##### Table of Contents



________________________________________________________________________________


UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, 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, 2004


Commission file number: 000-50784





Blackboard Inc.


(Exact Name of Registrant as Specified in Its Charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 52-2081178                              
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (I.R.S. Employer
    Identification No.)
|                                                                  
|1899 L Street, N.W.
    Washington D.C.                            |  | 20036(Zip Code)                         
|(Address of Principal Executive Offices)                           |  |                                         

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


þ


o þ






DOCUMENTS INCORPORATED BY REFERENCE












---










BLACKBOARD INC.


Form 10-K


TABLE OF CONTENTS


|         |  |                                                                                                                         |  |        |    | 
|-------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | ------ | -- | 
|         |  |                                                                                                                         |  | Page   |   
|         |  |                                                                                                                         |  | Number |   
|         |  |                                                                                                                         |  |        |   
|PART I   |  |                                                                                                                         |  |       
|Item 1.  |  | Business                                                                                                                |  |        | 1  | 
|Item 2.  |  | Properties                                                                                                              |  |        | 9  | 
|Item 3.  |  | Legal Proceedings                                                                                                       |  |        | 9  | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                                                 |  |        | 9  | 
|PART II  |  |                                                                                                                         |  |       
|Item 5.  |  | Market for Registrants Common Equity
    and Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  |        | 10 | 
|Item 6.  |  | Selected Financial Data                                                                                                 |  |        | 10 | 
|Item 7.  |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                               |  |        | 12 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                          |  |        | 36 | 
|Item 8.  |  | Financial Statements and Supplementary
    Data                                                                         |  |        | 37 | 
|Item 9.  |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                                |  |        | 62 | 
|Item 9A. |  | Controls and Procedures                                                                                                 |  |        | 62 | 
|Item 9B. |  | Other Information                                                                                                       |  |        | 62 | 
|PART III |  |                                                                                                                         |  |       
|Item 10. |  | Directors and Executive Officers of the
    Registrant                                                                  |  |        | 62 | 
|Item 11. |  | Executive Compensation                                                                                                  |  |        | 63 | 
|Item 12. |  | Security Ownership of Certain Beneficial
    Owners and Management                                                      |  |        | 63 | 
|Item 13. |  | Certain Relationships and Related
    Transactions                                                                      |  |        | 63 | 
|Item 14. |  | Principal Accounting Fees and Services                                                                                  |  |        | 63 | 
|PART IV  |  |                                                                                                                         |  |       
|Item 15. |  | Exhibits, Financial Statement Schedules                                                                                 |  |        | 63 | 
|Ex-10.7 
|Ex-10.8 
|Ex-10.9 
|Ex-10.21
|Ex-10.22
|Ex-21.1 
|Ex-23.1 
|Ex-31.1 
|Ex-31.2 
|Ex-32.1 
|Ex-32.2 



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 Factors That Could Affect Future
Results. 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 Suite Blackboard
Commerce Suite






Market Overview




1



---



##### Table of Contents



Products and Services


Blackboard Academic Suite Blackboard Commerce Suite. Blackboard
Academic Suite Blackboard Commerce Suite


The Blackboard Academic Suite


Blackboard Academic Suite Blackboard
Academic Suite




| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | the Blackboard Learning
    SystemTM;                                                               
|
| |  | the Blackboard Community
    SystemTM(formerly
    known as the Blackboard Portal
    SystemTM); and
|
| |  | the Blackboard Content
    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
    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 use both standard and customizable reporting
    templates to define 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. For example, different professional schools at a
    university or different schools in a school district could
    separately customize and manage our products for their
    respective users.                                                                                                                                                                 

Blackboard Learning System Blackboard Learning
System-Basic
EditionTM


2



---



##### Table of Contents



Blackboard Learning
System Blackboard Learning System ML




| |                            
| | ---------------------------
| | Blackboard Community System

Blackboard Community System Blackboard Academic
Suite, Blackboard Community System Blackboard Learning System Blackboard Community System




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Customizable portal environment. 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. Each institution
    can configure the Blackboard Community Systemto provide
    a variety of tools and information, including news,
    course-specific information, such as announcements, campus
    tools, such as library search, and other customizable services.
    In addition, each user can customize the Blackboard Community
    Systemaccording to his or her needs and preferences.
|
| |  | Community and communication tools. The Blackboard
    Community Systemfacilitates 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 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. This content can
    be indexed and searched through the librarys online
    catalog searches.                                                                                                                                                                                                                                                

3



---



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 Blackboard Commerce Suite




| |   |                                    
| | - | -----------------------------------
| |  | the Blackboard Transaction System;
|
| |  | the Blackboard Community System;and
|
| |  | Blackboard One.                   



| |                              
| | -----------------------------
| | Blackboard Transaction System

Blackboard Transaction System Blackboard Transaction
System Blackboard Transaction System Blackboard Transaction System




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Commerce. The Blackboard Transaction Systems
    transaction processing capabilities support 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,




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Storefront development. The Blackboard Community
    System enables campus business units and student
    organizations to charge fees, 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, remote account access by parents, balance inquiries,
    transaction history statements and lost and stolen card reports.                                                                                                                                                                                                                  

4



---



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| |               
| | --------------
| | Blackboard One

Blackboard One Blackboard
Transaction System Blackboard Transaction
System. Blackboard Transaction
System Blackboard
One


Professional Services






| |   |                                                              
| | - | -------------------------------------------------------------
| |  | project management;                                          
|
| |  | installation and configuration;                              
|
| |  | integration of our applications with existing campus systems;
|
| |  | user interface customization;                                
|
| |  | course and content migration; and                            
|
| |  | custom Blackboard Building Blocksapplication development.    

Blackboard Academic Suite Blackboard Commerce
Suite, Blackboard Academic Suite.


Competition


Blackboard Academic Suite Blackboard
Commerce Suite








| |   |                                                  
| | - | -------------------------------------------------
| |  | base of reference clients;                       
|
| |  | functional breadth and depth of solution offered;
|
| |  | ease of use;                                     

5



---



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| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | 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.                                                 
|
| |  | 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




6



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Marketing and Sales




| |          
| | ---------
| | Marketing





| |      
| | -----
| | Sales





Executive Officers




|                     |  |     |  |                                                            
|-------------------- |  | --- |  | -----------------------------------------------------------
|Name                 |  | Age |  | Position                                                   
|                     |  |     |  |                                                            
|Michael L. Chasen    |  | 33  |  | Chief executive officer, president, director               
|Matthew L. Pittinsky |  | 32  |  | Chairman, director                                         
|Peter Q. Repetti     |  | 43  |  | Chief financial officer                                    
|Todd E. Gibby        |  | 36  |  | Senior vice president for sales                            
|James M. Hermens     |  | 38  |  | Senior vice president for services and support             
|George D. Calvert    |  | 41  |  | Senior vice president for product development              
|Matthew H. Small     |  | 32  |  | Senior vice president for legal, general counsel, secretary
|Mary E. Good         |  | 41  |  | Senior vice president for human resources and facilities   
|Michael J. Beach     |  | 35  |  | Vice president for finance, treasurer                      

Matthew Pittinsky


7



---



##### Table of Contents





Michael Chasen


Peter Repetti


Todd Gibby


George Calvert


James Hermens


Matthew Small


Mary Good


8



---



##### Table of Contents



Michael Beach


Employees




International Operations




Website Access to U.S. Securities and Exchange
Commission Reports









|        |            
|------- | -----------
|Item 2. | Properties.








|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.








|        |                                                         
|------- | --------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders.



9



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PART II







|        |                                                                                                                      
|------- | ---------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities.



|                                     |  |      |       |  |     |   |       | 
|------------------------------------ |  | ---- | ----- |  | --- | - | ----- | 
|                                     |  | High |       |  | Low |  
|                                     |  |      |       |  |     |  
|Year Ended December 31, 2004:        |  |      |       |  |     |   |       | 
|Second Quarter (since June 18, 2004) |  | $    | 23.40 |  |     | $ | 15.50 | 
|Third Quarter                        |  |      | 22.60 |  |     |   | 15.43 | 
|Fourth Quarter                       |  |      | 19.88 |  |     |   | 14.14 | 














|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.



10



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|                                                                                                  |                                                                                                                                                                |                          |         |        |        |   |         |        |        |   |         |        |        |      |         |        |        |   |        |        |         | 
|------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------ | ------ | ------- | 
|                                                                                                  |                                                                                                                                                                | Year Ended December 31,  |        
|                                                                                                  |                                                                                                                                                                |                          |        
|                                                                                                  |                                                                                                                                                                | 2000                     |         |        | 2001   |   |         | 2002   |        |   | 2003    |        |        | 2004 |        
|                                                                                                  |                                                                                                                                                                |                          |         |        |        |   |         |        |        |   |         |        |        |      |        
|                                                                                                  |                                                                                                                                                                | (In thousands)           |        
|Statement of operations data:                                                                     |                                                                                                                                                                |                          |         |        |        |   |         |        |        |   |         |        |        |      |         |        |        |   |        |       
|Revenues:                                                                                         |                                                                                                                                                                |                          |         |        |        |   |         |        |        |   |         |        |        |      |         |        |        |   |        |       
|                                                                                                  | Product                                                                                                                                                        |                          | $       | 8,463  |        |   | $       | 39,643 |        |   | $       | 62,388 |        |      | $       | 83,331 |        |   | $      | 98,632 |        
|                                                                                                  | Professional services                                                                                                                                          |                          |         | 3,597  |        |   |         | 7,082  |        |   |         | 7,558  |        |      |         | 9,147  |        |   |        | 12,771 |        
|                                                                                                  |                                                                                                                                                                |                          |         |        |        |   |         |        |        |   |         |        |        |      |        
|                                                                                                  |                                                                                                                                                                | Total revenues           |         |        | 12,060 |   |         |        | 46,725 |   |         |        | 69,946 |      |         |        | 92,478 |   |        |        | 111,403 | 
|Operating expenses:                                                                               |                                                                                                                                                                |                          |         |        |        |   |         |        |        |   |         |        |        |      |         |        |        |   |        |       
|                                                                                                  | Cost of product revenues, excludes amortization of acquired
    technology included in amortization of intangibles resulting
    from acquisitions shown below |                          |         | 3,591  |        |   |         | 16,311 |        |   |         | 21,526 |        |      |         | 23,079 |        |   |        | 25,897 |        
|                                                                                                  | Cost of professional services revenues                                                                                                                         |                          |         | 3,858  |        |   |         | 5,995  |        |   |         | 5,742  |        |      |         | 6,628  |        |   |        | 7,962  |        
|                                                                                                  | Research and development                                                                                                                                       |                          |         | 8,024  |        |   |         | 13,207 |        |   |         | 10,272 |        |      |         | 11,397 |        |   |        | 13,749 |        
|                                                                                                  | Sales and marketing                                                                                                                                            |                          |         | 18,790 |        |   |         | 28,294 |        |   |         | 24,176 |        |      |         | 30,908 |        |   |        | 35,176 |        
|                                                                                                  | General and administrative                                                                                                                                     |                          |         | 6,994  |        |   |         | 13,773 |        |   |         | 16,464 |        |      |         | 14,731 |        |   |        | 14,895 |        
|                                                                                                  | Amortization of intangibles resulting from acquisitions                                                                                                        |                          |         | 958    |        |   |         | 9,271  |        |   |         | 5,519  |        |      |         | 5,757  |        |   |        | 3,517  |        
|                                                                                                  | Stock-based compensation                                                                                                                                       |                          |         | 186    |        |   |         | 193    |        |   |         | 474    |        |      |         | 319    |        |   |        | 174    |        
|                                                                                                  |                                                                                                                                                                |                          |         |        |        |   |         |        |        |   |         |        |        |      |        
|                                                                                                  |                                                                                                                                                                | Total operating expenses |         |        | 42,401 |   |         |        | 87,044 |   |         |        | 84,173 |      |         |        | 92,819 |   |        |        | 101,370 | 
|                                                                                                  |                                                                                                                                                                |                          |         |        |        |   |         |        |        |   |         |        |        |      |        
|(Loss) income from operations                                                                     |                                                                                                                                                                |                          | (30,341 | )      |        |   | (40,319 | )      |        |   | (14,227 | )      |        |      | (341    | )      |        |   | 10,033 |       
|Interest (expense) income, net                                                                    |                                                                                                                                                                |                          | 250     |        |        |   | (1,466  | )      |        |   | (509    | )      |        |      | (470    | )      |        |   | 315    |       
|(Loss) income before provision for income taxes and cumulative
    change in accounting principle |                                                                                                                                                                |                          | (30,091 | )      |        |   | (41,785 | )      |        |   | (14,736 | )      |        |      | (811    | )      |        |   | 10,348 |       
|Provision for income taxes                                                                        |                                                                                                                                                                |                          |        |        |        |   |        |        |        |   | (283    | )      |        |      | (614    | )      |        |   | (299   | )     
|                                                                                                  |                                                                                                                                                                |                          |         |        |        |   |         |        |        |   |         |        |        |      |        
|(Loss) income before cumulative change in accounting principle                                    |                                                                                                                                                                |                          | (30,091 | )      |        |   | (41,785 | )      |        |   | (15,019 | )      |        |      | (1,425  | )      |        |   | 10,049 |       
|Cumulative change in accounting principle                                                         |                                                                                                                                                                |                          |        |        |        |   |        |        |        |   | (26,632 | )      |        |      |        |        |        |   |       |       
|                                                                                                  |                                                                                                                                                                |                          |         |        |        |   |         |        |        |   |         |        |        |      |        
|Net (loss) income                                                                                 |                                                                                                                                                                |                          | (30,091 | )      |        |   | (41,785 | )      |        |   | (41,651 | )      |        |      | (1,425  | )      |        |   | 10,049 |       
|Dividends on and accretion of convertible preferred stock                                         |                                                                                                                                                                |                          | (3,437  | )      |        |   | (7,977  | )      |        |   | (9,699  | )      |        |      | (10,077 | )      |        |   | (6,344 | )     
|                                                                                                  |                                                                                                                                                                |                          |         |        |        |   |         |        |        |   |         |        |        |      |        
|Net (loss) income attributable to common stockholders                                             |                                                                                                                                                                | $                        | (33,528 | )      |        | $ | (49,762 | )      |        | $ | (51,350 | )      |        | $    | (11,502 | )      |        | $ | 3,705  |       
|                                                                                                  |                                                                                                                                                                |                          |         |        |        |   |         |        |        |   |         |        |        |      |        



|                                                                             |  |                |         |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |         | 
|---------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | - |  | ---- | -------- | - |  | - | ------- | 
|                                                                             |  | December 31,   |        
|                                                                             |  |                |        
|                                                                             |  | 2000           |         |   | 2001 |   |         | 2002 |  |   | 2003     |   |  | 2004 |         
|                                                                             |  |                |         |   |      |   |         |      |  |   |          |   |  |      |         
|                                                                             |  | (In thousands) |        
|Balance sheet data:                                                          |  |                |         |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |         | 
|Cash and cash equivalents                                                    |  | $              | 12,038  |   |      | $ | 20,270  |      |  | $ | 20,372   |   |  | $    | 30,456   |   |  | $ | 98,149  | 
|Working capital (deficit)                                                    |  |                | (16,200 | ) |      |   | 1,634   |      |  |   | (9,402   | ) |  |      | (13,001  | ) |  |   | 53,642  | 
|Total assets                                                                 |  |                | 73,743  |   |      |   | 86,504  |      |  |   | 71,140   |   |  |      | 83,054   |   |  |   | 148,398 | 
|Deferred revenues, current portion                                           |  |                | 13,445  |   |      |   | 22,659  |      |  |   | 37,342   |   |  |      | 51,215   |   |  |   | 63,901  | 
|Total debt                                                                   |  |                | 19,475  |   |      |   | 6,070   |      |  |   | 11,855   |   |  |      | 11,564   |   |  |   | 762     | 
|Mandatorily redeemable convertible preferred stock and
    Series E warrants |  |                | 55,298  |   |      |   | 110,522 |      |  |   | 120,221  |   |  |      | 130,297  |   |  |   |        | 
|Total stockholders (deficit) equity                                         |  |                | (29,275 | ) |      |   | (68,586 | )    |  |   | (113,403 | ) |  |      | (124,617 | ) |  |   | 69,107  | 

11



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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
Risks Related to Our Business and elsewhere in this
annual report.


General








Blackboard Academic Suite Blackboard
Commerce Suite. Blackboard Academic Suite Blackboard Learning System, Blackboard Community System Blackboard Portal System Blackboard Content
System. Blackboard Commerce Suite Blackboard Transaction System, Blackboard
Community System Blackboard One.






12



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Critical Accounting Policies and Estimates




13



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Revenue recognition. Software Revenue
Recognition Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions.






Application of AICPA
SOP 97-2 to Arrangements That Include the Right to Use
Software Stored on Another Entitys Hardware.






Allowance for uncollectible accounts.


Long-lived assets. Accounting for the


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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.


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

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| |   |                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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 prospective 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.





|                                                                            |                                                                                                              |                         |         |         |      |   |         |         |   |   |      |        |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ----------------------- | ------- | ------- | ---- | - | ------- | ------- | - | - | ---- | ------ | -
|                                                                            |                                                                                                              | Year Ended December 31, |        
|                                                                            |                                                                                                              |                         |        
|                                                                            |                                                                                                              | 2002                    |         |         | 2003 |   |         | 2004    |  
|                                                                            |                                                                                                              |                         |         |         |      |   |         |         |  
|                                                                            |                                                                                                              | (In thousands, except   |        
|                                                                            |                                                                                                              | per share amounts)      |        
|Pro forma net (loss) income attributable to common stockholders:            |                                                                                                              |                         |         |         |      |   |         |         |   |   |      |       
|                                                                            | As reported                                                                                                  |                         | $       | (51,350 | )    |   | $       | (11,502 | ) |   | $    | 3,705  |  
|                                                                            | Add: Stock-based compensation included in reported net (loss)
    income attributable to common stockholders |                         |         | 474     |      |   |         | 319     |   |   |      | 174    |  
|                                                                            | Deduct: Stock-based compensation expense determined under fair
    value-based method for all awards         |                         |         | (3,455  | )    |   |         | (2,942  | ) |   |      | (4,382 | )
|                                                                            |                                                                                                              |                         |         |         |      |   |         |         |  
|Pro forma net (loss) income attributable to common stockholders             |                                                                                                              | $                       | (54,331 | )       |      | $ | (14,125 | )       |   | $ | (503 | )     
|                                                                            |                                                                                                              |                         |         |         |      |   |         |         |  
|Net (loss) income attributable to common stockholders per common
    share: |                                                                                                              |                         |         |         |      |   |         |         |   |   |      |       
|                                                                            | Basic as reported                                                                                            |                         | $       | (9.40   | )    |   | $       | (2.09   | ) |   | $    | 0.23   |  
|                                                                            |                                                                                                              |                         |         |         |      |   |         |         |  
|                                                                            | Diluted as reported                                                                                          |                         |         | (9.40   | )    |   |         | (2.09   | ) |   |      | 0.21   |  
|                                                                            |                                                                                                              |                         |         |         |      |   |         |         |  
|                                                                            | Basic  pro forma                                                                                            |                         | $       | (9.95   | )    |   | $       | (2.56   | ) |   | $    | (0.03  | )
|                                                                            |                                                                                                              |                         |         |         |      |   |         |         |  
|                                                                            | Diluted  pro forma                                                                                          |                         |         | (9.95   | )    |   |         | (2.56   | ) |   |      | (0.03  | )
|                                                                            |                                                                                                              |                         |         |         |      |   |         |         |  

Accounting for income taxes.




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Acquisitions and Joint Venture






Consolidation of Variable Interest Entities 
an Interpretation of ARB No. 51


Important Factors Considered by Management




17



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Recurring ratable revenues include those product revenues that
    are recognized ratably over the contract term, which is
    typically one year, and that recur each year assuming clients
    renew their contracts. These revenues include revenues from the
    licensing of all of our software products and from our hosting
    arrangements.                                                                                                       
|
| |  | Non-recurring ratable revenues include those product revenues
    that are recognized ratably over the term of the contract, which
    is typically one year, but that do not contractually recur.
    These revenues include the hardware components of our
    Blackboard Transaction Systemproducts, with and without
    our embedded software, and third-party hardware and software
    sold to our clients in conjunction with our software licenses.
|
| |  | Other product revenues include those product revenues that are
    recognized as earned and are not deferred to future periods.
    These revenues include Blackboard Onesales,
    Blackboard Transaction System supplies and commissions we
    earn from publishers related to digital course supplement
    downloads. Each of these individual revenue streams has
    historically been insignificant.                                                





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Results of Operations




|                    |                                                         |                          |     |    |      |  |   |      |     |  |   |    |     | 
|------------------- | ------------------------------------------------------- | ------------------------ | --- | -- | ---- |  | - | ---- | --- |  | - | -- | --- | 
|                    |                                                         | Year Ended               |    
|                    |                                                         | December 31,             |    
|                    |                                                         |                          |    
|                    |                                                         | 2002                     |     |    | 2003 |  |   | 2004 |    
|                    |                                                         |                          |     |    |      |  |   |      |    
|Revenues:           |                                                         |                          |     |    |      |  |   |      |     |  |   |   
|                    | Product                                                 |                          |     | 89 | %    |  |   | 90   | %   |  |   | 89 | %  
|                    | Professional services                                   |                          |     | 11 |      |  |   | 10   |     |  |   | 11 |    
|                    |                                                         |                          |     |    |      |  |   |      |    
|                    |                                                         | Total revenues           |     |    | 100  |  |   |      | 100 |  |   |    | 100 | 
|Operating expenses: |                                                         |                          |     |    |      |  |   |      |     |  |   |   
|                    | Cost of product revenues                                |                          |     | 31 |      |  |   | 25   |     |  |   | 23 |    
|                    | Cost of professional services revenues                  |                          |     | 8  |      |  |   | 7    |     |  |   | 7  |    
|                    | Research and development                                |                          |     | 15 |      |  |   | 12   |     |  |   | 12 |    
|                    | Sales and marketing                                     |                          |     | 34 |      |  |   | 33   |     |  |   | 32 |    
|                    | General and administrative                              |                          |     | 23 |      |  |   | 16   |     |  |   | 14 |    
|                    | Amortization of intangibles resulting from acquisitions |                          |     | 8  |      |  |   | 6    |     |  |   | 3  |    
|                    | Stock-based compensation                                |                          |     | 1  |      |  |   | 0    |     |  |   | 0  |    
|                    |                                                         |                          |     |    |      |  |   |      |    
|                    |                                                         | Total operating expenses |     |    | 120  |  |   |      | 99  |  |   |    | 91  | 
|                    |                                                         |                          |     |    |      |  |   |      |    
|                    |                                                         |                          | (20 | )% |      |  | 1 | %    |     |  | 9 | % 
|                    |                                                         |                          |     |    |      |  |   |      |    



|                                       |  |              |    |   |      |  |    |      |  |  |    |  
|-------------------------------------- |  | ------------ | -- | - | ---- |  | -- | ---- |  |  | -- | -
|                                       |  | Year Ended   |   
|                                       |  | December 31, |   
|                                       |  |              |   
|                                       |  | 2002         |    |   | 2003 |  |    | 2004 | 
|                                       |  |              |    |   |      |  |    |      | 
|Cost of product revenues               |  |              | 35 | % |      |  | 28 | %    |  |  | 26 | %
|Cost of professional services revenues |  |              | 76 |   |      |  | 72 |      |  |  | 62 |  



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2004 Compared to Year Ended
    December 31, 2003

Revenues.




|                               |                        |               |      |      |      |   |      |      | 
|------------------------------ | ---------------------- | ------------- | ---- | ---- | ---- | - | ---- | ---- | 
|                               |                        | Year Ended    |     
|                               |                        | December 31,  |     
|                               |                        |               |     
|                               |                        | 2003          |      |      | 2004 |  
|                               |                        |               |      |      |      |  
|                               |                        | (In millions) |     
|Recurring ratable revenues     |                        | $             | 58.3 |      |      | $ | 74.9 |     
|Non-recurring ratable revenues |                        |               | 20.2 |      |      |   | 19.6 |     
|Other product revenues         |                        |               | 4.8  |      |      |   | 4.1  |     
|                               |                        |               |      |      |      |  
|                               | Total product revenues |               | $    | 83.3 |      |   | $    | 98.6 | 
|                               |                        |               |      |      |      |  

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##### Table of Contents



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




Cost of product revenues. Blackboard Content System. Blackboard Transaction System Blackboard Transaction System


Blackboard Transaction System Blackboard Transaction System


Cost of professional services revenues.


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Research and development expenses.


Sales and marketing expenses.


General and administrative expenses.


Net interest (expense) income.


Income taxes.


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(Loss) income before cumulative effect of change in
accounting principle.




| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2003 Compared to Year Ended
    December 31, 2002

Revenues.




|                               |                        |               |      |      |      |   |      |      | 
|------------------------------ | ---------------------- | ------------- | ---- | ---- | ---- | - | ---- | ---- | 
|                               |                        | Year Ended    |     
|                               |                        | December 31,  |     
|                               |                        |               |     
|                               |                        | 2002          |      |      | 2003 |  
|                               |                        |               |      |      |      |  
|                               |                        | (In millions) |     
|Recurring ratable revenues     |                        | $             | 39.8 |      |      | $ | 58.3 |     
|Non-recurring ratable revenues |                        |               | 19.4 |      |      |   | 20.2 |     
|Other product revenues         |                        |               | 3.2  |      |      |   | 4.8  |     
|                               |                        |               |      |      |      |  
|                               | Total product revenues |               | $    | 62.4 |      |   | $    | 83.3 | 
|                               |                        |               |      |      |      |  

Blackboard
Learning System Blackboard Community System Blackboard
Transaction System Blackboard Learning System Blackboard Learning System  Basic Edition Blackboard Learning System Blackboard Transaction System Blackboard One




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Blackboard Learning System Blackboard Community System Blackboard Learning
System Blackboard Community System




Cost of product revenues.


Cost of professional services revenues.


Research and development expenses.


Sales and marketing expenses.


General and administrative expenses.


Net interest expense.


Income taxes.


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Loss before cumulative effect of change in accounting
principle.


Quarterly Results




|                                          |  |                |        |   |          |   |        |               |  |   |              |  |  |   |        | 
|----------------------------------------- |  | -------------- | ------ | - | -------- | - | ------ | ------------- |  | - | ------------ |  |  | - | ------ | 
|                                          |  | Quarter Ended  |       
|                                          |  |                |       
|                                          |  | March 31,      |        |   | June 30, |   |        | September 30, |  |   | December 31, | 
|                                          |  | 2003           |        |   | 2003     |   |        | 2003          |  |   | 2003         | 
|                                          |  |                |        |   |          |   |        |               |  |   |              | 
|                                          |  | (In thousands) |       
|Total revenues                            |  | $              | 20,181 |   |          | $ | 22,744 |               |  | $ | 25,570       |  |  | $ | 23,983 | 
|Total operating expenses                  |  |                | 21,992 |   |          |   | 23,824 |               |  |   | 24,554       |  |  |   | 22,449 | 
|(Loss) income from operations             |  |                | (1,811 | ) |          |   | (1,080 | )             |  |   | 1,016        |  |  |   | 1,534  | 
|Net (loss) income                         |  |                | (2,034 | ) |          |   | (1,405 | )             |  |   | 591          |  |  |   | 1,423  | 
|Net cash provided by operating activities |  |                | 1,600  |   |          |   | 2,526  |               |  |   | 5,158        |  |  |   | 10,426 | 

|                                                    |  |                |        |   |          |   |        |               |  |   |              |  |  |   |        | 
|--------------------------------------------------- |  | -------------- | ------ | - | -------- | - | ------ | ------------- |  | - | ------------ |  |  | - | ------ | 
|                                                    |  | Quarter Ended  |       
|                                                    |  |                |       
|                                                    |  | March 31,      |        |   | June 30, |   |        | September 30, |  |   | December 31, | 
|                                                    |  | 2004           |        |   | 2004     |   |        | 2004          |  |   | 2004         | 
|                                                    |  |                |        |   |          |   |        |               |  |   |              | 
|                                                    |  | (In thousands) |       
|Total revenues                                      |  | $              | 25,219 |   |          | $ | 26,355 |               |  | $ | 29,776       |  |  | $ | 30,053 | 
|Total operating expenses                            |  |                | 24,023 |   |          |   | 25,023 |               |  |   | 26,682       |  |  |   | 25,642 | 
|Income from operations                              |  |                | 1,196  |   |          |   | 1,332  |               |  |   | 3,094        |  |  |   | 4,411  | 
|Net income                                          |  |                | 786    |   |          |   | 1,051  |               |  |   | 3,480        |  |  |   | 4,732  | 
|Net cash (used in) provided by operating activities |  |                | (1,867 | ) |          |   | 4,203  |               |  |   | 18,103       |  |  |   | 12,292 | 

Liquidity and Capital Resources










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Obligations and Commitments




|                |  |                |     |           |        |   |           |        |  |   |     | 
|--------------- |  | -------------- | --- | --------- | ------ | - | --------- | ------ |  | - | --- | 
|                |  |                |     | Operating |        |   | Sub Lease |       
|                |  | Debt           |     |           | Leases |   |           | Income | 
|                |  |                |     |           |        |   |           |        | 
|                |  | (In thousands) |    
|2005            |  | $              | 525 |           |        | $ | 3,374     |        |  | $ | 135 | 
|2006            |  |                | 237 |           |        |   | 3,459     |        |  |   | 139 | 
|2007            |  |                |    |           |        |   | 2,552     |        |  |   | 131 | 
|2008            |  |                |    |           |        |   | 522       |        |  |   |    | 
|2009            |  |                |    |           |        |   | 353       |        |  |   |    | 
|2010 and beyond |  |                |    |           |        |   |          |        |  |   |    | 
|                |  |                |     |           |        |   |           |        | 
|Total           |  | $              | 762 |           |        | $ | 10,260    |        |  | $ | 405 | 
|                |  |                |     |           |        |   |           |        | 

Seasonality




Recent Accounting Pronouncements


Effective Date of FASB
Interpretation No. 46


Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity.


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Applicability of AICPA
Statement of Position 97-2 to Non-Software Deliverables in
an Arrangement Containing More-Than-Incidental
Software.


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 prospective 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.                                                             



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Factors That Could Affect Future Results




| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | We have only had one profitable year and may never achieve
    sustained profitability.





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





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







| |                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Some of our clients use our products to facilitate online
    education, which is a relatively new field; if online education
    does not continue to develop and gain acceptance, demand for our
    products could suffer.



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| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | Our level of fixed expenses may cause us to incur
    operating losses if we are unsuccessful in achieving revenue
    growth.





| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 Content System, does
    not gain widespread market acceptance, our financial results
    could suffer.

Blackboard
Content System,




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



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





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



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| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to effectively manage our expanding
    operations, which could impair our ability to operate
    profitably.





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



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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;                                                                                                                                                         
|
| |  | 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.                                                                                                                                                                 

32



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





| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we undertake business combinations and acquisitions,
    they may be difficult to integrate, disrupt our business, dilute
    stockholder value or divert management attention.









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



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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.



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





| |                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our status under state and federal financial services
    regulation is currently unclear, and any violation of any
    present or future regulation could expose us to liability, force
    us to change our business practices or force us to stop selling
    or modify our products and services.

Blackboard Transaction System


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| |   |                                                               
| | - | --------------------------------------------------------------
| |  | disclosure of our business policies and practices;            
|
| |  | restrictions on specified uses and disclosures of information;
|
| |  | data security requirements;                                   
|
| |  | government registration; and                                  
|
| |  | reporting and documentation requirements.                     








|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures about Market
    Risk







36



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|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                                                                                                                       |  |      |    | 
|---------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                       |  | Page |   
|                                                                                                                       |  |      |   
|Report of Independent Registered Public
    Accounting Firm                                                            |  |      | 38 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2004                                                       |  |      | 39 | 
|Consolidated Statements of Operations for
    the years ended December 31, 2002, 2003 and 2004                         |  |      | 40 | 
|Consolidated Statements of
    Stockholders (Deficit) Equity for the years ended
    December 31, 2002, 2003 and 2004 |  |      | 41 | 
|Consolidated Statements of Cash Flows for
    the years ended December 31, 2002, 2003 and 2004                         |  |      | 42 | 
|Notes to Consolidated Financial
    Statements                                                                         |  |      | 43 | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














| |                  
| | -----------------
| | Ernst & Young LLP





38



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BLACKBOARD INC.





CONSOLIDATED BALANCE SHEETS


|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        |                                                                                                                                            |                           |          |        |        |         |          |        |         | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------- | -------- | ------ | ------ | ------- | -------- | ------ | ------- | 
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        | December 31,                                                                                                                               |                          
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        |                                                                                                                                            |                          
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        | 2003                                                                                                                                       |                           |          | 2004   |       
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        |                                                                                                                                            |                           |          |        |       
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        | (In thousands)                                                                                                                             |                          
|Current assets:                                                                                                                                                                                                                         |                                                                                                                                                                                                        |                                                                                                                                            |                           |          |        |        |         |         
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        | Cash and cash equivalents                                                                                                                  |                           | $        | 30,456 |        |         | $        | 98,149 |        
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        | Accounts receivable, net of allowance for doubtful accounts of
    $1,018,000 and $954,000 at December 31, 2003 and 2004,
    respectively |                           |          | 22,870 |        |         |          | 21,686 |        
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        | Inventories                                                                                                                                |                           |          | 2,050  |        |         |          | 1,994  |        
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        | Prepaid expenses and other current assets                                                                                                  |                           |          | 1,554  |        |         |          | 1,727  |        
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        | Deferred cost of revenues                                                                                                                  |                           |          | 3,846  |        |         |          | 4,916  |        
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        |                                                                                                                                            |                           |          |        |       
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        |                                                                                                                                            | Total current assets      |          |        | 60,776 |         |          |        | 128,472 | 
|Property and equipment, net                                                                                                                                                                                                             |                                                                                                                                                                                                        |                                                                                                                                            | 7,683                     |          |        |        | 8,848   |         
|Goodwill                                                                                                                                                                                                                                |                                                                                                                                                                                                        |                                                                                                                                            | 10,252                    |          |        |        | 10,252  |         
|Intangible assets, net                                                                                                                                                                                                                  |                                                                                                                                                                                                        |                                                                                                                                            | 4,343                     |          |        |        | 826     |         
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        |                                                                                                                                            |                           |          |        |       
|Total assets                                                                                                                                                                                                                            |                                                                                                                                                                                                        | $                                                                                                                                          | 83,054                    |          |        | $      | 148,398 |         
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        |                                                                                                                                            |                           |          |        |       
|Current liabilities:                                                                                                                                                                                                                    |                                                                                                                                                                                                        |                                                                                                                                            |                           |          |        |        |         |         
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        | Accounts payable                                                                                                                           |                           | $        | 1,833  |        |         | $        | 1,114  |        
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        | Accrued expenses                                                                                                                           |                           |          | 9,900  |        |         |          | 9,290  |        
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        | Line of credit                                                                                                                             |                           |          | 7,880  |        |         |          |       |        
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        | Equipment note, current portion                                                                                                            |                           |          | 949    |        |         |          | 525    |        
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        | Note payable, current portion                                                                                                              |                           |          | 2,000  |        |         |          |       |        
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        | Deferred revenues, current portion                                                                                                         |                           |          | 51,215 |        |         |          | 63,901 |        
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        |                                                                                                                                            |                           |          |        |       
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        |                                                                                                                                            | Total current liabilities |          |        | 73,777 |         |          |        | 74,830  | 
|Equipment note, noncurrent portion                                                                                                                                                                                                      |                                                                                                                                                                                                        |                                                                                                                                            | 735                       |          |        |        | 237     |         
|Deferred rent                                                                                                                                                                                                                           |                                                                                                                                                                                                        |                                                                                                                                            | 1,135                     |          |        |        | 1,067   |         
|Deferred revenues, noncurrent portion                                                                                                                                                                                                   |                                                                                                                                                                                                        |                                                                                                                                            | 1,727                     |          |        |        | 3,157   |         
|Commitments and contingencies                                                                                                                                                                                                           |                                                                                                                                                                                                        |                                                                                                                                            |                           |          |        |        |         |         
|Series A Convertible Preferred Stock, $0.01 par value;
    1,174,484 shares authorized,
    issued and outstanding at December 31, 2003; liquidation
    preference of $876,000 at December 31, 2003                                    |                                                                                                                                                                                                        |                                                                                                                                            | 868                       |          |        |        |        |         
|Series B Redeemable Convertible Preferred Stock,
    $0.01 par value; 5,025,935 shares authorized, issued
    and outstanding at December 31, 2003; liquidation
    preference of $4,403,000 at December 31, 2003                       |                                                                                                                                                                                                        |                                                                                                                                            | 4,397                     |          |        |        |        |         
|Series C Redeemable Convertible Preferred Stock,
    $0.01 par value; 6,220,049 shares authorized;
    5,904,788 shares issued and outstanding at
    December 31, 2003; liquidation preference of $21,285,000 at
    December 31, 2003 |                                                                                                                                                                                                        |                                                                                                                                            | 21,256                    |          |        |        |        |         
|Series D Redeemable Convertible Preferred Stock,
    $0.01 par value; 4,167,333 shares authorized;
    3,451,707 shares issued and outstanding at
    December 31, 2003; liquidation preference of $41,248,000 at
    December 31, 2003 |                                                                                                                                                                                                        |                                                                                                                                            | 41,215                    |          |        |        |        |         
|Series E Redeemable Convertible Preferred Stock,
    $0.01 par value; 13,000,000 shares authorized;
    10,236,934 shares issued at December 31, 2003,
    liquidation preference of $64,830,000 at December 31, 2003                   |                                                                                                                                                                                                        |                                                                                                                                            | 58,227                    |          |        |        |        |         
|Warrants to purchase Series E Redeemable Convertible
    Preferred Stock                                                                                                                                                                |                                                                                                                                                                                                        |                                                                                                                                            | 4,334                     |          |        |        |        |         
|Stockholders (deficit) equity:                                                                                                                                                                                                         |                                                                                                                                                                                                        |                                                                                                                                            |                           |          |        |        |         |         
|                                                                                                                                                                                                                                        | Preferred stock, $0.01 par value; no shares authorized,
    issued, or outstanding at December 31, 2003;
    5,000,000 shares authorized, and no shares issued or
    outstanding at December 31, 2004 |                                                                                                                                            |                           |         |        |        |         |         |       
|                                                                                                                                                                                                                                        | Common stock, $0.01 par value; 200,000,000 shares
    authorized; 5,536,396 and 25,977,822 shares issued and
    outstanding at December 31, 2003 and 2004, respectively                               |                                                                                                                                            |                           | 55       |        |        |         | 260      |       
|                                                                                                                                                                                                                                        | Additional paid-in capital                                                                                                                                                                             |                                                                                                                                            |                           | 8,020    |        |        |         | 191,664  |       
|                                                                                                                                                                                                                                        | Deferred stock compensation                                                                                                                                                                            |                                                                                                                                            |                           | (35      | )      |        |         | (209     | )     
|                                                                                                                                                                                                                                        | Accumulated deficit                                                                                                                                                                                    |                                                                                                                                            |                           | (132,657 | )      |        |         | (122,608 | )     
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        |                                                                                                                                            |                           |          |        |       
|Total stockholders (deficit) equity                                                                                                                                                                                                    |                                                                                                                                                                                                        |                                                                                                                                            | (124,617                  | )        |        |        | 69,107  |         
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        |                                                                                                                                            |                           |          |        |       
|Total liabilities and stockholders (deficit) equity                                                                                                                                                                                    |                                                                                                                                                                                                        | $                                                                                                                                          | 83,054                    |          |        | $      | 148,398 |         
|                                                                                                                                                                                                                                        |                                                                                                                                                                                                        |                                                                                                                                            |                           |          |        |       

See accompanying notes.


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BLACKBOARD INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                                                            |                                                                                                                                                                             |                                                 |         |           |      |   |         |           |   |   |         |            |  
|----------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------- | ------- | --------- | ---- | - | ------- | --------- | - | - | ------- | ---------- | -
|                                                                                                            |                                                                                                                                                                             | Year Ended December 31,                         |        
|                                                                                                            |                                                                                                                                                                             |                                                 |        
|                                                                                                            |                                                                                                                                                                             | 2002                                            |         |           | 2003 |   |         | 2004      |  
|                                                                                                            |                                                                                                                                                                             |                                                 |         |           |      |   |         |           |  
|                                                                                                            |                                                                                                                                                                             | (In thousands, except share and per share data) |        
|Revenues:                                                                                                   |                                                                                                                                                                             |                                                 |         |           |      |   |         |           |   |   |         |           
|                                                                                                            | Product                                                                                                                                                                     |                                                 | $       | 62,388    |      |   | $       | 83,331    |   |   | $       | 98,632     |  
|                                                                                                            | Professional services                                                                                                                                                       |                                                 |         | 7,558     |      |   |         | 9,147     |   |   |         | 12,771     |  
|                                                                                                            |                                                                                                                                                                             |                                                 |         |           |      |   |         |           |  
|Total revenues                                                                                              |                                                                                                                                                                             |                                                 | 69,946  |           |      |   | 92,478  |           |   |   | 111,403 |           
|Operating expenses:                                                                                         |                                                                                                                                                                             |                                                 |         |           |      |   |         |           |   |   |         |           
|                                                                                                            | Cost of product revenues, excludes amortization of acquired
    technology included in amortization of intangibles resulting
    from acquisitions shown below (see Note 2) |                                                 |         | 21,526    |      |   |         | 23,079    |   |   |         | 25,897     |  
|                                                                                                            | Cost of professional services revenues                                                                                                                                      |                                                 |         | 5,742     |      |   |         | 6,628     |   |   |         | 7,962      |  
|                                                                                                            | Research and development                                                                                                                                                    |                                                 |         | 10,272    |      |   |         | 11,397    |   |   |         | 13,749     |  
|                                                                                                            | Sales and marketing                                                                                                                                                         |                                                 |         | 24,176    |      |   |         | 30,908    |   |   |         | 35,176     |  
|                                                                                                            | General and administrative                                                                                                                                                  |                                                 |         | 16,464    |      |   |         | 14,731    |   |   |         | 14,895     |  
|                                                                                                            | Amortization of intangibles resulting from acquisitions                                                                                                                     |                                                 |         | 5,519     |      |   |         | 5,757     |   |   |         | 3,517      |  
|                                                                                                            | Stock-based compensation                                                                                                                                                    |                                                 |         | 474       |      |   |         | 319       |   |   |         | 174        |  
|                                                                                                            |                                                                                                                                                                             |                                                 |         |           |      |   |         |           |  
|Total operating expenses                                                                                    |                                                                                                                                                                             |                                                 | 84,173  |           |      |   | 92,819  |           |   |   | 101,370 |           
|                                                                                                            |                                                                                                                                                                             |                                                 |         |           |      |   |         |           |  
|(Loss) income from operations                                                                               |                                                                                                                                                                             |                                                 | (14,227 | )         |      |   | (341    | )         |   |   | 10,033  |           
|Other income (expense), net:                                                                                |                                                                                                                                                                             |                                                 |         |           |      |   |         |           |   |   |         |           
|                                                                                                            | Interest expense                                                                                                                                                            |                                                 |         | (737      | )    |   |         | (573      | ) |   |         | (179       | )
|                                                                                                            | Interest income                                                                                                                                                             |                                                 |         | 228       |      |   |         | 103       |   |   |         | 494        |  
|                                                                                                            |                                                                                                                                                                             |                                                 |         |           |      |   |         |           |  
|(Loss) income before provision for income taxes and cumulative
    effect of change in accounting principle |                                                                                                                                                                             |                                                 | (14,736 | )         |      |   | (811    | )         |   |   | 10,348  |           
|Provision for income taxes                                                                                  |                                                                                                                                                                             |                                                 | (283    | )         |      |   | (614    | )         |   |   | (299    | )         
|                                                                                                            |                                                                                                                                                                             |                                                 |         |           |      |   |         |           |  
|(Loss) income before cumulative effect of change in accounting
    principle                                |                                                                                                                                                                             |                                                 | (15,019 | )         |      |   | (1,425  | )         |   |   | 10,049  |           
|Cumulative effect of change in accounting principle                                                         |                                                                                                                                                                             |                                                 | (26,632 | )         |      |   |        |           |   |   |        |           
|                                                                                                            |                                                                                                                                                                             |                                                 |         |           |      |   |         |           |  
|Net (loss) income                                                                                           |                                                                                                                                                                             |                                                 | (41,651 | )         |      |   | (1,425  | )         |   |   | 10,049  |           
|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   |           
|                                                                                                            |                                                                                                                                                                             |                                                 |         |           |      |   |         |           |  
|Net (loss) income attributable to common stockholders per common
    share:                                 |                                                                                                                                                                             |                                                 |         |           |      |   |         |           |   |   |         |           
|                                                                                                            | Basic                                                                                                                                                                       |                                                 | $       | (9.40     | )    |   | $       | (2.09     | ) |   | $       | 0.23       |  
|                                                                                                            |                                                                                                                                                                             |                                                 |         |           |      |   |         |           |  
|                                                                                                            | Diluted                                                                                                                                                                     |                                                 | $       | (9.40     | )    |   | $       | (2.09     | ) |   | $       | 0.21       |  
|                                                                                                            |                                                                                                                                                                             |                                                 |         |           |      |   |         |           |  
|Weighted average number of common shares:                                                                   |                                                                                                                                                                             |                                                 |         |           |      |   |         |           |   |   |         |           
|                                                                                                            | Basic                                                                                                                                                                       |                                                 |         | 5,460,289 |      |   |         | 5,516,476 |   |   |         | 16,071,598 |  
|                                                                                                            |                                                                                                                                                                             |                                                 |         |           |      |   |         |           |  
|                                                                                                            | Diluted                                                                                                                                                                     |                                                 |         | 5,460,289 |      |   |         | 5,516,476 |   |   |         | 17,864,137 |  
|                                                                                                            |                                                                                                                                                                             |                                                 |         |           |      |   |         |           |  

See accompanying notes.


40



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BLACKBOARD INC.





CONSOLIDATED STATEMENTS OF STOCKHOLDERS
(DEFICIT) EQUITY


|                             |                                                                                                       |                                      |            |            |            |   |     |          |  |   |              |         |       |               |      |      |                  |   |          |         |   |   |          |         |  
|---------------------------- | ----------------------------------------------------------------------------------------------------- | ------------------------------------ | ---------- | ---------- | ---------- | - | --- | -------- |  | - | ------------ | ------- | ----- | ------------- | ---- | ---- | ---------------- | - | -------- | ------- | - | - | -------- | ------- | -
|                             |                                                                                                       | Common Stock                         |            |            | Additional |   |     | Deferred |  |   |              |         | Total |              
|                             |                                                                                                       |                                      |            |            | Paid-In    |   |     | Stock    |  |   | Accumulated  |         |       | Stockholders |     
|                             |                                                                                                       | Shares                               |            |            | Amount     |   |     | Capital  |  |   | Compensation |         |       | Deficit       |      |      | (Deficit) Equity |  
|                             |                                                                                                       |                                      |            |            |            |   |     |          |  |   |              |         |       |               |      |      |                  |  
|                             |                                                                                                       | (In thousands, except share amounts) |           
|Balance at December 31, 2001 |                                                                                                       |                                      | 4,948,290  |            |            | $ | 50  |          |  | $ | 21,196       |         |       | $             | (250 | )    |                  | $ | (89,581  | )       |   | $ | (68,585  | )      
|                             | Issuance of common stock upon exercise of options                                                     |                                      |            | 33,980     |            |   |     |         |  |   |              | 69      |       |               |      |     |                  |   |          |        |   |   |          | 69      |  
|                             | Issuance of common stock in connection with acquisition of
    Prometheus                             |                                      |            | 520,162    |            |   |     | 5        |  |   |              | 5,984   |       |               |      |     |                  |   |          |        |   |   |          | 5,989   |  
|                             | Issuance of compensatory stock options                                                                |                                      |            |           |            |   |     |         |  |   |              | 168     |       |               |      | (33  | )                |   |          |        |   |   |          | 135     |  
|                             | Recognition of stock compensation for modification of options                                         |                                      |            |           |            |   |     |         |  |   |              | 141     |       |               |      |     |                  |   |          |        |   |   |          | 141     |  
|                             | Amortization of deferred stock compensation                                                           |                                      |            |           |            |   |     |         |  |   |              |        |       |               |      | 198  |                  |   |          |        |   |   |          | 198     |  
|                             | Accretion of beneficial conversion feature associated with
    Series E Preferred Shares and warrants |                                      |            |           |            |   |     |         |  |   |              | (800    | )     |               |      |     |                  |   |          |        |   |   |          | (800    | )
|                             | Accretion on preferred stock and related dividends                                                    |                                      |            |           |            |   |     |         |  |   |              | (8,899  | )     |               |      |     |                  |   |          |        |   |   |          | (8,899  | )
|                             | Net loss                                                                                              |                                      |            |           |            |   |     |         |  |   |              |        |       |               |      |     |                  |   |          | (41,651 | ) |   |          | (41,651 | )
|                             |                                                                                                       |                                      |            |            |            |   |     |          |  |   |              |         |       |               |      |      |                  |  
|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     |       |               |      |     |                  |   |          |        |   |   |          | 194     |  
|                             | Issuance of common stock in connection with acquisition of
    Prometheus                             |                                      |            | 666        |            |   |     |         |  |   |              |        |       |               |      |     |                  |   |          |        |   |   |          |        |  
|                             | Issuance of compensatory stock options                                                                |                                      |            |           |            |   |     |         |  |   |              | 23      |       |               |      | (18  | )                |   |          |        |   |   |          | 5       |  
|                             | Recognition of stock compensation for modification of options                                         |                                      |            |           |            |   |     |         |  |   |              | 21      |       |               |      |     |                  |   |          |        |   |   |          | 21      |  
|                             | Amortization of deferred stock compensation                                                           |                                      |            |           |            |   |     |         |  |   |              |        |       |               |      | 68   |                  |   |          |        |   |   |          | 68      |  
|                             | Accretion 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   |       |               |      |     |                  |   |          |        |   |   |          | 1,970   |  
|                             | Issuance of common stock upon exercise of warrants                                                    |                                      |            | 156,171    |            |   |     | 2        |  |   |              | 246     |       |               |      |     |                  |   |          |        |   |   |          | 248     |  
|                             | Issuance of common stock in connection with acquisition of
    Prometheus                             |                                      |            | 27,447     |            |   |     |         |  |   |              |        |       |               |      |     |                  |   |          |        |   |   |          |        |  
|                             | Issuance of compensatory stock options                                                                |                                      |            |           |            |   |     |         |  |   |              | 348     |       |               |      | (279 | )                |   |          |        |   |   |          | 69      |  
|                             | Amortization of deferred stock compensation                                                           |                                      |            |           |            |   |     |         |  |   |              |        |       |               |      | 105  |                  |   |          |        |   |   |          | 105     |  
|                             | Accretion 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       |  |   |              |        |       |               |      |     |                  |   |          |        |   |   |          | 24      |  
|                             | Issuance of common stock pursuant to conversion of convertible
    preferred stock                    |                                      |            | 13,371,980 |            |   |     | 134      |  |   |              | 136,483 |       |               |      |     |                  |   |          |        |   |   |          | 136,617 |  
|                             | Issuance of common stock pursuant to initial public offering,
    net of expenses                     |                                      |            | 4,073,938  |            |   |     | 41       |  |   |              | 50,945  |       |               |      |     |                  |   |          |        |   |   |          | 50,986  |  
|                             | Net income                                                                                            |                                      |            |           |            |   |     |         |  |   |              |        |       |               |      |     |                  |   |          | 10,049  |   |   |          | 10,049  |  
|                             |                                                                                                       |                                      |            |            |            |   |     |          |  |   |              |         |       |               |      |      |                  |  
|Balance at December 31, 2004 |                                                                                                       |                                      | 25,977,822 |            |            | $ | 260 |          |  | $ | 191,664      |         |       | $             | (209 | )    |                  | $ | (122,608 | )       |   | $ | 69,107   |        
|                             |                                                                                                       |                                      |            |            |            |   |     |          |  |   |              |         |       |               |      |      |                  |  

See accompanying notes.


41



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##### Table of Contents



BLACKBOARD INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                                |                                                                                 |                                           |         |        |        |   |        |       |        |   |         |       |        |  
|----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ----------------------------------------- | ------- | ------ | ------ | - | ------ | ----- | ------ | - | ------- | ----- | ------ | -
|                                                                                                |                                                                                 | Year Ended December 31,                   |        
|                                                                                                |                                                                                 |                                           |        
|                                                                                                |                                                                                 | 2002                                      |         |        | 2003   |   |        | 2004  |       
|                                                                                                |                                                                                 |                                           |         |        |        |   |        |       |       
|                                                                                                |                                                                                 | (In thousands)                            |        
|Cash flows from operating activities                                                            |                                                                                 |                                           |         |        |        |   |        |       |        |   |         |      
|Net (loss) income                                                                               |                                                                                 | $                                         | (41,651 | )      |        | $ | (1,425 | )     |        | $ | 10,049  |      
|Adjustments to reconcile net (loss) income to net cash provided
    by operating activities     |                                                                                 |                                           |         |        |        |   |        |       |        |   |         |      
|                                                                                                | Cumulative effect of change in accounting principle                             |                                           |         | 26,632 |        |   |        |      |        |   |         |      |       
|                                                                                                | Depreciation and amortization                                                   |                                           |         | 4,485  |        |   |        | 3,911 |        |   |         | 6,275 |       
|                                                                                                | Amortization of intangibles resulting from acquisitions                         |                                           |         | 5,519  |        |   |        | 5,757 |        |   |         | 3,517 |       
|                                                                                                | Change in allowance for doubtful accounts                                       |                                           |         | (255   | )      |   |        | 586   |        |   |         | (64   | )     
|                                                                                                | Noncash stock compensation related to options issued to
    nonemployees        |                                           |         | 135    |        |   |        | 5     |        |   |         | 69    |       
|                                                                                                | Noncash stock compensation for modification of options                          |                                           |         | 141    |        |   |        | 21    |        |   |         |      |       
|                                                                                                | Noncash deferred stock amortization                                             |                                           |         | 198    |        |   |        | 68    |        |   |         | 105   |       
|                                                                                                | Changes in operating assets and liabilities, net of effect of
    acquisitions: |                                           |         |        |        |   |        |       |        |   |         |       |       
|                                                                                                |                                                                                 | Accounts receivable                       |         |        | (3,727 | ) |        |       | (6,345 | ) |         |       | 1,248  |  
|                                                                                                |                                                                                 | Inventories                               |         |        | 192    |   |        |       | 529    |   |         |       | 56     |  
|                                                                                                |                                                                                 | Prepaid expenses and other current assets |         |        | (2,427 | ) |        |       | 3,053  |   |         |       | (173   | )
|                                                                                                |                                                                                 | Deferred cost of revenues                 |         |        | (389   | ) |        |       | 675    |   |         |       | (1,070 | )
|                                                                                                |                                                                                 | Accounts payable                          |         |        | (864   | ) |        |       | 321    |   |         |       | (719   | )
|                                                                                                |                                                                                 | Accrued expenses                          |         |        | (481   | ) |        |       | 594    |   |         |       | (610   | )
|                                                                                                |                                                                                 | Deferred rent                             |         |        | 726    |   |        |       | (170   | ) |         |       | (68    | )
|                                                                                                |                                                                                 | Deferred revenues                         |         |        | 13,193 |   |        |       | 12,130 |   |         |       | 14,116 |  
|                                                                                                |                                                                                 |                                           |         |        |        |   |        |       |       
|Net cash provided by operating activities                                                       |                                                                                 |                                           | 1,427   |        |        |   | 19,710 |       |        |   | 32,731  |      
|Cash flows from investing activities                                                            |                                                                                 |                                           |         |        |        |   |        |       |        |   |         |      
|Purchase of property and equipment                                                              |                                                                                 |                                           | (4,434  | )      |        |   | (5,029 | )     |        |   | (7,440  | )    
|Acquisition of business, net of cash acquired                                                   |                                                                                 |                                           |        |        |        |   | (4,500 | )     |        |   |        |      
|                                                                                                |                                                                                 |                                           |         |        |        |   |        |       |       
|Net cash used in investing activities                                                           |                                                                                 |                                           | (4,434  | )      |        |   | (9,529 | )     |        |   | (7,440  | )    
|Cash flows from financing activities                                                            |                                                                                 |                                           |         |        |        |   |        |       |        |   |         |      
|Proceeds from equipment notes                                                                   |                                                                                 |                                           | 1,167   |        |        |   | 1,500  |       |        |   |        |      
|Payments on equipment notes                                                                     |                                                                                 |                                           | (1,134  | )      |        |   | (1,421 | )     |        |   | (922    | )    
|Proceeds from issuance of common stock pursuant to initial
    public offering, net of expenses |                                                                                 |                                           |        |        |        |   |       |       |        |   | 50,986  |      
|Proceeds from line of credit                                                                    |                                                                                 |                                           | 5,000   |        |        |   | 10,380 |       |        |   | 7,880   |      
|Payments on line of credit                                                                      |                                                                                 |                                           | (2,000  | )      |        |   | (9,750 | )     |        |   | (15,760 | )    
|Payments on note payable                                                                        |                                                                                 |                                           |        |        |        |   | (1,000 | )     |        |   | (2,000  | )    
|Proceeds from issuance of common stock pursuant to exercise of
    warrants                     |                                                                                 |                                           | 7       |        |        |   |       |       |        |   | 248     |      
|Proceeds from exercise of stock options                                                         |                                                                                 |                                           | 69      |        |        |   | 194    |       |        |   | 1,970   |      
|                                                                                                |                                                                                 |                                           |         |        |        |   |        |       |       
|Net cash provided by (used in) financing activities                                             |                                                                                 |                                           | 3,109   |        |        |   | (97    | )     |        |   | 42,402  |      
|Net increase in cash and cash equivalents                                                       |                                                                                 |                                           | 102     |        |        |   | 10,084 |       |        |   | 67,693  |      
|Cash and cash equivalents at beginning of year                                                  |                                                                                 |                                           | 20,270  |        |        |   | 20,372 |       |        |   | 30,456  |      
|                                                                                                |                                                                                 |                                           |         |        |        |   |        |       |       
|Cash and cash equivalents at end of year                                                        |                                                                                 | $                                         | 20,372  |        |        | $ | 30,456 |       |        | $ | 98,149  |      
|                                                                                                |                                                                                 |                                           |         |        |        |   |        |       |       
|Supplemental cash flow information                                                              |                                                                                 |                                           |         |        |        |   |        |       |        |   |         |      
|Cash paid for interest                                                                          |                                                                                 | $                                         | 701     |        |        | $ | 541    |       |        | $ | 179     |      
|Cash paid for income taxes                                                                      |                                                                                 |                                           | 92      |        |        |   | 88     |       |        |   | 607     |      
|Preferred stock dividends and accretion of convertible
    redeemable preferred stock           |                                                                                 |                                           | 9,699   |        |        |   | 10,077 |       |        |   | 6,344   |      

See accompanying notes.


42



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##### Table of Contents



BLACKBOARD INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2003 and 2004




|   |                                    
|-- | -----------------------------------
|1. | Nature of Business and Organization

Blackboard Learning
System, Blackboard Community System Blackboard Portal System , Blackboard Content System,
Blackboard Transaction System Blackboard One.








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



43



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##### 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





| |                
| | ---------------
| | Restricted Cash





| |                             
| | ----------------------------
| | Concentration of Credit Risk









| |            
| | -----------
| | Inventories





| |                       
| | ----------------------
| | Property and Equipment



|                              |  |                                     
|----------------------------- |  | ------------------------------------
|Computer and office equipment |  | 3 years                             
|Software                      |  | 2 years                             
|Furniture and fixtures        |  | 3 to 5 years                        
|Leasehold improvements        |  | Shorter of lease term or useful life

44



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##### Table of Contents



BLACKBOARD INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                  
| | -----------------
| | Intangible Assets



|                             |  |                  
|---------------------------- |  | -----------------
|Acquired technology          |  | 3 years          
|Contracts and customer lists |  | 3 to 5 years     
|Non-compete agreements       |  | Term of agreement
|Trademarks and domain names  |  | 3 years          



| |                                       
| | --------------------------------------
| | Impairment of Goodwill and Intangibles

Business Combinations Goodwill and Other Intangible
Assets




| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets





| |                  
| | -----------------
| | Equity Investment





| |                                         
| | ----------------------------------------
| | Revenue Recognition and Deferred Revenue



Software Revenue Recognition Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions.


45



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##### Table of Contents



BLACKBOARD INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                                               
| | ----------------------------------------------
| | Cost of Revenues and Deferred Cost of Revenues







| |                           
| | --------------------------
| | Software Development Costs



46



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##### Table of Contents



BLACKBOARD INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |            
| | -----------
| | 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.




|                                                                            |                                                                                                              |                           |         |         |      |   |         |         |   |   |      |        |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------------------- | ------- | ------- | ---- | - | ------- | ------- | - | - | ---- | ------ | -
|                                                                            |                                                                                                              | Year Ended December 31,   |        
|                                                                            |                                                                                                              |                           |        
|                                                                            |                                                                                                              | 2002                      |         |         | 2003 |   |         | 2004    |  
|                                                                            |                                                                                                              |                           |         |         |      |   |         |         |  
|                                                                            |                                                                                                              | (In thousands,            |        
|                                                                            |                                                                                                              | except per share amounts) |        
|Pro forma net (loss) income attributable to common stockholders:            |                                                                                                              |                           |         |         |      |   |         |         |   |   |      |       
|                                                                            | As reported                                                                                                  |                           | $       | (51,350 | )    |   | $       | (11,502 | ) |   | $    | 3,705  |  
|                                                                            | Add: Stock-based compensation included in reported net (loss)
    income attributable to common stockholders |                           |         | 474     |      |   |         | 319     |   |   |      | 174    |  
|                                                                            | Deduct: Stock-based compensation expense determined under fair
    value-based method for all awards         |                           |         | (3,455  | )    |   |         | (2,942  | ) |   |      | (4,382 | )
|                                                                            |                                                                                                              |                           |         |         |      |   |         |         |  
|Pro forma net (loss) attributable to common stockholders                    |                                                                                                              | $                         | (54,331 | )       |      | $ | (14,125 | )       |   | $ | (503 | )     
|                                                                            |                                                                                                              |                           |         |         |      |   |         |         |  
|Net (loss) income attributable to common stockholders per common
    share: |                                                                                                              |                           |         |         |      |   |         |         |   |   |      |       
|                                                                            | Basic as reported                                                                                            |                           | $       | (9.40   | )    |   | $       | (2.09   | ) |   | $    | 0.23   |  
|                                                                            |                                                                                                              |                           |         |         |      |   |         |         |  
|                                                                            | Diluted as reported                                                                                          |                           |         | (9.40   | )    |   |         | (2.09   | ) |   |      | 0.21   |  
|                                                                            |                                                                                                              |                           |         |         |      |   |         |         |  
|                                                                            | Basic  pro forma                                                                                            |                           | $       | (9.95   | )    |   | $       | (2.56   | ) |   | $    | (0.03  | )
|                                                                            |                                                                                                              |                           |         |         |      |   |         |         |  
|                                                                            | Diluted  pro forma                                                                                          |                           |         | (9.95   | )    |   |         | (2.56   | ) |   |      | (0.03  | )
|                                                                            |                                                                                                              |                           |         |         |      |   |         |         |  

47



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##### Table of Contents



BLACKBOARD INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                |  |                         |          |  |      |  |          |      |  |  |          | 
|------------------------------- |  | ----------------------- | -------- |  | ---- |  | -------- | ---- |  |  | -------- | 
|                                |  | Year Ended December 31, |         
|                                |  |                         |         
|                                |  | 2002                    |          |  | 2003 |  |          | 2004 | 
|                                |  |                         |          |  |      |  |          |      | 
|Dividend yield                  |  |                         | 0%       |  |      |  | 0%       |      |  |  | 0%       | 
|Expected volatility             |  |                         | 60%      |  |      |  | 85%      |      |  |  | 64.8%    | 
|Average risk-free interest rate |  |                         | 4.75%    |  |      |  | 3.00%    |      |  |  | 3.25%    | 
|Expected term                   |  |                         | 5  years |  |      |  | 5  years |      |  |  | 5  years | 



| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | Basic and Diluted Net (Loss) Income Attributable to Common
    Stockholders per Common Share



48



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##### Table of Contents



BLACKBOARD INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                                    |  |                                     |           |   |      |   |           |      |  |   |            |  
|----------------------------------------------------------------------------------- |  | ----------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | ---------- | -
|                                                                                    |  | Year Ended December 31,             |          
|                                                                                    |  |                                     |          
|                                                                                    |  | 2002                                |           |   | 2003 |   |           | 2004 | 
|                                                                                    |  |                                     |           |   |      |   |           |      | 
|                                                                                    |  | (In thousands,                      |          
|                                                                                    |  | except share and per share amounts) |          
|Basic net (loss) income attributable to common stockholders per
    common share:   |  |                                     |           |   |      |   |           |      |  |   |            |  
|Net income (loss)                                                                   |  | $                                   | (41,651   | ) |      | $ | (1,425    | )    |  | $ | 10,049     |  
|Less preferred stock dividends:                                                     |  |                                     |           |   |      |   |           |      |  |   |            |  
|Redeemable convertible preferred stock                                              |  |                                     | (9,699    | ) |      |   | (10,077   | )    |  |   | (6,344     | )
|                                                                                    |  |                                     |           |   |      |   |           |      | 
|Net (loss) income attributable to common stockholders per common
    share          |  | $                                   | (51,350   | ) |      | $ | (11,502   | )    |  | $ | 3,705      |  
|                                                                                    |  |                                     |           |   |      |   |           |      | 
|Weighted average shares outstanding                                                 |  |                                     | 5,460,289 |   |      |   | 5,516,476 |      |  |   | 16,071,598 |  
|                                                                                    |  |                                     |           |   |      |   |           |      | 
|Basic net (loss) income attributable to common stockholders per
    common share    |  | $                                   | (9.40     | ) |      | $ | (2.09     | )    |  | $ | 0.23       |  
|                                                                                    |  |                                     |           |   |      |   |           |      | 
|Diluted net (loss) income attributable to common stockholders
    per common share: |  |                                     |           |   |      |   |           |      |  |   |            |  
|Net (loss) income attributable to common stockholders per common
    share          |  | $                                   | (51,350   | ) |      | $ | (11,502   | )    |  | $ | 3,705      |  
|                                                                                    |  |                                     |           |   |      |   |           |      | 
|Weighted average number of basic shares outstanding                                 |  |                                     | 5,460,289 |   |      |   | 5,516,476 |      |  |   | 16,071,598 |  
|Dilutive effect of:                                                                 |  |                                     |           |   |      |   |           |      |  |   |            |  
|Stock options related to the purchase of common stock                               |  |                                     |          |   |      |   |          |      |  |   | 1,591,412  |  
|Warrants related to the purchase of common stock                                    |  |                                     |          |   |      |   |          |      |  |   | 201,127    |  
|                                                                                    |  |                                     |           |   |      |   |           |      | 
|Diluted shares outstanding                                                          |  |                                     | 5,460,289 |   |      |   | 5,516,476 |      |  |   | 17,864,137 |  
|                                                                                    |  |                                     |           |   |      |   |           |      | 
|Diluted net (loss) income attributable to common stockholders
    per common share  |  | $                                   | (9.40     | ) |      | $ | (2.09     | )    |  | $ | 0.21       |  
|                                                                                    |  |                                     |           |   |      |   |           |      | 



| |             
| | ------------
| | Income Taxes





| |                    
| | -------------------
| | Segment Information



49



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##### Table of Contents



BLACKBOARD INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Disclosure about Segments of an Enterprise and Related
Information.






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

Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity


Applicability of AICPA
Statement of Position 97-2 to Non-Software Deliverables in
an Arrangement Containing More-Than-Incidental
Software


Share-Based
Payment Statement of Cash
Flows






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A modified prospective method in which compensation
    cost is recognized beginning with the effective date
    (a) base 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 prospective 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.                                                     



50



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##### Table of Contents



BLACKBOARD INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                
| | -------------------------------
| | Comprehensive Net (Loss) Income





|   |                      
|-- | ---------------------
|3. | Business Combinations



| |           
| | ----------
| | Prometheus









| |        
| | -------
| | SA Cash



51



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##### Table of Contents



BLACKBOARD INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |            
|-- | -----------
|4. | Inventories



|                  |  |                |       |  |      |   |       | 
|----------------- |  | -------------- | ----- |  | ---- | - | ----- | 
|                  |  | December 31,   |      
|                  |  |                |      
|                  |  | 2003           |       |  | 2004 |  
|                  |  |                |       |  |      |  
|                  |  | (In thousands) |      
|Raw materials     |  | $              | 840   |  |      | $ | 395   | 
|Work-in-process   |  |                | 294   |  |      |   | 518   | 
|Finished goods    |  |                | 916   |  |      |   | 1,081 | 
|                  |  |                |       |  |      |  
|Total inventories |  | $              | 2,050 |  |      | $ | 1,994 | 
|                  |  |                |       |  |      |  



|   |                       
|-- | ----------------------
|5. | Property and Equipment



|                                               |  |                |         |   |      |   |         |  
|---------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                               |  | December 31,   |        
|                                               |  |                |        
|                                               |  | 2003           |         |   | 2004 |  
|                                               |  |                |         |   |      |  
|                                               |  | (In thousands) |        
|Computer and office equipment                  |  | $              | 14,026  |   |      | $ | 19,201  |  
|Software                                       |  |                | 7,029   |   |      |   | 9,196   |  
|Furniture and fixtures                         |  |                | 518     |   |      |   | 539     |  
|Leasehold improvements                         |  |                | 1,234   |   |      |   | 1,311   |  
|                                               |  |                |         |   |      |  
|                                               |  |                | 22,807  |   |      |   | 30,247  |  
|Less accumulated depreciation and amortization |  |                | (15,124 | ) |      |   | (21,399 | )
|                                               |  |                |         |   |      |  
|Total property and equipment, net              |  | $              | 7,683   |   |      | $ | 8,848   |  
|                                               |  |                |         |   |      |  



52



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BLACKBOARD INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                               
|-- | ------------------------------
|6. | Goodwill and Intangible Assets



|                              |  |                |         |   |      |   |         |  
|----------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                              |  | December 31,   |        
|                              |  |                |        
|                              |  | 2003           |         |   | 2004 |  
|                              |  |                |         |   |      |  
|                              |  | (In thousands) |        
|Goodwill                      |  | $              | 10,252  |   |      | $ | 10,252  |  
|                              |  |                |         |   |      |  
|Acquired technology           |  | $              | 10,400  |   |      | $ | 10,400  |  
|Contracts and customer lists  |  |                | 5,443   |   |      |   | 5,443   |  
|Non-compete agreements        |  |                | 2,043   |   |      |   | 2,043   |  
|Trademarks and domain names   |  |                | 71      |   |      |   | 71      |  
|                              |  |                |         |   |      |  
|Subtotal                      |  |                | 17,957  |   |      |   | 17,957  |  
|                              |  |                |         |   |      |  
|Less accumulated amortization |  |                | (13,614 | ) |      |   | (17,131 | )
|                              |  |                |         |   |      |  
|Intangible assets, net        |  | $              | 4,343   |   |      | $ | 826     |  
|                              |  |                |         |   |      |  









|   |     
|-- | ----
|7. | Debt



| |                                    
| | -----------------------------------
| | Working Capital and Equipment Lines





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BLACKBOARD INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














|                     |  |   |      |  
|-------------------- |  | - | ---- | -
|2005                 |  | $ | 525  |  
|2006                 |  |   | 237  |  
|                     |  |   |     
|Total                |  |   | 762  |  
|Less current portion |  |   | (525 | )
|                     |  |   |     
|Long-term portion    |  | $ | 237  |  
|                     |  |   |     



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





|   |                            
|-- | ---------------------------
|8. | Convertible Preferred Stock





| |          
| | ---------
| | Issuances



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##### Table of Contents



BLACKBOARD INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                         
| | ------------------------
| | Series A Preferred Stock









| |                                     
| | ------------------------------------
| | Series B, C, D and E Preferred Stock



55



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##### Table of Contents



BLACKBOARD INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)
















|   |             
|-- | ------------
|9. | Common Stock









56



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##### Table of Contents



BLACKBOARD INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)
















|    |                  
|--- | -----------------
|10. | Stock Option Plan





57



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BLACKBOARD INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                         |                   |        |           |                  |                |   |       |       | 
|---------------------------------------- | ----------------- | ------ | --------- | ---------------- | -------------- | - | ----- | ----- | 
|                                         |                   |        |           | Weighted-Average |               
|                                         |                   | Shares |           |                  | Exercise Price |  
|                                         |                   |        |           |                  |                |  
|Options outstanding at December 31, 2001 |                   |        | 3,080,210 |                  |                | $ | 8.84  |      
|                                         | Options granted   |        |           | 776,928          |                |   |       | 9.81  | 
|                                         | Options exercised |        |           | (33,980          | )              |   |       | 2.02  | 
|                                         | Options forfeited |        |           | (251,650         | )              |   |       | 10.37 | 
|                                         |                   |        |           |                  |                |  
|Options outstanding at December 31, 2002 |                   |        | 3,571,508 |                  |                |   | 9.01  |      
|                                         | Options granted   |        |           | 571,567          |                |   |       | 9.66  | 
|                                         | Options exercised |        |           | (33,298          | )              |   |       | 5.85  | 
|                                         | Options forfeited |        |           | (616,686         | )              |   |       | 10.09 | 
|                                         |                   |        |           |                  |                |  
|Options outstanding at December 31, 2003 |                   |        | 3,493,091 |                  |                |   | 8.95  |      
|                                         | Options granted   |        |           | 1,124,272        |                |   |       | 13.22 | 
|                                         | Options exercised |        |           | (397,033         | )              |   |       | 4.95  | 
|                                         | Options forfeited |        |           | (282,737         | )              |   |       | 11.68 | 
|                                         |                   |        |           |                  |                |  
|Options outstanding at December 31, 2004 |                   |        | 3,937,593 |                  |                |   | 10.37 |      
|                                         |                   |        |           |                  |                |  
|Options exercisable at December 31, 2004 |                   |        | 2,555,891 |                  |                |   | 9.43  |      
|                                         |                   |        |           |                  |                |  
|Options exercisable at December 31, 2003 |                   |        | 2,232,977 |                  |                |   | 8.46  |      
|                                         |                   |        |           |                  |                |  
|Options exercisable at December 31, 2002 |                   |        | 1,721,629 |                  |                |   | 7.91  |      
|                                         |                   |        |           |                  |                |  



|                         |  |                     |           |                  |                     |  |          |       |  |   |        |          |  |       |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ---------------- | ------------------- |  | -------- | ----- |  | - | ------ | -------- |  | ----- | --------- |  |  | - | ----- | 
|                         |  | Outstanding Options |           |                  | Exercisable Options | 
|                         |  |                     |           |                  |                     | 
|                         |  |                     |           | Weighted Average |                     |  | Weighted |       |  |   |        | Weighted | 
|                         |  |                     |           | Remaining Life   |                     |  | Average  |       |  |   |        | Average  | 
|Range of Exercise Prices |  | Shares              |           |                  | (Years)             |  |          | Price |  |   | Shares |          |  | Price |          
|                         |  |                     |           |                  |                     |  |          |       |  |   |        |          |  |       |          
|$0.02-$8.71              |  |                     | 412,219   |                  |                     |  | 3.85     |       |  | $ | 1.37   |          |  |       | 412,219   |  |  | $ | 1.37  | 
|$8.71-$10.81             |  |                     | 2,521,521 |                  |                     |  | 7.37     |       |  |   | 9.56   |          |  |       | 1,767,055 |  |  |   | 9.50  | 
|$10.82-$21.12            |  |                     | 1,003,853 |                  |                     |  | 7.94     |       |  |   | 16.07  |          |  |       | 376,617   |  |  |   | 17.89 | 
|                         |  |                     |           |                  |                     |  |          |       |  |   |        |          |  |       |          
|                         |  |                     | 3,937,593 |                  |                     |  |          |       |  |   |        |          |  |       | 2,555,891 |  |  |   |       | 
|                         |  |                     |           |                  |                     |  |          |       |  |   |        |          |  |       |          





58



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BLACKBOARD INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |             
|--- | ------------
|11. | Income Taxes





|                           |  |                |     |  |      |   |     |      |  |   |     | 
|-------------------------- |  | -------------- | --- |  | ---- | - | --- | ---- |  | - | --- | 
|                           |  | December 31,   |    
|                           |  |                |    
|                           |  | 2002           |     |  | 2003 |   |     | 2004 | 
|                           |  |                |     |  |      |   |     |      | 
|                           |  | (In thousands) |    
|Current expense            |  | $              | 283 |  |      | $ | 614 |      |  | $ | 299 | 
|Deferred expense (benefit) |  |                |    |  |      |   |    |      |  |   |    | 
|                           |  |                |     |  |      |   |     |      | 
|Provision for income taxes |  | $              | 283 |  |      | $ | 614 |      |  | $ | 299 | 
|                           |  |                |     |  |      |   |     |      | 



|                                      |                                                           |                |   |         |      |   |   |         |  
|------------------------------------- | --------------------------------------------------------- | -------------- | - | ------- | ---- | - | - | ------- | -
|                                      |                                                           | December 31,   |  
|                                      |                                                           |                |  
|                                      |                                                           | 2003           |   |         | 2004 |  
|                                      |                                                           |                |   |         |      |  
|                                      |                                                           | (In thousands) |  
|Deferred tax assets (liabilities):    |                                                           |                |   |         |      |   |   |        
|                                      | Net operating loss carryforwards                          |                | $ | 11,055  |      |   | $ | 23,077  |  
|                                      | AMT and other tax credits                                 |                |   | 1,528   |      |   |   | 2,030   |  
|                                      | Net operating loss attributable to stock option exercises |                |   |        |      |   |   | 704     |  
|                                      | Depreciation                                              |                |   | 2,418   |      |   |   | 1,139   |  
|                                      | Amortization                                              |                |   | 2,077   |      |   |   | 2,927   |  
|                                      | Bad debts                                                 |                |   | 397     |      |   |   | 371     |  
|                                      | Deferred rent                                             |                |   | 326     |      |   |   | 384     |  
|                                      | Deferred revenues                                         |                |   | 16,418  |      |   |   | 1,365   |  
|                                      | Deferred cost of revenues                                 |                |   | (1,301  | )    |   |   | (1,888  | )
|                                      | Other accruals and prepaids                               |                |   | 787     |      |   |   | 1,058   |  
|                                      | Valuation allowance                                       |                |   | (33,705 | )    |   |   | (31,167 | )
|                                      |                                                           |                |   |         |      |  
|Net deferred tax assets (liabilities) |                                                           | $              |  |         |      | $ |  |        
|                                      |                                                           |                |   |         |      |  



59



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##### Table of Contents



BLACKBOARD INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                    |  |      |       |    |      |  |        |      |  |  |       |  
|----------------------------------- |  | ---- | ----- | -- | ---- |  | ------ | ---- |  |  | ----- | -
|                                    |  | 2002 |       |    | 2003 |  |        | 2004 | 
|                                    |  |      |       |    |      |  |        |      | 
|Federal tax at statutory rates      |  |      | 34.0  | %  |      |  | 34.0   | %    |  |  | 34.0  | %
|State taxes, net of federal benefit |  |      | 4.6   |    |      |  | 4.6    |      |  |  | 4.6   |  
|Change in valuation allowance       |  |      | (31.7 | )  |      |  | (390.9 | )    |  |  | (24.5 | )
|Permanent differences               |  |      | (8.8  | )  |      |  | 276.6  |      |  |  | (11.2 | )
|                                    |  |      |       |    |      |  |        |      | 
|Provision for income taxes          |  |      | (1.9  | )% |      |  | (75.7  | )%   |  |  | 2.9   | %
|                                    |  |      |       |    |      |  |        |      | 



|    |                              
|--- | -----------------------------
|12. | Commitments and Contingencies





|                             |  |                |        |           |        |   |     | 
|---------------------------- |  | -------------- | ------ | --------- | ------ | - | --- | 
|                             |  |                |        | Sub-Lease |       
|                             |  | Operating      |        |           | Income |  
|                             |  |                |        |           |        |  
|                             |  | (In thousands) |       
|2005                         |  | $              | 3,374  |           |        | $ | 135 | 
|2006                         |  |                | 3,459  |           |        |   | 139 | 
|2007                         |  |                | 2,552  |           |        |   | 131 | 
|2008                         |  |                | 522    |           |        |   |    | 
|2009                         |  |                | 353    |           |        |   |    | 
|                             |  |                |        |           |        |  
|Total minimum lease payments |  | $              | 10,260 |           |        | $ | 405 | 
|                             |  |                |        |           |        |  





|    |                       
|--- | ----------------------
|13. | Employee Benefit Plans



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##### Table of Contents



BLACKBOARD INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                            
|--- | -------------------------------------------
|14. | Quarterly Financial Information (Unaudited)

|                                                               |         |                                          |        |       |          |   |        |               |   |   |              |       |   |   |        |       |  
|-------------------------------------------------------------- | ------- | ---------------------------------------- | ------ | ----- | -------- | - | ------ | ------------- | - | - | ------------ | ----- | - | - | ------ | ----- | -
|                                                               |         | March 31,                                |        |       | June 30, |   |        | September 30, |   |   | December 31, |      
|                                                               |         | 2003                                     |        |       | 2003     |   |        | 2003          |   |   | 2003         |      
|                                                               |         |                                          |        |       |          |   |        |               |   |   |              |      
|                                                               |         | (In thousands, except per share amounts) |       
|Summary consolidated statement of operations:                  |         |                                          |        |       |          |   |        |               |   |   |              |       |   |   |        |      
|Total revenues                                                 |         | $                                        | 20,181 |       |          | $ | 22,744 |               |   | $ | 25,570       |       |   | $ | 23,983 |      
|Costs of revenues                                              |         |                                          | 6,525  |       |          |   | 7,282  |               |   |   | 8,714        |       |   |   | 7,186  |      
|Net loss attributable to common stockholders                   |         |                                          | (4,517 | )     |          |   | (3,912 | )             |   |   | (1,940       | )     |   |   | (1,133 | )    
|Net loss attributable to common stockholders per common share: |         |                                          |        |       |          |   |        |               |   |   |              |       |   |   |        |      
|                                                               | Basic   |                                          | $      | (0.82 | )        |   | $      | (0.71         | ) |   | $            | (0.35 | ) |   | $      | (0.20 | )
|                                                               | Diluted |                                          | $      | (0.82 | )        |   | $      | (0.71         | ) |   | $            | (0.35 | ) |   | $      | (0.20 | )

|                                                                            |         |                                          |        |       |          |   |        |               |   |   |              |      |  |   |        |      | 
|--------------------------------------------------------------------------- | ------- | ---------------------------------------- | ------ | ----- | -------- | - | ------ | ------------- | - | - | ------------ | ---- |  | - | ------ | ---- | 
|                                                                            |         | 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       |      |  | $ | 30,053 |     
|Costs of revenues                                                           |         |                                          | 7,613  |       |          |   | 8,030  |               |   |   | 9,191        |      |  |   | 9,025  |     
|Net (loss) income attributable to common stockholders                       |         |                                          | (1,809 | )     |          |   | (2,698 | )             |   |   | 3,480        |      |  |   | 4,732  |     
|Net (loss) income attributable to common stockholders per common
    share: |         |                                          |        |       |          |   |        |               |   |   |              |      |  |   |        |     
|                                                                            | Basic   |                                          | $      | (0.33 | )        |   | $      | (0.37         | ) |   | $            | 0.14 |  |   | $      | 0.18 | 
|                                                                            | Diluted |                                          | $      | (0.33 | )        |   | $      | (0.37         | ) |   | $            | 0.12 |  |   | $      | 0.17 | 

61



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




(b) Changes in Internal Control over Financial
Reporting.









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




62



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##### Table of Contents








|         |                        
|-------- | -----------------------
|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. 
     Report of Independent Registered Public Accounting Firm on
    Financial Schedule 
     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.



| |     |                                                             
| | --- | ------------------------------------------------------------
| | (b) | Exhibits  see Item 15(a)(3) above.                         
|
| | (c) | Financial Statement Schedules  see Item 15(a)(2)
    above.

63



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##### Table of Contents



SIGNATURES




| |  |                                                                        
| |  | -----------------------------------------------------------------------
| |  | Blackboard Inc.                                                        
| |  | By: /s/ Peter Q.
    RepettiPeter
    Q. RepettiChief Financial Officer



|                                                     |  |                                                                        |  |                   |  | 
|---------------------------------------------------- |  | ---------------------------------------------------------------------- |  | ----------------- |  | 
|Signature                                            |  | Title                                                                  |  | Date             
|                                                     |  |                                                                        |  |                  
|                                                    
|/s/ Michael L. ChasenMichael
    L. Chasen           |  | Chief Executive Officer and Director
    (Principal Executive Officer) |  | March 1, 2005    
|                                                    
|/s/ Peter Q. RepettiPeter
    Q. Repetti             |  | Chief Financial Officer
    (Principal Financial Officer)              |  | March 1, 2005    
|                                                    
|/s/ Michael J. BeachMichael
    J. Beach             |  | Vice President, Finance
    (Principal Accounting Officer)             |  | March 1, 2005    
|                                                    
|/s/ Matthew PittinskyMatthew
    Pittinsky           |  | Chairman of the Board of Directors                                     |  | February 25, 2005
|                                                    
|/s/ Frank R. GattiFrank
    R. Gatti                 |  | Director                                                               |  | February 28, 2005
|                                                    
|/s/ Steven B. GruberSteven
    B. Gruber             |  | Director                                                               |  | February 28, 2005
|                                                    
|/s/ Arthur E. LevineArthur
    E. Levine             |  | Director                                                               |  | February 28, 2005
|                                                    
|/s/ E. Rogers
    Novak, Jr.E.
    Rogers Novak, Jr. |  | Director                                                               |  | February 25, 2005
|                                                    
|/s/ William RaduchelWilliam
    Raduchel             |  | Director                                                               |  | February 28, 2005

64



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##### Table of Contents



EXHIBIT INDEX


|        |    |     |  |                                                                                                                                                                         
|------- | -- | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    
|Number  |    |    
|        |    |    
|        | 3  | .1  |  | Fourth Restated Certificate of Incorporation of the Registrant(6)                                                                                                       
|        | 3  | .2  |  | Amended and Restated By-Laws of the Registrant(6)                                                                                                                       
|        | 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  |  | 2004 Stock Incentive Plan(4)                                                                                                                                            
|        | 10 | .3  |  | Employment Agreement between the Registrant and Matthew L.
    Pittinsky, dated November 9, 2001(2)                                                                     
|        | 10 | .4  |  | Employment Agreement between the Registrant and Michael L.
    Chasen, dated November 9, 2001(2)                                                                        
|        | 10 | .5  |  | Employment Agreement between the Registrant and Peter Q.
    Repetti, dated June 1, 2001(2)                                                                             
|        | 10 | .6  |  | Employment Agreement between the Registrant and Andrew H. Rosen,
    dated September 15, 2003(2)                                                                        
|        | 10 | .7  |  | Release Agreement between the Registrant and Andrew H. Rosen
    dated December 7, 2004                                                                                
|        | 10 | .8  |  | Summary of Approved 2004 and 2005 Compensation                                                                                                                         
|        | 10 | .9  |  | Director Compensation Policy                                                                                                                                           
|        | 10 | .10 |  | Office lease between the Registrant and 1899 L Street LLC, dated
    November 22, 1999, as amended(1)                                                                   
|        | 10 | .11 |  | Amended and Restated Loan and Security Agreement between the
    Registrant and Silicon Valley Bank, dated as of
    November 30, 2001 and various amendments thereto(2)
|        | 10 | .12 |  | Eighth Amendment to Amended and Restated Loan and Security
    Agreement between the Registrant and Silicon Valley Bank, dated
    July 1, 2004(6)                      
|        | 10 | .13 |  | Ninth Amendment to the Amended and Restated Loan and Security
    Agreement between the Registrant and Silicon Valley Bank, dated
    August 30, 2004(7)                
|        | 10 | .14 |  | Tenth Amendment to the Amended and Restated Loan and Security
    Agreement between the Registrant and Silicon Valley Bank, dated
    November 30, 2004(8)              
|        | 10 | .15 |  | Form of Warrant(5)                                                                                                                                                      
|        | 10 | .16 |  | Third Amended and Restated Registration Rights Agreement,
    between the Registrant and certain stockholders of the
    Registrant dated as of April 6, 2001(1)        
|        | 10 | .17 |  | Registration Rights Agreement, between the Registrant and The
    George Washington University, dated January 11, 2002(3)                                               
|        | 10 | .18 |  | Form of Incentive Stock Option Agreement(8)                                                                                                                             
|        | 10 | .19 |  | Form of Nonstatutory Stock Option Agreement(8)                                                                                                                          
|        | 10 | .20 |  | Form of Restricted Stock Agreement(8)                                                                                                                                   
|        | 10 | .21 |  | Form of Executive Incentive Stock Option Agreement                                                                                                                     
|        | 10 | .22 |  | Form of Executive Nonstatutory Stock Option Agreement                                                                                                                  
|        | 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.



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##### Table of Contents



|    |                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 May 28, 2004 as an exhibit to Amendment
    No. 4 to the Registrants Registration Statement on
    Form S-1 (File No. 333-113332), and incorporated by
    reference herein. 
|(5) | Previously filed on June 16, 2004 as an exhibit to
    Amendment No. 5 to the Registrants Registration
    Statement on Form S-1 (File No. 333-113332), and
    incorporated by reference herein.
|(6) | Previously filed on August 8, 2004 as an exhibit to the
    Registrants Report on Form 10-Q, and incorporated by
    reference herein.                                                           
|(7) | Previously filed on September 2, 2004 as an exhibit to the
    Registrants Report on Form 8-K, and incorporated by
    reference herein.                                                         
|(8) | Previously filed on December 3, 2004 as an exhibit to the
    Registrants Report on Form 8-K, and incorporated by
    reference herein.                                                          



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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED


PUBLIC ACCOUNTING FIRM ON FINANCIAL SCHEDULE












| |                          
| | -------------------------
| | /s/ Ernst & Young
    LLP









---



##### Table of Contents



BLACKBOARD INC.


SCHEDULE II  VALUATION AND QUALIFYING
ACCOUNTS


|                                |  |                    |        |   |      |   |        |      |  |   |       |  
|------------------------------- |  | ------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                |  | As of December 31, |       
|                                |  |                    |       
|                                |  | 2002               |        |   | 2003 |   |        | 2004 | 
|                                |  |                    |        |   |      |   |        |      | 
|                                |  | (In thousands)     |       
|Allowance for Doubtful Accounts |  |                    |        |   |      |   |        |      |  |   |       |  
|Beginning Balance               |  | $                  | 687    |   |      | $ | 432    |      |  | $ | 1,018 |  
|Additions                       |  |                    | 888    |   |      |   | 2,312  |      |  |   | 140   |  
|Reductions(1)                   |  |                    | (1,143 | ) |      |   | (1,726 | )    |  |   | (204  | )
|                                |  |                    |        |   |      |   |        |      | 
|Ending Balance                  |  | $                  | 432    |   |      | $ | 1,018  |      |  | $ | 954   |  
|                                |  |                    |        |   |      |   |        |      | 






|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|(1) | Includes accounts written-off, net of collections on accounts
    previously written-off.