Estyn inspectors said Ysgol Ceredigion, based at Aberaeron, had a number of good features but also many shortcomings.
The report said standards were low and the educational experience offered at the PRU was insufficient to address the learning deficits of many of the pupils.
"Although a minority of pupils achieve passes in externally accredited examination courses, progress overall is unsatisfactory," says the report.
The local education authority said a working group was addressing key issues raised by Estyn. It is also helping the unit's management committee formulate an action plan. Estyn found the curriculum lacked breadth and balance, and did not meet the needs of the 28 pupils aged 11 to 16.
The lack of a curriculum policy and schemes of work resulted in poor planning between classes and key stages. And while standards and progress in the key communication skills were satisfactory, there was little evidence of the development and use of reading, writing, numeracy and ICT across the curriculum, said Estyn.
Bilingual skills were not developed or used at all, the quality of short-term planning was variable and the absence of PRU-wide schemes of work inhibited teachers' planning.
But there was some praise for the unit. Teachers had good relationships with pupils, and used a range of teaching approaches.
Their enthusiasm and confidence engaged those pupils with a history of disaffection and failure. The PRU also had strong links with parents and support services, including social services.
A spokesperson for Ceredigion council said: "The director of education, Gareth Jones, accepts the report. Despite some shortcomings, he feels progress has been made under the leadership of the recently appointed head."