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, 2008





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 incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)325
      N Kirkwood Rd, Ste 300, St Louis, MO
            
            63122(Address
      of principal executive offices)
            
            (Zip
      Code)314-822-3163(Registrant’s
      telephone number, including area
code)








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 for 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. [X] Yes [  ]
No








Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.




Large
      accelerated filer [  ]
            Accelerated
      filer [  ]Non-accelerated
      filer [ ]
      (Do not check if a smaller reporting company)
            Smaller
      reporting company [X]








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








As of
August 1, 2008, the registrant had 16,920,419 outstanding shares of Common
Stock.








SIBONEY
CORPORATION


FORM
10-Q


INDEX





PagePART
      I  FINANCIAL INFORMATIONItem
      1.  Unaudited Financial StatementsConsolidated
      Balance Sheets, June 30, 2008 and December 31, 2007
            3Consolidated
      Statements of Operations, Three and Six Months Ended June 30, 2008
      and 2007
            4Consolidated
      Statements of Stockholders’ Equity, Six Months Ended
      June 30, 2008 and 2007
            5Consolidated
      Statements of Cash Flows, Six Months Ended June 30, 2008 and
      2007
            6Notes
      to Unaudited Consolidated Financial Statements
            7Item
      2.  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            13Item
      4.  Controls and Procedures
            18PART
      II  OTHER INFORMATIONItem
      3.  Defaults Upon Senior Securities
            19Item
      4.  Submission of Matters to a Vote of Security
      Holders
            19Item
      6.  Exhibits
            19SIGNATURES
            20INDEX
      TO EXHIBITS
            21





2





PART
I  FINANCIAL INFORMATION


Item
1.  Unaudited Financial Statements




SIBONEY
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Unaudited)June
      30,
            
            
            December
      31,2008
            
            
            2007AssetsCurrent
      AssetsCash
            
            $
            430,862
            
            
            $
            217,843Accounts receivable, net
            
            
            949,159
            
            
            
            557,388Inventories, net
            
            
            211,343
            
            
            
            209,420Prepaid expenses
            
            
            57,370
            
            
            
            77,551Total current assets
            
            
            1,648,734
            
            
            
            1,062,202Property
      and Equipment, Net
            
            
            66,912
            
            
            
            95,151Long-term
      Note Receivable
            
            
            150,204
            
            
            
            151,908Capitalized
      Software, Net
            
            
            1,966,535
            
            
            
            2,133,048Goodwill
            
            
            1,045,015
            
            
            
            1,045,015Other
      Assets
            
            
            12,406
            
            
            
            20,720Total assets
            
            $
            4,889,806
            
            
            $
            4,508,044Liabilities
      and Stockholders' EquityCurrent
      LiabilitiesCurrent portion of term loan
            
            $
            690,448
            
            
            $
            103,125Line of credit
            
            
            1,500,000
            
            
            
            —Current portion of subordinated debt (related party)
            
            
            219,133
            
            
            
            —Accounts payable
            
            
            208,041
            
            
            
            235,637Accrued expenses
            
            
            269,480
            
            
            
            266,634Deferred revenue
            
            
            337,759
            
            
            
            106,330Interest payable
            
            
            9,127
            
            
            
            15,068Total current liabilities
            
            
            3,233,988
            
            
            
            726,794Long-Term
      LiabilitiesLine of credit
            
            
            —
            
            
            
            1,075,000Long-term portion of term loan
            
            
            —
            
            
            
            652,784Subordinated debt (related party)
            
            
            —
            
            
            
            202,391Other long-term liabilities
            
            
            54,400
            
            
            
            54,400Total long-term liabilities
            
            
            54,400
            
            
            
            1,984,575Commitments
      and ContingenciesStockholders'
      EquityCommon stock:Authorized 100,000,000 shares at $0.10 par value; issued
    andoutstanding 16,920,419 at June 30, 2008 and December 31,
    2007
            
            
            1,692,042
            
            
            
            1,692,042Additional paid-in capital
            
            
            81,200
            
            
            
            77,600Retained earnings (deficit)
            
            
            (171,824
            )
            
            
            27,033Total stockholders' equity
            
            
            1,601,418
            
            
            
            1,796,675Total
      liabilities and stockholders' equity
            
            $
            4,889,806
            
            
            $
            4,508,044


Note: The
      balance sheet at December 31, 2007 has been derived from the audited
      consolidated financial statements at that date.See
      accompanying notes to unaudited consolidated financial
      statements.





3




SIBONEY
CORPORATION AND SUBSIDIARIES
 UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
  For
      the Three MonthsEnded
                June
      30,
              
              
              For
      the Six MonthsEnded
                June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Revenues
              
              $
              1,652,826
              
              
              $
              1,930,896
              
              
              $
              2,891,068
              
              
              $
              3,118,160Cost
      of Product Sales
              
              
              437,695
              
              
              
              442,199
              
              
              
              859,294
              
              
              
              870,072Gross
      profit
              
              
              1,215,131
              
              
              
              1,488,697
              
              
              
              2,031,774
              
              
              
              2,248,088Selling,
      General andAdministrative
      Expenses
              
              
              1,030,728
              
              
              
              1,193,738
              
              
              
              2,158,765
              
              
              
              2,286,618Income
      (loss) from operations
              
              
              184,403
              
              
              
              294,959
              
              
              
              (126,991
              )
              
              
              (38,530
              )Other
      ExpenseInterest
      expense, net
              
              
              (33,656
              )
              
              
              (58,359
              )
              
              
              (71,360
              )
              
              
              (110,499
              )Loss
      on sale of assets
              
              
              (506
              )
              
              
              —
              
              
              
              (506
              )
              
              
              —Total
      Other Expense
              
              
              (34,162
              )
              
              
              (58,359
              )
              
              
              (71,866
              )
              
              
              (110,499
              )Income
      (loss) before income taxes
              
              
              150,241
              
              
              
              236,600
              
              
              
              (198,857
              )
              
              
              (149,029
              )Income
      Tax Benefit (Expense)
              
              
              —
              
              
              
              (99,000
              )
              
              
              —
              
              
              
              37,000Net
      income (loss)
              
              $
              150,241
              
              
              $
              137,600
              
              
              $
              (198,857
              )
              
              $
              (112,029
              )Net
      income (loss) per share:Basic
              
              $
              0.01
              
              
              $
              0.01
              
              
              $
              (0.01
              )
              
              $
              (0.01
              )Diluted
              
              $
              0.01
              
              
              $
              0.01
              
              
              $
              (0.01
              )
              
              $
              (0.01
              )Weighted
      average number of shares:Basic
              
              
              16,920,419
              
              
              
              16,920,419
              
              
              
              16,920,419
              
              
              
              16,920,419Diluted
              
              
              17,132,990
              
              
              
              17,150,904
              
              
              
              16,920,419
              
              
              
              16,920,419Note:
      Basic income (loss) per share is computed using the weighted average
      number of common shares outstanding during the period.The
      fully diluted income per share calculations exclude the effect of stock
      options and warrants when their assumed proceeds exceed
theaverage
      market price of the common stock during the period. For the three
      months ended June 30, 2008 and 2007, the number of stockoptions
      excluded from the computations were 1,482,700 and 2,068,060,
      respectively. For the six months ended June 30, 2008 and
      2007,all
      stock options and warrants were excluded from the computations and totaled
      1,882,700 and 2,518,060, respectively, as their effect
    wouldbe
      anti-dilutive.See
      accompanying notes to unaudited consolidated financial
      statements.
  4
  SIBONEY
CORPORATION AND SUBSIDIARIES
 UNAUDITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
   For
      the Six Months Ended

                  June
      30,
 2008
              
              
              2007COMMON
      STOCKBalance at the beginning of the period
              
              $
              1,692,042
              
              
              $
              1,692,042Balance at the end of the period
              
              $
              1,692,042
              
              
              $
              1,692,042ADDITIONAL
      PAID-IN CAPITALBalance at the beginning of the period
              
              $
              77,600
              
              
              $
              38,296Stock-based compensation expense
              
              
              3,600
              
              
              
              8,762Issuance of warrants to related parties
              
              
              —
              
              
              
              22,741Balance at the end of the period
              
              $
              81,200
              
              
              $
              69,799RETAINED
      EARNINGS (DEFICIT)Balance at the beginning of the period
              
              $
              27,033
              
              
              $
              945,709Cumulative effect of adoption of FIN 48
              
              
              —
              
              
              
              (65,000
              )Net loss
              
              
              (198,857
              )
              
              
              (112,029
              )Balance at the end of the period
              
              $
              (171,824
              )
              
              $
              768,680STOCKHOLDERS'
      EQUITY AT END OF PERIOD
              
              $
              1,601,418
              
              
              $
              2,530,521See
      accompanying notes to unaudited consolidated financial
      statements.
  5
  SIBONEY
CORPORATION AND SUBSIDIARIES
 UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
   For
      the Six Months EndedJune
      30,2008
              
              
              2007Cash
      Flows From Operating ActivitiesNet loss
              
              $
              (198,857
              )
              
              $
              (112,029
              )Adjustments to reconcile net loss to net cashprovided by operating activities:Depreciation
              
              
              27,988
              
              
              
              52,026Amortization
              
              
              437,770
              
              
              
              400,947Interest paid "in-kind" related to subordinated debt
              
              
              11,071
              
              
              
              5,611Amortization of subordinated debt costs
              
              
              7,266
              
              
              
              4,031Deferred income taxes
              
              
              —
              
              
              
              (37,000
              )Stock-based compensation expense
              
              
              3,600
              
              
              
              8,762Loss on disposition of assets
              
              
              506
              
              
              
              —Abandonment of software development in process
              
              
              —
              
              
              
              11,404Allowance for doubtful accounts, sales credits and returns
              
              
              41,947
              
              
              
              3,888Reserve for obsolescence of inventory
              
              
              9,997
              
              
              
              9,000Change in assets and liabilities:Accounts and note receivable
              
              
              (432,014
              )
              
              
              (406,211
              )Inventories
              
              
              (11,920
              )
              
              
              11,487Prepaid expenses and other assets
              
              
              26,900
              
              
              
              45,872Accounts payable, accrued expensesand deferred revenue
              
              
              200,738
              
              
              
              154,226Net
      cash provided by operating activities
              
              
              124,992
              
              
              
              152,014Cash
      Flows From Investing ActivitiesPayments for equipment
              
              
              (2,196
              )
              
              
              (40,851
              )Proceeds from sale of assets
              
              
              1,941
              
              
              
              —Payments for software development costs
              
              
              (271,257
              )
              
              
              (337,922
              )Net
      cash used in investing activities
              
              
              (271,512
              )
              
              
              (378,773
              )Cash
      Flows From Financing ActivitiesProceeds on line of credit
              
              
              425,000
              
              
              
              —Principal payments on term loan
              
              
              (65,461
              )
              
              
              (28,125
              )Proceeds from issuance of related partysubordinated debt and warrants
              
              
              —
              
              
              
              193,600Net
      cash provided by financing activities
              
              
              359,539
              
              
              
              165,475Change
      in cash
              
              
              213,019
              
              
              
              (61,284
              )Cash
      - Beginning of period
              
              
              217,843
              
              
              
              226,486Cash
      - End of period
              
              $
              430,862
              
              
              $
              165,202See
      accompanying notes to unaudited consolidated financial
      statements.
  6




SIBONEY
CORPORATION AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS








1.  BASIS
OF PRESENTATION AND CONSOLIDATION





Basis
of Presentation





The
accompanying unaudited consolidated financial statements have been prepared by
Siboney Corporation (“Siboney,” the “Company,” “we” or “us”) in accordance with
the rules and regulations of the Securities and Exchange Commission
(“SEC”).  Certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance with
generally accepted accounting principles in the United States of America have
been condensed or omitted in accordance with such rules and
regulations.  In the opinion of management, the accompanying unaudited
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to state fairly the financial position
of the Company, and its results of operations and cash flows.  These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 2007, included in the Company’s Annual Report on Form 10-K filed with the
SEC on March 28, 2008.





The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries.  All significant intercompany accounts and
transactions have been eliminated in consolidation.





The
results of operations for the three and six months ended June 30, 2008, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2008, or any other future period, and we make no representations
related thereto.





The
accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business.  We have taken, or
are currently taking, the following actions to allow us to continue as a going
concern:





·
            Eliminated
      significant operating costs to better align our expenses with our
      revenues.


·
            Developed
      and released PracticePlanet® in late 2007 which we believe is positioned
      to generate a recurring revenue stream as well as open opportunities to
      cross-sell our Orchard Software®.


·
            Aggressively
      pursuing complementary new sales channels which can fill gaps in our
      current distribution network.








2.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Our
significant accounting policies were described in Note 1 to our audited
consolidated financial statements for the year ended December 31, 2007, included
in our Annual Report on Form 10-K.  These accounting policies have not
significantly changed with the exception of those discussed below.





Changes
in Accounting Principles





In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value
Measurements (“SFAS 157”), which clarifies that fair value is the amount
that would be exchanged to sell an asset or transfer a liability in an orderly
transaction between market participants.  Further, the standard
establishes a framework for measuring fair value in generally accepted
accounting principles and expands certain disclosures about fair value
measurements.  In February 2008, the FASB issued FASB Staff Position
(“FSP”) 157-2 that delayed application of SFAS 157 for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis, until fiscal years
beginning after November 15, 2008.  The partial adoption of SFAS 157
for financial assets and liabilities did not have a material impact on our
consolidated financial position or results of operations.  We are
currently evaluating the potential impact of adopting the remaining provisions
of SFAS 157 on our consolidated financial position and results of
operations.  See Note 3 “Fair Value Measurements”.






7





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 fiscal years beginning after
November 15, 2007.  Currently, we have not expanded our eligible
items subject to the fair value option under SFAS 159.





In March
2007, the FASB ratified Emerging Issues Task Force 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 postretirement benefit
obligations as well as recognition and measurement of the associated asset on
the basis of the terms of the collateral assignment agreement.  EITF
06-10 was effective for us beginning January 1, 2008 and did 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 was effective, on a prospective basis,
for us beginning January 1, 2008 and did not have an impact on our consolidated
financial position or results of operations.





Recent
Accounting Pronouncements





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS 162”), which identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of non-governmental entities that are
presented in conformity with generally accepted accounting principles (“GAAP”)
in the United States.  SFAS 162 is effective 60 days following the
SEC’s approval of The Public Company Accounting Oversight Board’s related
amendments to remove the GAAP hierarchy from auditing standards.





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an amendment to FASB Statement No.
133 (“SFAS 161”).  SFAS 161 is intended to improve financial
standards for derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity's financial position, financial performance, and cash
flows.  Entities are required to provide enhanced disclosures about:
(a) how and why an entity uses derivative instruments; (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations; and (c) how derivative instruments and related
hedged items affect an entity's financial position, financial performance,
and cash flows.  It is effective for financial statements issued for
fiscal years beginning after November 15, 2008, with early adoption
encouraged.  The adoption of this statement is not expected to have a
material effect on our consolidated financial position or results of
operations.








3.  FAIR
VALUE MEASUREMENTS







SFAS 157
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants.  As such, fair value is a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or liability.  As a
basis for considering such assumptions, SFAS 157 establishes a three-tier value
hierarchy, which prioritizes the inputs used in measuring fair value as follows:
(Level 1) observable inputs such as quoted prices in active markets; (Level 2)
inputs other than the quoted prices in active markets that are observable either
directly or indirectly; and (Level 3) unobservable inputs in which there is
little or no market data, which require us to develop our own
assumptions.  This hierarchy requires us to use observable market
data, when available, and to minimize the use of unobservable inputs when
determining fair value.  Our cash balances held in checking and money
market checking accounts are classified within Level 1 of the fair value
hierarchy.  We believe that the carrying value of our long-term note
receivable approximates fair value as its interest rate of 6.183% is reasonable
given the level of risk and nature of the receivable; this would be considered a
Level 3 fair value measurement.  The carrying value of our debt
approximates fair value based on the incremental borrowing rates currently
available to us for financing with similar terms and maturities, which would be
considered a Level 3 fair value measurement.





8


4.  BALANCE
SHEET DETAILS





June
      30,
            
            
            December
      31,2008
            
            
            2007Accounts
      receivable:Trade
      accounts receivable
            
            $
            1,055,853
            
            
            $
            622,578Current
      portion of note receivable
            
            
            14,636
            
            
            
            14,545Amount
      due from coal processor
            
            
            —
            
            
            
            11,245Other
            
            
            1,000
            
            
            
            —Allowance
      for doubtful accounts, sales credits
      and returns
            
            
            (122,330
            )
            
            
            (90,980
            )$
            949,159
            
            
            $
            557,388Inventories:Finished
      goods
            
            $
            133,848
            
            
            $
            137,981Raw
      materials
            
            
            134,995
            
            
            
            147,019Reserve
      for obsolescence
            
            
            (57,500
            )
            
            
            (75,580
            )$
            211,343
            
            
            $
            209,420Property
      and equipment:Leasehold
      improvements
            
            $
            69,063
            
            
            $
            85,891Office
      equipment, furniture and fixtures
            
            
            1,046,128
            
            
            
            1,125,814Machinery
      and equipment
            
            
            411,269
            
            
            
            444,4771,526,460
            
            
            
            1,656,182Accumulated
      depreciation
            
            
            (1,459,548
            )
            
            
            (1,561,031
            )$
            66,912
            
            
            $
            95,151Accrued expenses:Compensation
      and benefits
            
            $
            136,680
            
            
            $
            190,130Royalties
            
            
            94,031
            
            
            
            59,341Deposit
      from collaborator
            
            
            —
            
            
            
            14,821Other
            
            
            38,769
            
            
            
            2,342$
            269,480
            
            
            $
            266,634





Accounts
receivable, inventory and property and equipment of Siboney Corporation and
Siboney Learning Group, Inc. are pledged as collateral for debt (Notes 8 and
9).





5.  CAPITALIZED
SOFTWARE DEVELOPMENT COSTS





The
components of capitalized software development costs consist of:





June
      30,
            
            
            December
      31,2008
            
            
            2007Software
      development in progress
            
            $
            319,885
            
            
            $
            160,121Capitalized
      software development costs
            
            
            6,157,766
            
            
            
            6,046,273Accumulated
      amortization
            
            
            (4,511,116
            )
            
            
            (4,073,346
            )$
            1,966,535
            
            
            $
            2,133,048





Amortization
of software development costs charged against earnings amounted to $224,081 and
$190,590 for the three months ended June 30, 2008 and 2007,
respectively.  Amortization of software development costs charged






9




against
earnings amounted to $437,770 and $400,947 for the six months ended June 30,
2008 and 2007, respectively.  During the first quarter of 2007, we
expensed to selling, general and administrative expenses $11,404 in costs
related to a title that was not released.








6.  COLLABORATIVE
ARRANGEMENT





In
February 2007 we entered into a strategic alliance and joint development
agreement with Edumatics Corporation, Inc. (“Edumatics”).  Under the
agreement we jointly developed an online test practice product which is marketed
under the name PracticePlanet®.  We share costs and
revenues generated with Edumatics, as provided in the
agreement.  During 2007 we received approximately $390,000 in cash
from Edumatics to fund its share of the costs we incurred for development
efforts and overhead related to this product.  We reduced the amount
we capitalized into software development by approximately $14,000 during the six
months ended June 30, 2008 and $150,000 during 2007 to reflect the portion paid
by Edumatics.  Since the launch of PracticePlanet®, Edumatics is not obligated to
provide any additional funds to support further development or overhead related
to the product.  Under the agreement, we reduced the amount due to
Edumatics for PracticePlanet® sales by its portion of
overhead costs that we incurred to support PracticePlanet®.  We reduced our
selling, general and administrative expenses by approximately $48,000 and
$80,000 during the three months ended June 30, 2008 and 2007, respectively, to
reflect Edumatics’ portion of these costs.  During the six months
ended June 30, 2008 and 2007 we reduced our selling, general and administrative
expenses by approximately $54,000 and $143,000, respectively.





In
December 2007, the FASB ratified EITF Issue 07-1, Accounting for Collaborative
Arrangements (“EITF 07-1”), which discusses how parties to a
collaborative arrangement (which does not establish a legal entity within such
arrangement) should account for various activities.  EITF 07-1
indicates that costs incurred and revenues generated from transactions with
third parties should be reported by the collaborators on the respective line
items in their income statements pursuant to EITF Issue 99-19, Reporting Revenue Gross as a
Principal Versus Net as an Agent(“EITF 99-19”).  EITF 07-1
also provides that income statement characterization of payments between the
participants in a collaborative arrangement should be based upon existing
authoritative pronouncements; analogy to such pronouncements if not within their
scope; or a reasonable, rational and consistently applied accounting policy
election.  We have concluded that our agreement with Edumatics would
qualify as a collaborative arrangement and we believe that our presentation of
revenues and costs is consistent with EITF 07-1.  EITF 07-1 is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years, with retrospective application to all prior
periods presented for all collaborative arrangements existing as of the
effective date.





In
accordance with EITF 99-19 we report PracticePlanet® revenue on a gross basis
for the total amount billed to customers for subscriptions to the online product
because we are the primary obligor and provide the underlying
service.  The portion of revenues due to Edumatics is reported as a
cost of product sales in our consolidated statement of
operations.  This accounting policy of reporting revenue gross as a
principal versus net as an agent has no effect on gross profit, operating
income, or net income.








7.  INCOME
TAXES





We
reported no income tax expense in the three and six months ended June 30, 2008
and income tax expense of $99,000 and an income tax benefit of $37,000 in the
three and six months ended June 30, 2007, respectively.  These amounts
represented effective income tax rates of 0% in the three and six months ended
June 30, 2008 and 42% and 25% in the three and six months ended June 30, 2007,
respectively.  The significant change in our effective tax rate
resulted from no income tax benefit or expense being recorded in the three and
six months ended June 30, 2008 as a result of a full valuation allowance of
$73,000 related to our current year loss.  In accordance with SFAS No.
109, Accounting for Income
Taxes, we were unable to record a deferred tax benefit that would have
reduced our net loss during the six months ended June 30, 2008 due to the
uncertainty of realizing such deferred tax assets.





10





8.  DEBT





We
      have a $1,500,000 revolving line of credit agreement with our bank with an
      outstanding balance of $1,500,000 as of June 30, 2008.  As of
      December 31, 2007 we owed $1,075,000 on the line of
  credit.





In
      addition, we owed $690,448 and $755,909 as of June 30, 2008 and December
      31, 2007, respectively under a term loan with our
  bank.





Both
      the line of credit and the term loan require us to pay interest monthly on
      the outstanding balance at our bank’s prime rate which was 5.00% as of
      June 30, 2008.  Accounts receivable, inventory, property and
      equipment are pledged as
collateral.





We
      entered into a new debt agreement in March 2008 with our bank to extend
      the due dates from April 1, 2008 to January 1,
  2009.





We
renewed our bank loans in March 2008 under the following terms:





·
            The
      interest rate on the line of credit and term loan remained at our bank’s
      prime rate.·
            The
      quarterly principal payments of $28,125 on the term loan was changed to a
      schedule of monthly principal payments of $9,375 beginning May 1, 2008
      with the remaining principal due in full January 1, 2009.  Under
      the renewal we are obligated to make principal payments of $103,125 during
      2008 with the remaining balance due January 1, 2009.·
            The
      $1,500,000 line of credit was extended through January 1,
      2009.  The outstanding balance on the line is due on January 1,
      2009.·
            We
      agreed to achieve minimum earnings before interest, taxes, depreciation
      and amortization, which will be tested quarterly.·
            The
      covenant to maintain minimum stockholders’ equity plus subordinated debt
      of $2,700,000 was eliminated as of April 2, 2008.·
            The
      covenant to not exceed a ratio of 1.25:1.00 of liabilities as a ratio of
      stockholders’ equity plus subordinated debt was eliminated as of April 2,
      2008.





If
      we breach any term or condition in the agreements, as amended, our bank
      has the option to declare the loans due and
  payable.





As
      of June 30, 2008, we did not comply with the financial covenants specified
      in our bank credit agreement.  Under the credit agreement, the
      financial covenants are measured at the end of each quarter.  We
      are required to achieve minimum earnings before interest, taxes,
      depreciation and amortization (“EBITDA”) of $620,000 for the six months
      ended June 30, 2008; our EBITDA was $337,000.  We have obtained
      a waiver for this non-compliance as of June 30, 2008.  However,
      we can provide no assurance that we will be able to obtain a waiver from
      the bank of any future non-compliance with these or any other financial
      covenants.





In
      conjunction with the issuance of the waiver for our non-compliance with
      the financial covenants as of March 31, 2008, we agreed with our bank in
      May 2008 to add a loan payoff fee to our bank loan.  When we
      repay in full our line of credit and term loan, we will be required to pay
      our bank a fee equal to 50 basis points on the outstanding bank debt at
      repayment.





In
      accordance with SFAS No. 6, Classification of Short-Term
      Obligations Expected to Be Refinanced, at December 31, 2007, we
      classified our line of credit and a portion of our term loan as a
      long-term liability based upon the terms of the debt agreements that we
      entered into with our bank in March
2008.








9.  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




11




$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 in March 2007.





The
effective interest rate on this debt is 16.9%.  The debt is due in
full in March 2009; we may prepay it without penalty.  Interest is due
quarterly on this debt at a rate of 10% per annum; we can pay in cash or
in-kind.  We accrued interest of $5,604 during the three months ended
June 30, 2008, which was added to the principal balance of the subordinated
debt.  This debt is carried at $219,133 on our consolidated balance
sheet at June 30, 2008, which is the principal amount of $227,325 (including
accrued interest) less the unamortized portion of the original issuance discount
of $8,192.





The
following table shows the related party expenses in our consolidated statement
of operations related to this debt:




For
      the Three MonthsEnded
              June
      30,
            
            
            For
      the Six MonthsEnded
              June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Interest
      expense on subordinated debt
            
            $
            5,604
            
            
            $
            5,056
            
            
            $
            11,071
            
            
            $
            5,611Amortization
      of original issuance discount
            
            
            2,835
            
            
            
            2,835
            
            
            
            5,670
            
            
            
            3,146Total
      related party interest expense
            
            $
            8,439
            
            
            $
            7,891
            
            
            $
            16,741
            
            
            $
            8,757Debt
      issuance costs amortized to selling,general
      and administrative costs
            
            $
            799
            
            
            $
            798
            
            
            $
            1,596
            
            
            $
            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.  See
Note 8 “Debt”.








10.  STATEMENT
OF CASH FLOWS SUPPLEMENTAL DISCLOSURES





For
      the Six Months EndedJune
      30,2008
            
            
            2007Interest
      paid
            
            $
            65,805
            
            
            $
            107,454Income
      taxes paid, net
            
            $
            5,343
            
            
            $
            1,157Non-cash
      financing transaction related to therelated
      party subordinated debt issuance:Warrant
      recorded as original issuance discount
            
            $
            —
            
            
            $
            22,741








11.  SEGMENT
INFORMATION





We
operate our business in one operating segment: the publishing and distribution
of educational software products through Siboney Learning Group, Inc., a
wholly-owned subsidiary.  Our chief operating decision-maker is our
Chief Operating Officer, who reviews financial information presented on a
consolidated basis for purposes of making operating decisions and assessing
financial performance.





Sales to
Brainstorm USA represented 11% and 17% of our consolidated revenues during the
three and six months ended June 30, 2008, respectively.  This customer
represented 13% and 14% of our consolidated revenues during the three and six
months ended June 30, 2007, respectively.  As of June 30, 2008 and
December 31, 2007, the amount that Brainstorm USA owed us represented 15% and
14%, respectively, of our net accounts receivable.





12




ITEM
2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS







The
following contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the “Securities
Act”), and Section 21E of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”).  Forward-looking statements relate to
expectations concerning matters that are not historical facts. Words such as
“projects,” “believes,” “anticipates,” “plans,” “expects,” “intends,”
“strategy,” “continue,” “will,” “estimate,” “forecast,” and similar words and
expressions are intended to identify forward-looking statements. Although we
believe that the expectations reflected in the forward-looking statements
contained herein are reasonable, these expectations or any of the
forward-looking statements could prove to be incorrect, and actual results could
differ materially from those projected or assumed in the forward-looking
statements.  Our future financial condition and results of operations,
as well as any forward-looking statements, are subject to risks and
uncertainties, including, but not limited to, the factors set forth in
Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year
ended December 31, 2007.  All forward-looking statements and reasons
why results may differ included in this Quarterly Report on Form 10-Q are made
as of the date hereof, and we assume no obligation to update any such
forward-looking statements or reasons why actual results may
differ.





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 four comprehensive software product lines:


·
            Orchard
      Software® for Your State
(“Orchard”)


·
            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.





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 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.





13




Orchard
is an award winning solution for schools.  In June 2008, Orchard’s
K – 3 Language Arts programs was named the winner of the
Association of Educational Publishers' 2008 Distinguished Achievement Award in
the ESL/ELL curriculum software category.  Orchard's language arts
programs assess the needs of English Language Learners (“ELL’s”) and provide
targeted instruction that mirrors ELL teaching principles and addresses
challenges that ELL students face.  Orchard's reporting system
monitors ELL student progress by tracking their gains and areas in need of
attention.





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.  Orchard contributed approximately 80% to our revenue for
the six months ended June 30, 2008 and 2007.  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.  Our GAMCO product line contributed 5% of our revenue
for the six months ended June 30, 2008 and 2007.





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.  This product represented 6% and 9% of our revenues
for the six months ended June 30, 2008 and 2007, respectively.





In
February 2007, Siboney Learning Group and Edumatics Corporation, a California
corporation (“Edumatics”), entered into a Strategic Alliance and Joint
Development Agreement.  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 an online test practice
program designed to enhance student skills and improve scores on state
assessments.  PracticePlanet® uses test items which are correlated to
state testing 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 use.





We began
offering PracticePlanet® in August 2007.  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 is equally contributed between
Siboney and Edumatics.  All revenues generated from the product are
equally shared between the two parties, provided that we are entitled to a
disproportionate share of the revenues until we have received $250,000 from the
preferential allocation.  As of June 30, 2008 we have sold
approximately $132,000 in subscriptions to PracticePlanet®, the majority of
which is included in Deferred Revenue in our consolidated financial statements,
as we recognize the related revenue over the subscription period.





We also
have certain natural resources interests, including coal, oil and gas, through
Siboney Coal Company, Inc. and other subsidiaries which were not material to our
results of operations or financial condition for several years before
2007.  Royalties received are dependent upon coal prices and
production.  We recognized revenues of $183,529 and $11,965 related to
royalties and lease payments, during the six months ended June 30, 2008 and
2007, respectively.


14


Critical
Accounting Policies, Judgments and Estimates





The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States of
America.  The preparation of these financial statements requires us to
make estimates, assumptions and judgments that can have significant impact on
the reported amounts of assets and liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities at the date of our
financial statements.  We base our estimates, assumptions and
judgments on historical experience and various other factors that we believe to
be reasonable under the circumstances.  Actual results may differ from
these estimates under different assumptions or conditions. On a regular
basis we evaluate our estimates, assumptions and judgments and make changes
accordingly.  We also discuss our critical accounting estimates with
the Audit Committee of our Board of Directors.





We
believe that the estimates, assumptions and judgments involved in revenue
recognition, allowances for doubtful accounts, returns and discounts, impairment
of goodwill, capitalized software assets and accounting for income taxes have
the greatest potential impact on our consolidated financial statements, so we
consider these to be our critical accounting policies.  Historically,
our estimates, assumptions and judgments relative to our critical accounting
policies have not differed materially from actual results.  The
critical accounting estimates associated with these policies are described in
Part II, Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operation” of our Annual Report on Form 10-K for the
year ended December 31, 2007.





Recent
Accounting Pronouncements





Our
significant accounting policies were described in Note 1 to our audited
consolidated financial statements, included in our Annual Report on Form 10-K
for the year ended December 31, 2007.  There have been no significant
changes to our accounting policies during 2008.  Recent accounting
pronouncements are discussed in Note 2 of the Notes to Unaudited
Consolidated Financial Statements in Part I, Item 1. “Financial
Statements” of this report.





Results
of Operations





The
following is our discussion and analysis of certain significant factors which
have affected our financial condition and operating results during the periods
covered by the accompanying consolidated financial statements.





Three
and Six Months Ended June 30, 2008 Compared to June 30, 2007





Our
consolidated revenues decreased 14% to $1,652,826 from $1,930,896 during the
second quarter of 2008 compared to the second quarter of 2007.  Sales
of Orchard Home to Brainstorm USA decreased to $175,757 for the second quarter
of 2008 compared to $252,578 during the second quarter of 2007, but for the six
months ended June 30, 2008 Brainstorm USA’s purchases of Orchard Home increased
9% from purchases during the corresponding period in 2007.  Excluding
the sales to Brainstorm USA, we experienced a 10% decrease in sales of Orchard
during the second quarter of 2008 compared to 2007.  Our revenues
decreased 7% during the first half of 2008 compared to the first half of
2007.  We attribute the decreases to the impact of school system
budget cuts, resulting from anticipated lower tax revenues due to the housing
market and economic downturn and higher fuel costs.





During
the second quarter of 2008 we received an order from a dealer reseller for
$165,000 of Orchard product that will ship during the next twelve months at
which point we will recognize revenue.  The same dealer also sold
$80,000 of PracticePlanet® in June to the same customer, increasing total sales
since launch to $132,000 for this product.  The dollars related to
this sale of Orchard product and PracticePlanet® are included in deferred
revenue as of June 30, 2008 and contributed to its overall increase from
December 31, 2007.





Our
premium and professional development services revenues decreased to $22,377 from
$71,804 during the second quarter of 2008 compared to the second quarter of
2007; for the six months ended June 30, 2008 we recorded $70,707 in service
revenues compared to $209,580 during the first half of 2007; the decreases in
service revenues were due to fewer large district installation training sessions
conducted during the period.





15




Revenues
from natural resources royalties and lease payments increased to $93,352 from
$9,693, during the second quarter of 2008 compared to the second quarter of
2007.  For the six months ended June 30, 2008 these revenues were
$183,529 compared to $11,965 during the corresponding period in
2007.  The higher revenue was due to increased mining of coal under
leases.





Cost of
product sales during the three and six months ended June 30, 2008 were
consistent with the levels experienced during the comparable periods in
2007.  Lower sales volumes during the periods reduced our royalty
expense and material costs, offset by higher software amortization related to
our release of Orchard 4.3 during the fall of 2007.





Selling,
general and administrative expenses decreased 14% to $1,030,728 from $1,193,738
during the second quarter of 2008 compared to the second quarter of
2007.  For the six months ended June 30, 2008 selling, general and
administrative expenses decreased 6% compared to the six months ended June 30,
2007.  The decrease in expenses was due to our focus on controlling
costs; including reducing personnel costs, in a challenging revenue
environment.





In April
2008, we implemented a cost-cutting and headcount reduction
initiative.  We estimate that this initiative will reduce operating
costs by over $1,000,000 during the next 12 months.  We incurred
approximately $25,000 in April 2008 primarily for severance costs related to the
workforce reductions of 12 positions.  Our payroll expense was 11%
lower during the second quarter of 2008 compared to 2007 due to the headcount
reductions we implemented.  Due to lower sales and the headcount
reductions, employee commissions were 51% lower during the second quarter of
2008 compared to the second quarter of 2007.  These decreases were
offset by the lower reimbursement for our PracticePlanet® overhead costs to
$48,000 during the second quarter of 2008 from $80,000 during the second quarter
2007, as Edumatics is not obligated to provide additional funds, our
reimbursement in 2008 is limited to the amount that is due to Edumatics for its
share of sales.





Our
interest expense decreased during the three and six months ended June 30, 2008
compared to 2007 due to a combination of lower interest rates and lower
outstanding amounts due on our bank debt.  The interest rate charged
by our bank is their prime rate which has decreased from 8.25% during the three
and six months ended June 30, 2007 to 5.00% by the end of the second
quarter of 2008.  The weighted average interest rate during the second
quarter of 2008 was 5.14% compared to 8.25% during the second quarter of
2007.  Our average bank debt outstanding decreased to $2,200,000
during the second quarter of 2008 from $2,560,000 during the second quarter of
2007.  The reduction in principal was primarily due to the payments we
made on our bank debt in December 2007 from the cash proceeds that we received
on the extraordinary gain from the sale of a claim related to a natural resource
interest.  See further discussion related to our debt under -
“Liquidity and Capital Resources” section.





We
reported no income tax expense in the three and six months ended June 30, 2008
and income tax expense of $99,000 and an income tax benefit of $37,000 in the
three and six months ended June 30, 2007, respectively.  These amounts
represented effective income tax rates of 0% in the three and six months ended
June 30, 2008 and 42% and 25% in the three and six months ended June 30, 2007,
respectively.  The significant change in our effective tax rate
resulted from no income tax benefit or expense being recorded in the three and
six months ended June 30, 2008 as a result of a full valuation allowance of
$73,000 related to our current year loss.  In accordance with SFAS No.
109, Accounting for Income
Taxes, we were unable to record a deferred tax benefit that would have
reduced our net loss during the six months ended June 30, 2008 due to the
uncertainty of realizing such deferred tax assets.





Our net
income for the second quarter of 2008 increased to $150,241 (or $0.01 per share)
from the second quarter of 2007 net income of $137,600 (or $0.01 per share)
after income tax expense of $99,000.  Our net loss for the six months
ended June 30, 2008 was $198,857 (or $0.01 per share) compared to a net loss of
$112,029 (or $0.01 per share) after an income tax benefit of
$37,000.





Liquidity
and Capital Resources





Due to
losses from operations since 2005 we have funded investment in our software
development efforts from the proceeds of our bank term loan, draws on our bank
line of credit and issuance of related party subordinated
debt.  During December 2007 Siboney Corporation sold for $1,018,725 a
claim that arose out of natural resources interests held in Cuba which were
expropriated by the Cuban government.  We used $300,000 of the
proceeds to reduce our term loan with our bank, $425,000 reduced our line of
credit and the balance was used for working capital needs.





16




We had a
working capital deficit of $1,600,000 at June 30, 2008 which compared to
$300,000 of working capital at December 31, 2007 and ratios of current assets to
current liabilities of 0.51:1 as of June 30, 2008 and 1.46:1 as of December
31, 2007.  The working capital decrease of $1.9 million was primarily
due to our draws on the line of credit of $425,000 to fund operations during the
first quarter of 2008 and the classification of our bank term loan, line of
credit and related party subordinated debt to current liabilities as of
June 30, 2008.





In April
2008, as a result of our cash flow situation, no availability on our bank line
of credit, sales below our targets in March 2008 and concern related to sales
levels during the remainder of 2008, we implemented a cost-cutting and headcount
reduction initiative.  We estimate that this initiative will reduce
operating costs by over $1,000,000 during the next 12 months.  We
incurred approximately $25,000 in April 2008 primarily for severance costs
related to workforce reductions of 12 positions.  The majority of the
headcount reductions were in our product development department.  We
will focus our efforts on selling our existing products.  We
anticipate the cost reductions will improve our cash flows.





Cash
increased 98% or $213,019 to $430,862 at June 30, 2008 from $217,843 at December
31, 2007, primarily due to higher sales and collection of receivables during the
second quarter of 2008 and reduced payroll costs due to our headcount reduction
in April 2008.  Our accounts receivable increased $391,771 or 70% to
$949,159 at June 30, 2008 compared to $557,388 at December 31, 2007 due to
higher sales in June 2008 compared to December 2007.





Our total
debt increased $376,281 or 19% to $2,409,581 at June 30, 2008 from $2,033,300 at
December 31, 2007 due to $425,000 in draws on our line of credit offset by
principal payments of $65,461 on our term loan and an increase of $16,742 in our
subordinated debt, reflecting the accrual of “payment-in-kind”
interest.  We had no availability on our bank line of credit as of
June 30, 2008.





For
information regarding steps we have taken, or are currently taking to improve
our liquidity, please see Note 1 of the Notes to Unaudited Consolidated
Financial Statements in Part I, Item 1. “Financial Statements” of this
report.





Both the
line of credit and the term loan require us to pay interest monthly on the
outstanding balance at our bank’s prime rate which was 5.00% as of June 30,
2008.  Accounts receivable, inventory, property and equipment are
pledged as collateral.





For
information regarding the renewal of our bank loan in March 2008 please see
Note 8 of the Notes to Unaudited Consolidated Financial Statements in
Part I, Item 1. “Financial Statements” of this report.





If we
breach any term or condition in our bank credit agreements, as amended, our bank
has the option to declare the loans due and payable.





As
      of June 30, 2008, we did not comply with the financial covenants specified
      in our bank credit agreement.  Under the credit agreement, the
      financial covenants are measured at the end of each quarter.  We
      are required to achieve minimum earnings before interest, taxes,
      depreciation and amortization (“EBITDA”) of $620,000 for the six months
      ended June 30, 2008; our EBITDA was $337,000.  We have obtained
      a waiver for this non-compliance as of June 30, 2008.  However,
      we can provide no assurance that we will be able to obtain a waiver from
      the bank of any future non-compliance with these or any other financial
      covenants.





In
      conjunction with the issuance of the waiver for our non-compliance with
      the financial covenants as of March 31, 2008, we agreed with our bank in
      May 2008 to add a loan payoff fee to our bank loan.  When we
      repay in full our line of credit and term loan, we will be required to pay
      our bank a fee equal to 50 basis points on the outstanding bank debt at
      repayment.





17





ITEM
4.  CONTROLS AND PROCEDURES





Our
management, including the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form
10-Q.  Based upon that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that such disclosure controls and procedures
were effective as of the end of the period covered by this Quarterly Report on
Form 10-Q to ensure information required to be disclosed in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission rules and forms.  There have been no changes that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting that have occurred during the period covered by
this report.





18





PART
II - OTHER INFORMATION








ITEM
3.  DEFAULTS UPON SENIOR SECURITIES





For
information regarding our bank credit agreements, please see Note 8 of the
Notes to Unaudited Consolidated Financial Statements in Part I,
Item 1. “Financial Statements” of this report, which information is
incorporated herein by reference.





ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





The
      Company's annual meeting of stockholders was held on June 3,
      2008.  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
      WithheldRebecca
      M. Braddock
            
            9,477,066
            
            207,869William
      D. Edwards, Jr.
            
            9,474,476
            
            210,459John
      J. Riffle
            
            9,486,686
            
            198,249Lewis
      B. Shepley
            
            9,486,676
            
            198,259Timothy
      J. Tegeler
            
            9,469,866
            
            215,069Jerome
      W. Thomasson
            
            9,486,786
            
            198,149





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
21.





19





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
      CORPORATIONBy:/s/ William D.
      Edwards, Jr.William
      D. Edwards, Jr.Executive
      Vice President, Chief Operating Officer
              and
      Chief Financial Officer(Authorized
      officer and principal financial
officer)








August 8,
2008




20





Index
to Exhibits





Exhibits








10.1
            Letter
      Agreement between Southwest Bank, an M&I Bank and Siboney Learning
      Group, Inc. and Siboney Corporation dated April 2, 2008, incorporated by
      reference to Exhibit 10(i) to the Company’s Annual Report on Form 10-K for
      the year ended December 31, 2007.





10.2
            Promissory
      Note executed in favor of Southwest Bank, an M&I Bank by Siboney
      Learning Group, Inc. and Siboney Corporation dated April 2, 2008,
      incorporated by reference to Exhibit 10(j) to the Company’s Annual Report
      on Form 10-K for the year ended December 31,
  2007.





10.3
            Promissory
      Note executed in favor of Southwest Bank, an M&I Bank by Siboney
      Learning Group, Inc. and Siboney Corporation dated April 2, 2008,
      incorporated by reference to Exhibit 10(k) to the Company’s Annual Report
      on Form 10-K for the year ended December 31,
  2007.





31.1
            Certification
      by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002





31.2
            Certification
      by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002





32.1
            Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002





32.2
            Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002





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