##### Table of Contents



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, 2005
  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(b) of the
    Act:
 None
  Securities registered pursuant to Section 12(g) 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. o
   o þ o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K.




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##### 



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

Business


1Item 1A.

Risk Factors


10Item 1B.

Unresolved Staff
    Comments


18Item 2.

Properties


18Item 3.

Legal
    Proceedings


18Item 4.

Submission of
    Matters to a Vote of Security Holders


19 PART IIItem 5.

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


19Item 6.

Selected Financial
    Data


19Item 7.

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


22Item 7A.

Quantitative and
    Qualitative Disclosures About Market Risk


38Item 8.

Financial
    Statements and Supplementary Data


39Item 9.

Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


66Item 9A.

Controls and
    Procedures


66Item 9B.

Other
    Information


66 PART IIIItem 10.

Directors and
    Executive Officers of the Registrant


66Item 11.

Executive
    Compensation


67Item 12.

Security Ownership
    of Certain Beneficial Owners and Management


67Item 13.

Certain
    Relationships and Related Transactions


67Item 14.

Principal
    Accounting Fees and Services


67 PART IVItem 15.

Exhibits, Financial
    Statement Schedules


67EX-10.10EX-10.11EX-10.12EX-10.21EX-21.1EX-23.1CEO 302 CertificationCFO 302 CertificationCEO 906 CertificationCFO 906 Certification   ii




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##### Table of Contents



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
         1




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Market
    Overview
  U.S. K-12
  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
  
    the Blackboard Learning
    SystemTM;
    the Blackboard Community
    SystemTM; and
    the Blackboard Content
    SystemTM. 2




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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
    BlocksTM
    tools developed by our clients or independent parties.
    Blackboard Building Blocksallows 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.
    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-Basic
    EditionTM Blackboard Learning
    System Blackboard Learning System Blackboard Learning
    System MLTM
  Blackboard
    Community System
  Blackboard Community System Blackboard Academic Suite, Blackboard Community System Blackboard Learning System Blackboard Community System
  
    Customizable portal environment.  The
    Blackboard Community System enables 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. Each institution can configure the Blackboard
    Community Systemto support multiple brands within the
    institution and deliver content such as RSS feeds and new
    modules to targeted user groups. In addition, each user can
    customize the Blackboard Community Systemaccording to
    his or her needs and preferences.
    Community and communication tools.  The
    Blackboard Community System facilitates campus discussion
    boards that are accessible by all users on the campus.
    Additionally, clients can define dedicated online sites allowing
    departments, clubs and other campus organizations to distribute
    content, manage communication with their organization members
    and provide for online collaboration among the members of such
    organizations.
    Single sign-on access.  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 3




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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.  Blackboard
    Content System
  Blackboard Content System, Blackboard Content
    System
  
    Virtual hard drive.  Institutions can provide
    students, faculty and staff with Web-based file storage space
    from any computer with Internet access. Users can store and
    share files, track versions and synchronize those files with
    their own computer using the HTTP extensions for distributed
    authoring, known as the Web directory and versioning protocol,
    or WebDAV. To assure appropriate usage of the file space,
    administrators can manage disk space quotas and set bandwidth
    controls.
    Learning content management.  Instructors can
    manage versions of documents and other course material and can
    re-use content across courses. Institutions can create content
    repositories at departmental, school and institutional levels to
    facilitate the sharing and searching of digital content.
    Library digital asset management.  Librarians
    can create and manage collections of digital content for use by
    specific courses, disciplines or the entire institution.
    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 academic
    assignments, curriculum development and standards alignment for
    K-12 classes, or professional development, such as
    résumés and job applications.  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. 4




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
    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.
    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.
 5




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Competition
  Blackboard Academic Suite Blackboard Commerce Suite
      
    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; and
    total cost of ownership.    Our
    Growth Strategy
    
    Increasing penetration of the U.S. postsecondary
    market.  We intend to capitalize on our experience
    in the U.S. postsecondary education market to further
    enhance our leadership position.
    Growing annual license revenues.  We intend to
    increase annual license revenues with existing clients by
    upgrading current products, cross-selling complementary
    applications and focusing on client satisfaction.
    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. 6




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
    Increasing sales to international postsecondary and
    U.S. K-12 markets.  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
    Marketing
    and Sales
  Marketing
    Sales
     7




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Executive
    Officers
    Name

Age


PositionMichael L. Chasen


34


Chief executive officer,
    president, directorMatthew L. Pittinsky


33


Chairman, directorPeter Q. Repetti


44


Chief financial officerTodd E. Gibby


37


Executive vice president for
    operationsJames M. Hermens


39


Senior vice president for services
    and supportDavid Sample


57


Senior vice president for salesMatthew H. Small


33


Senior vice president for legal,
    general counsel, secretaryMary E. Good


42


Senior vice president for human
    resources and facilitiesMichael J. Beach


35


Vice president for finance,
    treasurer   Matthew Pittinsky
  Michael Chasen
  Peter Repetti
  Todd Gibby
  James Hermens
 8




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Matthew Small
  David Sample
  Mary Good
  Michael Beach
  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.
 9




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Item 1A.Risk
    Factors.  Delays
    in completing our proposed merger with WebCT could result in
    significant delays, distraction of management, disruption of our
    business and legal and other expenses, and could compromise our
    ability to realize the expected benefits of our proposed merger
    with WebCT; if we are not able to consummate the merger, we may
    be obligated to pay WebCT $15 million in liquidated
    damages.
    Our
    proposed merger with WebCT and any other future business
    combinations and acquisitions may be difficult to integrate,
    disrupt our business, dilute stockholder value or divert
    management attention.         10




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We
    will incur a significant amount of debt to finance the WebCT
    merger, which could which 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.
      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.
   11




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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
    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.
   12




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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.
    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. 13




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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    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.
   14




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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.
    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.
   15




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If we
    are found to infringe the proprietary rights of others, we could
    be required to redesign our products, pay significant royalties
    or enter into license agreements with third
    parties.
    
    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.  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.
   16




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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.
    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. 17




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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
  
    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.   18




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Item 4.
    Submission
    of Matters to a Vote of Security Holders.   PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities.    High


LowYear Ended December 31,
    2004:Second Quarter (since
    June 18, 2004)

$
23.40


$
15.50Third Quarter


22.60



15.43Fourth Quarter


19.88



14.14Year Ended December 31,
    2005:First Quarter

$
18.57


$
13.54Second Quarter


24.32



16.99Third Quarter


25.94



21.36Fourth Quarter


32.53



22.30           Item 6.
    Selected
    Financial Data.    19




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Year Ended
    December 31,2001


2002


2003


2004


2005(In thousands, except per share
    data)Statement of operations
    data:Revenues:Product

$
39,643


$
62,388


$
83,331


$
98,632


$
120,389Professional services


7,082



7,558



9,147



12,771



15,275Total revenues


46,725



69,946



92,478



111,403



135,664Operating expenses:Cost of product revenues, excludes
    amortization of acquired technology included in amortization of
    intangibles resulting from acquisitions shown below


16,311



21,526



23,079



25,897



29,607Cost of professional services
    revenues


5,995



5,742



6,628



7,962



10,220Research and development


13,207



10,272



11,397



13,749



13,945Sales and marketing


28,294



24,176



30,908



35,176



37,873General and administrative


13,773



16,464



14,731



14,895



19,231Amortization of intangibles
    resulting from acquisitions


9,271



5,519



5,757



3,517



266Stock-based compensation


193



474



319



174



75Total operating expenses


87,044



84,173



92,819



101,370



111,217(Loss) income from operations


(40,319
)


(14,227
)


(341
)


10,033



24,447Interest (expense) income, net


(1,466
)


(509
)


(470
)


315



3,097(Loss) income before (provision)
    benefit for income taxes and cumulative change in accounting
    principle


(41,785
)


(14,736
)


(811
)


10,348



27,544(Provision) benefit for income
    taxes






(283
)


(614
)


(299
)


14,309(Loss) income before cumulative
    change in accounting principle


(41,785
)


(15,019
)


(1,425
)


10,049



41,853Cumulative change in accounting
    principle






(26,632
)










Net (loss) income


(41,785
)


(41,651
)


(1,425
)


10,049



41,853Dividends on and accretion of
    convertible preferred stock


(7,977
)


(9,699
)


(10,077
)


(6,344
)


Net (loss) income attributable to
    common stockholders

$
(49,762
)

$
(51,350
)

$
(11,502
)

$
3,705


$
41,853Weighted average number of common
    shares:Basic


4,670



5,460



5,516



16,072



26,715Diluted


4,670



5,460



5,516



17,864



28,510Net (loss) income attributable to
    common stockholders per common share:Basic

$
(10.66
)

$
(9.40
)

$
(2.09
)

$
0.23


$
1.57Diluted

$
(10.66
)

$
(9.40
)

$
(2.09
)

$
0.21


$
1.47  20




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December 31,2001


2002


2003


2004


2005(In thousands)Balance sheet data:Cash and cash equivalents

$
20,270


$
20,372


$
30,456


$
78,149


$
75,895Short-term investments














20,000



62,602Working capital (deficit)


1,634



(9,402
)


(13,001
)


53,026



93,909Total assets


86,504



71,140



83,054



148,398



224,188Deferred revenues, current portion


22,659



37,342



51,215



63,901



74,975Total debt


6,070



11,855



11,564



762



Mandatorily redeemable convertible
    preferred stock and Series E warrants


110,522



120,221



130,297







Total stockholders (deficit)
    equity


(68,586
)


(113,403
)


(124,617
)


69,107



130,325  21




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Item 7.
    Managements
    Discussion and Analysis of Financial Condition
    and  Results of Operations.  You should read the following discussion together with our
    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 Risk
    Factors in Item 1A and elsewhere in this annual
    report.
  General
      time-and-materials
  Blackboard Academic Suite Blackboard
    Commerce Suite. Blackboard Academic Suite Blackboard Learning System, Blackboard Community System Blackboard Content
    System. Blackboard Commerce Suite Blackboard Transaction System, Blackboard Community System Blackboard
    One.
     22




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Critical
    Accounting Policies and Estimates
      Revenue recognition. Software Revenue Recognition, SOP 98-9, Modification of
    SOP 97-2,
    Software Revenue Recognition, with Respect to Certain
    Transactions.
 23




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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
  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
  Allowance for doubtful accounts.
  Deferred Income Taxes.
 24




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Long-lived assets. Accounting for the Impairment or Disposal of Long-Lived
    Assets.
  Goodwill. Goodwill and
    Other Intangible Assets.
  Stock-based compensation. Accounting for Stock Issued to Employees, Accounting for
    Stock-Based Compensation Accounting for Stock-Based
    Compensation  Transition and Disclosure, an
    amendment of SFAS No. 123.
 25




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##### Table of Contents



Share-Based Payment, Statement of Cash Flows.
    
    A modified prospective method in which compensation
    cost is recognized beginning with the effective date
    (a) based on the requirements of SFAS 123(R) for all
    share-based payments granted after the effective date and
    (b) based on the requirements of SFAS 123(R) for all
    awards granted to employees prior to the effective date of
    SFAS 123(R) that remain unvested on the effective date.
    A modified retrospective method which includes the
    requirements of the modified prospective method described above,
    but also permits entities to restate based on the amounts
    previously recognized under SFAS 123 for purposes of pro
    forma disclosures for either (a) all prior periods
    presented or (b) prior interim periods of the year of
    adoption.      Year Ended
    December 31,2003


2004


2005(In thousands, exceptper share amounts)Pro forma net (loss) income
    attributable to common stockholders:As reported

$
(11,502
)

$
3,705


$
41,853Add: Stock-based compensation
    included in reported net (loss) income attributable to common
    stockholders


319



174



75Deduct: Stock-based compensation
    expense determined under fair value-based method for all awards


(2,942
)


(4,382
)


(6,031
)Pro forma net (loss) income
    attributable to common stockholders

$
(14,125
)

$
(503
)

$
35,897Net (loss) income attributable to
    common stockholders per common share:Basic as reported

$
(2.09
)

$
0.23


$
1.57Diluted as reported

$
(2.09
)

$
0.21


$
1.47Basic  pro forma

$
(2.56
)

$
(0.03
)

$
1.34Diluted  pro forma

$
(2.56
)

$
(0.03
)

$
1.26   Acquisitions
   26




---



##### Table of Contents



Important
    Factors Considered by Management
     27




---



##### Table of Contents




    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, from our hosting
    arrangements and from enhanced support and maintenance contracts
    related to our software products.
    Non-recurring ratable revenues include those product revenues
    that are recognized ratably over the term of the contract, which
    is typically one year, but that do not contractually recur.
    These revenues include the revenues from hardware components of
    our Blackboard Transaction Systemproducts, with and
    without our embedded software, and from third-party hardware and
    software sold to our clients in conjunction with our software
    licenses.
    Other product revenues include those product revenues that are
    recognized as earned and are not deferred to future periods.
    These revenues include revenues from the sales of Blackboard
    Oneand Blackboard Transaction System,as well as the
    sale of the supplies and from commissions we earn from
    publishers related to digital course supplement downloads. Each
    of these individual revenue streams has historically been
    insignificant.      Results
    of Operations
    Year EndedDecember 31,2003


2004


2005Revenues:Product


90
%


89
%


89
%Professional services


10



11



11Total revenues


100



100



100Operating expenses:Cost of product revenues


25



23



22Cost of professional services
    revenues


7



7



8Research and development


12



12



10Sales and marketing


33



32



28General and administrative


16



14



14Amortization of intangibles
    resulting from acquisitions


6



3



0Stock-based compensation


0



0



0Total operating expenses


99



91



82Operating margin


1
%


9
%


18
%  28




---



##### Table of Contents



Year EndedDecember 31,2003


2004


2005Cost of product revenues


28
%


26
%


25
%Cost of professional services
    revenues


72
%


62
%


67
%   Year
    Ended December 31, 2005 Compared to Year Ended
    December 31, 2004
  Revenues.
    Year EndedDecember 31,2004


2005(In millions)Recurring ratable revenues

$
74.5


$
95.7Non-recurring ratable revenues


18.2



18.1Other product revenues


5.9



6.6Total product revenues

$
98.6


$
120.4     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 set-up
  Blackboard
    Learning System Blackboard Community System
 29




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##### Table of Contents



Blackboard Content System Blackboard Learning System-Basic Edition Blackboard
    Learning System
    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.
 30




---



##### Table of Contents



Net interest income.
  Income taxes.
     31




---



##### Table of Contents



Net Income.
  Year
    Ended December 31, 2004 Compared to Year Ended
    December 31, 2003
  Revenues.
    Year EndedDecember 31,2003


2004(In millions)Recurring ratable revenues

$
58.2


$
74.5Non-recurring ratable revenues


19.0



18.2Other product revenues


6.1



5.9Total product revenues

$
83.3


$
98.6     Blackboard
    Learning System Blackboard Transaction System Blackboard
    Community System Blackboard Content System Blackboard
    Learning System Blackboard Learning
    System  Basic Edition Blackboard Learning System
  Blackboard Transaction System Blackboard Transaction System
  Blackboard
    Learning System Blackboard
    Learning System
 32




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##### Table of Contents



Cost of product revenues. Blackboard Content System. Blackboard Transaction
    System Blackboard Transaction System
  Blackboard Transaction System Blackboard Transaction System
  Cost of professional services revenues.
  Research and development expenses.
  Sales and marketing expenses.
  General and administrative expenses.
 33




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##### Table of Contents



Net interest (expense) income.
  Income taxes.
  Net income (loss).
  Quarterly
    Results
   34




---



##### Table of Contents



Quarter EndedMarch 31,


June 30,


September 30,


December 31,2004


2004


2004


2004(In thousands)Total revenues

$
25,219


$
26,355


$
29,776


$
30,053Total operating expenses


24,023



25,023



26,682



25,642Income from operations


1,196



1,332



3,094



4,411Net income


786



1,051



3,480



4,732Net cash (used in) provided by
    operating activities


(1,867
)


4,203



18,103



12,292   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


5,410



6,063



7,269



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


(1,421
)


2,506



22,281



16,447     Liquidity
    and Capital Resources
       35




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##### Table of Contents



Blackboard Transaction System.
          Off-Balance
    Sheet Arrangements
   36




---



##### Table of Contents



Obligations
    and Commitments
    Operating


Sub LeaseLeases


Income(In thousands)2006

$
3,807


$
1392007


2,901



1312008


838



2009


702



2010


101



2011 and beyond


65



Total

$
8,414


$
270     Seasonality
    Recent
    Accounting Pronouncements
  Share-Based
    Payment Statement of Cash Flows.
    
    A modified prospective method in which compensation
    cost is recognized beginning with the effective date
    (a) based on the requirements of SFAS 123(R) for all
    share-based payments granted after the effective date and
    (b) based on the requirements of SFAS 123(R) for all
    awards granted to employees prior to the effective date of
    SFAS 123(R) that remain unvested on the effective
    date; or
    A modified retrospective method which includes the
    requirements of the modified prospective method described above,
    but also permits entities to restate based on the amounts
    previously recognized under SFAS 123(R) for purposes of pro
    forma disclosures either (a) all prior periods presented or
    (b) prior interim periods of the year of adoption. 37




---



##### Table of Contents



Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk     38




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data  INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
  PageManagements Report on
    Internal Control Over Financial Reporting

40Report of Independent Registered
    Public Accounting Firm

41Report of Independent Registered
    Public Accounting Firm

42Consolidated Balance Sheets as of
    December 31, 2004 and 2005

43Consolidated Statements of
    Operations for the years ended December 31, 2003, 2004 and
    2005

44Consolidated Statements of
    Stockholders (Deficit) Equity for the years ended
    December 31, 2003, 2004 and 2005

45Consolidated Statements of Cash
    Flows for the years ended December 31, 2003, 2004 and 2005

46Notes to Consolidated Financial
    Statements

47  39




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##### Table of Contents



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 15, 2006/s/  Peter
    Q. RepettiPeter
    Q. Repetti

Chief Financial Officer
    (Principal Financial Officer)

February 15, 2006  40




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
           Internal Control-Integrated
    Framework
  Ernst & Young LLP
    41




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
     Internal Control  Integrated Framework
            Ernst & Young LLP
   42




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##### Table of Contents



BLACKBOARD
    INC.
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2004


2005(In thousands)Current assets:Cash and cash equivalents

$
78,149


$
75,895Short-term investments


20,000



62,602Accounts receivable, net of
    allowance for doubtful accounts of $954,000 and $701,000 at
    December 31, 2004 and 2005, respectively


21,686



26,136Inventories


1,994



1,806Prepaid expenses and other current
    assets


1,727



2,637Deferred tax asset, current portion






10,274Deferred cost of revenues, current
    portion


4,547



5,797Total current assets


128,103



185,147Deferred tax asset, noncurrent
    portion






12,023Deferred cost of revenues,
    noncurrent portion


369



1,310Deferred merger costs (WebCT, Inc.)






4,956Property and equipment, net


8,848



9,940Goodwill


10,252



10,252Intangible assets, net


826



560Total assets

$
148,398


$
224,188Current liabilities:Accounts payable

$
1,114


$
1,833Accrued expenses


9,290



14,083Equipment note, current portion


525



Deferred rent, current portion


247



347Deferred revenues, current portion


63,901



74,975Total current liabilities


75,077



91,238Equipment note, noncurrent portion


237



Deferred rent, noncurrent portion


820



426Deferred revenues, noncurrent
    portion


3,157



2,199Commitments and contingenciesPreferred stock, $0.01 par
    value; 5,000,000 shares authorized, and no shares issued or
    outstanding at December 31, 2004 and 2005






Common stock, $0.01 par
    value; 200,000,000 shares authorized; 25,977,822 and
    27,479,351 shares issued and outstanding at
    December 31, 2004 and 2005, respectively


260



275Additional paid-in capital


191,664



210,919Deferred stock compensation


(209
)


(114
)Accumulated deficit


(122,608
)


(80,755
)Total stockholders equity


69,107



130,325Total liabilities and
    stockholders equity

$
148,398


$
224,188     43




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##### Table of Contents



BLACKBOARD
    INC.
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
  Year Ended
    December 31,2003


2004


2005(In thousands, except share and
    per share data)Revenues:Product

$
83,331


$
98,632


$
120,389Professional services


9,147



12,771



15,275Total revenues


92,478



111,403



135,664Operating expenses:Cost of product revenues, excludes
    amortization of acquired technology included in amortization of
    intangibles resulting from acquisitions shown below (see
    Note 2)


23,079



25,897



29,607Cost of professional services
    revenues


6,628



7,962



10,220Research and development


11,397



13,749



13,945Sales and marketing


30,908



35,176



37,873General and administrative


14,731



14,895



19,231Amortization of intangibles
    resulting from acquisitions


5,757



3,517



266Stock-based compensation


319



174



75Total operating expenses


92,819



101,370



111,217(Loss) income from operations


(341
)


10,033



24,447Other income (expense), net:Interest expense


(573
)


(179
)


(49
)Interest income


103



494



3,146(Loss) income before provision
    (benefit) for income taxes


(811
)


10,348



27,544(Provision) benefit for income
    taxes


(614
)


(299
)


14,309Net (loss) income


(1,425
)


10,049



41,853Dividends on and accretion of
    convertible preferred stock


(10,077
)


(6,344
)


Net (loss) income attributable to
    common stockholders

$
(11,502
)

$
3,705


$
41,853Net (loss) income attributable to
    common stockholders per common share:Basic

$
(2.09
)

$
0.23


$
1.57Diluted

$
(2.09
)

$
0.21


$
1.47Weighted average number of common
    shares:Basic


5,516,476



16,071,598



26,714,748Diluted


5,516,476



17,864,137



28,509,777     44




---



##### Table of Contents



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, 2002


5,502,432


$
55


$
17,859


$
(85
)

$
(131,232
)

$
(113,403
)Issuance of common stock upon
    exercise of options


33,298







194











194Issuance of common stock in
    connection with acquisition of Prometheus


666



















Issuance of compensatory stock
    options










23



(18
)






5Recognition of stock compensation
    for modification of options










21











21Amortization of deferred stock
    compensation














68







68Accretion of beneficial conversion
    feature associated with Series E Preferred Shares and
    warrants










(777
)










(777
)Accretion on preferred stock and
    related dividends










(9,300
)










(9,300
)Net loss


















(1,425
)


(1,425
)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
)

$
130,325   See accompanying notes.
 45




---



##### Table of Contents



BLACKBOARD
    INC.
  CONSOLIDATED STATEMENTS OF CASH FLOWS
  Year Ended
    December 31,2003


2004


2005(In thousands)Cash flows from operating
    activitiesNet (loss)
    income

$
(1,425
)

$
10,049


$
41,853Adjustments to reconcile net (loss)
    income to net cash provided by operating activitiesDeferred tax benefit










(14,799
)Depreciation and amortization


3,911



6,275



6,867Amortization of intangibles
    resulting from acquisitions


5,757



3,517



266Change in allowance for doubtful
    accounts


586



(64
)


(253
)Noncash deferred stock compensation


94



174



75Changes in operating assets and
    liabilities, net of effect of acquisitions:Accounts receivable


(6,345
)


1,248



(4,197
)Inventories


529



56



188Prepaid expenses and other current
    assets


3,053



(173
)


(910
)Deferred cost of revenues


675



(1,070
)


(2,191
)Accounts payable


321



(719
)


719Accrued expenses


594



(610
)


2,373Deferred rent


(170
)


(68
)


(294
)Deferred revenues


12,130



14,116



10,116Net cash provided by operating
    activities


19,710



32,731



39,813Cash flows from investing
    activitiesPurchase of property and equipment


(5,029
)


(7,440
)


(7,959
)Purchase of
    held-to-maturity
    securities










(33,296
)Sale of
    held-to-maturity
    securities










9,750Purchase of
    available-for-sale
    securities






(20,000
)


(55,306
)Sale of
    available-for-sale
    securities










36,250Payments for merger costs (WebCT,
    Inc.)










(2,536
)Acquisition of business, net of
    cash acquired


(4,500
)






Net cash used in investing
    activities


(9,529
)


(27,440
)


(53,097
)Cash flows from financing
    activitiesProceeds from equipment notes


1,500







Payments on equipment notes


(1,421
)


(922
)


(762
)Proceeds from issuance of common
    stock pursuant to initial public offering, net of expenses






50,986



Proceeds from line of credit


10,380



7,880



Payments on line of credit


(9,750
)


(15,760
)


Payments on note payable


(1,000
)


(2,000
)


Proceeds from issuance of common
    stock pursuant to exercise of warrants






248



Proceeds from exercise of stock
    options


194



1,970



11,792Net cash (used in) provided by
    financing activities


(97
)


42,402



11,030Net increase (decrease) in cash and
    cash equivalents


10,084



47,693



(2,254
)Cash and cash equivalents at
    beginning of year


20,372



30,456



78,149Cash and cash equivalents at end of
    year

$
30,456


$
78,149


$
75,895Supplemental cash flow
    informationCash paid for interest

$
541


$
179


$
49Cash paid for income taxes


88



607



687Preferred stock dividends and
    accretion of convertible redeemable preferred stock


10,077



6,344



    46




---



##### Table of Contents



BLACKBOARD
    INC.
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2004 and 2005
  1.
    Nature of
    Business and Organization  Blackboard Learning
    System, Blackboard Community System, Blackboard Content System,
    Blackboard Transaction System Blackboard One.
    one-for-two one-for-1.0594947
  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
   47




---



##### Table of Contents



BLACKBOARD
    INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fair
    Value of Financial Instruments
  Disclosures about Fair Value of
    Financial Instruments
  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
    Concentration
    of Credit Risk
     48




---



##### Table of Contents



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


3 yearsContracts and customer lists


3 to 5 yearsNon-compete agreements


Term of agreementTrademarks and domain names


3 years   Impairment
    of Long-Lived Assets
    Revenue
    Recognition and Deferred Revenue
   49




---



##### Table of Contents



BLACKBOARD
    INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Software Revenue Recognition (SOP 97-2), SOP 98-9, Modification of
    SOP 97-2,
    Software Revenue Recognition, with Respect to Certain
    Transactions.
  set-up
    when-and-if-available
  Cost
    of Revenues and Deferred Cost of Revenues
     50




---



##### Table of Contents



BLACKBOARD
    INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Software
    Development Costs
    Advertising
    Accounting
    for Stock-Based Compensation
  Accounting for Stock-Based
    Compensation Accounting for Stock-Based
    Compensation  Transition and Disclosure, an
    amendment of SFAS No. 123 Accounting for Stock Issued to
    Employees Accounting for Equity Instruments
    That Are Issued to Other Than Employees for Acquiring, or in
    Conjunction with Selling, Goods or Services.
 51




---



##### Table of Contents



BLACKBOARD
    INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Year Ended
    December 31,2003


2004


2005(In thousandsexcept per share
    amounts)Pro forma net (loss) income
    attributable to common stockholders:As reported

$
(11,502
)

$
3,705


$
41,853Add: Stock-based compensation
    included in reported net (loss) income attributable to common
    stockholders


319



174



75Deduct: Stock-based compensation
    expense determined under fair value-based method for all awards


(2,942
)


(4,382
)


(6,031
)Pro forma net (loss) income
    attributable to common stockholders

$
(14,125
)

$
(503
)

$
35,897Net (loss) income attributable to
    common stockholders per common share:Basic as reported

$
(2.09
)

$
0.23


$
1.57Diluted as reported

$
(2.09
)

$
0.21


$
1.47Basic  pro forma

$
(2.56
)

$
(0.03
)

$
1.34Diluted  pro forma

$
(2.56
)

$
(0.03
)

$
1.26       Year Ended
    December 31,2003


2004


2005Dividend yield


0%



0%



0%Expected volatility


85%



64.8%



47.4%Average risk-free interest rate


3.00%



3.25%



4.00%Expected term


5 years



5 years



5 years   Basic
    and Diluted Net (Loss) Income Attributable to Common
    Stockholders per Common Share
   52




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##### Table of Contents



BLACKBOARD
    INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       Year Ended
    December 31,2003


2004


2005(In thousands, except share and
    per share amounts)Basic net (loss) income
    attributable to common stockholders per common share:Net income (loss)

$
(1,425
)

$
10,049


$
41,853Less preferred stock dividends:Redeemable convertible preferred
    stock


(10,077
)


(6,344
)


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

$
(11,502
)

$
3,705


$
41,853Weighted average shares outstanding


5,516,476



16,071,598



26,714,748Basic net (loss) income
    attributable to common stockholders per common share

$
(2.09
)

$
0.23


$
1.57Diluted net (loss) income
    attributable to common stockholders per common share:Net (loss) income attributable to
    common stockholders per common share

$
(11,502
)

$
3,705


$
41,853Weighted average number of basic
    shares outstanding


5,516,476



16,071,598



26,714,748Dilutive effect of:Stock options related to the
    purchase of common stock






1,591,412



1,697,566Warrants related to the purchase
    of common stock






201,127



97,463Diluted shares outstanding


5,516,476



17,864,137



28,509,777Diluted net (loss) income
    attributable to common stockholders per common share

$
(2.09
)

$
0.21


$
1.47   Segment
    Information
  K-12, Disclosure about Segments of an
    Enterprise and Related Information.
 53




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##### Table of Contents



BLACKBOARD
    INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Recent
    Accounting Pronouncements
  Share-Based Payment Statement of Cash
    Flows.
    
    A modified prospective method in which compensation
    cost is recognized beginning with the effective date
    (a) based on the requirements of SFAS 123(R) for all
    share-based payments granted after the effective date and
    (b) based on the requirements of SFAS 123(R) for all
    awards granted to employees prior to the effective date of
    SFAS 123(R) that remain unvested on the effective date.
    A modified retrospective method which includes the
    requirements of the modified prospective method described above,
    but also permits entities to restate based on the amounts
    previously recognized under SFAS 123 for purposes of pro
    forma disclosures for either (a) all prior periods
    presented or (b) prior interim periods of the year of
    adoption.    Comprehensive
    Net (Loss) Income
    3.
    Business
    Combinations  SA
    Cash
   54




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##### Table of Contents



BLACKBOARD
    INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       Proposed
    Merger with WebCT, Inc.
           55




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##### Table of Contents



BLACKBOARD
    INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    4.
    Inventories    December 31,2004


2005(In thousands)Raw materials

$
395


$
700Work-in-process


518



451Finished goods


1,081



655Total inventories

$
1,994


$
1,806   5.
    Property
    and Equipment    December 31,2004


2005(In thousands)Computer and office equipment

$
19,201


$
24,394Software


9,196



11,347Furniture and fixtures


539



599Leasehold improvements


1,311



1,86630,247



38,206Less accumulated depreciation and
    amortization


(21,399
)


(28,266
)Total property and equipment, net

$
8,848


$
9,940     6.
    Goodwill
    and Intangible Assets    December 31,2004


2005(In thousands)Goodwill

$
10,252


$
10,252Acquired technology

$
10,400


$
10,400Contracts and customer lists


5,443



5,443Non-compete agreements


2,043



2,043Trademarks and domain names


71



71Subtotal


17,957



17,957Less accumulated amortization


(17,131
)


(17,397
)Intangible assets, net

$
826


$
560    56




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##### Table of Contents



BLACKBOARD
    INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Goodwill and Other Intangible Assets.
  7.
    Debt  Working
    Capital and Equipment Lines
      Note Payable
    8.
    Convertible
    Preferred Stock    Issuances
  2.1189894-to-1
   57




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##### Table of Contents



BLACKBOARD
    INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       Series A
    Preferred Stock
  2.1189894-to-1.
    paid-in-kind
  Series B,
    C, D and E Preferred Stock
  2.1189894-to-1
       58




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##### Table of Contents



BLACKBOARD
    INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
         paid-in-kind
  9.
    Common
    Stock                 59




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##### Table of Contents



BLACKBOARD
    INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        10.
    Stock
    Option Plan        Weighted-AverageShares


Exercise PriceOptions outstanding at
    December 31, 2002


3,571,508



9.01Options granted


571,567



9.66Options exercised


(33,298
)


5.85Options forfeited


(616,686
)


10.09Options 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


(1,311,762
)


8.99Options forfeited


(227,148
)


14.92Options outstanding at
    December 31, 2005


3,343,312



13.06Options exercisable at
    December 31, 2005


1,903,411



10.33  60




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##### Table of Contents



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


Exercisable OptionsWeighted Average


Weighted





WeightedRemaining Life


Average





AverageRange of Exercise
    Prices

Shares


(Years)


Price


Shares


Price$0.02-$8.71


149,798



2.57


$
1.332



149,798


$
1.32$8.72-$10.81


1,606,304



6.51



9.57



1,369,792



9.53$10.82-$14.00


328,532



8.44



14.00



121,559



14.00$14.01-$19.88


994,658



6.94



17.19



253,142



17.89$19.89-$31.34


264,020



7.79



24.27



9,120



20.483,343,312











1,903,411       11.
    Income
    Taxes  paid-in-capital
 61




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##### Table of Contents



BLACKBOARD
    INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      December 31,2003


2004


2005(In thousands)Current expense

$
614


$
299


$
490Deferred expense (benefit)










(14,799
)Provision (benefit) for income
    taxes

$
614


$
299


$
(14,309
)     December 31,2004


2005(In thousands)Deferred tax assets (liabilities):Net operating loss carryforwards

$
23,077


$
8,755International net operating loss
    carryforwards


3,334



2,391Research and development and other
    tax credits


2,030



2,568Net operating loss attributable to
    stock option exercises


704



7,498Depreciation


1,139



1,630Amortization


2,927



2,687Bad debts


371



277Deferred rent


384



305Deferred revenues


1,365



967Deferred cost of revenues


(1,888
)


(1,772
)Other accruals and prepaids


1,058



(153
)Valuation allowance


(34,501
)


(2,856
)Net deferred tax assets
    (liabilities)

$



$
22,297    62




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##### Table of Contents



BLACKBOARD
    INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      2003


2004


2005Federal tax at statutory rates


34.0
%


34.0
%


35.0
%State taxes, net of federal benefit


4.6



4.6



4.5Change in valuation allowance


(390.9
)


(24.5
)


(87.7
)Permanent differences


276.6



(11.2
)


(3.7
)(Benefit) provision for income
    taxes


(75.7
)%


2.9
%


(51.9
)%       12.
    Commitments
    and Contingencies   63




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##### Table of Contents



BLACKBOARD
    INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Sub-LeaseOperating


Income(In thousands)2006

$
3,807


$
1392007


2,901



1312008


838



2009


702



2010


101



2011 and beyond


65



Total minimum lease payments

$
8,414


$
270       13.
    Employee
    Benefit Plans      14.
    Quarterly
    Financial Information (Unaudited)    64




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##### Table of Contents



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


June 30,


September 30,


December 31,2004


2004


2004


2004(In thousands, except per share
    amounts)Summary consolidated statement of
    operations:Total revenues

$
25,219


$
26,355


$
29,776


$
30,053Costs of revenues


7,613



8,030



9,191



9,025Net loss attributable to common
    stockholders


(1,809
)


(2,698
)


3,480



4,732Net loss attributable to common
    stockholders per common share:Basic

$
(0.33
)

$
(0.37
)

$
0.14


$
0.18Diluted

$
(0.33
)

$
(0.37
)

$
0.12


$
0.17   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    65




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##### Table of Contents



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)
  Rules 13a-15(f) Form 10-K
  (b)
    Changes
    in Internal Control over Financial Reporting.  Rules 13a-15(f) 15d-15(f)
  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 66




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##### Table of Contents



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.   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.     67




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##### Table of Contents



BLACKBOARD
    INC.
  SCHEDULE II  VALUATION AND QUALIFYING
    ACCOUNTS
  As of
    December 31,2003


2004


2005(In thousands)Allowance for Doubtful
    AccountsBeginning Balance

$
432


$
1,018


$
954Additions


2,312



140



(1,250
)Reductions


(1,726
)


(515
)


(318
)Other(1)






311



1,315Ending Balance

$
1,018


$
954


$
701       (1)
    
    Includes the reinstatement and subsequent collections on
    accounts receivable that were deemed uncollectible in prior
    periods 68




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##### Table of Contents



SIGNATURES
  th
    By:
    /s/  Peter Q. Repetti   Chief Financial Officer
    Signature

Title

Date/s/  Michael L.
    ChasenMichael
    L. Chasen

Chief Executive Officer and
    Director (Principal Executive Officer)

February 15, 2006/s/  Peter Q. RepettiPeter
    Q. Repetti

Chief Financial Officer 
    (Principal Financial Officer)

February 15, 2006/s/  Michael J. BeachMichael
    J. Beach

Vice President, Finance and
    Treasurer (Principal Accounting Officer)

February 15, 2006/s/  Matthew
    PittinskyMatthew
    Pittinsky

Chairman of the Board of Directors

February 15, 2006/s/  Frank R. GattiFrank
    R. Gatti

Director

February 15, 2006/s/  Steven B. GruberSteven
    B. Gruber

Director

February 15, 2006/s/  Arthur E. LevineArthur
    E. Levine

Director

February 14, 2006/s/  E. Rogers Novak,
    Jr.E.
    Rogers Novak, Jr.

Director

February 15, 2006/s/  William RaduchelWilliam
    Raduchel

Director

February 15, 2006  69




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##### Table of Contents



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(8)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 Peter Q. Repetti, dated June 1, 2001(2)10
.6

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

Employment Agreement between the
    Registrant and Todd Gibby, dated May 11, 2005(7)10
.8

Director Compensation Policy (6)10
.9

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

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

Lease Commencement Agreement
    between the Registrant and 1899 L Street Tower LLC, dated
    August 31, 200510
.12

Sixth Amendment to Lease Agreement
    between the Registrant and 1899 L Street Tower, dated
    January 27, 200610
.13

Third Amended and Restated
    Registration Rights Agreement, between the Registrant and
    certain stockholders of the Registrant dated as of April 6,
    2001(1)10
.14

Registration Rights Agreement,
    between the Registrant and The George Washington University,
    dated January 11, 2002(3)10
.15

Form of Incentive Stock Option
    Agreement(5)10
.16

Form of Nonstatutory Stock Option
    Agreement(5)10
.17

Form of Restricted Stock
    Agreement(5)10
.18

Form of Executive Incentive Stock
    Option Agreement(6)10
.19

Form of Executive Nonstatutory
    Stock Option Agreement (6)10
.20

Commitment Letter, dated
    October 12, 2005, by and between the Registrant and Credit
    Suisse, Cayman Islands Branch(9)10
.21

Summary of Approved 2005 and 2006
    Compensation 21
.1

Subsidiaries of the Company 23
.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.




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##### Table of Contents



(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.