**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**








**FORM
      10-QSB**


(Mark
      One)





[√] QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934








**For
      the quarterly period ended September 29, 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 **114800**





**DEER
      VALLEY CORPORATION**


***(Exact
      name of Registrant as specified in its charter)***




**Florida**
            **20-5256635**(State
                or other jurisdiction of
            (I.R.S.
                employerincorporation
                or organization)
            identification
                no.)**4218
                W. Linebaugh Avenue, Tampa, FL**
            **33624**(Address
                of principal executive offices)
            (Zip
                code)





Registrant's
      telephone number, including area code:  **(813)
      885-5998**








Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the Registrant was required
      to file such reports) and (2) has been subject to such filing requirements
      for
      the past 90 days.  Yes [√]  No [   ]





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act). Yes [   ] No [√]





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





The
      Registrant had 8,592,929 shares of Common Stock, par value $0.001 per share,
      outstanding as of September 29, 2007.

















**TABLE
      OF CONTENTS**





**PART
                  I**
              **FINANCIAL
                  INFORMATION**
              
              **PAGE**Item
                  1
              Financial
                  Statements
              
              F-1Consolidated Balance SheetAs
                of
                September 29, 2007 (unaudited)
              F-2Consolidated Statements of OperationsThree
                and Nine Months ended September 29,
                2007
                (unaudited)Three
                and Nine Months ended September 30,
                2006
                (unaudited)
              F-3Consolidated Statements of Cash FlowsNine
                Months ended September
                29, 2007
                (unaudited)Nine
                Months
                ended September 30, 2006(unaudited)
              F-4Notes to Consolidated Financial Statements (unaudited)
              F-5Item
                  2
              Management's
                Discussion and Analysis
              3Item
                  3
              Controls
                  and Procedures
              
              10
   **PART
                  II**
              **OTHER
                  INFORMATION**
              11Item
                  1
              Legal
                  Proceedings
              11Item
                  2
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              11Item
                  3
              Defaults
                  Upon Senior Securities
              11Item
                  4
              Submission
                  of Matters to a Vote of Security Holders
              11Item
                  5
              Other
                  Information
              11Item
                  6
              Exhibits
              12
  Unless
      otherwise indicated or the context otherwise requires, all references below
      in
      this filing to “we,” “us,” the “Company,” and "Deer Valley" are to Deer
      Valley Corporation, a Florida corporation, together with its wholly-owned
      subsidiary, Deer Valley Homebuilders, Inc., an Alabama corporation.








**PART
      I                      FINANCIAL
      INFORMATION**





**Item
      1.  Financial Statements**


**Deer
        Valley Corporation & Subsidiary**
 **Consolidated Financial Statements**
 
 **Contents:****Consolidated
                    Balance Sheet as of September 29, 2007
                    (unaudited)**
                
                **F-2****Consolidated
                    Statements of Operations for the three and nine month periods**
                  **ended
                    September 29, 2007 and September 30, 2006
                    (unaudited)**
                **F-3****Consolidated
                    Statements of Cash Flows for the nine month periods**
                  **ended
                    September 29, 2007 and September 30, 2006
                    (unaudited)**
                **F-4****Notes
                    to Consolidated Financial Statements (unaudited)**
                
                **F-5**
 F-1
 
  **Deer
        Valley Corporation & Subsidiary**
 **Consolidated
        Balance Sheet**
 
 **ASSETS****September
                      29,****2007****(unaudited)**Cash
                  
                  $
                  5,521,043Accounts
                      receivable
                  
                  
                  9,870,432Inventory
                  
                  
                  1,988,054Prepaid
                      expenses and other current assets
                  
                  
                  960,31818,339,846Property,
                      plant and equipment, net
                  
                  
                  3,133,252Goodwill
                  
                  
                  6,506,148Other
                      assets
                  
                  
                  109,2066,615,354**$**
                  **28,088,453****LIABILITIES
                      AND STOCKHOLDERS'EQUITY**Current
                      maturities on long term debt
                  
                  $
                  5,019,526Accounts
                      payable & accrued expenses
                  
                  
                  5,121,818Accrued
                      warranties
                  
                  
                  2,100,000Accrued
                      preferred dividends
                  
                  
                  89,57812,330,919Accrued
                      earnout, net of current maturities
                  
                  
                  2,016,956Long-term
                      debt, net of current maturities
                  
                  
                  1,888,8103,905,76716,236,686Series
                      A Preferred stock, $0.01 par value, 750,000 shares authorized,
                      637,275
                      shares issued and outstanding
                  
                  
                  6,372,745Series
                      B Preferred stock, $0.01 par value, 49,451 shares authorized,
                      0 shares
                      issued and outstanding
                  
                  
                  -Series
                      C Preferred stock, $0.01 par value, 26,750 shares authorized,
                      26,750
                      shares issued and outstanding
                  
                  
                  267Series
                      D Preferred stock, $0.01 par value, 132,081 shares authorized,
                      0 shares
                      issued and outstanding
                  
                  
                  -Series
                      E Preferred stock, $0.01 par value, 1,000,000 shares authorized,
                      1,000,000
                      shares issued and outstanding
                  
                  
                  10,000Common
                      stock, $0.001 par value, 100,000,000 shares authorized, 8,592,929
                      shares
                      issued and outstanding
                  
                  
                  8,594Additional
                      paid-in capital
                  
                  
                  35,145,189Retained
                      earnings and accumulated deficit
                  
                  
                  (29,685,030
                  )11,851,765**$**
                  **28,088,453**
  ***See
          notes to consolidated financial statements***
  F-2
  **Deer
        Valley Corporation & Subsidiary**
 **Consolidated
        Statements of Operations**
 
 **For
                  the three month period ended**
              
              
              **For
                  the nine month period ended****September
                  29,**
              
              
              **September
                  30,**
              
              
              **September
                  29,**
              
              
              **September
                  30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006****(unaudited)**
              
              
              **(unaudited)**
              
              
              **(unaudited)**
              
              
              **(unaudited)****REVENUE**
              
              $
              18,103,462
              
              
              $
              16,901,751
              
              
              $
              45,803,829
              
              
              $
              48,767,224**COST
                  OF REVENUE**
              
              
              15,094,281
              
              
              
              14,688,814
              
              
              
              38,823,118
              
              
              
              41,289,963**GROSS
                  PROFIT**
              
              
              3,009,181
              
              
              
              2,212,937
              
              
              
              6,980,712
              
              
              
              7,477,261**OPERATING
                  EXPENSES:**Depreciation
              
              
              10,147
              
              
              
              8,187
              
              
              
              30,396
              
              
              
              24,240Selling,
                  general and administrative
              
              
              1,881,300
              
              
              
              1,557,614
              
              
              
              5,125,723
              
              
              
              4,520,552TOTAL
                  OPERATING EXPENSES
              
              
              1,891,447
              
              
              
              1,565,801
              
              
              
              5,156,119
              
              
              
              4,544,792OPERATING
                  INCOME
              
              
              1,117,735
              
              
              
              647,136
              
              
              
              1,824,592
              
              
              
              2,932,469**OTHER
                  INCOME (EXPENSES)**Other
                  income
              
              
              -
              
              
              
              34,496
              
              
              
              -
              
              
              
              65,740Interest
                  income
              
              
              54,549
              
              
              
              -
              
              
              
              169,117
              
              
              
              -Interest
                  expense
              
              
              (44,848
              )
              
              
              (37,077
              )
              
              
              (122,141
              )
              
              
              (72,742
              )TOTAL
                  OTHER INCOME/(EXPENSES)
              
              
              9,700
              
              
              
              (2,581
              )
              
              
              46,976
              
              
              
              (7,002
              )INCOME
                  BEFORE INCOME TAXES
              
              
              1,127,435
              
              
              
              644,555
              
              
              
              1,871,568
              
              
              
              2,925,467INCOME
                  TAX EXPENSE
              
              
              (376,563
              )
              
              
              (240,019
              )
              
              
              (755,409
              )
              
              
              (1,064,628
              )**NET
                  INCOME**
              
              **$**
              **750,872**
              
              
              **$**
              **404,536**
              
              
              **$**
              **1,116,159**
              
              
              **$**
              **1,860,840**Dividends
                  to preferred stockholders
              
              
              (89,577
              )
              
              
              (114,957
              )
              
              
              (310,816
              )
              
              
              (356,739
              )Deemed
                  dividend to preferred stockholders on beneficial conversion
                  feature
              
              
              -
              
              
              
              (5,206,294
              )
              
              
              -
              
              
              
              (8,777,025
              )**Net
                  Income Available to Common Shareholders**
              
              **$**
              **661,295**
              
              
              **$**
              **(4,916,715**
              **)**
              
              **$**
              **805,343**
              
              
              **$**
              **(7,272,925**
              **)****Net
                  Income/(Loss) Per Share (Basic)**
              
              **$**
              **0.08**
              
              
              **$**
              **(0.84**
              **)**
              
              **$**
              **0.09**
              
              
              **$**
              **(2.79**
              **)****Net
                  Income/(Loss) Per Share (Fully Diluted)**
              
              **$**
              **0.03**
              
              
              **$**
              **(0.84**
              **)**
              
              **$**
              **0.05**
              
              
              **$**
              **(2.79**
              **)****Weighted
                  Average Common Shares Outstanding**
              
              ****
              **8,513,004**
              
              
              ****
              **5,824,933**
              
              
              ****
              **8,493,349**
              
              
              ****
              **2,608,311****Weighted
                  Average Common and Common Equivalent Shares
                  Outstanding**
              
              ****
              **22,160,943**
              
              
              ****
              **5,824,933**
              
              
              ****
              **22,661,663**
              
              
              ****
              **2,608,311**
 ***See
        notes to consolidated financial statements***
 F-3
 
 **Deer
        Valley Corporation & Subsidiary**
 **Consolidated
        Statements of Cash Flows**





**For
                    the nine month period ended****September
                    29,**
                
                
                **September
                    30,****2007**
                
                
                **2006****(unaudited)**
                
                
                **(unaudited)****CASH
                    FLOWS FROM OPERATING ACTIVITIES:**Net
                    income
                
                $
                1,116,159
                
                
                $
                1,860,840Adjustments
                    to reconcile net income to net cash provided for/used in operating
                    activities:Depreciation
                    and amortization
                
                
                205,768
                
                
                
                137,213Stock
                    based compensation
                
                
                119,903
                
                
                
                8,651(Gain)
                    on sale of property and equipment
                
                
                -
                
                
                
                (14,624
                )Changes
                    in assets and liabilities:(Increase)
                    in receivables
                
                
                (7,695,434
                )
                
                
                (1,328,448
                )(Increase)
                    in inventories
                
                
                (690,410
                )
                
                
                (1,203,113
                )(Increase)
                    in prepayments and other assets
                
                
                (758,142
                )
                
                
                (93,323
                )Increase
                    in accounts payable
                
                
                1,020,402
                
                
                
                844,480Increase
                    in income taxes payable
                
                
                687,840
                
                
                
                1,054,339Increase
                    in estimated warranties
                
                
                35,000
                
                
                
                800,000Increase/(decrease)
                    in accrued expenses
                
                
                (368,040
                )
                
                
                (1,432,869
                )**CASH
                    FLOW PROVIDED FOR (USED IN) OPERATING ACTIVITIES**
                
                **$**
                **(6,326,953**
                **)**
                
                **$**
                **633,146****CASH
                    FLOWS FROM INVESTING ACTIVITIES:**Purchases
                    of equipment
                
                
                (116,910
                )
                
                
                (1,042,447
                )Purchase
                    of Subsidiary, net of cash acquired
                
                
                -
                
                
                
                (3,543,738
                )Proceeds
                    from sales of marketable securities
                
                
                -
                
                
                
                151,418**CASH
                    FLOW USED IN INVESTING ACTIVITIES**
                
                **$**
                **(116,910**
                **)**
                
                **$**
                **(4,434,767**
                **)****CASH
                    FLOWS FROM FINANCING ACTIVITIES:**Proceeds
                    from preferred issuances
                
                
                -
                
                
                
                7,728,780Accrual
                    of earnout
                
                
                -
                
                
                
                -Proceeds
                    from issuance of notes payable
                
                
                4,495,844
                
                
                
                476,481Proceeds
                    from the exercise of warrants
                
                
                37,910
                
                
                
                -Loan
                    costs
                
                
                -
                
                
                
                (98,950
                )**CASH
                    FLOW PROVIDED BY FINANCING ACTIVITIES**
                
                **$**
                **4,533,755**
                
                
                **$**
                **8,106,311****NET
                    INCREASE (DECREASE) IN CASH**
                
                **$**
                **(1,910,109**
                **)**
                
                **$**
                **4,304,690****CASH,
                    Beginning**
                
                **$**
                **7,431,152**
                
                
                **$**
                **221****CASH,
                    Ending**
                
                **$**
                **5,521,043**
                
                
                **$**
                **4,304,911****SUPPLEMENTAL
                    DISCLOSURE OF CASH FLOW INFORMATION:**Cash
                    paid during the year for:Interest
                
                $
                117,303
                
                
                $
                42,839Taxes
                
                $
                750,000
                
                
                $
                775,000**SUPPLEMENTAL
                    DISCLOSURE OF NON CASH INVESTING AND FINANCING
                    ACTIVITIES:**Additional
                    purchase price accrued under earnout provision
                
                $
                -
                
                
                $
                1,811,901Accrual
                    of dividends on preferred stock
                
                $
                310,816
                
                
                $
                356,739Deemed
                    dividend on beneficial conversion feature
                
                $
                -
                
                
                $
                8,777,025
  ***See
        notes to consolidated financial statements***
 F-4
  **Deer
        Valley Corporation &
Subsidiary**
 **Notes
        to Condensed Consolidated Financial Statements**
 **(unaudited)**
   **1.
        BASIS OF PRESENATION**
 
 The
        accompanying unaudited consolidated financial statements for the three and
        nine
        month periods ended September 29, 2007 and 2006 have been prepared in accordance
        with accounting principles generally accepted in the United States of America
        for interim financial information and pursuant to the rules and regulations
        of
        the  Securities and Exchange Commission for Form 10-QSB. Accordingly,
        they do not include all the information and footnotes required by accounting
        principles generally accepted in  the United States of America for
        complete financial statements.
 
 The
        unaudited financial information included in this report includes all adjustments
        which are, in the opinion of management, necessary to reflect a fair statement
        of the results for the interim periods. The operations for the three and
        nine
        month periods ended September 29, 2007 and September 30, 2006 are not
        necessarily indicative of the results of the full fiscal year.
 
 The
        condensed consolidated financial statements included in this report should
        be
        read in conjunction with the financial statements and notes thereto included
        in
        the Registrant's December 31, 2006 Annual Report on Form 10-KSB and subsequent
        filings on Form 8-K.
 
 **2. SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES**
 
 *Reclassifications
        -*Certainminorreclassifications
        in prior period
        amounts have been made to conform to the current period
        presentation.
 
 *Stock
        Based
        Compensation**-* In December 2004, the FASB issued SFAS
        No.123 (revised 2004), "Share-Based Payment". SFAS 123(R) will provide investors
        and other users of financial statements with more complete and neutral financial
        information by requiring that the compensation cost relating to share-based
        payment transactions be recognized in financial statements. That cost will
        be
        measured based on the fair value of the equity or liability instruments issued.
        SFAS 123(R) covers a wide range of share-based compensation arrangements
        including share options, restricted share plans, performance-based awards,
        share
        appreciation rights, and employee share purchase plans. SFAS 123(R) replaces
        FASB Statement No. 123, "Accounting for Stock-Based Compensation", and
        supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees".
        SFAS
        123, as originally issued in 1995, established as preferable a fair-value-based
        method of accounting for share-based payment transactions with employees.
        However, that statement permitted entities the option of continuing to apply
        the
        guidance in Opinion 25, as long as the footnotes to financial statements
        disclosed what net income would have been had the preferable fair-value-based
        method been used. Public entities (other than those filing as small business
        issuers) were required to apply SFAS 123(R) as of the first interim or annual
        reporting period that begins after June 15, 2005. For public entities that
        file
        as small business issuers SFAS 123(R) is applicable as of the beginning of
        the
        first interim or annual reporting period that begins after December 15,
        2005.
 
 Prior
        to
        January 1, 2006, the Company accounted for Stock Options and Stock Based
        Compensation under the recognition and measurement provisions of APB Opinion
        No.
        25, “Accounting for Stock Issued to Employees”, and related Interpretations, as
        permitted by FASB Statement No. 123, “Accounting for Stock-Based
        Compensation”.  Effective January 1, 2006, the Company adopted the
        fair value recognition provisions of SFAS No. 123(R), Share-Based Payment,
        using
        the modified-prospective-transition method. Under that transition method,
        compensation cost for all share-based payments granted prior to, but not
        yet
        vested as of January 1, 2006 are based on (a) the grant date fair value
        estimated in accordance with the original provisions of SFAS No. 123, and
        (b)
        compensation cost for all share-based payments granted subsequent to January
        1,
        2006 are based on the grant-date fair value estimated in accordance with
        the
        provisions of SFAS No.123(R).  Results for prior periods have not been
        restated.
 
 *2007
        Long Term Incentive Plan*
 
 On
        July
        1, 2007 the Company established a Long Term Incentive (the “2007 Incentive
        Plan”) plan for the purposes of advancing the interests of the Company and our
        shareholders by providing incentives to certain of our employees and other
        key
        individuals who perform services for us, including those who contribute
        significantly to the strategic and long-term performance objectives and growth
        of the Company.  The 2007 Incentive Plan is administered by a
        committee (the “Committee”) appointed by the Board of
        Directors.  Currently, the Committee is comprised of all members of
        the Board of Directors acting as a group.  The Committee has the power
        to interpret the 2007 Incentive Plan and to prescribe rules, regulations
        and
        procedures in connection with the operations of the 2007 Incentive
        Plan.  The Committee may delegate administrative responsibilities
        under the 2007 Incentive Plan to any one or more of its members or other
        persons, except as may otherwise be required under applicable law or listing
        standards for an exchange on which the Company’s common stock may be
        listed.  The 2007 Incentive Plan provides for the granting of several
        types of awards, including stock options, performance grants and other awards
        deemed by the Committee to be consistent with the purposes of the 2007 Incentive
        Plan.  Awards may be granted alone, or in conjunction with one or more
        other awards, as determined by the Committee.
  F-5
  
 The
        2007
        Incentive Plan was effective as of July 1, 2007, and was approved by the
        Company’s board of directors.  The Company’s shareholders have not
        voted on approval of the 2007 Incentive Plan.  A maximum of ONE
        MILLION EIGHT HUNDRED THOUSAND (1,800,000) shares of common stock has been
        authorized to be issued under the 2007 Incentive Plan in connection with
        the
        grant of awards, subject to adjustment for corporate transactions, including,
        without limitation, any stock dividend, forward stock split, reverse stock
        split, merger or recapitalization.  Of this amount, no more than ONE
        MILLION (1,000,000) shares of common stock may be issued as incentive stock
        options.  Common stock issued under the 2007 Incentive Plan may be
        either newly issued shares, treasury shares, reacquired shares or any
        combination thereof.  If common stock issued as restricted stock,
        restricted stock units or otherwise subject to repurchase or forfeiture rights
        is reacquired by us pursuant to such rights, or if any award is cancelled,
        terminates, or expires unexercised, the common stock which would otherwise
        have
        been issuable pursuant to such awards will be available for issuance under
        new
        awards.     All awards under the 2007 Incentive Plan
        shall be granted within 10 years of the date the plan was adopted.
 
 The
        Committee has exclusive discretion to select to whom awards will be granted;
        to
        determine the type, size, terms and conditions of each award; to modify or
        waive, within certain limits, the terms and conditions of any award; to
        determine the time when awards will be granted; to establish performance
        objectives; to prescribe the form of documents representing awards under
        the
        2007 Incentive Plan; and to make all other determinations which it deems
        necessary, advisable or desirable in the interpretation and administration
        of
        the 2007 Incentive Plan.  At the discretion of the Committee, awards
        may be made under the 2007 Incentive Plan in assumption of, or in substitution
        for, outstanding awards previously granted by the Company, any predecessor
        or a
        company acquired by the Company or with which it combines.  The
        Committee has the authority to administer and interpret the 2007 Incentive
        Plan,
        and its decisions are final, conclusive and binding.  We anticipate
        that all of our employees and directors will be eligible to participate in
        the
        2007 Incentive Plan.
 
 On
        July
        1, 2007 pursuant to the Long Term Incentive Plan the Company awarded members
        of
        the board of directors 350,000 stock options with an exercise price of $1.14
        and
        a term of 10 years.  Additionally, on September 7, 2007 the Company
        awarded members of the board of directors 350,000 stock options with an exercise
        price of $1.09 and a term of 10 years. All of the options issued were fully
        vested on the grant date.  The Company has recognized $119,903 of
        expense related to issuances in the Consolidated Statement of Operations
        for the
        three and nine month periods ended September 29, 2007.
 
 *Determining
        Fair-Value*
 
  The
        Company uses the Black-Scholes option valuation model to determine the fair
        value of stock options and employee stock purchase plan shares. The
        determination of the fair value of share-based payment awards on the date
        of
        grant using an option-valuation model is affected by the
        Company’s stock price as well as assumptions regarding a number of complex
        variables. These variables include the Company’s expected stock price volatility
        over the term of the awards, projected employee stock option exercise behavior,
        expected risk-free interest rate and expected dividends.
  The
        Company estimates the expected term and volatility of options granted based
        on
        values derived from its industry peer group. Our decision to use these measures
        of expected term and volatility was based upon the lack of availability of
        actively traded options in the Company’s own common stock and the Company’s
        assessment that the measure of volatility used is more representative of
        future
        stock price trends than the historical volatility of the Company’s common stock.
        The Company bases the risk-free interest rate for option valuation on Constant
        Maturity Rates provided by the U.S. Treasury with remaining terms similar
        to the
        expected term of the options. The Company does not anticipate paying any
        cash
        dividends in the foreseeable future and therefore uses an expected dividend
        yield of zero in the option valuation model. In addition, SFAS No. 123(R)
        requires forfeitures of share-based awards to be estimated at the time of
        grant
        and revised, if necessary, in subsequent periods if actual forfeitures differ
        from those estimates. As this is the Company’s initial issuance and no
        historical data exists to estimate pre-vesting option forfeitures the Company
        has recorded stock-based compensation expense for the all the awards
        vested. The Company uses the straight-line attribution as its expensing method
        of the value of share-based compensation for options and awards.
  Under
        SFAS No. 123(R) Deer Valley uses the Black-Scholes option valuation model
        to estimate the fair value of the Company’s option awards. The key assumptions
        used in the model during the three months ended September 29, 2007 are provided
        below:
  **September
                      29,****2007**Risk-free
                      interest rate
                  
                  4.69%Expected
                      volatility of stock
                  
                  26.3%Dividend
                      yield
                  
                  0Expected
                      option life
                  
                  2
                      years
 The
        following table summarizes the activity related to all
        Company stock options and warrants for the period ended September 30,
        2007:
  F-6
 **Exercise
                    Price****Per         
                    Share**
                **Weighted
                    Average****Exercise Price Per
                    Share****Stock****Warrants**
                
                
                **Options**
                
                
                **Warrants**
                
                
                **Options**
                
                
                **Warrants**
                
                
                **Options******
                **22,506,977**
                
                
                ****
                **-**
                
                
                **$**
                **0.75-3.00**
                
                
                ****
                **-**
                
                
                **$**
                **1.64**
                
                
                ****
                **-**Granted
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Exercised
                
                
                (25,273
                )
                
                
                -
                
                
                $
                1.50
                
                
                
                -
                
                
                $
                1.50
                
                
                
                -Cancelled
                    or expired
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -****
                **22,481,704**
                
                
                ****
                **-**
                
                
                **$**
                **0.75-3.00**
                
                
                ****
                **-**
                
                
                **$**
                **1.64**
                
                
                ****
                **-**Granted
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Cancelled
                    or expired
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -****
                **22,481,704**
                
                
                ****
                **-**
                
                
                **$**
                **0.75-3.00**
                
                
                ****
                **-**
                
                
                **$**
                **1.64**
                
                
                ****
                **-**Granted
                
                
                250,000
                
                
                
                700,000
                
                
                $
                2.25
                
                
                $
                1.09-$1.14
                
                
                $
                2.25
                
                
                $
                1.12Exercised
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Cancelled
                    or expired
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -****
                **22,731,704**
                
                
                ****
                **700,000**
                
                
                **$**
                **0.75-3.00**
                
                
                **$**
                **1.09-$1.14**
                
                
                **$**
                **1.64**
                
                
                **$**
                **1.12**
 The
        warrants expire at various dates ranging from January 2011 through November
        2016.  The stock options expire at various dates ranging from July
        2017 to September 2017.
 
 ***Earning
        (Loss)**Per Share*
        -**
        The Company uses SFAS No. 128, “*Earnings Per Share*” for calculating the
        basic and diluted loss per share. Basic income/(loss) per share is computed
        by
        dividing net income/(loss) and net income/(loss) attributable to common
        shareholders by the weighted average number of common shares outstanding.
        Diluted income/(loss) per share is computed similar to basic loss per share
        except that the denominator is increased to include the number of additional
        common shares that would have been outstanding if the potential shares had
        been
        issued and if the additional shares were dilutive. Common equivalent shares
        are
        excluded from the computation of net loss per share if they would be
        anti-dilutive.
 **For
                    the three month periods ending**
                
                
                **For
                    the nine month periods****ending****September
                    29,**
                
                
                **September
                    30,**
                
                
                **September
                    29,**
                
                
                **September
                    30,****2007**
                
                
                **2006**
                
                
                **2007**
                
                
                **2006****Net
                    income/( loss) available to common shareholders**
                
                **$**
                **661,295**
                
                
                **$**
                **(4,916,715**
                **)**
                
                **$**
                **805,343**
                
                
                **$**
                **(7,272,925**
                **)**Weighted
                    average shares outstanding:Basic
                
                
                8,513,004
                
                
                
                5,824,933
                
                
                
                8,493,349
                
                
                
                2,608,311Diluted
                
                
                22,160,943
                
                
                
                5,824,933
                
                
                
                22,661,663
                
                
                
                2,608,311**Income/Loss
                    per share:****Basic**
                
                **$**
                **0.08**
                
                
                **$**
                **(0.84**
                **)**
                
                **$**
                **0.09**
                
                
                **$**
                **(2.79**
                **)****Diluted***
                
                **$**
                **0.03**
                
                
                **$**
                **(0.84**
                **)**
                
                **$**
                **0.05**
                
                
                **$**
                **(2.79**
                **)**
 *Diluted
        weighted average shares outstanding for periods ended July 1, 2006 do not
        include the effect of the Company’s common stock equivalent shares because to do
        so would have been anti-dilutive.  Accordingly, basic and diluted net
        loss per share for this period is the same.
 
 For
        the
        periods ended September 29, 2007 diluted weighted average shares
        outstanding includes all of the Company’s dilutive common stock equivalent
        shares.  The Company’s dilutive common stock equivalent shares as of
        September 30, 2007 include all of the Convertible Preferred shares and any
        incremental shares, as defined by SFAS No. 128, “*Earnings Per Share*”,
        associated with the Company’s Class C and D outstanding warrants and stock
        options.
 
 See
        the
        detailed list of Common Stock Equivalents below.
 
  F-7
 **Common
        Stock Equivalents**
 **as
        of**
 **Exercise**
                
                
                **September
                    29,**
                
                
                **September
                    30,****Securities**
                
                **Price**
                
                
                **2007**
                
                
                **2006***Preferred:*Series
                    A Preferred
                
                
                
                
                
                8,496,993
                
                
                
                9,400,326Series
                    B Preferred
                
                
                
                
                
                -
                
                
                
                -Series
                    C Preferred
                
                
                
                
                
                2,675,000
                
                
                
                2,675,000Series
                    D Preferred
                
                
                
                
                
                -
                
                
                
                -Series
                    E Preferred
                
                
                
                
                
                1,000,000
                
                
                
                -Total
                
                
                
                
                
                12,171,993
                
                
                
                12,075,326*Warrants:*Class
                    A Warrants
                
                $
                1.50
                
                
                
                10,369,351
                
                
                
                10,545,105Class
                    B Warrants
                
                $
                2.25
                
                
                
                4,970,824
                
                
                
                4,970,824Class
                    C Warrants
                
                $
                0.75
                
                
                
                2,000,000
                
                
                
                2,000,000Class
                    D Warrants
                
                $
                0.75
                
                
                
                2,000,000
                
                
                
                2,000,000Class
                    E Warrants
                
                $
                3.00
                
                
                
                880,544
                
                
                
                880,540Class
                    F Warrants
                
                $
                2.25
                
                
                
                1,000,000
                
                
                
                -Class
                    BD-1 Warrants
                
                $
                0.75
                
                
                
                -
                
                
                
                -Class
                    BD-2 Warrants
                
                $
                1.50
                
                
                
                919,162
                
                
                
                919,162Class
                    BD-3 Warrants
                
                $
                2.25
                
                
                
                459,581
                
                
                
                459,581Class
                    BD-4 Warrants
                
                $
                1.50
                
                
                
                66,121
                
                
                
                66,121Class
                    BD-5 Warrants
                
                $
                3.00
                
                
                
                66,121
                
                
                
                66,121Total
                
                
                
                
                
                
                22,731,704
                
                
                
                21,907,454*Stock
                    Options:*7/1/07
                    Issuance
                
                $
                1.14
                
                
                
                350,000
                
                
                
                -9/7/07
                    Issuance
                
                $
                1.09
                
                
                
                350,000
                
                
                
                -Total
                
                
                
                
                
                
                700,000
                
                
                
                -**Total
                    common stock equivalents**
                
                
                
                
                
                ****
                **35,603,697**
                
                
                ****
                **33,982,780**
 ***Recent
        Accounting
        Pronouncements***
 
 FASB
        Interpretation No 48, “*Accounting for Uncertainty in Income Taxes -- an
        interpretation of FASB Statement No. 109*” (“FIN 48”), was issued in
        July 2006. This interpretation clarifies the accounting for uncertainty in
        income taxes recognized in an entity's financial statements in accordance
        with
        SFAS No. 109, “Accounting for Income Taxes.” It prescribes a recognition
        threshold and measurement attribute for financial statement disclosure of
        tax
        positions taken, or expected to be taken, on a tax return. The Company will
        be
        required to adopt FIN 48 in the first quarter of fiscal 2008. Management
        is
        currently evaluating the requirements of FIN 48 and has not yet determined
        the
        impact on the financial statements.
  In
        September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB No.
        108”), *Considering the Effects of Prior Year Misstatements When Quantifying
        Misstatements in Current Year Financial Statements*. SAB No. 108 provides
        guidance to registrants for assessing materiality. SAB No. 108 states that
        registrants should use both a balance sheet approach and income statement
        approach when quantifying and evaluating the materiality of a misstatement.
        SAB
        No. 108 also provides guidance on correcting errors under the dual approach
        as
        well as transition guidance for correcting previously immaterial errors that
        are
        now considered material. We adopted SAB No. 108 as of January 1, 2007 without
        any impact on our financial statements.
  In
        September 2006, the FASB issued SFAS No. 157, “*Fair Value
        Measurement*” (“SFAS 157”), which defines fair value, establishes a
        framework for measuring fair value and expands disclosures about assets and
        liabilities measured at fair value. The Company will be required to adopt
        SFAS
        157 in the first quarter of fiscal 2009. Management is currently evaluating
        the
        requirements of SFAS 157 and has not yet determined the impact on the financial
        statements.
  In
        February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for
        Financial Assets and Financial Liabilities*. SFAS No. 159 permits entities
        to choose to measure many financial instruments and certain other items at
        fair
        value. SFAS No. 159 will be effective at the beginning of fiscal year
        2008.  We are presently evaluating the impact of the adoption of SFAS
        No. 159 on our results of operations and financial position.
  
 **3.
        INVENTORY**
 
 Inventory
        consisted of the following components:
  F-8
 **September
                    29,****2007****(unaudited)**Raw
                    Materials
                
                
                
                1,295,154Work-in-Process
                
                
                
                494,124Finished
                    Goods
                
                
                
                198,776**Total
                    Inventory**
                **$**
                **1,988,054**
 **4.
        PRODUCT WARRANTIES**
 
 The
        Company provides the retail home buyer a one-year limited warranty covering
        defects in material or workmanship in home structure, plumbing and
        electrical systems.  The Company estimated warranty costs
        are accrued at the time of the sale to the dealer following industry
        standards and historical warranty cost incurred.  Periodic
        adjustments to the estimated warranty accrual are made as events occur
        which indicate changes are necessary. As of September 29, 2007, the Company
        has provided a liability of $2,100,000 for estimated warranty costs
        relating to homes sold, based upon management's assessment of historical
        experience factors and current industry trends.
 
 Management
        reviews its warranty requirements at the close of each reporting period and
        adjusts the reserves accordingly.  The following tabular
        presentation reflects activity in warranty reserves during the periods
        presented:
 
 **September
                    29,****2007****(unaudited)****$**
                **2,065,000**Warranty
                    charges
                
                
                1,413,697Warranty
                    payments
                
                
                (1,378,697
                )**$**
                **2,100,000**
  F-9
 
 **5.
        COMMITMENTS AND CONTINGENCIES**
 
 ***Litigation**-***The  Company  in  the  normal  course  of  business  is  subject  to  claims
        and
        litigation.  Management  of  the  Company  is  of  the  opinion  that,
        based  on information available, such  legal matters will
        not ultimately have a material adverse effect on the financial position or
        results of operation of the Company.
 
 ***Reserve
        for Repurchase
        Commitments**-*****Deer Valley Homebuilders, Inc. (“DVH”) is
        contingently liable under the terms of repurchase agreements with financial
        institutions providing inventory financing for retailers of DVH’s
        products.  These arrangements, which are customary in the industry,
        provide for the repurchase of products sold to retailers in the event of
        default
        by the retailer.  The risk of loss under these agreements is spread
        over numerous retailers.  The price DVH is obligated to pay generally
        declines over the period of the agreement (typically 18 to 24 months) and
        the
        risk of loss is further reduced by the sale value of repurchased
        homes.  The maximum amount for which the Company is contingently
        liable under repurchase agreements is approximately $18,539,000 at September
        29,
        2007.  DVH to date has not experienced significant losses under these
        agreements, and management does not expect any future losses to have a material
        effect on the accompanying financial statements.
 
 ***Earnout
        Agreement******-***On
        January 18, 2006, the Company's wholly-owned subsidiary, DeerValley Acquisitions
        Corp. (dissolved on July 1, 2006), entered into an Earnout Agreement (the
        "Earnout Agreement"), between Deer Valley Homebuilders, Inc., DeerValley
        Acquisitions Corp., and the former owners of Deer Valley Homebuilders, Inc.
         In connection with the Earnout Agreement additional payments may be paid
        to the former owners of Deer Valley Homebuilders, Inc. as an earnout based
        upon
        the Net Income Before Taxes of Deer Valley Homebuilders, Inc. during the
        next
        five (5) years, up to a maximum of $6,000,000.  In any given year
        during the term of the Earnout Agreement, 50% of the pre-tax profit exceeding
        $1,000,000 per year will be accrued and become distributable to the prior
        shareholders.  During the period ending December 31, 2006 the Company’s
        wholly owned subsidiary, Deer Valley Homebuilders, Inc., had pre-tax profit
        in
        the amount of $4,936,287, of which $3,936,287 was above the Company's earnout
        threshold of $1,000,000.  The Company accrued 50% of the amount in
        excess of earnout threshold in the amount of $1,968,143.
 
 On
        April
        12, 2007 the Company made a payment of $1,232,275 pursuant to the Earnout
        Agreement.  The payment represented the current portion due under the
        Earnout Agreement.
 
 For
        the
        nine month period ending September 29, 2007, Deer Valley Homebuilders, Inc.
        had
        a pre-tax profit in the amount of $2,569,362, of which $1,569,362 was above
        the
        Company’s earnout threshold of $1,000,000.  The Company accrued 50%,
        or $784,681, of the amount in excess of earnout threshold. The maximum
        remaining potential accrual under the Earnout Agreement is
        $2,750,769.
  F-10
  ***Loans
        and Letter of Credit
        -*** On May 26, 2006, DVH entered into a Loan Agreement
        with
        Fifth Third Bank (the “Lender”) providing for a loan of Two Million and No/100
        Dollars ($2,000,000) (the "Loan") evidenced by a promissory note and secured
        by
        a first mortgage on DVH’s properties in Guin, Alabama and Sulligent, Alabama,
        including the structures and fixtures located thereon, as well as DVH’s interest
        in any lease thereof. The purpose of the loan is to pay off an existing loan
        from another bank secured by the Guin property and to reduce the outstanding
        balance on DVH’s revolving credit facility with the Lender.  The net
        effect of the reduction in the revolving credit balance is to increase the
        credit available to the Company for working capital under its revolving
        facility.  The Loan has a term from May 26, 2006 through June 1, 2011
        and has a variable interest rate at 2.25% above LIBOR.  There is no
        prepayment penalty.  Future advances are available under the Loan
        Agreement, subject to approval by the Lender.  Also on May 26, 2006,
        the Company and DVA guaranteed the Loan.  Should Deer Valley default,
        thereby triggering acceleration of the Loan, the Company would become liable
        for
        payment of the Loan.
 
 On
        April
        11, 2007, Deer Valley Corporation entered into a new Loan and Security Agreement
        providing for a revolving line of credit in an amount not to exceed Two Million
        Five Hundred Thousand and No/100 Dollars ($2,500,000) (the "DV Loan Agreement")
        evidenced by a revolving credit note and secured by accounts receivable,
        inventory, equipment and all other tangible and intangible personal property
        of
        Deer Valley Corporation and DVH. The purpose of the DV Loan Agreement is
        to
        provide a standby source of working capital, letters of credit required by
        the
        terms of certain repurchase agreements and performance bonds entered into
        in the
        normal course of the Company’s business, and to provide financing for potential
        acquisition(s) of new manufacturing facilities or subsidiaries. The DV Loan
        Agreement has a one year term and has a variable interest rate at 2.60% above
        LIBOR. Upon issuance of a letter of credit, Deer Valley Corporation is charged
        a
        letter of credit fee equal to 1.00% of the face amount of the letter of credit.
        The DV Loan Agreement provides for conditions to meet prior to each advance,
        including financial ratios.
 
 In
        addition to the above, on April 11, 2007, DVH renewed its existing Loan and
        Security Agreement providing for a revolving line of credit in an amount
        not to
        exceed Two Million Five Hundred Thousand and No/100 Dollars ($2,500,000)
        (the
        "DVH Loan agreement") evidenced by a revolving credit note and secured by
        accounts receivable, inventory, equipment and all other tangible and intangible
        personal property of DVH and Deer Valley Corporation. The purpose of the
        DVH
        Loan is to provide standby working capital and letters of credit required
        by the
        terms of certain repurchase agreements and performance bonds entered into
        in the
        normal course of DVH’s business. The DVH Loan Agreement has a one year term and
        has a variable interest rate at 2.60% above LIBOR. Upon issuance of a letter
        of
        credit, DVH is charged a letter of credit fee equal to 1.00% of the face
        amount
        of the letter of credit. The DVH Loan provides for conditions to meet prior
        to
        each advance, including financial ratios.
 
 On
        August
        10, 2007, Deer Valley Homebuilders, Inc. (“DVH”) entered into a Revolving Bridge
        Loan and Security Agreement with Fifth Third Bank, providing for a line of
        credit in an amount not to exceed Five Million and No/100 Dollars ($5,000,000),
        evidenced by a revolving credit note and secured by accounts receivable,
        inventory, equipment and all other tangible and intangible personal property
        of
        DVH. The purpose of the new facility is to provide a standby source of working
        capital for fulfillment of one or more contracts with the State of Mississippi
        to construct housing units under the “Mississippi Alternative Pilot Program.”
This facility has a six month term and has a variable interest rate at 2.50%
        above LIBOR.  The Loan and Security Agreement permits acceleration
        upon certain payment and covenant defaults.
 
 In
        addition to the revolving line of credit described in the preceding paragraph,
        DVH, during its normal course of business, is required to issue irrevocable
        standby letters of credit in the favor of independent third party beneficiaries
        to cover obligations under repurchase agreements. As of September 30, 2007,
        no amounts had been drawn on the above irrevocable letters of credit by the
        beneficiaries.
 
 ***Dividends
        Payable******-***As
        of September 29, 2007 the total accrued dividend payable to Series A Preferred
        shareholders was $89,578.
 
 **6.
        EQUITY TRANSACTIONS**
 
 ***Series
        A Convertible
        Preferred Stock -*****During
        the three month period ending September 29, 2007 certain shareholders converted
        1,500 shares of Series A Preferred stock, par value $15,000, into 20,000
        shares
        of the Company’s common stock.
 
 ***Common
        Stock Dividends
        -*** On August 24, 2007, the Company issued 213,875 shares
        of
        the Company’s common stock to Series A Preferred shareholders as payment for
        $221,239 of dividends.
 
 ***Series
        E Convertible Preferred exchange***-**
        On
        July 23, 2007, in exchange for 250,000 shares of outstanding registered common
        stock, the Company issued 250,000 shares of Series E Convertible Preferred
        Stock
        and a warrant exercisable for 250,000 shares of common stock with an exercise
        price of $2.25 per share.  Subject to certain conditions, each share
        of Series E Convertible Preferred Stock is convertible into 1 share of common
        stock.  The securities were offered to a single institutional
        shareholder of the Company, and the transaction was exempt under Section
        3(a)(9)
        of the Securities Act, as amended.
 
 ***Stock
        Options*
        -** On July 1, 2007 pursuant to the Long Term Incentive Plan the Company
        awarded members of the board of directors 350,000 stock options with an exercise
        price of $1.14 and a term of 10 years.  Additionally, on September 7,
        2007 the Company awarded members of the board of directors 350,000 stock
        options
        with an exercise price of $1.09 and a term of 10 years. All of the options
        issued were fully vested on the grant date.  The Company has
        recognized $119,903 of expense related to issuances in the Consolidated
        Statement of Operations for the three and nine month periods ended September
        29,
        2007.
 
   F-11


**Item
      2.   Management’s Discussion and Analysis**





**Cautionary
      Notice Regarding Forward Looking Statements**





We
      desire to take advantage of the
“safe harbor” provisions of the Private Securities Litigation Reform Act of
      1995.  This filing contains a number of forward-looking statements
      which reflect management’s current views and expectations with respect to our
      business, strategies, products, future results and events, and financial
      performance.  All statements made in this filing other than statements
      of historical fact, including statements addressing operating performance,
      events, or developments which management expects or anticipates will or may
      occur in the future, including statements related to distributor channels,
      volume growth, revenues, profitability, new products, adequacy of funds from
      operations, statements expressing general optimism about future operating
      results, and non-historical information, are forward looking
      statements.  In particular, the words “believe,” “expect,” “intend,”
“anticipate,” “estimate,” “may,” variations of such words, and similar
      expressions identify forward-looking statements, but are not the exclusive
      means
      of identifying such statements, and their absence does not mean that the
      statement is not forward-looking.  These forward-looking statements
      are subject to certain risks and uncertainties, including those discussed
      below.  Our actual results, performance or achievements could differ
      materially from historical results as well as those expressed in, anticipated,
      or implied by these forward-looking statements.  We do not undertake
      any obligation to revise these forward-looking statements to reflect any future
      events or circumstances.





Readers
      should not place undue reliance
      on these forward-looking statements, which are based on management’s current
      expectations and projections about future events, are not guarantees of future
      performance, are subject to risks, uncertainties and assumptions (including
      those described below), and apply only as of the date of this
      filing.  Our actual results, performance or achievements could differ
      materially from the results expressed in, or implied by, these forward-looking
      statements.  Factors which could cause or contribute to such
      differences include, but are not limited to, risks discussed in our Annual
      Report on form 10-KSB.  We undertake no obligation to publicly update
      or revise any forward-looking statements, whether as a result of new
      information, future events, or otherwise.





**Overview**





The
      Company, through its wholly-owned
      subsidiary, Deer Valley Homebuilders, Inc. (“DVH”), an Alabama corporation with
      its business offices located at 205 Carriage Street, P.O. Box 310, Guin, Alabama
      35563, is engaged in the production, sale and marketing of factory-built homes
      in the southeastern and south central U.S. housing market.  As of the
      date of this filing, we manufacture all of our factory-built homes in two
      manufacturing facilities, one located in Guin, Alabama and one located in
      Sulligent, Alabama.  We rely upon a team of regional sales directors
      and approximately 80 independent dealers to market our factory-built homes
      in
      over 100 retail locations.  As of the date of this filing, we are
      selling our factory-built homes in 13 states through our network of independent
      dealers and retail centers.





In
      recent years, the factory-built
      housing industry has suffered a downturn in sales as a result of a tightening
      of
      credit standards, restricted availability of retail and wholesale financing,
      and
      excessive inventory levels.  This industry decline began in 1999,
      approximately five years before we successfully launched and began to rapidly
      grow our business in January, 2004.  We have excelled in a tough
      industry through efficient manufacturing at our production facilities, industry
      leading products, experienced and capable relations oriented sales and
      management teams, stringent cost controls, and attention to dealer support,
      customer satisfaction, and service efforts.





Beginning
      in the second quarter of
      calendar year 2007, state and federal agencies, and other government sponsored
      entities, began distributing Requests for Proposals (RFPs) for housing designed
      to test and evaluate future disaster recovery housing units for the Gulf Coast
      region.  These RFPs have presented an opportunity for a near term
      upswing in production for Deer Valley and other companies in the industry
      serving the Gulf Coast.





The
      Company has aggressively sought to
      take advantage of its Alabama location and reputation in the Gulf Coast area
      to
      become a significant participant in the permanent rebuilding of the Gulf Coast
      region and the production of prototypes for future disaster recovery housing
      units.  As an immediate result of its efforts, in June 2007 the
      Company’s plant in Guin, Alabama was selected by the State of Mississippi to
      produce 50 two-bedroom and 100 three-bedroom cottages as part of a program
      that
      is designed to test and evaluate future disaster housing units.  The
      total combined value of this initial contract pilot phase contract awarded
      to
      the Company was $7,535,000.  All units contracted for with the Company
      under this initial contract were produced and delivered before the end of the
      third quarter of 2007.


3







In
      October 2007, the Company was
      awarded a contract extension by the State of Mississippi for the production
      and
      delivery of an additional 150 two-bedroom cottages as part of the State of
      Mississippi’s pilot program to test and evaluate future disaster housing units.
      As with the initial contract, the Company will deliver the units to state
      designated staging areas located near the Gulf Coast.  Total
      anticipated proceeds from this contract extension is $7,185,000 which, when
      combined with the completed contract for the manufacture of 50 two-bedroom
      and
      100 three-bedroom cottages,  brings the combined proceeds of the pilot
      phase contracts awarded to Deer Valley to a total of $14,720,000.  All
      of the units to be produced by the Company under the contract extension are
      scheduled to be delivered prior to March 31, 2008.





To
      provide increased flexibility to
      fulfill it government contracts, on August 10, 2007, Deer Valley Homebuilders,
      Inc. (“DVH”) entered into a Revolving Bridge Loan and Security Agreement with
      Fifth Third Bank, providing for a line of credit of $5,000,000. This
      facility has a six month term and has a variable interest rate at 2.50% above
      LIBOR.  (see paragraph below titled “*Liquidity and Capital
      Resources*”).





In
      addition, as part of its strategic plan to continue its growth in a challenging
      industry, the Company has increased its involvement in the modular segment
      of
      the factory built housing industry.  As its initial entry into
      the modular
      segment, the Company is targeting the production of smaller units (less than
      3,000 square feet) that are readily produceable, in a cost efficient manner,
      using the Company’s existing manufacturing capabilities.  The
      Company intends to sell these models to large tract developers and independent
      dealers.  Modular homes are typically built in a factory in sections
      and transported to a site to be joined together on a permanent
      foundation.  Unlike homes constructed in accordance with the Federal
      Manufactured Home Construction and Safety Standards (“HUD Code homes”), modular
      homes generally do not have integrated steel frames and axles.





**Manufacturing
      Operations**





We
      currently produce all of our
      factory-built homes at two manufacturing facilities in Guin and Sulligent,
      Alabama.  Our facilities normally function on a single-shift, five-day
      work week basis.  Our sales backlog, without including the 150
      two-bedroom cottages that we are scheduled to manufacture for the State of
      Mississippi during the fourth quarter of 2007 and first quarter of 2008, is
      approximately five weeks.  Once the cottages for the State of
      Mississippi are included, our total sales backlog increases to approximately
      eight weeks.  During the third quarter of 2007, the Company’s average
      production rate was 8.4 “floors” produced per day.





While
      our HUD Code and modular homes
      are constructed with many of the same components and building materials used
      in
      site-built homes, we utilize a cost-efficient assembly line manufacturing
      process which enables us to produce a quality home at a significantly lower
      cost
      per square foot than a traditional, site-built home.  Our homes are
      built with residential features, including 1/2 inch drywall, thermally sealed
      double-paned windows from CapitolTM, enhanced insulation, oak cabinets, cultured
      marble vanities, and two inch by six inch exterior wall construction
      standards.





The
      extent of customization of our
      homes varies to a significant degree with the price of the homes.  In
      the higher price range of the market, the home buyer is often less sensitive
      to
      the price increase associated with significant design
      modifications.  Our experience in producing a customized home on a
      cost-effective basis has allowed us to offer customized homes, factory-provided
      trim-out services, and walk-through inspections of homes.





Each
      of our HUD Code homes is
      constructed in accordance with the Federal Manufactured Home Construction and
      Safety Standards promulgated by the U.S. Department of Housing and Urban
      Development, better known as the “HUD Code.”  Our production and
      marketing efforts have concentrated on multi-section homes.





Our
      modular homes must be constructed
      in accordance with the local building codes in effect at the point of
      delivery.  These codes vary from state to state and also within
      states.  Such variance in standards is not conducive to standardized
      factory construction of a quality home.  Accordingly, we build our
      modular homes to the standards of the International Residential Code (“IRC”),
      which is generally more stringent than local building codes.  The IRC
      has been adopted wholesale by several states and by selected localities in
      many
      others.


4


Our
      two and three-bedroom cottages
      which we have contracted to manufacture for the State of Mississippi are
      designed and manufactured to meet the requirements of both the HUD Code and
      the
      International Residential Code.  As a result, such cottages can either
      remain on an integrated steel frame and axle or be joined to a permanent
      foundation.





Because
      the cost of transporting a
      factory-built home is significant, substantially all of our homes are sold
      to
      dealers within a 500 mile radius of our manufacturing facility.  DVH
      arranges, at dealers’ expense, for the transportation of finished homes to
      dealer locations using independent trucking companies.  Customary
      sales terms are cash­-on-delivery or guaranteed payment from a floor-plan
      financing source.  Dealers or other independent installers are
      responsible for placing the home on site and connecting utilities.





When
      evaluating the Company’s operating
      performance, the key performance indicators management examines are (1) the
      Company’s production rate, in “floors” produced per day, (2) the cost of sales,
      and (3) the size of the Company’s sales backlog.  For more information
      on these performance indicators, please see the attached financial statements
      and notes thereto and the section of the Company’s Annual Report on Form 10-KSB
      titled “Description of Business.”





**Results
      of Operations**





*The
      following discussion examines the
      results of the Company’s operations for the three and nine month periods ended
      September 29, 2007.  This discussion of our financial condition and
      results of operations should be read in conjunction with our financial
      statements and notes to the financial statements, included
      herewith.  This discussion should not be construed to imply that the
      results discussed herein will necessarily continue into the future, or that
      any
      conclusion reached herein will necessarily be indicative of actual operating
      results in the future.  Such discussion represents only the best
      present assessment by our management.  It is also imperative that one
      read our December 31, 2006 Annual Report on Form 10-KSB and subsequent filings
      on Form 8-K.*





**HISTORICAL
      RESULTS - PERIODS ENDED SEPTEMBER 29, 2007 AND SEPTEMBER 30,
      2006.**





***Revenues.***  Overall
      gross revenue for the three and nine month periods ended September 29, 2007
      were
      $18,103,462 and $45,803,829, respectively, compared to $16,901,751 and
      $48,767,224, respectively, for the three and nine month periods ended September
      30, 2006.  Revenue for the three month period ended September 29, 2007
      increased over the same three period in 2006, primarily due to the Company’s
      fulfillment of its initial contract with the State of Mississippi for the
      production of 50 two-bedroom and 100 three-bedroom cottages as part of its
      program that is designed to test and evaluate future disaster housing
      units.  Revenue for the Company’s nine month period ended September
      29, 2007 was less than the same nine period in 2006 primarily due to reduced
      production schedule during the first quarter reflecting the industry wide
      softness in demand for HUD Code housing units.




Our *Cost of Revenues* as a percentage of revenue
      has generally remained the same for the nine month period ending September
      29,
      2007, when compared to the corresponding period for 2006.  For the
      three month period ending September 29, 2007, our cost of revenues as a
      percentage of revenue increased to 16.62%, as compared to 13.09% for the
      corresponding period for 2006.




***Selling,
      General, and Administrative Expenses.***  Selling, general
      and administrative expenses consisted of payroll and related expenses for
      executive, accounting, and administrative personnel, professional fees, and
      other general corporate expenses.  Selling, general, and
      administrative expenses for the three and nine month periods ended September
      29,
      2007 were $1,881,300 and $5,125,273, respectively, compared to $1,557,614 and
      $4,520,552, respectively, for the three and nine month periods ended September
      30, 2006.  General and administrative costs increased for the nine
      month period ending September 29, 2007, in comparison to the corresponding
      period for 2006, primarily due to increased production capacity, increased
      trade
      show participation, increased administration cost associated with the MEMA
      project, and increased non-cash compensation to members of the Board of
      Directors.  During the third quarter of 2007, the Company awarded to
      members of the board of directors, in the aggregate, 350,000 stock options
      with
      an exercise price of $1.14 and  350,000 stock options with an exercise
      price of $1.09.  In connection with such awards, the Company
      recognized $119,903 of expense related to issuances in the Consolidated
      Statement of Operations for the three and nine month periods ended September
      30,
      2007.







5


***Net
      Income.***The net income for the three and nine month periods
      ended September 29, 2007 was $750,872 and $1,116,159, respectively, compared
      to
      $404,536 and $1,860,840, respectively, for the three and nine month periods
      ended September 30, 2006.  After accounting for the stock dividend
      payable to preferred stockholders and the deemed dividend to preferred
      stockholders on beneficial conversion features, the net income to common
      stockholders for the three month and nine month periods ended September 29,
      2007
      was $661,295 and $805,343, respectively, compared to net losses of $4,916,715
      and $7,272,925, respectively, for the three and nine month periods ended
      September 30, 2006.  The significant increases in net income to common
      stockholders for the three and nine month periods ended September 29, 2007
      versus those same periods ended September 30, 2006 are primarily attributable
      to
      the elimination of an $8.78 million non-recurring, non-cash, deemed dividend
      to
      preferred stockholders on beneficial conversion features that burdened the
      reported earnings attributable to common shareholders for the first three fiscal
      quarters of 2006.





**Liquidity
      and Capital Resources**





Management
      believes that the Company
      currently has sufficient cash flow from operations, available bank borrowings,
      cash, and cash equivalents to meet its short-term working capital
      requirements.  The Company had $5,521,043 in cash and cash equivalents
      as of September 29, 2007, compared to $4,304,911 in cash and cash equivalents
      as
      of September 30, 2006.  Should our costs and expenses prove to be
      greater than we currently anticipate, or should we change our current business
      plan in a manner which will increase or accelerate our anticipated costs or
      capital demand, such as through the acquisition of new products, our working
      capital could be depleted at an accelerated rate.





The
      net cash used in operating
      activities for the nine month period ended September 29, 2007 was
      $6,326,953.  The net cash provided from operating activities for the
      nine month period ended September 30, 2006 was $633,146.  The
      reduction of cash provided by operating activities for the first nine months
      of
      2007, in comparison to the same period from the Company’s prior fiscal year, is
      attributable primarily to a temporary increase in receivables at the end of
      the
      third quarter related to the Company’s fulfillment of  its initial
      contact with the State of Mississippi to produce 50 two-bedroom and 100
      three-bedroom cottages.  During October 2007, the Company received
      payment from the State of Mississippi for a significant portion of such initial
      contract, and repaid all borrowings under its Revolving Bridge Loan with Fifth
      Third Bank. The Company anticipates receiving all remaining payment from the
      State of Mississippi for such initial contract during the fourth quarter of
      2007. The Company’s account receivable as of September 29, 2007 was $9,870,432,
      as compared to $3,468,853 as of September 30, 2006.





The
      net cash used in investing
      activities for the nine month period ending September 29, 2007 was $116,910,
      which primarily reflects purchases of equipment.  The net cash
      provided from financing activities for the nine month period ending September
      29, 2007 was $4,533,755, which primarily relates to the Company’s borrowings
      under its line of credit with its senior lender.  The Company
      anticipates receiving payments during the fourth quarter of 2007 in connection
      with governmental contracts which were completed during the third quarter,
      thereby reducing its accounts receivable and its borrowings under its line
      of
      credit with its senior lender.





On
      August 10, 2007, Deer Valley
      Homebuilders, Inc. (“DVH”) entered into a Revolving Bridge Loan and Security
      Agreement with Fifth Third Bank, providing for a line of credit in an amount
      not
      to exceed Five Million and No/100 Dollars ($5,000,000), evidenced by a revolving
      credit note and secured by accounts receivable, inventory, equipment and all
      other tangible and intangible personal property of DVH.  The purpose of the
      new facility is to provide a standby source of working capital for fulfillment
      of one or more contracts with the State of Mississippi to construct housing
      units under the “Mississippi Alternative Pilot Program.”  This
      facility has a six month term and has a variable interest rate at 2.50% above
      LIBOR.





On
      April 11, 2007, Deer Valley
      Corporation entered into a Loan and Security Agreement providing for a revolving
      line of credit in an amount not to exceed Two Million Five Hundred Thousand
      and
      No/100 Dollars ($2,500,000) (the "DV Loan Agreement") evidenced by a revolving
      credit note and secured by accounts receivable, inventory, equipment and all
      other tangible and intangible personal property of Deer Valley Corporation
      and
      DVH.  The purpose of the DV Loan Agreement is to provide a standby
      source of working capital, letters of credit required by the terms of certain
      repurchase agreements and performance bonds entered into in the normal course
      of
      the Company’s business, to provide financing for potential acquisition(s) of new
      manufacturing facilities or subsidiaries, and to provide funding for the
      Company’s entry into the modular home market.  The DV Loan Agreement
      has a one year term and has a variable interest rate at 2.60% above
      LIBOR.  Upon issuance of a letter of credit, Deer Valley Corporation
      is charged a letter of credit fee equal to 1.00% of the face amount of the
      letter of credit.


6





In
      addition to the above, on April 11,
      2007, Deer Valley Homebuilders, Inc. renewed its existing Loan and Security
      Agreement providing for a revolving line of credit in an amount not to exceed
      Two Million Five Hundred Thousand and No/100 Dollars ($2,500,000.00) (the "DVH
      Loan agreement") evidenced by a revolving credit note and secured by accounts
      receivable, inventory, equipment and all other tangible and intangible personal
      property of DVH and Deer Valley Corporation.  The purpose of the DVH
      Loan is to provide standby working capital and letters of credit required by
      the
      terms of certain repurchase agreements and performance bonds entered into in
      the
      normal course of DVH’s business.  The DVH Loan Agreement has a one
      year term and has a variable interest rate at 2.60% above LIBOR.  Upon
      issuance of a letter of credit, DVH is charged a letter of credit fee equal
      to
      1.00% of the face amount of the letter of credit.





We
      are contingently liable under the
      terms of repurchase agreements with financial institutions providing inventory
      financing for retailers of our products.  For more information on the
      repurchase agreements, including the Company’s contingent liability thereunder,
      please see “Reserve for Repurchase Commitments” below.





**Recent
      Developments**





In
      October 2007, the Company was
      awarded a contract extension by the State of Mississippi for the production
      and
      delivery of an additional 150 two-bedroom cottages as part of the State of
      Mississippi’s program designed to test and evaluate future disaster housing
      units. Total anticipated proceeds from the contract extension is $7,185,000
      which would bring the combined proceeds of the pilot phase contracts awarded
      to
      Deer Valley to a total of $14,720,000.  All of the units to be
      produced by the Company under the contract extension are scheduled to be
      delivered prior to March 31, 2008.





During
      October 2007, the Company
      received payment from the State of Mississippi for a significant portion of
      amounts due in connection with its initial contact with the State of Mississippi
      for the production of 50 two-bedroom and 100 three-bedroom cottages, and repaid
      all borrowings under its Revolving Bridge Loan with Fifth Third Bank. The total
      combined value of this initial pilot phase contract awarded to the Company
      was
      $7,535,000. The Company expects to receive all remaining payment from the State
      of Mississippi for such initial contract during the fourth quarter of
      2007.





**Critical
      Accounting Policies**





Our
      discussion and analysis of our
      financial condition and results of operations are based upon our financial
      statements, which have been prepared in accordance with accounting principles
      generally accepted in the United States of America.  The preparation
      of these consolidated financial statements requires us to make estimates and
      judgments which affect the reported amounts of assets, liabilities, revenues
      and
      expenses, and related disclosures of contingent assets and
      liabilities.  For a description of those estimates, see Note 2,
      Summary of Significant Accounting Policies, contained in the explanatory notes
      to the Company’s financial statements for the quarter ended September 29, 2007,
      contained in this filing.  On an ongoing basis, we evaluate our
      estimates, including those related to reserves, deferred tax assets, valuation
      allowances, impairment of long-lived assets, fair value of equity instruments
      issued to consultants for services, and estimates of costs to complete
      contracts.  We base our estimates on historical experience and on
      various other assumptions which we believe to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying value of assets and liabilities which are not readily apparent
      from
      other sources.  Actual results may differ from these estimates under
      different assumptions or conditions.  However, we believe that our
      estimates, including those for the above-described items, are
      reasonable.





**Critical
      Accounting Estimates**





Management
      is aware that certain
      changes in accounting estimates employed in generating financial statements
      can
      have the effect of making the Company look more or less profitable than it
      actually is.  Management does not believe that either the Company or
      its auditors have made any such changes in accounting estimates.  A
summary
      of the most critical accounting estimates employed by the Company in generating
      financial statements follows below.


7





**Warranties**





We
      provide our retail buyers with a
      one-year limited warranty covering defects in material or workmanship, including
      plumbing and electrical systems.  We record a liability for estimated
      future warranty costs relating to homes sold, based upon our assessment of
      historical experience and industry trends.  In making this estimate,
      we evaluate historical sales amounts, warranty costs related to homes sold
      and
      timing in which any work orders are completed.  The Company has
      accrued a warranty liability reserve of $2,100,000 on its balance sheet as
      of
      September 29, 2007.  Although we maintain reserves for such claims,
      there can be no assurance that warranty expense levels will remain at current
      levels or that the reserves that we have set aside will continue to be
      adequate.  A large number of warranty claims which exceed our current
      warranty expense levels could have a material adverse affect upon our results
      of
      operations.





**Volume
      Incentives Payable**





We
      have relied upon volume incentive
      payments to our independent dealers who retail our products.  These
      volume incentive payments are accounted for as a reduction to gross sales,
      and
      are estimated and accrued when sales of our factory-built homes are made to
      our
      independent dealers.  Volume incentive reserves are recorded based
      upon the annualized purchases of our independent dealers who purchase a
      qualifying amount of home products from us.  We accrue a liability to
      our dealers, based upon estimates derived from historical payout
      rates.  Volume incentive costs represent a significant expense to us,
      and any significant changes in actual payouts could have an adverse affect
      on
      our financial performance.  We had a reserve for volume incentives
      payable of $689,400 as of September 29, 2007, as compared to $685,559 as of
      September 30, 2006.





**Reserve
      for Repurchase Commitments**





Most
      of our independent dealers finance
      their purchases under a wholesale floor plan financing arrangement under which
      a
      financial institution provides the dealer with a loan for the purchase price
      of
      the home and maintains a security interest in the home as
      collateral.  When entering into a floor plan arrangement, the
      financial institution routinely requires that we enter into a separate
      repurchase agreement with the lender, under which we are obligated, upon default
      by the independent dealer, to repurchase the factory-built home at our original
      invoice price less the cost of administrative and shipping
      expenses.  Our potential loss under a repurchase obligation depends
      upon the estimated net resale value of the home, as compared to the repurchase
      price that we are obligated to pay.  This amount generally declines on
      a predetermined schedule over a period that usually does not exceed 24
      months.





The
      risk of loss that we face under
      these repurchase agreements is lessened by several factors, including the
      following:





(i)
            the
                sales of our products are spread over a number of independent
                dealers,(ii)
            we
                have had only isolated instances where we have incurred a repurchase
                obligation,(iii)
            the
              price we are obligated to pay under such repurchase agreements declines
              based upon a predetermined amount over a period which usually does
              not
              exceed 24 months, and(iv)
            we
                have been able to resell homes repurchased from lenders at current
                market
                prices, although there is no guarantee that we will continue to be
                able to
                do so.





The
      maximum amount for which the
      Company is contingently liable under such agreements amounted to approximately
      $18,539,000 as of September 29, 2007, as compared to $15,375,000 as of September
      30, 2006.  As of September 29, 2007 and September 30, 2006, we had
      reserves of $140,000 and $67,325, respectively, established for future
      repurchase commitments, based upon our prior experience and evaluation of our
      independent dealers’ financial conditions. Because Deer Valley to date has not
      experienced any significant losses under these agreements, management does
      not
      expect any future losses to have a material effect on our accompanying financial
      statements.







8




Revenue Recognition


Revenue
      for our products sold to
      independent dealers are generally recorded when all of the following conditions
      have been met:  (i) an order for the home has been received from the
      dealer, (ii) an agreement with respect to payment terms has been received,
      and
      (iii) the home has been shipped and risk of loss has passed to the
      dealer.





**Recent
      Accounting Pronouncements**




FASB
      Interpretation No 48, “Accounting
      for Uncertainty in Income Taxes -- an interpretation of FASB Statement
      No. 109” (“FIN 48”), was issued in July 2006.  This
      interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an entity's financial statements in accordance with SFAS
      No. 109, “Accounting for Income Taxes.”  It prescribes a
      recognition threshold and measurement attribute for financial statement
      disclosure of tax positions taken, or expected to be taken, on a tax
      return.  The Company will be required to adopt FIN 48 in the first
      quarter of fiscal 2008.  Management is currently evaluating the
      requirements of FIN 48 and has not yet determined the impact on the financial
      statements.





In
      September 2006, the SEC issued Staff
      Accounting Bulletin No. 108 (“SAB No. 108”), *Considering the Effects of
      Prior Year Misstatements When Quantifying Misstatements in Current Year
      Financial Statements*. SAB No. 108 provides guidance to registrants for
      assessing materiality.  SAB No. 108 states that registrants should use
      both a balance sheet approach and income statement approach when quantifying
      and
      evaluating the materiality of a misstatement.  SAB No. 108 also
      provides guidance on correcting errors under the dual approach as well as
      transition guidance for correcting previously immaterial errors that are now
      considered material.  We adopted SAB No. 108 as of January 1, 2007
      without any impact on our financial statements.





In
      September 2006, the FASB issued
      SFAS No. 157, “Fair Value Measurement” (“SFAS 157”), which defines fair
      value, establishes a framework for measuring fair value and expands disclosures
      about assets and liabilities measured at fair value.  The Company will
      be required to adopt SFAS 157 in the first quarter of fiscal
      2009.  Management is currently evaluating the requirements of SFAS 157
      and has not yet determined the impact on the financial
      statements.





In
      February 2007, the FASB issued SFAS
      No. 159, *The Fair Value Option for Financial Assets and Financial
      Liabilities*.  SFAS No. 159 permits entities to choose to measure
      many financial instruments and certain other items at fair
      value.  SFAS No. 159 will be effective at the beginning of fiscal year
      2008.  We are presently evaluating the impact of the adoption of SFAS
      No. 159 on our results of operations and financial position.





**Off-Balance
      Sheet Arrangements**





In
      connection with the Capital Stock
      Purchase Agreement, the Company entered into the Earnout Agreement, pursuant
      to
      which additional payments may be paid to the former owners of DVH, as an
      earnout, based upon the Net Income Before Taxes of DVH during the next five
      (5)
      years, up to a maximum of $6,000,000.  The business
      purpose of executing the Earnout Agreement was to set the purchase price of
      Deer
      Valley Homebuilders, Inc. by an objective standard, given that the owners of
      DVH
      and the Company could not agree on an outright purchase price.  The
      Company’s obligations under the Earnout Agreement could negatively affect
      liquidity, capital resources, market risk, and credit risk. 
 During
        the term of the Earnout
        Agreement, 50% of the pre-tax profit exceeding $1,000,000 per year will be
        accrued and become distributable to the former owners of DVH.  During
        the nine month period ending September 29, 2007, Deer Valley Homebuilders,
        Inc.
        had pre-tax profit in the amount of $2,569,362, of which $1,569,362 was above
        the Company’s earnout threshold.  The Company accrued 50% of the
        amount in excess of the earnout threshold in the amount of
        $784,681.  The maximum remaining potential accrual under the Earnout
        Agreement is $2,750,769.


9




**Item
      3.   Controls and Procedures**





**Evaluation
      of Disclosure Controls and Procedures**





The
      Company’s Chief Executive Officer and acting Chief Financial Officer has
      evaluated the effectiveness of the Company’s disclosure controls and procedures
      (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
      the
      fiscal period ending September 29, 2007 covered by this Quarterly Report on
      Form 10-QSB.  Based upon such evaluation, the Chief Executive Officer
      and acting Chief Financial Officer has concluded that, as of the end of
      such period, the Company’s disclosure controls and procedures were effective
      as required under Rules 13a-15(e) and 15d-15(e) under the Exchange
      Act.




**Changes
      in Internal Controls over Financial Reporting**




Beginning
      with the Company’s first
      fiscal year ending after December 15, 2007, Section 404 of the
      Sarbanes-Oxley Act of 2002 will require us to include management's report on
      our
      internal control over financial reporting in our Annual Report on
      Form 10-K.  The internal control report must contain (1) a
      statement of management's responsibility for establishing and maintaining
      adequate internal control over our financial reporting, (2) a statement
      identifying the framework used by management to conduct the required evaluation
      of the effectiveness of our internal control over financial reporting,
      (3) management's assessment of the effectiveness of our internal control
      over financial reporting as of the end of our most recent fiscal year, including
      a statement as to whether or not our internal control over financial reporting
      is effective, and (4) a statement that our registered independent public
      accounting firm has issued an attestation report on management's assessment
      of
      our internal control over financial reporting.




In
      order to achieve compliance with
      Section 404 within the prescribed period, management is planning to
      commence a Section 404 compliance project to assess the adequacy of our
      internal control over financial reporting, remediate any control deficiencies
      that may be identified, validate through testing that controls are functioning
      as documented, and implement a continuous reporting and improvement process
      for
      internal control over financial reporting.  At this time, management
      is assessing the proper parameters of a Section 404 compliance project in light
      of emerging guidance from the SEC on such parameters.




Except
      as described above, during the
      quarter ended September 29, 2007, there have been no changes in our internal
      control over financial reporting that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.




**Inherent
      Limitations of the Effectiveness of Internal Control**




A
      control system, no matter how well
      conceived and operated, can provide only reasonable, not absolute, assurance
      that the objectives of the internal control system are met.  Because
      of the inherent limitations of any internal control system, no evaluation of
      controls can provide absolute assurance that all control issues, if any, within
      a company have been detected.







10


**PART
      II                      OTHER
      INFORMATION**





**Item
      1.   Legal Proceedings**


Although
      the Company in the normal
      course of business is subject to claims and litigation, the Company is not
      a
      party to any material legal proceeding nor is the Company aware of any
      circumstance which may reasonably lead a third party to initiate legal
      proceeding against the Company.





As
      of the date of this filing, there
      are no material pending legal or governmental proceedings relating to our
      Company or properties to which we are a party, and to our knowledge there are
      no
      material proceedings to which any of our directors, executive officers, or
      affiliates are a party adverse to us or which have a material interest adverse
      to us.





**Item
      2.   Unregistered Sales of Equity Securities and Use of
      Proceeds**





***Option
      Plan; Option
      Grants*** - On September 7, 2007, the Company’s Board of Directors
      ratified the Company’s 2007 Long Term Incentive Plan (the “2007 Incentive
      Plan”).  The 2007 Incentive Plan was effective as of July 1,
      2007.  A maximum of 1,800,000 shares of common stock has been
      authorized to be issued under the 2007 Incentive Plan in connection with the
      grant of awards, subject to adjustment for corporate transactions, including,
      without limitation, any stock dividend, forward stock split, reverse stock
      split, merger or recapitalization.  Of this amount, no more than
      1,000,000 shares of common stock may be issued as incentive stock
      options.





Pursuant
      to the 2007 Incentive Plan,
      each of the seven members of the Board of Directors were issued an option
      exercisable for 50,000 shares of the Company’s common stock, at an exercise
      price of $1.14.  Such options were approved at a meeting of the Board
      of Directors in March 2007 and were effective as of July 1, 2007.  In
      addition, under  the 2007 Incentive Plan, each of the seven members of
      the Board of Directors were issued an option exercisable for 50,000 shares
      of
      the Company’s common stock, at an exercise price of $1.09.  Such
      options were approved at a meeting of the Board of Directors on September 7,
      2007 and were effective as of September 7, 2007.  The
      issuance of such options were effected in reliance on the exemptions for sales
      of securities not involving a public offering, as set forth in Rule 506
      promulgated under the Securities Act and in Section 4(2) of the Securities
      Act, based on the following: (a) the investors confirmed to us that they
      were either “accredited investors,” as defined in Rule 501 of Regulation D
      promulgated under the Securities Act; (b) there was no public offering or
      general solicitation with respect to the offering; (c) the investors
      acknowledged that all securities being purchased were “restricted securities”
for purposes of the Securities Act, and agreed to transfer such securities
      only
      in a transaction registered under the Securities Act or exempt from registration
      under the Securities Act; and (d) a legend was placed on the certificates
      reflecting such restrictions.





***Series
      A Convertible
      Preferred Stock -*********During
      the three month period ending September 30, 2007 certain shareholders converted
      1,500 shares of Series A Preferred stock, par value $15,000, into 20,000 shares
      of the Company’s common stock. The securities were issued
      to existing
      shareholders, and the transaction was exempt under Section 3(a)(9) of the
      Securities Act, as amended.





***Common
      Stock Dividends
      -*** On August 24, 2007, the Company issued 213,875 shares of the
      Company’s common stock to Series A Preferred shareholders as payment for
      $221,239 of dividends.





**Item
      3.   Defaults Upon Senior Securities**





None.





**Item
      4.   Submission of Matters to a Vote of Security
      Holders**





None.





**Item
      5.   Other Information**





None




11


**Item
      6.****Exhibits**





**Exhibit
                No.**
            **Description**3.01
            Articles
                of Incorporation of Deer Valley Corporation. (1)3.02
            Bylaws
                of Deer Valley Corporation. (1)4.01
            Certificate
                of Designation, Rights, and Preferences of Series A Convertible Preferred
                Stock. (1)4.02
            Certificate
                of Designation, Rights, and Preferences of Series B Convertible Preferred
                Stock. (1)4.03
            Certificate
                of Designation, Rights, and Preferences of Series C Convertible Preferred
                Stock. (1)4.04
            Certificate
                of Designation, Rights, and Preferences of Series D Convertible Preferred
                Stock. (1)4.05
            Certificate
                of Designation, Rights, and Preferences of Series E Convertible Preferred
                Stock. (2)10.01
            Amendment
                to Loan Agreement (3)10.02
            Form
                of Renewal Revolving Credit Note (3)10.03
            Revolving
                Credit Loan and Security Agreement (3)10.04
            Form
                of Revolving Credit Note (3)10.05
            Continuing
                Guaranty of Deer Valley Homebuilders, Inc. (3)10.06
            Continuing
                Guaranty of Deer Valley Corporation (3)10.07
            Form
                of Series F Warrant (4)10.08
            Revolving
                Bridge Loan and Security Agreement (4)10.09
            Revolving
                Bridge Note (4)10.10
            Continuing
                Guaranty of Deer Valley Corporation (4)10.11
            Deer
                Valley Corporation 2007 Long Term Incentive Plan effective July 1,
                2007
                (5)10.12
            Form
                of Stock Option Agreement (5)10.13
            Employment
                Agreement with Charles G. Masters (5)21.1
            List
              of Subsidiaries of Deer Valley Corporation31.01
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a)
                as
                adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
                dated
                November __, 2007. (5)31.02
            Certification
                of Acting Chief Financial Officer pursuant to Rule 13a-14(a) and
                15d-14(a)
                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
                dated November __, 2007. (5)32.01
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated
                November
                __, 2007. (5)32.02
            Certification
                of Acting Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
                dated
                November __, 2007. (5)





(1)              Previously
      filed as an exhibit to the Form 8-K, filed with the SEC on July 28, 2006 and
      incorporated herein by reference.





(2)              Previously
      filed as an exhibit to the Form 10-QSB, filed with the SEC on November 20,
      2006
      and incorporated herein by reference.




(3)              Previously
      filed as an exhibit to the Form 8-K filed with the SEC on April 16, 2007 and
      incorporated herein by reference.





(4)              Previously
      filed as an exhibit to the Form 10-QSB, filed with the SEC on August __2007
      and
      incorporated herein by reference.





(5)              Filed
      herewith.





12





**SIGNATURE**





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.








Deer Valley Corporation


(Registrant)








Dated:  November
                5, 2007
            By:  */s/Charles
                G. Masters*Charles
                G. MastersPresident
                & Chief Executive Officer


13