##### 









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


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
    September 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

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                                   
|(Address of Principal Executive
    Offices)                       |  | (Zip Code)                              

Registrants Telephone Number, Including
Area Code:

(202) 463-4860




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Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days. Yes þ
No o

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

|                              |  |                                
|----------------------------- |  | -------------------------------
|Class                         |  | Outstanding at October 31. 2004
|                              |  |                                
|Common Stock, $0.01 par value |  | 25,769,064                     



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##### 



Blackboard Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended September 30,
2004


INDEX

|                              |  |                                                                                                                                |    |  |    | 
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------ | -- |  | -- | 
|PART I. FINANCIAL INFORMATION
|Item 1.                       |  | Consolidated Financial Statements                                                                                              |    |  |    | 
|                              |  | Consolidated Balance Sheets as of
    December 31, 2003 and September 30, 2004 (Unaudited)                                     |    |  | 1  | 
|                              |  | Unaudited Consolidated Statements of Operations
    for the Three Months and Nine Months ended September 30,
    2003 and 2004 |    |  | 3  | 
|                              |  | Unaudited Consolidated Statements of Cash Flows
    for the Nine Months ended September 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                                  |    |  | 11 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                                 |    |  | 31 | 
|Item 4.                       |  | Controls and Procedures                                                                                                        |    |  | 31 | 
|PART II. OTHER INFORMATION   
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use
    of Proceeds                                                                |    |  | 32 | 
|Item 6.                       |  | Exhibits                                                                                                                       |    |  | 32 | 
|Signature                     |  |                                                                                                                                | 33 | 

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,              |        | September 30,
|                                                   |                                                                                                                                                            | 2003                      |        | 2004         
|                                                   |                                                                                                                                                            |                           |        |              
|                                                   |                                                                                                                                                            |                           |        | (Unaudited)  
|                                                   |                                                                                                                                                            |                          
|                                                   |                                                                                                                                                            | (In thousands)           
|ASSETS                                            
|Current assets:                                    |                                                                                                                                                            |                           |        |               |        |   |         |       
|                                                   | Cash and cash equivalents                                                                                                                                  |                           | $      | 30,456        |        |   | $       | 86,346 |        
|                                                   | Accounts receivable, net of allowance for
    doubtful accounts of $1,018,000 and $1,204,000 at
    December 31, 2003 and September 30, 2004, respectively |                           |        | 22,870        |        |   |         | 25,489 |        
|                                                   | Inventories, net of allowance for obsolescence of
    $115,000 and $132,000 at December 31, 2003 and
    September 30, 2004, respectively                  |                           |        | 2,050         |        |   |         | 2,122  |        
|                                                   | Prepaid expenses and other current assets                                                                                                                  |                           |        | 711           |        |   |         | 1,370  |        
|                                                   | Deferred cost of revenues                                                                                                                                  |                           |        | 3,846         |        |   |         | 5,505  |        
|                                                   |                                                                                                                                                            |                           |        |               |        |   |         |       
|                                                   |                                                                                                                                                            | Total current assets      |        |               | 59,933 |   |         |        | 120,832 | 
|Property and equipment, net                        |                                                                                                                                                            |                           | 7,683  |               |        |   | 9,542   |       
|Restricted cash                                    |                                                                                                                                                            |                           | 843    |               |        |   | 653     |       
|Goodwill                                           |                                                                                                                                                            |                           | 10,252 |               |        |   | 10,252  |       
|Intangible assets, net                             |                                                                                                                                                            |                           | 4,343  |               |        |   | 1,704   |       
|                                                   |                                                                                                                                                            |                           |        |               |        |   |         |       
|Total assets                                       |                                                                                                                                                            | $                         | 83,054 |               |        | $ | 142,983 |       
|                                                   |                                                                                                                                                            |                           |        |               |        |   |         |       
|                                                  
|LIABILITIES AND STOCKHOLDERS
    (DEFICIT) EQUITY
|Current liabilities:                               |                                                                                                                                                            |                           |        |               |        |   |         |       
|                                                   | Accounts payable                                                                                                                                           |                           | $      | 1,833         |        |   | $       | 1,414  |        
|                                                   | Accrued expenses                                                                                                                                           |                           |        | 9,900         |        |   |         | 9,122  |        
|                                                   | Line of credit                                                                                                                                             |                           |        | 7,880         |        |   |         |       |        
|                                                   | Equipment note, current portion                                                                                                                            |                           |        | 949           |        |   |         | 662    |        
|                                                   | Note payable                                                                                                                                               |                           |        | 2,000         |        |   |         |       |        
|                                                   | Deferred revenues, current portion                                                                                                                         |                           |        | 51,215        |        |   |         | 63,447 |        
|                                                   |                                                                                                                                                            |                           |        |               |        |   |         |       
|                                                   |                                                                                                                                                            | Total current liabilities |        |               | 73,777 |   |         |        | 74,645  | 
|Equipment note, noncurrent portion                 |                                                                                                                                                            |                           | 735    |               |        |   | 312     |       
|Deferred rent                                      |                                                                                                                                                            |                           | 1,135  |               |        |   | 1,116   |       
|Deferred revenues, noncurrent portion              |                                                                                                                                                            |                           | 1,727  |               |        |   | 3,552   |       

See notes to unaudited consolidated financial
statements.

1



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##### 



BLACKBOARD INC.

CONSOLIDATED BALANCE SHEETS 
(Continued)

|                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                        |                |          |               |   |   |         |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------- | -------- | ------------- | - | - | ------- | -------- | -
|                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                        | December 31,   |          | September 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 September 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 September, 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 September 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 September 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 September 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 September 30, 2004 |                |          |              |   |   |         |         |  
|                                                                                                                                                                                                                                                                                                                    | Common stock, $0.01 par value;
    200,000,000 shares authorized; 5,536,396 and
    25,765,423 shares issued and outstanding at
    December 31, 2003 and September 30, 2004, respectively             |                |          | 55            |   |   |         | 258      |  
|                                                                                                                                                                                                                                                                                                                    | Additional paid-in capital                                                                                                                                                                             |                |          | 8,020         |   |   |         | 190,665  |  
|                                                                                                                                                                                                                                                                                                                    | Deferred stock compensation                                                                                                                                                                            |                |          | (35           | ) |   |         | (226     | )
|                                                                                                                                                                                                                                                                                                                    | Accumulated deficit                                                                                                                                                                                    |                |          | (132,657      | ) |   |         | (127,339 | )
|                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                        |                |          |               |   |   |         |         
|Total stockholders (deficit) equity                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                        |                | (124,617 | )             |   |   | 63,358  |         
|                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                        |                |          |               |   |   |         |         
|Total liabilities and stockholders
    (deficit) equity                                                                                                                                                                                                                                                            |                                                                                                                                                                                                        | $              | 83,054   |               |   | $ | 142,983 |         
|                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                        |                |          |               |   |   |         |         

See notes to unaudited consolidated financial
statements.

2



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##### 



BLACKBOARD INC.

UNAUDITED CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                            |                                                                                                                                                                |                                                    |           |                   |   |      |            |        |   |   |           |        |   |   |            |        |  
|--------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | --------- | ----------------- | - | ---- | ---------- | ------ | - | - | --------- | ------ | - | - | ---------- | ------ | -
|                                                                            |                                                                                                                                                                |                                                    |           |                  
|                                                                            |                                                                                                                                                                | Three Months Ended                                 |           | Nine Months Ended
|                                                                            |                                                                                                                                                                | September 30,                                      |           | September 30,    
|                                                                            |                                                                                                                                                                |                                                    |           |                  
|                                                                            |                                                                                                                                                                | 2003                                               |           | 2004              |   | 2003 |            | 2004  
|                                                                            |                                                                                                                                                                |                                                    |           |                   |   |      |            |       
|                                                                            |                                                                                                                                                                |                                                   
|                                                                            |                                                                                                                                                                | (In thousands, except share and per share amounts)
|Revenues:                                                                   |                                                                                                                                                                |                                                    |           |                   |   |      |            |        |   |   |           |        |   |   |            |       
|                                                                            | Product                                                                                                                                                        |                                                    | $         | 22,206            |   |      | $          | 25,468 |   |   | $         | 61,199 |   |   | $          | 71,416 |  
|                                                                            | Professional services                                                                                                                                          |                                                    |           | 3,364             |   |      |            | 4,308  |   |   |           | 7,296  |   |   |            | 9,934  |  
|                                                                            |                                                                                                                                                                |                                                    |           |                   |   |      |            |        |   |   |           |        |   |   |            |       
|Total revenues                                                              |                                                                                                                                                                |                                                    | 25,570    |                   |   |      | 29,776     |        |   |   | 68,495    |        |   |   | 81,350     |       
|Operating expenses:                                                         |                                                                                                                                                                |                                                    |           |                   |   |      |            |        |   |   |           |        |   |   |            |       
|                                                                            | Cost of product revenues, excludes amortization
    of acquired technology included in amortization of intangibles
    resulting from acquisitions shown below |                                                    |           | 6,528             |   |      |            | 6,813  |   |   |           | 17,436 |   |   |            | 18,830 |  
|                                                                            | Cost of professional services revenues                                                                                                                         |                                                    |           | 2,186             |   |      |            | 2,378  |   |   |           | 5,085  |   |   |            | 6,004  |  
|                                                                            | Research and development                                                                                                                                       |                                                    |           | 2,980             |   |      |            | 3,537  |   |   |           | 8,433  |   |   |            | 10,427 |  
|                                                                            | Sales and marketing                                                                                                                                            |                                                    |           | 7,633             |   |      |            | 9,074  |   |   |           | 22,382 |   |   |            | 26,932 |  
|                                                                            | General and administrative                                                                                                                                     |                                                    |           | 3,677             |   |      |            | 3,957  |   |   |           | 12,415 |   |   |            | 10,742 |  
|                                                                            | Amortization of intangibles resulting from
    acquisitions                                                                                                    |                                                    |           | 1,445             |   |      |            | 879    |   |   |           | 4,313  |   |   |            | 2,638  |  
|                                                                            | Stock-based compensation                                                                                                                                       |                                                    |           | 105               |   |      |            | 44     |   |   |           | 306    |   |   |            | 155    |  
|                                                                            |                                                                                                                                                                |                                                    |           |                   |   |      |            |        |   |   |           |        |   |   |            |       
|Total operating expenses                                                    |                                                                                                                                                                |                                                    | 24,554    |                   |   |      | 26,682     |        |   |   | 70,370    |        |   |   | 75,728     |       
|                                                                            |                                                                                                                                                                |                                                    |           |                   |   |      |            |        |   |   |           |        |   |   |            |       
|Income (loss) from operations                                               |                                                                                                                                                                |                                                    | 1,016     |                   |   |      | 3,094      |        |   |   | (1,875    | )      |   |   | 5,622      |       
|Other income (expense), net:                                                |                                                                                                                                                                |                                                    |           |                   |   |      |            |        |   |   |           |        |   |   |            |       
|                                                                            | Interest expense                                                                                                                                               |                                                    |           | (146              | ) |      |            | (27    | ) |   |           | (439   | ) |   |            | (155   | )
|                                                                            | Interest income                                                                                                                                                |                                                    |           | 21                |   |      |            | 163    |   |   |           | 80     |   |   |            | 212    |  
|                                                                            |                                                                                                                                                                |                                                    |           |                   |   |      |            |        |   |   |           |        |   |   |            |       
|Income (loss) before (provision) benefit for
    income taxes               |                                                                                                                                                                |                                                    | 891       |                   |   |      | 3,230      |        |   |   | (2,234    | )      |   |   | 5,679      |       
|(Provision) benefit for income taxes                                        |                                                                                                                                                                |                                                    | (300      | )                 |   |      | 250        |        |   |   | (614      | )      |   |   | (362       | )     
|                                                                            |                                                                                                                                                                |                                                    |           |                   |   |      |            |        |   |   |           |        |   |   |            |       
|Net income (loss)                                                           |                                                                                                                                                                |                                                    | 591       |                   |   |      | 3,480      |        |   |   | (2,848    | )      |   |   | 5,317      |       
|Dividends on and accretion of convertible
    preferred stock               |                                                                                                                                                                |                                                    | (2,531    | )                 |   |      |           |        |   |   | (7,521    | )      |   |   | (6,344     | )     
|                                                                            |                                                                                                                                                                |                                                    |           |                   |   |      |            |        |   |   |           |        |   |   |            |       
|Net (loss) income attributable to common
    stockholders                   |                                                                                                                                                                | $                                                  | (1,940    | )                 |   | $    | 3,480      |        |   | $ | (10,369   | )      |   | $ | (1,027     | )     
|                                                                            |                                                                                                                                                                |                                                    |           |                   |   |      |            |        |   |   |           |        |   |   |            |       
|Net (loss) income attributable to common
    stockholders per common share: |                                                                                                                                                                |                                                    |           |                   |   |      |            |        |   |   |           |        |   |   |            |       
|Basic                                                                       |                                                                                                                                                                | $                                                  | (0.35     | )                 |   | $    | 0.14       |        |   | $ | (1.88     | )      |   | $ | (0.08      | )     
|                                                                            |                                                                                                                                                                |                                                    |           |                   |   |      |            |        |   |   |           |        |   |   |            |       
|Diluted                                                                     |                                                                                                                                                                | $                                                  | (0.35     | )                 |   | $    | 0.12       |        |   | $ | (1.88     | )      |   | $ | (0.08      | )     
|                                                                            |                                                                                                                                                                |                                                    |           |                   |   |      |            |        |   |   |           |        |   |   |            |       
|Weighted average number of common shares:                                   |                                                                                                                                                                |                                                    |           |                   |   |      |            |        |   |   |           |        |   |   |            |       
|Basic                                                                       |                                                                                                                                                                |                                                    | 5,519,638 |                   |   |      | 25,683,200 |        |   |   | 5,511,009 |        |   |   | 12,868,696 |       
|                                                                            |                                                                                                                                                                |                                                    |           |                   |   |      |            |        |   |   |           |        |   |   |            |       
|Diluted                                                                     |                                                                                                                                                                |                                                    | 5,519,638 |                   |   |      | 27,906,730 |        |   |   | 5,511,009 |        |   |   | 12,868,696 |       
|                                                                            |                                                                                                                                                                |                                                    |           |                   |   |      |            |        |   |   |           |        |   |   |            |       

See notes to unaudited consolidated financial
statements.

3



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##### 



BLACKBOARD INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                             |                                                                                |                                           |        |       |         |   |        |       |        |  
|-------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------------------- | ------ | ----- | ------- | - | ------ | ----- | ------ | -
|                                                                                             |                                                                                |                                          
|                                                                                             |                                                                                | Nine Months Ended                        
|                                                                                             |                                                                                | September 30,                            
|                                                                                             |                                                                                |                                          
|                                                                                             |                                                                                | 2003                                      |        | 2004 
|                                                                                             |                                                                                |                                           |        |      
|                                                                                             |                                                                                |                                          
|                                                                                             |                                                                                | (In thousands)                           
|Cash flows from operating activities                                                         |                                                                                |                                           |        |       |         |   |        |      
|Net (loss) income                                                                            |                                                                                | $                                         | (2,848 | )     |         | $ | 5,317  |      
|Adjustments to reconcile net (loss) income to net
    cash provided by operating activities: |                                                                                |                                           |        |       |         |   |        |      
|                                                                                             | Depreciation and amortization                                                  |                                           |        | 2,997 |         |   |        | 4,669 |       
|                                                                                             | Amortization of intangibles                                                    |                                           |        | 4,313 |         |   |        | 2,638 |       
|                                                                                             | Change in allowance for doubtful accounts                                      |                                           |        | 155   |         |   |        | 186   |       
|                                                                                             | Change in obsolescence reserve                                                 |                                           |        | 85    |         |   |        | 17    |       
|                                                                                             | Noncash stock compensation related to options
    issued to nonemployees       |                                           |        |      |         |   |        | 69    |       
|                                                                                             | Noncash stock compensation for modification of
    options                     |                                           |        | 21    |         |   |        |      |       
|                                                                                             | Noncash deferred stock amortization                                            |                                           |        | 56    |         |   |        | 86    |       
|                                                                                             | Changes in operating assets and liabilities, net
    of effect of acquisition: |                                           |        |       |         |   |        |       |       
|                                                                                             |                                                                                | Accounts receivable                       |        |       | (10,204 | ) |        |       | (2,805 | )
|                                                                                             |                                                                                | Inventories                               |        |       | (205    | ) |        |       | (89    | )
|                                                                                             |                                                                                | Prepaid expenses and other current assets |        |       | 2,661   |   |        |       | (659   | )
|                                                                                             |                                                                                | Deferred cost of revenues                 |        |       | (238    | ) |        |       | (1,659 | )
|                                                                                             |                                                                                | Accounts payable                          |        |       | 1,404   |   |        |       | (419   | )
|                                                                                             |                                                                                | Accrued expenses                          |        |       | 863     |   |        |       | (950   | )
|                                                                                             |                                                                                | Deferred rent                             |        |       | (117    | ) |        |       | (19    | )
|                                                                                             |                                                                                | Deferred revenues                         |        |       | 10,341  |   |        |       | 14,057 |  
|                                                                                             |                                                                                |                                           |        |       |         |   |        |      
|Net cash provided by operating activities                                                    |                                                                                |                                           | 9,284  |       |         |   | 20,439 |      
|Cash flows from investing activities                                                         |                                                                                |                                           |        |       |         |   |        |      
|Purchase of property and equipment                                                           |                                                                                |                                           | (3,472 | )     |         |   | (6,356 | )    
|Acquisition of business, net of cash acquired                                                |                                                                                |                                           | (4,500 | )     |         |   |       |      
|                                                                                             |                                                                                |                                           |        |       |         |   |        |      
|Net cash used in investing activities                                                        |                                                                                |                                           | (7,972 | )     |         |   | (6,356 | )    
|Cash flows from financing activities                                                         |                                                                                |                                           |        |       |         |   |        |      
|Proceeds from equipment notes                                                                |                                                                                |                                           | 1,540  |       |         |   |       |      
|Payments on equipment notes                                                                  |                                                                                |                                           | (1,062 | )     |         |   | (710   | )    
|Proceeds from line of credit                                                                 |                                                                                |                                           | 5,380  |       |         |   |       |      
|Payments on line of credit                                                                   |                                                                                |                                           | (4,750 | )     |         |   | (7,880 | )    
|Payments on note payable                                                                     |                                                                                |                                           | (1,000 | )     |         |   | (2,000 | )    
|Proceeds from issuance of common stock, net of
    issuance costs                            |                                                                                |                                           |       |       |         |   | 50,896 |      
|Proceeds from exercise of Series E Warrants                                                  |                                                                                |                                           |       |       |         |   | 248    |      
|Release of letters of credit                                                                 |                                                                                |                                           | 210    |       |         |   | 190    |      
|Proceeds from exercise of stock options                                                      |                                                                                |                                           | 140    |       |         |   | 1,063  |      
|                                                                                             |                                                                                |                                           |        |       |         |   |        |      
|Net cash provided by financing activities                                                    |                                                                                |                                           | 458    |       |         |   | 41,807 |      
|                                                                                             |                                                                                |                                           |        |       |         |   |        |      
|Net increase in cash and cash equivalents                                                    |                                                                                |                                           | 1,770  |       |         |   | 55,890 |      
|Cash and cash equivalents at beginning of period                                             |                                                                                |                                           | 20,372 |       |         |   | 30,456 |      
|                                                                                             |                                                                                |                                           |        |       |         |   |        |      
|Cash and cash equivalents at end of period                                                   |                                                                                | $                                         | 22,142 |       |         | $ | 86,346 |      
|                                                                                             |                                                                                |                                           |        |       |         |   |        |      

See notes to unaudited consolidated financial
statements.

4



---



##### 



BLACKBOARD INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS

For the Three Months and Nine Months Ended
September 30, 2003 and 2004


In these Notes to Unaudited Consolidated
Financial Statements, the terms the 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 Community System
(formerly known as 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 nine months ended
September 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) Income
    Attributable to Common Stockholders per Common
    Share

Basic net (loss) income attributable to common
stockholders per common share excludes dilution for potential
common stock issuances and is computed by dividing net (loss)
income attributable to common stockholders by the
weighted-average number of common shares outstanding for the
period. Diluted net (loss) income attributable to common
stockholders per common share reflects the potential dilution
that could occur

5



---



##### 



BLACKBOARD INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

if securities or other contracts to issue common
stock were exercised or converted into common stock. Mandatorily
redeemable convertible preferred stock, stock options and
warrants were not considered in the computation of diluted net
(loss) income attributable to common stockholders per common
share for the three and nine months ended September 30,
2003 and the nine months ended September 30, 2004 as their
effect is anti-dilutive.

The following schedule presents the calculation
of basic and diluted net (loss) income attributable to common
stockholders per common share:

|                                                                                    |  |                                                    |           |                   |  |      |            |      |  |   |           |   |  |   |            |  
|----------------------------------------------------------------------------------- |  | -------------------------------------------------- | --------- | ----------------- |  | ---- | ---------- | ---- |  | - | --------- | - |  | - | ---------- | -
|                                                                                    |  |                                                    |           |                  
|                                                                                    |  | Three Months Ended                                 |           | Nine Months Ended
|                                                                                    |  | September 30,                                      |           | September 30,    
|                                                                                    |  |                                                    |           |                  
|                                                                                    |  | 2003                                               |           | 2004              |  | 2003 |            | 2004
|                                                                                    |  |                                                    |           |                   |  |      |            |     
|                                                                                    |  |                                                   
|                                                                                    |  | (Unaudited)                                       
|                                                                                    |  |                                                   
|                                                                                    |  | (In thousands, except share and per share amounts)
|Basic net (loss) income attributable to common
    stockholders per common share:   |  |                                                    |           |                   |  |      |            |      |  |   |           |   |  |   |            |  
|Net income (loss)                                                                   |  | $                                                  | 591       |                   |  | $    | 3,480      |      |  | $ | (2,848    | ) |  | $ | 5,317      |  
|Less preferred stock dividends:                                                     |  |                                                    |           |                   |  |      |            |      |  |   |           |   |  |   |            |  
|Redeemable convertible preferred stock                                              |  |                                                    | (2,531    | )                 |  |      |           |      |  |   | (7,521    | ) |  |   | (6,344     | )
|                                                                                    |  |                                                    |           |                   |  |      |            |      |  |   |           |   |  |   |            |  
|Net (loss) income attributable to common
    stockholders per common share          |  | $                                                  | (1,940    | )                 |  | $    | 3,480      |      |  | $ | (10,369   | ) |  | $ | (1,027     | )
|                                                                                    |  |                                                    |           |                   |  |      |            |      |  |   |           |   |  |   |            |  
|Weighted average shares outstanding                                                 |  |                                                    | 5,519,638 |                   |  |      | 25,683,200 |      |  |   | 5,511,009 |   |  |   | 12,868,696 |  
|                                                                                    |  |                                                    |           |                   |  |      |            |      |  |   |           |   |  |   |            |  
|Basic net (loss) income attributable to common
    stockholders per common share    |  | $                                                  | (0.35     | )                 |  | $    | 0.14       |      |  | $ | (1.88     | ) |  | $ | (0.08      | )
|                                                                                    |  |                                                    |           |                   |  |      |            |      |  |   |           |   |  |   |            |  
|Diluted net (loss) income attributable to common
    stockholders per common share: |  |                                                    |           |                   |  |      |            |      |  |   |           |   |  |   |            |  
|Net (loss) income attributable to common
    stockholders per common share          |  | $                                                  | (1,940    | )                 |  | $    | 3,480      |      |  | $ | (10,369   | ) |  | $ | (1,027     | )
|                                                                                    |  |                                                    |           |                   |  |      |            |      |  |   |           |   |  |   |            |  
|Weighted average number of basic shares
    outstanding                             |  |                                                    | 5,519,638 |                   |  |      | 25,683,200 |      |  |   | 5,511,009 |   |  |   | 12,868,696 |  
|Dilutive effect of:                                                                 |  |                                                    |           |                   |  |      |            |      |  |   |           |   |  |   |            |  
|Stock options related to the purchase of common
    stock                           |  |                                                    |          |                   |  |      | 1,980,831  |      |  |   |          |   |  |   |           |  
|Warrants related to the purchase of common stock                                    |  |                                                    |          |                   |  |      | 242,699    |      |  |   |          |   |  |   |           |  
|                                                                                    |  |                                                    |           |                   |  |      |            |      |  |   |           |   |  |   |            |  
|Diluted shares outstanding                                                          |  |                                                    | 5,519,638 |                   |  |      | 27,906,730 |      |  |   | 5,511,009 |   |  |   | 12,868,696 |  
|                                                                                    |  |                                                    |           |                   |  |      |            |      |  |   |           |   |  |   |            |  
|Diluted net (loss) income attributable to common
    stockholders per common share  |  | $                                                  | (0.35     | )                 |  | $    | 0.12       |      |  | $ | (1.88     | ) |  | $ | (0.08      | )
|                                                                                    |  |                                                    |           |                   |  |      |            |      |  |   |           |   |  |   |            |  



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

On October 13, 2004, the Financial
Accounting Standards Board concluded that Statement 123R,
Share-Based Payment (Statement 123R), which
would require all companies to measure compensation cost for all
share-based payments (including employee stock options) at fair
value, would be effective for public companies (except small
business issuer as defined in SEC Regulation S-B) for
interim or annual periods beginning after June 15, 2005.
Retroactive application of the requirements of Statement of
Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation
(SFAS 123) (not

6



---



##### 



BLACKBOARD INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

Statement 123R) to the beginning of the
fiscal year that includes the effective date would be permitted,
but not required. The pro forma effect on net (loss) income
attributable to common stockholders and net (loss) income
attributable to common stockholders per common share assuming we
had applied the fair value recognition provisions of
Statement 123 is included in Note 3. Stock-Based
Compensation.



| |                                    
| | -----------------------------------
| | 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 nine months ended September 30, 2003 and
2004.



|   |                         
|-- | ------------------------
|3. | 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 nonemployees 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 to net
(loss) income attributable to common stockholders and net (loss)
income 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                       |        | Nine Months Ended
|                                                                            |                                                                                                              | September 30,                            |        | September 30,    
|                                                                            |                                                                                                              |                                          |        |                  
|                                                                            |                                                                                                              | 2003                                     |        | 2004              |   | 2003 |       | 2004  
|                                                                            |                                                                                                              |                                          |        |                   |   |      |       |       
|                                                                            |                                                                                                              |                                         
|                                                                            |                                                                                                              | (Unaudited)                             
|                                                                            |                                                                                                              |                                         
|                                                                            |                                                                                                              | (In thousands, except per share amounts)
|Pro forma net (loss) income attributable to
    common stockholders:        |                                                                                                              |                                          |        |                   |   |      |       |        |   |   |         |         |   |   |        |       
|                                                                            | As reported                                                                                                  |                                          | $      | (1,940            | ) |      | $     | 3,480  |   |   | $       | (10,369 | ) |   | $      | (1,027 | )
|                                                                            | Add: Stock-based compensation included in
    reported net (loss) income attributable to common stockholders |                                          |        | 105               |   |      |       | 44     |   |   |         | 306     |   |   |        | 155    |  
|                                                                            | Deduct: Stock-based compensation expense
    determined under fair value-based method for all awards         |                                          |        | (1,229            | ) |      |       | (1,327 | ) |   |         | (3,589  | ) |   |        | (3,492 | )
|                                                                            |                                                                                                              |                                          |        |                   |   |      |       |        |   |   |         |         |   |   |        |       
|Pro forma net (loss) income attributable to
    common stockholders         |                                                                                                              | $                                        | (3,064 | )                 |   | $    | 2,197 |        |   | $ | (13,652 | )       |   | $ | (4,364 | )     
|                                                                            |                                                                                                              |                                          |        |                   |   |      |       |        |   |   |         |         |   |   |        |       
|Net (loss) income attributable to common
    stockholders per common share: |                                                                                                              |                                          |        |                   |   |      |       |        |   |   |         |         |   |   |        |       
|                                                                            | Basic  as reported                                                                                          |                                          | $      | (0.35             | ) |      | $     | 0.14   |   |   | $       | (1.88   | ) |   | $      | (0.08  | )
|                                                                            |                                                                                                              |                                          |        |                   |   |      |       |        |   |   |         |         |   |   |        |       
|                                                                            | Basic  pro forma                                                                                            |                                          | $      | (0.56             | ) |      | $     | 0.09   |   |   | $       | (2.48   | ) |   | $      | (0.34  | )
|                                                                            |                                                                                                              |                                          |        |                   |   |      |       |        |   |   |         |         |   |   |        |       
|                                                                            | Diluted  as reported                                                                                        |                                          | $      | (0.35             | ) |      | $     | 0.12   |   |   | $       | (1.88   | ) |   | $      | (0.08  | )
|                                                                            |                                                                                                              |                                          |        |                   |   |      |       |        |   |   |         |         |   |   |        |       
|                                                                            | Diluted  pro forma                                                                                          |                                          | $      | (0.56             | ) |      | $     | 0.08   |   |   | $       | (2.48   | ) |   | $      | (0.34  | )
|                                                                            |                                                                                                              |                                          |        |                   |   |      |       |        |   |   |         |         |   |   |        |       

7



---



##### 



BLACKBOARD INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

The effect of applying SFAS 123 on pro forma
net (loss) income as stated above is not necessarily
representative of the effects on reported net (loss) income 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 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 nine months ended September 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 is amortizing
this amount into expense over the option vesting period of four
years.

In March 2004, the Company adopted the 2004 Stock
Incentive Plan and reserved 1,887,692 shares of common
stock under the plan. 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,   |       | September 30,
|                              |  | 2003           |       | 2004         
|                              |  |                |       |              
|                              |  |                |       | (Unaudited)  
|                              |  |               
|                              |  | (In thousands)
|Raw materials                 |  | $              | 840   |               |  | $ | 654   |  
|Work-in-process               |  |                | 294   |               |  |   | 482   |  
|Finished goods                |  |                | 1,031 |               |  |   | 1,118 |  
|                              |  |                |       |               |  |   |       |  
|                              |  |                | 2,165 |               |  |   | 2,254 |  
|Less reserve for obsolescence |  |                | (115  | )             |  |   | (132  | )
|                              |  |                |       |               |  |   |       |  
|Inventories, net              |  | $              | 2,050 |               |  | $ | 2,122 |  
|                              |  |                |       |               |  |   |       |  

8



---



##### 



BLACKBOARD INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)



|   |                               
|-- | ------------------------------
|5. | Goodwill and Intangible Assets

Goodwill and intangible assets consist of the
following:

|                              |  |                |         |               |  |   |         |  
|----------------------------- |  | -------------- | ------- | ------------- |  | - | ------- | -
|                              |  | December 31,   |         | September 30,
|                              |  | 2003           |         | 2004         
|                              |  |                |         |              
|                              |  |                |         | (Unaudited)  
|                              |  |               
|                              |  | (In thousands)
|Goodwill                      |  | $              | 10,252  |               |  | $ | 10,252  |  
|                              |  |                |         |               |  |   |         |  
|Intangible assets:            |  |                |         |               |  |   |         |  
|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 | )             |  |   | (16,253 | )
|                              |  |                |         |               |  |   |         |  
|Intangible assets, net        |  | $              | 4,343   |               |  | $ | 1,704   |  
|                              |  |                |         |               |  |   |         |  

Intangible assets from acquisitions are amortized
over three to five years. Amortization expense related to
intangible assets was approximately $4,313,000 and $2,638,000
for the nine months ended September 30, 2003 and
September 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 and Equipment Lines of
    Credit

On August 30, 2004, the Company entered into
a Ninth Amendment to the Amended and Restated Loan and Security
Agreement between the Company and Silicon Valley Bank, dated as
of November 30, 2001, as amended (the
Amendment). Pursuant to the Amendment, Silicon
Valley Bank has agreed to (i) extend the Agreement from
August 30, 2004 to November 30, 2004 and
(ii) increase the maximum principal amount of the equipment
line of credit under the Agreement from $1,500,000 to
$4,000,000. As of September 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. As of September 30, 2004, $974,000 was
outstanding on the equipment line of credit and $2,500,000 was
available for borrowing, subject to covenants and restrictions.



| |             
| | ------------
| | Note Payable

On July 1, 2004, the Company made the final
principal and interest payment of $1,016,250 to The George
Washington University in connection with the Companys
acquisition of Prometheus in January 2002.



|   |                              
|-- | -----------------------------
|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.

9



---



##### 



BLACKBOARD INC.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)



|   |                               
|-- | ------------------------------
|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 Companys initial public offering, or IPO.

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 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 September 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.

In August 2004, the Company issued
110,997 shares of common stock upon cashless exercises of
warrants held by certain stockholders.



|   |             
|-- | ------------
|9. | Income Taxes

During 2004, the Internal Revenue Service issued
an Internal Revenue Bulletin  Revenue Procedure
2004-34 (Rev Proc 2004-34), which allows for greater consistency
between GAAP and income tax revenue recognition for companies
that recognize revenues in a ratable manner. During the three
months ended September 30, 2004, the Company determined
that it will adopt Rev Proc 2004-34 for its 2004 and
subsequent income tax filings. As a result of this adoption, the
Company will recognize cumulative income tax expense
adjustments, which will decrease its federal and state taxable
income by approximately $34.0 million. The benefit for
income taxes for the three months ended September 30, 2004
reflects the benefit of this adoption on the Companys 2004
tax liability.

10



---



##### 



BLACKBOARD INC.



|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|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 Community System(formerly
known as Blackboard Portal System) and the Blackboard
Content System. The Blackboard Commerce Suiteincludes the Blackboard Transaction System, the
Blackboard Community 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

11



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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 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, and hosting

12



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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 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

13



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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 IPO, 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.

On October 13, 2004, the Financial
Accounting Standards Board concluded that Statement 123R,
Share-Based Payment (Statement 123R), which
would require all companies to measure compensation cost for all
share-based payments (including employee stock options) at fair
value, would be effective for public companies (except small
business issuer as defined in SEC Regulation S-B) for
interim or annual periods beginning after June 15, 2005.
Retroactive application of the requirements of SFAS 123
(not Statement 123R) to the beginning of the fiscal year
that includes the effective date would be permitted, but not
required. 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) income attributable to common
stockholders would have changed, as shown in the table below.

|                                                                            |                                                                                                      |                                          |        |                   |   |      |       |        |   |   |         |         |   |   |        |        |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ---------------------------------------- | ------ | ----------------- | - | ---- | ----- | ------ | - | - | ------- | ------- | - | - | ------ | ------ | -
|                                                                            |                                                                                                      |                                          |        |                  
|                                                                            |                                                                                                      | Three Months Ended                       |        | Nine Months Ended
|                                                                            |                                                                                                      | September 30,                            |        | September 30,    
|                                                                            |                                                                                                      |                                          |        |                  
|                                                                            |                                                                                                      | 2003                                     |        | 2004              |   | 2003 |       | 2004  
|                                                                            |                                                                                                      |                                          |        |                   |   |      |       |       
|                                                                            |                                                                                                      |                                         
|                                                                            |                                                                                                      | (Unaudited)                             
|                                                                            |                                                                                                      | (In thousands, except per share amounts)
|Pro forma net (loss) income attributable to
    common stockholders:        |                                                                                                      |                                          |        |                   |   |      |       |        |   |   |         |         |   |   |        |       
|                                                                            | As reported                                                                                          |                                          | $      | (1,940            | ) |      | $     | 3,480  |   |   | $       | (10,369 | ) |   | $      | (1,027 | )
|                                                                            | Add: Stock-based compensation included in
    reported net loss attributable to common stockholders  |                                          |        | 105               |   |      |       | 44     |   |   |         | 306     |   |   |        | 155    |  
|                                                                            | Deduct: Stock-based compensation expense
    determined under fair value-based method for all awards |                                          |        | (1,229            | ) |      |       | (1,327 | ) |   |         | (3,589  | ) |   |        | (3,492 | )
|                                                                            |                                                                                                      |                                          |        |                   |   |      |       |        |   |   |         |         |   |   |        |       
|Pro forma net (loss) income attributable to
    common stockholders         |                                                                                                      | $                                        | (3,064 | )                 |   | $    | 2,197 |        |   | $ | (13,652 | )       |   | $ | (4,364 | )     
|                                                                            |                                                                                                      |                                          |        |                   |   |      |       |        |   |   |         |         |   |   |        |       
|Net (loss) income attributable to common
    stockholders per common share: |                                                                                                      |                                          |        |                   |   |      |       |        |   |   |         |         |   |   |        |       
|                                                                            | Basic  as reported                                                                                  |                                          | $      | (0.35             | ) |      | $     | 0.14   |   |   | $       | (1.88   | ) |   | $      | (0.08  | )
|                                                                            |                                                                                                      |                                          |        |                   |   |      |       |        |   |   |         |         |   |   |        |       
|                                                                            | Basic  pro forma                                                                                    |                                          | $      | (0.56             | ) |      | $     | 0.09   |   |   | $       | (2.48   | ) |   | $      | (0.34  | )
|                                                                            |                                                                                                      |                                          |        |                   |   |      |       |        |   |   |         |         |   |   |        |       
|                                                                            | Diluted  as reported                                                                                |                                          | $      | (0.35             | ) |      | $     | 0.12   |   |   | $       | (1.88   | ) |   | $      | (0.08  | )
|                                                                            |                                                                                                      |                                          |        |                   |   |      |       |        |   |   |         |         |   |   |        |       
|                                                                            | Diluted  pro forma                                                                                  |                                          | $      | (0.56             | ) |      | $     | 0.08   |   |   | $       | (2.48   | ) |   | $      | (0.34  | )
|                                                                            |                                                                                                      |                                          |        |                   |   |      |       |        |   |   |         |         |   |   |        |       

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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.

During 2004, the Internal Revenue Service issued
an Internal Revenue Bulletin  Revenue Procedure
2004-34 (Rev Proc 2004-34), which allows for greater consistency
between GAAP and income tax revenue recognition for companies
that recognize revenues in a ratable manner. During the three
months ended September 30, 2004, we determined that we will
adopt this method for our 2004 and subsequent income tax
filings. As a result of this adoption, we will recognize
cumulative income tax expense adjustments that will decrease our
federal and state taxable income by approximately
$34.0 million. The benefit for income taxes for the three
months ended September 30, 2004 reflects the benefit of
this adoption on our 2004 tax liability.

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.                                                        

15



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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.

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             |   | Nine Months  
|                              |                                                             | Ended                    |   | Ended        
|                              |                                                             | September 30,            |   | September 30,
|                              |                                                             |                          |   |              
|                              |                                                             | 2003                     |   | 2004          |     | 2003 |    | 2004
|                              |                                                             |                          |   |               |     |      |    |     
|Revenues:                     |                                                             |                          |   |               |     |      |    |      |     |  |    |    |     |  |   |   
|                              | Product                                                     |                          |   | 87            | %   |      |    | 86   | %   |  |    | 89 | %   |  |   | 88 | %  
|                              | Professional services                                       |                          |   | 13            |     |      |    | 14   |     |  |    | 11 |     |  |   | 12 |    
|                              |                                                             |                          |   |               |     |      |    |      |     |  |    |    |     |  |   |   
|                              |                                                             | Total revenues           |   |               | 100 |      |    |      | 100 |  |    |    | 100 |  |   |    | 100 | 
|Operating expenses:           |                                                             |                          |   |               |     |      |    |      |     |  |    |    |     |  |   |   
|                              | Cost of product revenues                                    |                          |   | 25            |     |      |    | 23   |     |  |    | 25 |     |  |   | 23 |    
|                              | Cost of professional services revenues                      |                          |   | 9             |     |      |    | 8    |     |  |    | 7  |     |  |   | 8  |    
|                              | Research and development                                    |                          |   | 12            |     |      |    | 12   |     |  |    | 12 |     |  |   | 13 |    
|                              | Sales and marketing                                         |                          |   | 30            |     |      |    | 30   |     |  |    | 33 |     |  |   | 33 |    
|                              | General and administrative                                  |                          |   | 14            |     |      |    | 13   |     |  |    | 18 |     |  |   | 13 |    
|                              | Amortization of intangibles resulting from
    acquisitions |                          |   | 6             |     |      |    | 3    |     |  |    | 6  |     |  |   | 3  |    
|                              | Stock-based compensation                                    |                          |   | 0             |     |      |    | 0    |     |  |    | 1  |     |  |   | 0  |    
|                              |                                                             |                          |   |               |     |      |    |      |     |  |    |    |     |  |   |   
|                              |                                                             | Total operating expenses |   |               | 96  |      |    |      | 89  |  |    |    | 102 |  |   |    | 93  | 
|                              |                                                             |                          |   |               |     |      |    |      |     |  |    |    |     |  |   |   
|Income (loss) from operations |                                                             |                          | 4 | %             |     |      | 11 | %    |     |  | (2 | )% |     |  | 7 | % 
|                              |                                                             |                          |   |               |     |      |    |      |     |  |    |    |     |  |   |   



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

Revenues.Our total
revenues for the three months ended September 30, 2004 were
$29.8 million, representing an increase of
$4.2 million, or 16.4%, as compared to $25.6 million
for the three months ended September 30, 2003.

Product revenues, including domestic and
international, for the three months ended September 30,
2004 were $25.5 million, representing an increase of
$3.3 million, or 14.7%, as compared to $22.2 million
for the three months ended September 20, 2003. A detail of
our total product revenues by classification is as follows:

|                               |                        |               |      |      |  |   |      |      | 
|------------------------------ | ---------------------- | ------------- | ---- | ---- |  | - | ---- | ---- | 
|                               |                        |              
|                               |                        | Three Months 
|                               |                        | Ended        
|                               |                        | September 30,
|                               |                        |              
|                               |                        | 2003          |      | 2004
|                               |                        |               |      |     
|                               |                        |              
|                               |                        | (In millions)
|Recurring ratable revenues     |                        | $             | 15.7 |      |  | $ | 19.4 |     
|Non-recurring ratable revenues |                        |               | 5.5  |      |  |   | 5.0  |     
|Other product revenues         |                        |               | 1.0  |      |  |   | 1.1  |     
|                               |                        |               |      |      |  |   |      |     
|                               | Total product revenues |               | $    | 22.2 |  |   | $    | 25.5 | 
|                               |                        |               |      |      |  |   |      |     

16



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The increase in recurring ratable revenues was
primarily due to a $1.5 million increase in revenues from
Blackboard Learning Systemlicenses, a $700,000 increase
in hosting revenues, a $500,000 increase in revenues from
Blackboard Community Systemlicenses, a $400,000 increase
in revenues from Blackboard Content Systemlicenses and a
$400,000 increase in revenues from Blackboard Transaction
Systemlicenses. These increases in 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 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 a decrease in sales and shipments of
Blackboard Transaction Systemhardware during the three
months ended September 30, 2004 as compared to prior
periods. Other product revenues were relatively consistent
between the periods.

Of our total revenues, our total international
revenues for the three months ended September 30, 2004 were
$4.0 million, representing an increase of $826,000, or
25.9%, as compared to $3.2 million for the three months
ended September 30, 2003. International product revenues,
which consist primarily of recurring ratable revenues, were
$3.6 million for the three months ended September 30,
2004, representing an increase of $758,000 or 27.0%, as compared
to $2.8 million for the three months ended
September 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 primarily from 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 and 2004, 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 September 30, 2004 were $4.3 million,
representing an increase of $944,000, or 28.1%, as compared to
$3.4 million for the three months ended September 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 Blackboard Learning Systementerprise
version licensees, which generally purchase greater volumes of
our service offerings.

Cost of product
revenues.Our cost of product revenues
for the three months ended September 30, 2004 was
$6.8 million, representing an increase of $285,000, or
4.4%, as compared to $6.5 million for the three months
ended September 30, 2003. The increase in costs of product
revenues was primarily due to a $700,000 increase in our
technical support group expenses primarily due to increased
personnel-related costs to provide improved service to our
clients and a $250,000 increase in costs related to the
Blackboard Content System. These increases were primarily
offset by a decrease in Blackboard Transaction Systemhardware costs due to the decrease in sales and shipments of
Blackboard Transaction Systemhardware during the three
months ended September 30, 2004 as compared to prior
periods. Cost of product revenues as a percentage of product
revenues decreased to 26.7% for the three months ended
September 30, 2004 from 29.4% for the three months ended
September 30, 2003, due primarily to the decrease in
Blackboard Transaction Systemhardware sales and
shipments during the three months ended September 30, 2004.
Blackboard Transaction Systemhardware sales generally
have lower gross margins than our software product sales.

Cost of professional services
revenues.Our cost of professional
services revenues for the three months ended September 30,
2004 was $2.4 million, representing an increase of
$192,000, or 8.8%, from $2.2 million for the three months
ended September 30, 2003. The increase in cost of
professional services revenues is primarily due to a $400,000
increase in personnel-related costs due to an increase in
headcount and salaries, offset by a $250,000 decrease in
subcontractor costs. Cost of professional services revenues as a
percentage of

17



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professional services revenues decreased to 55.2%
for the three months ended September 30, 2004 from 65.0%
for the three months ended September 30, 2003. The decrease
in cost of professional services revenues as a percentage of
professional services revenues is primarily due to an increase
in utilization rates, an increase in hourly bill rates and a
decrease in subcontractor costs for the three months ended
September 30, 2004 as compared to the three months ended
September 30, 2003.


Research and development
expenses.Our research and development
expenses for the three months ended September 30, 2004 were
$3.5 million, representing an increase of $557,000, or
18.6%, as compared to $3.0 million for the three months
ended September 30, 2003. The increase in research and
development expenses was primarily attributable to a $200,000
increase in professional services costs and a $200,000 increase
in personnel-related costs for the three months ended
September 30, 2004 as compared to the three months ended
September 30, 2003. These increases are due to our
continued development efforts to increase the functionality of
our products.

Sales and marketing
expenses.Our sales and marketing
expenses for the three months ended September 30, 2004 were
$9.1 million, representing an increase of
$1.4 million, or 18.9%, as compared to $7.6 million
for the three months ended September 30, 2003. The increase
in sales and marketing expenses was attributable to a $560,000
increase in general marketing activities, a $580,000 increase in
sales and marketing personnel-related costs and a $500,000
increase in reseller costs. These increases were offset by a
$350,000 decrease in bonus costs due to lower than expected
quarterly sales attainment.

General and administrative
expenses.Our general and
administrative expenses for the three months ended
September 30, 2004 were $4.0 million, representing an
increase of $280,000, or 7.6%, as compared to $3.7 million
for the three months ended September 30, 2003. The increase
in general and administrative expenses was due to a $200,000
increase in professional services costs associated with being a
public company and a $130,000 increase in professional services
costs related to the implementation of a new customer
relationship management system.

Net interest income
(expense).Our net interest income for
the three months ended September 30, 2004 was $136,000,
compared to net interest expense of $125,000 for the three
months ended September 30, 2003. The increase in net
interest income was primarily due to higher cash balances during
the three months ended September 30, 2004 than the three
months ended September 30, 2003 resulting from the receipt
of proceeds from our IPO in June 2004 and repayment of
outstanding debt during current and prior periods.

Income taxes.Our
benefit for income taxes for the three months ended
September 30, 2004 was $250,000 compared to a provision for
income taxes of $300,000 for the three months ended
September 30, 2003. During 2004, the Internal Revenue
Service issued an Internal Revenue Bulletin  Revenue
Procedure 2004-34, which allows for greater consistency between
GAAP and income tax revenue recognition for companies that
recognize revenues in a ratable manner. During the three months
ended September 30, 2004, we determined that we will adopt
this method for our 2004 and subsequent income tax filings. As a
result of this adoption, we will recognize cumulative income tax
expense adjustments which will decrease our federal and state
taxable income by approximately $34.0 million. The benefit
for income taxes for the three months ended September 30,
2004 reflects the benefit of this adoption on our 2004 tax
liability.

Net income.As a
result of the foregoing, we reported net income of
$3.5 million for the three months ended September 30,
2004 compared to net income of $591,000 for the three months
ended September 30, 2003.



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | Nine Months Ended September 30, 2004
    Compared to Nine Months Ended September 30,
    2003

Revenues.Our total
revenues for the nine months ended September 30, 2004 were
$81.4 million, representing an increase of
$12.9 million, or 18.8%, as compared to $68.5 million
for the nine months ended September 30, 2003.

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Product revenues, including domestic and
international, for the nine months ended September 30, 2004
were $71.4 million, representing an increase of
$10.2 million, or 16.6%, as compared to $61.2 million
for the nine months ended September 30, 2003. A detail of
our total product revenues by classification is as follows:

|                               |                        |               |      |      |  |   |      |      | 
|------------------------------ | ---------------------- | ------------- | ---- | ---- |  | - | ---- | ---- | 
|                               |                        |              
|                               |                        | Nine Months  
|                               |                        | Ended        
|                               |                        | September 30,
|                               |                        |              
|                               |                        | 2003          |      | 2004
|                               |                        |               |      |     
|                               |                        |              
|                               |                        | (In millions)
|Recurring ratable revenues     |                        | $             | 42.5 |      |  | $ | 53.9 |     
|Non-recurring ratable revenues |                        |               | 15.2 |      |  |   | 14.6 |     
|Other product revenues         |                        |               | 3.5  |      |  |   | 2.9  |     
|                               |                        |               |      |      |  |   |      |     
|                               | Total product revenues |               | $    | 61.2 |  |   | $    | 71.4 | 
|                               |                        |               |      |      |  |   |      |     

The increase in recurring ratable revenues was
primarily due to a $4.7 million increase in revenues from
Blackboard Learning Systemlicenses, a $2.1 million
increase in revenues from Blackboard Transaction Systemlicenses, a $2.0 million increase in hosting revenues,
a $1.7 million increase in revenues from Blackboard
Community Systemlicenses and a $600,000 increase in
Blackboard Content Systemlicenses. These increases in
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 as compared to a Blackboard Learning
System  Basic Editionlicense.

The decrease in non-recurring ratable revenues
was primarily due to a decrease in sales and shipments of
Blackboard Transaction Systemhardware during the nine
months ended September 30, 2004 as compared to prior
periods. The decrease in other product revenues was due to a
decrease in publisher marketing fees related to revenues
recognized during the nine months ended September 30, 2003
from a large non-recurring sale.

Of our total revenues, our total international
revenues for the nine months ended September 30, 2004 were
$12.1 million, representing an increase of
$3.1 million, or 34.6%, as compared to $9.0 million
for the nine months ended September 30, 2003. International
product revenues, which consist primarily of recurring ratable
revenues, were $10.5 million, representing an increase of
$2.4 million, or 35.8%, as compared to $7.6 million
for the nine months ended September 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 System licenses resulting from prior period sales
to new and existing clients, including a prior period sale to
one large client. The increase in international Blackboard
Learning Systemrevenues 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 and 2004, 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 nine
months ended September 30, 2004 were $9.9 million,
representing an increase of $2.6 million, or 36.1%, as
compared to $7.3 million for the nine months ended
September 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 Blackboard Learning Systementerprise version licensees, which generally purchase
greater volumes of our service offerings.

Cost of product
revenues.Our cost of product revenues
for the nine months ended September 30, 2004 was
$18.8 million, representing an increase of
$1.4 million, or 7.9%, compared to $17.4 million for
the nine

19



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months ended September 30, 2003. The
increase in costs of product revenues was primarily due to a
$1.9 million increase in our technical support group
expenses primarily due to increased personnel-related costs to
provide improved service to our clients and a $400,000 increase
in costs related to the Blackboard Content System. These
increases were offset by a $600,000 decrease in Blackboard
Transaction System hardware costs due to the decrease in
sales and shipments of Blackboard Transaction System
hardware during the three months ended September 30, 2004
as compared to the three months ended September 30, 2003
and lower sublicense costs on the renewal of our licenses. The
cost of sublicenses is generally lower after the initial year of
the sale. Cost of product revenues as a percentage of product
revenues decreased to 26.4% for the nine months ended
September 30, 2004 from 28.5% for the nine months ended
September 30, 2003, due primarily to the decrease in
Blackboard Transaction System hardware sales and
shipments during the three months ended September 30, 2004
and lower sublicense costs. Blackboard Transaction System
hardware sales have lower gross margins than our software
product sales.


Cost of professional services
revenues.Our cost of professional
services revenues for the nine months ended September 30,
2004 was $6.0 million, representing an increase of
$919,000, or 18.0%, from $5.1 million for the nine months
ended September 30, 2003. The increase in cost of
professional services revenues is due to a $500,000 increase in
personnel-related costs due to an increase in headcount and
salaries and a $400,000 increase in subcontractor costs. Cost of
professional services revenues as a percentage of professional
services revenues decreased to 60.4% for the nine months ended
September 30, 2004 from 69.7% for the nine months ended
September 30, 2003. The decrease in cost of professional
services revenues as a percentage of professional services
revenues is primarily due to an increase in utilization rates
and an increase in hourly bill rates for the nine months ended
September 30, 2004 as compared to the nine months ended
September 30, 2003.

Research and development
expenses.Our research and development
expenses for the nine months ended September 30, 2004 were
$10.4 million, representing an increase of
$2.0 million, or 23.6%, as compared to research and
development expenses of $8.4 million for the nine months
ended September 30, 2003. The increase in research and
development expenses was primarily attributable to a $750,000
increase in personnel-related costs, a $300,000 increase in
relocation and recruiting costs and a $305,000 increase in
professional services. These increases are due to an increase in
headcount and development efforts related to our continued
efforts to increase the functionality of our products.

Sales and marketing
expenses.Our sales and marketing
expenses for the nine months ended September 30, 2004 were
$26.9 million, representing an increase of
$4.5 million, or 20.3%, as compared to sales and marketing
expenses of $22.4 million for the nine months ended
September 30, 2003. The increase in sales and marketing
expenses was attributable to a $2.0 million increase in
personnel-related costs due to increase in headcount and
salaries, a $1.3 million increase in general marketing
activities, including our User Conference in March 2004 that was
larger than in prior years, and a $500,000 increase in reseller
costs.

General and administrative
expenses.Our general and
administrative expenses for the nine months ended
September 30, 2004 were $10.7 million, representing a
decrease of $1.7 million, or 13.4%, as compared to general
and administrative expenses of $12.4 million for the nine
months ended September 30, 2003. This decrease was due
primarily to a $900,000 decrease in legal and accounting
expenses associated with litigation and international operations
during the nine months ended September 30, 2003 and a
$600,000 decrease in personnel-related costs associated with
movement of some personnel to other functional areas within the
Company during 2003.

Net interest income
(expense).Our net interest income for
the nine months ended September 30, 2004 was $57,000,
compared to net interest expense of $359,000 for the nine months
ended September 30, 2003. The increase in net interest
income was primarily due to higher cash balances during the nine
months ended September 30, 2004 than the nine months ended
September 30, 2003 resulting from the receipt of proceeds
from our IPO in June 2004 and repayment of outstanding debt
during current and prior periods.

Income taxes.Our
provision for income taxes for the nine months ended
September 30, 2004 was $362,000, compared to $614,000 for
the nine months ended September 30, 2003. During 2004, the
Internal Revenue Service issued an Internal Revenue
Bulletin  Revenue Procedure 2004-34, which allows for
greater

20



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##### 



consistency between GAAP and income tax revenue
recognition for companies that recognize revenues in a ratable
manner. During the three months ended September 30, 2004,
we determined that we will adopt this method for our 2004 and
subsequent income tax filings. As a result of this adoption, we
will recognize cumulative income tax expense adjustments, which
will decrease our federal and state taxable income by
approximately $34.0 million. The provision for income taxes
for the nine months ended September 30, 2004 reflects the
benefit of this adoption on our 2004 tax liability.


Net income (loss).As a result of the foregoing, we reported net income of
$5.3 million for the nine months ended September 30,
2004, compared to a net loss of $2.8 million for the nine
months ended September 30, 2003.

Liquidity and Capital Resources

We recognize revenues ratably on annually
renewable agreements, which results in deferred revenues.
Deferred revenues as of September 30, 2004 were
$67.0 million, representing an increase of
$14.1 million, or 26.6%, 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
September 30, 2004 than the fourth quarter of 2003, offset
by the recognition of revenues from prior period sales.

Our cash and cash equivalents were
$86.3 million at September 30, 2004 as compared to
$30.5 million at December 31, 2003.

Net cash provided by operating activities was
$20.4 million during the nine months ended
September 30, 2004 as compared to $9.3 million during
the nine months ended September 30, 2003. This change was
primarily due to increased sales to new and existing clients and
improved collections during the nine months ended
September 30, 2004 as compared to the nine months ended
September 30, 2003.

Net cash used in investing activities was
$6.4 million during the nine months ended
September 30, 2004, a decrease of $1.6 million, or
20.3%, from $8.0 million during the nine months ended
September 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. in January 2003. Exclusive of the SA Cash
acquisition, investing activities increased $2.9 million
for the nine months ended September 30, 2004 as compared to
the nine months ended September 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
$41.8 million during the nine months ended
September 30, 2004 as compared to net cash provided by
financing activities of $458,000 during the nine months ended
September 30, 2003. This change was primarily due to the
$50.9 million in proceeds from our IPO 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 a total of
$2.0 million in payments to The George Washington
University in January 2004 and July 2004.

We have an $8.0 million working capital line
of credit and a $4.0 million equipment line of credit, each
with Silicon Valley Bank. The working capital line of credit
expires in November 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 September 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 nine months ended September 30,
2004, we are obligated to recognize revenues of at least
$22.3 million. We were in compliance with all covenants as
of September 30, 2004. If we were not compliant with these
covenants, the bank would have the right to

21



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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 September 30, 2004, $974,000 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 September 30, 2004, we
had $8.0 million in borrowings available under the working
capital line of credit and no amount was outstanding.


We believe our existing cash and cash equivalents
and cash provided by operating activities will be sufficient to
meet our working capital and capital expenditure needs over the
next 12 months. Our future capital requirements will depend
on many factors, including our rate of revenue growth, the
expansion of our marketing and sales activities, the timing and
extent of spending to support product development efforts and
expansion into new territories, the timing of introductions of
new products or services, the timing of enhancements to existing
products and services and the timing of capital expenditures. To
the extent that available funds are insufficient to fund our
future activities, we may need to raise additional funds through
public or private equity or debt financing. Although we are
currently not a party to any agreement or letter of intent with
respect to potential investments in, or acquisitions of,
complementary businesses, services or technologies, we may enter
into these types of arrangements in the future, which could also
require us to seek additional equity or debt financing.
Additional funds may not be available on terms favorable to us
or at all.

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.

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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 five
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 September 30, 2004, we
had an accumulated deficit of $127.3 million. We can give
no assurance that operating losses will not occur 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 business grows, we anticipate increasing our operating
expenses to expand our product development, technical support,
sales

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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

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and defects in our products. We would expect
that, despite our testing, errors will be 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.

25



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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.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Our future success depends on our ability
    to continue to retain and attract qualified
    employees.

Our future success depends upon the continued
service of our key management, technical, sales and other
critical personnel. Whether we are able to execute effectively
on our business strategy will depend in large part on how well
key management and other personnel perform in their positions
and are integrated within our company. Key personnel have left
our company over the years, and there may be additional
departures of key personnel from time to time. In addition, as
we seek to expand our global organization, the hiring of
qualified sales, technical and support personnel has been
difficult due to the limited number of qualified professionals.
Failure to attract, integrate and retain key personnel would
result in disruptions to our operations, including adversely
affecting the timeliness of product releases, the successful
implementation and completion of company initiatives and the
results of our operations.



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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

26



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##### 



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.




| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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

27



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##### 



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 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

28



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##### 



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.




| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | 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

29



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##### 



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.




| |                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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

30



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##### 



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.




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

Our principal exposure to market risk relates to
changes in interest rates. At September 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 September
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 September 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.

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
September 30, 2004. Based on this evaluation, our principal
executive officer and principal financial officer concluded
that, as of September 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.

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.

31



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##### 



PART II. OTHER INFORMATION



|        |                                                                 
|------- | ----------------------------------------------------------------
|Item 2. | Unregistered Sales of Equity Securities and
    Use of Proceeds.

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 Regulation D promulgated thereunder:

On August 20, 2004, we issued
22,158 shares of our common stock to a warrant holder
pursuant to the cashless exercise of a warrant held by the
warrant holder.

On August 23, 2004, we issued
88,839 shares of our common stock to certain warrant
holders pursuant to the cashless exercises of warrants held by
such warrant holders.

The following table summarizes the expenses
incurred by us in connection with our initial public offering in
June 2004, 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  |           | Expenses Paid to or |  |                |        |               
|Discounts and |           | for the             |  |                |        |               
|Commissions   |           | Underwriters        |  | Other Expenses |        | Total Expenses
|              |           |                     |  |                |        |               
|$             | 3,992,459 |                     |  | $              | 50,000 |                |  | $ | 2,097,037 |  |  | $ | 6,139,496 | 

Our net proceeds from our initial public offering
after expenses were approximately $50.9 million. From
June 17, 2004 until September 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 remaining 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 September 30,
2004 were $86.3 million.



|        |          
|------- | ---------
|Item 6. | Exhibits.

(a) Exhibits:

|            |    |             |  |                                                                                                                       
|----------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 10 | .1(*)       |  | Ninth Amendment to the Amended and Restated Loan
    and Security Agreement between Blackboard and Silicon Valley Bank
|            | 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                



---



|    |                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------
|(*) | Incorporated herein by reference to the exhibits
    to the Companys Current Report on Form 8-K filed on
    September 2, 2004.

32



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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.



| |     |                     
| | --- | --------------------
| | By: | /s/ PETER Q. REPETTI

| |                                                  
| | -------------------------------------------------
| |                                                  
| | Peter Q. Repetti                                 
| | Chief Financial Officer                          
| | (On behalf of the registrant and as
    Principal
| | Financial Officer)                               

Date: November 10, 2004

33