**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





QUARTERLY
      REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE
      ACT OF 1934








**For
      the
      Quarterly Period Ended**  **June
      30,
      2006**








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.
                Employer I.D. No.)incorporation
                or organization)





**325
      North
      Kirkwood Road, Suite 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 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]





Title
                of
                class of
            Number
                of
                shares outstandingcommon
                stock
            as
                of the
                date of this report**Common
                stock, par value**
            **16,930,419****$.10
                per share**








**INDEX****PART
                I  FINANCIAL INFORMATION****Item
                1. Unaudited Financial Statements**Consolidated
                Balance Sheet, June 30, 2006 andDecember
                31,
                2005
            3Consolidated
                Statement of Operations, Three andSix
                Months
                Ended June 30, 2006 and June 30, 2005
            4Consolidated
                Statement of Cash Flows, Six Months EndedJune
                30, 2006
                and June 30, 2005
            5Notes
                to Unaudited Consolidated Financial
                Statements
            6**Item
                2. Management's Discussion and Analysis of****Financial****Condition
                and Results of Operations**
            10**Item****3.
                Quantitative and Qualitative Disclosures****About
                Market Risk**
            13**Item
                4. Controls and
                Procedures**
            14**PART
              II  OTHER
              INFORMATION****Item
                4.
                Submission of Matters to a Vote of Security
                Holders**
            14**Item
                5.****Other
                Information**
            15**Item
                6.****Exhibits**
            15**SIGNATURES**
            16**INDEX
                TO EXHIBITS**
            17











2




**PART
        I -
        FINANCIAL INFORMATION**
  **ITEM
          1.
          UNAUDITED FINANCIAL STATEMENTS**
  **SIBONEY
            CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE
            SHEET**




**Assets**


**June
                  30,**
              
              **December
                  31,****2006
                  (Unaudited)**
              **2005****Current
                  Assets**Cash
              
              $
              422,461
              
              $
              270,987Accounts
                  receivable
              
              
              1,150,281
              
              
              833,916Inventories
              
              
              317,185
              
              
              349,773Refundable
                  income taxes
              
              
              23,165
              
              
              21,665Prepaid
                  expenses and other assets
              
              
              110,483
              
              
              164,840Deferred
                  tax
                  asset
              
              
              221,000
              
              
              191,000**Total
                  Current Assets**
              
              
              2,244,575
              
              
              1,832,181**Property
                  and Equipment, Net**
              
              
              226,449
              
              
              304,294**Capitalized
                  Software, Net**
              
              
              2,337,504
              
              
              2,214,901**Goodwill**
              
              
              1,045,015
              
              
              1,045,015**Deferred
                  Tax Asset**
              
              
              488,000
              
              
              274,000**Other
                  Assets**
              
              
              25,524
              
              
              35,694**Total
                  Assets**
              
              $
              6,367,067
              
              $
              5,706,085**Liabilities
                  and Stockholders' Equity****Current
                  Liabilities**Notes
                  payable
              
              $
              2,225,000
              
              $
              1,200,000Current
                  portion of capitalized lease obligation
              
              
              —
              
              
              11,116Accounts
                  payable
              
              
              201,814
              
              
              387,516Accrued
                  expenses
              
              
              552,101
              
              
              455,930**Total
                  Current Liabilities**
              
              
              2,978,915
              
              
              2,054,562**Commitments
                  and Contingencies (Note 7)****Stockholders'
                  Equity**Common
                  stock:Authorized
                  100,000,000 shares at $0.10 par value; issued andoutstanding
                  16,930,419 at June 30, 2006 and December 31, 2005
              
              
              1,693,042
              
              
              1,693,042Additional
                  paid-in capital
              
              
              28,484
              
              
              —Retained
                  earnings
              
              
              1,666,626
              
              
              1,958,481**Total
                  Stockholders' Equity**
              
              
              3,388,152
              
              
              3,651,523**Total
                  Liabilities and Stockholders' Equity**
              
              $
              6,367,067
              
              $
              5,706,085
  Note:
          The balance
          sheet at December 31, 2005 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**


**CONSOLIDATED
        STATEMENT OF OPERATIONS
        (Unaudited)**


**Three
                  Months Ended June 30,**
              
              **Six
                  Months Ended June 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****Revenues**
              
              $
              2,233,779
              
              $
              2,799,627
              
              $
              3,729,183
              
              $
              4,573,502**Cost
                  of Product Sales**
              
              
              506,810
              
              
              529,743
              
              
              940,082
              
              
              972,896**Gross
                  Profit**
              
              
              1,726,969
              
              
              2,269,884
              
              
              2,789,101
              
              
              3,600,606**Selling,
                  General and Administrative****Expenses**
              
              
              1,617,145
              
              
              1,810,578
              
              
              3,258,917
              
              
              4,002,900**Income
                  (Loss) From Operations**
              
              
              109,824
              
              
              459,306
              
              
              (469,816
              )
              
              (402,294
              )**Other
                  Income (Expense)**Interest
                  expense, net
              
              
              (43,240
              )
              
              (8,283
              )
              
              (71,494
              )
              
              (10,974
              )Loss
                  on sale
                  and disposition of asset
              
              
              —
              
              
              —
              
              
              (1,441
              )
              
              —Miscellaneous
              
              
              689
              
              
              411
              
              
              896
              
              
              1,399**Total
                  Other Expense**
              
              
              (42,551
              )
              
              (7,872
              )
              
              (72,039
              )
              
              (9,575
              )**Income
                  (Loss) Before Income Taxes**
              
              
              67,273
              
              
              451,434
              
              
              (541,855
              )
              
              (411,869
              )**Income
                  Tax Benefit (Expense)**
              
              
              7,000
              
              
              (255,000
              )
              
              250,000
              
              
              247,000**Net
                  Income (Loss)**
              
              $
              74,273
              
              $
              196,434
              
              $
              (291,855
              )
              $
              (164,869
              )**Earnings
                  (Loss) Per Common Share - Basic**
              
              $
              0.00
              
              $
              0.01
              
              $
              (0.02
              )
              $
              (0.01
              )**Earnings
                  (Loss) Per Common Share - Diluted**
              
              $
              0.00
              
              $
              0.01
              
              $
              (0.02
              )
              $
              (0.01
              )**Weighted
                  Average Number of Common****Shares
                  Outstanding - Basic**
              
              
              17,094,350
              
              
              17,124,821
              
              
              17,094,350
              
              
              17,209,053**Weighted
                  Average Number of Common****Shares
                  Outstanding - Diluted**
              
              
              17,113,202
              
              
              17,323,781
              
              
              17,094,350
              
              
              17,209,053See
                  accompanying notes to unaudited consolidated financial
                  statements.


4


**SIBONEY
        CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
        STATEMENT OF CASH FLOWS
        (Unaudited)**
  **Six
                  Months Ended June 30,****2006**
              
              **2005****Cash
                  Flows From Operating Activities**Net
                  loss
              
              $
              (291,855
              )
              $
              (164,869
              )Adjustments
                  to reconcile net loss to net cashused
                  in
                  operating activities:Depreciation
              
              
              99,634
              
              
              119,178Amortization
              
              
              316,352
              
              
              287,663Deferred
                  income taxes
              
              
              (244,000
              )
              
              (180,000
              )Allowance
                  for
                  doubtful accounts, sales credits and returns
              
              
              63,725
              
              
              24,476Reserve
                  for
                  obsolescence
              
              
              1,800
              
              
              8,800Loss
                  on
                  disposition of assets
              
              
              1,441
              
              
              —Stock-based
                  compensation
              
              
              28,484
              
              
              —Change
                  in
                  assets and liabilities:Accounts
                  receivable
              
              
              (380,090
              )
              
              (590,492
              )Inventories
              
              
              30,788
              
              
              (81,784
              )Refundable
                  income taxes
              
              
              (1,500
              )
              
              339,584Prepaid
                  expenses and other assets
              
              
              64,524
              
              
              57,576Accounts
                  payable and accrued expenses
              
              
              (89,530
              )
              
              84,123**Net
                  Cash Used In Operating Activities**
              
              
              (400,227
              )
              
              (95,745
              )**Cash
                  Flows From Investing Activities**Payments
                  for
                  equipment
              
              
              (23,728
              )
              
              (68,316
              )Payments
                  for
                  software development costs
              
              
              (438,955
              )
              
              (655,580
              )Proceeds
                  from
                  the sale of assets
              
              
              500
              
              
              —**Net
                  Cash Used In Investing Activities**
              
              
              (462,183
              )
              
              (723,896
              )**Cash
                  Flows From Financing Activities**Borrowings
                  on
                  line of credit
              
              
              1,100,000
              
              
              450,000Payments
                  under stock buy back program
              
              
              —
              
              
              (120,986
              )Principal
                  payments on capital lease obligation
              
              
              (11,116
              )
              
              (12,670
              )Principal
                  payments on debt
              
              
              (75,000
              )
              
              (6,771
              )**Net
                  Cash Provided By Financing Activities**
              
              
              1,013,884
              
              
              309,573**Net
                  Increase (Decrease) In Cash**
              
              
              151,474
              
              
              (510,068
              )**Cash
                  - Beginning of Period**
              
              
              270,987
              
              
              686,642**Cash
                  - End of Period**
              
              $
              422,461
              
              $
              176,574**Supplemental
                  Disclosure of Cash Flow Information**Interest
                  paid
              
              $
              71,629
              
              $
              5,853Income
                  taxes
                  paid
              
              $
              6,700
              
              $
              —See
                  accompanying notes to unaudited consolidated financial
                  statements.





5





**SIBONEY
      CORPORATION AND SUBSIDIARIES**





**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL
      STATEMENTS**





**JUNE
      30,
      2006 AND 2005**





**1.
      BASIS OF
      PRESENTATION**





Our
      consolidated
      balance sheet as of December 31, 2005 was derived from the Company’s audited
      balance sheet as of that date, as set forth in our Annual Report on Form 10-K
      for the year ended December 31, 2005. 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 the
      Company's Annual Report on Form 10-K for the year ended December 31, 2005.
      The
      results of operations for the three and six months ended June 30, 2006 are
      not
      necessarily indicative of the operating results for the full year.





Certain
      prior
      period balance sheet and cash flow amounts have been accumulated to conform
      to
      current year presentation with no effect on any subtotals.





**2.
      REVENUE
      RECOGNITION**





The
      Company follows
      specific and detailed guidelines in determining the proper amount of revenue
      to
      be recorded. The Company recognizes 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
      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, the Company allocates
      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 the Company does 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 the Company does not have
      VSOE have been delivered.





The
      Company also
      generates 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.





**3.
      ACCOUNTS
      RECEIVABLE**





Accounts
      receivable
      consist of:





**June
                30, 2006**
            
            **December
                31, 2005**Accounts
                receivable
            
            
            $1,432,273
            
            
            $1,065,108Allowance
                for
                doubtful accounts, salescredits
                and
                returns
            
            
            
            (281,992
            )
            
            
            (231,192
            )$1,150,281
            
            
            
            $  
                833,916








6


**4.
      INVENTORIES**





Inventories
      consist
      of:


**June
                  30, 2006**
              **December
                  31, 2005**Raw
                  materials
              
              $
              223,219
              
              $
              244,178Finished
                  goods
              
              
              127,266
              
              
              161,924Reserve
                  for
                  obsolescence
              
              
              (33,300
              )
              
              (56,329
              )$
              317,185
              
              $
              349,773


**5.
      CAPITALIZED SOFTWARE DEVELOPMENT COSTS**





Capitalized
      software development costs consist of:


**June
                  30, 2006**
              ******December
                  31, 2005**Software
                  development in progress
              
              $
              868,337
              
              $
              987,575Capitalized
                  software development costs
              
              
              4,362,826
              
              
              3,804,633Accumulated
                  amortization
              
              
              (2,893,659
              )
              
              (2,577,307
              )$
              2,337,504
              
              $
              2,214,901
  Software
        development costs are capitalized at the point the Company determines 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. The Company ceases
        capitalizing costs when the product is released for sale to our customers,
        at
        which time amortization of the capitalized costs begins. Capitalized software
        development costs are amortized on a product-by-product basis at the greater
        of
        the ratio that current gross revenue for a product for the period involved
        bears
        to the total of current and anticipated future gross revenues for the product
        or
        the straight-line method over the estimated economic life of the products,
        which
        is generally estimated to be 48 months.





At
      each reporting
      date, the Company reviews 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
      expense related to capitalized software charged against earnings was $151,505
      and $152,661 for the three months ended June 30, 2006 and 2005, respectively.
      Amortization expense related to capitalized software charged against earnings
      was $316,352 and $287,663 for the six months ended June 30, 2006 and 2005,
      respectively.





**6.
      SHARE
      BASED COMPENSATION**





The
      Company’s 1997
      Incentive Stock Option Plan, as amended (the “1997 Plan”), provides for granting
      to key employees of the Company or its subsidiaries options to purchase a
      maximum of 2,400,000 shares of the Company’s common stock. The 1997 Plan
      provides for the granting of options which qualify as incentive stock options,
      within the meaning of Section 422 of the Internal Revenue Code. All options
      granted under the 1997 Plan must have an exercise price of not less than 100%
      of
      the fair market value of the common stock on the date of grant. The 1997 Plan
      has a maximum term of ten years.





The
      Board of
      Directors of the Company may, in its sole discretion, amend, discontinue or
      terminate the 1997 Plan at any time, provided, however, that it may not, without
      stockholder approval, change the maximum number of shares for which options
      may
      be granted under the 1997 Plan.


7


The
      Company also
      has a non-qualified stock option plan (the “1987 Plan”) which provides for
      granting to eligible employees, directors, consultants and contractors of the
      Company or its subsidiaries, options to purchase authorized but unissued or
      reacquired shares of the Company’s common stock. The Board of Directors has full
      authority and discretion in fixing the purchase price of the stock subject
      to
      each option granted. The term of each option granted pursuant to the 1987 Plan
      shall not be more than five years from the date of grant.





On
      January 1, 2006,
      the Company adopted Statement of Financial Accounting Standards (“SFAS”) No.
      123(R), “Share-Based Payment,” which establishes accounting for equity
      instruments exchanged for employee services. SFAS 123(R) is a revision of SFAS
      No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), and supercedes
      Accounting Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Issued
      to Employees” (APB 25). Under the provisions of SFAS 123(R), share-based
      compensation cost is measured at the date of grant, based on the estimated
      fair
      value of the award, and is recognized as expense on a straight line basis over
      the employee’s requisite service period.





Prior
      to January 1,
      2006, the Company accounted for stock-based compensation to employees under
      the
      intrinsic value method in accordance with APB 25, as permitted by SFAS 123.
      Under this method, the Company did not recognize compensation cost for
      stock-option awards to employees because options were issued at exercise prices
      equal to the market value of the stock on the date of grant.





The
      Company adopted
      SFAS 123(R) using the modified prospective application method and accordingly,
      no prior periods have been restated. Under this method, the Company will
      recognize expense including (a) compensation cost for all share-based payments
      granted prior to, but not yet vested as of January 1, 2006, based on the
      grant-date fair value estimated in accordance with the provisions of SFAS 123,
      and (b) compensation cost for all share-based payments granted subsequent to
      January 1, 2006, based on the grant-date fair value estimated in accordance
      with
      SFAS 123(R). For the three and six months ended June 30, 2006, the Company
      recognized compensation expense related to options granted prior to January
      1,
      2006 of approximately $9,600 and $21,000, respectively. The Company granted
      options to purchase 437,900 shares in the three months ended June 30, 2006.
      For
      the three and six months ended June 30, 2006, the Company recognized
      approximately $7,500 of expense related to options granted after January 1,
      2006. The total amount of approximately $28,500 is reflected in additional
      paid
      in capital at June 30, 2006.





The
      following table
      illustrates the effect on net loss and loss per share if the Company had applied
      the fair value recognition provisions of SFAS 123 to stock-based employee
      compensation for the three and six months ended June 30, 2005:







**Three
                Months Ended**
            **Six
                Months Ended****June
                30, 2005**
            **June
                30, 2005**Net
                income
                (loss), as reported
            
            $
            196,434
            
            $
            (164,869
            )Deduct:
                total
                stock-based employee compensationexpense
                determined under the fair value-based methodfor
                all
                awards, net of related tax effects
            
            
            
            
            (36,473
            )
            
            
            
            (59,710
            )Pro
                forma net
                income (loss)
            
            
            
            $
            159,961
            
            
            
            $
            (224,579
            )Income
                (loss)
                per share (basic and diluted):As
                reported
            
            
            
            $
            0.01
            
            
            
            $
            (0.01
            )Pro
                forma
            
            
            
            $
            0.01
            
            
            
            $
            (0.01
            )





The
      fair value of
      each option granted is estimated on the date of grant using the Black-Scholes
      option-pricing model. The following table presents the weighted-average
      assumptions used in the option pricing model for the three and six months ended
      June 30, 2006 and 2005. The expected life of the options represents the period
      of time the options are expected to be outstanding based on historical trends.
      The risk-free interest rate is determined using the rates for U.S. Treasury
      bonds with maturities similar to the expected life of the options at the time
      the options are granted. Estimated volatility is measured using historical
      weekly price changes of the stock over the expected life of the options.


8




**Three
                and Six Months Ended June 30, 2006**
              **Actual**
            
            **Three
                and Six
                Months Ended June 30, 2005**
              **Pro
                forma**Expected
                option life
            
            
            2.6
            years
            
            3.1
            yearsRisk-free
                interest rate
            
            
            5.13
            %
            
            3.76
            %Expected
                volatility
            
            
            62.3
            %
            
            52.9
            %Expected
                dividend yield
            
            
            —
            
            
            —





A
      summary of option activity is presented below:





**Options**
            
            **Number
                of**
              **Shares**
            
            **Range
                of Exercise**
              **Prices**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price****Outstanding
                at December 31, 2005**
            
            
            3,055,080
            
            
            $0.20
                - $0.655
            
            
            $0.38Granted
            
            
            ─
            
            
            ─
            
            
            ─Forfeited/Expired
            
            
            (227,200
            )
            
            $0.2875
                - $0.30
            
            
            $0.29**Outstanding
                at March 31, 2006**
            
            
            2,827,880
            
            
            $0.20
                - $0.655
            
            
            $0.32Granted
            
            
            437,900
            
            
            $0.165
                - $0.1815
            
            
            $0.17Forfeited/Expired
            
            
            (392,320
            )
            
            $0.165
                - $0.5665
            
            
            $0.40**Outstanding
                at June 30, 2006**
            
            
            2,873,460
            
            
            $0.165
                - $0.655
            
            
            $0.28**Exercisable
                at June 30, 2006**
            
            
            2,311,448
            
            
            $0.165
                - $0.655
            
            
            $0.29





As
      of June 30,
      2006, there was $103,317 of total unrecognized compensation cost related to
      nonvested share-based compensation awards, net of estimated forfeitures, which
      the Company expects to recognize over a weighted average period of approximately
      3.1 years. The estimated forfeiture rate is based on historical forfeiture
      patterns. There was no intrinsic value of any options outstanding at June 30,
      2006.





A
      summary of the
      status of the Company’s nonvested stock options as of June 30, 2006 and the
      activity for the three and six months ended June 30, 2006 is presented
      below:





**Nonvested
                Shares**
            
            **Number
                of Shares**
            
            **Weighted
                    Average**
                  **Grant-Date**
                  **Fair
                    Value****Nonvested
                at December 31, 2005**
            
            
            1,053,019
            
            
            $0.27Granted
            
            
            ─
            
            
            ─Vested
            
            
            (73,678
            )
            
            $0.27Forfeited
            
            
            (203,574
            )
            
            $0.29**Nonvested
                at March 31, 2006**
            
            
            775,767
            
            
            $0.26Granted
            
            
            124,588
            
            
            $0.17Vested
            
            
            (63,805
            )
            
            $0.38Forfeited
            
            
            (71,055
            )
            
            $0.31**Nonvested
                at June 30, 2006**
            
            
            765,495
            
            
            $0.21





The
      total fair
      value of stock options vested during the three months ended June 30, 2006 and
      2005 was $24,049 and $14,303, respectively. The total fair value of stock
      options vested during the six months ended June 30, 2006 and 2005 was $43,973
      and $31,941, respectively.


9


The
      following table
      summarizes information about stock options outstanding at June 30,
      2006:




**Outstanding
                    Options**
                
                **Exercisable
                    Options****Range
                    Of**
                  **Exercise**
                  **Prices**
                **Number
                    Of**
                  **Options**
                **Weighted
                    Average**
                  **Remaining
                    Years**
                  **Of
                    Contractual Life**
                **Weighted**
                  **Average**
                  **Exercise
                    Price**
                
                **Number
                    Of**
                  **Options**
                **Weighted**
                  **Average**
                  **Exercise
                    Price**$0.165
                    -
                    $0.3163
                2,223,960
                4.0
                $0.22
                
                1,692,308
                $0.22$0.380
                    -
                    $0.5665
                449,500
                1.8
                0.39
                
                419,140
                0.39$0.620
                    -
                    $0.6550
                200,000
                0.0
                0.66
                
                200,000
                0.66$0.165
                    -
                    $0.6550
                2,873,460
                3.1
                $0.28
                
                2,311,448
                $0.29




**7.
      COMMITMENTS AND CONTINGENCIES**





On
      June 25, 2004,
      Merit Audio Visual, Inc. d/b/a Merit Software (“Merit”) filed a lawsuit in the
      Federal District Court for the Eastern District of Missouri against Siboney
      Corporation, Siboney Learning Group, Inc., and the Company’s former President
      (collectively “Siboney”). In the lawsuit, Merit alleged, among other things,
      copyright infringement and breach of contract. In September 2004, Siboney
      recorded a $615,000 litigation settlement accrual. In December 2004, **** Siboney
      entered
      into a definitive agreement with Merit to settle all claims in the lawsuit.
      The
      principal terms of the settlement agreement included: none of the parties
      admitted liability for any of the claims; Siboney’s software licensing agreement
      with Merit terminated as of December 31, 2005; Siboney agreed to pay royalties
      due under the licensing agreement through its termination; Siboney paid to
      Merit
      $465,000 upon execution of the settlement agreement; Merit returned
      approximately $50,000 of the royalty payments previously made by Siboney; and
      Siboney paid to Merit $100,000 in September 2005. The Company will pay the
      final
      payment of $100,000 in September 2006. In accordance with the settlement
      agreement, all claims were dismissed with prejudice on January 18, 2005.





**8.
      DEBT**





The
      Company has a
      $1,500,000 revolving line of credit agreement and a $1,125,000 promissory note
      with a bank. As of June 30, 2006, the Company had a balance of $1,100,000
      outstanding under the line of credit. The line of credit agreement and
      promissory note were refinanced on March 31, 2006 and renewed on August 1,
      2006,
      extending their maturity date from July 31, 2006 to November 1, 2006. Both
      the
      line of credit agreement and promissory note require monthly interest payments
      on the outstanding balance at a variable rate based on the prime rate, currently
      8.25% per annum, and are secured by the Company’s assets. The Company expects to
      enter into a new credit agreement with its existing bank effective on or before
      November 1, 2006. The
      Company
      believes that its available capital resources are adequate to support its
      current business levels, however, failure to enter into a renewal of its bank
      credit agreement would have a material adverse effect on the Company’s financial
      condition and results of operations. The
      terms of a
      replacement credit facility may be less favorable than those historically
      experienced by the Company.





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





**Overview**





The
      Company’s
      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. The Company publishes two comprehensive software product lines ─
Orchard Software for Your State and Journey ─ and three titles-based product
      lines ─ GAMCO Educational Software, Teacher Support Software and Educational
      Activities Software. The Company believes that these products position it to
      appeal to the different budgets and spending patterns found in classrooms,
      schools, school districts and adult learning centers.


10





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, the Company has focused on the development, upgrading, selling and
      marketing of its Orchard Software for Your State (“Orchard”) product line. The
      Company believes that Orchard is a cost-effective solution for schools facing
      growing pressures to demonstrate Adequate Yearly Progress and instructional
      improvement as mandated by NCLB.





NCLB
      requires every
      public school to conduct annual assessments in reading and math based upon
      each
      state’s academic standards for every student in grades three through eight. 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
      three through eight by school year 2013-2014, which places increasingly
      difficult demands upon schools for instructional improvement and satisfactory
      progress towards 100% proficiency.





Orchard
      integrates
      the results of subject specific assessment tests which are based upon state
      standards, with individualized instruction from over 160 Skill Trees (i.e.,
      software programs) in K-12 reading, language, mathematics and science. Orchard’s
      assessment identifies areas of academic weakness for each student within his/her
      state’s grade-specific standards of learning. Orchard then prescribes an
      individualized learning path for each student as students interact with a wide
      variety of motivating instructional approaches that appeal to different learning
      styles. Orchard’s management system tracks student progress for teachers and
      administrators who are facing increasing pressure for data-driven decision
      making as mandated by NCLB. Interim assessment tools can be used to measure
      educational gains and to prepare students for their high-stakes state
      tests.





Approximately
      8,000
      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.





As
      of June 30,
      2006, the Company employed approximately 15 people in its product development
      team who develop new instructional content, upgrade product features, ensure
      compatibility with new hardware and network operating systems and test for
      quality assurance. The Company released a new version of Orchard in 2005 -
      Orchard Gold Star - with significantly improved options for interim formative
      assessment and curriculum mapping, upgraded management and progress reports,
      upgraded content and content sequencing and a Structured Query Language (“SQL”)
      database foundation that provides improved performance and scalability within
      schools and school districts.





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 the Company’s
      Orchard business is repeat business from schools or school districts that
      benefit from Orchard’s scalability by acquiring additional skill trees
      (individual programs) or bundles. The Company believes that Orchard has become
      a
      recognized competitor in the 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 76.0% of the Company’s revenue
      for the six months ended June 30, 2006 and 2005, respectively.





In
      addition to
      Orchard Software for Your State, the Company publishes four other instructional
      software product lines:





GAMCO
      Educational
      Software (“GAMCO”), the Company's original software product line, provides
      schools with single titles and curriculum solutions which the Company believes
      are highly motivating and engaging. GAMCO products are sold through the major
      national and regional school software catalog dealers, the Company's inside
      sales force, its direct catalogs and direct promotions. All GAMCO titles include
      management features that track student progress and allow teachers to modify
      the
      instruction to meet


11


individual
      learning
      needs. Popular titles include Touchdown Math, Math Concepts, Language Concepts
      and Phonics. The Company is expecting to release its new software titles along
      with an improved version of the GAMCO manager in the third quarter of
      2006.





The
      Teacher Support
      Software (“TSS”) product line is best known for its popular tools for teachers,
      including Worksheet Magic, and its reading programs, including WordWorks. TSS
      products are sold through all of the Company’s sales channels as single-title
      solutions and as part of comprehensive Orchard solutions. The Company has
      actively upgraded older TSS products to be compatible with the computers and
      networks found in schools today.





The
      Company’s
      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 the
      Company’s primary product offering for the adult learning market and allows the
      Company to achieve incremental sales growth through this market. In addition,
      the Company has developed a series of bundled EAS titles named Real Achievement
      which includes a robust student management and reporting system. The Company
      is
      focusing programming resources on upgrading and enhancing these titles as a
      result of a perceived increase in demand for adult learner and remedial
      products.





Journey
      has been
      upgraded to make it more competitive with other prescriptive self-branching
      integrated learning systems. The Company is in the process of enhancing Journey
      and developing an online version.





The
      Company
      generates sales from titles which have been revised for the home market and
      are
      sold through a direct-to-the-home marketer of educational software. This
      alliance allows the Company to achieve incremental sales in the home market
      without incurring the costs of expensive retail distribution.





The
      Company also
      has certain natural resources interests, including coal, oil and gas, through
      Siboney Coal Company, Inc. and other subsidiaries which are not believed to
      be
      material to the Company’s ongoing results of operations or financial
      condition.





**Results
      of
      Operations for the Three and Six Months Ended June 30, 2006 Compared To Three
      and Six Months Ended June 30, 2005**





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





Total
      revenues
      decreased 20.2% or $565,848 to $2,233,779 from $2,799,627 during the second
      quarter of 2006 compared to the second quarter of 2005. Total revenue decreased
      18.5% or $844,319 to $3,729,183 in the first six months of 2006 from $4,573,502
      in the first six months of 2005. These decreases were attributable primarily
      to
      overall decreased educational funding levels which led to decreased sales for
      Siboney Learning Group.





Cost
      of product
      sales decreased 4.3% or $22,933 to $506,810 from $529,743 during the second
      quarter of 2006 compared to the second quarter of 2005. Cost of product sales
      decreased 3.4% or $32,814 to $940,082 from $972,896 during the first six months
      of 2006 compared to the first six months of 2005. This decrease was attributable
      to lower royalty expense due to removing the Merit content from the current
      product, partially offset by higher material costs due to writing off older
      versions of our software in 2006.





Selling,
      general
      and administrative expenses decreased 10.7% or $193,433 to $1,617,145 from
      $1,810,578 during the second quarter of 2006 compared to the second quarter
      of
      2005. Selling, general and administrative expenses decreased 18.6% or $743,983
      to $3,258,917 from $4,002,900 during the first six months of 2006 compared
      to
      the first six months of 2005. These decreases were due to our efforts over
      the
      past year to align operating expenses to lower projected sales by implementing
      cost reduction initiatives resulting in lower salaries, professional fees and
      sales and marketing expenses. The full effect of these reductions will not
      be
      realized until the third quarter of 2006.





The
      Company’s net
      income for the second quarter of 2006, primarily for the reasons described
      above, was $74,273, after income tax benefit of $7,000, compared to net income
      of $196,434 after income tax expense of $255,000 for the second quarter of
      2005.
      The income tax benefit of $7,000 for the quarter ended June 30,


12


2006
      differs from
      the net income before taxes multiplied by our effective tax rate due to the
      return to provision adjustments recorded in the second quarter. The Company’s
      net loss for the first six months of 2006 was $291,855, after income tax benefit
      of $250,000, compared to net loss of $164,869 after income tax benefit of
      $247,000.





**Liquidity
      and Capital Resources**





Cash
      increased
      $151,474 or 55.9% to $422,461 at June 30, 2006 compared to $270,987 at December
      31, 2005 primarily reflecting borrowings on the line of credit.





Accounts
      receivable
      increased $316,365 or 37.9% to $1,150,281 at June 30, 2006 compared to $833,916
      at December 31, 2005 primarily due to stronger sales in the second quarter
      of
      2006 compared to the fourth quarter of 2005.





Short-term
      debt
      increased $1,025,000 or 85.4% to $2,225,000 at June 30, 2006 from $1,200,000
      at
      December 31, 2005 primarily due to seasonal borrowing on the line of credit.





Working
      capital
      deficit was $734,337 at June 30, 2006 compared to $222,381 at December 31,
      2005
      primarily due to the increase in short-term debt, partially offset by the
      increase in cash and accounts receivable.





On
      March 8, 2004,
      the Board of Directors authorized a stock repurchase program under which the
      Company may purchase up to 1,000,000 shares of the Company’s common stock from
      time to time in the open market or in privately negotiated transactions. Under
      this program, the Company has repurchased a cumulative total of 587,500 shares
      of the Company’s common stock. On May 11, 2005, the Board of Directors
      authorized the purchase of up to an additional 1,000,000 shares of the Company’s
      common stock from time to time in the open market or in privately negotiated
      transactions. No shares will be purchased under the 2005 program until the
      2004
      program is completed. During the first six months of 2006, the Company did
      not
      purchase any shares of common stock of the Company.





The
      Company has
      financed its business primarily with cash generated from operating activities,
      accessing its bank revolving line of credit and promissory note. The Company
      has
      a $1,500,000 revolving line of credit agreement and a $1,125,000 promissory
      note
      with a bank. As of June 30, 2006, the Company had a balance of $1,100,000
      outstanding under the line of credit. The line of credit agreement and
      promissory note were refinanced on March 31, 2006 and renewed on August 1,
      2006,
      extending their maturity date from July 31, 2006 to November 1, 2006. Both
      the
      line of credit agreement and the promissory note require monthly interest
      payments on the outstanding balance at a variable rate based on the prime rate,
      currently 8.25% per annum, and are secured by the Company’s accounts
      receivable, equipment and inventory. The
      Company expects
      to enter into a new loan arrangement on or before the maturity of this loan
      and
      the line of credit on November 1, 2006. The Company believes that its available
      capital resources are adequate to support its current business levels, however,
      failure to enter into a renewal of its bank credit agreement would have a
      material adverse effect on the Company’s financial condition and results of
      operations. The terms of a replacement credit facility may be less favorable
      than those historically experienced by the Company.





**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





The
      Company
      presently does not use any derivative financial instruments to hedge its
      exposure to adverse fluctuations in interest rates, foreign exchange rates,
      fluctuations in commodity prices or other market risks, nor does the Company
      invest in speculative financial instruments. Borrowings with the bank bear
      interest at a variable rate based on the prime rate, currently 8.25% per annum.
      A 1% change in the prime rate would result in a change in interest expense
      of
      $22,250 on an annual basis on outstanding debt as of June 30, 2006. Due to
      the
      nature of the Company’s borrowings, it has concluded that there is no material
      market risk exposure and, therefore, no quantitative tabular disclosures are
      required.




13




**ITEM
        4. CONTROLS AND PROCEDURES**
 
 Based
        on their
        evaluation as of June 30, 2006, Timothy J. Tegeler, the Company’s Chief
        Executive Officer and
        William D.
        Edwards, Jr., the Company’s Chief Financial Officer, have concluded that the
        Company’s 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.
        There have been no changes in internal controls over financial reporting
        during
        the period covered by this report that have materially affected, or are
        reasonably likely to materially affect, the Company’s internal control over
        financial reporting.





*
      * * *
      *





**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, but are not limited to, the following: (1) risks related to our
      customers’ dependence on government funding to purchase the Company’s products;
      (2) risks associated with our ability to compete with well-established and
      well-funded competitors; (3) risks associated with the constant changes in
      the
      technologies used to build and deliver the Company’s products; (4) the Company’s
      ability to retain key personnel; (5) the Company’s ability to motivate its
      independent dealer representatives to sell the Company’s products; (6) changes
      in market acceptance and demand for curriculum-based educational software;
      (7)
      risks associated with acceptance of statistical studies; and (8) risks
      associated with our ability to access capital to finance our business including
      the necessity to refinance short-term bank loans.





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. The Company assumes
      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
      4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY
      HOLDERS**





The
      Company's
      annual meeting of stockholders was held on May 17, 2006. At the annual meeting,
      shareholders of the Company voted to elect six directors.





With
      respect to the
      election of directors, the following votes were cast:





Nominee
            Votes
                in
                Favor
            Votes
                Withheld
            Bank
                Non-votesRebecca
                M.
                Braddock
            10,766,577
            545,044
            184,153William
                D.
                Edwards, Jr.
            10,623,972
            687,649
            184,153John
                J.
                Riffle
            10,767,622
            543,999
            184,153Lewis
                B.
                Shepley
            10,780,872
            530,749
            184,153Timothy
                J.
                Tegeler
            10,587,572
            724,049
            184,153Jerome
                W.
                Thomasson
            10,780,672
            530,949
            184,153





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


14


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. Broker non-votes are included in “votes
      in favor” for the purposes of election of directors.





**ITEM
      5. OTHER INFORMATION**





Effective
      August 1,
      2006, the Company replaced its existing loans with Southwest Bank by executing
      a
      new promissory note in favor of the bank with a principal amount of $1,125,000
      and a new line of credit providing for maximum borrowings of $1,500,000. Both
      the promissory note and the line of credit bear interest at a variable rate
      based on the prime rate, currently 8.25 **%** per annum. They
      are each secured by the Company’s accounts
      receivable, equipment and inventory under the terms of a security agreement
      with
      the bank dated June 1, 2003. The Company is obligated to make monthly interest
      payments on the outstanding principal amounts under the note and the line of
      credit beginning August 31, 2006. The promissory note and the line of credit
      mature on November 1, 2006. As of June 30, 2006, the Company had a balance
      of
      $1,100,000 outstanding under the line of credit. The Company expects to enter
      into a new loan arrangement on or before the maturity of the promissory note
      and
      the line of credit, each of which expire on November 1, 2006.





**ITEM
      6. EXHIBITS**





Exhibits
      required
      as part of this report are listed in the index appearing on page 17.








15




**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)








August
      11,
      2006


16




**Index
      to Exhibits**





**Exhibits**





10.1
            Promissory
                Note executed in favor of Southwest Bank of St. Louis by Siboney
                Learning
                Group Inc. and Siboney Corporation dated August 1, 200610.2
            Promissory
                Note executed in favor of Southwest Bank of St. Louis by Siboney
                Learning
                Group Inc. and Siboney Corporation dated August 1,
                200610.3
            General
              Business Security Agreement in favor of Southwest Bank of St. Louis
              by
              Siboney Learning Group Inc. and Siboney Corporation dated June 1,
              2003.31.1
            Certification
                by Chief Executive Officer pursuant to Rule 13a - 14(a) or Rule 15d
                -
                14(a) of the Securities Exchange Act of 193431.2
            Certification
                by Chief Financial Officer pursuant to Rule 13a - 14(a) or Rule 15d
                -
                14(a) of the Securities Exchange Act of 193432.1
            Certification
                Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 200232.2
            Certification
                Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002







17