##### 



UNITED
    STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
    20549
      Form 10-K
   ANNUAL
    REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE SECURITIES EXCHANGE ACT of
    1934
  For the fiscal year ended December 31, 2006
  Commission file number:
    000-50784
      Blackboard Inc.
 (Exact Name of Registrant as
    Specified in Its Charter)
  Delaware

52-2081178(State or Other Jurisdiction
    of
    Incorporation or Organization)

(I.R.S. Employer
    Identification No.)1899 L Street, N.W.
    Washington D.C.(Address of Principal
    Executive Offices)

20036(Zip
    Code)   Registrants telephone number, including area code:
 (202) 463-4860
  Securities registered pursuant to Section 12(g) of the
    Act:
    None
  Securities registered pursuant to Section 12(b) of the
    Act:
  Common Stock, $0.01 par value per share
  þ o
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
   þ o o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K.




---



##### 



BLACKBOARD
    INC.
  Form 10-K
  TABLE OF
    CONTENTS
  PageNumberPART IItem 1.


Business


1Item 1A.


Risk
    Factors


10Item 1B.


Unresolved Staff
    Comments


19Item 2.


Properties


19Item 3.


Legal
    Proceedings


19Item 4.


Submission of
    Matters to a Vote of Security Holders


19PART IIItem 5.


Market for
    Registrants Common Equity and Related Stockholder Matters
    and Issuer Purchases of Equity Securities


20Item 6.


Selected Financial
    Data


22Item 7.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


24Item 7A.


Quantitative and
    Qualitative Disclosures About Market Risk


42Item 8.


Financial
    Statements and Supplementary Data


43Item 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


69Item 9A.


Controls and
    Procedures


69Item 9B.


Other
    Information


72PART IIIItem 10.


Directors and
    Executive Officers of the Registrant


72Item 11.


Executive
    Compensation


72Item 12.


Security Ownership
    of Certain Beneficial Owners and Management


72Item 13.


Certain
    Relationships and Related Transactions


72Item 14.


Principal
    Accounting Fees and Services


72PART IVItem 15.


Exhibits, Financial
    Statement Schedules


73   ii




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##### 



This report contains forward-looking statements that involve
    risks and uncertainties that could cause our actual results to
    differ materially from those expressed or implied by such
    statements. Factors that might cause or contribute to such
    differences include, but are not limited to, those discussed in
    the section entitled Risk Factors under
    Item 1A. When used in this report, the words
    expects, anticipates,
    intends, plans, believes,
    seeks, estimates and similar expressions
    are generally intended to identify forward-looking statements
    within the meaning of The Private Securities Litigation Reform
    Act of 1995. You should not place undue reliance on these
    forward-looking statements, which reflect our opinions only as
    of the date of this report. Blackboard assumes no obligation and
    does not intend to update these forward-looking statements.
 PART I  Item 1.
    Business.  General
  Blackboard Academic
    Suitetm Blackboard Commerce
    Suitetm
        Customer
    Overview
  U.S. K-12
 1




---



##### 



Products
    and Services
  Blackboard Academic Suite Blackboard Commerce Suite. Blackboard
    Academic Suite Blackboard Commerce Suite
  The
    Blackboard Academic Suite
  Blackboard Academic Suite easy-to-use Blackboard Academic Suite WebCT Campus
    EditionTM WebCT
    VistaTM Blackboard Academic Suite
  
    the Blackboard Learning
    SystemTMbasic products, which include Blackboard Learning
    System  Basic Licenseand Blackboard Learning
    System  CE Basic License (formerly WebCT
    Campus
    EditionTM 
    Focus license),
    the Blackboard Learning Systementerprise products, which
    include Blackboard Learning System  Enterprise
    License, Blackboard Learning System  CE Enterprise
    License (formerly WebCT Campus Edition) and
    Blackboard Learning System  Vista Enterprise
    License (formerly WebCT Vista),
    the Blackboard Community
    SystemTM;
    the Blackboard Content
    SystemTM
    ;
    the Blackboard Portfolio
    SystemTM;
    and
    the Blackboard Outcomes
    SystemTM
    .  Blackboard
    Learning System
  Blackboard Learning System Blackboard Learning System
  
    Learning environment.  Instructors can post
    syllabi and course materials, including documents, graphics,
    audio, video and multimedia; manage course communication through
    integrated email, discussion forums and live virtual classrooms;
    facilitate group collaboration, communication and file-sharing;
    create, deliver and automatically score online assignments and
    tests; and report grades and other information to students.
    Additional capabilities are available through the integration of
    third-party Blackboard Building
    Blocks®tools developed by our clients or independent parties.
    Blackboard Building Blocksallow institutions to
    download, install and manage third-party extensions. These
    third-party applications add functionality to our products and
    several client-managed online communities exist to foster open
    source development of enhancements to our products as well.
    Integration with existing systems.  Built on an
    enterprise Java architecture, the Blackboard Learning Systemis capable of supporting multiple end users in a high-usage
    environment. Our products can be integrated with existing campus
    student information systems and campus registrars systems
    to access the user, course and enrollment information stored
    throughout the institution. 2




---



##### 




    System administration.  User categories, or
    roles, are definable across the features of our products,
    including the ability to designate access parameters for all
    roles and set access policies for guest accounts and observers,
    such as parents, advisors, mentors and supervisors. System
    administrators can customize user roles. The appearance and
    configuration of our products are customizable by each client
    for multiple independent user populations on the same system
    hardware and database.  Blackboard Learning System Blackboard Learning System Blackboard Learning System
  Blackboard
    Community System
  Blackboard Community System Blackboard Learning System  Enterprise Blackboard Academic Suite, Blackboard Community System Blackboard
    Learning System Blackboard Community System
  
    Configurable portal environment enabling one stop access to
    services.  The Blackboard Community Systemenables institutions to provide their users, such as
    students, faculty and administrators, access through a
    customizable Web portal to multiple content sources, campus
    services, administrative systems and personal information
    management tools, such as email and calendar. The Blackboard
    Community Systemcan act as the single sign-on access to a
    variety of campus systems, eliminating the need for multiple
    access points and identification verifications. Institutions and
    independent software vendors can create custom portal
    applications that provide views into content and data from other
    systems or integrate other applications.
    Facilitating academic and co-curricular collaboration using
    community and communication tools.  The
    Blackboard Community Systemfacilitates the creation of
    meaningful campus connections by allowing institutions to define
    dedicated online environments for departments, clubs and other
    groups. Members of organizations can manage their own
    operations, as well as upload and share documents, and use their
    own communication tools.
    Maintaining distinct campus identities.  An
    institution can configure the Blackboard Community Systemto support multiple identities or brands within the
    institution (such as multiple campuses, a law school, medical
    school or continuing education program) and deliver content to
    targeted, institution-defined roles. In addition, users can
    customize the Blackboard Community Systeminterface
    according to their needs and preferences.  Blackboard
    Content System
  Blackboard Content System Blackboard Learning System  Enterprise Blackboard
    Content System
  
    Storing and accessing learning
    materials.  Institutions can make secure,
    web-based,
    drag-and-drop
    file storage space available to all users, who can then use a
    configurable permissions structure to share files with
    individuals or groups, track versions, and add comments. To
    assure appropriate usage of the file space, administrators can
    manage disk space quotas and set bandwidth controls. 3




---



##### 




    Learning content management.  Instructors can
    manage versions of documents and other course material and can
    re-use content across courses. Institutions can create moderated
    content repositories at departmental, school and institutional
    levels to facilitate the sharing and searching of digital
    content.
    Integrating library resources into the learning
    environment.  Librarians can create and manage
    collections of digital assets for use by specific courses,
    disciplines or the entire institution.
    Collecting and sharing materials within electronic
    portfolios.  Users can collect and organize their
    academic work as electronic portfolios, which can be shared with
    other users on the system, as well as published externally.
    These portfolios can be used for personal reflection, academic
    assignments, program completion, and educational standards
    alignment, or for professional development, such as
    résumés and job applications.  Blackboard
    Portfolio System
  Blackboard Portfolio System Blackboard Learning System  CE and Vista
    Enterprise Blackboard Portfolio System Blackboard Portfolio System
  
    Collecting learning materials.  Users can
    incorporate specific examples of students learning, from
    their courses into their portfolios. Easy collection of student
    work is also facilitated by the ability to upload diverse
    documents, multimedia or presentations into the portfolio. Users
    can also use an HTML editor to create materials directly in
    their portfolios.
    Presenting materials.  Flexible layouts help
    users to personalize their portfolios with fonts, backgrounds,
    and navigation menus of their choice. Faculty can use templates
    to provide guidance and direction to students and other authors
    as well as to create consistent presentation formats. There can
    be multiple template formats, for showcasing research work or
    resumes, or for reflecting on coursework, for example. Shared
    portfolios allow learning groups and project teams to develop
    portfolios together, encouraging collaboration and social
    learning.
    Reflecting on learning content:  Personal
    reflection capabilities allow users to create blogs and journals
    within their portfolio, facilitating reflection on their
    learning. Discussion boards embedded within portfolios enable
    users to obtain feedback from students, advisors and instructors.  Blackboard
    Outcomes System
  Blackboard Outcomes
    SystemTM Blackboard Learning System 
    Enterprise
  Blackboard Outcomes System
  
    Planning outcomes.  The Standards, Goals
    and Student Learning Objectives feature enables
    institutions to document intended outcomes of courses, programs,
    departments, colleges, universities and standards bodies.
    Rubrics, or standard evaluation criteria, facilitate shared and
    consistent evaluation of outcomes, while curriculum maps
    highlight the connection between program goals and courses and
    co-curricular educational experiences. 4




---



##### 




    Measuring learning and administrative
    outcomes.  Various assessment tools simplify the
    collection of student work and its evaluation against shared
    rubrics. Surveys and course evaluations enable users to collect
    useful indirect assessment data, soliciting attitudes and
    opinions from constituents on-campus and off-campus.
    Improving learning and institutional
    effectiveness.  Operational and analytic reports
    provide insight into assessment plans, activities, data,
    follow-up
    actions and correlations to all levels of an institution.  The
    Blackboard Commerce Suite
  Blackboard Commerce Suite e-commerce, Blackboard Commerce Suite
  
    the Blackboard Transaction
    Systemtm;
    the Blackboard Community System;and
    Blackboard
    Onetm.  Blackboard
    Transaction System
  Blackboard Transaction System Blackboard Transaction
    System point-of-sale Blackboard Transaction System Blackboard
    Transaction System
  
    Commerce.  Transaction processing capabilities
    of the Blackboard Transaction Systemsupport the creation
    and management of student debit accounts, as well as the
    processing of payments against those accounts using student ID
    cards on campus, such as in dining facilities, vending machines,
    copy machines and bookstores, off-campus and online. Our clients
    use the Blackboard Transaction Systemto manage
    point-of-sale
    transactions, such as prepaid debit cards, meal plan
    administration, cash equivalency, privilege verification and
    discounts, and self-service or unattended transactions, such as
    vending, laundry, printing and copying and parking.
    Activities management and security.  The
    access-rights capabilities of the Blackboard Transaction
    Systemenable a variety of applications using the
    clients investment in a single-card environment for
    commerce. These include event admission, student government
    voting, wireless verification on buses, library authorization
    and computer lab access and tracking. In addition, the system
    interfaces directly with door access points to manage
    identification and secure access control to facilities using the
    same student ID card.  Blackboard
    Community System
  Blackboard Academic Suite Blackboard Community
    System Blackboard Commerce Suite
  
    eMarketplace.  The Blackboard Community
    Systemenables campus business units and student
    organizations to sell products, which may be paid with the
    student debit account. Users can activate template-driven tools
    that allow them to describe, price, display and charge for an
    item all within the campus portal environment. Uses include
    campus bookstore online purchases, athletics and event tickets,
    library fees and parking fees. 5




---



##### 




    Web account management.  Through an online
    account, end users can manage a variety of activities, including
    online deposits, guest and parent deposits, balance inquiries,
    transaction history statements and lost and stolen card reports.  Blackboard
    One
  Blackboard One Blackboard Commerce
    Suite Blackboard Transaction
    System. Blackboard Transaction
    System Blackboard
    One
  Professional
    Services
    
    project management;
    integration of our applications with existing campus systems;
    user interface customization;
    installation and configuration;
    course and content migration; and
    custom Blackboard Building Blocksapplication development.  on-site Blackboard Academic Suite Blackboard
    Commerce Suite, Blackboard Academic Suite.
  Competition
  Blackboard Academic Suite Blackboard Commerce Suite
   6




---



##### 




    base of reference clients;
    functional breadth and depth of solution offered;
    ease of use;
    complexity of installation and upgrade;
    scalability of solution to meet growing needs;
    client service;
    availability of third-party application and content add-ons;
    total cost of ownership;
    financial stability; and
    company reputation.    Our
    Growth Strategy
    
    Growing annual license revenues.  We intend to
    increase annual license revenues with existing clients through
    upgrades to current products, cross-selling of complementary
    applications and increased total license value commensurate with
    the value of our offerings.
    Increasing penetration with U.S. postsecondary
    clients.  We intend to capitalize on our
    experience in the U.S. postsecondary education market to
    further enhance our leadership position.
    Offering new products to our target
    markets.  Using feedback gathered from our clients
    and our sales and technical support groups, we intend to
    continue to develop and offer new upgrades, applications and
    application suites to increase our presence on campuses and
    expand the value provided to our clients.
    Increasing sales to international postsecondary and
    U.S. K-12 clients.  We intend to continue to
    expand sales and marketing efforts to increase sales of our
    applications to international postsecondary institutions as well
    as U.S. K-12 schools.
    Pursuing strategic relationships and acquisition
    opportunities.  We intend to continue to pursue
    strategic relationships with, acquisitions of, and investments
    in, companies that enhance the technological features of our
    products, offer complementary products, services and
    technologies, or broaden the scope of our product offerings into
    other areas.  Research
    and Development
   7




---



##### 



Marketing
    and Sales
  Marketing
    Sales
     8




---



##### 



Executive
    Officers
    Name

Age

PositionMichael L. Chasen


35


Chief executive officer,
    president, directorMatthew L. Pittinsky


34


Chairman, directorMichael J. Beach


36


Chief financial officer and
    treasurerMatthew H. Small


34


Chief legal officer and secretaryPeter Segall


45


President, North American higher
    education and operationsDavid Sample


58


Senior vice president for salesJonathan R. Walsh


34


Vice president for finance and
    accounting   Matthew Pittinsky
  Michael Chasen
  Michael Beach
  Matthew Small
  Peter Segall
  David Sample
 9




---



##### 



Jonathan Walsh
  Employees
    International
    Operations
    Website
    Access to U.S. Securities and Exchange Commission
    Reports
  Form 10-K, Form 10-Q, Form 8-K 1-800-SEC-0330.
  Item 1A.
    Risk
    Factors.  Our
    merger with WebCT presents many risks, and we may not realize
    the financial and strategic goals that were contemplated at the
    time of the transaction.
    
    we may not realize the anticipated increase in our revenues if a
    larger than predicted number of customers decline to renew their
    contracts, if we are unable to sell WebCTs products to our
    customer base or if the acquired contracts do not allow us to
    recognize revenues on a timely basis;
    we may have difficulty incorporating WebCTs technologies
    or products with our existing product lines and maintaining
    uniform standards, controls, procedures and policies;
    we may have higher than anticipated costs in continuing support
    and development of WebCTs products;
    we may lose anticipated tax benefits or have additional legal or
    tax exposures;
    we may not be able to retain key WebCT employees;
    we may face contingencies related to product liability,
    intellectual property, financial disclosures, and accounting
    practices or internal controls; and 10




---



##### 




    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.  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.
          We
    incurred a significant amount of debt to finance the WebCT
    merger, which could constrict our liquidity, result in
    substantial cash outflows, and adversely affect our financial
    health and ability to obtain financing in the
    future.
    Providing
    enterprise software applications to the education industry is an
    emerging and uncertain business; if the market for our products
    fails to develop, we will not be able to grow our
    business.
   11




---



##### 



Most
    of our clients use our products to facilitate online education,
    which is a relatively new field; if online education does not
    continue to develop and gain acceptance, demand for our products
    could suffer.
    We
    face intense and growing competition, which could result in
    price reductions, reduced operating margins and loss of market
    share.
    Blackboard Academic Suite Blackboard Commerce
    Suite
   12




---



##### 



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.
    Because
    most of our licenses are renewable on an annual basis, a
    reduction in our license renewal rate could significantly reduce
    our revenues.
      If our
    newest product, the Blackboard Outcomes System, does not gain
    widespread market acceptance, our financial results could
    suffer.
    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.   13




---



##### 



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.
    If our
    products contain errors or if new product releases are delayed,
    we could lose new sales and be subject to significant liability
    claims.
    
    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.    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.
    
    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. 14




---



##### 



Our
    sales cycle with international postsecondary education providers
    and U.S. K-12 schools may be longer than our historic
    U.S. postsecondary sales cycle, which could cause us to
    incur greater costs and could reduce our operating
    margins.
    We may
    have exposure to greater than anticipated tax
    liabilities.
    Our
    ability to utilize our net operating loss carryforwards may be
    limited.
      Our
    future success depends on our ability to continue to retain and
    attract qualified employees.
    Our
    move to our headquarters location may be delayed which would
    disrupt our operations and increase our expenses.
   15




---



##### 



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.
    If we
    are unable to protect our proprietary technology and other
    rights, it will reduce our ability to compete for
    business.
    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.
    
    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, if at all. 16




---



##### 



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.
    
    foreign currency fluctuations, which could result in reduced
    revenues and increased operating expenses;
    potentially longer payment and sales cycles;
    difficulty in collecting accounts receivable;
    the effect of applicable foreign tax structures, including tax
    rates that may be higher than tax rates in the United States or
    taxes that may be duplicative of those imposed in the United
    States;
    tariffs and trade barriers;
    general economic and political conditions in each country;
    inadequate intellectual property protection in foreign countries;
    uncertainty regarding liability for information retrieved and
    replicated in foreign countries;
    the difficulties and increased expenses in complying with a
    variety of foreign laws, regulations and trade
    standards; and
    unexpected changes in regulatory requirements.  Unauthorized
    disclosure of data, whether through breach of our computer
    systems or otherwise, could expose us to protracted and costly
    litigation or cause us to lose clients.
    Operational
    failures in our network infrastructure could disrupt our remote
    hosting service, could cause us to lose current hosting clients
    and sales to potential hosting clients and could result in
    increased expenses and reduced revenues.
   17




---



##### 



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.
    U.S.
    and foreign government regulation of the Internet could cause us
    to incur significant expenses, and failure to comply with
    applicable regulations could make our business less efficient or
    even impossible.
      
    The Childrens Online Protection Act and the
    Childrens Online Privacy Protection Act restrict the
    distribution of certain materials deemed harmful to children and
    impose additional restrictions on the ability of online services
    to collect personal information from children under the age of
    13; and
    The Family Educational Rights and Privacy Act imposes parental
    or student consent requirements for specified disclosures of
    student information, including online information.    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.
  Blackboard Transaction System
 18




---



##### 




    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.    Item 1B.
    Unresolved
    Staff Comments.    Item 2.
    Properties.    Item 3.
    Legal
    Proceedings.    Item 4.
    Submission
    of Matters to a Vote of Security Holders.   19




---



##### 



PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities.    High


LowYear Ended December 31,
    2005:First Quarter

$
18.57


$
13.54Second Quarter


24.32



16.99Third Quarter


25.94



21.36Fourth Quarter


32.53



22.30Year Ended December 31,
    2006:First Quarter


32.24



25.75Second Quarter


32.98



23.46Third Quarter


29.49



25.23Fourth Quarter


30.12



25.98          20




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##### 



STOCK
    PERFORMANCE GRAPH
    COMPARE
    CUMULATIVE TOTAL RETURN
    AMONG BLACKBOARD INC.
    NASDAQ MARKET INDEX AND SIC CODE INDEX
  
  Assumes $100 invested on June 18, 2004
 Assumes dividends reinvested
 Fiscal year ending December 31, 2006
  6/18/2004


12/31/2004


12/31/2005


12/31/2006Blackboard Inc.


$
100.00



$
74.01



$
144.83



$
150.12SIC Code Index



100.00




107.82




106.14




121.83NASDAQ Market Index



100.00




106.69




109.04




120.23   (1)
    
    This graph is not soliciting material, is not deemed
    filed with the SEC and is not to be incorporated by reference in
    any filing by us under the Securities Act of 1933, as amended
    (the Securities Act), or the Exchange Act, whether
    made before or after the date hereof and irrespective of any
    general incorporation language in any such filing.(2)
    
    The stock price performance shown on the graph is not
    necessarily indicative of future price performance. Information
    used in the graph was obtained from Hemscott Inc., a source
    believed to be reliable, but we are not responsible for any
    errors or omissions in such information.(3)
    
    The hypothetical investment in our common stock presented in the
    stock performance graph above is based on an assumed initial
    price of $20.01 per share, the closing price on
    June 18, 2004, the date of our initial public offering. The
    stock sold in our initial public offering was issued at a price
    to the public of $14.00 per share. 21




---



##### 



Item 6.
    Selected
    Financial Data.    Year Ended December 31,2002


2003


2004


2005


2006(In thousands, except per share amounts)Statement of operations
    data:Revenues:Product

$
62,388


$
83,331


$
98,632


$
120,389


$
160,392Professional services


7,558



9,147



12,771



15,275



22,671Total revenues


69,946



92,478



111,403



135,664



183,063Operating expenses:Cost of product revenues, excludes
    $3,467, $3,467, $1,567, $0 and $9,333 of amortization of
    acquired technology included in amortization of intangibles
    resulting from acquisitions shown below for the years ended
    December 31, 2002, 2003, 2004, 2005 and 2006,
    respectively(1)


21,526



23,079



25,897



29,607



39,594Cost of professional services
    revenues(1)


5,742



6,628



7,962



10,220



16,001Research and development(1)


10,272



11,397



13,749



13,945



27,162Sales and marketing(1)


24,176



30,908



35,176



37,873



58,340General and administrative(1)


16,938



15,050



15,069



19,306



35,823Amortization of intangibles
    resulting from acquisitions


5,519



5,757



3,517



266



17,969Total operating expenses


84,173



92,819



101,370



111,217



194,889(Loss) income from operations


(14,227
)


(341
)


10,033



24,447



(11,826
)Interest (expense) income, net


(509
)


(470
)


315



3,097



(2,974
)Other expense


















(519
)(Loss) income before (provision)
    benefit for income taxes and cumulative change in accounting
    principle


(14,736
)


(811
)


10,348



27,544



(15,319
)(Provision) benefit for income
    taxes


(283
)


(614
)


(299
)


14,309



4,582(Loss) income before cumulative
    change in accounting principle


(15,019
)


(1,425
)


10,049



41,853



(10,737
)Cumulative change in accounting
    principle


(26,632
)














Net (loss) income


(41,651
)


(1,425
)


10,049



41,853



(10,737
)Dividends on and accretion of
    convertible preferred stock


(9,699
)


(10,077
)


(6,344
)






Net (loss) income attributable to
    common stockholders

$
(51,350
)

$
(11,502
)

$
3,705


$
41,853


$
(10,737
) 22




---



##### 



Year Ended December 31,2002


2003


2004


2005


2006(In thousands, except per share amounts)Net (loss) income attributable to
    common stockholders per common share:Basic

$
(9.40
)

$
(2.09
)

$
0.23


$
1.57


$
(0.39
)Diluted

$
(9.40
)

$
(2.09
)

$
0.21


$
1.47


$
(0.39
)Weighted average number of common
    shares:Basic


5,460



5,516



16,072



26,715



27,858Diluted


5,460



5,516



17,864



28,510



27,858(1) Includes the following
    amounts related to
    stock-based
    compensation:Cost of product revenues

$



$



$



$



$
386Cost of professional services
    revenues


















524Research and development


















733Sales and marketing


















2,951General and administrative


474



319



174



75



3,462     December 31,2002


2003


2004


2005


2006(In thousands)Balance sheet data:Cash and cash equivalents

$
20,372


$
30,456


$
78,149


$
75,895


$
30,776Short-term investments










20,000



62,602



Working capital (deficit)


(9,402
)


(13,001
)


53,026



93,388



(36,976
)Total assets


71,140



83,054



148,398



224,188



307,299Deferred revenues, current portion


37,342



51,215



63,901



74,975



117,972Total debt


11,855



11,564



762







23,623Mandatorily redeemable convertible
    preferred stock and Series E warrants


120,221



130,297











Total stockholders (deficit)
    equity


(113,403
)


(124,617
)


69,107



130,325



140,121  23




---



##### 



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations.  You should read the following discussion together with our
    consolidated financial statements and the related notes included
    elsewhere in this annual report. This discussion contains
    forward-looking statements that are based on our current
    expectations, estimates and projections about our business and
    operations. Our actual results may differ materially from those
    currently anticipated and expressed in such forward-looking
    statements as a result of a number of factors, including those
    we discuss under Risks Related to Our Business and
    elsewhere in this annual report.
  General
      time-and-materials
  Blackboard Academic
    SuiteTM Blackboard Commerce
    SuiteTM. Blackboard Academic Suite WebCT Campus
    EditionTM WebCT
    VistaTM
       24




---



##### 



Critical
    Accounting Policies and Estimates
      Revenue recognition. 97-2, Software Revenue Recognition, SOP 98-9, Modification of
    SOP 97-2,
    Software Revenue Recognition, with Respect to Certain
    Transactions.
 25




---



##### 



00-3, Application of AICPA
    SOP 97-2
    to Arrangements That Include the Right to Use Software Stored on
    Another Entitys Hardware. set-up
  time-and-materials
  when-and-if-available
  Allowance for doubtful accounts.
  Short-term investments. Accounting for Certain
    Investments in Debt and Equity Securities. Held-to-maturity held-to-maturity Available-for-sale other-than-temporary available-for-sale
  Long-lived assets. Accounting for the Impairment or Disposal of Long-Lived
    Assets.
 26




---



##### 



Goodwill and intangible assets. Goodwill and
    Other Intangible Assets.
      Acquired technology

3 yearsContracts and customer lists

3 to 5 yearsNon-compete agreements

Term of agreementTrademarks and domain names

3 yearsPatents and related costs

Life of patent     Business Combinations.
 27




---



##### 



Cash and cash equivalents

$
27,880Restricted cash


1,452Accounts receivable, net


4,369Prepaid expenses and other current
    assets


1,356Property and equipment, net


1,720Deferred tax assets, net


1,398Accounts payable


(272
)Other accrued liabilities


(10,687
)Deferred revenues


(4,456
)Net tangible assets to be acquired


22,760Definite-lived intangible assets
    acquired


73,307Goodwill


91,392Total estimated purchase price

$
187,459        28




---



##### 



build-up build-up
        2005


2006(In thousands, except per share amounts)(Unaudited)Total revenues

$
182,963


$
191,069Net income (loss)

$
25,332


$
(14,936
)Basic net income (loss) per common
    share

$
0.95


$
(0.54
)Diluted net income (loss) per
    common share

$
0.89


$
(0.54
)  29




---



##### 



Deferred Income Taxes.
    Stock-Based Compensation. Accounting for Stock Issued to Employees Accounting for Stock-Based
    Compensation Share-Based Payment
      Recent Accounting Pronouncements. Accounting for Uncertainty in Income taxes 
    an interpretation of FASB Statement No. 109 Accounting for Income Taxes.
  Fair Value Measurements
 30




---



##### 



Important
    Factors Considered by Management
        
    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
    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 Blackboard
    One, as well as the supplies and commissions we earn from
    publishers related to digital course supplement downloads.     31




---



##### 



Results
    of Operations
    Year EndedDecember 31,2004


2005


2006Revenues:Product


89
%


89
%


88
%Professional services


11



11



12Total revenues


100



100



100Operating expenses:Cost of product revenues


23



22



22Cost of professional services
    revenues


7



8



9Research and development


12



10



15Sales and marketing


32



28



32General and administrative


14



14



19Amortization of intangibles
    resulting from acquisitions


3



0



9Total operating expenses


91



82



106Operating margin


9
%


18
%


(6
)%     Year EndedDecember 31,2004


2005


2006Cost of product revenues


26
%


25
%


25
%Cost of professional services
    revenues


62
%


67
%


71
%   Year
    Ended December 31, 2006 Compared to Year Ended
    December 31, 2005
  Revenues.
    2005


2006Product


Professional





Product


ProfessionalRevenues


Services Revenues


Total


Revenues


Services Revenues


Total(In millions)(Unaudited)Recurring ratable revenues

$
95.7


$
0.9


$
96.6


$
130.4


$
2.3


$
132.7Non-recurring ratable revenues


18.1







18.1



20.0







20.0Other revenues


6.6



14.4



21.0



10.0



20.4



30.4Total revenues

$
120.4


$
15.3


$
135.7


$
160.4


$
22.7


$
183.1   Product revenues. Blackboard Academic Suite
 32




---



##### 



Blackboard Academic
    Suite Blackboard Learning Sys m Blackboard Content System Blackboard
    Community System Blackboard Commerce Suite Blackboard Transaction
    System
  Blackboard Learning System Blackboard Learning System Blackboard Learning System Blackboard Learning System Blackboard Learning System Blackboard Learning System Blackboard Learning System Blackboard Learning System Blackboard Learning
    System
    Blackboard One
  Blackboard
    Academic Suite Blackboard Academic Suite Blackboard Academic Suite Blackboard Academic Suite
  Professional services revenues.
 33




---



##### 



Cost of product revenues. Blackboard Transaction System
    Cost of professional services revenues.
  Research and development expenses.
  Sales and marketing expenses.
 34




---



##### 



General and administrative expenses.
  Net interest income (expense).
  Other expense.
  Income taxes.
    Net income (loss).
 35




---



##### 



Year
    Ended December 31, 2005 Compared to Year Ended
    December 31, 2004
  Revenues.
    2004


2005Product


Professional





Product


ProfessionalRevenues


Services Revenues


Total


Revenues


Services Revenues


Total(In millions)(Unaudited)Recurring ratable revenues

$
74.5


$
0.2


$
74.7


$
95.7


$
0.9


$
96.6Non-recurring ratable revenues


18.2







18.2



18.1







18.1Other revenues


5.9



12.6



18.5



6.6



14.4



21.0Total revenues

$
98.6


$
12.8


$
111.4


$
120.4


$
15.3


$
135.7   Product Revenues. Blackboard Learning System Blackboard
    Community System Blackboard Content System Blackboard
    Transaction System Blackboard Learning System-Basic Edition Blackboard Learning System Blackboard
    Learning System  Basic Edition Blackboard Learning System
  Blackboard
    Transaction System
  Blackboard
    Learning System Blackboard Community System Blackboard Content System Blackboard
    Learning System-Basic Edition Blackboard Learning System
 36




---



##### 



Professional services revenues.
  Cost of product revenues. Blackboard Content System Blackboard Transaction System Blackboard Transaction System
  Cost of professional services revenues.
  Research and development expenses.
  Sales and marketing expenses.
  General and administrative expenses.
 37




---



##### 



Net interest income.
  Income taxes.
      Net Income.
  Quarterly
    Results
   38




---



##### 



Quarter EndedMarch 31,


June 30,


September 30,


December 31,2005


2005


2005


2005(In thousands)Total revenues

$
30,942


$
33,049


$
35,927


$
35,746Total operating expenses


25,803



27,291



29,318



28,805Income from operations


5,139



5,758



6,609



6,941Net income(1)


5,410



6,063



7,269



23,111Net cash (used in) provided by
    operating activities


(1,421
)


2,506



22,281



16,447   Quarter EndedMarch 31,


June 30,


September 30,


December 31,2006


2006


2006


2006(In thousands)Total revenues

$
37,708


$
43,580


$
50,354


$
51,421Total operating expenses(2)


37,827



51,856



55,455



49,751(Loss) Income from operations


(119
)


(8,276
)


(5,101
)


1,670Net income (loss)


148



(6,311
)


(4,775
)


201Net cash (used in) provided by
    operating activities


(10,023
)


(3,848
)


24,455



12,302   (1)
    For the first time in our history, we had generated cumulative
    earnings from operations for the three-year period ended
    December 31, 2005. As a result of this positive earnings
    trend and projected operating results in the foreseeable future,
    we determined that it was more likely than not that we would be
    able to generate sufficient taxable income to utilize our net
    operating loss carryforwards, and accordingly, reduced our
    deferred tax asset valuation allowance by approximately
    $31.6 million. This reduction resulted in the recognition
    of an income tax benefit of $14.8 million for the quarter
    ended December 31, 2005.(2)
    During the three months ended December 31, 2006, we
    adjusted our estimated forfeiture rate from approximately 10.0%
    to approximately 15.0% which resulted in a reduction of
    previously recorded compensation expense of approximately
    $475,000.  Liquidity
    and Capital Resources
     39




---



##### 



40




---



##### 



Off-Balance
    Sheet Arrangements
    Obligations
    and Commitments
    Credit


Operating


Sub-LeaseFacilities


Leases


Income(In thousands)2007

$
246


$
4,312


$
2302008


246



5,057



2009


246



5,133



2010


246



5,510



2011


23,416



5,525



2012 and beyond






35,409



Total

$
24,400


$
60,946


$
230      41




---



##### 



Seasonality
    Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk       42




---



##### 



Item 8.
    Financial
    Statements and Supplementary Data  INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
  PageReport of
    Independent Registered Public Accounting Firm


44Consolidated
    Balance Sheets as of December 31, 2005 and 2006


45Consolidated
    Statements of Operations for the years ended December 31,
    2004, 2005 and 2006


46Consolidated
    Statements of Stockholders (Deficit) Equity for the years
    ended December 31, 2004, 2005 and 2006


47Consolidated
    Statements of Cash Flows for the years ended December 31,
    2004, 2005 and 2006


48Notes to
    Consolidated Financial Statements


49  43




---



##### 



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM           Internal Control-Integrated
    Framework
    Ernst &
    Young LLP
    44




---



##### 



BLACKBOARD
    INC.
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2005


2006(In thousands)Current assets:Cash and cash equivalents

$
75,895


$
30,776Short-term investments


62,602



Accounts receivable, net of
    allowance for doubtful accounts of $701 and $767 at
    December 31, 2005 and 2006, respectively


26,136



52,394Inventories


1,806



2,377Prepaid expenses and other current
    assets


2,116



3,514Deferred tax asset, current portion


10,274



7,326Deferred cost of revenues, current
    portion


5,797



7,983Total current assets


184,626



104,370Deferred tax asset, noncurrent
    portion


12,023



25,431Deferred cost of revenues,
    noncurrent portion


1,310



4,253Deferred merger costs (WebCT, Inc.)


4,956



Restricted cash


521



1,999Property and equipment, net


9,940



12,761Goodwill


10,252



101,644Intangible assets, net


560



56,841Total assets

$
224,188


$
307,299Current liabilities:Accounts payable

$
1,833


$
2,238Accrued expenses


14,083



20,519Term loan, current portion






246Deferred rent, current portion


347



371Deferred revenues, current portion


74,975



117,972Total current liabilities


91,238



141,346Term loan, noncurrent portion, net
    of debt discount of $777 at December 31, 2006






23,377Deferred rent, noncurrent portion


426



157Deferred revenues, noncurrent
    portion


2,199



2,298Commitments and contingenciesPreferred stock, $0.01 par
    value; 5,000,000 shares authorized, and no shares issued or
    outstanding at December 31, 2005 and 2006






Common stock, $0.01 par
    value; 200,000,000 shares authorized; 27,479,351 and
    28,248,214 shares issued and outstanding at
    December 31, 2005 and 2006, respectively


275



282Additional paid-in capital


210,919



231,331Deferred stock compensation


(114
)


Accumulated deficit


(80,755
)


(91,492
)Total stockholders equity


130,325



140,121Total liabilities and
    stockholders equity

$
224,188


$
307,299    45




---



##### 



BLACKBOARD
    INC.
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
  Year Ended December 31,2004


2005


2006(In thousands, except share and per share data)Revenues:Product

$
98,632


$
120,389


$
160,392Professional services


12,771



15,275



22,671Total revenues


111,403



135,664



183,063Operating expenses:Cost of product revenues, excludes
    $1,567, $0 and $9,333 in amortization of acquired technology
    included in amortization of intangibles resulting from
    acquisitions shown below for the years ended December 31,
    2004, 2005 and 2006, respectively(1)


25,897



29,607



39,594Cost of professional services
    revenues(1)


7,962



10,220



16,001Research and development(1)


13,749



13,945



27,162Sales and marketing(1)


35,176



37,873



58,340General and administrative(1)


15,069



19,306



35,823Amortization of intangibles
    resulting from acquisitions


3,517



266



17,969Total operating expenses


101,370



111,217



194,889Income (loss) from operations


10,033



24,447



(11,826
)Other income (expense), net:Interest expense


(179
)


(49
)


(5,354
)Interest income


494



3,146



2,380Other expense










(519
)Income (loss) before (provision)
    benefit for income taxes


10,348



27,544



(15,319
)(Provision) benefit for income
    taxes


(299
)


14,309



4,582Net income (loss)


10,049



41,853



(10,737
)Dividends on and accretion of
    convertible preferred stock


(6,344
)






Net income (loss) attributable to
    common stockholders

$
3,705


$
41,853


$
(10,737
)Net income (loss) per common share:Basic

$
0.23


$
1.57


$
(0.39
)Diluted

$
0.21


$
1.47


$
(0.39
)Weighted average number of common
    shares:Basic


16,071,598



26,714,748



27,857,576Diluted


17,864,137



28,509,777



27,857,576(1) Includes the following
    amounts related to stock-based compensation:Cost of product revenues

$



$



$
386Cost of professional services
    revenues










524Research and development










733Sales and marketing










2,951General and administrative


174



75



3,462    46




---



##### 



BLACKBOARD
    INC.
  CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS (DEFICIT) EQUITY
  Additional


Deferred





TotalCommon Stock


Paid-In


Stock


Accumulated


StockholdersShares


Amount


Capital


Compensation


Deficit


(Deficit) Equity(In thousands, except share amounts)Balance at December 31, 2003


5,536,396


$
55


$
8,020


$
(35
)

$
(132,657
)

$
(124,617
)Issuance of common stock upon
    exercise of options


397,033



4



1,966











1,970Issuance of common stock upon
    exercise of warrants


156,171



2



246











248Issuance of common stock in
    connection with acquisition of Prometheus


27,447



















Issuance of compensatory stock
    options










348



(279
)






69Amortization of deferred stock
    compensation














105







105Accretion of beneficial conversion
    feature associated with Series E Preferred Shares and
    warrants










(1,775
)










(1,775
)Accretion on preferred stock and
    related dividends










(4,569
)










(4,569
)Issuance of common stock pursuant
    to accrued dividends on convertible preferred stock


2,414,857



24















24Issuance of common stock pursuant
    to conversion of convertible preferred stock


13,371,980



134



136,483











136,617Issuance of common stock pursuant
    to initial public offering, net of expenses


4,073,938



41



50,945











50,986Net income


















10,049



10,049Balance at December 31, 2004


25,977,822



260



191,664



(209
)


(122,608
)


69,107Issuance of common stock upon
    exercise of options


1,320,728



13



11,779











11,792Issuance of common stock upon
    cashless exercise of warrants


180,801



2



(2
)










Amortization of deferred stock
    compensation










(20
)


95







75Tax benefit for exercise of
    disqualified stock options










7,498











7,498Net income


















41,853



41,853Balance at December 31, 2005


27,479,351



275



210,919



(114
)


(80,755
)


130,325Issuance of common stock upon
    exercise of options


768,863



7



9,153











9,160Reclassification of deferred stock
    compensation upon adoption of SFAS 123R










(114
)


114







Tax benefit for exercise of
    disqualified stock options










3,317











3,317Stock-based compensation expense










8,056











8,056Net loss


















(10,737
)


(10,737
)Balance at December 31, 2006


28,248,214


$
282


$
231,331


$



$
(91,492
)

$
140,121    47




---



##### 



BLACKBOARD
    INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Year Ended December 31,2004


2005


2006(In thousands)Cash flows from operating
    activitiesNet income (loss)

$
10,049


$
41,853


$
(10,737
)Adjustments to reconcile net income
    (loss) to net cash provided by operating activities Deferred tax
    benefit






(14,799
)


(5,075
)Excess tax benefits from
    stock-based compensation










(3,317
)Amortization of debt discount










1,701Depreciation and amortization


6,275



6,867



8,980Amortization of intangibles
    resulting from acquisitions


3,517



266



17,969Change in allowance for doubtful
    accounts


(64
)


(253
)


(109
)Noncash deferred stock compensation


174



75



8,056Changes in operating assets and
    liabilities, net of effect of acquisitions:Accounts receivable


1,248



(4,197
)


(21,780
)Inventories


56



188



(571
)Prepaid expenses and other current
    assets


(173
)


(910
)


(42
)Deferred cost of revenues


(1,070
)


(2,191
)


(5,129
)Accounts payable


(719
)


719



133Accrued expenses


(610
)


2,373



(5,588
)Deferred rent


(68
)


(294
)


(245
)Deferred revenues


14,116



10,116



38,640Net cash provided by operating
    activities


32,731



39,813



22,886Cash flows from investing
    activitiesPurchase of property and equipment


(7,440
)


(7,959
)


(10,081
)Payments for patent enforcement
    costs










(276
)Purchase of
    held-to-maturity
    securities






(33,296
)


Sale of
    held-to-maturity
    securities






9,750



23,546Purchase of
    available-for-sale
    securities


(20,000
)


(55,306
)


Sale of
    available-for-sale
    securities






36,250



39,056Payments for merger costs (WebCT,
    Inc.)






(2,536
)


Acquisition of WebCT, Inc., net of
    cash acquired










(154,628
)Net cash used in investing
    activities


(27,440
)


(53,097
)


(102,383
)Cash flows from financing
    activitiesProceeds from revolving credit
    facility










10,000Payments on revolving credit
    facility










(10,000
)Proceeds from term loan










57,522Payments on term loan










(35,600
)Payments on equipment notes


(922
)


(762
)


Proceeds from line of credit


7,880







Payments on line of credit


(15,760
)






Payments on note payable


(2,000
)






Proceeds from issuance of common
    stock pursuant to initial public offering, net of expenses


50,986







Releases of letters of credit










1,777Payments on letters of credit










(1,798
)Proceeds from issuance of common
    stock pursuant to exercise of warrants


248







Excess tax benefits from
    stock-based compensation










3,317Proceeds from exercise of stock
    options


1,970



11,792



9,160Net cash provided by financing
    activities


42,402



11,030



34,378Net increase (decrease) in cash and
    cash equivalents


47,693



(2,254
)


(45,119
)Cash and cash equivalents at
    beginning of year


30,456



78,149



75,895Cash and cash equivalents at end of
    year

$
78,149


$
75,895


$
30,776Supplemental cash flow
    informationCash paid for interest

$
179


$
49


$
3,539Cash paid for income taxes


607



687



344Accretion on preferred stock and
    related dividends


6,344







    48




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 December 31,
    2005 and 2006
  1.
    Nature of
    Business and Organization  Blackboard Learning
    SystemTM,
    Blackboard Community
    SystemTM,
    Blackboard Content
    SystemTM,
    Blackboard Outcomes
    SystemTM Blackboard Portfolio
    SystemTM
    Blackboard Transaction
    SystemTM Blackboard
    OneTM.
      2.
    Significant
    Accounting Policies  Basis
    of Presentation and Consolidation
  Consolidated
    Financial Statements, Consolidation of all Majority-Owned
    Subsidiaries. Consolidation of Variable Interest
    Entities, The
    Equity Method of Accounting for Investments in Common
    Stock.
  Use of
    Estimates
    Reclassifications
    Fair
    Value of Financial Instruments
  Disclosures about Fair Value of
    Financial Instruments,
 49




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Cash
    and Cash Equivalents
    Short-term
    Investments
  Accounting for Certain
    Investments in Debt and Equity Securities. Held-to-maturity held-to-maturity Available-for-sale other-than-temporary available-for-sale
  held-to-maturity available-for-sale.
  Restricted
    Cash
    Foreign
    Currency Translation
   50




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Concentration
    of Credit Risk
        Deferred
    Income Taxes
    Inventories
  first-in,
  Property
    and Equipment
    Computer and office equipment

3 yearsSoftware

2 yearsFurniture and fixtures

3 to 5 yearsLeasehold improvements

Shorter of lease term or useful
    life   Goodwill
    and Intangible Assets
  Goodwill and Other Intangible
    Assets.
 51




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       Acquired technology

3 yearsContracts and customer lists

3 to 5 yearsNon-compete agreements

Term of agreementTrademarks and domain names

3 yearsPatents and related costs

Life of patent   Impairment
    of Long-Lived Assets
    Revenue
    Recognition and Deferred Revenue
  97-2, Software Revenue Recognition, SOP 98-9, Modification of
    SOP 97-2,
    Software Revenue Recognition, with Respect to Certain
    Transactions.
      00-3, Application of AICPA
    SOP 97-2
    to Arrangements That Include the Right to Use Software Stored on
    Another Entitys Hardware. set-up
 52




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   time-and-materials
  when-and-if-available
  Cost
    of Revenues and Deferred Cost of Revenues
      Software
    Development Costs
  Accounting for
    the Costs of Computer Software to be Sold, Leased, or Otherwise
    Marketed.
  Advertising
    Accounting
    for Stock-Based Compensation
  Accounting for
 53




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Stock Issued to Employees Accounting for Stock-Based Compensation Share-Based
    Payment
      Year Ended December 31,2004


2005


2006(In thousands, except per share amounts)Pro forma net income (loss)
    attributable to common stockholders:As reported

$
3,705


$
41,853


$
(10,737
)Add: Stock-based compensation
    included in reported net income (loss) attributable to common
    stockholders


174



75



Deduct: Stock-based compensation
    expense determined under fair value-based method for all awards


(4,382
)


(6,031
)


Pro forma net (loss) income
    attributable to common stockholders

$
(503
)

$
35,897


$
(10,737
)Net income (loss) attributable to
    common stockholders per common share:Basic as reported

$
0.23


$
1.57


$
(0.39
)Diluted as reported

$
0.21


$
1.47


$
(0.39
)Basic  pro forma

$
(0.03
)

$
1.34


$
(0.39
)Diluted  pro forma

$
(0.03
)

$
1.26


$
(0.39
)  54




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2004


2005


2006Dividend yield


0
%


0
%


0
%Expected volatility


64.8
%


47.4
%


42.4
%Average risk-free interest rate


3.25
%


4.00
%


4.75
%Expected term


5.0 years



5.0 years



4.9 yearsForfeiture rate


10.0
%


10.0
%


15.0
%   Dividend yield
  Expected volatility
  Risk-free interest rate
  Expected life of the options
  Forfeiture rate
      Basic
    and Diluted Net Income (loss) Attributable to Common
    Stockholders per Common Share
   55




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Year Ended December 31,2004


2005


2006(In thousands, except share and per share amounts)Basic net income (loss)
    attributable to common stockholders per common share:Net income (loss)

$
10,049


$
41,853


$
(10,737
)Less accretion on preferred stock
    and related dividends:Redeemable convertible preferred
    stock


(6,344
)






Net income (loss) attributable to
    common stockholders per common share

$
3,705


$
41,853


$
(10,737
)Weighted average shares outstanding


16,071,598



26,714,748



27,857,576Basic net income (loss)
    attributable to common stockholders per common share

$
0.23


$
1.57


$
(0.39
)Diluted net income (loss)
    attributable to common stockholders per common share:Net income (loss) attributable to
    common stockholders per common share

$
3,705


$
41,853


$
(10,737
)Weighted average number of basic
    shares outstanding


16,071,598



26,714,748



27,857,576Dilutive effect of:Stock options related to the
    purchase of common stock


1,591,412



1,697,566



Warrants related to the purchase
    of common stock


201,127



97,463



Diluted shares outstanding


17,864,137



28,509,777



27,857,576Diluted net income (loss)
    attributable to common stockholders per common share

$
0.21


$
1.47


$
(0.39
)     Segment
    Information
   56




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Disclosure about Segments of an Enterprise and Related
    Information.
    Recent
    Accounting Pronouncements
  Accounting for Uncertainty in Income taxes 
    an interpretation of FASB Statement No. 109 Accounting for Income Taxes.
  Fair Value Measurements
  Comprehensive
    Net Income (loss)
    3.
    WebCT,
    Inc. Merger    Business Combinations
  Purchase
    Price Allocation
   57




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Cash and cash equivalents

$
27,880Restricted cash


1,452Accounts receivable, net


4,369Prepaid expenses and other current
    assets


1,356Property and equipment, net


1,720Deferred tax assets, net


1,398Accounts payable


(272
)Other accrued liabilities


(10,687
)Deferred revenues


(4,456
)Net tangible assets to be acquired


22,760Definite-lived intangible assets
    acquired


73,307Goodwill


91,392Total estimated purchase price

$
187,459        58




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Deferred
    Revenues
  build-up build-up
  Pre-Acquisition
    Contingencies
    Pro
    Forma Financial Information
   59




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     2005


2006(In thousands, except per share amounts)(Unaudited)Total revenues

$
182,963


$
191,069Net income (loss)

$
25,332


$
(14,936
)Basic net income (loss) per common
    share

$
0.95


$
(0.54
)Diluted net income (loss) per
    common share

$
0.89


$
(0.54
)   4.
    Inventories    December 31,2005


2006(In thousands)Raw materials

$
700


$
799Work-in-process


451



658Finished goods


655



920Total inventories

$
1,806


$
2,377   5.
    Property
    and Equipment    December 31,2005


2006(In thousands)Computer and office equipment

$
24,394


$
32,108Software


11,347



14,914Furniture and fixtures


599



681Leasehold improvements


1,866



2,30438,206



50,007Less accumulated depreciation and
    amortization


(28,266
)


(37,246
)Total property and equipment, net

$
9,940


$
12,761    60




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   6.
    Goodwill
    and Intangible Assets    December 31,2005


2006(In thousands)Goodwill

$
10,252


$
101,644Acquired technology

$
10,400


$
44,107Contracts and customer lists


5,443



45,042Non-compete agreements


2,043



2,043Trademarks and domain names


71



71Patents and related costs






944Subtotal


17,957



92,207Less accumulated amortization


(17,397
)


(35,366
)Intangible assets, net

$
560


$
56,841     7.
    Credit
    Facilities       61




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        8.
    Stockholders
    Equity    2.1189894-to-1,
 62




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   paid-in-kind
  one-for-two one-for-1.0594947
  9.
    Stock
    Option Plan     63




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Weighted-AverageShares


Price/ShareOptions outstanding at
    December 31, 2003


3,493,091


$
8.95Options granted


1,124,272



13.22Options exercised


(397,033
)


4.95Options forfeited


(282,737
)


11.68Options outstanding at
    December 31, 2004


3,937,593



10.37Options granted


944,629



19.10Options exercised


(1,320,728
)


8.99Options forfeited


(218,182
)


14.92Options outstanding at
    December 31, 2005


3,343,312



13.06Options granted


1,858,250



27.65Options exercised


(768,863
)


11.99Options forfeited


(510,654
)


24.16Options outstanding at
    December 31, 2006


3,922,045



18.76Options exercisable at
    December 31, 2006


1,810,267



11.85     Outstanding Options


Exercisable OptionsWeighted Average


Weighted





WeightedRemaining Life


Average





AverageRange of Exercise Prices

Shares


(Years)


Price


Shares


Price$0.02-$9.66


1,017,218



4.76


$
8.51



994,157


$
8.48$9.67-$17.00


872,541



7.05



14.06



522,834



13.55$17.01-$26.84


856,026



6.76



22.66



262,078



19.12$26.85-$28.41


962,300



7.01



28.03



2,407



27.91$28.42-$31.34


213,960



7.39



29.42



28,791



29.563,922,045



6.40



18.76



1,810,267



11.85     10.
    Income
    Taxes  paid-in-capital
 64




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      December 31,2004


2005


2006(In thousands)Current expense

$
299


$
490


$
493Deferred benefit






(14,799
)


(5,075
)Provision (benefit) for income
    taxes

$
299


$
(14,309
)

$
(4,582
)     December 31,2005


2006(In thousands)Deferred tax assets (liabilities):Stock-based compensation expense

$



$
1,813Net operating loss carryforwards


8,755



34,996International net operating loss
    carryforwards


2,391



1,542Alternative minimum tax and other
    tax credits


2,568



2,749Net operating loss attributable to
    stock option exercises


7,498



9,663Depreciation


1,630



1,328Amortization


2,687



(13,136
)Bad debts


277



305Deferred rent


305



140Deferred revenues


967



1,350Deferred cost of revenues


(1,772
)


(2,388
)Other accruals and prepaids


(153
)


(458
)Valuation allowance


(2,856
)


(5,147
)Net deferred tax assets

$
22,297


$
32,757   2018-2026.
 65




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     2004


2005


2006Federal tax at statutory rates


34.0
%


35.0
%


35.0
%State taxes, net of federal benefit


4.6



4.5



4.5Change in valuation allowance


(24.5
)


(87.7
)


4.6Permanent differences


(11.2
)


(3.7
)


(9.1
)Change in tax rates










(1.3
)Other










(3.8
)(Benefit) provision for income
    taxes


2.9
%


(51.9
)%


(29.9
)%   Accounting for Contingencies.
    11.
    Commitments
    and Contingencies   66




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Credit


Operating


Sub-LeaseFacilities


Leases


Income(In thousands)2007

$
246


$
4,312


$
2302008


246



5,057



2009


246



5,133



2010


246



5,510



2011


23,416



5,525



2012 and beyond






35,409



Total

$
24,400


$
60,946


$
230         12.
    Employee
    Benefit Plans      13.
    Quarterly
    Financial Information (Unaudited)   67




---



##### 



BLACKBOARD
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    March 31,


June 30,


September 30,


December 31,2005


2005


2005


2005(In thousands, except per share amounts)Summary consolidated statement of
    operations:Total revenues

$
30,942


$
33,049


$
35,927


$
35,746Costs of revenues


9,430



9,647



10,240



10,510Net income attributable to common
    stockholders


5,410



6,063



7,269



23,111Net income attributable to common
    stockholders per common share:Basic

$
0.21


$
0.23


$
0.27


$
0.85Diluted

$
0.20


$
0.21


$
0.25


$
0.79     March 31,


June 30,


September 30,


December 31,2006


2006


2006


2006(In thousands, except per share amounts)Summary consolidated statement of
    operations:Total revenues

$
37,708


$
43,580


$
50,354


$
51,421Costs of revenues


11,357



14,312



15,739



14,187Net income (loss) attributable to
    common stockholders


148



(6,311
)


(4,775
)


201Net income (loss) attributable to
    common stockholders per common share:Basic

$
0.01


$
(0.23
)

$
(0.17
)

$
0.01Diluted

$
0.01


$
(0.23
)

$
(0.17
)

$
0.01    68




---



##### 



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure.    Item 9A.
    Controls
    and Procedures.  (a)
    Evaluation
    of Disclosure Controls and Procedures.  Rules 13a-15(e) 15d-15(e)
  (b)
    Changes
    in Internal Control over Financial Reporting.  Rules 13a-15(f) 15d-15(f)
 69




---



##### 



MANAGEMENTS
    REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
  Rule 13a-15(f).
  Internal Control 
    Integrated Framewor Internal
    Control  Integrated Framework
    Signature

Title

Date/s/  Michael
    L. ChasenMichael
    L. Chasen

Chief Executive Officer and
    Director (Principal Executive Officer)

February 23, 2007/s/  Michael
    J. BeachMichael
    J. Beach

Chief Financial Officer
    (Principal Financial Officer)

February 23, 2007  70




---



##### 



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
     Internal Control  Integrated Framework
            
     71




---



##### 



Item 9B.
    Other
    Information.    PART III  Item 10.
    Directors
    and Executive Officers of the Registrant.      
    Information regarding our directors required by this Item is set
    forth under the heading Election of Directors
    Information regarding our audit committee and designated
    audit committee financial experts is set forth under
    the heading Corporate Governance Principles and Board
    Matters, Board Structure and Committee Composition 
    Audit Committee
    Information regarding Section 16(a) beneficial ownership
    reporting compliance is set forth under the heading
    Section 16(a) Beneficial Ownership Reporting
    Compliance  Code of
    Ethics
    Item 11.
    Executive
    Compensation.    Item 12.
    Security
    Ownership of Certain Beneficial Owners and
    Management.    Item 13.
    Certain
    Relationships and Related Transactions.    Item 14.
    Principal
    Accounting Fees and Services.   72




---



##### 



PART IV  Item 15.
    Exhibits,
    Financial Statement Schedules.  (a)  1.
    Financial Statements.
    The consolidated financial statements are listed under
    Item 8 of this report.  2.
    Financial Statement Schedules.
    Schedule II  Valuation and Qualifying Accounts    3.
    Exhibits.
    The Exhibits filed as part of this Annual Report on
    Form 10-K
    are listed on the Exhibit Index immediately preceding such
    Exhibits, which Exhibit Index is incorporated herein by
    reference.     73




---



##### 



BLACKBOARD
    INC.
  SCHEDULE II 
    VALUATION AND QUALIFYING ACCOUNTS
  As of December 31,2004


2005


2006(In thousands)Allowance for Doubtful
    AccountsBeginning Balance

$
1,018


$
954


$
701Additions


140



(1,250
)


198Reductions


(515
)


(318
)


(132
)Other(1)


311



1,315



Ending Balance

$
954


$
701


$
767     (1)
    
    The years ended December 31, 2004 and 2005 include the
    reinstatement and subsequent collections on accounts receivable
    that were deemed uncollectible in prior periods. 74




---



##### 



SIGNATURES
      By:
    /s/  Michael
    J. Beach   Chief Financial Officer
    Signature

Title

Date/s/  Michael
    L. ChasenMichael
    L. Chasen

Chief Executive Officer and
    Director (Principal Executive Officer)

February 23, 2007/s/  Michael
    J. BeachMichael
    J. Beach

Chief Financial Officer 
    (Principal Financial Officer)

February 23, 2007/s/  Jonathan
    R. WalshJonathan
    R. Walsh

Vice President, Finance and
    Accounting (Principal Accounting Officer)

February 23, 2007/s/  Matthew
    PittinskyMatthew
    Pittinsky

Chairman of the Board of Directors

February 23, 2007/s/  Frank
    R. GattiFrank
    R. Gatti

Director

February 23, 2007/s/  Arthur
    E. LevineArthur
    E. Levine

Director

February 23, 2007/s/  E.
    Rogers Novak, Jr.E.
    Rogers Novak, Jr.

Director

February 23, 2007/s/  William
    RaduchelWilliam
    Raduchel

Director

February 23, 2007  75




---



##### 



EXHIBIT INDEX
  ExhibitNumber2
.1

Agreement and Plan of Merger,
    dated October 12, 2005, by and among the Registrant, WebCT,
    Inc. and College Acquisition Sub, Inc.(9)3
.1

Fourth Restated Certificate of
    Incorporation of the Registrant(4)3
.2

Amended and Restated By-Laws of
    the Registrant(4)4
.1

Form of certificate representing
    the shares of the Registrants common stock(3)10
.1

Amended and Restated Stock
    Incentive Plan, as amended(1)10
.2

Amended and Restated 2004 Stock
    Incentive Plan(13)10
.3

Employment Agreement between the
    Registrant and Michael Chasen dated November 14, 2005(10)10
.4

Employment Agreement between the
    Registrant and Matthew Pittinsky dated November 14, 2005(10)10
.5

Employment Agreement between the
    Registrant and Michael Beach, dated September 1, 2006(14)10
.6

Employment Agreement between the
    Registrant and Matthew H. Small, dated January 26, 2004(7)10
.7

Employment Agreement between the
    Registrant and David Sample, dated June 3, 2006 10
.8

Employment Agreement between the
    Registrant and Peter Q. Repetti, dated June 1, 2001(2)10
.9

Outside Director Compensation
    Plan(15)10
.10

Office lease between the
    Registrant and 1899 L Street LLC, dated November 22, 1999,
    as amended(1)10
.11

Fifth Amendment to Lease Agreement
    between the Registrant and 1899 L Street Tower LLC, dated
    August 31, 2005(11)10
.12

Lease Commencement Agreement
    between the Registrant and 1899 L Street Tower LLC, dated
    August 31, 2005(11)10
.13

Sixth Amendment to Lease Agreement
    between the Registrant and 1899 L Street Tower LLC, dated
    January 27, 2006(11)10
.14

Seventh Amendment to Lease
    Agreement between the Registrant and 1899 L Street Tower LLC,
    dated November 3, 2006 10
.15

Eighth Amendment to Lease
    Agreement between the Registrant and L Street Tower LLC
    dated February 21, 2007 10
.16

Office Lease Agreement between the
    Registrant and Washington Television Center, dated
    December 15, 2006 10
.17

Third Amended and Restated
    Registration Rights Agreement, between the Registrant and
    certain stockholders of the Registrant dated as of April 6,
    2001(1)10
.18

Registration Rights Agreement,
    between the Registrant and The George Washington University,
    dated January 11, 2002(3)10
.19

Form of Incentive Stock Option
    Agreement(5)10
.20

Form of Nonstatutory Stock Option
    Agreement(5)10
.21

Form of Restricted Stock
    Agreement(5)10
.22

Form of Executive Incentive Stock
    Option Agreement(6)10
.23

Form of Executive Nonstatutory
    Stock Option Agreement(6)10
.24

Form of Executive Nonstatutory
    Stock Option Agreement(15)10
.25

Form of Executive Nonstatutory
    Stock Option Agreement(15)10
.26

Summary of Approved 2006 and 2007
    Compensation(15)10
.27

Guarantee and Collateral
    Agreement, dated February 28, 2006 by and among the
    Registrant, certain subsidiaries of Registrant and Credit
    Suisse, Cayman Islands Branch.(12)10
.28

$70,000,000 Credit Agreement,
    dated February 28, 2006 by and between the Registrant,
    Credit Suisse, Cayman Islands Branch, Credit Suisse and certain
    lenders thereto.(12)10
.29

Escrow Agreement, dated
    February 28, 2006 by and between the Registrant, American
    Stock Transfer & Trust Company, Dennis Beckingham and
    Marc Poirier.(12)21
.1

Subsidiaries of the Company 




---



##### 



ExhibitNumber23
.1

Consent of Ernst & Young
    LLP 31
.1

Certification Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002 31
.2

Certification Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002 32
.1

Section 906 Principal
    Executive Officer Certification 32
.2

Section 906 Principal
    Financial Officer Certification      
    
    Filed herewith.
    
    Furnished herewith.(1)
    
    Previously filed on March 5, 2004 as an exhibit to the
    Registrants Registration Statement on
    Form S-1
    (File
    No. 333-113332),
    and incorporated by reference herein.(2)
    
    Previously filed on April 7, 2004 as an exhibit to
    Amendment No. 1 to the Registrants Registration
    Statement on
    Form S-1
    (File
    No. 333-113332),
    and incorporated by reference herein.(3)
    
    Previously filed on May 4, 2004 as an exhibit to Amendment
    No. 2 to the Registrants Registration Statement on
    Form S-1
    (File
    No. 333-113332),
    and incorporated by reference herein.(4)
    
    Previously filed on August 8, 2004 as an exhibit to the
    Registrants Report on
    Form 10-Q,
    and incorporated by reference herein.(5)
    
    Previously filed on December 3, 2004 as an exhibit to the
    Registrants Report on
    Form 8-K,
    and incorporated by reference herein.(6)
    
    Previously filed on March 1, 2005 as an exhibit to the
    Registrants Report on
    Form 10-K,
    and incorporated by reference herein.(7)
    
    Previously filed on May 13, 2005 as an exhibit to the
    Registrants Report on
    Form 10-Q,
    and incorporated by reference herein.(8)
    
    Previously filed on May 25, 2005 as an exhibit to the
    Registrants Report on
    Form 8-K,
    and incorporated by reference herein.(9)
    
    Previously filed on October 12, 2005 as an exhibit to the
    Registrants Report on
    Form 8-K,
    and incorporated by reference herein.(10)
    
    Previously filed on November 18, 2005 as an exhibit to the
    Registrants Report on
    Form 8-K,
    and incorporated by reference herein.(11)
    
    Previously filed on February 15, 2006 as an exhibit to the
    Registrants Report on
    Form 10-K,
    and incorporated by reference herein.(12)
    
    Previously filed on May 10, 2006 as an exhibit to the
    Registrants Report on
    Form 10-Q,
    and incorporated by reference herein.(13)
    
    Previously filed on August 9, 2006 as an exhibit to the
    Registrants Report on
    Form 10-Q,
    and incorporated by reference herein.(14)
    
    Previously filed on November 9, 2006 as an exhibit to the
    Registrants Report on
    Form 10-Q,
    and incorporated by reference herein.(15)
    
    Previously filed on February 6, 2007 as an exhibit to the
    Registrants Report on
    Form 8-K,
    and incorporated by reference herein.