**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 September 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 October 31, 2007:
      16,920,419








**SIBONEY
      CORPORATION**


**FORM
      10-Q**


**INDEX**





**Page****PART
                I  FINANCIAL INFORMATION****Item
                1.  Unaudited Financial Statements**Consolidated
                Balance Sheet, September 30, 2007 and December 31, 2006
            3Consolidated
                Statement of Operations, Three and Nine Months Ended September
                30, 2007 and 2006
            4Consolidated
                Statement of Stockholders’ Equity, Nine Months Ended
                September 30, 2007 and 2006
            5Consolidated
                Statement of Cash Flows, Nine Months Ended September 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**
            19**Item
                4.  Controls and Procedures**
            19**PART
                II  OTHER INFORMATION****Item
                3.  Defaults Upon Senior Securities**
            20**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)****September
                30,**
            
            
            **December
                31,****2007**
            
            
            **2006****Assets****Current
                Assets**Cash
            
            **$**
            **216,227**
            
            
            $
            226,486Accounts
                receivable, net
            
            ****
            **684,907**
            
            
            
            746,458Inventories,
                net
            
            ****
            **279,873**
            
            
            
            297,398Refundable
                income taxes
            
            ****
            **6,274**
            
            
            
            8,719Prepaid
                expense
            
            ****
            **85,267**
            
            
            
            111,720Deferred
                tax
                asset
            
            ****
            **—**
            
            
            
            114,000**Total
                Current Assets**
            
            ****
            **1,272,548**
            
            
            
            1,504,781**Property
                and Equipment, Net**
            
            ****
            **111,796**
            
            
            
            131,677**Long-term
                Note Receivable**
            
            ****
            **156,294**
            
            
            
            163,839**Capitalized
                Software, Net**
            
            ****
            **2,120,648**
            
            
            
            2,174,239**Goodwill**
            
            ****
            **1,045,015**
            
            
            
            1,045,015**Deferred
                Tax Asset**
            
            ****
            **—**
            
            
            
            991,000**Other
                Assets**
            
            ****
            **22,340**
            
            
            
            12,778**Total
                Assets**
            
            **$**
            **4,728,641**
            
            
            $
            6,023,329**Liabilities
                and Stockholders' Equity****Current
                Liabilities**Current
                portion of long-term debt
            
            **$**
            **1,090,747**
            
            
            $
            56,250Line
                of
                credit
            
            ****
            **1,400,000**
            
            
            
            —Accounts
                payable
            
            ****
            **235,600**
            
            
            
            234,978Accrued
                expenses
            
            ****
            **299,502**
            
            
            
            296,596Deferred
                revenue
            
            ****
            **89,517**
            
            
            
            190,708Interest
                payable ($0 related party)
            
            ****
            **16,966**
            
            
            
            —**Total
                Current Liabilities**
            
            ****
            **3,132,332**
            
            
            
            778,532**Long-Term
                Liabilities**Line
                of
                credit
            
            ****
            **—**
            
            
            
            1,500,000Long-term
                debt
            
            ****
            **—**
            
            
            
            1,068,750Subordinated
                debt (related party)
            
            ****
            **194,137**
            
            
            
            —Other
                long-term liabilities
            
            ****
            **54,400**
            
            
            
            —**Total
                Long-Term Liabilities**
            
            ****
            **248,537**
            
            
            
            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 September 30, 2007 and December 31, 2006
            
            ****
            **1,692,042**
            
            
            
            1,692,042Additional
                paid-in capital
            
            ****
            **73,526**
            
            
            
            38,296Retained
                earnings (deficit)
            
            ****
            **(417,796**
            **)**
            
            
            945,709**Total
                Stockholders' Equity**
            
            ****
            **1,347,772**
            
            
            
            2,676,047**Total
                Liabilities and Stockholders' Equity**
            
            **$**
            **4,728,641**
            
            
            $
            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 September 30,**
              
              
              **For
                  the Nine Months Ended September 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006****Revenues**
              
              **$**
              **1,486,094**
              
              
              $
              1,289,135
              
              
              **$**
              **4,604,254**
              
              
              $
              5,018,318**Cost
                  of Product Sales**
              
              ****
              **404,611**
              
              
              
              444,039
              
              
              ****
              **1,274,684**
              
              
              
              1,384,122**Gross
                  Profit**
              
              ****
              **1,081,483**
              
              
              
              845,096
              
              
              ****
              **3,329,570**
              
              
              
              3,634,196**Selling,
                  General and****Administrative
                  Expenses**
              
              ****
              **1,073,228**
              
              
              
              1,353,443
              
              
              ****
              **3,359,845**
              
              
              
              4,612,358**Income
                  (loss) from Operations**
              
              ****
              **8,255**
              
              
              
              (508,347
              )
              
              ****
              **(30,275**
              **)**
              
              
              (978,162
              )**Other
                  Income (Expense)**Interest
                  expense, net
              
              ****
              **(58,882**
              **)**
              
              
              (46,768
              )
              
              ****
              **(169,381**
              **)**
              
              
              (118,262
              )Gain
                  (loss) on sale of assets
              
              ****
              **250**
              
              
              
              (14,960
              )
              
              ****
              **250**
              
              
              
              (16,401
              )Miscellaneous
              
              ****
              **—**
              
              
              
              94
              
              
              ****
              **—**
              
              
              
              990**Total
                  Other Expense**
              
              ****
              **(58,632**
              **)**
              
              
              (61,634
              )
              
              ****
              **(169,131**
              **)**
              
              
              (133,673
              )**Loss
                  Before Income Taxes**
              
              ****
              **(50,377**
              **)**
              
              
              (569,981
              )
              
              ****
              **(199,406**
              **)**
              
              
              (1,111,835
              )**Income
                  Tax (Expense) Benefit**
              
              ****
              **(1,136,099**
              **)**
              
              
              221,000
              
              
              ****
              **(1,099,099**
              **)**
              
              
              471,000**Net
                  Loss**
              
              **$**
              **(1,186,476**
              **)**
              
              $
              (348,981
              )
              
              **$**
              **(1,298,505**
              **)**
              
              $
              (640,835
              )**Net
                  Loss per Share:**Basic
              
              **$**
              **(0.07**
              **)**
              
              $
              (0.02
              )
              
              **$**
              **(0.08**
              **)**
              
              $
              (0.04
              )Diluted
              
              **$**
              **(0.07**
              **)**
              
              $
              (0.02
              )
              
              **$**
              **(0.08**
              **)**
              
              $
              (0.04
              )**Weighted
                  Average Number of Shares:**Basic
              
              ****
              **16,920,419**
              
              
              
              16,930,419
              
              
              ****
              **16,920,419**
              
              
              
              16,930,419Diluted
              
              ****
              **16,920,419**
              
              
              
              16,930,419
              
              
              ****
              **16,920,419**
              
              
              
              16,930,419Note: For
                  the three and nine months ended September 30, 2007 and 2006, all
                  stock
                  options andoutstanding
                  warrants were excluded from the computations of diluted income
                  per share
                  and totaled2,518,060
                  and
                  2,673,460, 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 Nine Months Ended****September
                  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
              
              ****
              **12,489**
              
              
              
              33,093Issuance
                  of
                  warrants to related parties
              
              ****
              **22,741**
              
              
              
              —Balance
                  at
                  the end of the period
              
              **$**
              **73,526**
              
              
              $
              33,093**RETAINED
                  EARNINGS (DEFICIT)**Balance
                  at
                  the beginning of the period
              
              **$**
              **945,709**
              
              
              $
              1,958,481Cumulative
                  effect of adoption of FIN 48
              
              ****
              **(65,000**
              **)**
              
              
              —Net
                  loss
              
              ****
              **(1,298,505**
              **)**
              
              
              (640,835
              )Balance
                  at
                  the end of the period
              
              **$**
              **(417,796**
              **)**
              
              $
              1,317,646**STOCKHOLDERS'
                  EQUITY AT END OF PERIOD**
              
              **$**
              **1,347,772**
              
              
              $
              3,043,781See
                  accompanying notes to unaudited consolidated financial
                  statements.
    5
  **SIBONEY
                  CORPORATION AND SUBSIDIARIES****UNAUDITED
                  CONSOLIDATED STATEMENT OF CASH FLOWS****For
                  the Nine Months Ended****September
                  30,****2007**
              
              
              **2006****Cash
                  Flows From Operating Activities**Net
                  loss
              
              **$**
              **(1,298,505**
              **)**
              
              $
              (640,835
              )Adjustments
                  to reconcile net loss to net cashprovided
                  by
                  (used in) operating activities:Depreciation
              
              ****
              **72,422**
              
              
              
              142,201Amortization
              
              ****
              **576,818**
              
              
              
              500,542Amortization
                  of subordinated debt costs
              
              ****
              **18,570**
              
              
              
              —Deferred
                  income taxes
              
              ****
              **1,105,000**
              
              
              
              (464,000
              )Stock-based
                  compensation expense
              
              ****
              **12,489**
              
              
              
              33,093Gain
                  (loss)
                  on disposition of assets
              
              ****
              **(250**
              **)**
              
              
              16,401Abandonment
                  of software development in process
              
              ****
              **11,404**
              
              
              
              —Reserves
                  and
                  allowances for accounts receivable
              
              ****
              **(14,725**
              **)**
              
              
              60,325Reserve
                  for
                  obsolescence of inventory
              
              ****
              **11,860**
              
              
              
              (500
              )Change
                  in
                  assets and liabilities:Accounts
                  and
                  notes receivable
              
              ****
              **83,821**
              
              
              
              (40,498
              )Inventories
              
              ****
              **5,665**
              
              
              
              57,185Refundable
                  income taxes
              
              ****
              **2,445**
              
              
              
              7,721Prepaid
                  expenses and other assets
              
              ****
              **21,599**
              
              
              
              26,908Accounts
                  payable, accrued expensesand
                  deferred revenue
              
              ****
              **(91,297**
              **)**
              
              
              (204,818
              )**Net
                  Cash Provided By (Used In) Operating Activities**
              
              ****
              **517,316**
              
              
              
              (506,275
              )**Cash
                  Flows From Investing Activities**Payments
                  for
                  equipment
              
              ****
              **(52,541**
              **)**
              
              
              (23,728
              )Proceeds
                  from
                  sale of assets
              
              ****
              **250**
              
              
              
              500Payments
                  for
                  software development costs
              
              ****
              **(534,631**
              **)**
              
              
              (617,765
              )**Net
                  Cash Used In Investing Activities**
              
              ****
              **(586,922**
              **)**
              
              
              (640,993
              )**Cash
                  Flows From Financing Activities**Proceeds
                  (payment) on line of credit
              
              ****
              **(100,000**
              **)**
              
              
              1,100,000Principal
                  payment on promissory note
              
              ****
              **(34,253**
              **)**
              
              
              (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**
              
              ****
              **59,347**
              
              
              
              1,013,884**Change
                  In Cash**
              
              ****
              **(10,259**
              **)**
              
              
              (133,384
              )**Cash
                  - Beginning of Period**
              
              ****
              **226,486**
              
              
              
              270,987**Cash
                  - End of Period**
              
              **$**
              **216,227**
              
              
              $
              137,603See
                  accompanying notes to unaudited consolidated financial
                  statements.


6




**SIBONEY
      CORPORATION AND SUBSIDIARIES**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      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 nine months ended
      September 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:





**September
                30,**
            
            
            **December
                31,****2007**
            
            
            **2006**Accounts
                receivable
            
            **$**
            **716,975**
            
            
            $
            874,237Amount
                due from collaborator
            
            ****
            **79,120**
            
            
            
            —Allowance
                for doubtful accounts, salescredits
                and returns
            
            ****
            **(111,188**
            **)**
            
            
            (127,779
            )**$**
            **684,907**
            
            
            $
            746,458





Accounts
      receivable are pledged as collateral for debt (Notes 8 and 9).








**4.  INVENTORIES**





Inventories
      consist of:





**September
                30,**
            
            
            **December
                31,****2007**
            
            
            **2006**Finished
                goods
            
            **$**
            **153,197**
            
            
            $
            160,160Raw
                materials
            
            ****
            **169,536**
            
            
            
            168,238Reserve
                for obsolescence
            
            ****
            **(42,860**
            **)**
            
            
            (31,000
            )**$**
            **279,873**
            
            
            $
            297,398





Inventories
      are pledged as collateral for debt (Notes 8 and 9).








**5.  CAPITALIZED
      SOFTWARE DEVELOPMENT COSTS**





The
      components of capitalized software development costs consist of:





**September
                30,**
            
            
            **December
                31,****2007**
            
            
            **2006**Software
                development in progress
            
            **$**
            **714,420**
            
            
            $
            379,308Capitalized
                software development costs
            
            ****
            **5,259,075**
            
            
            
            5,070,960Accumulated
                amortization
            
            ****
            **(3,852,847**
            **)**
            
            
            (3,276,029
            )**$**
            **2,120,648**
            
            
            $
            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


8


costs
      begins.  We amortize capitalized software development costs on a
      product-by-product basis at the 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 $175,871
      and
      $184,192 for the three months ended September 30, 2007 and 2006,
      respectively.  Amortization of software development costs charged
      against earnings amounted to $576,818 and $500,542 for the nine months ended
      September 30, 2007 and 2006, respectively.  We expensed to selling,
      general and administrative expenses $11,404 in costs related to a title that
      was
      abandoned during the first quarter of 2007.








**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 a new online test practice product which is
      marketed under the name PracticePlanetTM.  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 their 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 $120,000 during the nine months ended September
      30,
      2007 to reflect the portion paid by Edumatics.  We also reduced our
      selling, general and administrative expenses by approximately $83,000 during
      the
      three months ended September 30, 2007 and $225,000 during the nine months ended
      September 30, 2007 to reflect Edumatics’ portion of these costs.  We
      have $45,000 of development funds we received from Edumatics which is accounted
      for as an accrued expense in our consolidated balance sheet as of September
      30,
      2007 as we consider these funds to be a liability until we have completed the
      development of the program, at which time the funds will reduce our capitalized
      software development costs.  We are due $79,120 from Edumatics under
      the agreement for their portion of the overhead and marketing costs we incurred
      during the third quarter of 2007, which is included in accounts receivable
      on
      our consolidated balance sheet as of September 30, 2007.





On
      October 1, 2007, the Emerging Issues Task Force ratified a draft abstract:
      Issue
      07-1, *Accounting for Collaborative Arrangements*.  The draft
      abstract defines collaborative arrangements and establishes reporting
      requirements for transactions between collaborators.  We reviewed the
      draft abstract and concluded that our agreement with Edumatics (discussed above)
      would qualify as a collaborative arrangement under the definition of the draft
      abstract.  We do not believe that the presentation of our costs will
      be impacted by this issue if it is ratified.  The Task Force will
      discuss this issue at its November meeting and the proposed effective date
      is
      set for fiscal years beginning after December 15, 2007, and interim periods
      within those fiscal years, with retrospective application to all prior periods
      presented.








**7.  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


9


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.





Based
      upon our continued assessment of the realization of our net deferred tax asset;
      our third year of historic cumulative losses and the generation of a loss during
      the three months ended September 30, 2007, we concluded that it was appropriate
      to establish a full valuation allowance for our net deferred tax asset in the
      amount of $1,141,000 as of September 30, 2007.  In future periods, our
      earnings or losses will not be tax-effected until such time as the certainty
      of
      future tax benefits can be reasonably assured.





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 authorities for years prior to 2004 and, accordingly, a
      liability for uncertain tax positions is 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 originally 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 increased $19,900 during the three months ended September 30, 2007
      due
      to the identification of unrecognized tax benefits related to meals and
      entertainment, partially offset by the expiration of the statute of limitations
      for tax year 2003.  The identification of additional unrecognized tax
      benefits increased the cumulative effect on retained earnings by $30,500 due
      to
      our adoption of FIN 48.  The expiration of the statute of
      limitations was recorded as income tax benefit of $10,600 during the three
      months ended September 30, 2007.  We do not expect that the amounts of
      unrecognized tax benefits will change significantly within the next 12
      months.





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 nine months ended September 30, 2007, we reported no interest
      expense in our consolidated statement of operations and we did not report any
      accrued interest in our consolidated balance sheet as of September 30, 2007
      related to unrecognized tax benefits.  No penalties were recognized
      during the three and nine months ended September 30, 2007.








**8.  DEBT**





We
      have
      a $1,500,000 revolving line of credit agreement with our bank.  We had
      a balance of $1,400,000 outstanding on this line as of September 30,
      2007.  In addition, we owe our bank $1,090,747 as of September 30,
      2007 under a promissory note.





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 7.50% 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


10


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 quarterly principal payments of $28,125 on October 1, 2007
                and
                January 1, 2008 and the remaining $1,034,497 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.


·
            Our
                liabilities as a percent of stockholders’ equity plus subordinated debt
                must be less than 1.25:1.00.


·
            We
                were required to obtain $200,000 of subordinated debt from two of
                our
                Directors.  (See Note 9 “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 in the amount of $2,490,747 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
      September 30, 2007, 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 to maintain
      a ratio of liabilities to stockholders’ equity plus subordinated debt no greater
      than 1.25:1.00.  Our ratio as of September 30, 2007 was
      2.19:1.00.  In addition we are to maintain a net worth, plus
      subordinated debt, of not less than $2,700,000; our net worth plus subordinated
      debt was $1,541,909 as of September 30, 2007.  We have obtained a
      waiver for this non-compliance as of September 30, 2007.  Although we
      continue to be out of compliance with these financial covenants 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 these or any other financial covenants.





**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 $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 interest of $5,255 during the three months ended
      September 30, 2007, which was added to the principal balance of the subordinated
      debt increasing it to $210,866.


11





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





**For
                the Three**
            
            
            **For
                the Nine****Months
                Ended**
            
            
            **Months
                Ended****September
                30, 2007**
            
            
            **September
                30, 2007**Interest
                expense on subordinated debt
            
            **$**
            **5,255**
            
            
            **$**
            **10,866**Amortization
                of original issuance discount
            
            ****
            **2,866**
            
            
            ****
            **6,012**Total
                related party interest expense
            
            **$**
            **8,121**
            
            
            **$**
            **16,878**Debt
                issuance costs amortized to selling,general
                and administrative costs
            
            **$**
            **807**
            
            
            **$**
            **1,692**








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 our bank debt.  See Note 8.








**10.  STATEMENT
      OF CASH FLOWS SUPPLEMENTAL DISCLOSURES**





**For
                the Nine Months Ended****September
                30,****2007**
            
            
            **2006**Interest
                paid
            
            **$**
            **144,212**
            
            
            $
            118,555Income
                taxes paid
            
            **$**
            **2,255**
            
            
            $
            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
            
            **$**
            **10,866**
            
            
            $
            —Reclassification
                to long-term note receivablefrom
                accounts receivable
            
            **$**
            **—**
            
            
            $
            164,503








**11.  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*


12


*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.








**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


13


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., individual 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.





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 and in September 2007 Orchard Gold Star was honored
      with a *Technology & Learning* 2007 Award of Excellence.





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 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 78.8% and 80.0% of our
      revenue for the nine months ended September 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,


14


Math
      Concepts, Language Concepts and Phonics.  Many of our GAMCO titles
      have recently been updated to run under the Macintosh OS X and Microsoft Vista
      operating systems in an effort to pursue sales in this underserved
      market.  Our GAMCO product line contributed 5.4% and 6.7% of our
      revenue for the nine months ended September 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 represented 7% and
      9% of our revenues for the nine months ended September 30, 2007 and 2006,
      respectively.





On
      February 2, 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 PracticePlanetTM) to assist elementary and middle school students in
      preparing for their annual high-stakes state tests, using intellectual property
      provided by Siboney.  We began offering PracticePlanetTM in August
      2007.  PracticePlanetTM 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 the two parties, provided that Siboney will be entitled
      to a disproportionate share of the revenues until it has received $250,000
      from
      the preferential allocation.





PracticePlanetTM
      is an online test practice program designed to enhance student skills and
      improve scores on state assessments.  PracticePlanetTM 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 PracticePlanetTM 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.  Royalties received are dependent upon coal prices and
      production.  During the quarter and nine months ended September 30,
      2007, we received $14,720 and $23,685 of royalties and lease payments,
      respectively.  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 Nine Months Ended September 30, 2007 Compared to the Three and Nine Months
      Ended September 30, 2006**





Our
      consolidated revenues increased 15.3% or $196,959 to $1,486,094 from $1,289,135
      during the third quarter of 2007 compared to the third quarter of
      2006.  Total revenue decreased 8.3% or $414,064 to $4,604,254 in the
      first nine months of 2007 from $5,018,318 in the first nine months of
      2006.  The


15


improvement
      in our revenues during the third quarter of 2007 over the third quarter last
      year was primarily due to higher sales of Orchard which we believe was due
      in
      large part to the increased visibility we have received from recent industry
      awards.  The decrease in revenues during the nine months ended
      September 30, 2007 compared to the corresponding period of 2006 we attribute
      to
      an industry-wide slowdown for supplemental curriculum software which resulted
      in
      lower Orchard Gold Star sales though our independent dealer network, offset
      by
      an increase of approximately $174,000 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
      $98,252 during the third quarter of 2007 as compared to $56,241 during the
      third
      quarter last year.  Service revenues were $307,832 in the first nine
      months of 2007 compared to $134,242 during the first nine months of
      2006.





Cost
      of
      product sales decreased 8.9% or $39,428 to $404,611 from $444,039 during the
      third quarter of 2007 compared to the third quarter of 2006.  Cost of
      product sales decreased 7.9% or $109,438 to $1,247,684 from $1,384,122 during
      the first nine months of 2007 compared to the first nine months of
      2006.  These decreases were attributable to lower material costs as we
      wrote-off older versions of our packaging in 2006 in conjunction with the
      release of Orchard 4.2 and we were able to reduce costs by transitioning to
      smaller packaging and electronic documentation, offset by higher software
      amortization related to our release of Orchard 4.2 in the summer of
      2006.





Selling,
      general and administrative expenses decreased 20.7% or $280,215 to $1,073,228
      from $1,353,443 during the third quarter of 2007 compared to the third quarter
      of 2006.  Selling, general and administrative expenses decreased 27.2%
      or $1,252,513 to $3,359,845 from $4,612,358 during the first nine months of
      2007
      compared to the first nine 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 nine 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
      $83,000 during the three months ended September 30, 2007 and $225,000 during
      the
      nine months ended September 30, 2007.





Due
      to
      the increase in revenues and decrease in costs we reported a lower loss before
      income taxes for the third quarter of 2007 compared to the third quarter of
      2006.  Our net loss before income taxes for the third quarter of 2007
      was $50,378 compared to $569,981 for the third quarter of 2006.





Based
      upon our continued assessment of the realization of our net deferred tax asset,
      our third year of historic cumulative losses and the generation of a loss during
      the three months ended September 30, 2007, we concluded that it was appropriate
      to establish a full valuation allowance for our net deferred tax asset in the
      amount of $1,141,000 as of September 30, 2007.  The establishment of
      the valuation allowance increased our income tax expense by $1,141,000 during
      both the three and nine months ended September 30, 2007.  The
      valuation allowance did not affect our cash position.





We
      also
      recorded income tax expense in the third quarter of 2007 due to an adjustment
      to
      our deferred tax asset to reflect permanent differences and deductions on our
      2006 income tax returns that were not accounted for when we estimated our income
      tax benefit at December 31, 2006.  The reduction in our unrecognized
      tax benefits due to the expiration of a statute of limitations was recorded
      as
      income tax benefit of $10,600 during the three months ended September 30,
      2007.





Our
      net
      loss for the first nine months of 2007 was $1,298,505 (or $0.08 per share)
      after
      income tax expense of $1,099,099, compared to a net loss of $640,835 (or $0.04
      per share) after an income tax benefit of $471,000 for the first nine 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 a new online test practice


16


product
      which is marketed under the name PracticePlanetTM.  We received a
      payment of $240,632 from Edumatics in February 2007, a payment of $70,423 in
      March 2007 and a payment of $79,120 in October 2007.  We use the funds
      that we receive 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 nine months ended September 30,
      2007.  We expect that revenue from this new product, launched in
      August 2007, could help to improve our liquidity position during
      2008.





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 $10,259 or 4.5% to $216,227 at September 30, 2007 compared to $226,486
      at December 31, 2006, primarily reflecting cash provided by operations during
      the nine months ended September 30, 2007, proceeds from our related party
      subordinated debt and warrants issuance of $200,000, offset by the $100,000
      payment on our line of credit and software development costs and equipment
      purchases.  We made $34,253 in principal payments on our promissory
      note during the nine months ended September 30, 2007 and made the scheduled
      $28,125 principal payment on October 1, 2007.





Accounts
      receivable decreased $61,551 or 8.3% to $684,907 compared to $746,458 at
      December 31, 2006.  This decrease was primarily due to the timing of
      sales in the quarter.





As
      a
      result of our financing activities during the nine months ended September 30,
      2007, our total debt increased $59,884 or 2.3% to $2,684,884 at September 30,
      2007 from $2,625,000 at December 31, 2006, due to payments of $34,253 on our
      promissory note and $100,000 on our line of credit, offset by the $200,000
      in
      borrowing on the subordinated debt in March 2007.  We accrued a total
      of $10,866 in interest through September 30, 2007, which was added to the
      principal balance of the subordinated debt increasing it to
      $210,866.  The subordinated debt is carried on our balance sheet at a
      discount reflecting the value of the warrants issued with it which is being
      amortized over the term of the debt.  We had $100,000 available on our
      line of credit as of September 30, 2007.





Working
      capital decreased $2,586,033 to a working capital deficit of $1,859,784 at
      September 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.





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 7.75% as of September
      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 quarterly principal payments of $28,125 on October 1, 2007
                and
                January 1, 2008 and the remaining $1,034,497 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.


·
            Our
                liabilities as a percent of stockholders’ equity plus subordinated debt
                must be less than 1.25:1.00.


·
            We
                were required to obtain $200,000 of subordinated debt from two of
                our
                Directors.  (See Note 9 “Related Party Subordinated
                Debt”.)





If
      we
      breach any term or condition in the agreements our bank has the option to
      declare the notes


17


immediately
      due and payable.





The
      entire bank debt in the amount of $2,490,747 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
      September 30, 2007, 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 to maintain
      a ratio of liabilities to stockholders’ equity plus subordinated debt no greater
      than 1.25:1.00.  Our ratio as of September 30, 2007 was
      2.19:1.00.  In addition we are to maintain a net worth, plus
      subordinated debt, of not less than $2,700,000; our net worth plus subordinated
      debt was $1,541,909 as of September 30, 2007.  We have obtained a
      waiver for this non-compliance as of September 30, 2007.  Although we
      continue to be out of compliance with these financial covenants 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 these or any other financial covenants.





**Other
      Matters**





Critical
      Accounting Policies





The
      financial information as of September 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 7 and 11 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.


18





**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 7.50% 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 September 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,


19


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
                including our ability to meet our obligations under our bank
                loans.


·
            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
                associated with the launch of our new PracticePlanetTM online test practice
                product.


·
            Risks
                associated with our ability to comply with the requirements of Section
                404(a) of the Sarbanes-Oxley Act of
                2002.


·
            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
      September 30, 2007, 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 to maintain
      a ratio of liabilities to stockholders’ equity plus subordinated debt no greater
      than 1.25:1.00.  Our ratio as of September 30, 2007 was
      2.19:1.00.  At all times we are to maintain a net worth, plus
      subordinated debt, of not less than $2,700,000; our net worth plus subordinated
      debt was $1,541,909 as of September 30, 2007.  We have obtained a
      waiver for this non-compliance as of September 30, 2007.  Although we
      continue to be out of compliance with these financial covenants 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 these or any other financial covenants.








**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 Officer
              and
                Chief Financial Officer(Authorized
                officer and principal financial
                officer)








November
      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
                1934





31.2
            Certification
                by Chief Financial Officer pursuant to Rule 13a – 14(a) or Rule 15d –
                14(a) of the Securities Exchange Act of
                1934





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













22