e10vq

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, 2009
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.)

650 Massachusetts Avenue, N.W. Washington D.C. (Address of Principal Executive Offices)		20001 (Zip Code)

Registrant’s Telephone Number, Including Area Code:

(202) 463-4860

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

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


Class		Outstanding at October 31, 2009

Common Stock, $0.01 par value		32,546,577

PART I — FINANCIAL INFORMATION


Item 1.	*Consolidated Financial Statements*

BLACKBOARD INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)


	December 31,			September 30,
	2008			2009
	(As adjusted (1))

Current assets:
Cash and cash equivalents	$	141,746		$	132,049
Accounts receivable, net of allowance for doubtful accounts of $926 and $2,159, respectively		92,529			93,018
Inventories		1,783			2,140
Prepaid expenses and other current assets		8,361			12,235
Deferred tax asset, current portion		1,796			5,255
Deferred cost of revenues		7,126			7,609

Total current assets		253,341			252,306
Deferred tax asset, noncurrent portion		18,897			9,067
Investment in common stock warrant		1,990			3,124
Restricted cash		4,249			4,139
Property and equipment, net		31,950			36,286
Other assets		549			936
Goodwill		263,850			329,287
Intangible assets, net		75,126			80,586

Total assets	$	649,952		$	715,731

Current liabilities:
Accounts payable	$	2,579		$	5,524
Accrued expenses		27,879			35,880
Deferred rent, current portion		345			975
Deferred revenues, current portion		179,238			200,472

Total current liabilities		210,041			242,851
Convertible senior notes, net of debt discount of $15,077 and $10,388, respectively		149,923			154,612
Deferred rent, noncurrent portion		10,959			11,674
Deferred revenues, noncurrent portion		5,554			6,536

Total liabilities		376,477			415,673

Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized, and no shares issued or outstanding		—			—
Common stock, $0.01 par value; 200,000,000 shares authorized; 31,359,738 and 32,203,982 shares issued and outstanding, respectively		314			322
Additional paid-in capital		356,683			383,060
Accumulated deficit		(83,522	)		(83,324	)

Total stockholders’ equity		273,475			300,058

Total liabilities and stockholders’ equity	$	649,952		$	715,731

See notes to unaudited consolidated financial statements.


(1)		On January 1, 2009, the Company adopted ASC 470, “Debt,” (Prior authoritative literature: FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion”) which required adjustment of prior periods. See Note 7 of notes to unaudited consolidated financial statements.

BLACKBOARD INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2009			2008			2009
	(As adjusted (1))						(As adjusted (1))

Revenues:
Product	$	74,332		$	87,862		$	205,818		$	251,369
Professional services		8,758			10,546			21,295			25,597

Total revenues		83,090			98,408			227,113			276,966
Operating expenses:
Cost of product revenues, excludes $4,572 and $2,480 for the three months ended September 30, 2008 and 2009, respectively, and $13,232 and $8,153 for the nine months ended September 30, 2008 and 2009, respectively, in amortization of acquired technology included in amortization of intangibles resulting from acquisitions shown below(2)		19,626			23,849			53,597			67,055
Cost of professional services revenues(2)		4,994			5,550			15,078			15,020
Research and development(2)		10,514			11,428			30,191			33,848
Sales and marketing(2)		24,079			24,670			67,699			74,008
General and administrative(2)		12,716			14,636			37,931			42,476
Patent related (proceeds) impairment and other costs		—			—			(3,313	)		10,984
Amortization of intangibles resulting from acquisitions		9,729			9,282			28,137			25,728

Total operating expenses		81,658			89,415			229,320			269,119

Income (loss) from operations		1,432			8,993			(2,207	)		7,847
Other (expense) income, net:
Interest expense		(3,004	)		(3,015	)		(9,073	)		(8,877	)
Interest income		339			36			1,487			202
Other (expense) income		(233	)		300			3,857			1,103

(Loss) income before benefit (provision) for income taxes		(1,466	)		6,314			(5,936	)		275
Benefit (provision) for income taxes		2,351			(2,007	)		2,243			(77	)

Net income (loss)	$	885		$	4,307		$	(3,693	)	$	198

Net income (loss) per common share:
Basic	$	0.03		$	0.13		$	(0.12	)	$	0.01

Diluted	$	0.03		$	0.13		$	(0.12	)	$	0.01

Weighted average number of common shares:
Basic		31,184,215			32,073,491			30,754,997			31,682,212

Diluted		32,203,249			33,045,337			30,754,997			32,466,179

(2) Includes the following amounts related to stock-based compensation:
Cost of product revenues	$	244		$	347		$	679		$	923
Cost of professional services revenues		8			138			240			398
Research and development		195			284			547			768
Sales and marketing		1,549			1,501			4,630			4,625
General and administrative		1,636			1,775			5,015			5,270

See notes to unaudited consolidated financial statements.


(1)		On January 1, 2009, the Company adopted ASC 470, “Debt,” (Prior authoritative literature: FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion”) which required adjustment of prior periods. See Note 7 of notes to unaudited consolidated financial statements.

BLACKBOARD INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


	Nine Months
	Ended September 30,
	2008			2009
	(As adjusted (1))

Cash flows from operating activities
Net (loss) income	$	(3,693	)	$	198
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Deferred tax benefit		(6,094	)		(2,455	)
Excess tax benefit from stock-based compensation		(1,903	)		(763	)
Amortization of debt discount		4,777			4,689
Depreciation and amortization		11,642			14,045
Amortization of intangibles resulting from acquisitions		28,137			25,728
Patent related impairment charge		—			7,447
Change in allowance for doubtful accounts		245			1,233
Stock-based compensation		11,111			11,984
Gain on investment in common stock warrant		(3,980	)		(1,136	)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		(41,818	)		987
Inventories		59			(357	)
Prepaid expenses and other current assets		(2,545	)		(3,319	)
Deferred cost of revenues		(6	)		(483	)
Accounts payable		(2,027	)		2,885
Accrued expenses		1,006			8,780
Deferred rent		8,575			1,345
Deferred revenues		51,932			19,002

Net cash provided by operating activities		55,418			89,810
Cash flows from investing activities
Acquisitions, net of cash acquired		(132,992	)		(91,784	)
Purchases of property and equipment		(22,297	)		(15,919	)
Purchases of available-for-sale securities		—			(6,586	)
Redemptions of available-for-sale securities		—			6,586
Payments for patent enforcement costs		(3,141	)		(414	)
Proceeds from sale of investment in common stock warrant		1,990			—

Net cash used in investing activities		(156,440	)		(108,117	)
Cash flows from financing activities
Releases of letters of credit		777			110
Payments on letters of credit		(127	)		—
Excess tax benefits from stock-based compensation		1,903			763
Proceeds from exercise of stock options		10,657			7,737

Net cash provided by financing activities		13,210			8,610
Net decrease in cash and cash equivalents		(87,812	)		(9,697	)
Cash and cash equivalents at beginning of period		206,558			141,746

Cash and cash equivalents at end of period	$	118,746		$	132,049

See notes to unaudited consolidated financial statements.


(1)		On January 1, 2009, the Company adopted ASC 470, “Debt,” (Prior authoritative literature: FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion”) which required adjustment of prior periods. See Note 7 of notes to unaudited consolidated financial statements.

BLACKBOARD INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2008 and 2009

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 and Organization

Blackboard Inc. (the “Company”) is a leading provider of enterprise software applications and related services to the education industry. The Company’s clients include colleges, universities, schools and other education providers, textbook publishers and student-focused merchants who serve these education providers and their students, and corporate and government clients.


2.	Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles 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 U.S. 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 and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the full fiscal year. The consolidated balance sheet at December 31, 2008 has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by U.S. 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, 2007 and 2008 and for each of the three years in the period ended December 31, 2008 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2009.

In May 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 855, “Subsequent Events” (“ASC 855”) (Prior authoritative literature: Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events”). ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Company evaluated all events or transactions that occurred after September 30, 2009 through November 6, 2009, the date these unaudited financial statements were issued.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all significant intercompany balances and transactions.

Foreign Currency Translation

The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. The Company remeasures the monetary assets and liabilities of its foreign subsidiaries, which are maintained in the local currency ledgers, at the rates of exchange in effect at month end. Revenues and expenses recorded in the local currency during the period are translated using average exchange rates for each month. Non-monetary assets and liabilities are translated using historical rates. Resulting adjustments from the remeasurement process are included in other income (expense) in the accompanying consolidated statements of operations.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,

BLACKBOARD INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

Fair Value Measurements

As of January 1, 2008, the Company adopted ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”) (Prior authoritative literature: SFAS No. 157, “Fair Value Measurements,” except as it applied to the nonfinancial assets and nonfinancial liabilities subject to FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157”, which the Company adopted effective January 1, 2009). ASC 820 defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value and expands required disclosure about fair value measurements. The ASC 820 hierarchy ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value and requires assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:

Level 1 — quoted prices in active markets for identical assets and liabilities


	Level 2 —	inputs other than Level 1 quoted prices in active markets that are either directly or indirectly observable

Level 3 — unobservable inputs that are corroborated by little or no market data

The Company evaluates assets and liabilities subject to fair value measurements on a recurring and nonrecurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made by the Company. The following table sets forth the Company’s assets and liabilities that were measured at fair value as of September 30, 2009, by level within the fair value hierarchy (in thousands):


			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	September 30, 2009		(Level 1)		(Level 2)		(Level 3)

Assets:
Cash equivalents(1)	$	97,768	$	97,768	$	—	$	—
Investment in common stock warrant		3,124		—		—		3,124

Total Assets	$	100,892	$	97,768	$	—	$	3,124

Liabilities:
Convertible senior notes(2)	$	163,350	$	163,350	$	—	$	—


(1)		Cash equivalents consist of money market funds with original maturity dates of less than three months for which the fair value is based on quoted market prices.

(2)		The fair value of the Company’s convertible senior notes is based on the quoted market price.

Assets and liabilities that are measured at fair value on a non-recurring basis include intangible assets and goodwill. These items are recognized at fair value when they are considered to be other-than-temporarily impaired. During the nine months ended September 30, 2009, there were no required fair value measurements for assets and liabilities at fair value on a non-recurring basis.

BLACKBOARD INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table provides a reconciliation of the beginning and ending balances for the major class of assets measured at fair value using significant unobservable inputs (Level 3) (in thousands):


	Investment in
	Common Stock
	Warrant

Balance on December 31, 2008	$	—
Transfers in and/or (out) of Level 3		1,990
Total gains (losses) realized / unrealized included in earnings		1,134
Purchases, sales, issuances and settlements, net		—

Balance on September 30, 2009	$	3,124

During the nine months ended September 30, 2009, the Company transferred its investment in common stock warrant out of Level 2 to Level 3. The classification of an instrument as Level 2 versus Level 3 involves judgment based on a variety of subjective factors, including determining whether a market is considered inactive based on an evaluation of the frequency and size of transactions occurring in a certain financial instrument or similar class of financial instruments. Determining an inactive market requires a judgmental evaluation that includes comparing the recent trading activities to historical experience. During the nine months ended September 30, 2009, the Company determined that although some market data was available the investment in common stock warrant was principally valued using the Company’s own assumptions in calculating the estimate of fair value.

As of April 1, 2009, the Company adopted ASC 825, “Financial Instruments,” (Prior authoritative literature: FASB Staff Position (“FSP”) SFAS 107-1 and Accounting Principles Board (“APB”) 28-1 “Interim Disclosures about Fair Value of Financial Instruments”) which requires disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim as well as annual financial statements. Due to their short-term nature, the carrying amounts reported in the consolidated financial statements approximate the fair value for accounts receivables, accounts payables and accrued expenses.

Investment in Common Stock Warrant

The Company holds a warrant to purchase common stock in an entity that provides technology support services to educational institutions, including the Company’s customers, that is exercisable for 9.9% of the common shares of the entity. This common stock warrant meets the definition of a derivative as defined by ASC 815, “Derivatives and Hedging” (ASC 815”) (Prior authoritative literature: FASB SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activity”). During the nine months ended September 30, 2009, other income of approximately $1.1 million was recorded in the Company’s consolidated statements of operations related to the fair value adjustment of the common stock warrant. In determining the fair value of the common stock warrant, the Company considered an equity transaction between this entity and a venture capital firm during the nine months ended September 30, 2009 as well as other measures that the Company evaluates in calculating fair value. The fair value of the common stock warrant of approximately $3.1 million is recorded as investment in common stock warrant on the Company’s consolidated balance sheet as of September 30, 2009. The Company will continue to evaluate the fair value of this instrument in subsequent reporting periods and any changes in value will be recognized in the consolidated statements of operations.

Business Combinations

Effective January 1, 2009, the Company adopted ASC 805, “Business Combinations” (“ASC 805”) (Prior authoritative literature: SFAS No. 141(R), a revision of SFAS No. 141, “Business Combinations”). Under ASC 805, an acquiring entity is required to recognize all of the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred; that restructuring costs generally be

BLACKBOARD INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

expensed in periods subsequent to the acquisition date; and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of income tax provision or benefit. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life.

The excess of the purchase price of an acquired business over the fair value of the net tangible and intangible assets acquired is recorded as goodwill. Goodwill is not deductible for tax purposes. In accordance with ASC 350, “Intangibles-Goodwill and Other,” (Prior authoritative literature: SFAS No. 142, “Goodwill and Other Intangible Assets”) goodwill will not be amortized but instead will be tested for impairment at least annually (more frequently if indicators of impairment arise). In the event that management determines that the goodwill has become impaired, the Company will incur an accounting charge for the amount of the impairment during the fiscal quarter in which the determination is made.

Income Taxes

Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting bases and the tax bases of assets and liabilities. Deferred tax assets are also recognized for tax net operating loss carryforwards. These deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when such amounts are expected to reverse or be utilized. The realization of total deferred tax assets is contingent upon the generation of future taxable income. Valuation allowances are provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized.

Income tax provision or benefit includes U.S. federal, state and local and foreign income taxes and is based on pre-tax income or loss. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company’s annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local and foreign income taxes and the ability of the Company to use tax credits and net operating loss carryforwards. The Company has elected to utilize the principles applicable under tax law in ordering of tax benefits to determine whether an excess tax benefit was realized under ASC 718, “Compensation-Stock Compensation” (“ASC 718”) (Prior authoritative literature: FASB Statement No. 123 (revised 2005), “Share-Based Payment”).

The Company follows the provisions of ASC 740, “Income Taxes” (“ASC 740”) (Prior authoritative literature: FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”). ASC 740 clarifies the accounting for uncertainty in income taxes. It prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the more-likely-than-not recognition threshold should be measured as the largest amount of the tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. The Company recognizes interest and penalties related to income tax matters in income tax expense. All tax years since 1998 are subject to examination. All of the Company’s unrecognized tax benefit liability would affect the Company’s effective tax rate if recognized. The Company does not expect its unrecognized tax benefit liability to change significantly over the next 12 months.

Revenue Recognition and Deferred Revenue

The Company’s revenues are derived from two sources: product sales and professional services sales. Product revenues include software license fees, subscription fees from customers accessing its on-demand application services, hardware, premium support and maintenance, and hosting revenues. Professional services revenues include training and consulting services. Revenue from software licenses and maintenance is recorded in accordance with the ASC 985, “Software” (“ASC 985”) (Prior authoritative literature: American Institute of Certified Public Accountants’ Statement of Position (“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”). The Company’s software does not require significant modification and customization services. Where services are not

BLACKBOARD INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

essential to the functionality of the software, the Company begins 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.

The Company does not have vendor-specific objective evidence (“VSOE”) of fair value for support and maintenance separate from software for the majority of its products. Accordingly, when licenses are sold in conjunction with the Company’s support and maintenance, license revenue is recognized over the term of the maintenance service period. When licenses of certain offerings are sold in conjunction with support and maintenance where the Company does have VSOE, the Company recognizes the license revenue upon delivery of the license and recognizes the support and maintenance revenue over the term of the maintenance service period.

The Company’s hardware revenues are derived from two types of transactions: sales of hardware in conjunction with the Company’s software licenses, which are referred 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. VSOE of the fair value for the separate components of bundled hardware-software systems has not been determined. 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 the Company’s client.

Hosting revenues are recorded in accordance with ASC 985 (Prior authoritative literature: Emerging Issues Task Force (“EITF”) 00-3, “Application of AICPA SOP 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware”). Accordingly, hosting fees and set-up fees are recognized ratably over the term of the hosting agreement.

The Company’s sales arrangements may include professional services sold separately under professional services agreements that include training and consulting services. Revenues from these arrangements are accounted for separately from the license revenue because they meet the criteria for separate accounting, as defined in ASC 985. The more significant factors considered in determining whether revenues should be accounted for separately include the nature of the professional services, such as consideration of whether the professional services are essential to the functionality of the licensed product, degree of risk, availability of professional services from other vendors and timing of payments. Professional services that are sold separately from license revenue are recognized as the professional services are performed on a time-and-materials basis.

The Company does not offer specified upgrades or incrementally significant discounts. Advance payments are recorded as deferred revenues until the product is shipped, services are delivered or obligations are met and the revenues can be recognized. Deferred revenues represent the excess of amounts invoiced over amounts recognized as revenues. Non-specified upgrades of the Company’s product are provided only on a when-and-if-available basis. Any contingencies, such as rights of return, conditions of acceptance, warranties and price protection, are accounted for under ASC 985. The effect of accounting for these contingencies included in revenue arrangements has not been material.

Cost of Revenues and Deferred Cost of Revenues

Cost of revenues includes all direct materials, direct labor, direct shipping and handling costs, telecommunications costs related to the Blackboard Connect product, and those indirect costs related to revenue such as indirect labor, materials and supplies, equipment rent, and amortization of software developed internally and software license rights. Cost of product revenues excludes amortization of acquired technology intangibles resulting from acquisitions, which is included as amortization of intangibles acquired in acquisitions. Amortization expense related to acquired technology was $4.6 million and $2.5 million for the three months ended September 30, 2008 and 2009, respectively and $13.2 million and $8.2 million for the nine months ended September 30, 2008 and 2009, respectively.

BLACKBOARD INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Deferred cost of revenues represents the cost of hardware (if sold as part of a complete system) and software that is purchased and has been sold in conjunction with the Company’s products. These costs are recognized as cost of revenues proportionally and over the same period that deferred revenue is recognized as revenues in accordance with ASC 605, “Revenue Recognition” (Prior authoritative literature: SAB Topic 13). The Company does not have transactions in which the deferred cost of revenues exceeds deferred revenues.

Basic and Diluted Net Income (Loss) per Common Share

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

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2009		2008			2009
	(Unaudited)
	(In thousands, except share and per share amounts)

Net income (loss)	$	885	$	4,307	$	(3,693	)	$	198

Weighted average shares outstanding, basic		31,184,215		32,073,491		30,754,997			31,682,212
Dilutive effect of:
Stock options related to the purchase of common stock		1,019,034		971,846		—			783,967

Weighted average shares outstanding, diluted		32,203,249		33,045,337		30,754,997			32,466,179

Basic net income (loss) per common share	$	0.03	$	0.13	$	(0.12	)	$	0.01

Diluted net income (loss) per common share	$	0.03	$	0.13	$	(0.12	)	$	0.01

The dilutive effect of options to purchase an aggregate of 2,045,401 and 2,577,649 shares were not included in the computations of diluted net loss per share for the three months ended September 30, 2008 and 2009, respectively, as their effect would be anti-dilutive. The dilutive effect of options to purchase an aggregate of 4,923,373 and 3,383,508 shares were not included in the computations of diluted net loss per share for the nine months ended September 30, 2008 and 2009, respectively, as their effect would be anti-dilutive.

Stock-Based Compensation

The Company accounts for stock-based compensation expense in accordance with ASC 718 which requires the measurement and recognition of compensation expense for share-based awards based on the estimated fair value on the date of grant. The Company estimates the fair value of each share-based award on the date of grant using the Black-Scholes option-pricing model. Fair value estimates determined in accordance with this model are affected by the Company’s stock price as well as estimates regarding a number of variables including expected stock price volatility over the term of the award and projected employee stock option exercise behaviors.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Comprehensive Net Income (Loss)

Comprehensive net income (loss) includes net income (loss), combined with unrealized gains and losses not included in earnings and reflected as a separate component of stockholders’ equity. There were no material differences between net income (loss) and comprehensive net income (loss) for the three and nine months ended September 30, 2008 and 2009.

Recent Accounting Pronouncements

In September 2009, the FASB ratified Accounting Standards Update (“ASU”) 2009-13 (Prior authoritative literature: EITF Issue No. 08-1, “Revenue Arrangements with Multiple Deliverables”) which supersedes ASC 605 (Prior authoritative literature: EITF No. 00-21 “Revenue Arrangements with Multiple Deliverables”) and addresses criteria for separating the consideration in multiple-element arrangements. ASU 2009-13 will require companies to allocate the overall consideration to each deliverable using a best estimate of the selling price of individual deliverables in the arrangement in the absence of VSOE or other third-party evidence of the selling price. ASU 2009-13 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption will be permitted. The Company is currently evaluating the potential impact of the adoption of ASU 2009-13 on its consolidated results of operations and financial condition.

In September 2009, the FASB also ratified ASU 2009-14 (Prior authoritative literature: EITF No. 09-3, “Certain Revenue Arrangements That Include Software Elements”) which modifies the scope of ASC 985 (Prior authoritative literature: American Institute of Certified Public Accountants’ SOP 97-2, “Software Revenue Recognition”) to exclude (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionally. ASU 2009-14 has an effective date that is consistent with ASU 2009-13. The Company is currently evaluating the potential impact of the adoption of ASU 2009-14 on its consolidated results of operations and financial condition.


3.	Mergers and Acquisitions

Terriblyclever Design, LLC Asset Purchase

On July 10, 2009, the Company acquired the business assets of Terriblyclever Design, LLC, (“Terriblyclever”) a provider of mobile software applications for the education industry and the creator of MobilEdu^tm, a suite of mobile web applications for the education industry. The Blackboard MobilEdu service enables educational institutions to deliver campus life services and content to mobile devices to connect students, parents, faculty, prospective students and alumni to the campus experience. The purchase price was $3.5 million in cash, of which $1.5 million was paid during the three months ended September 30, 2009, $1.7 million was paid in October 2009 and $0.3 million is to be paid in July 2010, plus up to $0.5 million in contingent payments, subject to certain adjustments.

The merger was accounted for under the purchase method of accounting in accordance with ASC 805. Approximately $0.1 million of assets were acquired and approximately $0.1 million of liabilities were assumed. The assets acquired and liabilities assumed were recorded at their fair values as of July 10, 2009. Of the total estimated purchase price, $1.8 million has been allocated to definite-lived intangible assets acquired which consist of the value assigned to Terriblyclever’s customer relationships of $0.6 million and developed and core technology of $1.2 million. The Company amortizes the value of Terriblyclever’s customer relationships over five years and amortizes the developed and core technology over three years. The amortization of customer relationships and developed and core technology is not deductible for tax purposes. Approximately $1.7 million has been allocated to goodwill and represents factors including expected synergies from combining operations.

The unaudited pro forma financial information for the three and nine months ended September 30, 2008 and 2009 does not include revenue and net loss for Terriblyclever as the results are immaterial.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ANGEL Learning, Inc. Merger

On May 8, 2009, the Company completed its merger with ANGEL Learning, Inc. (“ANGEL”) pursuant to the Agreement and Plan of Merger dated May 1, 2009. Pursuant to the Agreement and Plan of Merger, the Company paid merger consideration of $101.3 million, which includes $87.4 million in cash and $13.9 million in shares of the Company’s common stock, or approximately 0.5 million shares of common stock. The effective cash portion of the purchase price of ANGEL before transaction costs was approximately $80.8 million, net of ANGEL’s May 8, 2009 cash balance of approximately $6.6 million. The Company has included the financial results of ANGEL in its consolidated financial statements beginning May 9, 2009.

ANGEL is a leading developer of e-learning software to the U.S. education industry. The Company believes the merger with ANGEL supports the Company’s long-term strategic direction and the demands for innovative technology in the education industry. Management believes that the merger with ANGEL will help the Company to create a stronger, more flexible supporter of teaching, learning and student engagement and will accelerate the pace of innovation and interoperability in e-learning.

The merger was accounted for under the purchase method of accounting in accordance with ASC 805. Assets acquired and liabilities assumed were recorded at their fair values as of May 8, 2009. The total preliminary purchase price was $101.3 million, excluding the estimated acquisition related transaction costs of approximately $1.5 million and excluding acquired cash. Acquisition-related transaction costs include investment banking, legal and accounting fees, and other external costs directly related to the merger.

Preliminary Purchase Price Allocation

Under the purchase method of accounting, the total estimated purchase price is allocated to ANGEL’s net tangible liabilities and intangible assets based on their estimated fair values as of May 8, 2009. The excess of the purchase price over the net tangible liabilities and identifiable intangible assets was recorded as goodwill. The preliminary allocation of the purchase price as shown in the table below was based upon management’s preliminary valuation, which was based on estimates and assumptions that are subject to change. The areas of the purchase price allocation that are not yet finalized relate primarily to income and non-income based taxes. The preliminary estimated purchase price is allocated as follows (in thousands):


Cash and cash equivalents	$	6,579
Accounts receivable		2,629
Prepaid expenses and other current assets		897
Property and equipment		2,133
Other assets		43
Accounts payable		(59	)
Other accrued liabilities		(941	)
Deferred tax liabilities, net		(8,911	)
Deferred revenue		(3,213	)

Net tangible liabilities acquired		(843	)
Definite-lived intangible assets acquired		36,760
Goodwill		65,388

Total estimated purchase price	$	101,305

Prior to the end of the measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation retrospectively.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Of the total estimated purchase price, a preliminary estimate of $0.8 million has been allocated to net tangible liabilities acquired, and $36.8 million has been allocated to definite-lived intangible assets acquired. Definite-lived intangible assets of $36.8 million consist of the value assigned to ANGEL’s customer relationships of $33.3 million, developed and core technology of $2.5 million, and trademarks of $1.0 million. Approximately $65.4 million has been allocated to goodwill and represents factors including expected synergies from combining operations.

The value assigned to ANGEL’s customer relationships was determined by discounting the estimated cash flows associated with the existing customers as of the date the merger was consummated taking into consideration estimated attrition of the existing customer base. The estimated cash flows were based on revenues for those existing customers net of operating expenses and net of capital charges for other tangible and intangible assets that contribute to the projected cash flow from those customers. The projected revenues were based on assumed revenue growth rates and customer renewal rates. Operating expenses were estimated based on the supporting infrastructure expected to sustain the assumed revenue growth rates. Net capital charges for assets that contribute to projected customer cash flow were based on the estimated fair value of those assets. A discount rate of 16% was deemed appropriate for valuing the existing customer base and was based on the risks associated with the respective cash flows taking into consideration the Company’s weighted average cost of capital. The Company amortizes the value of ANGEL’s customer relationships proportionally to the respective discounted cash flows over five years. Amortization of customer relationships is not deductible for tax purposes.

The value assigned to ANGEL’s developed and core technology was determined by discounting the estimated future cash flows associated with the existing developed and core technologies to their present value. Developed and core technology, which consists of products that have reached technological feasibility, includes products in ANGEL’s current product line. The revenue projections used to value the developed and core technology were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by ANGEL and its competitors. A discount rate of 16% was deemed appropriate for valuing developed and core technology and was based on the risks associated with the respective cash flows taking into consideration the Company’s weighted average cost of capital. The Company amortizes the developed and core technology on a straight-line basis over one year. Amortization of developed and core technology is not deductible for tax purposes.

The value assigned to ANGEL’s trademarks was determined by discounting the estimated royalty savings associated with an estimated royalty rate for the use of the trademarks to their present value. The trademarks consist of ANGEL’s trade name and various trademarks related to its existing product lines. The royalty rates used to value the trademarks were based on estimates of prevailing royalty rates paid for the use of similar trade names and trademarks in market transactions involving licensing arrangements of companies that operate in service-related industries. A discount rate of 16% was deemed appropriate for valuing ANGEL’s trademarks and was based on the risks associated with the respective royalty savings taking into consideration the Company’s weighted average cost of capital. The Company amortizes the trademarks on a straight-line basis over eighteen months. Amortization of trademarks is not deductible for tax purposes.

As a result of the ANGEL merger, the Company recorded net deferred tax liabilities of approximately $8.9 million in its preliminary purchase price allocation. This balance is comprised primarily of approximately $14.5 million in a deferred tax liability resulting primarily from the estimated amortization expense of identified intangibles and $2.4 million in a deferred tax liability resulting from the fair value adjustment to acquired deferred revenues, offset in part by approximately $8.2 million in deferred tax assets that relate primarily to federal and state net operating loss carryforwards.

Deferred Revenue

In connection with the preliminary purchase price allocation, the estimated fair value of the support obligation assumed from ANGEL in connection with the merger was determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs relating to fulfilling the obligation plus a normal

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

profit margin. The sum of the costs and operating profit approximates the amount that the Company would be required to pay a third party to assume the support obligation. The estimated costs to fulfill the support obligation were based on the historical direct costs related to providing the support services and correcting any errors in ANGEL’s software products. These estimated costs did not include any costs associated with selling efforts or research and development or the related fulfillment margins on these costs. Profit associated with selling efforts is excluded because ANGEL had concluded the selling effort on the support contracts prior to May 8, 2009. The estimated profit margin was determined to be approximately 22% which approximates the Company’s operating profit margin to fulfill the obligations. In allocating the purchase price, the Company recorded an adjustment to reduce the carrying value of ANGEL’s May 8, 2009 deferred support revenue by approximately $6.3 million to $3.2 million which represents the Company’s estimate of the fair value of the support obligation assumed. As former ANGEL customers renew these support contracts, the Company will recognize revenue for the full value of the support contracts over the remaining term of the contracts, the majority of which are one year.

Pro Forma Financial Information

The unaudited financial information in the table below summarizes the combined results of operations of the Company and ANGEL on a pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of each of the periods presented. The pro forma financial information for all periods presented also includes amortization expense from acquired intangible assets, adjustments to interest expense, interest income and related tax effects.

The unaudited pro forma financial information for the nine months ended September 30, 2009 combines the historical results for the Company for the nine months ended September 30, 2009 and the historical results for ANGEL for the period from January 1, 2009 to May 8, 2009. The unaudited pro forma financial information for the three and nine months ended September 30, 2008 combines the historical results for the Company for the three and nine months ended September 30, 2008 and the historical results for ANGEL for the same period and also gives effect to the Company’s merger with The NTI Group, Inc. (“NTI”) on January 31, 2008 as if it had occurred on January 1, 2008. The consolidated financial results for the Company for the three months ended September 30, 2009 include revenue and net loss for ANGEL for the period from July 1, 2009 to September 30, 2009 of $4.9 million and $1.3 million, respectively. The consolidated financial results for the Company for the nine months ended September 30, 2009 include revenues and net loss for ANGEL for the period from May 9, 2009 to September 30, 2009 of $5.7 million and $5.2 million, respectively.


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2008			2009		2008			2009
	(Unaudited)
	(In thousands, except per share amounts)

Total revenues	$	88,569		$	98,408	$	245,695		$	285,129
Net (loss) income	$	(1,897	)	$	4,307	$	(8,276	)	$	(3,328	)
Basic net (loss) income per common share	$	(0.06	)	$	0.13	$	(0.27	)	$	(0.11	)
Diluted net (loss) income per common share	$	(0.06	)	$	0.13	$	(0.27	)	$	(0.11	)

NTI Group, Inc. Merger

On January 31, 2008, the Company completed its merger with NTI pursuant to the Agreement and Plan of Merger dated January 11, 2008. Pursuant to the Agreement and Plan of Merger, the Company paid merger consideration of $184.8 million, which includes $140.1 million in cash and $44.7 million in shares of the Company’s common stock, or 1.3 million shares of common stock. The effective cash portion of the purchase price of NTI before transaction costs was approximately $138.5 million, net of NTI’s January 31, 2008 cash balance of

BLACKBOARD INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

approximately $1.6 million. The Company has included the financial results of NTI in its consolidated financial statements beginning February 1, 2008. Up to an additional 0.4 million shares of the Company’s common stock may be issued contingent on the achievement of certain performance milestones. NTI has since been renamed Blackboard Connect Inc.

NTI is a provider of mass messaging and notifications solutions for educational and government organizations via voice, email, short message service (SMS) and other text-receiving devices. The Company believes the merger with NTI supports the Company’s long-term strategic direction and the demands for innovative technology in the education industry. Management believes that the merger with NTI will help the Company meet the growing demands of its clients, including the ability to send mass communications via various means.

The merger was accounted for under the purchase method of accounting in accordance with ASC 805. Assets acquired and liabilities assumed were recorded at their fair values as of January 31, 2008. The total purchase price was $187.8 million, including the acquisition related transaction costs of approximately $3.0 million. Acquisition-related transaction costs include investment banking, legal and accounting fees, and other external costs directly related to the merger.

During the three months ended March 31, 2009, the Company recorded an adjustment to decrease goodwill and increase deferred tax assets by $1.6 million related to transaction costs from the NTI merger that are deductible for tax purposes. Of the total purchase price, $141.4 million was allocated to goodwill. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net tangible and intangible assets acquired. Goodwill is not deductible for tax purposes. Definite-lived intangible assets were $60.3 million and consist of the value assigned to NTI’s customer relationships of $42.1 million, developed and core technology of $17.4 million and trademarks of $0.8 million. Net tangible liabilities acquired were $13.9 million.

During the nine months ended September 30, 2009, approximately 0.2 million shares of the Company’s common stock held in escrow as part of the NTI merger were returned to the Company in order to satisfy certain acquisition-related liabilities of approximately $8.0 million which was paid during the nine months ended September 30, 2009. The Company retired the shares of common stock during the nine months ended September 30, 2009 and the shares of common stock are not included as issued and outstanding as of September 30, 2009.


4.	Stock-Based Compensation

Stock Incentive Plans

As of September 30, 2009, approximately 4.3 million shares of common stock were available for future grants under the Company’s Amended and Restated 2004 Stock Incentive Plan (the “2004 Plan”) and no options were available for future grants under the Company’s Amended and Restated Stock Incentive Plan adopted in 1998. Awards granted under the 2004 Plan generally vest over a three to four-year period and have an eight to ten-year expiration period. In October 2009, options to purchase 7,250 shares and 125,000 shares of restricted stock were granted under the 2004 Plan. In June 2009, the Board of Directors of the Company and the Company’s stockholders approved an increase in the total number of shares of common stock issuable under the 2004 Stock Incentive Plan from 8,700,000 to 10,500,000.

The compensation cost that has been recognized in the unaudited consolidated statements of operations for the Company’s stock incentive plans was $11.1 million and $12.0 million for the nine months ended September 30, 2008 and 2009, respectively. The total income tax benefit recognized in the unaudited consolidated statements of operations for stock-based compensation arrangements was $1.9 million and $0.8 million for the nine months ended September 30, 2008 and 2009, respectively. For stock subject to graded vesting, the Company has utilized the “straight-line” method for allocating compensation cost by period.

BLACKBOARD INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock Options

A summary of stock option activity under the Company’s stock incentive plans as of September 30, 2009, and changes during the nine months then ended are as follows (aggregate intrinsic value in thousands):


	Number of			Weighted Average		Aggregate
	Shares			Price/Share		Intrinsic Value

Exercisable at December 31, 2008		2,416,333		$	22.91
Outstanding at December 31, 2008		4,864,260		$	27.80
Granted		1,129,800		$	28.94
Exercised		(428,377	)	$	19.01	$	6,262
Cancelled		(264,417	)	$	32.16

Outstanding at September 30, 2009		5,301,266		$	28.54	$	50,385

Exercisable at September 30, 2009		2,711,809		$	26.14	$	32,253

The Company has utilized the Black-Scholes valuation model to estimate the fair value of stock options during all periods. The following table presents the weighted-average assumptions used in valuing the equity grants during the three and nine months ended September 30, 2008 and 2009 and a discussion of the Company’s inputs.


	Three Months Ended September 30						Nine Months Ended September 30,
	2008			2009			2008			2009

Dividend yield		0	%		0	%		0	%		0	%
Expected volatility		39.5	%		47.2	%		39.6	%		47.5	%
Risk-free interest rate		2.9	%		2.5	%		2.9	%		1.8	%
Expected life of options		4.9 years			4.9 years			4.9 years			4.9 years
Forfeiture rate		15.8	%		18.5	%		11.2	%		15.0	%

Dividend yield — The Company has never declared or paid dividends on its common stock and does not anticipate paying dividends in the foreseeable future.

Expected volatility — Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company used the Company’s daily historical volatility since January 1, 2006 to calculate the expected volatility.

Risk-free interest rate — This is the average U.S. Treasury rate (having a term that most closely approximates the expected life of the option) for the period in which the option was granted.

Expected life of the options — This is the period of time that the equity grants are expected to remain outstanding. The Company calculates the expected life of the options as prescribed under the provisions of ASC 718 (Prior authoritative literature: Staff Accounting Bulletin (“SAB”) No. 110, “Share-Based Payment”) and utilizes historical information about the specific exercise behavior of its grantees to determine the expected life. For grants that have been exercised, the Company uses actual exercise data to estimate option exercise timing within the valuation model. For grants that have not been exercised, the Company generally uses the midpoint between the end of the vesting period and the contractual life of the grant to estimate option exercise timing. Options granted during the three and nine months ended September 30, 2008 and 2009 have a maximum term of eight years.

Forfeiture rate — This is the estimated percentage of equity grants that are expected to be forfeited or cancelled on an annual basis before becoming fully vested. The Company estimates the forfeiture rate based on past turnover data, level of employee receiving the equity grant and vesting terms and revises the rate if subsequent information, such as the passage of time, indicates that the actual number of instruments that will vest is likely to

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

differ from previous estimates. The cumulative effect on current and prior periods of a change in the estimated number of instruments likely to vest is recognized in compensation cost in the period of the change.

The weighted average remaining contractual life for all options outstanding under the Company’s stock incentive plans at September 30, 2009 was 5.6 years. The weighted average remaining contractual life for exercisable stock options at September 30, 2009 was 4.7 years. The weighted average fair market value of the options at the date of grant for options granted during the nine months ended September 30, 2009 was $12.37 per share. As of September 30, 2009, there was approximately $29.7 million of total unrecognized compensation cost related to unvested stock options granted under the Company’s option plans. The cost is expected to be recognized through September 2013 with a weighted average recognition period of approximately 1.4 years.

Restricted Stock

Restricted stock is an award of shares of the Company’s common stock with restrictions on transfer that lapse as the award vests. A summary of restricted stock activity under the Company’s stock incentive plans as of September 30, 2009, and changes during the nine months then ended are as follows (aggregate intrinsic value in thousands):


	Number of			Weighted Average		Aggregate
	Shares			Fair Value/Share		Intrinsic Value

Unvested at December 31, 2008		70,000		$	29.25
Granted		216,000			29.24
Vested and issued		—
Cancelled		(17,500	)		29.07

Unvested at September 30, 2009		268,500		$	29.25	$	10,144

The fair value of each restricted stock award is estimated using the intrinsic value method which is based on the closing price on the date of grant. Compensation expense for restricted stock awards is recognized ratably over the vesting period on a straight-line basis. The weighted average fair market value of restricted stock at the date of grant for awards granted during the nine months ended September 30, 2009 was $29.24 per share.

As of September 30, 2009, there was approximately $6.4 million of total unrecognized compensation cost related to unvested restricted stock awards granted under the Company’s stock incentive plans. The cost is expected to be recognized through June 2013 with a weighted average recognition period of approximately 2.0 years.


5.	Inventories

The carrying amounts of inventories as of December 31, 2008 and September 30, 2009 are as follows:


	December 31,		September 30,
	2008		2009
	(In thousands)

Raw materials	$	678	$	874
Work-in-process		547		580
Finished goods		558		686

Total inventories	$	1,783	$	2,140

BLACKBOARD INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


6.	Goodwill and Intangible Assets

Goodwill and intangible assets consist of the following:


							Weighted-
							Average
	December 31,			September 30,			Amortization
	2008			2009			Period
	(In thousands)						(In years)

Goodwill	$	263,850		$	329,287

Acquired technology	$	65,255		$	68,955			2.9
Accumulated amortization		(49,199	)		(57,352	)

Acquired technology, net		16,056			11,603

Contracts and customer lists		94,732			130,675			5.0
Accumulated amortization		(43,704	)		(62,848	)

Contracts and customer lists, net		51,028			67,827

Trademarks and domain names		1,016			1,976			2.3
Accumulated amortization		(443	)		(876	)

Trademarks and domain names, net		573			1,100

Patents and related costs		8,198			101			2.0
Accumulated amortization		(729	)		(45	)

Patents and related costs, net		7,469			56

Intangible assets, net	$	75,126		$	80,586

Intangible assets from acquisitions are amortized over three to five years. Amortization expense related to intangible assets resulting from acquisitions was approximately $28.1 million and $25.7 million for the nine months ended September 30, 2008 and 2009, respectively.

During the nine months ended September 30, 2008, the Company capitalized $2.6 million in costs of defending and protecting patents, due to costs incurred in a suit against Desire2Learn, Inc. (“Desire2Learn”) in which the Company had alleged infringement of one of its patents. Amortization expense related to patent and related costs was approximately $0.4 million for the nine months ended September 30, 2008.

During the nine months ended September 30, 2009, the Company recorded a non-cash $7.5 million impairment charge related to capitalized patent costs due to the reversal of the 2008 patent judgment verdict against Desire2Learn (see Note 8). This charge is included in patent related (proceeds) impairment and other costs on the unaudited consolidated statement of operations for the nine months ended September 30, 2009.


7.	Notes Payable

In June 2007, the Company issued and sold $165.0 million aggregate principal amount of 3.25% Convertible Senior Notes due 2027 (the “Notes”) in a public offering. The Company used a portion of the proceeds to terminate and satisfy in full the Company’s existing indebtedness of $19.4 million outstanding pursuant to the borrowings under a $70.0 million senior secured credit facilities agreement with Credit Suisse (the “Credit Agreement”) and to pay all fees and expenses incurred in connection with the termination. The Company was not required to pay any prepayment premium or penalties in connection with the early termination of the Credit Agreement.

The Notes bear interest at a rate of 3.25% per year on the principal amount, accruing from June 20, 2007. Interest is payable semi-annually on January 1 and July 1. The Company made interest payments of $2.8 million on

BLACKBOARD INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

December 31, 2007 and $2.7 million on each of July 1, 2008, December 30, 2008 and June 30, 2009. The Notes will mature on July 1, 2027, subject to earlier conversion, redemption or repurchase.

The Notes will be convertible, under certain circumstances, into cash or a combination of cash and the Company’s common stock at an initial base conversion rate of 15.4202 shares of common stock per $1,000 principal amount of Notes. The base conversion rate represents an initial base conversion price of approximately $64.85. If at the time of conversion the applicable price of the Company’s common stock exceeds the base conversion price, the conversion rate will be increased by up to an additional 9.5605 shares of the Company’s common stock per $1,000 principal amount of Notes, as determined pursuant to a specified formula. In general, upon conversion of a Note, the holder of such Note will receive cash equal to the principal amount of the Note and the Company’s common stock for the Note’s conversion value in excess of such principal amount. In accordance with the earnings per share method outlined in ASC 260, “Earnings Per Share,” (Prior authoritative literature: EITF 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share,”) the diluted earnings per share effect of the shares that would be issued will be accounted for only if the average market price of the Company’s common stock price during the period is greater than the Notes’ conversion price.

Because the Notes contain an adjusting conversion rate provision based on the Company’s common stock price and anti-dilution adjustment provisions, at each reporting period, the Company evaluates whether any adjustments to the conversion price would alter the effective conversion rate from the stated conversion rate and result in an “in-the-money” conversion. Whenever an adjustment to the conversion rate results in an increase in the number of shares of common stock issuable upon conversion of the Notes, the Company would recognize a beneficial conversion feature in the period such a determination is made and amortize it over the remaining life of the Notes. As of September 30, 2009, a beneficial conversion feature under the Notes did not exist.

Holders may surrender their Notes for conversion at any time prior to the close of business on the business day immediately preceding the maturity date for the Notes only under the following circumstances: (1) prior to January 1, 2027, with respect to any calendar quarter beginning after June 30, 2007, if the closing price of the Company’s common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 130% of the base conversion price per share of the Notes on such last trading day; (2) on or after January 1, 2027, until the close of business on the business day preceding maturity; (3) during the five business days after any five consecutive trading day period in which the trading price per $1,000 principal amount of Notes for each day of that period was less than 95% of the product of the closing price of the Company’s common stock and the then applicable conversion rate of the Notes; or (4) upon the occurrence of other events or circumstances as specifically defined in the Notes.

If a make-whole fundamental change, as defined in the Notes, occurs prior to July 1, 2011, the Company may be required in certain circumstances to increase the applicable conversion rate for any Notes converted in connection with such fundamental change by a specified number of shares of the Company’s common stock. The Notes may not be redeemed by the Company prior to July 1, 2011, after which they may be redeemed by the Company, in whole at any time, or in part from time to time, on or after July 1, 2011 at a redemption price, payable in cash, of 100% of the principal amount of the Notes plus accrued and unpaid interest, if any. Holders of the Notes may require the Company to repurchase some or all of the Notes on July 1, 2011, July 1, 2017 and July 1, 2022, or in the event of certain fundamental change transactions, at 100% of the principal amount on the date of repurchase, plus accrued and unpaid interest, if any, payable in cash. If such an event occurs, the Company would be required to pay the entire outstanding principal amount of $165.0 million in cash, in addition to any other rights that the investors may have under the Notes.

The Notes are unsecured senior obligations and are effectively subordinated to all of the Company’s existing and future senior indebtedness to the extent of the assets securing such debt, and are effectively subordinated to all indebtedness and liabilities of the Company’s subsidiaries, including trade payables.

BLACKBOARD INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Adoption ASC 470 (Prior authoritative literature: FSP APB 14-1)

On January 1, 2009, the Company adopted ASC 470, “Debt” (“ASC 470”) (Prior authoritative literature: FSP No. APB 14-1, “Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion”). ASC 470 requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer’s nonconvertible debt borrowing rate. The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. ASC 470 requires retrospective application. Accordingly, the accompanying prior period consolidated financial statements have been adjusted to reflect the adoption of this standard.

The Notes fall within the scope of ASC 470 because their terms include partial cash settlement. Accordingly, the debt and conversion components of the Notes are accounted for separately. We have determined that our nonconvertible borrowing rate at the time the Notes were issued was 6.9%. Accordingly, we estimated the fair value of the liability (debt) component as $144.1 million upon issuance of the Notes. The excess of the proceeds received over the estimated fair value of the liability component totaling $20.9 million was allocated to the conversion (equity) component. The carrying amount of the equity component of the Notes was $13.5 million and $9.6 million at December 31, 2008 and September 30, 2009, respectively, and is recorded as a debt discount and is netted against the remaining principal amount outstanding on the Company’s consolidated balance sheets.

In connection with obtaining the Notes, the Company incurred $4.5 million in debt issuance costs, of which $4.0 million was allocated to the liability component and $0.5 million was allocated to the equity component upon the adoption of ASC 470. The carrying amount of the liability component of the debt issuance costs is $1.6 million and $0.8 million at December 31, 2008 and September 30, 2009, respectively, and is recorded as a debt discount and is netted against the remaining principal amount outstanding on the Company’s consolidated balance sheets.

The debt discount, which includes the equity component and the liability component of the debt issuance costs, is being amortized as interest expense using the effective interest method through July 1, 2011, the first redemption date of the Notes. The Company recorded total interest expense of approximately $3.0 million for each of the three months ended September 30, 2008 and 2009, which consisted of $1.4 million in interest expense at a rate of 3.25% per year for each of the three months ended September 30, 2008 and 2009 and $1.6 million in amortization of the debt discount for each of the three months ended September 30, 2008 and 2009. The Company recorded total interest expense of approximately $8.9 million and $8.8 million for the nine months ended September 30, 2008 and 2009, respectively, which consisted of $4.0 million in interest expense at a rate of 3.25% per year for each of the nine months ended September 30, 2008 and 2009 and $4.9 million and $4.8 million in amortization of the debt discount for the nine months ended September 30, 2008 and 2009, respectively.

The principal amount of the liability component of the Notes was $165.0 million at December 31, 2008 and September 30, 2009. The unamortized debt discount was $15.1 million and $10.4 million at December 31, 2008 and September 30, 2009, respectively. The net carrying amount of the liability component of the Notes was $149.9 million and $154.6 million at December 31, 2008 and September 30, 2009, respectively.

BLACKBOARD INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The impact of the adoption of ASC 470 on the results of operations for the three months ended September 30, 2008 and 2009 is presented below (in thousands, except for per share data):


	Three Months Ended September 30, 2008									Three Months Ended September 30, 2009
				Incremental									Incremental
				Impact of						Before the			Impact of
	As Previously			Adoption of						Impact of			Adoption of
	Reported			ASC 470			As Adjusted			ASC 470			ASC 470			As Reported

Interest expense	$	(1,798	)	$	(1,206	)	$	(3,004	)	$	(1,721	)	$	(1,294	)	$	(3,015	)
Benefit (Provision) for income taxes		2,351			—			2,351			(2,007	)		—			(2,007	)
Net income (loss)		2,091			(1,206	)		885			5,601			(1,294	)		4,307
Net income (loss) per common share:
Basic	$	0.07		$	(0.04	)	$	0.03		$	0.17		$	(0.04	)	$	0.13
Diluted	$	0.06		$	(0.03	)	$	0.03		$	0.17		$	(0.04	)	$	0.13

The impact of the adoption of ASC 470 on the results of operations for the nine months ended September 30, 2008 and 2009 is presented below (in thousands, except for per share data):


	Nine Months Ended September 30, 2008									Nine Months Ended September 30, 2009
				Incremental									Incremental
				Impact of						Before the			Impact of
	As Previously			Adoption of						Impact of			Adoption of
	Reported			ASC 470			As Adjusted			ASC 470			ASC 470			As Reported

Interest expense	$	(5,545	)	$	(3,528	)	$	(9,073	)	$	(5,104	)	$	(3,773	)	$	(8,877	)
Benefit (Provision) for income taxes		2,243			—			2,243			(77	)		—			(77	)
Net (loss) income		(165	)		(3,528	)		(3,693	)		3,971			(3,773	)		198
Net (loss) income per common share:
Basic	$	(0.01	)	$	(0.11	)	$	(0.12	)	$	0.13		$	(0.12	)	$	0.01
Diluted	$	(0.01	)	$	(0.11	)	$	(0.12	)	$	0.12		$	(0.11	)	$	0.01

The impact of the adoption of ASC 470 on balance sheet line items as of December 31, 2008 and September 30, 2009 is presented below (in thousands):


	December 31, 2008									September 30, 2009
				Incremental									Incremental
				Impact of						Before the			Impact of
	As Previously			Adoption of						Impact of			Adoption of
	Reported			ASC 470			As Adjusted			ASC 470			ASC 470			As Reported

Prepaid expenses and other current assets	$	8,518		$	(157	)	$	8,361		$	12,386		$	(151	)	$	12,235
Deferred tax assets		28,942			(8,249	)		20,693			22,571			(8,249	)		14,322
Notes payable, net of debt discount		163,172			(13,249	)		149,923			164,088			(9,476	)		154,612
Additional paid-in capital		344,698			11,985			356,683			371,075			11,985			383,060
Accumulated deficit		(76,380	)		(7,142	)		(83,522	)		(72,409	)		(10,915	)		(83,324	)

On January 1, 2009, the Company adopted ASC 815 (Prior authoritative literature: EITF No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”) which clarifies how to determine whether certain instruments or features are indexed to an entity’s own stock. ASC 815 outlines a two-step approach to evaluate the instrument’s contingent exercise provisions and the instrument’s settlement provisions. The Company evaluated the provisions of ASC 815 and the embedded conversion options in the Notes and determined that the embedded conversion options are indexed to the Company’s own stock and, therefore, do not require bifurcation and separate accounting.

BLACKBOARD INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


8.	Commitments and Contingencies

On July 26, 2006, the Company filed a complaint in the United States District Court for the Eastern District of Texas alleging that Desire2Learn infringes U.S. Patent No. 6,988,138 held by the Company (the “’138 Patent”). On February 22, 2008, the jury returned a verdict in the Company’s favor on infringement and validity. On May 7, 2008, the court entered judgment for the Company in the amount of $3.3 million plus post-judgment interest accruing at 6% per annum. On June 11, 2008, Desire2Learn paid the Company the sum of $3.3 million, which consisted of the judgment amount plus accrued interest. On July 27, 2009, the United States Court of Appeals for the Federal Circuit affirmed in part, reversed in part, and dismissed in part the March 2008 decision of the district court in which the Company was awarded approximately $3.3 million in damages and interest. The Federal Circuit reversed the district court’s decision regarding the proper construction of independent claim 36, invalidating claims 36, 37 and 38 of the ’138 patent and affirmed the district court’s decision that claims 1-35 of the ’138 patent are invalid as indefinite. The decision did not reach all claims or contentions asserted by the parties with respect to infringement of claims 36, 37 and 38. The Federal Circuit’s decision also did not reach claims 39 through 44 of the ’138 patent, which remain valid and enforceable. The Company intends to seek review of the Federal Circuit decision. In the event that the Federal Circuit decision becomes final and non-appealable, the Company will be required to repay $3.3 million previously received plus 6% interest per annum within 10 business days. As a result of the Federal Circuit decision, for the nine months ended September 30, 2009, the Company recorded expenses of approximately $3.5 million related to the reversal of the district court judgment and a non-cash charge of $7.5 million as the result of impairment of capitalized patent costs.

On August 19, 2009, the Company filed suit in United States District Court for the District of Columbia against Steven Zimmers and Daniel Davis. The Company is seeking a declaratory judgment and unspecified damages relating to contract between the Company and the defendants. The defendants have filed counterclaims alleging breach of the agreement by the Company and seeking damages of less than $14.0 million. The initial court status conference occurred on October 14, 2009 and the matter remains pending.

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


9.	Quarterly Financial Information

The Company’s quarterly operating results normally fluctuate as a result of seasonal variations in its business, principally due to the timing of client budget cycles and student attendance at client facilities. Historically, the Company has had lower new sales in its first and fourth quarters than in the remainder of the year. The Company’s expenses, however, do not vary significantly with these changes, and, as a result, such expenses do not fluctuate significantly on a quarterly basis. Historically, the Company has performed a disproportionate amount of its professional services, which are recognized as incurred, in its second and third quarters each year. The Company expects quarterly fluctuations in operating results to continue as a result of the uneven seasonal demand for its licenses and services offerings.


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; a superintendant sending mass communications via voice, email and text messages to parents and students; 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, textbook publishers, student-focused merchants, and corporate and government clients.

On May 8, 2009, we completed our merger with ANGEL Learning, Inc. (“ANGEL”) pursuant to the Agreement and Plan of Merger dated May 1, 2009. Pursuant to the Agreement and Plan of Merger, we paid merger consideration of $101.3 million, which included $87.4 million in cash and $13.9 million in shares of our common stock, or approximately 0.5 million shares of common stock. The effective cash portion of the purchase price of ANGEL before transaction costs was approximately $80.8 million, net of ANGEL’s May 8, 2009 cash balance of approximately $6.6 million. We have included the financial results of ANGEL in our consolidated financial statements beginning May 9, 2009.

On July 10, 2009, we acquired the business assets of Terriblyclever Design, LLC, a provider of software applications and the creator of MobilEdu^tm, a suite of mobile web applications for the education industry. The Blackboard MobilEdu service enables educational institutions to deliver campus life services and content to mobile devices to connect students, parents, faculty, prospective students and alumni to the campus experience. The purchase price of the transaction was $3.5 million in cash, of which $1.5 million was paid during the three months ended September 30, 2009, $1.7 million was paid in October 2009 and $0.3 million is to be paid in July 2010, plus up to $0.5 million in contingent payments, subject to certain adjustments.

We generate revenues from sales and licensing of products and from professional services. Our product revenues consist principally of revenues from annual software licenses, subscription fees from customers accessing our on-demand application services, 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 one of our three product suites: the Blackboard Academic Suite^tm, the Blackboard Commerce Suite^tm and Blackboard Connect^tm. Our suites of products include the following products: Blackboard Learning System^tm, Blackboard

Community System^tm, Blackboard Content System^tm, Blackboard Outcomes System^tm, Blackboard Portfolio System^tm, Blackboard Transaction System^tm, BbOne^tm, and Blackboard Connect^tm.

Beginning in early 2009, we renamed our three product suites:


	•	Blackboard Learn^tm;

	•	Blackboard Transact^tm; and

	•	Blackboard Connect^tm.

Blackboard Learn^tm, our web-based teaching and learning platform, is the new version of the widely deployed Blackboard Academic Suite^tm. We launched Blackboard Learn^tm, Release 9.0, our latest software release, in January 2009 as part of our multi-year, multi-release effort to deliver the next generation of Blackboard solutions, and it is available to our existing clients under their current licenses with us. Clients on the Blackboard Learn platform may license packages featuring combinations of the following modules: Course Delivery, Community Engagement, Content Management, Portfolio Management, and Outcomes Assessment. The new modules correspond to the products within the Blackboard Academic Suite as follows:


Offered in Blackboard Academic Suite^tm		Offered in Blackboard Learn^tm

The Blackboard Learning System^tm		Course Delivery module
The Blackboard Community System^tm		Community Engagement module
The Blackboard Content System^tm		Content Management module
The Blackboard Portfolio System^tm		Portfolio Management module
The Blackboard Outcomes System^tm		Outcomes Assessment module

Similarly, the Blackboard Commerce Suite^tm, the platform for our commerce and security solutions, is now offered as Blackboard Transact^tm. Blackboard Connect^tm is our alert and notification platform for our comprehensive communications and notification system solutions.

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 and amortization of intangibles resulting from acquisitions.

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, telecommunications costs related to the Blackboard Connect product, all direct materials and shipping and handling costs, employee compensation, including bonuses, stock-based compensation and benefits for personnel supporting our hosting, support and production functions, as well as related facility rent, communication costs, utilities, depreciation expense and cost of external professional services used in these functions. All of these costs are expensed as incurred. The costs of third-party software and hardware that is not bundled with software are also expensed when incurred, normally upon delivery to our client. Cost of product revenues excludes amortization of acquired technology intangibles resulting from acquisitions, which is included as amortization of intangibles acquired in acquisitions. Amortization expense related to acquired technology was $13.2 million and $8.2 million for the nine months ended September 30, 2008 and 2009, respectively.

Cost of professional services revenues primarily includes the costs of compensation, including bonuses, stock-based 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, including bonuses, stock-based 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 used in these functions. All of these costs are expensed as incurred.

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

General and administrative expenses include the costs of compensation, including bonuses, stock-based compensation and benefits for employees in the human resources, legal, finance and accounting, management information systems, facilities management, executive management and other administrative functions that 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. All of these costs are expensed as incurred.

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.

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 U.S. generally accepted accounting principles. 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, fair value measures, 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 purchase accounting and 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 fees, subscription fees from customers accessing our on-demand application services, hardware, premium support and maintenance, and hosting revenues. Professional services revenues include revenues from training and consulting services. We recognize software license and maintenance revenues in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 985, “Software” (“ASC 985”) (Prior authoritative literature: American Institute of Certified Public Accountants’ Statement of Position (“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 (“VSOE”) of fair value for our support and maintenance separate from our software for the majority of our products. 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. When licenses of certain offerings are sold in conjunction with our support and maintenance where we do have VSOE, we recognize the license revenue upon delivery of the license and recognize the support and maintenance 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 ASC 985 (Prior authoritative literature: Emerging Issues Task Force (“EITF”) 00-3, “Application of AICPA SOP 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware”). Accordingly, we recognize hosting fees and set-up fees ratably over the term of the hosting agreement.

Our sales arrangements may include professional services sold separately under professional services agreements that include training and consulting services. Revenues from these arrangements are accounted for separately from the license revenue because they meet the criteria for separate accounting, as defined in ASC 985. The more significant factors considered in determining whether revenue should be accounted for separately include the nature of the professional services, such as consideration of whether the professional services are essential to the functionality of the licensed product, degree of risk, availability of professional services from other vendors and timing of payments. Professional services that are sold separately from license revenue are recognized as the professional services are performed on a time-and-materials basis.

We do not offer specified upgrades or incrementally significant discounts. Advance payments are recorded as deferred revenues 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. Any contingencies, such as rights of return, conditions of acceptance, warranties and price protection, are accounted for under ASC 985. The effect of accounting for these contingencies included in revenue arrangements has not been material.

Allowance for doubtful accounts. We maintain an allowance for doubtful 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 doubtful accounts. We use an internal collection effort, which may include our sales and services groups as we deem appropriate. 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.

Fair Value Measurements. As of January 1, 2008, we adopted provisions of ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”) (Prior authoritative literature: Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”, except as it applied to the nonfinancial assets and nonfinancial liabilities subject to FASB Staff Position (“FSP”) No. 157-2, “Effective Date of FASB Statement No. 157”, which we adopted effective January 1, 2009). ASC 820 defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value and expands required disclosure about fair value measurements. The ASC 820 hierarchy ranks the quality and reliability of inputs, or assumptions, used in the

determination of fair value and requires assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:


	Level 1 —	quoted prices in active markets for identical assets and liabilities

	Level 2 —	inputs other than Level 1 quoted prices in active markets that are either directly or indirectly observable

	Level 3 —	unobservable inputs that are corroborated by little or no market data

We evaluate assets and liabilities subject to fair value measurements on a recurring and nonrecurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made by us.

During the nine months ended September 30, 2009, we transferred our investment in common stock warrant out of Level 2 to Level 3. The classification of an instrument as Level 2 versus Level 3 involves judgment based on a variety of subjective factors, including determining whether a market is considered inactive based on an evaluation of the frequency and size of transactions occurring in a certain financial instrument or similar class of financial instruments. Determining an inactive market requires a judgmental evaluation that includes comparing the recent trading activities to historical experience. During the nine months ended September 30, 2009, we determined that although some market data was available the investment in common stock warrant was principally valued using our own assumptions in calculating the estimate of fair value.

As of April 1, 2009, we adopted ASC 825, “Financial Instruments,” (Prior authoritative literature: FSP SFAS 107-1 and Accounting Principles Board (“APB”) 28-1 “Interim Disclosures about Fair Value of Financial Instruments”) which requires disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim as well as annual financial statements. Due to their short-term nature, the carrying amounts reported in the consolidated financial statements approximate the fair value for accounts receivables, accounts payables and accrued expenses.

Business combinations. Effective January 1, 2009, we adopted ASC 805, “Business Combinations” (“ASC 805”) (Prior authoritative literature: SFAS No. 141(R), a revision of SFAS No. 141, “Business Combinations”). Under ASC 805, an acquiring entity is required to recognize all of the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred; that restructuring costs generally be expensed in periods subsequent to the acquisition date; and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of (provision) benefit for income taxes. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life.

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 ASC 360, “Property, Plant and Equipment” (Prior authoritative literature: 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 conditions or significant technological developments could significantly impact these judgments and require adjustments to recorded asset balances.

Goodwill and intangible assets. As the result of acquisitions, any excess purchase price over the net tangible and identifiable intangible assets acquired is recorded as goodwill. A preliminary allocation of the purchase price to tangible and intangible net assets acquired is based upon a preliminary valuation and our estimates and assumptions may be subject to change. We assess the impairment of goodwill in accordance with ASC 350, “Intangibles-Goodwill and Other” (Prior authoritative literature: 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.

Based on an analysis of patents held by the Company, certain costs of defending and protecting patents may be capitalized. All costs incurred prior to filing a patent application are expensed as incurred.

Notes payable. In June 2007, we issued and sold $165.0 million aggregate principal amount of 3.25% Convertible Senior Notes due 2027 (the “Notes”) in a public offering. On January 1, 2009, we adopted ASC 470, “Debt” (“ASC 470”) (Prior authoritative literature: FSP APB 14-1, “Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion”). ASC 470 requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer’s nonconvertible debt borrowing rate. The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. ASC 470 requires retrospective application. Accordingly, the accompanying prior period consolidated financial statements have been adjusted to reflect the adoption of this standard.

In connection with obtaining the Notes, we incurred $4.5 million in debt issuance costs, of which $4.0 million was allocated to the liability component and $0.5 million was allocated to the equity component upon adoption of ASC 470. The carrying amount of the liability component of the debt issuance costs is $1.6 million and $0.8 million at December 31, 2008 and September 30, 2009, respectively, and is recorded as a debt discount and is netted against the remaining principal amount outstanding on our consolidated balance sheets.

The debt discount, which includes the equity component and the liability component of the debt issuance costs, is being amortized as interest expense using the effective interest method through July 1, 2011, the first redemption date of the Notes. We recorded total interest expense of approximately $3.0 million for each of the three months ended September 30, 2008 and 2009, which consisted of $1.4 million in interest expense at a rate of 3.25% per year for each of the three months ended September 30, 2008 and 2009 and $1.6 million in amortization of the debt discount for each of the three months ended September 30, 2008 and 2009. We recorded total interest expense of approximately $8.9 million and $8.8 million for the nine months ended September 30, 2008 and 2009, respectively, which consisted of $4.0 million in interest expense at a rate of 3.25% per year for each of the nine months ended September 30, 2008 and 2009 and $4.9 million and $4.8 million in amortization of the debt discount for the nine months ended September 30, 2008 and 2009, respectively.

September 30, 2009, respectively. The net carrying amount of the liability component of the Notes was $149.9 million and $154.6 million at December 31, 2008 and September 30, 2009, respectively.

The impact of the adoption of ASC 470 on the results of operations for the three months ended September 30, 2008 and 2009 is presented below (in thousands, except for per share data):


	Three Months Ended September 30, 2008									Three Months Ended September 30, 2009
				Incremental									Incremental
				Impact of						Before the			Impact of
	As Previously			Adoption of						Impact of			Adoption of
	Reported			ASC 470			As Adjusted			ASC 470			ASC 470			As Reported

Interest expense	$	(1,798	)	$	(1,206	)	$	(3,004	)	$	(1,721	)	$	(1,294	)	$	(3,015	)
Benefit (Provision) for income taxes		2,351			—			2,351			(2,007	)		—			(2,007	)
Net income (loss)		2,091			(1,206	)		885			5,601			(1,294	)		4,307
Net income (loss) per common share:
Basic	$	0.07		$	(0.04	)	$	0.03		$	0.17		$	(0.04	)	$	0.13
Diluted	$	0.06		$	(0.03	)	$	0.03		$	0.17		$	(0.04	)	$	0.13

The impact of the adoption of ASC 470 on the results of operations for the nine months ended September 30, 2008 and 2009 is presented below (in thousands, except for per share data):


	Nine Months Ended September 30, 2008									Nine Months Ended September 30, 2009
				Incremental									Incremental
				Impact of						Before the			Impact of
	As Previously			Adoption of						Impact of			Adoption of
	Reported			ASC 470			As Adjusted			ASC 470			ASC 470			As Reported

Interest expense	$	(5,545	)	$	(3,528	)	$	(9,073	)	$	(5,104	)	$	(3,773	)	$	(8,877	)
Benefit (Provision) for income taxes		2,243			—			2,243			(77	)		—			(77	)
Net (loss) income		(165	)		(3,528	)		(3,693	)		3,971			(3,773	)		198
Net (loss) income per common share:
Basic	$	(0.01	)	$	(0.11	)	$	(0.12	)	$	0.13		$	(0.12	)	$	0.01
Diluted	$	(0.01	)	$	(0.11	)	$	(0.12	)	$	0.12		$	(0.11	)	$	0.01

The impact of the adoption of ASC 470 on balance sheet line items as of December 31, 2008 and September 30, 2009 is presented below (in thousands):


	December 31, 2008									September 30, 2009
				Incremental									Incremental
				Impact of						Before the			Impact of
	As Previously			Adoption of						Impact of			Adoption of
	Reported			ASC 470			As Adjusted			ASC 470			ASC 470			As Reported

Prepaid expenses and other current assets	$	8,518		$	(157	)	$	8,361		$	12,386		$	(151	)	$	12,235
Deferred tax assets		28,942			(8,249	)		20,693			22,571			(8,249	)		14,322
Notes payable, net of debt discount		163,172			(13,249	)		149,923			164,088			(9,476	)		154,612
Additional paid-in capital		344,698			11,985			356,683			371,075			11,985			383,060
Accumulated deficit		(76,380	)		(7,142	)		(83,522	)		(72,409	)		(10,915	)		(83,324	)

On January 1, 2009, we adopted ASC 815, “Derivatives and Hedging” (ASC 815”) (Prior authoritative literature: EITF No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”) which clarifies how to determine whether certain instruments or features are indexed to an entity’s own stock. ASC 815 outlines a two-step approach to evaluate the instrument’s contingent exercise provisions and the instrument’s settlement provisions. We evaluated the provisions of ASC 815 and the embedded conversion options

in the Notes and determined that the embedded conversion options are indexed to our own stock and, therefore, do not require bifurcation and separate accounting.

Income Taxes. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting bases and the tax bases of assets and liabilities. Deferred tax assets are also recognized for tax net operating loss carryforwards. These deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when such amounts are expected to reverse or be utilized. The realization of total deferred tax assets is contingent upon the generation of future taxable income. Valuation allowances are provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized.

Income tax provision or benefit includes U.S. federal, state and local and foreign income taxes and is based on pre-tax income or loss. The provision or benefit for income taxes is based upon our estimate of our annual effective income tax rate. In determining the estimated annual effective income tax rate, we analyze various factors, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local and foreign income taxes and our ability to use tax credits and net operating loss carryforwards. All tax years since 1998 are subject to examination.

We follow the provisions of ASC 740, “Income Taxes,” (Prior authoritative literature: FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”) which prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the more-likely-than-not recognition threshold should be measured as the largest amount of the tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. We recognize interest and penalties related to income tax matters in income tax expense. All of our unrecognized tax benefit liability would affect our effective tax rate if recognized. We do not expect our unrecognized tax benefit liability as of September 30, 2009 to change significantly over the next 12 months.

Stock-Based Compensation. We account for stock-based compensation expense in accordance with ASC 718, “Compensation-Stock Compensation,” (Prior authoritative literature: SFAS No. 123 (revised 2005), “Share-Based Payment”) which requires the measurement and recognition of compensation expense for share-based awards based on estimated fair values on the date of grant. We estimate the fair value of each stock-based award on the date of grant using the Black-Scholes option-pricing model. Fair value estimates determined in accordance with this model are affected by our stock price, as well as estimates regarding a number of variables including expected stock price volatility over the term of the award and projected employee stock option exercise activity.

Recent Accounting Pronouncements. In September 2009, the FASB ratified Accounting Standards Update (“ASU”) 2009-13 (Prior authoritative literature: EITF Issue No. 08-1, “Revenue Arrangements with Multiple Deliverables”) which supersedes ASC 605, “Revenue Recognition,” (Prior authoritative literature: EITF No. 00-21 “Revenue Arrangements with Multiple Deliverables”) and addresses criteria for separating the consideration in multiple-element arrangements. ASU 2009-13 will require companies to allocate the overall consideration to each deliverable using a best estimate of the selling price of individual deliverables in the arrangement in the absence of VSOE or other third-party evidence of the selling price. ASU 2009-13 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption will be permitted. We are currently evaluating the potential impact of the adoption of ASU 2009-13 on our consolidated results of operations and financial condition.

In September 2009, the FASB also ratified ASU 2009-14 (Prior authoritative literature: EITF No. 09-3, “Certain Revenue Arrangements That Include Software Elements”) which modifies the scope of ASC 985 (Prior authoritative literature: American Institute of Certified Public Accountants’ SOP 97-2, “Software Revenue Recognition”) to exclude (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionally. ASU 2009-14 has an effective date that is consistent with ASU 2009-13. We are currently evaluating the potential impact of the adoption of ASU 2009-14 on our consolidated results of operations and financial condition.

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 revenues 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 revenues, we analyze them in three categories: recurring ratable revenues, non-recurring ratable revenues and other 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, hosting arrangements, subscription fees from customers accessing our on-demand application services and enhanced support and maintenance contracts related to our software products, including certain professional services performed by our professional services groups.

	•	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 certain hardware components of our Blackboard Transaction System products and certain third-party hardware and software sold to our clients in conjunction with our software licenses.

	•	Other revenues include those revenues that are recognized as earned and are not deferred to future periods. These revenues include professional services, the sales of BbOne, certain sales of licenses, as well as the supplies and commissions we earn from publishers related to digital course supplement downloads.

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 the renewal of previously existing licenses, non-recurring ratable revenues primarily reflect one-time sales that do not contractually 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 consolidated statement of operations data expressed as a percentage of total revenues for each of the periods indicated.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2009			2008			2009
	(As adjusted (1))						(As adjusted (1))
	(Unaudited)

Revenues:
Product		89	%		89	%		91	%		91	%
Professional services		11			11			9			9

Total revenues		100			100			100			100
Operating expenses:
Cost of product revenues, excludes amortization of acquired technology included in amortization of intangibles resulting from acquisitions shown below		24			24			24			24
Cost of professional services revenues		6			6			6			6
Research and development		12			12			13			12
Sales and marketing		29			25			30			27
General and administrative		15			15			17			15
Patent related (proceeds) impairment and other costs		—			—			(1	)		4
Amortization of intangibles resulting from acquisitions		12			9			12			9

Total operating expenses		98			91			101			97

Income (loss) from operations		2	%		9	%		(1	)%		3	%


(1)		On January 1, 2009, we adopted ASC 470, which required adjustment of prior periods. See note 7 of Notes to unaudited consolidated financial statements.

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

Our total revenues for the three months ended September 30, 2009 were $98.4 million, representing an increase of $15.3 million, or 18.4%, as compared to $83.1 million for the three months ended September 30, 2008.

A detail of our total revenues by classification is as follows:


	Three Months Ended September 30,
	2008						2009
			Professional						Professional
	Product		Services				Product		Services
	Revenues		Revenues		Total		Revenues		Revenues		Total
	(Unaudited)
	(In millions)

Recurring ratable revenues	$	64.4	$	1.1	$	65.5	$	76.9	$	2.3	$	79.2
Non-recurring ratable revenues		6.5		—		6.5		6.2		0.6		6.8
Other revenues		3.4		7.7		11.1		4.8		7.6		12.4

Total revenues	$	74.3	$	8.8	$	83.1	$	87.9	$	10.5	$	98.4

Product revenues. Product revenues, including domestic and international, for the three months ended September 30, 2009 were $87.9 million, representing an increase of $13.5 million, or 18.2%, as compared to $74.3 million for the three months ended September 30, 2008. Recurring ratable product revenues increased by $12.5 million, or 19.4%, for the three months ended September 30, 2009 as compared to the three months ended

September 30, 2008. This increase in recurring ratable revenues was primarily due to a $4.4 million increase in revenues recognized from Blackboard Learn enterprise licenses, which was attributable to current and prior period sales to new and existing clients, including clients resulting from the ANGEL merger, the continued shift of our existing clients from Blackboard Learn basic products to Blackboard Learn enterprise products and the cross-selling of other enterprise products to existing clients. Blackboard Learn enterprise products have additional functionality that is not available in Blackboard Learn basic products and consequently some Blackboard Learn basic product clients upgrade to Blackboard Learn enterprise products. Licenses of the enterprise version of Blackboard Learn products have higher average pricing, which normally results in at least twice the contractual value as compared to Blackboard Learn basic product licenses. The remaining increase in recurring ratable product revenues primarily resulted from a $4.0 million increase in hosting revenues, a $2.4 million increase in revenues for subscription fees from customers accessing our on-demand application services primarily related to Blackboard Connect and a $1.7 million increase in revenues primarily related to our arrangements with our technology and content partners.

The increase in other product revenues was primarily due to a $0.7 million increase in revenues related to sales of certain of our content management software products and a $0.7 million increase in revenues related to sales of third party hardware and software products.

Of our total revenues, our total international revenues for the three months ended September 30, 2009 were $17.6 million, representing an increase of $2.1 million, or 13.5%, as compared to $15.5 million for the three months ended September 30, 2008. International revenues as a percentage of total revenues decreased to 17.9% for the three months ended September 30, 2009 from 18.7% for the three months ended September 30, 2008 due to the increase in Blackboard Connect revenues, as this product is primarily sold in the United States. International product revenues, which consist primarily of recurring ratable product revenues, were $16.5 million for the three months ended September 30, 2009, representing an increase of $2.3 million, or 15.9%, as compared to $14.2 million for the three months ended September 30, 2008. The increase in international recurring ratable product revenues was primarily due to an increase in international revenues from Blackboard Learn enterprise products resulting from prior period sales to new and existing clients. In addition, the increase in international revenues also reflects our investment in increasing the size of our international sales force and international marketing efforts during prior periods, 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. Professional services revenues for the three months ended September 30, 2009 were $10.5 million, representing an increase of $1.8 million, or 20.4%, as compared to $8.8 million for the three months ended September 30, 2008. The increase in professional services was primarily attributable to increased sales of consulting services. As a percentage of total revenues, professional services revenues for the three months ended September 30, 2008 and 2009 were 10.5% and 10.7%, respectively.

Cost of product revenues. Our cost of product revenues for the three months ended September 30, 2009 was $23.8 million, representing an increase of $4.2 million, or 21.5%, as compared to $19.6 million for the three months ended September 30, 2008. The increase in cost of product revenues was primarily due to an increase of $2.5 million in expenses related to hosting services due to the increase in the number of clients contracting for new hosting services or existing clients expanding their existing hosting arrangements. The remaining increase was primarily due to increases in our technical support expenses associated with increased headcount and personnel costs to support increase in licenses held by new and existing clients. Cost of product revenues as a percentage of product revenues increased to 27.1% for the three months ended September 30, 2009 compared to 26.4% for the three months ended September 30, 2008. This decrease in product revenues margin is due primarily to the fair value adjustment recorded in purchase accounting to the acquired ANGEL deferred revenue balances.

Cost of product revenues excludes amortization of acquired technology intangibles resulting from acquisitions, which is included as amortization of intangibles resulting from acquisitions. Amortization expense related to acquired technology was $4.6 million and $2.5 million for the three months ended September 30, 2008 and 2009, respectively. This decrease was attributable to the completion of the amortization of acquired technology acquired in connection with our acquisition of WebCT, Inc. (“WebCT”) in 2006. Cost of product revenues, including

amortization of acquired technology, as a percentage of product revenues was 30.0% for the three months ended September 30, 2009 as compared to 32.6% for the three months ended September 30, 2008.

Cost of professional services revenues. Our cost of professional services revenues for the three months ended September 30, 2009 was $5.6 million, representing an increase of $0.6 million, or 11.1%, as compared to $5.0 million for the three months ended September 30, 2008. This increase was primarily due to an increase in personnel-related costs due to higher average headcount during the three months ended September 30, 2009 as compared to the three months ended September 30, 2008. Cost of professional services revenues as a percentage of professional services revenues decreased to 52.6% for the three months ended September 30, 2009 from 57.0% for the three months ended September 30, 2008. The increase in professional services revenues margin was primarily attributable to an increase in professional services revenues from new professional service engagements in current and prior periods.

Research and development expenses. Our research and development expenses for the three months ended September 30, 2009 were $11.4 million, representing an increase of $0.9 million, or 8.7%, as compared to $10.5 million for the three months ended September 30, 2008. This increase was primarily attributable to increased personnel-related costs due to higher average headcount during the three months ended September 30, 2009 as compared to the three months ended September 30, 2008, including increased personnel-related costs associated with the inclusion of ANGEL following the merger that closed in May 2009.

Sales and marketing expenses. Our sales and marketing expenses for the three months ended September 30, 2009 were $24.7 million, representing an increase of $0.6 million, or 2.5%, as compared to $24.1 million for the three months ended September 30, 2008. This increase was primarily attributable to increased personnel-related costs due to higher average headcount during the three months ended September 30, 2009 as compared to the three months ended September 30, 2008, including increased personnel-related costs associated with the inclusion of ANGEL following the merger that closed in May 2009.

General and administrative expenses. Our general and administrative expenses for the three months ended September 30, 2009 were $14.6 million, representing an increase of $1.9 million, or 15.1%, as compared to $12.7 million for the three months ended September 30, 2008. This increase was primarily attributable to a $0.8 million increase in non-income tax related expenses primarily related to increased revenues associated with the ANGEL and NTI mergers, a $0.6 million increase in professional service expenses primarily associated with integration related expenses attributable to the ANGEL merger, and the remaining increase relates to personnel-related costs due to higher average headcount during the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 primarily due to the increased headcount following the ANGEL merger.

Amortization of intangibles resulting from acquisitions. Our amortization of intangibles resulting from acquisitions for the nine months ended September 30, 2009 were $9.3 million, representing a decrease of $0.4 million, or 4.6%, as compared to $9.7 million for the nine months ended September 30, 2008. This decrease was attributable the completion of the amortization of certain intangible assets acquired in connection with our acquisition of WebCT in 2006.

Net interest expense. Our net interest expense for the three months ended September 30, 2009 was $3.0 million, representing an increase of $0.3 million, or 11.8%, as compared to $2.7 million for the three months ended September 30, 2008. This increase was primarily attributable to higher interest income earned during the three months ended September 30, 2008 as compared to the three months ended September 30, 2009 due to the general reduction in interest rates.

Other (expense) income. Our other income for the three months ended September 30, 2009 was $0.3 million, representing an increase of $0.5 million, or 228.8%, as compared to other expense of $0.2 million for the three months ended September 30, 2008. This increase was related to the remeasurement of our foreign subsidiaries ledgers, which are maintained in the respective subsidiary’s local foreign currency, into the United States dollar.

Benefit (provision) for income taxes. Our provision for income taxes for the three months ended September 30, 2009 was $2.0 million as compared to our benefit for income taxes of $2.4 million for the three months ended September 30, 2008. This change was due to our income before provision for income taxes during the three months ended September 30, 2009 as compared to our loss before benefit for income taxes during the three months

ended September 30, 2008. The benefit for income taxes for the three months ended September 30, 2008 was due to the mix of domestic and international earnings and losses generated by our subsidiaries.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

Our total revenues for the nine months ended September 30, 2009 were $277.0 million, representing an increase of $49.9 million, or 22.0%, as compared to $227.1 million for the nine months ended September 30, 2008.

A detail of our total revenues by classification is as follows:


	Nine Months Ended September 30,
	2008						2009
			Professional						Professional
	Product		Services				Product		Services
	Revenues		Revenues		Total		Revenues		Revenues		Total
					(Unaudited)
					(In millions)

Recurring ratable revenues	$	176.9	$	2.9	$	179.8	$	220.5	$	5.0	$	225.5
Non-recurring ratable revenues		18.2		—		18.2		18.2		1.0		19.2
Other revenues		10.7		18.4		29.1		12.7		19.6		32.3

Total revenues	$	205.8	$	21.3	$	227.1	$	251.4	$	25.6	$	277.0

Product revenues. Product revenues, including domestic and international, for the nine months ended September 30, 2009 were $251.4 million, representing an increase of $45.6 million, or 22.1%, as compared to $205.8 million for the nine months ended September 30, 2008. Recurring ratable product revenues increased by $43.6 million, or 24.6%, for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. This increase in recurring ratable revenues was primarily due to a $19.0 million increase in revenues recognized for subscription fees from customers accessing our on-demand application services primarily related to Blackboard Connect, which we acquired from our merger with NTI in January 2008. The increase was also due to a $12.7 million increase in revenues from Blackboard Learn enterprise licenses, which was attributable to current and prior period sales to new and existing clients, including clients resulting from the ANGEL merger, the continued shift of our existing clients from Blackboard Learn basic products to Blackboard Learn enterprise products and the cross-selling of other enterprise products to existing clients. Blackboard Learn enterprise products have additional functionality that is not available in Blackboard Learn basic products and consequently some Blackboard Learn basic product clients upgrade to Blackboard Learn enterprise products. Licenses of the enterprise version of Blackboard Learn products have higher average pricing, which normally results in at least twice the contractual value as compared to Blackboard Learn basic product licenses. The remaining increase in recurring ratable product revenues primarily resulted from a $9.4 million increase in hosting revenues and a $2.5 million increase in revenues primarily related to our arrangements with our technology and content partners.

The increase in other product revenues was primarily due to a $1.0 million increase in revenues related to sales of certain of our content management software products and a $1.0 million increase in revenues related to sales of third party hardware and software products.

Of our total revenues, our total international revenues for the nine months ended September 30, 2009 were $51.5 million, representing an increase of $6.7 million, or 14.8%, as compared to $44.8 million for the nine months ended September 30, 2008. International revenues as a percentage of total revenues decreased to 18.6% for the nine months ended September 30, 2009 from 19.7% for the nine months ended September 30, 2008 due to the increase in revenues from our Blackboard Connect product, which is primarily sold in the United States. International product revenues, which consist primarily of recurring ratable product revenues, were $47.8 million for the nine months ended September 30, 2009, representing an increase of $6.5 million, or 15.9%, as compared to $41.2 million for the nine months ended September 30, 2008. The increase in international recurring ratable product revenues was primarily due to an increase in international revenues from Blackboard Learn enterprise products resulting from prior period sales to new and existing clients. In addition, the increase in international revenues also reflects our investment in increasing the size of our international sales force and international marketing efforts during prior

periods, 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. Professional services revenues for the nine months ended September 30, 2009 were $25.6 million, representing an increase of $4.3 million, or 20.2%, as compared to $21.3 million for the nine months ended September 30, 2008. The increase in professional services was primarily attributable to increased sales of consulting services. As a percentage of total revenues, professional services revenues for the nine months ended September 30, 2009 were 9.2% as compared to 9.4% for the nine months ended September 30, 2008. This decrease in professional service revenues as a percentage of total revenues is primarily due to the increase in revenues from our Blackboard Connect product, for which we generally do not provide consulting related services.

Cost of product revenues. Our cost of product revenues for the nine months ended September 30, 2009 was $67.1 million, representing an increase of $13.5 million, or 25.1%, as compared to $53.6 million for the nine months ended September 30, 2008. The increase in cost of product revenues was primarily due to a $6.3 million increase in expenses related to hosting services due to the increase in the number of clients contracting for new hosting services or existing clients expanding their existing hosting arrangements and a $3.2 million in expenses incurred related to our Blackboard Connect product, including related telecommunications costs. The remaining increase is primarily due to increases in our technical support expenses associated with increased headcount and personnel costs to support increases in licenses held by new and existing clients, including the addition of ANGEL’s technical support groups following the merger that closed in May 2009. Cost of product revenues as a percentage of product revenues were 26.7% for the nine months ended September 30, 2009 compared to 26.0% for the nine months ended September 30, 2008. This decrease in product revenues margin is due primarily to the fair value adjustment recorded in purchase accounting to the acquired ANGEL deferred revenue balances.

Cost of product revenues excludes amortization of acquired technology intangibles resulting from acquisitions, which is included as amortization of intangibles resulting from acquisitions. Amortization expense related to acquired technology was $13.2 million and $8.2 million for the nine months ended September 30, 2008 and 2009, respectively. This decrease was attributable to the completion of the amortization of acquired technology acquired in connection with our acquisition of WebCT in 2006. Cost of product revenues, including amortization of acquired technology, as a percentage of product revenues was 29.9% for the nine months ended September 30, 2009 as compared to 32.5% for the nine months ended September 30, 2008.

Cost of professional services revenues. Our cost of professional services revenues for the nine months ended September 30, 2009 was $15.0 million, representing a decrease of $0.1 million, or 0.4%, as compared to $15.1 million for the nine months ended September 30, 2008. Cost of professional services revenues as a percentage of professional services revenues decreased to 58.7% for the nine months ended September 30, 2009 from 70.8% for the nine months ended September 30, 2008. The increase in professional services revenues margin was primarily attributable to an increase in professional services revenues from new professional service engagements in current and prior periods.

Research and development expenses. Our research and development expenses for the nine months ended September 30, 2009 were $33.8 million, representing an increase of $3.7 million, or 12.1%, as compared to $30.2 million for the nine months ended September 30, 2008. This increase was primarily attributable to increased personnel-related costs due to higher average headcount during the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008, including increased personnel-related costs associated with the inclusion of ANGEL following the ANGEL merger that closed in May 2009 and NTI following the NTI merger that closed in January 2008.

Sales and marketing expenses. Our sales and marketing expenses for the nine months ended September 30, 2009 were $74.0 million, representing an increase of $6.3 million, or 9.3%, as compared to $67.7 million for the nine months ended September 30, 2008. This increase was primarily attributable to increased personnel-related costs due to higher average headcount during the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 primarily due to the increased headcount following the ANGEL merger that closed in May 2009 and the NTI merger that closed in January 2008. Further, we incurred approximately $1.3 million in additional bad debt expense during the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008.

General and administrative expenses. Our general and administrative expenses for the nine months ended September 30, 2009 were $42.5 million, representing an increase of $4.5 million, or 12.0%, as compared to $37.9 million for the nine months ended September 30, 2008. This increase was primarily attributable to approximately $2.4 million in acquisition and integration related expenses attributable to the ANGEL merger that closed in May 2009. The further increase is primarily due to a $0.9 million increase in non-income tax related expenses primarily related to increased revenues associated with the ANGEL and NTI mergers, and the remaining increase relates to increased personnel-related costs due to higher average headcount during the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 primarily due to the increased headcount following the ANGEL merger.

Patent related (proceeds) impairment and other costs. Our operating expenses were reduced during the nine months ended September 30, 2008 due to the $3.3 million payment from Desire2Learn in June 2008 in satisfaction of the judgment amount plus accrued interest arising from the patent litigation between us and Desire2Learn. During the nine months ended September 30, 2009, we recorded a $3.5 million expense related to the reversal of this verdict as the result of the outcome of an appeal by Desire2Learn. Additionally, during the nine months ended September 30, 2009, we recorded a non-cash $7.5 million impairment charge related to capitalized patent costs due to the reversal of the 2008 verdict.

Amortization of intangibles resulting from acquisitions. Our amortization of intangibles resulting from acquisitions for the nine months ended September 30, 2009 were $25.7 million, representing a decrease of $2.4 million, or 8.6%, as compared to $28.1 million for the nine months ended September 30, 2008. This decrease was attributable the completion of the amortization of certain intangible assets acquired in connection with our acquisition of WebCT in 2006.

Net interest expense. Our net interest expense for the nine months ended September 30, 2009 was $8.7 million, representing an increase of $1.1 million, or 14.4%, as compared to $7.6 million for the nine months ended September 30, 2008. This change was primarily attributable to decreased interest income during the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 due to lower interest yields on lower average cash and cash equivalent balances.

Other (expense) income. Our other income for the nine months ended September 30, 2009 was $1.1 million, representing a decrease of $2.8 million, or 71.4%, as compared to $3.9 million for the nine months ended September 30, 2008. As of September 30, 2008, we held a common stock warrant in an entity that provides technology support services to educational institutions, including our customers, to purchase 19.9% of the shares of the entity. Other income of approximately $3.8 million was recorded during the nine months ended September 30, 2008 related to the fair value adjustment of the common stock warrant. In connection with an equity transaction between this entity and a venture capital firm, we exercised approximately one-half of our warrant and sold the related shares to the venture capital firm for approximately $2.0 million on July 1, 2008. The fair value of the common stock warrant was recorded as investment in common stock warrant on our consolidated balance sheets and was calculated based on the entity’s implied value upon closing of the equity transaction on July 1, 2008. On July 1, 2008, we entered into an amended common stock warrant agreement in which we can purchase up to 9.9% of the shares of the entity.

During the nine months ended September 30, 2009, other income of approximately $1.0 million was recorded in our consolidated statements of operations related to the fair value adjustment of the common stock warrant in connection with an equity transaction between this entity and a venture capital firm that occurred in June 2009. We will evaluate the fair value of this instrument in subsequent reporting periods and any changes in value will be recognized in the consolidated statements of operations.

The remaining change in other income for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 related to the remeasurement of our foreign subsidiaries ledgers, which are maintained in the respective subsidiary’s local foreign currency, into the United States dollar.

Benefit (provision) for income taxes. Our provision for income taxes for the nine months ended September 30, 2009 was $0.1 million as compared to our benefit for income taxes of $2.2 million for the nine months ended September 30, 2008. This change is primarily attributable to our income before provision for income taxes for the

nine months ended September 30, 2009 as compared to our loss before benefit for income taxes for the nine months ended September 30, 2008. Our lower effective tax rate for the nine months ended September 30, 2009 was due to the mix of domestic and international earnings and losses generated by our subsidiaries.

Liquidity and Capital Resources

Our cash and cash equivalents were $132.0 million at September 30, 2009 as compared to $141.7 million at December 31, 2008. The decrease in cash and cash equivalents was primarily due to the use of cash for the ANGEL merger, offset in part by cash generated by our operating and financing activities. Cash and cash equivalents consist of highly liquid investments, which are readily convertible into cash and have original maturities of three months or less.

Net cash provided by operating activities was $89.8 million during the nine months ended September 30, 2009 as compared to $55.4 million during the nine months ended September 30, 2008. We recognize revenues on annually renewable agreements, which results in deferred revenues. Deferred revenues increased $19.0 million during the nine months ended September 30, 2009, excluding ANGEL’s acquired deferred revenues. This increase was expected and was due to the seasonal variations in our business due to the timing of our clients’ budget cycles and the renewal dates for our existing clients’ annual licenses. Amortization of intangibles resulting from acquisitions was $25.7 million during the nine months ended September 30, 2009 and related to the amortization of identified intangibles resulting from acquisitions. For the nine months ended September 30, 2009, we recorded a non-cash $7.5 million impairment charge related to capitalized patent costs due to the reversal of the 2008 patent judgment verdict against Desire2Learn.

Net cash used in investing activities was $108.1 million during the nine months ended September 30, 2009 as compared to $156.4 million during the nine months ended September 30, 2008. During the nine months ended September 30, 2009 we paid $82.3 million in net cash consideration for the acquisition of ANGEL, including transaction costs of approximately $1.5 million. During the nine months ended September 30, 2008, we paid $133.0 million for acquisitions which primarily related to the NTI merger and excludes certain NTI merger costs that were paid in 2007. During the nine months ended September 30, 2009, approximately 0.2 million shares of our common stock held in escrow as part of the NTI merger were returned us in order to satisfy certain acquisition-related liabilities of $8.0 million which were paid during the nine months ended September 30, 2009. We retired the shares of common stock during the nine months ended September 30, 2009 and the shares of common stock are not included as issued and outstanding as of September 30, 2009. During the nine months ended September 30, 2009, cash expenditures for purchases of property and equipment were $15.9 million, which represents approximately 5.7% of total revenues for the nine months ended September 30, 2009.

In July 2009, we acquired the business assets of Terriblyclever Design, LLC, a provider of software applications and the creator of MobilEdu^tm, a suite of mobile web applications for the education industry. The Blackboard MobilEdu service enables educational institutions to deliver campus life services and content to mobile devices to connect students, parents, faculty, prospective students and alumni to the campus experience. The purchase price of the transaction was $3.5 million in cash, of which $1.5 million was paid during the three months ended September 30, 2009, $1.7 million was paid in October 2009 and $0.3 million is to be paid in July 2010, plus up to $0.5 million in contingent payments, subject to certain adjustments.

Net cash provided by financing activities was $8.6 million during the nine months ended September 30, 2009 as compared to $13.2 million during the nine months ended September 30, 2008. During the nine months ended September 30, 2009, we received $7.7 million in proceeds from exercise of stock options as compared to $10.7 million during the nine months ended September 30, 2008.

Notes Payable

In June 2007, we issued and sold the Notes in a public offering. We used a portion of the proceeds to terminate and satisfy in full our existing indebtedness outstanding of $19.4 million pursuant to the senior secured credit facilities agreement, which we entered into in connection with our acquisition of WebCT in 2006, and to pay all fees and expenses incurred in connection with the termination.

The Notes bear interest at a rate of 3.25% per year on the principal amount, accruing from June 20, 2007. Interest is payable semi-annually on January 1 and July 1. We made interest payments of $2.8 million on December 31, 2007 and $2.7 million on each of July 1, 2008, December 30, 2008 and June 30, 2009. The Notes will mature on July 1, 2027, subject to earlier conversion, redemption or repurchase.

The Notes will be convertible, under certain circumstances, into cash or a combination of cash and our common stock at an initial base conversion rate of 15.4202 shares of common stock per $1,000 principal amount of Notes. The base conversion rate represents an initial base conversion price of approximately $64.85. If at the time of conversion the applicable price of our common stock exceeds the base conversion price, the conversion rate will be increased by up to an additional 9.5605 shares of our common stock per $1,000 principal amount of Notes, as determined pursuant to a specified formula. In general, upon conversion of a Note, the holder of such Note will receive cash equal to the principal amount of the Note and our common stock for the Note’s conversion value in excess of such principal amount. In accordance with the earnings per share method outlined in ASC 260, “Earnings Per Share,” (Prior authoritative literature: EITF 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share,”) the diluted earnings per share effect of the shares that would be issued will be accounted for only if the average market price of our common stock price during the period is greater than the Notes’ conversion price.

Because the Notes contain an adjusting conversion rate provision based on our common stock price and anti-dilution adjustment provisions, at each reporting period, we evaluate whether any adjustments to the conversion price would alter the effective conversion rate from the stated conversion rate and result in an “in-the-money” conversion. Whenever an adjustment to the conversion rate results in an increase in the number of shares of common stock issuable upon conversion of the Notes, we would recognize a beneficial conversion feature in the period such a determination is made and amortize it over the remaining life of the Notes. As of September 30, 2009, a beneficial conversion feature under the Notes did not exist.

Holders may surrender their Notes for conversion at any time prior to the close of business on the business day immediately preceding the maturity date for the Notes only under the following circumstances: (1) prior to January 1, 2027, with respect to any calendar quarter beginning after June 30, 2007, if the closing price of our common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 130% of the base conversion price per share of the Notes on such last trading day; (2) on or after January 1, 2027, until the close of business on the business day preceding maturity; (3) during the five business days after any five consecutive trading day period in which the trading price per $1,000 principal amount of Notes for each day of that period was less than 95% of the product of the closing price of our common stock and the then applicable conversion rate of the Notes; or (4) upon the occurrence of other events or circumstances as specifically defined in the Notes.

If a make-whole fundamental change, as defined in the Notes, occurs prior to July 1, 2011, we may be required in certain circumstances to increase the applicable conversion rate for any Notes converted in connection with such fundamental change by a specified number of shares of our common stock. The Notes may not be redeemed by us prior to July 1, 2011, after which they may be redeemed by us, in whole at any time, or in part from time to time, on or after July 1, 2011 at a redemption price, payable in cash, of 100% of the principal amount of the Notes plus accrued and unpaid interest, if any. Holders of the Notes may require us to repurchase some or all of the Notes on July 1, 2011, July 1, 2017 and July 1, 2022, or in the event of certain fundamental change transactions, at 100% of the principal amount on the date of repurchase, plus accrued and unpaid interest, if any, payable in cash. If such an event occurs, we would be required to pay the entire outstanding principal amount of $165.0 million in cash, in addition to any other rights that the investors may have under the Notes.

The Notes are unsecured senior obligations and are effectively subordinated to all of our existing and future senior indebtedness to the extent of the assets securing such debt, and are effectively subordinated to all indebtedness and liabilities of our subsidiaries, including trade payables.

Working Capital Needs

We believe that our existing cash and cash equivalents and future 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. Also, we may make investments in, or acquisitions of, complementary businesses, services or technologies, which could also require us to seek additional equity or debt financing. 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. Additional funds may not be available on terms favorable to us or at all. From time to time we may use our existing cash to repurchase shares of our common stock, outstanding indebtedness or other outstanding securities. Any such repurchases would depend on market conditions, the market price of our common stock, and management’s assessment of our liquidity and cash flow needs.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements with unconsolidated entities or related parties, and, accordingly, there are no off-balance sheet risks to our liquidity and capital resources.


Item 3.	*Quantitative and Qualitative Disclosures about Market Risk.*

Interest income on our cash and cash equivalents is subject to interest rate fluctuations. For the three and nine months ended September 30, 2009, a one percentage point decrease in interest rates would not have had a material effect on the consolidated results of operations and financial condition.

We have accounts on our foreign subsidiaries’ ledgers which are maintained in the respective subsidiary’s local foreign currency and remeasured into the U.S. dollar. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar and against the currencies of other countries in which we sell products and services including the Canadian dollar, Euro, British pound, Japanese yen, Australian dollar and others. For the three and nine months ended September 30, 2009, a one percentage point adverse change in these various exchange rates into the U.S. dollar as of September 30, 2009 would not have had a material effect on the consolidated results of operations and financial condition.


Item 4.	*Controls and Procedures.*


(a)	Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2009. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2009, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.


(b)	Changes in Internal Control over Financial Reporting.

No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.	*Legal Proceedings*

The description of the legal proceedings contained in Note 8 — Commitments and Contingencies — in the Notes to Unaudited Consolidated Financial Statements is incorporated by reference herein.

In addition, we may be involved in various legal proceedings from time to time incidental to the ordinary conduct of our business.


Item 1A.	*Risk Factors.*

We describe our business risk factors below. This description includes any material changes to and supersedes the description of the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.

Challenging economic conditions may adversely affect our business.

The economic disruption experienced in the United States and globally during the second half of 2008 and 2009 and any continuing unfavorable economic conditions may affect our sales and renewals of our products and services, and could negatively affect our revenues and our ability to maintain or grow our business. In addition, the current global financial crisis affecting the banking system and the possibility that financial institutions may consolidate or go out of business has resulted in a tightening of the credit markets, which could impair the ability of our customers to obtain credit to finance purchases of our products. Our client base is diverse and each client or potential client faces a unique set of risks. These risks include, for example, the availability of public funds and the possibility of state and local budget cuts, reduced enrollment, or lower revenues, which could lead to a reduction in overall spending, including information technology spending, by our current and potential clients. A prolonged economic downturn may result in a reduction in overall demand for educational software products and services, which could cause a decline in both new sales and renewals of our existing products and difficulty in establishing a market for our new products and services.

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

Most of our clients and potential clients are colleges, universities, schools and other education providers who depend substantially on government funding. Accordingly, any general decrease, delay or change in federal, state or local funding for colleges, universities, schools and other education providers could cause our current and potential clients to reduce their purchases of our products and services, to exercise their right to terminate licenses, or to decide not to renew licenses, any of which could cause us to lose revenues. In addition, a specific reduction in governmental funding support for products such as ours would also cause us to lose revenues. In light of the severe economic downturn experienced in the U.S. and globally commencing in the second half of 2008 and in 2009, many of our clients have experienced and may continue to experience budgetary pressures, which may have a negative impact on sales of our products. Continuing unfavorable economic conditions may result in budget cuts and lead to lower overall spending, including information technology spending, by our current and potential clients, which may cause our revenues to decrease. In addition, our accounts receivable may increase and the relative aging of our receivables may deteriorate if our clients delay or are unable to make their payments due to the tightening of credit markets and the lack of available funding. A prolonged economic downturn may make it difficult for potential clients to buy our products and might compromise the ability of existing clients to renew their licenses. Also, because many of our clients begin their fiscal year in July or later, the full impact of the economic conditions may not yet have become apparent and we may face decreases in our sales or renewal of existing clients if their new budgets require cost reductions.

There is no assurance that our investments in product development and product acquisition will be successful; if our products do not gain market acceptance, our revenues may decrease and we may not realize a return on such investments.

We make substantial investments in improving our products and acquiring products through mergers and acquisitions, and we have no assurance that our investments will be successful. Our ability to grow our business will be compromised if we do not develop products and services that achieve broad market acceptance with our current and potential clients. We have recently released a new version of our Blackboard Learn platform which offers enhanced functionality over prior versions. If clients do not upgrade to the latest version of the Blackboard Learn platform, the functionality of their existing installed versions will not compare as favorably to competing products which may cause a reduction in renewal rates. Further, if the latest version of our software does not become widely adopted by clients, we may not be able to justify the investments we have made and our financial results will suffer.

If our newest products, the Blackboard Outcomes System, Blackboard Connect and Blackboard MobilEdu, do not gain widespread market acceptance, our financial results could suffer. We introduced our newest software application, the Blackboard Outcomes System, in December 2006. We acquired the technology underlying Blackboard Connect through our merger with The NTI Group, Inc. in January 2008, and acquired the technology underlying the Blackboard MobilEdu platform through our purchase of the business assets of Terriblyclever Design, LLC in July 2009. Our ability to grow our business will depend, in part, on client acceptance of these products. If we are not successful in gaining market acceptance of these products, our revenues may fall below our expectations.

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, content management, transaction systems and mass notification products are intensely competitive and rapidly changing, and barriers to entry in these 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 Learn platform are companies and open source projects that provide course management systems, such as Desire2Learn Inc., Jenzabar, Inc., Microsoft, IBM, Oracle, Moodle, Pearson Education, The Sakai Project, UCompass Educator and WebTycho; learning content management systems, such as Giunti Labs S.r.I. 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, large diversified software vendors who offer products in numerous markets including the education market and open source software applications. Our competitors for the Blackboard Transact platform include companies that provide transaction systems, security and access systems and off-campus merchant relationship programs. Our competitors for Blackboard Connect include a variety of competitors which provide mass notification technologies including voice, email and/or text messaging communications.

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 sales and distribution channels. Similarly, our competitors may also be acquired by larger and more well-funded companies which have more resources than our current competitors. These larger companies 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. As open source offerings become more prevalent, customers may defer or forego purchases of our products, which could reduce our sales and lengthen the sales cycle for our products or result in the loss of current clients to open source solutions. If we are unable to differentiate our products from competitive products based on open source software, demand for our products and services may decline, and we may face pressure to reduce the prices of our products, which would hurt our profitability.

Our mergers with The NTI Group, Inc. (“NTI”) and ANGEL Learning, Inc. (“ANGEL”) present many risks, and we may not realize the financial and strategic goals that were contemplated at the time of the transactions.

We completed the merger with NTI on January 31, 2008. We completed the merger with ANGEL on May 8, 2009. We entered into these transactions with the expectation that each would result in various long-term benefits including improved revenue and profits, and enhancements to our product portfolio and customer base. Risks that we may encounter in seeking to realize the benefits of these and other proposed acquisitions transactions include:


	•	we may not realize the anticipated financial benefits if we are unable to sell the acquired company products to our customer base, if a larger than predicted number of customers decline to renew their contracts, or if the acquired contracts do not allow us to recognize revenues on a timely basis;

	•	we may have difficulty incorporating the acquired technologies or products with our existing product lines and maintaining uniform standards, controls, procedures and policies;

	•	we may face contingencies related to product liability, intellectual property, financial disclosures, and accounting practices or internal controls;

	•	we may have higher than anticipated costs in supporting and continuing development of the acquired company products and in servicing new and existing clients of a company we acquire;

	•	we may not be able to retain key employees from the companies we acquire;

	•	we may be unable to manage effectively the increased size and complexity of the combined company, and our management’s attention may be diverted from our ongoing business by transition or integration issues;

	•	we may lose anticipated tax benefits or have additional legal or tax exposures; and

	•	we will not be able to determine whether all or any of the 0.4 million shares of stock consideration in the NTI merger that remains contingent on the achievement of certain performance milestones will be issued until the completion of the financial results for fiscal year 2009.

Our business strategy contemplates future business combinations and acquisitions which 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 tangible and intangible assets, which could require us to record in our statements of operations ongoing amortization of identified intangible assets acquired in connection with acquisitions, which we currently do with respect to our historical acquisitions, including the NTI and ANGEL mergers. In addition, we may need to record write-downs from future impairments of identified tangible and intangible assets and goodwill. These accounting charges would reduce any future reported earnings, or increase a reported loss. In future acquisitions, we could also incur debt to pay for acquisitions, or issue additional equity securities as consideration, which could cause our stockholders to suffer significant dilution.

Additionally, our ability to utilize net operating loss carryforwards, if any, acquired in any acquisitions may be significantly limited or unusable by us under Section 382 or other sections of the Internal Revenue Code.

Our existing indebtedness could adversely affect our financial condition and we may not be able to fulfill our debt obligations, including the 3.25% Convertible Senior Notes due 2027 (the “Notes”).

The outstanding Notes in the principal amount of $165.0 million pose the following risks to our overall business:


	•	upon conversion or redemption of the Notes, we will be required to repay the principal amount of $165.0 million in cash;

	•	we will use a significant portion of our cash flow to pay interest on our outstanding debt, limiting the amount available for working capital, capital expenditures and other general corporate purposes;

	•	lenders may be unwilling to lend additional amounts to us for future working capital needs, additional acquisitions or other purposes or may only be willing to provide funding on terms we would consider unacceptable;

	•	if our cash flow were inadequate to make interest and principal payments on our debt, we might have to refinance our indebtedness or issue additional equity or other securities and may not be successful in those efforts or may not obtain terms favorable to us; and

	•	our ability to finance working capital needs and general corporate purposes for the public and private markets, as well as the associated cost of funding, is dependent, in part, on our credit ratings, which may be adversely affected if we experience declining revenues.

We may be more vulnerable to adverse economic conditions than less leveraged competitors and thus less able to withstand competitive pressures. Any of these events could reduce our ability to generate cash available for investment or debt repayment or to make improvements or respond to events that would enhance profitability. We may incur significantly more debt in the future, which will increase each of the foregoing risks related to our indebtedness.

We may not be able to repurchase the Notes when required by the holders, including upon a defined fundamental change or other specified dates at the option of the holder, or pay cash upon conversion of the Notes.

Upon the occurrence of a fundamental change as defined in the Notes, holders of the Notes would have the right to require us to repurchase the Notes at a price in cash equal to 100% of the principal amount of the Notes plus accrued and unpaid interest. Any future credit agreement or other agreements relating to indebtedness to which we become a party may contain similar provisions. Holders will also have the right to require us to repurchase the Notes for cash or a combination of cash and our common stock on July 1, 2011, July 1, 2017 or July 1, 2022. Moreover, upon conversion of the Notes, we are required to settle a portion of the conversion obligation in cash. In the event that we are required to repurchase the Notes or upon conversion of the Notes, we may not have sufficient financial

resources to satisfy all of our obligations under the Notes and our other debt instruments. Our failure to pay the repurchase price when due, to pay cash upon conversion of Notes, or similarly fail to meet our payment obligations, would result in a default under the indenture governing the Notes. Any default under our indebtedness could have a material adverse effect on our business, results of operations and financial condition.

Conversion of the Notes may affect the market price of our common stock and may dilute the ownership of existing stockholders.

The conversion of some or all of the Notes and any sales in the public market of our common stock issued upon such conversion could adversely affect the market price of our common stock. The existence of the Notes may encourage short selling by market participants because the conversion of the Notes could depress our common stock price. In addition, the conversion of some or all of the Notes could dilute the ownership interests of existing stockholders to the extent that shares of our common stock are issued upon conversion.

Our reported earnings per share may be more volatile because of the contingent conversion provision of the Notes.

The Notes may have a dilutive effect on earnings per share in any period in which the market price of our common stock exceeds the conversion price for the Notes as a result of the inclusion of the underlying shares in the fully diluted earnings per share calculation. Volatility in our stock price could cause this condition or other conversion conditions to be met in one quarter and not in a subsequent quarter, increasing the volatility of fully diluted earnings per share.

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. 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.

We may experience difficulties that could delay or prevent the successful development, introduction and sale of new products under development. If introduced for sale, the new products may not adequately meet the requirements of the marketplace and may not achieve any significant degree of market acceptance, which could cause our financial results to suffer. In addition, during the development period for the new products, our customers may defer or forego purchases of our products and services. We often obtain renewable client contracts in acquisitions, such as our acquisitions of WebCT, NTI, and ANGEL, and if we experience a decrease in the renewal rate from expected levels it could reduce revenues below our expectations.

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 over 60 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, new product releases are delayed or our services are disrupted, we could lose new sales and be subject to significant liability claims.

Because our software products are complex, they may contain undetected errors or defects, known as bugs. Bugs can be detected at any point in a product’s life cycle, but are more common when a new product is introduced or when new versions are released. In the past, we have encountered product development delays and defects in our products. We expect that, despite our testing, errors will be found in new products and product enhancements in the future. In addition, our service offerings may be disrupted causing delays or interruptions in the services provided to our clients. Significant errors in our products or disruptions in the provision of our services 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, retrieve and utilize critical information, we may be subject to significant liability claims if our products do not work properly or if the provision of our services is disrupted. Such an event could result in significant expenses, disrupt sales and affect our reputation and that of our products. 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 and our insurance may not cover all or any of the claims. A material liability claim against us, regardless of its merit or its outcome, could result in substantial costs, significantly harm 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 18 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. In light of the ongoing economic disruption in the U.S. and globally, we have experienced some

lengthening of sales cycles and, depending on the future economic climate, may see a continuation of this trend. Our client base is diverse and each component faces a unique set of risks, including, for example, the possibility of state and local budget cuts for K-12 institutions or reduced enrollment in higher education, which may affect our revenues and our ability to grow our business. If the economic downturn worsens or is prolonged, our clients and prospective clients may defer or cancel their purchases with us, which would negatively impact our consolidated results of operations and financial condition.

Our sales cycle with international postsecondary education providers and U.S. K-12 schools may be longer than our historical 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. 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 international postsecondary and U.S. K-12 clients 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.

We may have exposure to greater than anticipated tax liabilities.

We are subject to income taxes and other taxes in a variety of jurisdictions and are subject to review by both domestic and foreign taxation authorities. The determination of our provision for income taxes and other tax liabilities requires significant judgment and the ultimate tax outcome may differ from the amounts recorded in our consolidated financial statements, which may materially affect our financial results in the period or periods for which such determination is made.

Our ability to utilize our net operating loss carryforwards may be limited.

Our federal net operating loss carryforwards are subject to limitations on how much may be utilized on an annual basis. The use of the net operating loss carryforwards may have additional limitations resulting from certain future ownership changes or other factors under Section 382 of the Internal Revenue Code.

If our net operating loss carryforwards are further limited, and we have taxable income which exceeds the available net operating loss carryforwards for that period, we would incur an income tax liability even though net operating loss carryforwards may be available in future years prior to their expiration. Any such income tax liability may adversely affect our future cash flow, financial position and financial results.

The investment of our cash balances are subject to risks which may cause losses and affect the liquidity of these investments.

We hold our cash in a variety of marketable investments which are generally investment grade, liquid, short-term fixed-income securities and money market instruments denominated in U.S. dollars. If the carrying value of our investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to further write down the value of our investments, which could materially harm our results of operations and financial condition. With the current unstable credit environment, we might incur significant realized, unrealized or impairment losses associated with these investments.

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, including employees who joined Blackboard in connection with our acquisitions of WebCT, Xythos Software Inc., NTI, ANGEL and the business assets of Terriblyclever Design, LLC. 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, patent, 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, and these protections may be costly and difficult to enforce. Our competitors may independently develop technologies that are substantially equivalent or superior to our technology. To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. The protective mechanisms we include in our products may not be sufficient to prevent unauthorized copying. Existing copyright laws afford only limited protection for our intellectual property rights and may not protect such rights in the event competitors independently develop products similar to ours. In addition, the laws of some countries in which our products are or may be licensed do not protect our products and intellectual property rights to the same extent as do the laws of the United States.

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 products in our markets increases and the functionality of these products further overlaps, we believe that infringement claims may 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 and reimburse certain costs to our clients;

	•	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, or at all.

The nature of our business and our reliance on intellectual property and other proprietary information subjects us to the risks of litigation.

We are in an industry where litigation is common, including litigation related to copyright, patent, trademark and trade secret rights, and other types of claims. Litigation can be expensive and disruptive to normal business operations. The results of litigation are inherently uncertain and may result in adverse rulings or decisions. We may enter into settlements or be subject to judgments that may, individually or in the aggregate, have a material adverse effect on our business, financial condition or operating results.

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 of 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 our systems is of critical importance for our clients because they may 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. This area is heavily regulated in many countries in which we operate, including the United States. Individuals and groups may develop and deploy viruses, worms and other malicious software programs that attack or attempt to infiltrate our products. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, we could be subject to liability or our business could be interrupted. Penetration of our network security could have a negative impact on our reputation, could lead our present and potential clients to choose competing offerings, and could result in legal or regulatory action against us. Even if we do not encounter a security breach ourselves, a well-publicized breach of the consumer data security of another company could lead to a general public loss of confidence in the use of our products, which could significantly diminish the attractiveness of our products and services.

Operational failures in our network infrastructure could disrupt our remote hosting services, could cause us to lose clients and sales to potential 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 services we provide to some of our clients. We provide remote hosting through computer hardware that is currently located in third-party co-location facilities in various locations in the United States, The Netherlands and Australia. We do not control the operation of these co-location facilities. 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 facilities or if these co-location facilities were to close without adequate notice. Although we have developed certain redundancies in our systems, 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 in the event of an extended loss of service at the co-location facilities. Certain of our co-location facilities are served by data backup redundancy at other facilities. However, they are not equipped to provide full disaster recovery to all of our hosted clients. If there are operational failures in our network infrastructure that cause interruptions, slower response times, loss of data or extended loss of service for our remotely hosted clients, we may be required to issue credits or pay penalties, current clients may terminate their contracts or elect not to renew them, and we may lose sales to potential clients. If we determine that we need additional hardware and systems, we may be required to make further investments in our network infrastructure.

U.S. and foreign government regulation of our products and services 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 our products and services, including regulations relating to issues such as privacy, telecommunications, 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, local and foreign governments might attempt to regulate our products and services 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 our products and services.

We may be subject to state and federal financial services regulation, 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 Transact platform supports 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 consumer rights and our business policies and practices;

	•	restrictions on uses and disclosures of customer information;

	•	error resolution procedures;

	•	limitations on consumers’ liability for unauthorized account activity;

	•	data security requirements;


	•	government registration; and

	•	reporting and documentation requirements.

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


Item 6.	*Exhibits.*

(a) Exhibits:


Exhibit No.			Description

	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.


PART I. FINANCIAL INFORMATION
	Item 1.	Consolidated Financial Statements
		Unaudited Consolidated Balance Sheets as of December 31, 2008 and September 30, 2009	1
		Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2009	2
		Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2009	3
		Notes to Unaudited Consolidated Financial Statements	4
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
	Item 4.	Controls and Procedures	39

PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	40
	Item 1A.	Risk Factors	40
	Item 6.	Exhibits	50
	Signature		51