**UNITED
      STATES**


**SECURITIES
        AND EXCHANGE COMMISSION**


**Washington,
      D.C.  20549**





**FORM
      10-Q**





[X]
      QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the quarterly
      period ended June 30, 2007





or





[ 
]
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT
      OF 1934





For
      the transition
      period from ______________ to ______________








Commission
      file
      number: **1-3952**




**SIBONEY
        CORPORATION**


(Exact
      name of
      registrant as specified in its charter)








**Maryland**
            
            **73-0629975**(State
                or other jurisdiction of
            
            (I.R.S.
                Employerincorporation
                or organization)
            
            Identification
                No.)**325
                North Kirkwood Road, Suite 300****St.
                Louis, Missouri**
            
            **63122**(Address
                of
                principal executive offices)
            
            (Zip
                Code)Registrant’s
                telephone number, including area code:
            
            **314-822-3163**





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





Indicate
      by check
      mark whether the Registrant is a large accelerated filer, an accelerated filer,
      or a non-accelerated filer.  See definition of “accelerated filer and
      large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check
      one):   Large accelerated filer [
 ]   Accelerated filer [
 ]   Non-accelerated filer [X]





Indicate
      by check
      mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
      the
      Exchange Act).  Yes [  ] No [X]





Number
      of shares of
      the registrant’s common stock outstanding as of July 31, 2007:
      16,920,419








**SIBONEY
        CORPORATION**
 **FORM
        10-Q**
 **INDEX**
 
 **Page****PART
                  I  FINANCIAL
                  INFORMATION****Item
                  1.  Unaudited Financial
                  Statements**Consolidated
                  Balance Sheet, June 30, 2007
                  and December 31, 2006
              3Consolidated
                  Statement of Operations, Three
                  and Six Months Ended June 30, 2007 and 2006
              4Consolidated
                  Statement of Stockholders’
                  Equity, Six Months Ended June 30, 2007 and
                  2006
              5Consolidated
                  Statement of Cash Flows, Six
                  Months Ended June 30, 2007 and 2006
              6Notes
                  to Unaudited Consolidated Financial
                  Statements
              7**Item
                  2.  Management’s Discussion and Analysis of
                  Financial Condition and Results of Operations**
              13**Item
                  3.  Quantitative and Qualitative Disclosures
                  About Market Risk**
              18**Item
                  4.  Controls and
                  Procedures**
              18**PART
                  II  OTHER
                  INFORMATION****Item
                  3.  Defaults Upon Senior
                  Securities**
              19**Item
                  4.  Submission of Matters to a Vote
                  of Security Holders**
              19**Item
                  6.  Exhibits**
              20**SIGNATURES**
              21**INDEX
                  TO EXHIBITS**
              22
   2 
   **PART
          I  FINANCIAL INFORMATION**
 **Item
          1.  Unaudited Financial
          Statements**
 **SIBONEY
                    CORPORATION AND SUBSIDIARIES****CONSOLIDATED
                    BALANCE
                    SHEET**
 
 **(Unaudited)****June
                    30,**
                
                
                **December
                    31,****2007**
                
                
                **2006****Assets****Current
                    Assets**Cash
                
                **$**
                **165,202**
                
                
                $
                226,486Accounts
                    receivable, net
                
                ****
                **1,156,946**
                
                
                
                746,458Inventories,
                    net
                
                ****
                **276,911**
                
                
                
                297,398Refundable
                    income taxes
                
                ****
                **9,700**
                
                
                
                8,719Prepaid
                    expense
                
                ****
                **66,402**
                
                
                
                111,720Deferred
                    tax
                    asset
                
                ****
                **130,000**
                
                
                
                114,000**Total
                    Current Assets**
                
                ****
                **1,805,161**
                
                
                
                1,504,781**Property
                    and Equipment, Net**
                
                ****
                **120,502**
                
                
                
                131,677**Long-term
                    Note Receivable**
                
                ****
                **155,674**
                
                
                
                163,839**Capitalized
                    Software, Net**
                
                ****
                **2,099,810**
                
                
                
                2,174,239**Goodwill**
                
                ****
                **1,045,015**
                
                
                
                1,045,015**Deferred
                    Tax Asset**
                
                ****
                **1,012,000**
                
                
                
                991,000**Other
                    Assets**
                
                ****
                **16,758**
                
                
                
                12,778**Total
                    Assets**
                
                **$**
                **6,254,920**
                
                
                $
                6,023,329**Liabilities
                    and Stockholders' Equity****Current
                    Liabilities**Current
                    portion of long-term debt
                
                **$**
                **1,096,875**
                
                
                $
                56,250Line
                    of
                    credit
                
                ****
                **1,500,000**
                
                
                
                —Accounts
                    payable
                
                ****
                **326,548**
                
                
                
                234,978Accrued
                    expenses
                
                ****
                **421,484**
                
                
                
                296,596Deferred
                    revenue
                
                ****
                **139,076**
                
                
                
                190,708**Total
                    Current Liabilities**
                
                ****
                **3,483,983**
                
                
                
                778,532**Long-Term
                    Liabilities**Line
                    of
                    credit
                
                ****
                **—**
                
                
                
                1,500,000Long-term
                    debt
                
                ****
                **—**
                
                
                
                1,068,750Subordinated
                    debt (related party)
                
                ****
                **186,016**
                
                
                
                —Other
                    long-term liabilities
                
                ****
                **23,900**
                
                
                
                —**Total
                    Long-Term Liabilities**
                
                ****
                **209,916**
                
                
                
                2,568,750**Commitments
                    and Contingencies****Stockholders'
                    Equity**Common
                    stock:Authorized
                    100,000,000 shares at $0.10 par value; issued andoutstanding
                    16,920,419 at June 30, 2007 and December 31, 2006
                
                ****
                **1,692,042**
                
                
                
                1,692,042Additional
                    paid-in capital
                
                ****
                **69,799**
                
                
                
                38,296Retained
                    earnings
                
                ****
                **799,180**
                
                
                
                945,709**Total
                    Stockholders' Equity**
                
                ****
                **2,561,021**
                
                
                
                2,676,047**Total
                    Liabilities and Stockholders' Equity**
                
                **$**
                **6,254,920**
                
                
                $
                6,023,329Note: The
                    balance sheet at December 31, 2006 has been derived from the
                    audited
                    financial statements at that date.See
                    accompanying notes to unaudited consolidated financial
                    statements.
   3 
   **SIBONEY
                      CORPORATION AND SUBSIDIARIES****UNAUDITED
                      CONSOLIDATED STATEMENT OF
                      OPERATIONS**
 
    **For
                      the Three Months****Ended**
                    **June
                      30,**
                  
                  
                  **For
                      the Six Months Ended**
                    **June
                      30,****2007**
                  
                  
                  **2006**
                  
                  
                  **2007**
                  
                  
                  **2006****Revenues**
                  
                  **$**
                  **1,930,896**
                  
                  
                  $
                  2,233,779
                  
                  
                  **$**
                  **3,118,160**
                  
                  
                  $
                  3,729,183**Cost
                      of Product Sales**
                  
                  ****
                  **442,199**
                  
                  
                  
                  506,810
                  
                  
                  ****
                  **870,072**
                  
                  
                  
                  940,082**Gross
                      Profit**
                  
                  ****
                  **1,488,697**
                  
                  
                  
                  1,726,969
                  
                  
                  ****
                  **2,248,088**
                  
                  
                  
                  2,789,101****Selling,
                      General and** Administrative
                      Expenses**
                  
                  ****
                  **1,193,738**
                  
                  
                  
                  1,617,145
                  
                  
                  ****
                  **2,286,686**
                  
                  
                  
                  3,258,917**Income
                      (Loss) from Operations**
                  
                  ****
                  **294,959**
                  
                  
                  
                  109,824
                  
                  
                  ****
                  **(38,598**
                  **)**
                  
                  
                  (469,816
                  )**Other
                      Income (Expense)**Interest
                      expense, net
                  
                  ****
                  **(58,359**
                  **)**
                  
                  
                  (43,240
                  )
                  
                  ****
                  **(110,499**
                  **)**
                  
                  
                  (71,494
                  )Loss
                      on sale of assets
                  
                  ****
                  **—**
                  
                  
                  
                  —
                  
                  
                  ****
                  **—**
                  
                  
                  
                  (1,441
                  )Miscellaneous
                  
                  ****
                  **—**
                  
                  
                  
                  689
                  
                  
                  ****
                  **68**
                  
                  
                  
                  896**Total
                      Other Expense**
                  
                  ****
                  **(58,359**
                  **)**
                  
                  
                  (42,551
                  )
                  
                  ****
                  **(110,431**
                  **)**
                  
                  
                  (72,039
                  )**Income
                          (Loss) Before Income Taxes**
                  
                  ****
                  **236,600**
                  
                  
                  
                  67,273
                  
                  
                  ****
                  **(149,029**
                  **)**
                  
                  
                  (541,855
                  )**Income
                      Tax (Expense) Benefit**
                  
                  ****
                  **(99,000**
                  **)**
                  
                  
                  7,000
                  
                  
                  ****
                  **37,000**
                  
                  
                  
                  250,000**Net
                      Income (Loss)**
                  
                  **$**
                  **137,600**
                  
                  
                  $
                  74,273
                  
                  
                  **$**
                  **(112,029**
                  **)**
                  
                  $
                  (291,855
                  )**Net
                      Income (Loss) per Share:**Basic
                  
                  **$**
                  **0.01**
                  
                  
                  $
                  —
                  
                  
                  **$**
                  **(0.01**
                  **)**
                  
                  $
                  (0.02
                  )Fully
                      Diluted
                  
                  **$**
                  **0.01**
                  
                  
                  $
                  —
                  
                  
                  **$**
                  **(0.01**
                  **)**
                  
                  $
                  (0.02
                  )**Weighted
                      Average Number of Shares:**Basic
                  
                  ****
                  **16,920,419**
                  
                  
                  
                  16,930,419
                  
                  
                  ****
                  **16,920,419**
                  
                  
                  
                  16,930,419Fully
                      Diluted
                  
                  ****
                  **17,150,904**
                  
                  
                  
                  16,948,209
                  
                  
                  ****
                  **16,920,419**
                  
                  
                  
                  16,930,419
    Note:  The
              fully diluted income per share calculations exclude the effect of stock
              options
              and warrants when their assumed proceeds exceed the average market
              price of the
              common stock during the period. For the three months ended June 30,
              2007 and
              2006, the number of stock options excluded from the computations were
              2,068,060
              and 2,646,760, respectively. For the six months ended June 30, 2007 and
              2006, all stock options and outstanding warrants were excluded from
              the
              computations and totaled 2,518,060 and 2,873,460, respectively, as
              their effect
              would be anti-dilutive.
  See
                accompanying
                notes to unaudited consolidated financial statements.
   4
 
 
 **SIBONEY
                          CORPORATION AND SUBSIDIARIES****UNAUDITED
                          CONSOLIDATED STATEMENT OF
                          STOCKHOLDERS' EQUITY**
 
 **For
                            the Six Months Ended**
                          **June
                            30,**
  **2007**
                      
                      
                      **2006****COMMON
                          STOCK**Balance
                          at
                          the beginning of the period
                      
                      **$**
                      **1,692,042**
                      
                      
                      $
                      1,693,042Balance
                          at
                          the end of the period
                      
                      **$**
                      **1,692,042**
                      
                      
                      $
                      1,693,042**ADDITIONAL
                          PAID-IN CAPITAL**Balance
                          at
                          the beginning of the period
                      
                      **$**
                      **38,296**
                      
                      
                      $
                      —Stock-based
                          compensation expense
                      
                      ****
                      **8,762**
                      
                      
                      
                      28,484Issuance
                          of
                          warrants to related parties
                      
                      ****
                      **22,741**
                      
                      
                      
                      —Balance
                          at
                          the end of the period
                      
                      **$**
                      **69,799**
                      
                      
                      $
                      28,484**RETAINED
                          EARNINGS**Balance
                          at
                          the beginning of the period
                      
                      **$**
                      **945,709**
                      
                      
                      $
                      1,958,481Cumulative
                          effect of adoption of FIN 48
                      
                      ****
                      **(34,500**
                      **)**
                      
                      
                      —Net
                          loss
                      
                      ****
                      **(112,029**
                      **)**
                      
                      
                      (291,855
                      )Balance
                          at
                          the end of the period
                      
                      **$**
                      **799,180**
                      
                      
                      $
                      1,666,626**STOCKHOLDERS'
                          EQUITY AT END OF PERIOD**
                      
                      **$**
                      **2,561,021**
                      
                      
                      $
                      3,388,152See
                          accompanying notes to unaudited consolidated financial
                          statements.
   5 
 
 **SIBONEY
                          CORPORATION AND SUBSIDIARIES****UNAUDITED
                          CONSOLIDATED STATEMENT OF CASH
                          FLOWS**
 
 **For
                          the Six Months Ended**
                        **June
                          30,****2007**
                      
                      
                      **2006****Cash
                          Flows From Operating Activities**Net
                          loss
                      
                      **$**
                      **(112,029**
                      **)**
                      
                      $
                      (291,855
                      )Adjustments
                          to reconcile net loss to net cashprovided
                          by
                          (used in) operating activities:Depreciation
                      
                      ****
                      **52,026**
                      
                      
                      
                      99,634Amortization
                      
                      ****
                      **400,947**
                      
                      
                      
                      316,352Amortization
                          of subordinated debt costs
                      
                      ****
                      **9,642**
                      
                      
                      
                      —Deferred
                          income taxes
                      
                      ****
                      **(37,000**
                      **)**
                      
                      
                      (244,000
                      )Stock-based
                          compensation expense
                      
                      ****
                      **8,762**
                      
                      
                      
                      28,484Loss
                          on
                          disposition of assets
                      
                      ****
                      **—**
                      
                      
                      
                      1,441Abandonment
                          of software development in process
                      
                      ****
                      **11,404**
                      
                      
                      
                      —Reserves
                          and
                          allowances for accounts receivable
                      
                      ****
                      **3,888**
                      
                      
                      
                      63,725Reserve
                          for
                          obsolescence of inventory
                      
                      ****
                      **9,000**
                      
                      
                      
                      1,800Change
                          in
                          assets and liabilities:Accounts
                          and
                          notes receivable
                      
                      ****
                      **(406,211**
                      **)**
                      
                      
                      (380,090
                      )Inventories
                      
                      ****
                      **11,487**
                      
                      
                      
                      30,788Refundable
                          income taxes
                      
                      ****
                      **(981**
                      **)**
                      
                      
                      (1,500
                      )Prepaid
                          expenses and other assets
                      
                      ****
                      **46,853**
                      
                      
                      
                      64,524Accounts
                          payable, accrued expensesand
                          deferred revenue
                      
                      ****
                      **154,226**
                      
                      
                      
                      (89,530
                      )**Net
                          Cash Provided By (Used In) Operating Activities**
                      
                      ****
                      **152,014**
                      
                      
                      
                      (400,227
                      )**Cash
                          Flows From Investing Activities**Payments
                          for
                          equipment
                      
                      ****
                      **(40,851**
                      **)**
                      
                      
                      (23,728
                      )Proceeds
                          from
                          sale of assets
                      
                      ****
                      **—**
                      
                      
                      
                      500Payments
                          for
                          software development costs
                      
                      ****
                      **(337,922**
                      **)**
                      
                      
                      (438,955
                      )**Net
                          Cash Used In Investing Activities**
                      
                      ****
                      **(378,773**
                      **)**
                      
                      
                      (462,183
                      )**Cash
                          Flows From Financing Activities**Proceeds
                          on
                          line of credit
                      
                      ****
                      **—**
                      
                      
                      
                      1,100,000Principal
                          payment on promissory note
                      
                      ****
                      **(28,125**
                      **)**
                      
                      
                      (75,000
                      )Proceeds
                          from
                          issuance of related partysubordinated
                          debt and warrants
                      
                      ****
                      **193,600**
                      
                      
                      
                      —Principal
                          payments on capital lease obligation
                      
                      ****
                      **—**
                      
                      
                      
                      (11,116
                      )**Net
                          Cash Provided By Financing Activities**
                      
                      ****
                      **165,475**
                      
                      
                      
                      1,013,884**Change
                          In Cash**
                      
                      ****
                      **(61,284**
                      **)**
                      
                      
                      151,474**Cash
                          - Beginning of Period**
                      
                      ****
                      **226,486**
                      
                      
                      
                      270,987**Cash
                          - End of Period**
                      
                      **$**
                      **165,202**
                      
                      
                      $
                      422,461See
                          accompanying notes to unaudited consolidated financial
                          statements.
   6
 
 **SIBONEY
                CORPORATION AND SUBSIDIARIES**
 **NOTES
                TO UNAUDITED CONSOLIDATED FINANCIAL
                STATEMENTS**
 **JUNE
                30,
                2007 AND 2006**
 
 
 **1.  BASIS
                OF PRESENTATION AND CONSOLIDATION**
 
 **Basis
                of
                Presentation**
 
 Our
                consolidated
                balance sheet as of December 31, 2006 was derived from our audited
                balance sheet
                as of that date, as set forth in our Annual Report on Form 10-K for
                the year
                ended December 31, 2006. All other financial statements contained
                herein are
                unaudited and, in the opinion of management, contain all adjustments
                considered
                necessary for a fair presentation.
 
 Certain
                information
                and footnote disclosures normally included in financial statements
                prepared in
                accordance with generally accepted accounting principles have been
                omitted. These unaudited consolidated financial statements should be read
                in conjunction with the consolidated financial statements and notes
                thereto
                included in our Annual Report on Form 10-K for the year ended December
                31,
                2006. The results of operations for the three and six months ended June
                30,
                2007 are not necessarily indicative of the operating results for
                the full
                year.
 
 **Basis
                of
                Consolidation**
 
 The
                accompanying
                consolidated financial statements include the accounts of Siboney
                Corporation
                and its wholly-owned subsidiaries. All significant intercompany balances
                and transactions have been eliminated in consolidation.
 
 
 **2.  REVENUE
                RECOGNITION**
 
 We
                follow specific and detailed guidelines in determining the proper
                amount of
                revenue to be recorded. We recognize revenues in accordance with Statement
                of Position (“SOP”) 97-2 *Software Revenue Recognition* as amended by SOP
                98-9 *Modification of SOP 97-2, Software Revenue Recognition, With
                Respect to
                Certain Transactions*.
 
 Revenue
                from
                software license agreements is recognized when the following have
                been
                met:
 
 ·
                      Persuasive
                          evidence of an agreement exists;
 ·
                      Delivery
                          of
                          the software has occurred;
 ·
                      The
                          fee is
                          fixed or determinable; and
 ·
                      Collectibility
                          is probable.
 
 In
                software arrangements that include more than one element, we allocate
                the total
                arrangement fee among the elements based on the vendor-specific objective
                evidence (“VSOE”) of the relative fair value of each deliverable, using the
                price charged when that element is sold separately. For software
                arrangements in which we do not have VSOE for undelivered elements,
                revenue is
                deferred until the earlier of when VSOE is determined for the undelivered
                elements or when all elements for which we do not have VSOE have
                been
                delivered.
 
 We
                also generate revenue by providing professional services which consist
                of
                consulting, training and implementation support. The revenue for these
                services is recognized as the services are performed. Consulting, training
                and implementation services are not essential to the functionality
                of our
                software products. Accordingly, revenues from these services are recognized
                separately.
   7
 3.  ACCOUNTS
                  RECEIVABLE
 
 Accounts
                  receivable
                  consist of:
 
 **June
                            30,**
                        
                        **December
                            31,****2007**
                        
                        
                        **2006**Accounts
                            receivable
                        
                        **$**
                        **1,286,747**
                        
                        
                        $
                        874,237Allowance
                              for
                              doubtful accounts, sales credits and returns
                        
                        ****
                        **(129,801**
                        **)**
                        
                        
                        (127,779
                        )**$**
                        **1,156,946**
                        
                        
                        $
                        746,458
 
 Accounts
                  receivable
                  are pledged as collateral for debt (Notes 7 and 8).
 
 
 **4.  INVENTORIES**
 
 Inventories
                  consist
                  of:
  **June
                              30,**
                          
                          **December
                              31,****2007**
                          
                          
                          **2006**Finished
                              goods
                          
                          **$**
                          **149,812**
                          
                          
                          $
                          160,160Raw
                              materials
                          
                          ****
                          **167,099**
                          
                          
                          
                          168,238Reserve
                              for
                              obsolescence
                          
                          ****
                          **(40,000**
                          **)**
                          
                          
                          (31,000
                          )**$**
                          **276,911**
                          
                          
                          $
                          297,398
 Inventories
                  are
                  pledged as collateral for debt (Notes 7 and 8).
 
 
 **5.  CAPITALIZED
                  SOFTWARE DEVELOPMENT COSTS**
 
 The
                  components of
                  capitalized software development costs consist of:
 
 **June
                            30,**
                        
                        **December
                            31,****2007**
                        
                        
                        **2006**Software
                            development in progress
                        
                        **$**
                        **657,726**
                        
                        
                        $
                        379,308Capitalized
                            software development costs
                        
                        ****
                        **5,119,060**
                        
                        
                        
                        5,070,960Accumulated
                            amortization
                        
                        ****
                        **(3,676,976**
                        **)**
                        
                        
                        (3,276,029
                        )**$**
                        **2,099,810**
                        
                        
                        $
                        2,174,239
 
 We
                  capitalize software development costs when we determine that it
                  is
                  technologically feasible to produce the software title. The majority of our
                  product development costs qualify for capitalization due to the
                  concentration of
                  our development efforts on the content of our courseware. We stop
                  capitalizing costs when the product is released for sale to our
                  customers, at
                  which time amortization of the capitalized costs begins. We amortize
                  capitalized software development costs on a product-by-product
                  basis at
                  the
   8 
   greater
                    of the
                    ratio that the product’s current gross revenue bears to the total of its current
                    and anticipated future gross revenues or the straight-line method
                    over the
                    estimated economic life of the products, which is generally estimated
                    to be 48
                    months.
 
 On
                    an annual basis, we review each capitalized project to determine
                    if the
                    unamortized balance exceeds its estimated net realizable value. Estimated
                    net realizable value requires us to use judgment in projecting
                    future
                    revenues. Actual amounts realized could differ materially from those
                    estimated.  Future events such as market conditions, customer demand
                    or technological obsolescence could cause us to conclude that
                    the carrying value
                    of the software at a given point in time is impaired, and the
                    amount of the
                    impairment so determined would be required to be written off
                    against the
                    carrying value of the asset and charged as an expense against
                    operations at the
                    time such determination is made.
 
 Amortization
                    of
                    software development costs charged against earnings amounted
                    to $190,590 and
                    $151,505 for the three months ended June 30, 2007 and 2006,
                    respectively. Amortization of software development costs charged against
                    earnings amounted to $400,947 and $316,352 for the six months
                    ended June 30,
                    2007 and 2006, respectively.  We expensed to selling, general and
                    administrative expenses $11,404 in costs related to a title that
                    was not
                    released during the first quarter of 2007.
 
 In
                    February 2007 we entered into a strategic alliance and joint
                    development
                    agreement with Edumatics Corporation, Inc. (“Edumatics”). Under the
                    agreement we are jointly developing and marketing a new test
                    preparation
                    program. We share costs and any revenues generated with Edumatics, as
                    provided in the agreement. During the first quarter of 2007 we received
                    approximately $311,000 in cash from Edumatics to fund its share
                    of the costs we
                    incurred for development efforts and overhead costs related to
                    this new
                    product. We reduced the amount we capitalized into software development
                    by
                    approximately $87,000 during the six months ended June 30, 2007
                    to reflect the
                    portion paid by Edumatics. We also reduced our selling, general and
                    administrative expenses by approximately $80,000 during the three
                    months ended
                    June 30, 2007 and $142,000 during the six months ended June 30,
                    2007 to reflect
                    the portion paid by Edumatics. The remaining $82,000 of funds we received
                    from Edumatics is accounted for as an accrued expense in our
                    consolidated
                    balance sheet as of June 30, 2007 as we consider these funds
                    to be a liability
                    until we have completed the software development of the test
                    preparation
                    program, at which time the funds will reduce our capitalized
                    software
                    development costs.
 
 
 **6.  INCOME
                    TAXES**
 
 We
                    account for income taxes according to the provisions of SFAS
                    No. 109,
*Accounting for Income Taxes* (“SFAS 109”). SFAS 109 requires
                    recognition of deferred tax assets and liabilities to reflect
                    the expected
                    future tax consequences of temporary differences between the
                    financial statement
                    and tax basis of assets and liabilities. Deferred tax assets are reduced by
                    a valuation allowance when it is more likely than not that some
                    or all of the
                    deferred tax asset will not be realized.
 
 In
                    assessing the realization of deferred tax assets, we consider
                    whether it is more
                    likely than not that some portion or all of the deferred tax
                    assets will not be
                    realized. The realization of deferred tax assets is dependent
                    upon the
                    generation of future taxable income during the periods in which
                    those temporary
                    differences become deductible. Based upon the level of historical taxable
                    income and projections for future taxable income over the periods
                    in which the
                    deferred tax assets are deductible, we believe it is more likely
                    than not that
                    we will realize the benefits of these deductible differences.
 
 On
                    January 1, 2007 we adopted Financial Accounting Standards Board
                    (“FASB”)
                    Interpretation No. 48, *Accounting for Uncertainty in Income Taxes, an
                    interpretation of FASB Statement 109* (“FIN 48”). FIN 48 provides
                    recognition criteria and a related measurement model for uncertain
                    tax positions
                    taken or expected to be taken in income tax returns. FIN 48 requires that a
                    position taken or expected to be taken in a tax return be recognized
                    in the
                    financial statements when it is “more-likely-than-not” that the position would
                    be sustained upon examination by tax authorities. Tax positions that meet
                    the “more-likely-than-not” threshold are then valued to determine the amount of
                    benefit to be recognized in the financial statements. In general, we are
                    not subject to U.S. federal, state and local income tax examinations
                    by
                    tax
   9
 authorities
                    for
                    years prior to 2003 and, accordingly, a liability for uncertain
                    tax positions
                    was not required for those years.
 
 In
                    May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 *Definition of
                    Settlement in FASB Interpretation No. 48* (“FSP FIN 48-1”). FSP FIN
                    48-1 provides guidance on how to determine whether a tax position
                    is effectively
                    settled for the purpose of recognizing previously unrecognized
                    tax
                    benefits. FSP FIN 48-1 is effective retroactively to January 1,
                    2007. The implementation of this standard did not have a material impact
                    on
                    our consolidated financial position or results of operations.
 
 As
                    of January 1, 2007, we provided a liability of $34,500 for unrecognized
                    tax
                    benefits related to various federal and state income tax matters. This
                    entire amount would impact our effective tax rate, if recognized. As we
                    have net operating losses we did not accrue interest or penalties
                    related to our
                    unrecognized tax benefits. The liability has not changed during the three
                    and six months ended June 30, 2007. We do not expect that the amounts of
                    unrecognized tax benefits will change significantly within the
                    next 12 months,
                    except for a $10,600 reduction, which relates to the amortization
                    of intangible
                    assets, due to the expiration of the statute of limitations for
                    tax year
                    2003.
 
 We
                    recognize interest related to uncertain tax positions in interest
                    income or
                    expense and related penalties, if applicable, in operating expenses
                    which is
                    consistent with how we recognized these items in prior periods. For the
                    three and six months ended June 30, 2007, we had no interest
                    expense in our
                    consolidated statement of operations or any accrued interest
                    in our consolidated
                    balance sheet as of June 30, 2007 related to unrecognized tax
                    benefits. No
                    penalties were recognized during the three and six months ended
                    June 30,
                    2007.
 
 
 **7.  DEBT**
 
 We
                    have a $1,500,000 revolving line of credit agreement with our
                    bank. We had
                    a balance of $1,500,000 outstanding on this line as of June 30,
                    2007. In
                    addition, we owe our bank $1,096,875 as of June 30, 2007 under
                    a promissory
                    note. We made the July 1, 2007 scheduled quarterly principal payment
                    of
                    $28,125 at the end of June 2007.
 
 Both
                    the line of
                    credit and the promissory note require us to pay interest monthly
                    on the
                    outstanding balance at our bank’s prime rate which is currently 8.25% per
                    annum. Accounts receivable, inventory, property and equipment are pledged
                    as collateral.
 
 In
                    March 2007 we entered into new debt agreements with our bank
                    that extended the
                    due dates on both the line of credit and the promissory note
                    to April 1, 2008
                    from April 1, 2007.
 
 In
                    connection with the renewal of our bank loan, the following terms
                    were added to
                    our debt:
 
 ·
                          We
                              will make
                              two additional quarterly principal payments of $28,125
                              on October 1, 2007
                              and January 1, 2008 and the remaining $1,040,625 is
                              due April 1,
                              2008.
 ·
                          The
                              line of
                              credit was extended to April 1, 2008 when the outstanding
                              balance is
                              due.
 ·
                          Our
                              stockholders’ equity plus subordinated debt must be at least $2,700,000
                              as
                              of June 30, 2007.
 ·
                          Our
                              liabilities as a percent of stockholders’ equity plus subordinated debt
                              must be less than 1.25:1.00 as of June 30,
                              2007.
 ·
                          We
                              were
                              required to obtain $200,000 of subordinated debt from
                              two of our
                              Directors.  (See Note 8 “Related Party Subordinated
                              Debt”.)
 
 If
                    we breach any term or condition in the agreements our bank has
                    the option to
                    declare the notes immediately due and payable.
 
 The
                    entire bank
                    debt of $2,596,875 matures on April 1, 2008.
 
 We
                    will seek to enter into a new credit agreement with our bank
                    effective on or
                    before April 1, 2008.  We
   10
 believe
                    that we
                    will continue to generate cash flows from operations or be able
                    to obtain
                    additional financing to enable us to support our current business
                    levels;
                    however, failure to enter into a renewal of our credit agreement
                    would have a
                    material adverse effect on our financial condition and results
                    of
                    operations. The terms of a replacement credit facility may be less
                    favorable than those historically experienced.
 
 As
                    of June 30,
                    2007, we did not comply with a financial covenant specified in
                    our bank credit
                    agreement. We are to maintain a ratio of liabilities to stockholders’
equity plus subordinated debt no greater than 1.25:1.00.  Under the
                    credit agreement, this ratio is measured at the end of each quarter. Our
                    ratio as of June 30, 2007 was 1.34:1.00. We have obtained a waiver for this
                    non-compliance as of June 30, 2007. Although we continue to be out of
                    compliance with this financial covenant as of the date of this
                    report, we do not
                    anticipate that the bank will exercise its right to declare the
                    notes due and
                    payable. However, we can provide no assurance that we will be able to
                    obtain a waiver from the bank of future non-compliance with this
                    financial
                    covenant.
 
 **8.  RELATED
                    PARTY SUBORDINATED DEBT**
 
 On
                    March 21, 2007 we borrowed $200,000 from two members of our Board
                    of Directors;
                    one of the Directors is also an officer of the Company. We issued to each
                    Director a $100,000 principal amount subordinated secured note
                    and a five-year
                    warrant to buy 200,000 shares of our common stock. The exercise price under
                    the warrant is $0.01 per share. We assigned a value of $22,741 to the
                    warrants that were issued as original issuance discount against
                    the debt and
                    recorded it as an increase to additional paid-in capital.
 
 The
                    effective
                    interest rate on this debt is 16.9%. The debt will be due in full in March
                    2009; we may prepay it without penalty. We used the proceeds from this
                    debt, which was net of $6,400 of issuance costs, to provide us
                    additional
                    working capital.
 
 Interest
                    is due
                    quarterly on this debt at a rate of 10% per annum; we can pay
                    in cash or
                    in-kind. We accrued a total of $5,611 in interest through June 30, 2007,
                    which was added to the principal balance of the subordinated
                    debt increasing it
                    to $205,611.
 
 The
                    following table
                    shows the related party expenses in our consolidated statement
                    of operations
                    related to this debt:
 **For
                                the Three**
                              **Months
                                Ended**
                              **June
                                30, 2007**
                            
                            
                            **For
                                the****Six
                                Months Ended**
                              **June
                                30, 2007**Interest
                                expense on subordinated debt
                            
                            **$**
                            **5,056**
                            
                            
                            **$**
                            **5,611**Amortization
                                of original issuance discount
                            
                            ****
                            **2,835**
                            
                            
                            ****
                            **3,146**Total
                                related party interest expense
                            
                            **$**
                            **7,891**
                            
                            
                            **$**
                            **8,757**Debt
                                issuance
                                costs amortized to selling,general
                                and administrative costs
                            
                            **$**
                            **798**
                            
                            
                            **$**
                            **885**
 This
                    debt is
                    secured by a junior lien on substantially all of Siboney Learning
                    Group, Inc.’s
                    assets. Our bank required that the Directors enter into an agreement
                    that
                    subordinates their loans to the amounts that we owe the bank
                    as part of the
                    refinancing of their debt.  See Note 7.
   11
 **9.  STATEMENT
                      OF CASH FLOWS SUPPLEMENTAL DISCLOSURES**
  **For
                                    the Six Months Ended****June
                                    30,****2007**
                                
                                
                                **2006**Interest
                                    paid
                                
                                **$**
                                **107,454**
                                
                                
                                $
                                71,629Income
                                    taxes
                                    paid
                                
                                **$**
                                **1,157**
                                
                                
                                $
                                6,700Noncash
                                    financing transactions related to therelated
                                    party
                                    subordinated debt issuance:Warrants
                                    recorded as original issuance discount
                                
                                **$**
                                **22,741**
                                
                                
                                $
                                —Payment
                                    "in
                                    kind" of accrued interest
                                
                                **$**
                                **5,611**
                                
                                
                                $
                                —
 **10.  RECENT
                      ACCOUNTING PRONOUNCEMENTS**
 
 In
                      June 2006, the FASB ratified the Emerging Issues Task Force
                      Issue No. 06-3
                      ("EITF 06-3"), *How Taxes Collected from Customers and Remitted to
                      Governmental Authorities Should Be Presented in the Income
                      Statement (That Is,
                      Gross versus Net Presentation)*. EITF 06-3 addresses the income
                      statement presentation of taxes assessed by various governmental
                      authorities and
                      allows either gross or net presentation.  EITF 06-3 is effective for
                      us beginning January 1, 2007. Taxes that we are required to collect from
                      our customers are not included in our revenues, but are accounted
                      for as a
                      liability to the agency until remitted. The implementation of this standard
                      did not have a material impact on our consolidated financial
                      position or results
                      of operations.
 
 In
                      September 2006, the FASB issued FASB Staff Position AUG AIR-1
*Accounting for
                      Planned Major Maintenance Activities* (“FSP AUG AIR-1”).  FSP AUG
                      AIR-1 amends the guidance on the accounting for planned major
                      maintenance
                      activities; specifically it precludes the use of the previously
                      acceptable
“accrue in advance” method. FSP AUG AIR-1 is effective for us beginning
                      January 1, 2007. The implementation of this standard did not have a
                      material impact on our consolidated financial position or results
                      of
                      operations.
 
 In
                      February 2007, the FASB issued SFAS No. 159 *The Fair Value Option for
                      Financial Assets and Financial Liabilities* (“SFAS 159”). SFAS 159
                      permits entities to choose to measure many financial assets
                      and financial
                      liabilities at fair value. Unrealized gains and losses on items for which
                      the fair value option has been elected are reported in earnings.  SFAS
                      159 is effective for us beginning January 1, 2008. We have not begun an
                      assessment of the impact of SFAS 159 on our consolidated financial
                      position and
                      results of operations.
 
 In
                      March 2007, the FASB ratified EITF Issue No. 06-10 *Accounting for Collateral
                      Assignment Split-Dollar Life Insurance Agreements* (“EITF 06-10”). EITF
                      06-10 provides guidance for determining a liability for the
                      postretirement
                      benefit obligation as well as recognition and measurement of
                      the associated
                      asset on the basis of the terms of the collateral assignment
                      agreement. EITF 06-10 is effective for us beginning January 1, 2008 and
                      should not have an impact on our consolidated financial position
                      or results of
                      operations.
 
 In
                      June 2007, the FASB ratified EITF 06-11 *Accounting for the Income Tax
                      Benefits of Dividends on Share-Based Payment Awards* (“EITF
                      06-11”). EITF 06-11 provides that tax benefits associated with dividends
                      on
                      share-based payment awards be recorded as a component of additional
                      paid-in
                      capital.  EITF 06-11 is effective, on a prospective basis, for us
                      beginning January 1, 2008 and should not have an impact on
                      our consolidated
                      financial position or results of operations.
   12
 
 **ITEM
                        2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                        AND RESULTS OF OPERATIONS**
 
 
 **General**- Siboney Corporation was incorporated in the State
                        of Maryland in
                        1955. Our principal business is the publishing of educational software
                        products in core academic areas, primarily for schools.
 
 Unless
                        the context
                        indicates otherwise, references to us, our, we or the “Company” in this report
                        include Siboney Corporation and its subsidiaries.
 
 **Business
                        -
                        General Description And Current Developments****-** Our
                        principal subsidiary, Siboney Learning Group, Inc., publishes
                        standards-based
                        educational software products for reading, language, mathematics,
                        science,
                        writing and English as a Second Language, primarily for K-12
                        students and adult
                        learners.
 
 We
                        publish five software product lines:
 ·
                                Orchard
                                    Software for Your State (“Orchard”)·
                                Journey·
                                GAMCO
                                    Educational Software·
                                Educational
                                    Activities Software·
                                PracticePlanet
 We
                        believe that these products position us to appeal to the
                        different budgets and
                        spending patterns found in classrooms, schools, school districts
                        and adult
                        learning centers.
 
 The
                        passage and
                        implementation of the No Child Left Behind Act (“NCLB”) in 2002 placed higher
                        standards for accountability, research-based products, instructional
                        improvement
                        and data-driven decision-making upon all public schools in
                        the United States. As
                        a result, we focus on the development, upgrading, selling
                        and marketing of our
                        Orchard product line. We believe that Orchard is a cost-effective
                        solution for
                        schools facing growing pressures to demonstrate Adequate
                        Yearly Progress and
                        instructional improvement as mandated by NCLB.
 
 NCLB
                        requires every
                        public school have annual assessments in reading and in math
                        in grades 3-8 and
                        once between grades 10-12. Schools are also to assess all children in
                        science at least once between the grades 3-5, 6-9, and 10-12. Although the
                        science assessments are required, the results, under current
                        law, will not be
                        used for purposes of determining adequate yearly progress. Each school must
                        meet state-specific annual mandates for adequate yearly progress
                        or be
                        classified as a failing school.  Failing schools face serious
                        consequences, from losing accreditation to relinquishing
                        administrative
                        control. NCLB requires 100% proficiency in reading and math for all
                        public
                        school students in grades 3–8 by school year 2013-2014, which places
                        increasingly difficult demands upon schools for instructional
                        improvement and
                        satisfactory progress towards 100% proficiency.
 
 Orchard
                        integrates
                        the results of subject specific assessment tests which are
                        based upon state
                        standards, with individualized instruction from over 160
                        Skill Trees (i.e.,
                        software programs) in K-12 reading, language, mathematics
                        and
                        science. Orchard’s assessment identifies areas of academic weakness for
                        each student within his/her state’s grade-specific standards of
                        learning. Orchard then prescribes an individualized learning path for
                        each
                        student as students interact with a wide variety of motivating
                        instructional
                        approaches that appeal to different learning styles. Orchard’s management
                        system tracks student progress for teachers and administrators
                        who are facing
                        increasing pressure for data-driven decision making as mandated
                        by
                        NCLB. Interim assessment tools can be used to measure educational
                        gains and
                        to prepare students for their high-stakes state tests.
 
 Over
                        9,000 schools
                        use Orchard in computer labs, learning centers and classrooms
                        to supplement core
                        instruction. Unlike many competitive comprehensive solutions, Orchard’s
                        solution is delivered as an
 13
 
 
 unlimited
                      network/site license with no required recurring fees. Orchard’s scalable
                      product configurations allow schools with limited budgets to
                      make a modest
                      initial investment by purchasing individual Skill Trees and
                      then to grow their
                      Orchard solution with future purchases of larger curriculum
                      bundles.
 
 In
                      early 2007 we were notified that Orchard Gold Star is a finalist
                      for “Best
                      Education Solution” in the Software & Information Industry Association’s
                      22nd annual CODiE Awards. In April 2007 our Orchard Gold Star 7-9 bundle
                      was awarded ComputED’s Bessie award for Best Educational Software in the Middle
                      School Language Arts category. In June 2007 Orchard Gold Star was awarded
                      the Golden Lamp award in the Technology category by the Association
                      of
                      Educational Publishers.
 
 Orchard
                      is sold
                      through a network of independent dealer representatives, direct
                      field and inside
                      sales representatives who actively call on schools to sell
                      comprehensive
                      curriculum- and technology-based learning solutions. A majority of our
                      Orchard business is repeat business from schools or school
                      districts that
                      benefit from Orchard’s scalability by acquiring additional Skill Trees
                      (individual programs) or bundles.  We believe that Orchard has become
                      a recognized competitor in the growing comprehensive instructional
                      software
                      market as a result of its motivating and research-based instructional
                      content,
                      its strong correlations to state objectives and tests, and
                      its cost-effective
                      and scalable pricing structures. Orchard contributed 77.9% and 80.9% of our
                      revenue for the six months ended June 30, 2007 and 2006, respectively. A
                      version of Orchard (Orchard Home) appropriate for home users
                      is sold through a
                      direct-to-home marketer of educational products.  This reseller
                      relationship provides us with access to the home market without
                      the costs
                      associated with retail distribution.
 
 We
                      also publish two titles-based instructional software product
                      lines:
 
 GAMCO
                      Educational
                      Software (“GAMCO”) is our original software product line. GAMCO provides
                      schools with single titles and curriculum solutions which we
                      believe are highly
                      motivating and engaging. GAMCO products are sold through the major national
                      and regional school software catalog dealers, our inside sales
                      force, direct
                      catalogs and direct promotions. All GAMCO titles include management
                      features that track student progress and allow teachers to
                      modify the
                      instruction to meet individual learning needs. Popular titles include
                      Touchdown Math, Math Concepts, Language Concepts and Phonics. Many of our
                      GAMCO titles were updated in 2006 to run under the Macintosh
                      OS X operating
                      system in an effort to pursue sales in this underserved market. Our GAMCO
                      product line contributed 5.5% and 6.1% of our revenue for the
                      six months ended
                      June 30, 2007 and 2006, respectively.
 
 Our
                      Educational
                      Activities Software (“EAS”) line has been a leading publisher of software for
                      the middle school to adult learner market for more than 20
                      years. Best
                      known for its Diascriptive Reading Series, EAS has traditionally
                      sold its
                      products to schools, community colleges, adult learning centers
                      and correctional
                      facilities through a network of independent representatives. EAS is our
                      primary product offering for the adult learning market and
                      allows us to achieve
                      incremental sales growth through this market. We continue to allocate
                      programming resources on upgrading and enhancing these titles
                      as a result of a
                      perceived increase in demand for adult learner and remedial
                      products. This
                      product has represented approximately 9% of our revenues for
                      the six months
                      ended June 30, 2007 and 2006.
 
 On
                      February 2, 2007 Siboney Learning Group and Edumatics Corporation,
                      a California
                      corporation, (“Edumatics”) entered into a Strategic Alliance and Joint
                      Development Agreement. Edumatics is a wholly-owned subsidiary of Educomp
                      Solutions LTD of New Delhi, India. The Strategic Alliance and Joint
                      Development Agreement calls for Siboney and Edumatics to jointly
                      develop an
                      online product (named PracticePlanet) to assist elementary
                      and middle school
                      students in preparing for their annual high-stakes state tests,
                      using
                      intellectual property provided by Siboney. PracticePlanet is marketed, sold
                      and supported using Siboney’s employees and independent sales channels. The
                      terms of the agreement required Edumatics to make a one-time
                      payment to Siboney
                      in the amount of $240,000 in order to equally share in the
                      cost of the software
                      development. Edumatics also agreed to compensate Siboney for Edumatics’
share of the agreed upon value of the intellectual property
                      provided by
                      Siboney. Ongoing working capital required to market, sell and support
                      the
                      product will be equally contributed between Siboney and Edumatics. All
                      revenues generated from the product will also be equally shared
                      between he two
                      parties, provided that Siboney will be entitled to a disproportionate
                      share of
                      the revenues until it
   14  
   has
                        received
                        $250,000 from the preferential allocation.
 
 PracticePlanet
                        is
                        an online test preparation program designed to enhance student
                        skills and
                        improve scores on state assessments. PracticePlanet uses test items which
                        are correlated to state curriculum standards, prompt feedback
                        and interactive
                        games designed to keep students engaged.  A robust management system
                        allows educators to track progress at the student, class
                        and school
                        level. The online delivery system allows students and teachers to
                        have
                        access to PracticePlanet wherever an Internet connection
                        is available. Test
                        and practice results are automatically aggregated and presented
                        in a form that
                        is concise and easy to read.
 
 We
                        also have certain natural resources interests, including
                        coal, oil and gas,
                        through Siboney Coal Company, Inc. and other subsidiaries
                        which have not been
                        material to our results of operations or financial condition
                        over the past
                        several years. We could receive an aggregate payment of up to $250,000
                        under a lease of our coal properties in the second half of
                        2007. Royalties
                        received are dependent upon coal prices and production. Our claims for oil
                        and gas interests nationalized by the Cuban government could
                        have material
                        value, however there is no assurance that we will be able
                        to monetize such
                        interests or as to the amount of any such value.
 
 **Results
                        of
                        Operations**
 
 The
                        following is
                        our discussion and analysis of certain significant factors
                        which have affected
                        our financial position and operating results during the periods
                        covered by the
                        accompanying consolidated financial statements.
 
 **Three
                        and
                        Six Months Ended June 30, 2007 Compared to the Three and
                        Six Months Ended June
                        30, 2006**
 
 Our
                        consolidated
                        revenues decreased 13.6% or $302,883 to $1,930,896 from $2,233,799
                        during the
                        second quarter of 2007 compared to the second quarter of
                        2006. Total
                        revenue decreased 16.4% or $611,023 to $3,118,160 in the
                        first six months of
                        2007 from $3,729,183 in the first six months of 2006. These decreases were
                        attributable to an industry-wide slowdown for supplemental
                        curriculum software
                        which resulted in lower Orchard Gold Star sales though our
                        independent dealer
                        network during the first six months of 2007, offset by an
                        increase of
                        approximately $131,000 in premium and professional development
                        services revenues
                        as our customers have purchased these services on a higher
                        percentage of our
                        Orchard sales in 2007. Our service revenues were $71,804 during the second
                        quarter of 2007 as compared to $39,137 during the second
                        quarter of
                        2006. Service revenues were $209,580 in the first six months of
                        2007
                        compared to $78,001 during the first six months of 2006.
 
 Cost
                        of product
                        sales decreased 12.7% or $64,611 to $442,199 from $506,810
                        during the second
                        quarter of 2007 compared to the second quarter of 2006. Cost of product
                        sales decreased 7.4% or $70,010 to $870,072 from $940,082
                        during the first six
                        months of 2007 compared to the first six months of 2006. These decreases
                        were attributable to lower material costs due to lower sales,
                        offset by higher
                        software amortization related to our release of Orchard 4.2
                        in the summer of
                        2006 and higher material costs in the second quarter of 2006
                        as we wrote off
                        older versions of our software in conjunction with the release
                        of Orchard
                        4.2.
 
 Selling,
                        general
                        and administrative expenses decreased 26.2% or $423,407 to
                        $1,193,738 from
                        $1,617,145 during the second quarter of 2007 compared to
                        the second quarter of
                        2006. Selling, general and administrative expenses decreased 29.8%
                        or
                        $972,231 to $2,286,686 from $3,258,917 during the first six
                        months of 2007
                        compared to the first six months of 2006. These decreases were due to
                        aggressive cost reduction initiatives we implemented during
                        the summer of 2006
                        which resulted in lower salaries and related costs.  In addition, we
                        had lower commission expense during the first six months
                        of 2007 compared to the
                        same period of 2006 due to lower sales.  We also received
                        reimbursement for a portion of our operating expenses due
                        to the joint software
                        and development agreement we entered into with Edumatics
                        in February 2007, which
                        reduced our selling, general and administrative expenses
                        by approximately
                        $80,000 during the three months ended June 30, 2007 and $142,000
                        during the six
                        months ended June 30, 2007.
   15
 
 
 Due
                        to the decrease
                        in our costs we reported higher net income for the second
                        quarter of 2007
                        compared to the second quarter of 2006, despite the lower
                        revenues. Our net
                        income for the second quarter of 2007 was $137,600 (or $0.01
                        per share) after
                        income tax expense of $99,000 compared to $74,273 (or $0.00
                        per share) after an
                        income tax benefit of $7,000 for the second quarter of 2006. We booked an
                        income tax benefit in the second quarter of 2006 primarily
                        due to an increase to
                        our deferred tax asset to reflect deductions on our 2005
                        income tax returns that
                        were not accounted for when we estimated our income tax benefit
                        at December 31,
                        2005. These adjustments were recorded in the second quarter of
                        2006 after
                        our 2005 income tax returns were prepared. Our net loss for the first six
                        months of 2007 was $112,029 (or $0.01 per share) after an
                        income tax benefit of
                        $37,000, compared to a net loss of $291,855 (or $0.02 per
                        share) after an income
                        tax benefit of $250,000 for the first six months of 2006.
 
 **Liquidity
                        and Capital Resources**
 
 In
                        February 2007, we entered into a joint software development
                        agreement with
                        Edumatics. The agreement calls for Edumatics and Siboney to jointly
                        fund
                        the development of an online test preparation program to
                        be released in
                        mid-summer 2007. We received a payment of $240,632 from Edumatics in
                        February 2007 and a payment of $70,423 in March 2007. We used the funds
                        that we received from Edumatics to offset half of the costs
                        we incurred on the
                        development of the online test preparation program and a
                        portion of the
                        operating costs we incurred during the six months ended June
                        30, 2007. The
                        revenue expected to be generated from this new product would
                        help to improve our
                        liquidity position during the latter part of 2007.
 
 In
                        March 2007 we issued $200,000 of subordinated debt and warrants
                        to two
                        Directors, the proceeds of which we used for working capital
                        needs as well as
                        investing in our short-term sales and marketing efforts.
 
 Cash
                        decreased
                        $61,284 or 27.1% to $165,202 at June 30, 2007 compared to
                        $226,486 at December
                        31, 2006 primarily reflecting cash provided by operations
                        during the six months
                        ended June 30, 2007, proceeds from our related party subordinated
                        debt and
                        warrants issuance of $200,000, offset by software development
                        costs and
                        equipment purchases. We made a $28,125 principal payment on our promissory
                        note at the end of June 2007.
 
 Accounts
                        receivable
                        increased $410,488 or 55.0% to $1,156,946 compared to $746,458
                        at December 31,
                        2006. This increase was due to stronger sales in the second quarter
                        of 2007
                        as compared to the fourth quarter of 2006 and an increase
                        in days sales
                        outstanding to 61 days from 52 days at December 31, 2006
                        due to the timing of
                        sales in the quarter and slower payments from larger school
                        district orders
                        during the quarter.
 
 As
                        a result of our financing activities during the six months
                        ended June 30, 2007,
                        the dollar amount of our total debt increased $157,891 or
                        6.0% to $2,782,891 at
                        June 30, 2007 from $2,625,000 at December 31, 2006 due to
                        a payment of $28,125
                        on our promissory note, offset by the $200,000 in borrowing
                        on the subordinated
                        debt in March 2007. We accrued a total of $5,611 in interest through June
                        30, 2007, which was added to the principal balance of the
                        subordinated debt
                        increasing it to $205,611. The subordinated debt is carried on our balance
                        sheet at a discount reflecting the value of the warrants
                        issued with it which
                        will be amortized over the term of the debt. We have no availability on our
                        line of credit as of June 30, 2007.
 
 Working
                        capital
                        decreased $2,405,071 to a working capital deficit of $1,678,822
                        at June 30, 2007
                        from $726,249 at December 31, 2006 primarily due to the classification
                        of our
                        line of credit and promissory note as current liabilities.
 
 In
                        March 2007, we renewed and extended the maturity of our debt
                        agreements with our
                        bank. We were able to classify our note payable to a long-term
                        liability on
                        our balance sheet as of December 31, 2006. The maturity dates of our line
                        of credit and note payable were extended to April 1, 2008
                        from April 1,
                        2007.
   16
 
 Both
                          the line of
                          credit and the promissory note require us to pay interest
                          monthly on the
                          outstanding balance at our bank’s prime rate which was 8.25% as of June 30,
                          2007. Accounts receivable, inventory, property and equipment
                          are pledged as
                          collateral.
 
 In
                          connection with the renewal of our bank loan, the following
                          terms were added to
                          our debt:
 
 ·
                                We
                                    will make
                                    two additional quarterly principal payments of
                                    $28,125 on October 1, 2007
                                    and January 1, 2008 and the remaining $1,040,625
                                    is due April 1,
                                    2008.
 ·
                                The
                                    line of
                                    credit was extended to April 1, 2008 when the
                                    outstanding balance is
                                    due.
 ·
                                Our
                                    stockholders’ equity plus subordinated debt must be at least
                                    $2,700,000 as
                                    of June 30, 2007.
 ·
                                Our
                                    liabilities as a percent of stockholders’ equity plus subordinated debt
                                    must be less than 1.25:1.00 as of June 30,
                                    2007.
 ·
                                We
                                    were
                                    required to obtain $200,000 of subordinated debt
                                    from two of our
                                    Directors.  (See Note 8 “Related Party Subordinated
                                    Debt”.)
 
 If
                          we breach any term or condition in the agreements our bank
                          has the option to
                          declare the notes immediately due and payable.
 
 The
                          entire bank
                          debt of $2,596,875 matures on April 1, 2008.
 
 We
                          will seek to enter into a new credit agreement with our
                          bank effective on or
                          before April 1, 2008. We believe that we will continue to generate cash
                          flows from operations or be able to obtain additional financing
                          to enable us to
                          support our current business levels; however, failure to
                          enter into a renewal of
                          our credit agreement would have a material adverse effect
                          on our financial
                          condition and results of operations. The terms of a replacement credit
                          facility may be less favorable than those historically
                          experienced.
 
 As
                          of June 30,
                          2007, we did not comply with a financial covenant specified
                          in our bank credit
                          agreement. We are to maintain a ratio of liabilities to stockholders’
equity plus subordinated debt no greater than 1.25:1.00. Under the credit
                          agreement, this ratio is measured at the end of each quarter. Our ratio as
                          of June 30, 2007 was 1.34:1.00. We have obtained a waiver for this
                          non-compliance as of June 30, 2007. Although we continue to be out of
                          compliance with this financial covenant as of the date
                          of this report, we do not
                          anticipate that the bank will exercise its right to declare
                          the notes due and
                          payable. However, we can provide no assurance that we will be able
                          to
                          obtain a waiver from the bank of future non-compliance
                          with this financial
                          covenant.
 
 **Other
                          Matters**
 
 Critical
                          Accounting Policies
 
 The
                          financial
                          information as of June 30, 2007 should be read in conjunction
                          with the financial
                          statements for the year ended December 31, 2006 contained
                          in our Form 10-K filed
                          on March 23, 2007.
 
 For
                          a discussion of
                          our critical accounting policies, see Item 7. “Management’s Discussion and
                          Analysis of Financial Condition and Results of Operations” in our Form 10-K
                          filed on March 23, 2007.
 
 Recent
                          Accounting Pronouncements
 
 See
                          Notes 6 and 10
                          of Notes to Unaudited Consolidated Financial Statements
                          for a discussion of
                          recent accounting pronouncements, including discussion
                          of the impact of adopting
                          FIN 48 *Accounting for Uncertainty in Income Taxes, an interpretation
                          of FASB
                          Statement 109* on January 1, 2007.
   17
 ITEM
                            3.
                            QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                            RISK
 
 We
                            do not use any derivative financial instruments to hedge
                            our exposure to adverse
                            fluctuations in interest rates, foreign exchange rates,
                            fluctuations in
                            commodity prices or other market risks, nor do we invest
                            in speculative
                            financial instruments. Borrowings with the bank bear interest at a variable
                            rate based on prime rate, currently 8.25% per annum. Due to the nature of
                            our borrowings, we have concluded that there is no material
                            market risk exposure
                            and, therefore, no quantitative tabular disclosures are
                            required.
 
 **ITEM
                            4. CONTROLS AND PROCEDURES**
 
 Based
                            on their
                            evaluation as of June 30, 2007, Timothy J. Tegeler, the
                            Company’s Chief
                            Executive Officer and William D. Edwards, Jr., the Company’s Chief Financial
                            Officer, have concluded that our disclosure controls
                            and procedures (as defined
                            in Rules 13a-15(e) and 15d-15(e) under the Securities
                            Exchange Act of 1934, as
                            amended) are effective.
 
 Under
                            rules adopted
                            by the Securities and Exchange Commission, as a non-accelerated
                            filer we are not
                            required to perform an evaluation of changes to our internal
                            control over
                            financial reporting requirements mandated by Section
                            404 of the Sarbanes Oxley
                            Act of 2002  for the quarterly period covered by this
                            report.
 
 However,
                            we
                            previously reported a material weakness related to our
                            corporate tax accounting
                            function which was identified by management in its assessment
                            of the Company’s
                            internal control over financial reporting. A material weakness is a control
                            deficiency, or combination of control deficiencies, that
                            results in more than a
                            remote likelihood that a material misstatement of our
                            annual or interim
                            financial statements will not be prevented or detected.
 
 This
                            weakness
                            related specifically to the Company’s not maintaining sufficient resources in
                            the corporate tax accounting function to accurately identify,
                            evaluate and
                            report our income tax transactions. This deficiency did not result in any
                            material errors in the Company’s accounting for income taxes. Remediation
                            will be taken and may include the following:
 
 ·
                                  Developing
                                      and implementing a formal policy governing
                                      all key aspects of accounting
                                      for income taxes.
 ·
                                  Increasing
                                      the training of our corporate accountants on
                                      accounting for income taxes
                                      and other complex accounting
                                      issues.
 ·
                                  If
                                      necessary,
                                      retaining outside experts to supplement our
                                      core knowledge of the
                                      complexities around both current and deferred
                                      income tax
                                      accounts.  We believe these resources, when combined with
                                      our
                                      existing resources, will enable us to comply
                                      with the technical
                                      complexities of accounting for income
                                      taxes.
 
 
 *  *  *
 
 **FORWARD-LOOKING
                              STATEMENTS**
 
 This
                              report
                              contains certain statements regarding future results,
                              performance, expectations
                              or intentions that may be considered “forward-looking statements” as that term
                              is defined in Section 27A of the Securities Act of
                              1933 and Section 21E of the
                              Securities Exchange Act of 1934. Any forward-looking statements are
                              necessarily subject to significant uncertainties and
                              risks. When used in
                              this report, the words “believes,” “anticipates,” “intends,” “expects” and
                              similar expressions are intended to identify forward-looking
                              statements. Actual results could be materially different as a result
                              of
                              various uncertainties.
 
 Factors
                              that could
                              cause actual results to differ materially from the
                              forward-looking statements
                              include,
 18
 but
                              are not limited
                              to, the following:
 ·
                                      Risks
                                          related
                                          to our customers’ dependence on government funding to purchase
                                          our
                                          products.·
                                      Risks
                                          associated with our ability to access capital
                                          to finance our
                                          business.·
                                      Risks
                                          associated with our ability to compete
                                          with well-established and
                                          well-funded competitors.·
                                      Risks
                                          associated with the constant changes in
                                          the technologies used to build and
                                          deliver our products.·
                                      Our
                                          ability
                                          to retain key personnel.·
                                      Our
                                          ability
                                          to motivate our independent dealer representatives
                                          to sell our
                                          products.·
                                      Changes
                                          in
                                          market acceptance and demand for curriculum-based
                                          educational software,
                                          including the effects of possible changes
                                          to NCLB
                                          requirements.·
                                      Risks
                                          associated with acceptance of statistical
                                          studies.·
                                      Risks
                                          that we
                                          may not receive payment under coal leases
                                          or monetize the value, if any,
                                          in our oil and gas interests that were
                                          nationalized by the Cuban
                                          government.
 
 No
                              assurances can be given that the results contemplated
                              in any forward-looking
                              statements will be achieved or will be achieved in
                              any particular
                              timeframe. We assume no obligation to publicly correct or update
                              any
                              forward-looking statements as a result of events or
                              developments subsequent to
                              the date of this report. The reader is advised, however, to consult any
                              further disclosures the Company makes on related subjects
                              in reports to the
                              SEC.
 
 **PART
                              II - OTHER INFORMATION**
 
 **ITEM
                              3. DEFAULT UPON SENIOR
                              SECURITIES**
 
 As
                              of June 30,
                              2007, we did not comply with a financial covenant specified
                              in our bank credit
                              agreement.  We are to maintain a ratio of liabilities to stockholders’
equity plus subordinated debt no greater than 1.25:1.00.  Under the
                              credit agreement, this ratio is measured at the end
                              of each quarter. Our
                              ratio as of June 30, 2007 was 1.34:1.00. We have obtained a waiver for this
                              non-compliance as of June 30, 2007. Although we continue to be out of
                              compliance with this financial covenant as of the date
                              of this report, we do not
                              anticipate that the bank will exercise its right to
                              declare the notes due and
                              payable. However, we can provide no assurance that we will be
                              able to
                              obtain a waiver from the bank of future non-compliance
                              with this financial
                              covenant.
 
 
 ITEM
                              4. SUBMISSION
                              OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 The
                              Company's
                              annual meeting of stockholders was held on May 22,
                              2007. At the annual meeting,
                              shareholders of the Company voted to elect six directors.
 
 With
                              respect to the
                              election of directors, the following votes were cast:
 
 Nominee
                                        Votes
                                            in
                                            Favor
                                        Votes
                                            Withheld
                                        Broker
                                            Non-votesRebecca
                                            M.
                                            Braddock
                                        11,494,175
                                        163,710
                                        757,010William
                                            D.
                                            Edwards, Jr.
                                        11,479,375
                                        171,210
                                        757,010John
                                            J.
                                            Riffle
                                        11,539,775
                                        140,660
                                        757,010Lewis
                                            B.
                                            Shepley
                                        11,539,075
                                        141,260
                                        757,010Timothy
                                            J.
                                            Tegeler
                                        11,469,525
                                        176,160
                                        757,010Jerome
                                            W.
                                            Thomasson
                                        11,539,575
                                        140,760
                                        757,010
 19
 
 
 Directors
                                are
                                elected by a plurality of the votes cast at the meeting.
                                This means that the
                                individuals who receive the largest number of votes
                                are elected as directors up
                                to the maximum number of directors to be chosen at
                                the meeting. There were no
                                nominees for director other than management's nominees
                                identified
                                above. Accordingly, each such nominee received a plurality
                                of the votes
                                cast and, therefore, was elected.
 
 ITEM
                                6.
                                EXHIBITS
 
 Exhibits
                                required
                                as part of this report are listed in the index appearing
                                on page
                                22.
   20
 **SIGNATURES**
 
 
 Pursuant
                                to the
                                requirements of the Securities Exchange Act of 1934,
                                the Registrant has duly
                                caused this report to be signed on its behalf by
                                the undersigned, thereunto duly
                                authorized.
  **SIBONEY
                                            CORPORATION**By:
                                        /s/
                                            William D. Edwards, Jr.William
                                            D.
                                            Edwards, Jr.Executive
                                            Vice President, Chief Operating Officerand
                                          Chief
                                          Financial Officer(Authorized
                                            officer and principal financial
                                            officer)
 August
                                14,
                                2007
   21
 **Index
                                to Exhibits**
 
 Exhibits
 
 31.1
                                      Certification
                                          by Chief Executive Officer pursuant to
                                          Rule 13a – 14(a) or Rule 15d –
                                          14(a) of the Securities Exchange Act of
                                          193431.2
                                      Certification
                                          by Chief Financial Officer pursuant to
                                          Rule 13a – 14(a) or Rule 15d –
                                          14(a) of the Securities Exchange Act of
                                          193432.1
                                      Certification
                                          Pursuant to 18 U.S.C. Section 1350, as
                                          Adopted Pursuant to Section 906 of
                                          the Sarbanes-Oxley Act of 200232.2
                                      Certification
                                          Pursuant to 18 U.S.C. Section 1350, as
                                          Adopted Pursuant to Section 906 of
                                          the Sarbanes-Oxley Act of
                                          2002
   22