General and administrative                                  |                          |    | 19         |     |      |   | 13   |     |  |    | 20 |     |  |   | 13 |    
|                              | Amortization of intangibles resulting from
    acquisitions |                          |    | 6          |     |      |   | 3    |     |  |    | 7  |     |  |   | 3  |    
|                              | Stock-based compensation                                    |                          |    | 0          |     |      |   | 0    |     |  |    | 1  |     |  |   | 0  |    
|                              |                                                             |                          |    |            |     |      |   |      |     |  |    |    |     |  |   |   
|                              |                                                             | Total operating expenses |    |            | 105 |      |   |      | 95  |  |    |    | 107 |  |   |    | 95  | 
|                              |                                                             |                          |    |            |     |      |   |      |     |  |    |    |     |  |   |   
|(Loss) income from operations |                                                             |                          | (5 | )%         |     |      | 5 | %    |     |  | (7 | )% |     |  | 5 | % 
|                              |                                                             |                          |    |            |     |      |   |      |     |  |    |    |     |  |   |   



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Three Months Ended June 30, 2004
    Compared to Three Months Ended June 30, 2003

Revenues.Our total
revenues for the three months ended June 30, 2004 were
$26.4 million, representing an increase of
$3.7 million, or 16.3%, as compared to $22.7 million
for the three months ended June 30, 2003.

Product revenues, including domestic and
international, for the three months ended June 30, 2004
were $23.3 million, representing an increase of
$2.9 million, or 14.2%, as compared to $20.4 million
for the three months ended June 20, 2003. A detail of our
total product revenues by classification is as follows:

|                               |                        |                |      |      |  |   |      |      | 
|------------------------------ | ---------------------- | -------------- | ---- | ---- |  | - | ---- | ---- | 
|                               |                        |               
|                               |                        | Three Months  
|                               |                        | Ended June 30,
|                               |                        |               
|                               |                        | 2003           |      | 2004
|                               |                        |                |      |     
|                               |                        |               
|                               |                        | (In millions) 
|Recurring ratable revenues     |                        | $              | 13.7 |      |  | $ | 17.7 |     
|Non-recurring ratable revenues |                        |                | 5.4  |      |  |   | 4.7  |     
|Other product revenues         |                        |                | 1.3  |      |  |   | 0.9  |     
|                               |                        |                |      |      |  |   |      |     
|                               | Total product revenues |                | $    | 20.4 |  |   | $    | 23.3 | 
|                               |                        |                |      |      |  |   |      |     

The increase in recurring ratable revenues was
primarily due to a $1.6 million increase in revenues from
Blackboard Learning Systemlicenses, a $600,000 increase
in revenues from Blackboard Portal Systemlicenses, an
$800,000 increase in revenues from Blackboard Transaction
Systemlicenses and a $660,000 increase in hosting revenues.
These increases in revenues from Blackboard Learning Systemlicenses, Blackboard Portal Systemlicenses,
Blackboard Transaction Systemlicenses and hosting
revenues were attributable to prior period sales to new and
existing clients.

The increase in Blackboard Learning Systemlicense revenue was also attributable to the continued shift
from the Blackboard Learning System  Basic
Edition to the enterprise version of the Blackboard
Learning System. The enterprise version of the Blackboard
Learning Systemhas additional functionality

15



---



##### 



that is not available in the Blackboard
Learning System  Basic Editionand consequently
some Blackboard Learning System  Basic Edition
clients upgrade to the Blackboard Learning System.
Licenses of the enterprise version of the Blackboard Learning
Systemhave higher average pricing, which normally results
in at least twice the contractual value as compared to a
Blackboard Learning System  Basic Editionlicense.


The decrease in non-recurring ratable revenues
was primarily due to the timing of Blackboard Transaction
Systemhardware sales and shipment of the hardware. A
majority of the Blackboard Transaction Systemhardware
sales in the second quarter of 2004 were made in June 2004 and
delivered subsequent to the end of the quarter, as compared to
the second quarter of 2003 when Blackboard Transaction Systemhardware sales were spread throughout the quarter and mostly
delivered within the quarter. Other product revenues were
relatively consistent between the periods.

Of our total revenues, our total international
revenues for the three months ended June 30, 2004 were
$4.6 million, representing an increase of
$1.5 million, or 48.4%, as compared to $3.1 million
for the three months ended June 30, 2003. International
product revenues, which consist primarily of recurring ratable
revenues, were $3.7 million for the three months ended
June 30, 2004, representing an increase of
$1.2 million, or 48.0%, as compared to $2.5 million
for the three months ended June 30, 2003. The increase in
international revenues was driven primarily by an increase in
recurring ratable revenues. The increase in international
recurring ratable revenues was primarily due to an increase in
international revenues from Blackboard Learning Systemlicenses resulting from prior period sales to new and
existing clients, including a prior period sale to one large
international client. Further, the increase in international
revenues also reflects our investment in increasing the size of
our international sales force and international marketing
efforts during 2003, which expanded our international presence
and enabled us to sell more of our products to new and existing
clients in our international markets.

Professional services revenues for the three
months ended June 30, 2004 were $3.0 million,
representing an increase of $674,000, or 28.7%, as compared to
$2.3 million for the three months ended June 30, 2003.
The increase in professional services revenues was primarily
attributable to an increase in the number and size of service
engagements, which is directly related to the increase in the
number of licensees of the enterprise version of the
Blackboard Learning System, which generally purchase
greater volumes of our service offerings.

Cost of product
revenues.Our cost of product revenues
for the three months ended June 30, 2004 was
$6.0 million, representing an increase of $260,000, or
4.6%, as compared to $5.7 million for the three months
ended June 30, 2003. Cost of product revenues as a
percentage of product revenues decreased to 25.5% for the three
months ended June 30, 2004 from 27.9% for the three months
ended June 30, 2003, due primarily to lower sublicense
costs on the renewal of our licenses. The cost of sublicenses is
generally lower after the initial year of the sale. The decrease
in sublicense costs as a percentage of product revenues was
offset by a $650,000 increase in our technical support
department expenses primarily due to increased personnel-related
costs to provide improved service to our clients.

Cost of professional services
revenues.Our cost of professional
services revenues for the three months ended June 30, 2004
was $2.1 million, representing an increase of $488,000, or
30.8%, from $1.6 million for the three months ended
June 30, 2003. The increase in cost of professional
services revenues is directly related to the increase in
professional services revenues. Cost of professional services
revenues as a percentage of professional services revenues
increased to 68.6% for the three months ended June 30, 2004
from 67.5% for the three months ended June 30, 2003.

Research and development
expenses.Our research and development
expenses for the three months ended June 30, 2004 were
$3.6 million, representing an increase of $892,000, or
32.5%, as compared to $2.7 million for the three months
ended June 30, 2003. This increase was primarily
attributable to a $600,000 increase in personnel-related and
relocation costs in our research and development department for
the three months ended June 30, 2004 as compared to the
three months ended June 30, 2003 due primarily to an
increase in headcount in order to increase our development
efforts to increase the functionality of our products.

16



---



##### 



Sales and marketing
expenses.Our sales and marketing
expenses for the three months ended June 30, 2004 were
$9.1 million, representing an increase of
$1.0 million, or 12.3%, as compared to $8.1 million
for the three months ended June 30, 2003. This increase was
attributable to a $550,000 increase in sales and marketing
personnel-related costs due to an increase in headcount, a
$220,000 increase in costs associated with general marketing
activities and a $135,000 increase in outside professional
services expenses.

General and administrative
expenses.Our general and
administrative expenses for the three months ended June 30,
2004 were $3.4 million, representing a decrease of
$871,000, or 20.6%, as compared to $4.2 million for the
three months ended June 30, 2003. This decrease was due to
a $460,000 decrease in legal and professional service expenses
associated with litigation and international operations during
the three months ended June 30, 2003, a $700,000 decrease
in personnel-related costs associated with movement of some
personnel to other functional areas within the Company during
2003 and a $215,000 decrease in costs of professional services
overhead allocation due to higher utilization rates and the
shift of sales focus from our sales department to our
professional services management team. These decreases were
partially offset by higher salary and bonus expense due to
salary increases in 2004 and revised compensation packages for
key employees.

Net interest
expense.Our net interest expense for
the three months ended June 30, 2004 was $27,000, compared
to $118,000 for the three months ended June 30, 2003. Our
interest expense was attributable primarily to our line of
credit, the note payable to The George Washington University in
connection with the Prometheus acquisition and equipment
financing.

Income taxes.Our
provision for income taxes for the three months ended
June 30, 2004 was $254,000, compared to $207,000 for the
three months ended June 30, 2003. This increase was
primarily due to higher levels of taxable income for which
certain state income taxes, federal alternative minimum taxes
and international taxes will be owed to the respective taxing
authorities.

Net income (loss).As a result of the foregoing, we reported net income of
$1.1 million for the three months ended June 30, 2004,
compared to a net loss of $1.4 million for the three months
ended June 30, 2003.



| |                                                                              
| | -----------------------------------------------------------------------------
| | Six Months Ended June 30, 2004
    Compared to Six Months Ended June 30, 2003

Revenues.Our total
revenues for the six months ended June 30, 2004 were
$51.6 million, representing an increase of
$8.7 million, or 20.3%, as compared to $42.9 million
for the six months ended June 30, 2003.

Product revenues, including domestic and
international, for the six months ended June 30, 2003 were
$45.9 million, representing an increase of
$6.9 million, or 17.7%, as compared to $39.0 million
for the six months ended June 30, 2003. A detail of our
total product revenues by classification is as follows:

|                               |                        |                |      |      |  |   |      |      | 
|------------------------------ | ---------------------- | -------------- | ---- | ---- |  | - | ---- | ---- | 
|                               |                        |               
|                               |                        | Six Months    
|                               |                        | Ended June 30,
|                               |                        |               
|                               |                        | 2003           |      | 2004
|                               |                        |                |      |     
|                               |                        |               
|                               |                        | (In millions) 
|Recurring ratable revenues     |                        | $              | 26.8 |      |  | $ | 34.5 |     
|Non-recurring ratable revenues |                        |                | 9.7  |      |  |   | 9.6  |     
|Other product revenues         |                        |                | 2.5  |      |  |   | 1.8  |     
|                               |                        |                |      |      |  |   |      |     
|                               | Total product revenues |                | $    | 39.0 |  |   | $    | 45.9 | 
|                               |                        |                |      |      |  |   |      |     

The increase in recurring ratable revenues was
primarily due to a $3.2 million increase in revenues from
Blackboard Learning Systemlicenses, a $1.1 million
increase in revenues from Blackboard Portal Systemlicenses, a $1.7 million increase in revenues from
Blackboard Transaction Systemlicenses and a

17



---



##### 



$1.4 million increase in hosting revenues.
These increases in revenues from Blackboard Learning System,
Blackboard Portal System, Blackboard Transaction Systemlicenses and hosting revenues were attributable to prior
period sales to new and existing clients.


The increase in Blackboard Learning Systemlicense revenue was also attributable to the continued shift
from the Blackboard Learning System  Basic Editionto the enterprise version of the Blackboard Learning
System. The enterprise version of the Blackboard Learning
Systemhas additional functionality that is not available in
the Blackboard Learning System  Basic Editionand consequently some Blackboard Learning
System  Basic Edition clients upgrade to the
Blackboard Learning System. Licenses of the enterprise
version of the Blackboard Learning Systemhave higher
average pricing, which normally results in at least twice the
contractual value of a Blackboard Learning System 
Basic Editionlicense. Non-recurring ratable revenues were
relatively consistent between the periods. The decrease in other
product revenues was due to a decrease in publisher marketing
fees related to revenues recognized during the six months ended
June 30, 2003 from a large non-recurring sale.

Of our total revenues, our total international
revenues for the six months ended June 30, 2004 were
$8.1 million, representing an increase of $2.3 million, or
39.7%, as compared to $5.8 million for the six months ended
June 30, 2003. International product revenues, which consist
primarily of recurring ratable revenues, were $6.9 million,
representing an increase of $2.1 million, or 43.8%, as
compared to $4.8 million for the six months ended
June 30, 2003. The increase in international revenues was
driven primarily by an increase in recurring ratable revenues.
This increase was primarily due to an increase in international
revenues from Blackboard Learning Systemlicenses
resulting from prior period sales to new and existing clients,
including a prior period sale to one large international client.
The increase in international Blackboard Learning System
revenues was primarily attributable to the same factors that
contributed to the increase in overall Blackboard Learning
Systemrevenues. The increase in international revenues also
reflects our investment in increasing the size of our
international sales force and international marketing efforts
during 2003, which expanded our international presence and
enabled us to sell more of our products to new and existing
clients in our international markets.

Professional services revenues for the six months
ended June 30, 2004, were $5.6 million, representing
an increase of $1.7 million, or 43.6%, as compared to
$3.9 million for the six months ended June 30, 2003.
The increase in professional services revenues was primarily
attributable to an increase in the number and size of service
engagements, which is directly related to the increase in the
number of licensees of the enterprise version of the
Blackboard Learning System, which generally purchase
greater volumes of our service offerings.

Cost of product
revenues.Our cost of product revenues
for the six months ended June 30, 2004 was
$12.0 million, representing an increase of
$1.1 million, or 10.1%, compared to $10.9 million for
the six months ended June 30, 2003. Cost of product
revenues as a percentage of product revenues decreased to 26.2%
for the six months ended June 30, 2004 from 28.0% for the
six months ended June 30, 2003, due primarily to lower
sublicense costs on the renewal of our licenses. The cost of
sublicenses is generally lower after the initial year of the
sale. The decrease in sublicense costs as a percentage of
product revenues was offset by a $1.3 million increase in
our technical support department expenses primarily due to
increased personnel-related costs to provide improved service to
our clients.

Cost of professional services
revenues.Our cost of professional
services revenues for the six months ended June 30, 2004
was $3.6 million, representing an increase of $727,000, or
25.1%, from $2.9 million for the six months ended
June 30, 2003. The increase in cost of professional
services revenues is directly related to the increase in service
revenues. Cost of professional services revenues as a percentage
of professional services revenues decreased to 64.5% for the six
months ended June 30, 2004 from 73.7% for the six months
ended June 30, 2003, due to higher revenues resulting from
the higher volume of service offering purchases by licensees of
the enterprise version of the Blackboard Learning System.

18



---



##### 



Research and development
expenses.Our research and development
expenses for the six months ended June 30, 2004 were
$6.9 million, representing an increase of
$1.4 million, or 25.5%, as compared to research and
development expenses of $5.5 million for the six months
ended June 30, 2003. This increase was primarily
attributable to a $535,000 increase in personnel-related costs,
a $325,000 increase in relocation and recruiting costs, and a
$105,000 increase in professional services in our research and
development department. These increases are due to an increase
in headcount and development efforts related to our increased
efforts to increase the functionality of our products.

Sales and marketing
expenses.Our sales and marketing
expenses for the six months ended June 30, 2004 were
$17.9 million, representing an increase of
$3.2 million, or 21.8%, as compared to sales and marketing
expenses of $14.7 million for the six months ended
June 30, 2003. This increase was attributable to a $780,000
increase in expenses associated with our general marketing
activities, including our User Conference in March 2004 that was
larger than in the prior years. Additionally, during the six
months ended June 30, 2004, there was a $1.6 million
increase in sales and marketing personnel-related costs due to
an increase in headcount and a $200,000 increase in outside
professional services expenses as compared to the six months
ended June 30, 2003.

General and administrative
expenses.Our general and
administrative expenses for the six months ended June 30,
2004 were $6.8 million, representing a decrease of
$1.9 million, or 21.8%, as compared to general and
administrative expenses of $8.7 million for the six months
ended June 30, 2003. This decrease was due to a $665,000
decrease in legal and professional service expenses associated
with litigation and international operations during the six
months ended June 30, 2003, a $415,000 decrease in
personnel-related costs associated with movement of some
personnel to other functional areas within the Company during
2003, a $340,000 decrease in depreciation expense and a $386,000
decrease in costs of professional services overhead allocation
due to higher utilization rates and the shift of sales focus
from our sales department to our professional services
management team.

Net interest
expense.Our net interest expense for
the six months ended June 30, 2004 was $79,000, compared to
$234,000 for the six months ended June 30, 2003. Our
interest expense was attributable primarily to our line of
credit, the note payable to The George Washington University in
connection with the Prometheus acquisition and equipment
financing.

Income taxes.Our
provision for income taxes for the six months ended
June 30, 2004 was $612,000, compared to $314,000 for the
six months ended June 30, 2003. This increase was primarily
due to higher levels of taxable income for which certain state
income taxes, federal alternative minimum taxes and
international taxes will be owed to the respective taxing
authorities.

Net income (loss).As a result of the foregoing, we
reported net income of $1.8 million for the six months
ended June 30, 2004, compared to a net loss of
$3.4 million for the six months ended June 30, 2003.

Liquidity and Capital Resources

We recognize revenues on annually renewable
agreements, which results in deferred revenues. Deferred
revenues as of June 30, 2004 were $62.3 million,
representing an increase of $9.4 million, or 17.8%, from
$52.9 million as of December 31, 2003. This increase
was expected due to the seasonal variations in our business. We
historically have lower sales to new and existing clients in our
fourth quarter due to the timing of our clients budget
cycles and the renewal dates for our existing clients
annual licenses. Consequently, deferred revenues increased due
to the higher volume of new sales to new and existing clients
and the higher level of renewing licenses during the three
months ended June 30, 2004 as compared to the fourth
quarter of 2003, offset by the recognition of revenues from
prior period sales.

Our cash and cash equivalents were
$71.1 million at June 30, 2004 compared to
$30.5 million at December 31, 2003.

Net cash provided by operating activities was
$2.3 million during the six months ended June 30,
2004, compared to net cash provided by operating activities of
$4.1 million during the six months ended June 30,

19



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2003. This change was primarily due to the timing
of payments related to our accounts payable and the significant
prepayment of some 2003 expenses at the end of 2002.


Net cash used in investing activities was
$4.0 million during the six months ended June 30,
2004, a decrease of $2.6 million, or 39.4%, from
$6.6 million during the six months ended June 30,
2003. This decrease in cash usage was primarily due to our
payment of the $4.5 million cash purchase price for the SA
Cash division of Student Advantage, Inc. during the six months
ended June 30, 2003. Exclusive of the SA Cash acquisition,
investing activities increased $1.8 million for the six
months ended June 30, 2004 compared to the six months ended
June 30, 2003, primarily due to the purchase of internal
telecommunications equipment and additional computer equipment
for our hosting facility due to the increase in the number of
clients purchasing our hosting offering.

Net cash provided by financing activities was
$42.9 million during the six months ended June 30,
2004, compared to net cash provided by financing activities of
$1.4 million during the six months ended June 30,
2003. This change was primarily due to the $50.9 million in
proceeds from our initial public offering in June 2004, net of
offering costs, offset by the $7.9 million repayment of our
working capital line of credit in April 2004 and
$1.0 million payment to The George Washington University in
January 2004.

We have an $8.0 million working capital line
of credit and a $3.0 million equipment line of credit, each
with Silicon Valley Bank. The working capital line of credit
expires in August 2004, at which time we intend to negotiate a
new working capital line of credit. The interest rate on the
working capital line is equal to the prime rate, effectively
4.0% as of June 30, 2004, and the interest rate on new
advances under the equipment line is 9.0%. Prior borrowings
under the equipment line had interest rates ranging from 6.0% to
9.0%. Pursuant to the terms of these lines of credit, we must
comply with financial covenants that require us to maintain on a
quarterly basis: specified revenue amounts; a quick ratio of
1.5; and positive earnings before interest, taxes, depreciation
and amortization. For the six months ended June 30, 2004,
we are obligated to recognize revenues of at least
$21.0 million. We were in compliance with all covenants as
of June 30, 2004. If we were not compliant with these
covenants, the bank would have the right to accelerate the debt
under the equipment and working capital lines of credit. We have
pledged all of our domestic assets to secure the working capital
and equipment lines of credit. As of June 30, 2004,
$1.2 million was outstanding on the equipment lines and
there was no amount outstanding on the working capital line of
credit, each subject to covenants and restrictions. As of
June 30, 2004, we had $8.0 million in borrowings
available under the working capital line of credit.

As of June 30, 2004, we had
$1.0 million outstanding on our note payable with The
George Washington University in connection with our January 2002
acquisition of Prometheus, a division of The George Washington
University. The note was paid in full on July 1, 2004.

Management believes that the Company will have
sufficient resources to meet its cash needs over the next
12 months, which may include costs associated with
obtaining additional office space, establishing new offices,
investing in upgraded systems infrastructure or acquisitions of
other businesses and technologies.

Seasonality

Our operating results normally fluctuate as a
result of seasonal variations in our business, principally due
to the timing of client budget cycles and student attendance at
client facilities. Historically, we have had lower new sales in
our first and fourth quarters than in the remainder of our year.
Our expenses, however, do not vary significantly with these
changes and, as a result, such expenses do not fluctuate
significantly on a quarterly basis. Historically, we have
performed a disproportionate amount of our professional
services, which are recognized as incurred, in our second and
third quarters each year. In addition, deferred revenues can
vary on a seasonal basis for the same reasons. We expect
quarterly fluctuations in operating results to continue as a
result of the uneven seasonal demand for our licenses and
services offerings. This pattern may change, however, as a
result of acquisitions, new market opportunities or new product
introductions.

20



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Risk Factors

There are a number of important factors that
could affect our business and future operating results,
including without limitation, the factors set forth below. The
information contained in this report should be read in light of
such factors. Any of the following factors could harm our
business and future operating results.



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | We have only had a few profitable quarters
    and may never achieve sustained profitability.

Although we have been profitable in the last four
quarters on a net income basis, we have not yet been profitable
for a full calendar year, and may not be profitable in future
periods, either on a short- or long-term basis. We incurred a
net loss of $41.8 million, $41.7 million and
$1.4 million for the years ended December 31, 2001,
2002 and 2003, respectively. As of June 30, 2004, we had an
accumulated deficit of $130.8 million. We can give you no
assurance that operating losses will not recur in the future or
that we will ever sustain profitability on a quarterly or annual
basis.



| |                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Providing enterprise software applications
    to the education industry is an emerging and uncertain business;
    if the market for our products fails to develop, we will not be
    able to grow our business.

Our success will depend on our ability to
generate revenues by providing enterprise software applications
and services to colleges, universities, schools and other
education providers. This market has only recently developed and
the viability and profitability of this market is unproven. Our
ability to grow our business will be compromised if we do not
develop and market products and services that achieve broad
market acceptance with our current and potential clients and
their students and employees. The use of online education,
transactional or content management software applications and
services in the education industry may not become widespread and
our products and services may not achieve commercial success.
Even if potential clients decide to implement products of this
type, they may still choose to design, develop or manage all or
a part of their system internally.

Given our clients relatively early adoption
of enterprise software applications aimed at the education
industry, they are likely to be less risk-averse than most
colleges, universities, schools and other education providers.
Accordingly, the rate at which we have been able to establish
relationships with our clients in the past may not be indicative
of the rate at which we will be able to establish additional
client relationships in the future.



| |                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Some of our clients use our products to
    facilitate online education, which is a relatively new field; if
    online education does not continue to develop and gain
    acceptance, demand for our products could suffer.

Our success will depend in part upon the
continued adoption by our clients and potential clients of
online education initiatives. Some academics and educators are
opposed to online education in principle and have expressed
concerns regarding the perceived loss of control over the
education process that can result from offering courses online.
Some of these critics, particularly college and university
professors, have the capacity to influence the market for online
education, and their opposition could reduce the demand for our
products and services. In addition, the growth and development
of the market for online education may prompt some members of
the academic community to advocate more stringent protection of
intellectual property associated with course content, which may
impose additional burdens on clients and potential clients
offering online education. This could require us to modify our
products, or could cause these clients and potential clients to
abandon their online education initiatives.



| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | Our level of fixed expenses may cause us to
    incur operating losses if we are unsuccessful in achieving
    revenue growth.

Our expense levels are based, in significant
part, on our estimates of future revenues and are largely fixed
in the short term. As a result, we may be unable to adjust our
spending in a timely manner if our revenues fall short of our
expectations. Accordingly, any significant shortfall of revenues
in relation to our expectations would have an immediate and
material effect on our results of operations. In addition, as our

21



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business grows, we anticipate increasing our
operating expenses to expand our product development, technical
support, sales and marketing and administrative organizations.
Any such expansion could cause material losses to the extent we
do not generate additional revenues sufficient to cover the
additional expenses.




| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because most of our licenses are renewable
    on an annual basis, a reduction in our license renewal rate
    could significantly reduce our revenues.

Our clients have no obligation to renew their
licenses for our products after the expiration of the initial
license period, which is typically one year, and some clients
have elected not to do so. A decline in license renewal rates
could cause our revenues to decline. Although we have
experienced favorable license renewal rates in recent periods,
we have limited historical data with respect to rates of
renewals, so we cannot accurately predict future renewal rates.
Our license renewal rates may decline or fluctuate as a result
of a number of factors, including client dissatisfaction with
our products and services, our failure to update our products to
maintain their attractiveness in the market or budgetary
constraints or changes in budget priorities faced by our clients.



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | If our newest product, the Blackboard
    Content System, does not gain widespread market acceptance, our
    financial results could suffer.

We introduced our newest software application,
the Blackboard Content System,in March 2004. Our ability
to grow our business will depend, in part, on client acceptance
of this product, which is currently unproven. If we are not
successful in gaining widespread market acceptance of this
product, our revenues may fall below our expectations, which
could cause our stock price to decline.



| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we generally recognize revenues
    ratably over the term of our contract with a client, downturns
    or upturns in sales will not be fully reflected in our operating
    results until future periods.

We recognize most of our revenues from clients
monthly over the terms of their agreements, which are typically
12 months, although terms can range from one month to
48 months. As a result, much of the revenue we report in
each quarter is attributable to agreements entered into during
previous quarters. Consequently, a decline in sales, client
renewals, or market acceptance of our products in any one
quarter will not necessarily be fully reflected in the revenues
in that quarter, and will negatively affect our revenues and
profitability in future quarters. This ratable revenue
recognition also makes it difficult for us to rapidly increase
our revenues through additional sales in any period, as revenues
from new clients must be recognized over the applicable
agreement term.



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating margins may suffer if our
    professional services revenues increase in proportion to total
    revenues because our professional services revenues have lower
    gross margins.

Because our professional services revenues
typically have lower gross margins than our product revenues, an
increase in the percentage of total revenues represented by
professional services revenues could have a detrimental impact
on our overall gross margins, and could adversely affect our
operating results. In addition, we sometimes subcontract
professional services to third parties, which further reduces
our gross margins on these professional services. As a result,
an increase in the percentage of professional services provided
by third-party consultants could lower our overall gross margins.



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our products contain errors or if new
    product releases are delayed, we could lose new sales and be
    subject to significant liability claims.

Because our software products are complex, they
may contain undetected errors or defects, known as bugs. Bugs
can be detected at any point in a products life cycle, but
are more common when a new product is introduced or when new
versions are released. In the past, we have encountered product
development delays and defects in our products. We would expect
that, despite our testing, errors will be

22



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found in new products and product enhancements in
the future. Significant errors in our products could lead to:




| |   |                                                            
| | - | -----------------------------------------------------------
| |  | delays in or loss of market acceptance of our
    products;
|
| |  | diversion of our resources;                                
|
| |  | a lower rate of license renewals or upgrades;              
|
| |  | injury to our reputation; and                              
|
| |  | increased service expenses or payment of damages.          

Because our clients use our products to store and
retrieve critical information, we may be subject to significant
liability claims if our products do not work properly. We cannot
be certain that the limitations of liability set forth in our
licenses and agreements would be enforceable or would otherwise
protect us from liability for damages. A material liability
claim against us, regardless of its merit or its outcome, could
result in substantial costs, significantly harming our business
reputation and divert managements attention from our
operations.



| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The length and unpredictability of the
    sales cycle for our software could delay new sales and cause our
    revenues and cash flows for any given quarter to fail to meet
    our projections or market expectations.

The sales cycle between our initial contact with
a potential client and the signing of a license with that client
typically ranges from 6 to 15 months. As a result of this
lengthy sales cycle, we have only a limited ability to forecast
the timing of sales. A delay in or failure to complete license
transactions could harm our business and financial results, and
could cause our financial results to vary significantly from
quarter to quarter. Our sales cycle varies widely, reflecting
differences in our potential clients decision-making
processes, procurement requirements and budget cycles, and is
subject to significant risks over which we have little or no
control, including:



| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | clients budgetary constraints and
    priorities;                                                                  
|
| |  | the timing of our clients budget cycles;                                                                           
|
| |  | the need by some clients for lengthy evaluations
    that often include both their administrators and faculties; and
|
| |  | the length and timing of clients approval
    processes.                                                           

Potential clients typically conduct extensive and
lengthy evaluations before committing to our products and
services and generally require us to expend substantial time,
effort and money educating them as to the value of our offerings.



| |                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our sales cycle with international
    postsecondary education providers and U.S. K-12 schools may be
    longer than our historic U.S. postsecondary sales cycle, which
    could cause us to incur greater costs and could reduce our
    operating margins.

As we target more of our sales efforts at
international postsecondary education providers and U.S. K-12
schools, we could face greater costs, longer sales cycles and
less predictability in completing some of our sales, which may
harm our business. In both of these markets, a potential
clients decision to use our products and services may be a
decision involving multiple institutions and, if so, these types
of sales would require us to provide greater levels of education
to prospective clients regarding the use and benefits of our
products and services. In addition, we expect that potential
clients in both of these markets may demand more customization,
integration services and features. As a result of these factors,
these sales opportunities may require us to devote greater sales
support and professional services resources to individual sales,
thereby increasing the costs and time required to complete sales
and diverting sales and professional services resources to a
smaller number of international and U.S. K-12 transactions.

23



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| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to effectively manage
    our expanding operations, which could impair our ability to
    operate profitably.

We may be unable to operate our business
profitably if we fail to manage our growth. We have experienced
significant expansion since our inception, which has sometimes
strained our managerial, operational, financial and other
resources. Future growth could continue to strain our resources.
Our failure to successfully manage growth and to continue to
refine our financial controls and accounting and reporting
systems and to add and retain personnel that adequately support
our growth would disrupt our business.

Our future success and our ability to pursue our
growth strategy will depend to a significant extent on the
continued service of our key management personnel, including
Michael L. Chasen, our chief executive officer and
president, and Matthew L. Pittinsky, our chairman. Although
we have employment agreements with several of our executive
officers, including Mr. Chasen and Mr. Pittinsky,
these agreements do not obligate them to remain employed by us.
The loss of services of any key management personnel could make
it more difficult to successfully pursue our business goals.



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not maintain the compatibility of
    our products with third-party applications that our clients use
    in conjunction with our products, demand for our products could
    decline.

Our software applications can be used with a
variety of third-party applications used by our clients to
extend the functionality of our products, which we believe
contributes to the attractiveness of our products in the market.
If we are not able to maintain the compatibility of our products
with third-party applications, demand for our products could
decline and we could lose sales. We may desire in the future to
make our products compatible with new or existing third-party
applications that achieve popularity within the education
marketplace, and these third-party applications may not be
compatible with our designs. Any failure on our part to modify
our applications to ensure compatibility with such third-party
applications would reduce demand for our products and services.



| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to protect our proprietary
    technology and other rights, it will reduce our ability to
    compete for business.

If we are unable to protect our intellectual
property, our competitors could use our intellectual property to
market products similar to our products, which could decrease
demand for our products. In addition, we may be unable to
prevent the use of our products by persons who have not paid the
required license fee, which could reduce our revenues. We rely
on a combination of copyright, trademark and trade secret laws,
as well as licensing agreements, third-party nondisclosure
agreements and other contractual provisions and technical
measures, to protect our intellectual property rights. These
protections may not be adequate to prevent our competitors from
copying or reverse-engineering our products. Our competitors may
independently develop technologies that are substantially
equivalent or superior to our technology. To protect our trade
secrets and other proprietary information, we require employees,
consultants, advisors and collaborators to enter into
confidentiality agreements. These agreements may not provide
meaningful protection for our trade secrets, know-how or other
proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how
or other proprietary information. The protective mechanisms we
include in our products may not be sufficient to prevent
unauthorized copying. Existing copyright laws afford only
limited protection for our intellectual property rights and may
not protect such rights in the event competitors independently
develop products similar to ours. In addition, the laws of some
countries in which our products are or may be licensed do not
protect our products and intellectual property rights to the
same extent as do the laws of the United States.

24



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| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are found to infringe the proprietary
    rights of others, we could be required to redesign our products,
    pay significant royalties or enter into license agreements with
    third parties.

A third party may assert that our technology
violates its intellectual property rights. As the number of
software products in our markets increases and the functionality
of these products further overlap, we believe that infringement
claims will become more common. Any claims, regardless of their
merit, could:



| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | be expensive and time consuming to defend;                                                                                                                                                       
|
| |  | force us to stop licensing our products that
    incorporate the challenged intellectual property;                                                                                               
|
| |  | require us to redesign our products;                                                                                                                                                             
|
| |  | divert managements attention and other
    company resources; and                                                                                                                               
|
| |  | require us to enter into royalty or licensing
    agreements in order to obtain the right to use necessary
    technologies, which may not be available on terms acceptable to
    us, if at all.



| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Expansion of our business internationally
    will subject our business to additional economic and operational
    risks that could increase our costs and make it difficult for us
    to operate profitably.

One of our key growth strategies is to pursue
international expansion. Expansion of our international
operations may require significant expenditure of financial and
management resources and result in increased administrative and
compliance costs. As a result of such expansion, we will be
increasingly subject to the risks inherent in conducting
business internationally, including:



| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | foreign currency fluctuations, which could result
    in reduced revenues and increased operating expenses;                                                                                                    
|
| |  | potentially longer payment and sales cycles;                                                                                                                                                                   
|
| |  | difficulty in collecting accounts receivable;                                                                                                                                                                  
|
| |  | the effect of applicable foreign tax structures,
    including tax rates that may be higher than tax rates in the
    United States or taxes that may be duplicative of those imposed
    in the United States;
|
| |  | tariffs and trade barriers;                                                                                                                                                                                    
|
| |  | general economic and political conditions in each
    country;                                                                                                                                                 
|
| |  | inadequate intellectual property protection in
    foreign countries;                                                                                                                                          
|
| |  | uncertainty regarding liability for information
    retrieved and replicated in foreign countries;                                                                                                             
|
| |  | the difficulties and increased expenses in
    complying with a variety of foreign laws, regulations and trade
    standards; and                                                                              
|
| |  | unexpected changes in regulatory requirements.                                                                                                                                                                 



| |                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Unauthorized disclosure of data, whether
    through breach of our computer systems or otherwise, could
    expose us to protracted and costly litigation or cause us to
    lose clients.

Maintaining the security of online education and
transaction networks is an issue of critical importance for our
clients because these activities involve the storage and
transmission of proprietary and confidential client and student
information, including personal student information and consumer
financial data, such as credit card numbers. Individuals and
groups may develop and deploy viruses, worms and other malicious
software programs that attack or attempt to infiltrate our
products. If our security measures are breached as a result of
third-party action, employee error, malfeasance or otherwise, we
could be subject to liability or our business could be
interrupted. Penetration of our network security could have a
negative impact on our reputation and could lead our present and
potential clients to choose competitive offerings. Even if we do
not encounter a security breach ourselves, a well-publicized
breach of the consumer data security of any major consumer Web
site could lead to a general public loss of

25



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confidence in the use of the Internet, which
could significantly diminish the attractiveness of our products
and services.




| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we undertake business combinations and
    acquisitions, they may be difficult to integrate, disrupt our
    business, dilute stockholder value or divert management
    attention.

During the course of our history, we have
acquired several businesses, and a key element of our growth
strategy is to pursue additional acquisitions in the future. Any
acquisition could be expensive, disrupt our ongoing business and
distract our management and employees. We may not be able to
identify suitable acquisition candidates, and if we do identify
suitable candidates, we may not be able to make these
acquisitions on acceptable terms or at all. If we make an
acquisition, we could have difficulty integrating the acquired
technology, employees or operations. In addition, the key
personnel of the acquired company may decide not to work for us.
Acquisitions also involve the risk of potential unknown
liabilities associated with the acquired business.

As a result of these risks, we may not be able to
achieve the expected benefits of any acquisition. If we are
unsuccessful in completing or integrating acquisitions that we
may pursue in the future, we would be required to reevaluate our
growth strategy and we may have incurred substantial expenses
and devoted significant management time and resources in seeking
to complete and integrate the acquisitions.

Future business combinations could involve the
acquisition of significant intangible assets. We currently
record in our statements of operations ongoing significant
amortization of intangible assets acquired in connection with
our historic acquisitions, and may need to recognize similar
charges in connection with any future acquisitions. In addition,
we may need to record write-downs from future impairments of
identified intangible assets and goodwill. These accounting
charges would reduce any future reported earnings, or increase a
reported loss. In addition, we could use substantial portions of
our available cash to pay the purchase price for acquisitions.
We could also incur debt to pay for acquisitions, or issue
additional equity securities as consideration for these
acquisitions, which could cause our stockholders to suffer
significant dilution.



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Operational failures in our network
    infrastructure could disrupt our remote hosting service, could
    cause us to lose current hosting clients and sales to potential
    hosting clients and could result in increased expenses and
    reduced revenues.

Unanticipated problems affecting our network
systems could cause interruptions or delays in the delivery of
the hosting product we provide to some of our clients. If there
are operational failures in our network infrastructure that
cause interruptions, slower response times or loss of data for
our remotely hosted clients, we may be required to issue credits
or pay penalties, current hosting clients may terminate their
contracts or elect not to renew them, and we may lose sales to
potential hosting clients. We provide remote hosting through
computer hardware that is currently located in a third-party
co-location facility in Vienna, Virginia. We do not control the
operation of this co-location facility. Lengthy interruptions in
our hosting service could be caused by the occurrence of a
natural disaster, power loss, vandalism or other
telecommunications problems at the co-location facility or if
this co-location facility were to close without adequate notice.
Although we have multiple transmission lines into the
co-location facility through two telecommunications service
providers, we have experienced problems of this nature from time
to time in the past, and we will continue to be exposed to the
risk of network failures in the future.

We currently do not have adequate computer
hardware and systems to provide alternative service for most of
our hosted clients. Our current back-up system, located in our
corporate headquarters in Washington, D.C., is vulnerable to
risks similar to those faced at the co-location facility in
Virginia, and its location close to the facility in Virginia
means that many of the factors that could cause a failure of the
Virginia facility could also affect the back-up facility. Our
back-up system has not been fully tested under actual disaster
conditions. We have begun the process of securing another
co-location facility for disaster recovery purposes, but we do
not believe we will have a geographically remote back-up
facility in operation before December 2004, if ever.

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| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | We face intense and growing competition,
    which could result in price reductions, reduced operating
    margins and loss of market share.

We operate in highly competitive markets and
generally encounter intense competition to win contracts. If we
are unable to successfully compete for new business and license
renewals, our revenue growth and operating margins may decline.
The markets for online education, transactional, portal and
content management products are intensely competitive and
rapidly changing, and barriers to entry in such markets are
relatively low. With the introduction of new technologies and
market entrants, we expect competition to intensify in the
future. Some of our principal competitors offer their products
at a lower price, which has resulted in pricing pressures. Such
pricing pressures and increased competition generally could
result in reduced sales, reduced margins or the failure of our
product and service offerings to achieve or maintain more
widespread market acceptance.

Our primary competitors for the Blackboard
Academic Suiteare companies that provide course management
systems, such as WebCT, Inc., eCollege.com and Desire2Learn
Inc., learning content management systems, such as HarvestRoad
Ltd. and Concord USA, Inc., and education enterprise information
portal technologies, such as SunGard SCT Inc., an operating unit
of SunGard Data Systems Inc. We also face competition from
clients and potential clients who develop their own applications
internally. Our primary competitors for the Blackboard
Commerce Suiteare companies that provide university
transaction systems, such as Diebold, Incorporateds Card
Systems division and The CBORD Group, Inc., as well as
off-campus merchant relationship programs.

We may also face competition from potential
competitors that are substantially larger than we are and have
significantly greater financial, technical and marketing
resources, and established, extensive direct and indirect
channels of distribution. As a result, they may be able to
respond more quickly to new or emerging technologies and changes
in client requirements, or to devote greater resources to the
development, promotion and sale of their products than we can.
In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or
prospective clients. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and
rapidly acquire significant market share to our detriment.



| |                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If potential clients or competitors use
    open source software to develop products that are competitive
    with our products and services, we may face decreased demand and
    pressure to reduce the prices for our products.

The growing acceptance and prevalence of open
source software may make it easier for competitors or potential
competitors to develop software applications that compete with
our products, or for clients and potential clients to internally
develop software applications that they would otherwise have
licensed from us. One of the aspects of open source software is
that it can be modified or used to develop new software that
competes with proprietary software applications, such as ours.
Such competition can develop without the degree of overhead and
lead time required by traditional proprietary software
companies. If potential clients use open source software to
internally develop software or if a current or potential
competitor develops products using open source software that are
competitive with our products and services, we may face
decreased demand for our products and services.



| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We could lose revenues if there are changes
    in the spending policies or budget priorities for government
    funding of colleges, universities, schools and other education
    providers.

Most of our clients and potential clients are
colleges, universities, schools and other education providers
who depend substantially on government funding. Accordingly, any
general decrease, delay or change in federal, state or local
funding for colleges, universities, schools and other education
providers could cause our current and potential clients to
reduce their purchases of our products and services, to exercise
their right to terminate licenses, or to decide not to renew
licenses, any of which could cause us to lose revenues. In
addition, a specific reduction in governmental funding support
for products such as ours would also cause us to lose revenues.

27



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##### 





| |                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | U.S. and foreign government regulation of
    the Internet could cause us to incur significant expenses, and
    failure to comply with applicable regulations could make our
    business less efficient or even impossible.

The application of existing laws and regulations
potentially applicable to the Internet, including regulations
relating to issues such as privacy, defamation, pricing,
advertising, taxation, consumer protection, content regulation,
quality of products and services and intellectual property
ownership and infringement, can be unclear. It is possible that
U.S., state and foreign governments might attempt to regulate
Internet transmissions or prosecute us for violations of their
laws. In addition, these laws may be modified and new laws may
be enacted in the future, which could increase the costs of
regulatory compliance for us or force us to change our business
practices. Any existing or new legislation applicable to us
could expose us to substantial liability, including significant
expenses necessary to comply with such laws and regulations, and
dampen the growth in use of the Internet.

Specific federal laws that could also have an
impact on our business include the following:



| |   |                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Childrens Online Protection Act and the
    Childrens Online Privacy Protection Act restrict the
    distribution of certain materials deemed harmful to children and
    impose additional restrictions on the ability of online services
    to collect personal information from children under the age of
    13; and
|
| |  | The Family Educational Rights and Privacy Act
    imposes parental or student consent requirements for specified
    disclosures of student information, including online information.                                                                                                                                         

Our clients use of our software as their
central platform for online education initiatives may make us
subject to any such laws or regulations, which could impose
significant additional costs on our business or subject us to
additional liabilities.



| |                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our status under state and federal
    financial services regulation is currently unclear, and any
    violation of any present or future regulation could expose us to
    liability, force us to change our business practices or force us
    to stop selling or modify our products and
    services.

Our transaction processing product and service
offering could be subject to state and federal financial
services regulation. The Blackboard Transaction Systemsupports the creation and management of student debit
accounts and the processing of payments against those accounts
for both on-campus vendors and off-campus merchants. For
example, one or more federal or state governmental agencies that
regulate or monitor banks or other types of providers of
electronic commerce services may conclude that we are engaged in
banking or other financial services activities that are
regulated by the Federal Reserve under the U.S. Federal
Electronic Funds Transfer Act or Regulation E thereunder or
by state agencies under similar state statutes or regulations.
Regulatory requirements may include, for example:



| |   |                                                                   
| | - | ------------------------------------------------------------------
| |  | disclosure of our business policies and practices;                
|
| |  | restrictions on specified uses and disclosures of
    information;
|
| |  | data security requirements;                                       
|
| |  | government registration; and                                      
|
| |  | reporting and documentation requirements.                         

A number of states have enacted legislation
regulating check sellers, money transmitters or transaction
settlement service providers as banks. If we were deemed to be
in violation of any current or future regulations, we could be
exposed to financial liability and adverse publicity or forced
to change our business practices or stop selling some of our
products and services. As a result, we could face significant
legal fees, delays in extending our product and services
offerings, and damage to our reputation that could harm our
business and reduce demand for our products and services. Even
if we are not required to change our business practices, we
could be required to obtain licenses or regulatory approvals
that could cause us to incur substantial costs.

28



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##### 





|        |                                                                
|------- | ---------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    about Market Risk.

Our principal exposure to market risk relates to
changes in interest rates. At June 30, 2004, we had no
borrowings under our line of credit, which bears interest at a
floating rate equal to the prime rate (4.0% as of June 30,
2004). The fair value of our fixed rate long-term debt is
sensitive to interest rate changes. Interest rate changes would
result in increases or decreases in the fair value of our debt
due to differences between market interest rates and rates in
effect at the inception of our debt obligation. Changes in the
fair value of our fixed rate debt have no impact on our cash
flows or consolidated financial statements.

Interest income on our cash and cash equivalents
is subject to interest rate fluctuations, but we believe that
the impact of these fluctuations does not have a material effect
on our financial position due to the short-term nature of these
financial instruments. For the quarter ending June 30,
2004, a 100 basis-point adverse change in interest rates would
not have had a material effect on our consolidated financial
position, earnings or cash flows.

Item 4.     Controls
and Procedures.

(a) Evaluation of Disclosure Controls and
Procedures

Our management, with the participation of our
principal executive officer and principal financial officer, has
evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (the Exchange Act)) as of June 30, 2004.
Based on this evaluation, our principal executive officer and
principal financial officer concluded that, as of June 30, 2004,
these disclosure controls and procedures are effective and
designed to ensure that the information required to be disclosed
in our reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the
requisite time periods.

(b) Changes in Internal Control over
Financial Reporting

There was no change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) identified in connection with
the evaluation of our internal control that occurred during our
last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.

29



---



##### 



PART II.     OTHER
INFORMATION



|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 2. | Changes in Securities, Use of Proceeds and
    Issuer Purchases of Equity Securities.

(c) During the period covered by this
report, we issued the following equity securities under the
exemptions from registration provided in Section 4(2) of
the Securities Act and Rule 701 promulgated thereunder:

Option Grants

The table below lists the grants of options to
purchase shares of our common stock made under our Amended and
Restated Stock Incentive Plan and 2004 Stock Incentive Plan to
our employees during the period covered by this report (not
including any grants made under the registration statement on
Form S-8 filed by us on June 18, 2004), as well as the
exercise price of such options. These options were granted in
consideration of services to be rendered by such employees.

|               |  |                  |         |                |  |   |       | 
|-------------- |  | ---------------- | ------- | -------------- |  | - | ----- | 
|Date of Grant  |  | Number of Shares |         | Exercise Price
|               |  |                  |         |               
|April 21, 2004 |  |                  | 12,732  |                |  | $ | 9.66  | 
|April 21, 2004 |  |                  | 943     |                |  |   | 9.34  | 
|June 18, 2004  |  |                  | 512,560 |                |  |   | 14.00 | 
|June 25, 2004  |  |                  | 24,500  |                |  |   | 20.32 | 
|June 30, 2004  |  |                  | 4,720   |                |  |   | 21.12 | 

Option Exercises

The table below lists the exercises of options to
purchase our common stock during the period covered by this
report. These exercises were made by current or former employees:

|                 |  |                  |        |               |  |   |            | 
|---------------- |  | ---------------- | ------ | ------------- |  | - | ---------- | 
|Date of Exercise |  | Number of Shares |        | Consideration
|                 |  |                  |        |              
|April 1, 2004    |  |                  | 28,315 |               |  | $ | 110,523.66 | 
|April 9, 2004    |  |                  | 353    |               |  |   | 3,409.98   | 
|April 14, 2004   |  |                  | 1,105  |               |  |   | 10,674.30  | 
|April 21, 2004   |  |                  | 2,568  |               |  |   | 13,724.06  | 
|May 1, 2004      |  |                  | 864    |               |  |   | 8,346.24   | 
|May 24, 2004     |  |                  | 353    |               |  |   | 3,409.98   | 
|May 25, 2004     |  |                  | 78     |               |  |   | 753.48     | 
|June 7, 2004     |  |                  | 321    |               |  |   | 3,044.54   | 
|June 11, 2004    |  |                  | 17,697 |               |  |   | 93,794.10  | 
|June 15, 2004    |  |                  | 306    |               |  |   | 2,858.04   | 
|June 16, 2004    |  |                  | 20,000 |               |  |   | 2,600.00   | 
|June 21, 2004    |  |                  | 5,007  |               |  |   | 29,887.69  | 
|June 22, 2004    |  |                  | 4,690  |               |  |   | 34,855.36  | 
|June 24, 2004    |  |                  | 1,500  |               |  |   | 21,000.00  | 

Warrant Exercises

Pursuant to exercises of warrants for the
purchase of our equity securities held by certain of our
stockholders, we issued 2,541,388 shares of our series E
preferred stock and 25,080 shares of our common stock. The
consideration for all of the series E preferred stock and 3,708
shares of the common stock was the surrender of a portion of the
shares available for purchase under the warrants. The
consideration for the remaining 21,372 shares of common stock
was cash in the amount of $248,050.71.

30



---



##### 



Conversion of Preferred Stock and Issuance of
Shares in Respect of Dividends

In connection with our initial public offering,
shares of our preferred stock were automatically converted into
shares of our common stock, and the accrued dividends on such
preferred stock were paid in shares of common stock. The table
below lists the shares issued pursuant to such conversion and
dividends for each series of our preferred stock.

|                |  |                  |           |                  |  |  |           | 
|--------------- |  | ---------------- | --------- | ---------------- |  |  | --------- | 
|                |  |                  |           | Number of Shares
|                |  | Number of Shares |           | of Common Stock 
|                |  | of Common Stock  |           | Issued in       
|Series of       |  | Issued upon      |           | Respect of      
|Preferred Stock |  | Conversion       |           | Dividends       
|                |  |                  |           |                 
|Series A        |  |                  | 554,252   |                  |  |  | 25,748    | 
|Series B        |  |                  | 2,371,853 |                  |  |  | 101,527   | 
|Series C        |  |                  | 2,786,589 |                  |  |  | 445,188   | 
|Series D        |  |                  | 1,628,941 |                  |  |  | 764,342   | 
|Series E        |  |                  | 6,030,345 |                  |  |  | 1,078,052 | 

(d) We are furnishing the following
information with respect to the use of proceeds from our initial
public offering of common stock, $0.01 par value per share,
which closed in June 2004. The effective date of the
Registration Statement on Form S-1 for the offering was
June 17, 2004, and the commission file number of the
Registration Statement is 333-113332. The offering commenced on
June 17, 2004 and terminated on June 23, 2004. In
connection with the closing of our initial public offering, the
underwriters exercised their entire over-allotment option for
825,000 shares for a price of $14.00 per share, before discounts
and commissions. The over-allotment option was comprised of
401,062 shares from selling stockholders and 423,938 from us.
All of the shares of common stock registered for our account
were sold prior to the termination of the offering. The managing
underwriter for the offering was Credit Suisse First Boston LLC.
We registered 6,325,000 shares of our common stock, which
includes the over-allotment shares, in the offering, including
2,251,062 shares sold by certain selling stockholders. The
following table discloses the amounts registered and sold, and
the aggregate proceeds for us and each selling stockholder:

|                                                                             |  |                     |           |                |  |   |            | 
|---------------------------------------------------------------------------- |  | ------------------- | --------- | -------------- |  | - | ---------- | 
|                                                                             |  | Number of shares    |           | Aggregate     
|                                                                             |  | registered and sold |           | Offering Price
|                                                                             |  |                     |           |               
|Blackboard Inc.                                                              |  |                     | 4,073,938 |                |  | $ | 57,035,132 | 
|Microsoft Corporation                                                        |  |                     | 672,969   |                |  |   | 9,421,566  | 
|Merrill Lynch KECALP L.P. 1999                                               |  |                     | 158,502   |                |  |   | 2,219,028  | 
|KECALP Inc., as nominee for Merrill Lynch KECALP
    International L.P. 1999 |  |                     | 17,611    |                |  |   | 246,554    | 
|Pearson Investment Holdings, Inc.                                            |  |                     | 401,161   |                |  |   | 5,616,254  | 
|The George Washington University                                             |  |                     | 489,630   |                |  |   | 6,854,820  | 
|Aurora Ventures II, LLC                                                      |  |                     | 33,927    |                |  |   | 474,978    | 
|America Online, Inc.                                                         |  |                     | 355,639   |                |  |   | 4,978,946  | 
|Michael Pettit                                                               |  |                     | 32,106    |                |  |   | 449,484    | 
|Gregory M. Davies                                                            |  |                     | 16,517    |                |  |   | 231,238    | 
|Neal Nored                                                                   |  |                     | 14,157    |                |  |   | 198,198    | 
|Kenneth J. Krushel                                                           |  |                     | 11,798    |                |  |   | 165,172    | 
|Mary Anne Waikart                                                            |  |                     | 9,438     |                |  |   | 132,132    | 
|Anne Keehn                                                                   |  |                     | 9,438     |                |  |   | 132,132    | 
|Stephen A. Haines                                                            |  |                     | 4,483     |                |  |   | 62,762     | 
|Karl Udo Schuermann                                                          |  |                     | 4,247     |                |  |   | 59,458     | 
|Ewing Edward Neelley, Jr.                                                    |  |                     | 3,869     |                |  |   | 54,166     | 
|Najib Kabbani                                                                |  |                     | 2,831     |                |  |   | 39,634     | 

31



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##### 



|                      |  |                     |           |                |  |   |            | 
|--------------------- |  | ------------------- | --------- | -------------- |  | - | ---------- | 
|                      |  | Number of shares    |           | Aggregate     
|                      |  | registered and sold |           | Offering Price
|                      |  |                     |           |               
|Richard Jacobs        |  |                     | 2,831     |                |  | $ | 39,634     | 
|Wendy Sue Jacobs      |  |                     | 2,831     |                |  |   | 39,634     | 
|Steven Saltzberg      |  |                     | 2,359     |                |  |   | 33,026     | 
|Laurence D. Pittinsky |  |                     | 2,359     |                |  |   | 33,026     | 
|Cindy Jones           |  |                     | 2,359     |                |  |   | 33,026     | 
|                      |  |                     |           |                |  |   |            | 
|Total                 |  |                     | 6,325,000 |                |  | $ | 88,550,000 | 
|                      |  |                     |           |                |  |   |            | 

The following table summarizes the expenses
incurred by us in connection with the offering, none of which
were paid to our directors, officers, general partners or their
associates, persons owning 10% or more of our equity securities,
or our affiliates:

|                       |              |                      |  |                |           |                |  |   |              |  |  |   |              | 
|---------------------- | ------------ | -------------------- |  | -------------- | --------- | -------------- |  | - | ------------ |  |  | - | ------------ | 
|Underwriting Discounts |              | Expenses Paid to or  |  |                |           |               
|and Commissions        |              | for the Underwriters |  | Other Expenses |           | Total Expenses
|                       |              |                      |  |                |           |               
|$                      | 3,992,459.24 |                      |  | $              | 50,000.00 |                |  | $ | 2,097,037.00 |  |  | $ | 6,139,496.24 | 

The $50,000 in expenses paid to or for the
Underwriters is an estimate and $125,000 of other expenses is an
estimate.

Our net offering proceeds, after expenses, were
approximately $50.9 million. From June 17, 2004 until
June 30, 2004, we have not used any of the net proceeds. We
have not made any specific plans with respect to the use of the
net proceeds of the offering. We will use the net proceeds from
the offering for general corporate purposes, including working
capital and capital expenditures. We may also use a portion of
the net proceeds to acquire businesses, products or technologies
that are complementary to our business. Since our June 17,
2004 offering, we have continued to collect outstanding
receivables and generate positive cash flow from operations. As
a result, our actual cash and cash equivalents as of
June 30, 2004 were $71.7 million.



|        |                                                         
|------- | --------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders.

On April 23, 2004, certain of our
stockholders executed a Written Consent in Lieu of Annual
Meeting pursuant to which the stockholders:



| |       |                                                                                                                                                                                               
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)   | Amended our certificate of incorporation to
    effect a one-for-two reverse stock split;                                                                                                     
|
| | (ii)  | Approved the Fourth Restated Certificate of
    Incorporation, to be filed upon the closing of our initial
    public offering;                                                               
|
| | (iii) | Approved the adoption of our 2004 Stock Incentive
    Plan, effective upon the closing of our initial public offering;                                                                        
|
| | (iv)  | Approved our Amended and Restated By-laws,
    effective upon the closing of our initial public offering;                                                                                     
|
| | (v)   | Approved the issuance by us of common stock in
    our initial public offering;                                                                                                               
|
| | (vi)  | Elected Douglas A. Alexander, E. Rogers
    Novak, Jr., Robert E. Grady, Steven B. Gruber,
    Michael L. Chasen, Matthew L. Pittinsky, Frank R.
    Gatti and Arthur E. Levine directors; and
|
| | (vii) | Ratified the selection of Ernst & Young LLP
    as our independent auditors for the year ending
    December 31, 2004.                                                                        

32



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##### 



Consents of the following number of shares of
each class or series of stock were obtained as to all matters
(before giving effect to the one-for-two reverse stock split
approved in this consent):

|                   |  |                   |            |              |  |            |            |  |  |  |      |  
|------------------ |  | ----------------- | ---------- | ------------ |  | ---------- | ---------- |  |  |  | ---- | -
|Class or Series    |  | Consents Obtained |            | Total Shares |  | Percentage
|                   |  |                   |            |              |  |           
|Common             |  |                   | 7,798,195  |              |  |            | 11,872,649 |  |  |  | 65.7 | %
|Series A Preferred |  |                   | 623,243    |              |  |            | 1,174,484  |  |  |  | 53.1 | %
|Series B Preferred |  |                   | 5,025,935  |              |  |            | 5,025,935  |  |  |  | 100  | %
|Series C Preferred |  |                   | 5,182,190  |              |  |            | 5,904,788  |  |  |  | 87.8 | %
|Series D Preferred |  |                   | 2,662,215  |              |  |            | 3,451,737  |  |  |  | 77.3 | %
|Series E Preferred |  |                   | 7,929,928  |              |  |            | 10,252,486 |  |  |  | 81.3 | %
|Common, B,C,D & E  |  |                   | 28,598,463 |              |  |            | 36,507,595 |  |  |  | 78.3 | %

On May 26, 2004, certain of our stockholders
executed a Written Consent in Lieu of Meeting pursuant to which
the stockholders:

(i) Amended our certificate of incorporation
to effect a one-for-1.0594947 reverse stock split.

Consents of the following number of shares of
each class or series of stock were obtained (after giving effect
to the one-for-two reverse stock split effected on
April 23, 2004, but before giving effect to the
one-for-1.0594947 reverse stock split approved in this consent):

|                   |  |                   |            |              |  |            |            |  |  |  |      |  
|------------------ |  | ----------------- | ---------- | ------------ |  | ---------- | ---------- |  |  |  | ---- | -
|Class or Series    |  | Consents Obtained |            | Total Shares |  | Percentage
|                   |  |                   |            |              |  |           
|Common             |  |                   | 3,899,097  |              |  |            | 5,987,578  |  |  |  | 65.1 | %
|Series A Preferred |  |                   | 311,621    |              |  |            | 587,238    |  |  |  | 53.1 | %
|Series B Preferred |  |                   | 2,512,967  |              |  |            | 2,512,967  |  |  |  | 100  | %
|Series C Preferred |  |                   | 2,591,092  |              |  |            | 2,952,389  |  |  |  | 87.8 | %
|Series D Preferred |  |                   | 1,331,104  |              |  |            | 1,725,858  |  |  |  | 77.3 | %
|Series E Preferred |  |                   | 3,964,958  |              |  |            | 5,126,226  |  |  |  | 81.3 | %
|Common, B,C,D & E  |  |                   | 14,299,218 |              |  |            | 18,305,018 |  |  |  | 78.1 | %

Item 6.     Exhibits
and Reports on Form 8-K.

(a) Exhibits: See Exhibit Index.

(b) Reports on Form 8-K:

Current report on Form 8-K dated
August 4, 2004, furnished under Item 12,
Disclosure of Results of Operations and Financial
Condition, announcing the Companys financial results
for the quarter ended June 30, 2004. A copy of the press
release announcing the Companys financial results for the
quarter ended June 30, 2004 was attached to the
Form 8-K as Exhibit 99.1.

33



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##### 



SIGNATURE

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

|                     |  |                                                                                                                                         
|-------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|                     |  | BLACKBOARD INC.                                                                                                                         
|Date: August 6, 2004 |  | By: /s/ PETER Q. REPETTIPeter Q. RepettiChief Financial Officer
    (On behalf of the registrant and as Principal Financial
    Officer)

34



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##### 



EXHIBIT INDEX

|            |      |             |  |                                                                                                                                                                        
|----------- | ---- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |      | Description
|            |      |            
|            | 3.1  |             |  | Fourth Restated Certificate of Incorporation of
    the Registrant.                                                                                                    
|            | 3.2  |             |  | Amended and Restated By-Laws of the Registrant.                                                                                                                        
|            | 10.1 |             |  | Eighth Amendment to Amended and Restated Loan and
    Security Agreement between the Registrant and Silicon Valley
    Bank, dated as of November 30, 2001, as amended.
|            | 31.1 |             |  | Certification of Chief Executive Officer Pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                
|            | 31.2 |             |  | Certification of Chief Financial Officer Pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                
|            | 32.1 |             |  | Certification of Chief Executive Officer Pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                
|            | 32.2 |             |  | Certification of Chief Financial Officer Pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.