Inspectors visited the unit, which provides education for permanently excluded pupils and those at risk of being excluded, in July and found significant weaknesses in strategic leadership and management provided by the local education authority.
While they praised staff for some aspects of their work, they said pupils did not make sufficient progress over time.
Councillor Les Allen, Derby's cabinet member for lifelong learning, said: "Naturally we are disappointed with the finding of the Ofsted inspectors. While we welcome the positive comments of the inspectorate, we will work hard to put together a package of measures to support the improvements needed."
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