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But the initial response was less than enthusiastic, said the Harvard Business School graduate whose company, Freeborders, is in China's southern city of Shenzhen. Western companies seeking to outsource work were focused on India at that time, he said.

"The rest of the world was very skeptical," said Cestar. "India was very successful, and people were satisfied that India was perfect, and there was no need to go anywhere else."

But as the number of U.S. companies with operations in India increased, so did India's wages, personnel turnover and delivery problems, prompting clients to seek alternatives.

China, the Philippines, Russia, Poland, and Israel now are seen as growing alternatives for outsourcing.

In 2004, not a single buyer surveyed by Chicago-based management consulting company DiamondCluster International Inc.  said they were actively outsourcing technology functions to China. This year, 6 percent of the buyers said that they are already in China.

Interest in moving some operations to China in the next three to five years has quintupled. The percentage of companies who expected to establish outsourcing operations in China in the next three to five years has surged to 40 percent from 8 percent just a year ago, according to DiamondCluster's survey.

By comparison, outsourcing to India is not expected to increase much in the next three to five years, it said.

"China is starting to look like India did 10 years ago," Tom Weakland, who leads the outsourcing practice at DiamondCluster said. "Manufacturing firms have been in China for a long time and IT services have just started to ramp up in China right now."

China attracts Western companies with its reliable infrastructure, skilled workers and domestic market. Wage rates in coastal cities such as Shanghai have gone up, but overall remain lower than those in India.

Analysts say China, already a $30 billion software market, has the potential to become the world's next software outsourcing center.

But the country must first overcome several obstacles such as deficiencies in English fluency and intellectual property protection.

Because China does not have as many fluent English speakers as India does, it has focused on other prospects of business process outsourcing rather than call-center work, or taking customer service calls.

"India may have a little big edge because of the language," said Trip Chowdhry, analyst with FTN Midwest Research. "But I have also seen a lot of cooperation as many Indian software companies have opened offices in China."

Freeborders' Cestar said better infrastructure is China's biggest draw.

"We ask our clients to go to India first and then fly to Shenzhen, we couldn't have better sales materials than that," Cestar said. "Because the minute you land in Shenzhen you can see the environment is much better."

U.S. companies, as well as India's emerging software giants, are busy building operations in China.

Infosys , India's second-largest software exporter, has plans to build a campus close to Shanghai.

Accenture Ltd.  started offshoring in India but is now beefing up its center, which employs Japanese speakers to serve clients in Japan, in China's coastal city, Dalian.

U.S. consulting firm BearingPoint  started building its outsourcing base first in India but is now pushing aggressively in China. It employs about 1,000 engineers in the world's seventh-largest economy, and the number could rise to 10,000.

"China is coming to the forefront in terms of the demand," Manuel Barbero, vice president with BearingPoint said, adding that quarterly growth rate averages 25 percent there.

Costs of its China centers are about a quarter less than that of India, Barbero said.

China has developed strong expertise in transforming, integrating and implementing enterprise resources planning systems, Barbero said.

It also has more engineers who are familiar with the open source software, which is a free operating system favored in developing countries, he said.

India, instead, tends to focus on call centers and software coding. It moves upstream by handling more consulting work, analysts said

Total revenue for the quarter ended June 30, 2005 was $33.0 million, an increase of 25% over the second quarter of 2004. Product revenues for the quarter were $29.4 million, an increase of 26% over the second quarter of 2004, while professional services revenues for the quarter were $3.7 million, an increase of 22% over the second quarter of 2004. Operating income was $5.8 million for the second quarter of 2005 compared to operating income of $1.3 million for the second quarter of 2004. Net income was $6.1 million for the second quarter of 2005 compared to net income of $1.1 million for the second quarter of 2004. Cash net income for the second quarter of 2005, which excludes the amortization of acquisition-related intangible assets, net of taxes, was $6.1 million. Earnings per diluted share were $0.21 and cash earnings per diluted share were $0.22 in the second quarter of 2005.

"We are very pleased with our results for this quarter, where we experienced strong revenue growth and expanded operating margins and earnings per share," said Michael Chasen, CEO and President of Blackboard Inc. "Looking forward, we're encouraged by the strong interest we see for our Blackboard Academic Suite and Blackboard Commerce Suite product lines and remain focused on our strategy of enabling education innovation through great products and world-class support and service."

Total revenue for the first six months ended June 30, 2005 was $64.0 million, an increase of 24% over the first six months of 2004. Operating income was $10.9 million for the first six months of 2005 compared to operating income of $2.5 million for the first six months of 2004. Net income was $11.5 million for the first six months of 2005 compared to net income of $1.8 million for the first six months of 2004. Cash net income for the first six months of 2005, which excludes the amortization of acquisition-related intangible assets, net of taxes, was $11.6 million.

Blackboard provides cash net income and cash net income per share in this press release as additional information regarding Blackboard's operating results. These measures are not in accordance with, nor are they an alternative for, generally accepted accounting principles (GAAP) and may be different from cash net income and other non-GAAP measures used by other companies. Blackboard believes that this presentation of cash net income and cash net income per share provides useful information to investors regarding additional financial and business trends relating to Blackboard's financial condition and results of operations.


Highlights from the Second Quarter of 2005

* A few of Blackboard's new and expanded client relationships in the
quarter included:

- U.S. Higher Education Market: Association of Jesuit Colleges and
Universities, Clark College, Colorado Mountain College, Morgan
State University, Roger Williams College, San Bernardino Community
College, Southern Methodist University, University of Evansville,
Villa Julie College and others.

- International Markets: Universidad Popular Autonoma del Estado de
Puebla, Bond University, Bridgwater College, Dundee College, The
American University of Paris, University of Cardiff, University of
Copenhagen, University of Melbourne, University of Paisley and
others.

- K-12 Market: Alexandria City Public Schools, Deer Valley Unified
School District, Greenville County School District, Jefferson
County Public Schools, Orange County Department of Education,
Phoenix Union High School District, St. John Lutheran School,
Wayne RESA, Xavier College Preparatory and others.

* Blackboard announced the promotion of Todd Gibby to executive vice
president of operations and the appointment of David Sample to senior
vice president of sales. David Sample joined Blackboard with more
than 25 years of sales and executive management experience at a
variety of different enterprise software companies, including eleven
years at Hyperion Solutions Corporation.

* Blackboard announced Project Caliper, a development effort aimed at
delivering a sophisticated new product to meet our clients' needs in
the areas of student, course, program and institutional evaluation and
assessment.

* Blackboard announced the launch of a new European data center, which
allows Blackboard to host products for its clients in Europe. The new
center complements the two successful U.S. based data centers, which
host more than 340 academic institutions.

Outlook for the Third Quarter and Full Year of 2005
The following forward-looking statements regarding future financial performance are based on current expectations and actual results may differ materially. These statements do not reflect the potential impact of mergers, acquisitions or other business combinations that may be completed after the date of this release.

Blackboard expects that its effective tax rate will continue to be in the range of 4 to 7 percent through the end of 2005. Additionally, the Company's guidance does not incorporate the impact of expensing stock-based compensation under FAS 123®, which the Company will adopt beginning January 1, 2006.


For the third quarter of 2005, we expect:

* Revenue to be $35.4 to $35.9 million;
* Net income to be $6.2 to $6.5 million, resulting in diluted EPS of
$0.21 to $0.23 per share. This is based on an estimated 28.9 million
diluted shares and a 4% effective tax rate for the quarter; and
* Cash net income to be $6.2 to $6.6 million after adding back the tax
adjusted amortization of intangibles of approximately $75,000, which
would result in cash EPS of $0.22 to $0.23 per share. This is based
on an estimated 28.9 million diluted shares and an estimated 4%
effective tax rate for the quarter.

For the full year of 2005, we expect:

* Revenue to be $134.0 to $135.0 million;
* Net income to be $24.0 to $24.6 million, resulting in diluted EPS of
$0.84 to $0.86 per share, which is based on an estimated 28.5 million
diluted shares and a 4% effective tax rate for the full year; and
* Cash net income to be $24.3 to $24.9 million after adding back the tax
adjusted amortization of intangibles of approximately $300,000, which
would result in cash EPS of $0.85 to $0.87 per share based on an
estimated 28.5 million diluted shares and an estimated 4% effective
tax rate for the full year.