**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington
      D.C., 20549**





**FORM
      10-KSB/A**





**[** Ö **] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**


**For
      the fiscal year ended December 31, 2006**





**[
      ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF
      1934**


**For
      the transition period from to**





**Commission
      File No. 333-100137**




Deep Down Inc.


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




Nevada
            
            75-2263732(State
                of other jurisdiction of incorporation)
            
            (I.R.S.
                Employer Identification No.)15473
                East Freeway
              Channelview,
                Texas
            
            77530(Address
                of Principal Executive Office)
            
            (Zip
                Code)


Registrant’s
      telephone number, including area code: **(281)
      862-2201**





Securities
      registered pursuant to Section 12 (b) of the Act: **NONE**





Securities
      registered pursuant to Section 12 (g) of the Act: **Common
      Stock $0.01 par value**










Check
        whether the issuer is not required to file reports pursuant to 13 or 15(d)
        of
        the Exchange Act. [  ]




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
      (or
      such shorter period that the registrant was required to file such reports),
      and
      (2) has been subject to such filing requirement for the past 90 days. Yes [ Ö **** ]
      No [
      ]





Check
      if
      there is no disclosures of delinquent filers in response to Item 405 of
      Regulations S-B not contained in this form, and no disclosure will be contained,
      to the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. [ **** ]




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


The
      issuer’s revenues for the period from inception, June 29, 2006 to December 31,
      2006 were $978,047.


The
      aggregate market value of the voting stock and non-voting common equity (based
      on the closing price on that date) held by non-affiliates of the registrant
      as
      of April 13, 2007 was approximately $7,885,630.


At
          March
          31, 2007, the issuer had outstanding 67,142,673 shares of Common Stock,
          par
          value $0.01 per share.
  Transitional
          Small Business Disclosure Format: Ö **** ]
 We
            are
            filing this Amendment No. 1 on Form 10-KSB for the period ended December
            31,
            2006 for the purpose of amending certain information appearing in the
            10-KSB in
            Item 2 Management's Discussion and Analysis, Proforma results of operations
            section, Part II Item 8A, and note 9 to the financial statements. In
            Item 2,
            Adjusted Proforma net income for the period ended December 31, 2005 was
            amended
            up from $601,839 as previously filed, to $839,269, and adjusted Proforma
            EBITDA
            was amended up from $1,053,328, as previously filed, to $1,290,758. Item
            8A
            erroneously reported that management felt that internal controls were
            effective.
            While conducting the audit of the financial statements as of and for
            the period
            ended December 31, 2006, our independent auditors found numerous audit
            adjustments that indicated a material weakness in our controls over financial
            reporting. It is our plan with additional funding to devote more resources
            to
            this very critical function. Note 9 to the financial statements includes
            additional information regarding the treatment of Series D and F preferred
            stock
            as temporary equity.
  There
            is
            no impact to the financial statements for any of these changes.







**PART
        I**
  **Forward-Looking
        Information**
  The
        statements contained in this Annual Report on Form 10-KSB that are not
        historical fact are forward-looking statements (as such term is defined in
        the
        Private Securities Litigation Reform Act of 1995), within the meaning of
        Section
        27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
        Exchange Act of 1934, as amended. The forward-looking statements contained
        herein are based on current expectations that involve a number of risks and
        uncertainties. These statements can be identified by the use of forward-looking
        terminology such as “believes,” “expects,” “may,” “will,” “should,” “intend,”
“plan,” “could,” “is likely,” or “anticipates,” or the negative thereof or other
        variations thereon or comparable terminology, or by discussions of strategy
        that
        involve risks and uncertainties. The Company wishes to caution the reader
        that
        these forward-looking statements that are not historical facts are only
        predictions. No assurances can be given that the future results indicated,
        whether expressed or implied, will be achieved. While sometimes presented
        with
        numerical specificity, these projections and other forward-looking statements
        are based upon a variety of assumptions relating to the business of the Company,
        which, although considered reasonable by the Company, may not be realized.
        Because of the number and range of assumptions underlying the Company’s
        projections and forward-looking statements, many of which are subject to
        significant uncertainties and contingencies that are beyond the reasonable
        control of the Company, some of the assumptions inevitably will not materialize,
        and unanticipated events and circumstances may occur subsequent to the date
        of
        this report. These forward-looking statements are based on current expectations
        and the Company assumes no obligation to update this information. Therefore,
        the
        actual experience of the Company and the results achieved during the period
        covered by any particular projections or forward-looking statements may differ
        substantially from those projected. Consequently, the inclusion of projections
        and other forward-looking statements should not be regarded as a representation
        by the Company or any other person that these estimates and projections will
        be
        realized, and actual results may vary materially. There can be no assurance
        that
        any of these expectations will be realized or that any of the forward-looking
        statements contained herein will prove to be accurate.
  **Item
        1. Description of Business.**
  **Corporate
        History**
 
 During
        2006, MediQuip Holdings, Inc. (“MediQuip”), a publicly traded company, divested
        its operating subsidiary and subsequently entered into a merger agreement
        with
        Deep Down, Inc. which was accounted for as a reverse merger with Deep Down,
        Inc.
        being the surviving entity for accounting purposes. The following discussion
        describes the history of Deep Down, Inc. (“we” or “the Company”)
 
 On
        June
        29, 2006, Subsea Acquisition Corporation (“Subsea”) was formed by three
        shareholders with the intent to acquire service providers to the offshore
        industry, and designers and manufacturers of subsea equipment, surface equipment
        and offshore rig equipment that are used by major integrated, large independent
        and foreign national oil and gas companies in offshore areas throughout the
        world. In November 2006, Subsea On June 29, 2006, Subsea Acquisition Corporation
        (“Subsea”) was formed by three shareholders with the intent to acquire service
        providers to the offshore industry, and designers and manufacturers of subsea
        equipment, surface equipment and offshore rig equipment that are used by
        major
        integrated, large independent and foreign national oil and gas companies
        in
        offshore areas throughout the world. On November 21, 2006, Subsea acquired
        Deep
        Down, Inc, a Delaware corporation founded in 1997. Under the terms of this
        transaction, all of Deep Down, Inc.’s shareholders transferred ownership of all
        of Deep Down Inc.’s common stock to Subsea in exchange for 5,000 shares of
        Subsea’s Series D Preferred Stock and 5,000 shares of Subsea’s Series E
        Preferred Stock resulting in Deep Down Inc. becoming a wholly owned subsidiary
        of Subsea. On the same day, Subsea then merged with Deep Down, with the
        surviving company operating as Deep Down Inc. Unless specifically stated
        otherwise, all references to Deep Down refer to the combined entity comprising
        Subsea and Deep Down Inc. This transaction was accounted for as a purchase
        with
        Subsea being the acquirer based on a change in voting control. Under purchase
        accounting, we have included the results of operations of the entity formerly
        operating as Deep Down from the acquisition date of November 21, 2006 forward.
        As Subsea was formed on June 29, 2006, the financial statements included
        herein
        reflect the results of the operations from the date of inception to December
        31,
        2006.
  
  
 Additionally
        on November 21, 2006, Subsea acquired all the common stock of Strategic Offshore
        Services Corporation (“SOS”) for 3,000 Series F Preferred Stock and 1,000 Series
        G Preferred Stock from two common shareholders of Subsea. Since the entities
        were under common control and the acquired entity did not constitute a business
        the Company charged compensation expense to shareholders for the fair value
        of
        both series totaling $3,340,792 million.
 
 On
        December 14, 2006 Deep Down exchanged all 9,999,999 shares of Deep Down common
        stock and all 14,000 shares of Deep Down preferred stock for 75,000,000 shares
        of common stock and 14,000 shares of preferred stock of MediQuip. The preferred
        shares of MediQuip have the same designations as Deep Down’s preferred stock. As
        a result of the acquisition, the shareholders of Deep Down will own a majority
        of the voting stock of MediQuip, which changed its name to Deep Down, Inc.
        The
        merger has been accounted for as a reverse merger whereby Deep Down is the
        accounting acquirer resulting in a recapitalization of Deep Down’s equity. The
        acquisition did not require the approval of shareholders of MediQuip. In
        connection and simultaneously with this reverse merger, Westmeria Healthcare
        Limited, a wholly owned subsidiary of MediQuip was transferred to MediQuip’s
        majority shareholder in exchange for the cancellation of 31,351,256 common
        share
        equivalents. The MediQuip Series C convertible preferred stock outstanding
        prior
        to the reverse merger remains outstanding.
 
 The
        Company’s historical financial statements reflect those of Deep Down, Inc, and
        do not include the results of MediQuip or Westmeria Healthcare Limited for
        periods prior to the merger date.
 
 **Company
        Overview**
  Our
        strategy is to consolidate service providers to the offshore industry, and
        designers and manufacturers of subsea equipment, surface equipment and offshore
        rig equipment that are used by major integrated, large independent and foreign
        national oil and gas companies in offshore areas throughout the world. Our
        current operations are the result of a recent acquisition of Deep Down founded
        by Ronald E. Smith. Mr. Smith is well known in the industry for his unique
        ability to address and solve mission-critical issues confronted by offshore
        energy companies. Mr. Smith and his key managers have over 113 years of combined
        experience in the oilfield equipment industry, either with Deep Down or its
        competitors.
  We
        are an
        umbilical and flexible pipe installation engineering and installation management
        company. We also fabricate component parts for subsea distribution systems
        and
        assemblies that specialize in the development of offshore subsea fields and
        tie
        backs. These items include umbilicals, flow lines, distribution systems,
        pipeline terminations, controls, winches, and launch and retrieval systems,
        among others. We provide these services from the initial field conception
        phase,
        thru manufacturing, site integration testing, installation, topsides
        connections, and the final commissioning of a project. Our products and services
        serve the offshore industry and are used in deep-water exploration and
        production of oil and gas.
  **Business
        Overview**
  We
        are an
        installation engineering and management company focused on the offshore segment
        of the energy industry. We can custom design and manufacture product or modify
        existing equipment to meet customer specifications. We design, manufacture,
        fabricate, sell and service highly-engineered subsea equipment, surface
        equipment and offshore rig equipment for use in deepwater, harsh environment
        and
        severe service applications. Our principal products consist of flying lead
        installation, maintenance and termination systems; buoyancy and rigging systems;
        high and low pressure testing and monitoring systems; latch systems; lay
        chutes;
        rollers; tensioners; and offshore storage and space management systems. We
        also
        provide installation, retrieval, storage and management services in connection
        with the use of our products.
  Deep
        Down
        has developed its broad line of subsea equipment, surface equipment and offshore
        rig equipment primarily through internal product development efforts in
        Channelview, Texas. In many cases, these products were developed in direct
        response to customer requests for solutions to critical problems in the field.
        We are instrumental in achieving solutions for our clients to simplify
        installation procedures and reduce costs.
  
   We
        believe that we have achieved significant market share and brand name
        recognition with respect to our established products due to the technological
        capabilities, reliability, cost effectiveness, timely delivery and operational
        timesaving features of these products. Since our formation, we have introduced
        many new products that continue to broaden the market currently served by
        us.
  Deep
        Down
        markets its products through its offices in Channelview, Texas. Its sales
        representatives travel to all of the major international energy markets
        throughout the world. We manufacture and fabricate our products at facilities
        located in Channelview, Texas and maintain valuable relationships with several
        other companies that own additional manufacturing and fabrication facilities
        in
        and around Houston, Texas. These other companies provide excellent subcontract
        manufacturing support on an as needed basis. Our manufacturing operations
        are
        vertically integrated. We perform substantially all of our own heat-treating,
        machining, fabrication, inspection, assembly and testing at our
        facilities.
  **Industry
        Overview**
  The
        offshore energy industry is centered around the use of platforms. An oil
        platform is a large structure used to house workers and machinery needed
        to
        drill and then produce oil and natural gas in the ocean. Depending on the
        circumstances, the platform may be attached to the ocean floor, consist of
        an
        artificial island, or be floating. Generally, oil platforms are located on
        the
        continental shelf, though as technology improves, drilling and production
        in
        deeper waters becomes both feasible and profitable. A typical platform may
        have
        around thirty wellheads located on the platform and directional drilling
        allows
        reservoirs to be accessed at both different depths and at remote positions
        up to
        5 miles (8 kilometers) from the platform. Many platforms also have remote
        wellheads attached by umbilical connections, which may be single wells or
        a
        manifold centre for multiple wells. An umbilical cable supplies necessary
        requirements to an apparatus.
  There
        are
        several distinct types of platforms and rigs: fixed platforms, compliant
        towers,
        semi-submersible platforms, jack-up platforms, drillships, floating production
        systems, tension-leg platforms, and Spar platforms.
  • Fixed
        Platforms are
        built on concrete and/or steel legs anchored directly onto the seabed, and
        support a deck with space for drilling rigs, production facilities and crew
        quarters. Such platforms are, by virtue of their immobility, designed for
        very
        long-term use. Fixed platforms are economically feasible for installation
        in
        water depths up to about 1,700 feet.
  • Compliant
        Towers consist
        of narrow, flexible towers and a piled foundation supporting a conventional
        deck
        for drilling and production operations. Compliant towers are designed to
        sustain
        significant lateral deflections and forces, and are typically used in water
        depths ranging from 1,500 and 3,000 feet.
  • Semi-submersible
        Platforms have
        legs of sufficient buoyancy to cause the structure to float, but of weight
        sufficient to keep the structure upright. Semi-submersible rigs can be moved
        from place to place; and can ballasted up or down by altering the amount
        of
        flooding in buoyancy tanks. They are generally secured in position by cable
        anchors during drilling operations, though they can also be kept in place
        by the
        use of dynamic positioning. Semi-submersibles can be used in depths from
        600 to
        6,000 feet.
  • Jack-up
        Platforms are
        platforms that can be jacked up above the sea by dint of legs that can be
        lowered like jacks. These platforms, used in relatively low depths, are designed
        to move from place to place, and then anchor themselves by deploying the
        jack-like legs.
  • Drillships are
        maritime vessels that have been fitted with drilling apparatus. They are
        often
        used for exploratory drilling of new oil or gas wells in deep water but can
        also
        be used for scientific drilling. They are often built on a modified tanker
        hull
        and outfitted with dynamic positioning systems to maintain their position
        over a
        well.
   
  • Floating
        production systems are
        large ships equipped with processing facilities and moored to a location
        for a
        long period. The main types of floating production systems are FPSO (floating
        production, storage, and offloading system), FSO (floating storage and
        offloading system), and FSU (floating storage unit).
  • Tension-leg
        Platforms (“TLPs”) consist
        of floating rigs tethered to the seabed in a manner that eliminates most
        vertical movement of the structure. TLPs are used in water depths up to about
        6,000 feet. The "conventional" TLP is a 4-column design which looks similar
        to a
        semi-submersible. • Spar Platforms are moored to the seabed like the TLP, but
        whereas the TLP has vertical tension tethers the Spar has more conventional
        mooring lines. Spars have been designed in three configurations: the
        "conventional" one-piece cylindrical hull, the "truss spar" where the midsection
        is composed of truss elements connecting the upper buoyant hull (called a
        hard
        tank) with the bottom soft tank containing permanent ballast, and the "cell
        spar" which is built from multiple vertical cylinders. The Spar may be more
        economical to build for small and medium sized rigs than the TLP, and has
        more
        inherent stability than a TLP since it has a large counterweight at the bottom
        and does not depend on the mooring to hold it upright. It also has the ability,
        by use of chain-jacks attached to the mooring lines, to move horizontally
        over
        the oil field.
  The
        market for subsea equipment, surface equipment and offshore rig equipment
        and
        services and the Company's business are substantially dependent on the condition
        of the oil and gas industry and, in particular, the willingness of oil and
        gas
        companies to make capital expenditures on exploration, drilling and production
        operations offshore. The level of capital expenditures is generally dependent
        upon the prevailing view of future oil and gas prices, which are influenced
        by
        numerous factors affecting the supply and demand for oil and gas, including
        worldwide economic activity, interest rates and the cost of capital,
        environmental regulation, tax policies, and the ability of OPEC and other
        producing nations to set and maintain production levels and prices. Capital
        expenditures are also dependent on the cost of exploring for and producing
        oil
        and gas, the sale and expiration dates of offshore leases in the United States
        and other countries overseas, the discovery rate of new oil and gas reserves
        in
        offshore areas and technological advances. Oil and gas prices and the level
        of
        offshore drilling and production activity have historically been characterized
        by significant volatility.
  **Services**
  Deep
        Down’s engineering team can provide project engineering, installation and
        pull-in engineering, project management, installation management, and
        commissioning services. We pride ourselves on collaborating with engineers
        from
        the installation contractors and manufacturing side of the industry to find
        the
        most effective solutions to address installation problems in the subsea world.
        We also provide installation, retrieval, storage and management services
        in
        connection with the use of our products. Approximately 60% of our revenue
        is
        derived from services.
  Project
        Management .
        Our
        installation management and engineering team specializes in deep water subsea
        developments. We are often contracted by our customers to assist with the
        preparation and evaluation of subsea development tenders and Requests for
        Quotes. Our experience comes from working with installation contractors,
        operators, controls suppliers, and umbilical manufacturers. Our engineers
        have
        experience ranging from the initial conceptual design phases through
        manufacturing and installation, and concluding with topsides connections
        and
        commissioning. This experience provides us with a level of “hands on and
        practical” experience that has proven to be in-dispensable in enabling us to
        offer customer solutions to the many problems encountered both subsea and
        topsides. Because of this wide knowledge base, our engineering team is often
        hired by operators and installation contractors to provide installation
        management and engineering support services.
  Project
        Engineering .
        Our
        engineering team has been involved in most of the innovative solutions used
        today in deepwater subsea systems. We are unique in the fact that we are
        often
        hired by the controls and umbilical manufacturers, installation contractors,
        and
        the operators to help ensure that the project progresses smoothly, on time
        and
        on budget.
  Our
        team
        specializes in offshore installation engineering and the writing of practical
        installation procedures. We deal with issues involving flying leads; compliant
        umbilical splices; bend stiffener latches; umbilical hardware; hold-back
        clamps;
        and the development of distribution system components, among others. We are
        heavily involved in the fabrication of installation aids to simplify offshore
        executions, and offer hydraulic, fiber optic, and electrical testing services
        and various contingency testing tools.
  
   Installation
        Support and Management .
        Deep
        Down’s installation management is centered around the utilization of
        standardized hardware, proven installation techniques, and an experienced,
        consistent team that has proven to be safe and skilled in the various areas
        of
        all installation phases. We pride ourselves on supporting installation
        contractors through its installation management and engineering services,
        installation aids and equipment, and its offshore installation support services,
        including spooling operators, offshore testing, and flying lead installation
        support. We have extensive “Hands-On” experience in the field. Many installation
        contractors find it beneficial to utilize our services to help reduce personnel
        on board by allowing a few specialized technicians to perform multiple roles
        such as performing the offshore testing services, as well as operation of
        the
        lay system and equipment.
  Deep
        Down
        has designed and fabricated many different installation tools and equipment
        over
        the years. We have been involved in the design of the following pieces of
        equipment to help make installations go as smoothly as possible: steel flying
        leads; steel flying lead deployment systems; umbilical hardware and termination
        systems; umbilical bell mouths; lay chutes; Mud Mats; flying lead installation
        and parking frames; Umbilical Termination Assembly Stab & Hinge Over
        Systems; and numerous other pieces of offshore equipment. Deep Down’s team has
        vast experience with the installation of flexible and rigid risers and flow
        lines, umbilicals, flexible and rigid jumpers, steel tube and thermoplastic
        hose
        flying leads, pipeline end terminations (“PLETs”) and manifolds.
  Spooling .
        Our
        experienced personnel have been involved in running spooling equipment on
        many
        projects. Deep Down has also been employed by other companies to run their
        spooling equipment. Many installation contractors find it beneficial to use
        the
        same team to run the spooling equipment as well as function as the umbilical
        support team to do installation testing and monitoring as required. Our
        technicians are often hired by the umbilical manufacturers and the installation
        contractors to provide spooling support. Our team runs two under roller units,
        electrically- powered reels, and the Company’s five (5) steel flying lead
        installation systems.
  Systems
        operated include:
  •
        Technip’s TR-10 and TR-45
  •
        Cal-Dive's Reel System 1 and 2
  •
        Cal-Dive’s Big Boy Pipe Lay System on the Intrepid
  •
New
        Cal-Dive Carousel system
  •
        Coflexip Offshore TR-45 and 1200 ton carousel
  •
Deep
        Down's 200 ton carousel and four (4) additional Horizontal Drive
        Units
  •
Deep
        Down's 300 and 340 ton under rollers
  •
Topside
        pull-in winches for umbilical pull-in operations
  Deep
        Down
        is also a main supplier of high tension spooling services, allowing full
        dive
        simulation and tensioning for deep water ROV operations.
  Pull-In
        Operations .
        Deep
        Down’s team has been involved in the pull-in operations for many umbilical
        projects in the Gulf of Mexico. Deep Down pull-ins run smoothly because the
        same
        engineers who are planning the pull-in operation are also supervising the
        offshore operation. Familiarity with the system is important. The offshore
        servicemen are also the topside umbilical support team familiar with the
        umbilical termination hardware, and most often were involved in terminating
        the
        umbilicals at the manufacturers’ yard weeks prior to the installation.
        Remediation is a large part of Deep Down services. If a system does not work
        properly, Deep Down retrofit kits designed for effective ROV installations
        can
        help convert potential failures into positive successes. Everything is
        thoroughly tested prior to installation, including winches at the rental
        contractor’s yard and after set-up on the platform. Load cells are tested
        onshore, and the same load cells are used to test the system offshore. This
        eliminates variables and validates the condition of the pull-in system. Pull-ins
        are then performed under more control and with increased confidence resulting
        in
        safer operations.
  Termination. Deep
        Down and/or its employees have been involved in umbilical terminations since
        1988. The Company’s team was involved with the designs for the armored thermo
        plastic umbilicals at Multiflex, the first steel tube umbilical in the Gulf
        of
        Mexico for the Shell Popeye umbilical, and the standardization of many steel
        tube umbilical terminations. Deep Down has also pioneered the concept of
        the
        compliant Moray® section that enables a traditional helically wound umbilical to
        be used for direct well step outs, or long field flying leads. Management
        believes Deep Down is the only Company that can terminate anyone else’s
        umbilicals with the same Deep Down termination system.
  Testing
        Services. Deep
        Down’s service team is often utilized by the umbilical manufacturers, control
        suppliers, installation contractors, and operators to perform all aspects
        of
        testing, beginning with the initial Factory Acceptance Testing (“FAT”) of the
        system, connecting the umbilical termination assemblies and performing Extended
        Factory Acceptance Testing (“EFAT”) throughout the process to System Integration
        (“SIT”), to the installation, and finally commissioning. To execute these
        services, the Company has assembled a variety of personnel and equipment
        to
        ensure that all testing operations are done in the most safe and time-efficient
        manner, ensuring a reduced overall project cost. We also work hard to utilize
        the most detailed digital testing and monitoring equipment to ensure that
        the
        most accurate data is provided to our clients. We have been hired to perform
        coiled tubing flushing, cleaning, and hydro testing; umbilical filling,
        flushing, pressure, flow rate, and cleanliness testing; load out monitoring
        and
        testing; installation monitoring; post installation testing; system
        commissioning; umbilical intermediate testing; and umbilical and umbilical
        termination assembly cleanliness, flow, and leak testing, among others.
  We
        believe we have one of the best filling, flushing and testing teams in the
        business. Deep Down employs a variety of different pumping systems to meet
        industry needs and offers maximum flexibility. Deep Down’s philosophy is to
        flush through the maximum number of lines at the highest flow rate possible
        to
        maximize efficiency. Deep Down has assembled a comprehensive list of offshore
        pumping units from Babe, Rambo, and an assortment of chemical pumping skids.
        The
        Company’s equipment can be used to pump all of the standard offshore water based
        chemicals as well as all offshore commissioning fluids such as Methanol and
        diesel.
  System
        Integration Testing (“SIT ”).
        We
        have lead the revolution into the digital age with our use of digital
        transducers to provide much greater levels of accuracy compared to information
        gathered off of conventional chart recorders. Deep Down has a wide variety
        of
        digital pressure transducers, flow meters, and temperature gauges. Deep Down
        has
        two wire data systems (4 port and one 16 port) as well as 25 individual digital
        pressure and temperature recorders that are often employed for installation
        monitoring activities. In addition to these units, the Company also has three
        desks set up with data systems that are capable of tracking from 4 to 15
        individual sensors simultaneously. This, in combination with Subsea handling
        equipment, experienced personnel, and a fully equipped facility, make Deep
        Down
        ideal to manage SIT operations either at their location or abroad.
  Deep
        Down’s team has been involved in the pull-in operations for many umbilical
        projects in the Gulf of Mexico. The Company has been involved in the design,
        procurement, testing, installation, and operation of the testing equipment.
        Deep
        Down’s engineers and service technicians can also assist in writing the testing
        procedures and sequences from simple FAT to very extensive multiple pressures
        and fluids test up to full system Site Integration Testing procedures.
  Commissioning .
        Deep
        Down has been involved in most of the topsides connections and commissioning
        in
        the Gulf of Mexico since its conception in 1997. The commissioning team is
        often
        identified early on in the project and participates in all aspects of planning
        and risk assessment for the project. Due to the limited time associated with
        project commissioning it is extremely important to do detailed planning and
        engineering prior to arrival at the offshore platform location to reduce
        any
        possible shut in or down time on the platform. The Company’s engineers and
        technicians work hand in hand with the project managers and platform engineers
        to help ensure that all aspects and dangers are identified, planned for,
        and
        eliminated prior to arrival on the platform. Deep Down has been involved
        in most
        of the topsides connections and commissioning activities in the Gulf of Mexico
        and often participate in all aspects of planning and risk assessments for
        the
        project. Due to the different requirements for testing and commissioning
        of
        subsea systems, Deep Down has an assortment of pumps and equipment to pull
        from
        to ensure a safe and efficient commissioning program. Deep Down has experience
        handling all types of commissioning fluids, including asphaltine Dispersants,
        diesel, methanol, xylene, corrosion inhibitors, water-based control fluids,
        oil-based control fluids, 100% Glycol, paraffin inhibitors, and alcohol,
        among
        others.
  Storage
        Management .
        With
        more than 50,000 sq. ft. of internal high quality warehousing capacity &
300,000 sq. ft. of external storage, Deep Down's facility in Channelview
        is
        strategically located to cover Houston's Ship Channel area. Our warehouse
        is
        designed to provide clients with flexible and cost effective warehousing
        and
        storage management options. Our professional and experienced warehouse staff,
        combined with the very latest in information technology, results in a fully
        integrated warehousing package designed to deliver clever solutions to client
        needs. Deep Down is capable of providing long-term specialized contract
        warehousing; long and short term storage; modern materials handling equipment;
        undercover loading areas; quality security systems; integrated inventory
        management; packing and repacking; computerized stock controls; and labeling,
        among others.
  **Products**
  We
        provide installation support equipment and component parts and assemblies
        for
        subsea distribution systems. We believe the key to successful installations
        of
        hardware is to design the subsea system, considering installation issues
        first,
        working backwards to the design of the hardware itself. This is why we have
        been
        instrumental in the development of hardware and techniques to simplify deep
        water installations. We design, manufacture, fabricate, inspect, assemble,
        test
        and market subsea equipment, surface equipment and offshore rig equipment
        that
        are used by major integrated, large independent and foreign national oil
        and gas
        companies in offshore areas throughout the world. Our products are used during
        oil and gas exploration, development and production operations on offshore
        drilling rigs, such as floating rigs and jack-ups, and for drilling and
        production of oil and gas wells on offshore platforms, TLPs, Spars and moored
        vessels such as FPSOs. We have been involved in almost every Umbilical
        installation and Steel Flying Lead installation and development in the Gulf
        of
        Mexico. Approximately 40% of our revenue is from product sales. A few of
        our
        major product lines are highlighted below.
  Flying
        Leads .
        We have
        developed a method to pull individual steel tubes, hoses, or electrical cables
        to create a loose steel tube flying lead or short umbilical. This method
        is
        utilized to build the Loose Steel Flying Leads up to 10,000 feet long. We
        have
        built flying leads with up to 14 tubes and compliant sections with 22 - 1⁄2”
tubes. Additional lines or electrical and fiber optic cables can be added
        to
        produce any combination required for the transportation of various fluids,
        chemicals or data. The flying leads are then fitted with our terminations
        and
        Morays® that are attached to the Multiple Quick Connection plate, and finished
        off with the our elastometric bend limiters. The non-helixly wound design
        allows
        for our flying leads to be very installation friendly with minimal-bending
        stiffness. A compliant Moray consists of a 20-foot flexible flying lead with
        an
        electro-hydraulic Moray that is connected to a full-sized umbilical with
        the
        installation tension being applied through an armor pot and slings extending
        by
        the compliant section. A Moray is the termination head on the flying lead
        and
        connects the tubing assembly to the junction plate. Flying leads account
        for
        approximately 50% of our product revenue.
  Bend
        Stiffener Latcher TM .
        The
        latcher is used in dynamic installations on floating vessels. Umbilical
        stiffener latching mechanisms have always caused installation problems as
        well
        as expensive diver operations for expansion developments. Deep Down management
        believes it has conceived the very first remote operated vehicle (“ROV”)
        installable latching mechanism. Divers installed a Bell mouth with locking
        dogs
        on the bottom of the I-tube. During the umbilical installation, the bend
        stiffener could be latched in with a ROV and the umbilical could be pulled
        up
        the remaining distance and hung off. For example, during the BP Aspen
        installation, a competitive version of Bell mouth failed allowing Deep Down
        the
        opportunity to develop a new type of latcher which was spring loaded. This
        allowed the latcher to fit onto an existing flange, completely eliminating
        the
        need for divers both prior to and during the installation. The BS Latcher
        can be
        designed to fit onto any existing flange on the bottom of an existing
        I-tube.
  Umbilical
        Hardware .
        Our
        management team has been involved in more umbilical installations then probably
        any other team in the industry. Our unique blend of drilling contractor,
        umbilical manufacturing, subsea engineering, and installation contractor
        experience has been effective in acting on behalf of the operator to ensure
        key
        hardware installation is performed in the most efficient and safe manner.
        Due to
        our strong foundation and experience with the offshore umbilicals industry,
        we
        have recently begun to fabricate and design terminations for umbilical
        manufacturers. The designs are often much lighter in weight and smaller than
        the
        typical hardware that has been created and used in the past. Our engineering
        team has designed and fabricated bending restrictors, armor pots, split barrels,
        tubing fittings and unions, compliant umbilical splices and topsides
        terminations with our unique threaded welded fittings, the compliant umbilical
        splice, and the Bend Stiffener Latcher; all which assist our clients with
        installation friendly hardware.
  Bend
        Limiters .
        We
        offer both plastic and steel bend limiters. Due to our ability to design
        and
        manufacture bend limiters in house, delivery time is greatly reduced. Steel
        bend
        limiters are typically utilized for steel tube umbilicals and have been designed
        with a simple and reliable hinged attachment system which significantly
        decreases installation time. Plastic bend limiters are typically provided
        for
        small diameter umbilicals or flying leads, as well as for their compliant
        umbilical section, which turns a traditional umbilical into a ROV- friendly,
        installable flying lead.
  Compliant
        Umbilical Splice .
        Deep
        Down has formed a unique concept of turning spare umbilicals into actual
        production umbilicals by splicing spares together to produce the required
        length. This allows operators to save significant costs by utilizing existing
        investments as well as reducing field development costs and delivery time.
        This
        concept, for example, along with our new articulating umbilical splice kit,
        allowed the King West project to save millions of dollars and months in delivery
        time by combining the existing BP Nile and BP King spare
        umbilicals.
  The
        Compliant splice is a new patent- pending termination system that eliminates
        the
        burdens of dealing with umbilical splices during installation. The compliant
        splice allows clients to join two umbilicals together. This design is capable
        of
        housing both electrical and fiber optic Fiber Termination Assemblies while
        still
        allowing for the splice to be spooled up onto a reel or carousel. The optional
        mud mat is used to assist in carrying the splice over the chute and functions
        to
        keep the splice out of the mud for easy inspection.
  SeaStax® is a new
        concept in offshore storage and space management to help optimize available
        deck
        space on offshore installation vessels and platforms. The key philosophy
        behind
        SEASTAXTM is to take common offshore items and standardize a size for each of the
        pieces to allow for the system to be stackable and interchangeable in subsurface
        conditions. The current system utilizes newly designed 550 gallon Tote Tanks,
        Baskets, and Tool Boxes that are all inter-changeable and stackable. Using
        common dimensions and designs allows a variety of different items to all
        be
        commonly stored and stacked, to minimize required storage area. Currently
        available products include 550-gallon totes, baskets with hinged ramps, tool
        boxes. The stacking philosophy can be applied to other custom applications
        if
        required. In order to maximize accessibility and to reduce maintenance, a
        variety of options are available such as galvanizing, ladders, and drip
        pans.
  Installation
        Aids .
        To help
        our clients and our own internal needs, we have developed several installation
        aids. Following is a brief summary of the equipment currently
        available:
  •
Steel
        Flying Lead Installation Systems
  •
5
        ton
        Caterpillar Tensioner
  •
10
        -
        foot radius Lay Chute with Work Platform
  •
        Buoyancy
  •
Clump
        Weights
  •
        Crimping Systems
  •
Load
        Cells
  •
300
        & 340 - ton Under Rollers
  •
200
        -
        ton Carousel
 
 •
Three
        (3) 300 - ton Horizontal Drive Units (HDU)
 
 •
One
        (1)
        500 - ton Horizontal Drive Unit (HDU)
 
 •
        Deployment Frames
  •
        Termination Shelters
  •
Pipe
        Straightener
  •
ROV
        Hooks and Shackles
  •
        Stackable SeaStax: tanks, baskets, and boxes
   **Manufacturing**
  Deep
        Down
        has major manufacturing facilities in Channelview, Texas, a suburb of Houston,
        where it conducts a broad variety of processes, including machining,
        fabrication, inspection, assembly and testing. Deep Down’s Manufactured Systems
        Division is devoted to the design, manufacturing, testing, and commissioning
        of
        heavy equipment used in both on- and offshore operations in a variety of
        markets
        and industries. The manufacturing personnel have over 50 years of combined
        experience serving commercial, government, and academic customers in a variety
        of applications.
  The
        facilities encompass over 8 acres, with approximately 60,000 square feet
        of
        manufacturing space with 4 overhead cranes and 7,000 square feet of office
        space. The Company is ideally located with great access to both I-10 and
        the
        Houston Ship Channel. The facilities have 120V, 240V and 480V power.
  Deep
        Down’s personnel have been utilized in the development and fabrication of many
        tools to aid in the installation process. These tools have varied from UTA
        running and parking frames, to VIV strakes, mud mats, as well as the Deep
        Down
        Flying Lead Deployment system. We have also designed and fabricated many
        of our
        own equipment frames such as the dual tank skid, gang boxes, testing units,
        and
        work vans. Deep Down has also built, maintained and manufactured equipment
        such
        as under rollers, control booths, fluid drum carriers, and stainless steel
        tote
        tanks.
  Deep
        Down
        manufactures DnV certified systems and is in the process of obtaining ISO
        9001
        certification, at its Channelview, Texas facility. Deep Down maintains its
        high
        standards of product quality through the use of quality assurance specialists
        who work with product manufacturing personnel throughout the manufacturing
        process by inspecting and documenting equipment as it is processed through
        the
        Company's manufacturing facility. The Company has the capability to manufacture
        various products from each of its product lines at its major manufacturing
        facility and believes that this localized manufacturing capability is essential
        in order to compete with the Company's major competitors. The Company maintains
        valuable relationships with several other companies that own additional
        fabrication facilities in and around Houston, Texas. These other companies
        provide excellent subcontract manufacturing support on an as-needed basis.
        The
        Company's manufacturing process is vertically integrated, producing, in house,
        essentially all of its heat treatment, machining, fabrication, inspection,
        assembly and testing requirements. The Company's primary raw material is
        steel.
        The Company routinely purchases raw materials from many suppliers on a purchase
        order basis and does not have any long-term supply contracts.
  Deep
        Down’s manufacturing facility utilizes state-of-the-art computer numerically
        controlled ("CNC") Plasma Burn Table, which contributes to the Company's
        product
        quality and timely delivery. The Company maintains its equipment and tooling
        and
        upgrades its capabilities as needed to enhance the economic manufacture of
        its
        specialized products. The Company purchases quality used machine tools and
        equipment as they become available and stores them at its facility to be
        rebuilt, upgraded or refurbished as needed.
  
  **Customers**
  The
        Company's principal customers are major integrated oil and gas companies,
        large
        independent oil and gas companies and foreign national oil and gas companies
        involved in offshore exploration and production. Offshore drilling contractors
        and engineering and construction companies also represent a smaller customer
        base. The Company’s customers include Shell; Amerada Hess; Marathon; ExxonMobil;
        Cal Dive; Devon; BHP; Anadarko; Texaco; Chevron; British Petroleum; Kerr
        McGee;
        Unocal; Noble Energy; Cameron and Aker Kvaerner, Technip, Oceaneering, Subsea
        7,
        Helix, among others.
  The
        Company is not dependent on any one customer or group of customers. The number
        and variety of the Company's products required in a given year by any one
        customer depends upon the amount of that customer's capital expenditure budget
        devoted to offshore exploration and production in any single year and on
        the
        results of competitive bids for major projects. Consequently, a customer
        that
        accounts for a significant portion of revenues in one fiscal year may represent
        an immaterial portion of revenues in subsequent years. While the Company
        is not
        dependent on any one customer or group of customers, the loss of one or more
        of
        its significant customers could, at least on a short-term basis, have an
        adverse
        effect on the Company's results of operations.
  **Marketing
        and Sales**
  Deep
        Down
        markets its products and services throughout the world directly through its
        sales personnel out of the Channelview office. The Company also places print
        advertising from time to time in trade and technical publications targeted
        to
        its customer base. It also participates in industry conferences and trade
        shows
        to enhance industry awareness of its products.
  The
        Company's customers generally order products and services after consultation
        with the Company on project specifics. Orders are typically filled within
        two
        weeks to three months after receipt of an order, depending on the type of
        product or service. Contracts for certain of the Company's larger, more complex
        products, can take as long as four to six months to complete. The primary
        factors influencing a customer's decision to purchase the Company's products
        and
        services are the quality, reliability and reputation of the product or service,
        price, timely delivery and technologically superior features. For large drilling
        and production system orders, project management teams coordinate customer
        needs
        with engineering, manufacturing and service organizations, as well as with
        subcontractors and vendors.
  A
        portion
        of the Company's business consists of designing, manufacturing, selling and
        installing equipment for major projects pursuant to competitive bids, and
        the
        number of such projects in any year fluctuates. The Company's profitability
        on
        such projects is critically dependent on making accurate and cost effective
        bids
        and performing efficiently in accordance with bid specifications. Various
        factors can adversely affect the Company's performance on individual projects,
        with potential adverse effects on project profitability.
  **Product
        Development and Engineering**
  The
        technological demands of the oil and gas industry continue to increase as
        offshore exploration and drilling operations expand into deeper and more
        hostile
        environments. Conditions encountered in these environments include well
        pressures of up to 15,000 psi, mixed flows of oil and gas under high pressure
        that may also be highly corrosive, and water depths in excess of 8,000 feet.
        Deep Down is continually engaged in product development activities to generate
        new products and improve existing products to meet its customers’ specific
        needs. The Company also focuses its activities on reducing the overall cost
        to
        the customer, which includes not only the initial capital cost but also
        operating costs associated with its products.
  Deep
        Down
        has an established track record of introducing new products and product
        enhancements. Our product development work is conducted at its facilities
        in
        Channelview, Texas and in the field. The Company's application engineering
        staff
        also provides engineering services to customers in connection with the design
        and sales of its products. The Company's ability to develop new products
        and
        maintain technological advantages is important to its future
        success.
  The
        Company believes that the success of its business depends more on the technical
        competence, creativity and marketing abilities of its employees than on any
        individual patent, trademark or copyright. Nevertheless, as part of its ongoing
        product development and manufacturing activities, Deep Down’s policy is to seek
        patents when appropriate on inventions concerning new products and product
        improvements. All patent rights for products developed by employees are assigned
        to the Company.
  **Competition**
  The
        principal competitive factors in the petroleum drilling and production equipment
        markets are quality, reliability and reputation of the product, price,
        technology, service and timely delivery. Deep Down faces significant competition
        from other manufacturers of exploration and production equipment. Several
        of its
        primary competitors are diversified multinational companies with substantially
        larger operating staffs and greater capital resources than those of the Company
        and which, in many instances, have been engaged in the manufacturing business
        for a much longer time than the Company. The Company competes principally
        with
        FMC; Kvaerner and Oceaneering on its steel flying leads; Norson; VFL and
        Halliburton Product Pipeline Services on its umbilical services; Dynacon
        and
        Ocean Works on its Launch and Recovery Systems..
  **Employees**
  The
        total
        number of the Company's employees as of April 12, 2007 was 49. The Company's
        employees are not covered by collective bargaining agreements, and the Company
        considers its employee relations to be good. The Company's operations depend
        in
        part on its ability to attract a skilled labor force. While the Company believes
        that its wage rates are competitive and that its relationship with its skilled
        labor force is good, a significant increase in the wages paid by competing
        employers could result in a reduction of the Company's skilled labor force,
        increases in the wage rates paid by the Company or both.
  **Governmental
        Regulations**
  Many
        aspects of the Company's operations are affected by political developments
        and
        are subject to both domestic and foreign governmental regulations, including
        those relating to oilfield operations, worker safety and the protection of
        the
        environment. In addition, the Company depends on the demand for its services
        from the oil and gas industry and, therefore, is affected by changing taxes,
        price controls and other laws and regulations relating to the oil and gas
        industry generally, including those specifically directed to offshore
        operations. The adoption of laws and regulations curtailing exploration and
        development drilling for oil and gas for economic or other policy reasons
        could
        adversely affect the Company's operations by limiting demand for the Company's
        products.
  In
        recent
        years, increased concern has been raised over the protection of the environment.
        Offshore drilling in certain areas has been opposed by environmental groups
        and,
        in certain areas, has been restricted. To the extent that new laws or other
        governmental actions prohibit or restrict offshore drilling or impose additional
        environmental protection requirements that result in increased costs to the
        oil
        and gas industry in general and the offshore drilling industry in particular,
        the business of the Company could be adversely affected. The Company cannot
        determine to what extent its future operations and earnings may be affected
        by
        new legislation, new regulations or changes in existing regulations.
  The
        Company's operations are affected by numerous foreign, federal, state and
        local
        environmental laws and regulations. The technical requirements of these laws
        and
        regulations are becoming increasingly expensive, complex and stringent. These
        laws may provide for "strict liability" for damages to natural resources
        or
        threats to public health and safety, rendering a party liable for the
        environmental damage without regard to negligence or fault on the part of
        such
        party. Sanctions for noncompliance may include revocation of permits, corrective
        action orders, administrative or civil penalties and criminal prosecution.
        Certain environmental laws provide for joint and several strict liabilities
        for
        remediation of spills and releases of hazardous substances. In addition,
        companies may be subject to claims alleging personal injury or property damage
        as a result of alleged exposure to hazardous substances, as well as damage
        to
        natural resources. Such laws and regulations may also expose the Company
        to
        liability for the conduct of or conditions caused by others, or for acts
        of the
        Company that were in compliance with all applicable laws at the time such
        acts
        were performed. Compliance with environmental laws and regulations may require
        the Company to obtain permits or other authorizations for certain activities
        and
        to comply with various standards or procedural requirements. The Company
        believes that its facilities are in substantial compliance with current
        regulatory standards.
   
  Based
        on
        the Company's experience to date, the Company does not currently anticipate
        any
        material adverse effect on its business or consolidated financial position
        as a
        result of future compliance with existing environmental laws and regulations
        controlling the discharge of materials into the environment. However, future
        events, such as changes in existing laws and regulations or their
        interpretation, more vigorous enforcement policies of regulatory agencies,
        or
        stricter or different interpretations of existing laws and regulations, may
        require additional expenditures by the Company, which may be
        material.
  **Item
        2. Description of Property.**
  The
        Company’s offices are located at 15473 East Freeway; Channelview, Texas 77530.
        The subject property consists of approximately 55,252 square feet of
        manufacturing and office space on approximately 7.71 acres of land.
  **Item
        3. Legal Proceedings.**
  We
        are
        from time to time involved in legal proceedings arising from the normal course
        of business. As of the date of this report, we are not currently involved
        in any
        legal proceedings.
  **Item
        4. Submission of Matters to a Vote of Security Holders.**
  No
        matter
        was submitted to vote of our security holders during the fourth fiscal quarter
        covered by this report.
  **PART
        II**
  **Item
        5. Market for Common Equity, Related Stockholder Matters and Small Business
        Issuer Purchases of Equity Securities.**
  **Market
        for Common Stock**
  Our
        common stock trades publicly on the OTC Bulletin Board under the symbol “DPDW.”
The OTCBB is a regulated quotation service that displays real-time quotes,
        last-sale prices and volume information in over-the-counter equity securities.
        The OTCBB securities are traded by a community of market makers that enter
        quotes and trade reports. This market is extremely limited and any prices
        quoted
        are not a reliable indication of the value of our common stock.
  Prior
        to the reverse merger with MediQuip on December 14, 2006, no public market
        in
        our common stock existed. See the discussion of the reverse merger under
        Corporate History in Item 1 and in Note 1 “Description of Business” of the notes
        to our audited consolidated financial statements included elsewhere in this
        report. Beginning December 14, 2006, our common stock was quoted on the OTC
        Bulletin Board. The high and low bids for period from December 14 to December
        31, 2006 were $0.85 and $0.13 respectively. These quotes represent inter-dealer
        quotations, without adjustment for retail mark-up, markdown or commission
        and
        may not represent actual transactions.
  **Holders**
  As
        of
        April 12, 2007, there were approximately 1,050 holders of record of our common
        stock and we believe there were approximately 1,676 beneficial
        owners.
  **Dividend
        Policy**
  To
        date,
        we have not paid any cash dividends and our present policy is to retain earnings
        for use in our business.
   
  **Equity
        Compensation Plan Information**
  The
        Company has no outstanding equity compensation plan and therefore no outstanding
        options or rights to purchase common stock under a compensation plan as of
        December 31, 2006.
 
 **Recent
        Sales of Unregistered Securities**
 
 On
        March
        20, 2007, the Company completed the sale of 10,000,000 shares of common stock
        in
        a private placement for $1,000,000. This private placement was initiated
        prior
        to the closing of the Agreement and Plan of Reorganization between Deep Down
        (Nevada), formerly MediQuip Holdings, Inc., and Deep Down (Delaware). Pursuant
        to the terms thereof, 10,000,000 shares of common stock were reserved to
        complete this private placement. The shares are restricted as defined in
        Rule
        144 of the Securities Act of 1933 and contain a restrictive legend, which
        restricts the ability of the holders to sell these shares for a period of
        no
        less than one year. Funds will be used to redeem certain outstanding
        exchangeable preferred stock and for working capital.
  The
        Company finalized the terms of an agreement with Daniel L. Ritz, Jr.
        (shareholder and director), who agreed to surrender 25,000,000 shares of
        common
        stock; 1,500 shares of Series F convertible preferred stock and 500 shares
        of
        Series G exchangeable preferred stock to the Company for cancellation. For
        these
        actions, Mr. Ritz will receive 1,250 shares of Series E exchangeable preferred
        stock and $250,000 cash. In addition, Mr. Ritz will keep 500 shares of Series
        E
        exchangeable preferred stock he currently owns and agreed to tender his
        resignation from the Board. As a result of this exchange, Mr. Ritz will own
        1,750 shares of Series E exchangeable preferred stock.
  The
        Company agreed to issue 2,000 shares of Series E exchangeable preferred stock
        to
        John C. Siedhoff (shareholder, Chief Financial Officer, and director) for
        the
        surrender of his ownership of 1,500 shares of Series F convertible preferred
        stock and 500 shares of Series G exchangeable preferred stock, which will
        be
        returned to the transfer agent for cancellation.
  The
        offers and sales of the securities in the private placement are exempt from
        the
        registration requirements of the Securities Act of 1933 (the “Act”) pursuant to
        Rule 506 and Section 4(2) of the Act. In connection with the offers and sales,
        we did not conduct any general solicitation or advertising, and we complied
        with
        the requirements of Regulation D relating to the restrictions on the
        transferability of the shares issued.
  **Item
        6. Management’s Discussion and Analysis or Plan of
        Operation.**
  *Cautionary
        Note Regarding Forward-Looking Statements*
  Statement
        under the safe harbor provisions of the Private Securities Litigation Reform
        Act
        of 1995: Deep Down, Inc. and its representatives may from time to time make
        written or oral statements that are “forward-looking” and provide information
        that is not historical in nature, including statements that are or will be
        contained in this report, the notes to our consolidated financial statements,
        our other filings with the Securities and Exchange Commission, our press
        releases and conference call presentations and our other communications to
        our
        stockholders. These statements involve known and unknown risks, uncertainties
        and other factors that may be outside of our control and may cause actual
        results to differ materially from any results, levels of activity, performance
        or achievements expressed or implied by any forward-looking statement. These
        factors include, among other things, those described under Risk Factors in
        Item 1A of this Annual Report on Form 10-K.
  In
        some
        cases, forward-looking statements can be identified by such words or phrases
        as
“will likely result,” “is confident that,” “expects,” “should,” “could,” “may,”
“will continue to,” “believes,” “anticipates,” “predicts,” “forecasts,”
“estimates,” “projects,” “potential,” “intends” or similar expressions
        identifying “forward-looking statements” within the meaning of the Private
        Securities Litigation Reform Act of 1995, including the negative of those
        words
        and phrases. Such forward-looking statements are based on our current views
        and
        assumptions regarding future events, future business conditions and our outlook
        based on currently available information. We wish to caution you not to place
        undue reliance on any such forward-looking statements, which speak only as
        of
        the date made and involve judgments.
  The
        following discussion and analysis provides information that management believes
        is relevant to an assessment and understanding of our results of operations
        and
        financial condition.  The following selected financial information is
        derived from our historical financial statements, and proforma financial
        statements where noted, and should be read in conjunction with such financial
        statements and notes thereto set forth elsewhere herein and the “Forward-Looking
        Statements” explanation included herein.
  **Executive
        Overview**
  We
        are an
        installation engineering and management company focused on the offshore segment
        of the energy industry. We can custom design and manufacture product or modify
        existing equipment to meet customer specifications. We design, manufacture,
        fabricate, sell and service highly-engineered subsea equipment, surface
        equipment and offshore rig equipment for use in deepwater, harsh environment
        and
        severe service applications. Our principal products consist of flying lead
        installation, maintenance and termination systems; buoyancy and rigging systems;
        high and low pressure testing and monitoring systems; latch systems; lay
        chutes;
        rollers; tensioners; and offshore storage and space management systems. We
        also
        provide installation, retrieval, storage and management services in connection
        with the use of our products.
  Deep
        Down
        has developed its broad line of subsea equipment, surface equipment and offshore
        rig equipment primarily through internal product development efforts in
        Channelview, Texas. In many cases, these products were developed in direct
        response to customer requests for solutions to critical problems in the field.
        We are instrumental in achieving solutions for our clients to simplify
        installation procedures and reduce costs.
  In
        2006,
        we continued our focus on customer service, expanded our customer base and
        went
        public through a reverse merger, thereby giving Deep Down access to additional
        sources of capital. Nevertheless, our banking relationships continue to grow
        as
        well, giving us continued access to traditional sources of capital to help
        us
        expand our operations. The infrastructure we have in place has enabled us
        to
        increase our revenue over 63% from 2005 to 2006, after a 52% increase in
        the
        prior period.
  Our
        new
        product line of Launch and Recovery Systems (LARS) have started shipping
        to our
        customers, including a Saturation Diving LARS, a Sea-eye LARS and a 3,000
        meter
        rated LARS. We are currently manufacturing two (2) 4,000 meter rated LARS
        for
        extreme water depths and geophysical installation equipment for an international
        customer.
  Product
        innovations continued during 2006 with the patent-pending SubSea Deployment
        Baskets (SDB), a new Bend Stiffener Latcher that is enjoying wide acceptance
        in
        the market for subsea connections, a fleet of rapid deployment cartridges
        for
        Steel Flying Leads, special Hold Back Clamps, and delivery of the first
        Electrical Hydraulic Loose Steel Flying Leads in the industry.
  We
        continue to support our installation contracting customers with installations
        of
        Steel Flying Leads (SFL’s), and our major operating customers with the provision
        of offshore testing, monitoring, remediation and/or commissioning work. Our
        equipment rental fleet has been expanded to now include five (5) Horizontal
        Drive Unit systems to provide flying lead and specialty cable installation
        deployment capabilities with our fleet of pumps, under rollers, buoyancy
        compensators and other tools and equipment.
  We
        remain
        committed to supporting the operator, installation contractor, and umbilical
        and
        controls supplier to enhance the progression and completion of major offshore
        oil and gas exploration and production projects.
  **Corporate
        History**
  During
        2006, MediQuip Holdings, Inc. (“MediQuip”), a publicly traded company, divested
        its operating subsidiary and subsequently entered into a merger agreement
        with
        Deep Down, Inc. which was accounted for as a reverse merger with Deep Down,
        Inc.
        being the surviving entity for accounting purposes. The following discussion
        describes the history of Deep Down, Inc. (“we” or “the Company”)
 
 On
        June
        29, 2006, Subsea Acquisition Corporation (“Subsea”) was formed by three
        shareholders with the intent to acquire service providers to the offshore
        industry, and designers and manufacturers of subsea equipment, surface equipment
        and offshore rig equipment that are used by major integrated, large independent
        and foreign national oil and gas companies in offshore areas throughout the
        world. In November 2006, Subsea On June 29, 2006, Subsea Acquisition Corporation
        (“Subsea”) was formed by three shareholders with the intent to acquire service
        providers to the offshore industry, and designers and manufacturers of subsea
        equipment, surface equipment and offshore rig equipment that are used by
        major
        integrated, large independent and foreign national oil and gas companies
        in
        offshore areas throughout the world. On November 21, 2006, Subsea acquired
        Deep
        Down, Inc, a Delaware corporation founded in 1997. Under the terms of this
        transaction, all of Deep Down, Inc.’s shareholders transferred ownership of all
        of Deep Down Inc.’s common stock to Subsea in exchange for 5,000 shares of
        Subsea’s Series D Preferred Stock and 5,000 shares of Subsea’s Series E
        Preferred Stock resulting in Deep Down Inc. becoming a wholly owned subsidiary
        of Subsea. On the same day, Subsea then merged with Deep Down, with the
        surviving company operating as Deep Down Inc. Unless specifically stated
        otherwise, all references to Deep Down refer to the combined entity comprising
        Subsea and Deep Down Inc. This transaction was accounted for as a purchase
        with
        Subsea being the acquirer based on a change in voting control. Under purchase
        accounting, we have included the results of operations of the entity formerly
        operating as Deep Down from the acquisition date of November 21, 2006 forward.
        As Subsea was formed on June 29, 2006, the financial statements included
        herein
        reflect the results of the operations from the date of inception to December
        31,
        2006.
 
 Additionally
        on November 21, 2006, Subsea acquired all the common stock of Strategic Offshore
        Services Corporation (“SOS”) for 3,000 Series F Preferred Stock and 1,000 Series
        G Preferred Stock from two common shareholders of Subsea. Since the entities
        were under common control and the acquired entity did not constitute a business
        the Company charged compensation expense to shareholders for the fair value
        of
        both series totaling $3,340,792 million.
 
 On
        December 14, 2006 Deep Down exchanged all 9,999,999 shares of Deep Down common
        stock and all 14,000 shares of Deep Down preferred stock for 75,000,000 shares
        of common stock and 14,000 shares of preferred stock of MediQuip. The preferred
        shares of MediQuip have the same designations as Deep Down’s preferred stock. As
        a result of the acquisition, the shareholders of Deep Down will own a majority
        of the voting stock of MediQuip, which changed its name to Deep Down, Inc.
        The
        merger has been accounted for as a reverse merger whereby Deep Down is the
        accounting acquirer resulting in a recapitalization of Deep Down’s equity. The
        acquisition did not require the approval of shareholders of MediQuip. In
        connection and simultaneously with this reverse merger, Westmeria Healthcare
        Limited, a wholly owned subsidiary of MediQuip was transferred to MediQuip’s
        majority shareholder in exchange for the cancellation of 31,351,256 common
        share
        equivalents. The MediQuip Series C convertible preferred stock outstanding
        prior
        to the reverse merger remains outstanding.
 
 The
        Company’s historical financial statements reflect those of Deep Down, Inc, and
        do not include the results of MediQuip or Westmeria Healthcare Limited for
        periods prior to the merger date.
  **Critical
        Accounting Policies**
  The
        accompanying discussion and analysis of our financial condition and results
        of
        operations is based upon our audited consolidated financial statements, which
        have been prepared in accordance with accounting principles generally accepted
        in the United States of America. Note 2 “Summary of Significant Accounting
        Policies” of the notes to our audited consolidated financial statements included
        elsewhere in this report contain a detailed summary of our significant
        accounting policies. We utilize the following critical accounting policies
        in
        the preparation of our financial statements.
  ***Accounts
        Receivable*** We
        provide an allowance for doubtful accounts on trade receivables based on
        historical collection experience and a specific review of each customer’s trade
        receivable balance.
 
 ***Inventory*** Inventory
        is stated at the lower of cost (first-in, first out) or net realizable value.
        Inventory mainly consists of supplies used in the offshore industry such
        as
        fittings and valves.
 
 ***Revenue
        Recognition*** Revenue
        from fabrication and sale of equipment is recognized upon transfer of title
        to
        the customer (which is upon shipment or when customer-specific acceptance
        requirements are met). Service revenue is recognized as the service is provided.
  
  
 ***Impairment
        of Long-Lived Assets*** Long-lived
        assets, including property, plant and equipment, capitalized software costs,
        and
        assets held for sale are reviewed for impairment whenever events or changes
        in
        circumstances indicate that the carrying amount of the long-lived asset may
        not
        be recoverable. The carrying amount of a long-lived asset is not recoverable
        if
        it exceeds the sum of the undiscounted cash flows expected to result from
        the
        use and eventual disposition of the asset. If it is determined that an
        impairment loss has occurred, the loss is measured as the amount by which
        the
        carrying amount of the long-lived asset exceeds its fair value.
 
 ***Goodwill*** Goodwill
        represents the cost in excess of the fair value of net assets acquired in
        business combinations. Statement of financial accounting standards (SFAS)
        No.
        142, “Goodwill and Other Intangible Assets” (SFAS 142), prescribes the process
        for impairment testing of goodwill on an annual basis or more often if a
        triggering event occurs. Goodwill is not amortized, and there were no indicators
        of impairment at December 31, 2006.
 
 The
        Company evaluates the carrying value of goodwill during the fourth quarter
        of
        each year and between annual evaluations if events occur or circumstances
        change
        that would more likely than not reduce the fair value of the reporting unit
        below its carrying amount. Such circumstances could include a significant
        adverse change in legal factors or in business or the business climate or
        unanticipated competition. When evaluating whether goodwill is impaired,
        the
        Company compares the fair value of the business to its carrying amount,
        including goodwill. The fair value of the reporting unit is estimated using
        a
        combination of the income, or discounted cash flows, approach and the market
        approach, which utilizes comparable companies’ data. If the carrying amount of
        the business exceeds its fair value, then the amount of the impairment loss
        must
        be measured. The impairment loss would be calculated by comparing the implied
        fair value of reporting unit goodwill to its carrying amount.
 
 **** ***Income
        Taxes*** We
        have
        adopted the provisions of SFAS No. 109, “Accounting for Income Taxes" which
        requires recognition of deferred tax liabilities and assets for the expected
        future tax consequences of events that have been included in the consolidated
        financial statements or tax returns. Under this method, deferred tax liabilities
        and assets are determined based on the difference between the financial
        statement and tax basis of assets and liabilities using enacted tax rates
        in
        effect for the year in which the differences are expected to
        reverse.
  **Pro-forma
        Results of Operations**
  Under
        purchase accounting rules, the audited financial results disclosed herein
        present operating results for the period beginning November 21, 2006 and
        ending
        December 31, 2006, the period after which Deep Down was acquired. Management
        believes this stub period does not give a full view of the operations of
        the
        Company and, therefore, present pro-forma results of operations. The following
        presentation and discussion of the unaudited pro forma consolidated results
        of
        operations has been prepared as if the acquisition of Deep Down had occurred
        at
        January 1, 2005. The pro forma information is presented for informational
        purposes only and is not necessarily indicative of the results of operations
        that actually would have been achieved had the acquisition been consummated
        as
        of that time, nor is it intended to be a projection of future results.
        Additionally, on November 21, 2006, Subsea acquired all the common stock
        of
        Strategic Offshore Services Corporation (“SOS”) for 3,000 Series F Preferred
        Stock and 1,000 Series G Preferred Stock from two common shareholders of
        Subsea.
        Since the entities were under common control and the acquired entity did
        not
        constitute a business, the Company charged non-cash, non-operating compensation
        expense to shareholders for the fair value of both series totaling $3,340,792.
  
 
  **Deep
          Down, Inc.**
 **Pro
          forma Statements of Operations**
 **Year
                  Ended December 31,****2006**
              
              **2005**Revenues
              $
                  8,821,149
              
              $
                  5,417,872Cost
                  of sales
              5,155,399
              
              2,531,148Gross
                  profit
              3,665,750
              
              2,886,724Operating
                  expenses:Selling,
                  general & administrative (2)
              5,710,324
              
              1,819,103Depreciation
              166,468
              
              200,313Loss
                  on sale of assets
              -
              
              14,293Total
                  operating expenses
              5,876,792
              
              2,033,709Operating
                  income (loss)
              (2,211,042)
              
              853,015Other
                  income (expense):Interest
                  expense (1)
              (578,335)
              
              (555,087)Total
                  other income (expense)
              (578,335)
              
              (555,087)Income
                  (loss) from continuing operations
              (2,789,377)
              
              297,928Discontinued
                  operations:Loss
                  from operations of discontinued businesses
              -
              
              (5,292)Loss
                  on disposal of business segment
              -
              
              (72,107)Loss
                  on discontinued operations
              -
              
              (77,399)Income
                  tax provision
              (22,250)
              
              -Net
                  income (loss)
              $
                  (2,811,627)
              
              $
                  220,529Net
                  loss per share:Basic
                  and diluted
              $
                  (0.04)
              
              $
                  0.00Weighted
                  average common shares outstandingBasic
                  and diluted
              75,862,484
              
              75,000,000
 (1)
          Includes approximately $423,258 and $381,310, respectively, additional
          interest
          expense from
          the
          accretion of the Series E preferred shares.
 (2)
          Includes $3.3 million compensation expense from the issuance of Preferred
          series
          F and G stock
          in
          2006 and $237,430 in 2005
 
 
  The
        following discussion of the unaudited pro forma consolidated results of
        operations has been prepared as if the acquisition of Deep Down had occurred
        at
        January 1, 2005. The pro forma information is presented for informational
        purposes only and is not necessarily indicative of the results of operations
        that actually would have been achieved had the acquisition been consummated
        as
        of that time, nor is it intended to be a projection of future
        results.
  *Revenues*
 
 **2006**
              **2005**
              **Change**
              **%**Revenues
              $
                  8,821,149
              $
                  5,417,872
              $
                  3,403,277
              62.8%
 
 Revenues
        increased by approximately $3.40 million, or 62.8% for the twelve months
        ended
        December 31, 2006 from approximately $5.42 million for the comparable period
        in
        2005. This increase was due in part to the hiring of a sales manager to bring
        increased focus to the sales effort; the generation of a new product line
        of
        manufactured Launch And Recovery Systems (LARS); increased capital expenditures
        to expand our equipment rental fleet of spooling and handling equipment;
        and a
        continued focus on customer service to increase both orders and order size.
  *Cost
        of sales*
  
 **2006**
              **2005**
              **Change**
              **%**Cost
                  of sales
              $
                  5,155,399
              $
                  2,531,148
              $
                  2,624,251
              103.7%
  As
        a
        percentage of revenues, cost of sales increased from approximately 46.7%
        in 2005
        to approximately 58.4% in 2006. This increase was due in part to the
        manufacturing of LARS, which has a higher cost of goods sold than the rental
        fleet and service work. As a result, gross margins decreased from approximately
        53.3% in 2005 to approximately 41.6% in 2006.
  *Selling,
        general and administrative expenses*
  
 **2006**
              **2005**
              **Change**
              **%**Selling,
                  general and administrative
              $
                  5,710,324
              $
                  1,819,103
              $
                  3,891,221Stock
                  based compensation expense
              (3,340,792)
              (237,430)
              (3,103,362)Adjusted
                  selling, general and administrative
              $
                  2,369,532
              $
                  1,581,673
              $
                  787,859
              49.8%
  Selling,
        general and administrative expenses include rent, utilities, general office
        expenses, insurance, personnel and other costs necessary to conduct business
        operations. Also included in selling, general and administrative expenses
        for
        the year ended December 31, 2006 is a non-cash, non-operating compensation
        expense of approximately $3.34 million related to the Series F and G Preferred
        Stock which was issued in exchange for the acquisition of 100% of the common
        stock of Strategic Offshore Services Corporation. See further discussion
        in
        Corporate History above.
  After
        adjusting for this non-cash, non-operating expense of approximately $3.34
        million, selling, general and administrative expenses for the year ended
        December 31, 2006 was approximately $2.37 million, up approximately $0.79
        million or 49.8% from $1.58 million for the comparable period in 2005. The
        increase is primarily the result of an increased engineering staff to focus
        on
        the development of new products and quality control, increased administrative
        personnel, increased rent expense (see related party transactions related
        to the
        land and building in the footnotes to the financials) and increased bonuses.
        Additionally, the Company recorded stock based compensation of $237,430 in
        fiscal 2005.
  
 *Depreciation
        expense*
  **2006**
              **2005**
              **Change**
              **%**Depreciation
                  expense
              $
                  166,468
              $
                  200,313
              $
                  (33,845)
              (16.9)%
  Depreciation
        expense is related primarily to equipment used in manufacturing
        operations.
  *Interest
        expense*
  
 **2006**
              **2005**
              **Change**
              **%**Interest
                  expense
              $
                  578,335
              $
                  555,087
              $
                  23,248Less
                  amounts related to accretion
              (423,258)
              (381,310)
              (41,948)Interest
                  expense on long term debt
              $
                  155,077
              $
                  173,777
              $
                  (18,700)
              (10.8)%
 
  The
        Company completed a detailed debt consolidation program in November 2005
        which
        led to both a lower fixed interest rate and the decrease in actual interest
        expense in 2006, despite an increase in debt. The Company added one loan
        for
        approximately $496,000.
 
 The
        Company calculated the fair value for the Series E and G Preferred Stock
        issued
        in exchange for 100% of the common stock of Deep Down, Inc. (Delaware) and
        Strategic Offshore Services Corporation using a discount rate significantly
        greater than the 6% interest on the three-year term note into which those
        preferred shares are exchangeable. The Company must accrete the difference
        between the determined value and the face value for which the Company is
        obligated as interest expense.
  After
        adjusting for this non-cash, non-operating expense, the interest expense
        for the
        year ended December 31, 2006 was approximately $155,077, down approximately
        $18,700, or 10.8%, from the comparable period in 2005.
  *Loss
        on discontinued operations*
 
 **2006**
              **2005**
              **Change**
              **%**Loss
                  on discontinued operations
              $
                  -
              $
                  77,399
              $
                  (77,399)
              (100.0)%
 
 During
        the year ended December 31, 2005 the Company discontinued operations that were
        not part of the core business. These two operations included a vending company
        and a sales distribution company of Jet Dock equipment.
 
 *Net
        Income (loss)*
 
 
 **2006**
              **2005**
              **Change**
              **%**Net
                  income (loss)
              $
                  (2,811,627)
              $
                  220,529
              $
                  (3,032,156)Stock
                  based compensation expense
              3,340,792
              237,430
              3,103,362Amounts
                  related to accretion
              423,258
              381,310
              41,948Adjusted
                  net income
              $
                  952,423
              $
                  839,269
              $
                  113,154
              13.5%
 
 The
        increase in net loss from normal operations includes the proforma and
        non-recurring non-cash, non-operating expense items noted above arising out
        of
        the accounting treatment of the Series D, E, F and G Preferred Stock. After
        adjusting for these non-cash, non-operating expenses, the Company has net
        income
        of approximately $0.95 million, up approximately $0.11 million, or 13.5%,
        from
        $0.83 million for the comparable period in 2005.
  *EBITDA*
 
 **2006**
              **2005**
              **Change**
              **%**Operating
                  income (loss)
              $
                  (2,211,042)
              $
                  853,015
              $
                  (3,064,057)Depreciation
                  expense
              166,468
              200,313
              (33,845)Stock
                  based compensation expense
              3,340,792
              237,430
              3,103,362EBITDA
              $
                  1,296,218
              $
                  1,290,758
              $
                  5,460
              0.4%
 
  After
        adjusting for all non-cash, non-operating expenses related to the Series
        D, E, F
        and G preferred stock, the Company has EBITDA for the year ended December
        31,
        2006 of $1,296,218, up $5,460, or 0.4%, from $1,290,758 for the comparable
        period in 2005.
  EBITDA
        is
        a non-GAAP financial measure. The Company defines EBITDA as net income plus
        interest expense, income taxes, depreciation, amortization and other non-cash,
        non-operating expense. The Company uses EBITDA as a supplemental financial
        measure to assess the financial performance of its assets without regard
        to
        financing methods, capital structures, taxes or historical cost basis; its
        liquidity and operating performance over time in relation to other companies
        that own similar assets and that the Company believes calculate EBITDA in
        a
        similar manner; and the ability of the Company's assets to generate cash
        sufficient for the Company to pay potential interest costs. The Company also
        understands that such data are used by investors to assess the Company's
        performance. However, the term EBITDA is not defined under generally accepted
        accounting principles and EBITDA is not a measure of operating income, operating
        performance or liquidity presented in accordance with generally accepted
        accounting principles. When assessing the Company's operating performance
        or
        liquidity, investors and others should not consider this data in isolation
        or as
        a substitute for net income, cash flow from operating activities, or other
        cash
        flow data calculated in accordance with generally accepted accounting
        principles.
  **Sources
        and Uses of Cash for the period from inception, June 29, 2006 through December
        31, 2006**
  Cash
        flows for the period from inception, June 29, 2006 through December 31, 2006,
        were as follows:
 
 ***Operating
        Cash Flows***
 
 Cash
        required by operating activities of continuing operations was $56,242. Our
        working capital balances can vary depending on the payment and delivery terms
        on
        key contracts; work in process, and outstanding receivables and
        payables.
 
 ***Investing
        Cash Flows***
 
 The
        increase in cash from investing activities of $101,497 is primarily due to
        cash
        acquired in the acquisition of a business.
 
 ***Financing
        Cash Flows***
 
 Cash
        required by financing activities was $32,893 which reflects payments on long
        term debt.
 
 **Liquidity
        and Capital Resources**
 
 We
        generate our capital resources primarily through operations and, when needed,
        through bank loans. Our total bank loans due at December 31, 2006 was
        $1,168,348, of which $410,731 was short term. During the period from November
        21, 2006 through December 31, 2006, we made $32,893 in bank debt
        payments.
 
  
  ***Debt
        and Liquidity***
 
 Total
        borrowings at December 31, 2006, comprised the following:
 
 A
        note
        payable with a bank, monthly principal and interest payments, interest fixed
        at
        7.5%, due September 2008, secured by equipment under lease contract to a
        third
        party in the amount of $438,812.
 
 A
        note
        payable with a bank, monthly principal and interest payment, interest fixed
        at
        7.5%, due November 2010, secured by machinery, equipment, and furniture in
        the
        amount of $729,536.
 
 Of
        the
        total of $1,168,348 in debt, $410,731 is short term debt, and $757,617 is
        long
        term debt.
 
 ***Outlook
        for 2007***
 
 We
        plan
        to meet our cash requirements in 2007 with cash generated from operations.
        We
        will continue to expand our product line offerings, and we are projecting
        to
        spend approximately $250,000 to expand our rental fleet and approximately
        $150,000 to develop new products.
 
 We
        continue to evaluate acquisitions and joint ventures in the ordinary course
        of
        business. When opportunities for business acquisitions meet our standards,
        we
        believe we will have access to capital sources necessary to take advantage
        of
        those opportunities.
 
 **Off-Balance
        Sheet Arrangements**
  The
        company has no off-balance sheet arrangements that have or are reasonably
        likely
        to have a current or future effect on the Company’s financial condition, changes
        in financial condition, revenues or expenses, results of operations, liquidity,
        capital expenditures or capital resources that is material to investors.
 
 **Certain
        Factors That May Affect Future Operating Results**
  Our
        business is subject to various risks, including those described below. You
        should carefully consider the following risk factors, together with all of
        the
        other information included in this Form 10-KSB. Any of these risks could
        materially adversely affect our business, operating results and financial
        condition.
  ***Risks
        Related to Our Business***
  **A
        material or extended decline in expenditures by the oil and gas industry
        could
        significantly reduce our revenue and income.**
  Our
        business depends upon the condition of the oil and gas industry and, in
        particular, the willingness of oil and gas companies to make capital
        expenditures on exploration, drilling and production operations offshore.
        The
        level of capital expenditures is generally dependent on the prevailing view
        of
        future oil and gas prices, which are influenced by numerous factors affecting
        the supply and demand for oil and gas, including:
  •
        Worldwide economic activity;
  •
The
        level of exploration and production activity;
  •
        Interest rates and the cost of capital;
  •
        Environmental regulation;
  •
        Federal, state and foreign policies regarding exploration and development
        of oil
        and gas;
  •
The
        ability of the Organization of Petroleum Exporting Countries to set and maintain
        production levels and pricing;
  •
The
        cost of exploring for and producing oil and gas;
  •
The
        cost of developing alternative energy sources;
  •
The
        sale and expiration dates of offshore leases in the United States and
        overseas;
  •
The
        discovery rate of new oil and gas reserves in offshore areas;
  •
        Technological advances; and
  •
Weather
        conditions.
  Oil
        and
        gas prices and the level of offshore drilling and production activity have
        been
        characterized by significant volatility in recent years. Worldwide military,
        political and economic events have contributed to oil and natural gas price
        volatility and are likely to continue to do so in the future. Although
        hydrocarbon prices have improved in recent years and the level of offshore
        exploration, drilling and production activity has increased, we cannot assure
        you that such price and activity levels will be sustained and that there
        will
        not be continued volatility in the level of drilling and production related
        activities. Even during periods of high prices for oil and natural gas,
        companies exploring for oil and gas may cancel or curtail programs, or reduce
        their levels of capital expenditures for exploration and production for a
        variety of reasons. In addition, a significant and prolonged decline in
        hydrocarbon prices would likely have a material adverse effect on our results
        of
        operations.
  **Our
        business involves numerous operating hazards that may not be covered by
        insurance. The occurrence of an event not fully covered by insurance could
        have
        a material adverse effect on our financial conditions and results of
        operations.**
  Our
        products are used in potentially hazardous drilling, completion and production
        applications that can cause personal injury, product liability and environmental
        claims. A catastrophic occurrence at a location where our equipment and/or
        services are used may expose us to substantial liability for personal injury,
        wrongful death, product liability or commercial claims. To the extent available,
        we maintain insurance coverage that we believe is customary in the industry.
        Such insurance does not, however, provide coverage for all liabilities, and
        we
        cannot assure you that our insurance coverage will be adequate to cover claims
        that may arise or that we will be able to maintain adequate insurance at
        rates
        we consider reasonable. The occurrence of an event not fully covered by
        insurance could have a material adverse effect on our financial condition
        and
        results of operations.
  **We
        may lose money on fixed-price contracts.**
  A
        portion
        of our business consists of designing, manufacturing, selling and installing
        equipment for major projects pursuant to competitive bids, and is performed
        on a
        fixed-price basis. Under these contracts, we are typically responsible for
        all
        cost overruns, other than the amount of any cost overruns resulting from
        requested changes in order specifications. Our actual costs and any gross
        profit
        realized on these fixed price contracts will often vary from the estimated
        amounts on which these contracts were originally based.
  This
        may
        occur for various reasons, including:
  •
Errors
        in estimates or bidding;
  •
Changes
        in availability and cost of labor and materials; and
  •
        Variations in productivity from our original estimates.
  These
        variations and the risks inherent in our projects may result in reduced
        profitability or losses on projects. Depending on the size of a project,
        variations from estimated contract performance could have a significant impact
        on our operating results.
  **Our
        business could be adversely affected if we do not develop new
        products**
  Technology
        is an important component of our business and growth strategy, and our success
        as a company depends to a significant extent on the development and
        implementation of new product designs and improvements. Whether we can continue
        to develop systems and services and related technologies to meet evolving
        industry requirements and, if so, at prices acceptable to our customers will
        be
        significant factors in determining our ability to compete in the industry
        in
        which we operate. Many of our competitors are large multinational companies
        that
        may have significantly greater financial resources than we have, and they
        may be
        able to devote greater resources to research and development of new systems,
        services and technologies than we are able to do.
  **Loss
        of our key management or other personnel could adversely impact our
        business**
  We
        depend
        on the services of our executive management team, including Ronald E. Smith,
        John C. Siedhoff and Robert E. Chamberlain, Jr. The loss of any of these
        officers could have a material adverse effect on our operations and financial
        condition. In addition, competition for skilled machinists, fabricators and
        technical personnel among companies that rely heavily on engineering and
        technology is intense, and the loss of qualified employees or an inability
        to
        attract, retain and motivate additional highly skilled employees required
        for
        the operation and expansion of our business could hinder our ability to conduct
        research activities successfully and develop and produce marketable products
        and
        services. While we believe that our wage rates are competitive and that our
        relationship with our skilled labor force is good, a significant increase
        in the
        wages paid by competing employers could result in a reduction of our skilled
        labor force, increases in the wage rates paid by us, or both. If either of
        these
        events were to occur, in the near-term, the profits realized by us from work
        in
        progress would be reduced and, in the long-term, our production capacity
        and
        profitability could be diminished, and our growth potential could be
        impaired.
  **Our
        operations and our customers’ operations are subject to a variety of
        governmental laws and regulations that may increase our costs, limit the
        demand
        for our products and services or restrict our operations.**
  Our
        business and our customers’ businesses may be significantly affected
        by:
  •
        Federal, state and local and foreign laws and other regulations relating
        to the
        oilfield operations, worker safety and the protection of the
        environment;
  •
Changes
        in these laws and regulations; and
  •
The
        level of enforcement of these laws and regulations.
  In
        addition, we depend on the demand for our products and services from the
        oil and
        gas industry. This demand is affected by changing taxes, price controls and
        other laws and regulations relating to the oil and gas industry generally,
        including those specifically directed to offshore operations. For example,
        the
        adoption of laws and regulations curtailing exploration and development drilling
        for oil and gas for economic or other policy reasons could adversely affect
        our
        operations by limiting demand for our products. We cannot determine the extent
        to which our future operations and earnings may be affected by new legislation,
        new regulations or changes in existing regulations.
  **Our
        businesses and our customers’ businesses are subject to environmental laws and
        regulation that may increase our costs, limit the demand for our products
        and
        services or restrict our operations.**
  Our
        operations and the operations of our customers are subject to federal, state
        and
        local and foreign laws and regulations relating to the protection of the
        environment. These environmental laws and regulations affect the products
        and
        services we design, market and sell, as well as the facilities where we
        manufacture our products. In addition, environmental laws and regulations
        could
        limit our customers’ exploration and production activities. We are required to
        invest financial and managerial resources to comply with environmental laws
        and
        regulations and anticipate that we will continue to be required to do so
        in the
        future. These laws and regulations change frequently, which makes it impossible
        for us to predict their cost or impact on our future operations. The
        modification of existing laws or regulations or the adoption of new laws
        or
        regulations imposing more stringent environmental restrictions could adversely
        affect our operations.
  These
        laws may provide for “strict liability” for damages to natural resources or
        threats to public health and safety, rendering a party liable for environmental
        damage without regard to negligence or fault on the part of such party.
        Sanctions for noncompliance may include revocation of permits, corrective
        action
        orders, administrative or civil penalties, and criminal prosecution. Some
        environmental laws and regulations provide for joint and several strict
        liability for remediation of spills and releases of hazardous substances.
        In
        addition, we may be subject to claims alleging personal injury or property
        damage as a result of alleged exposure to hazardous substances, as well as
        damage to natural resources. These laws and regulations also may expose us
        to
        liability for the conduct of or conditions caused by others, or for our acts
        that were in compliance with all applicable laws and regulations at the time
        such acts were performed. Any of these laws and regulations could result
        in
        claims, fines or expenditures that could be material to our earnings, financial
        condition or cash flow.
  **We
        may be unable to successfully compete with other manufacturers of drilling
        and
        production equipment.**
  Several
        of our primary competitors are diversified multinational companies with
        substantially larger operating staffs and greater capital resources than
        ours
        and which have been engaged in the manufacturing business for a much longer
        time
        than us. If these competitors substantially increase the resources they devote
        to developing and marketing competitive products and services, we may not
        be
        able to compete effectively. Similarly, consolidation among our competitors
        could enhance their product and service offerings and financial resources,
        further intensifying competition.
  **The
        loss of a significant customer could have an adverse impact on our financial
        results.**
  Our
        principal customers are major integrated oil and gas companies, large
        independent oil and gas companies and foreign national oil and gas companies.
        Offshore drilling contractors and engineering and construction companies
        also
        represent a portion of our customer base. During the period from inception,
        June
        29, 2006 to December 31, 2006, our top 3 customers represented approximately
        43%
        of total revenues, with our largest customer accounting for approximately
        16% of
        our total revenues. While we are not dependent on any one customer or group
        of
        customers, the loss of one or more of our significant customers could, at
        least
        on a short-term basis, have an adverse effect on our results of
        operations.
  **Our
        customers’ industries are undergoing continuing consolidation that may impact
        our results of operations.**
  The
        oil
        and gas industry is rapidly consolidating and, as a result, some of our largest
        customers have consolidated and are using their size and purchasing power
        to
        seek economies of scale and pricing concessions. This consolidation may result
        in reduced capital spending by some of our customers or the acquisition of
        one
        or more of our primary customers, which may lead to decreased demand for
        our
        products and services. We cannot assure you that we will be able to maintain
        our
        level of sales to a customer that has consolidated or replace that revenue
        with
        increased business activity with other customers. As a result, the acquisition
        of one or more of our primary customers may have a significant negative impact
        on our results of operations or our financial condition. We are unable to
        predict what effect consolidations in the industry may have on price, capital
        spending by our customers, our selling strategies, our competitive position,
        our
        ability to retain customers or our ability to negotiate favorable agreements
        with our customers.
  **Increases
        in the cost of raw materials and energy used in our manufacturing processes
        could negatively impact our profitability.**
  During
        2005 and 2006, commodity prices for items such as nickel, molybdenum and
        heavy
        metal scrap that are used to make the steel alloys required for our products
        increased significantly, resulting in an increase in our raw material costs.
        Similarly, energy costs to produce our products have increased significantly.
        If
        we are not successful in raising our prices on products, our margins will
        be
        negatively impacted.
   
  **Future
        Capital Needs**
  Our
        growth and continued operations could be impaired by limitations on our access
        to the capital markets. There can be no assurance that capital from outside
        sources will be available, or if such financing is available, it may involve
        issuing securities senior to the Common Stock or equity financings which
        are
        dilutive to holders of the Common Stock.
  **We
        depend on third party suppliers for timely deliveries of raw materials, and
        our
        results of operations could be adversely affected if we are unable to obtain
        adequate supplies in a timely manner.**
  Our
        manufacturing operations depend upon obtaining adequate supplies of raw
        materials from third parties. The ability of these third parties to deliver
        raw
        materials may be affected by events beyond our control. Any interruption
        in the
        supply of raw materials needed to manufacture our products could adversely
        affect our business, results of operations and reputation with our
        customers.
  **Limitation
        on Remedies, Indemnification**
  The
        Company’s Bylaws provide that the officers and directors will only be liable to
        the Company for acts or omissions that constitute actual fraud, gross negligence
        or willful and wanton misconduct. Thus, the Company may be prevented from
        recovering damages for certain alleged errors or omissions by the officers
        and
        directors for liabilities incurred in connection with their good faith acts
        for
        the Company. Such an indemnification payment might deplete the Company’s assets.
        Stockholders who have questions regarding the fiduciary obligations of the
        officers and directors of the Company should consult with independent legal
        counsel. It is the position of the Securities and Exchange Commission that
        exculpation from and indemnification for liabilities arising under the 1933
        Act
        and the rules and regulations hereunder is against public policy and therefore
        unenforceable.
  ***Risks
        Related to our Principal Stockholders***
  **We
        are controlled by our principal stockholders, and our other stockholders
        are
        unable to affect the outcome of stockholder voting.**
  Officers
        and directors, as a group, own approximately 74.5% of our outstanding common
        stock on a primary basis and approximately 74.7% on a fully diluted basis.
        As
        long as they continue to own, directly or indirectly, a majority of our
        outstanding common stock, they will be able to exert significant control
        over
        us. Our other stockholders, by themselves, will not be able to affect the
        outcome of any stockholder vote. As a result, the principal stockholders
        will be
        able to control all matters affecting us, including:
  •
The
        composition of our board of directors and, through it, any determination
        with
        respect to our business direction and policies, including the appointment
        and
        removal of officers;
  •
Any
        determinations with respect to mergers or other business
        combinations;
  •
Our
        acquisition or disposition of assets;
  •
Our
        financing decisions and our capital raising activities;
  •
The
        payment of dividends on our common stock;
  •
        Amendments to our restated certificate of incorporation or bylaws;
        and
  •
        Determinations with respect to our tax returns.
  In
        addition, such ownership may have the effect of delaying or preventing a
        change
        of control. The principal stockholders are generally not prohibited from
        selling
        a controlling interest in us to a third party.
   
  **Our
        shares that are eligible for future sale may have an adverse effect on the
        price
        of our common stock.**
  Future
        sales of substantial amounts of our common stock, or a perception that such
        sales could occur, could adversely affect the market price of our common
        stock
        and could impair our ability to raise capital through the sale of our equity
        securities. Officers and directors, as a group, own approximately 74.5% of
        our
        common stock outstanding. The market price of our stock could be adversely
        impacted if, in the future, they should obtain piggyback and/or demand
        registration rights that provide for the registration of the resale of those
        shares to allow those shares to be sold in the public market without
        restriction.
  
 ***Risks
        related to the market***
  **The
        market price of our common stock is volatile.**
  The
        trading price of our common stock and the price at which we may sell common
        stock in the future are subject to large fluctuations in response to any
        of the
        following:
  •
Limited
        trading volume in our common stock;
  •
        Quarterly variations in operating results;
  •
General
        financial market conditions;
  •
The
        prices of natural gas and oil;
  •
        Announcements by us and our competitors;
  •
Our
        liquidity;
  •
Changes
        in government regulations;
  •
Our
        ability to raise additional funds;
  •
Our
        involvement in litigation; and
  •
Other
        events.
  ***Risks
        Related to our Common Stock***
 
 **We
        do not expect to pay dividends on our common stock for the foreseeable
        future.**
 
 We
        do not
        expect to pay cash or other dividends on our common stock for the foreseeable
        future. Our board of directors reviews this policy on a regular basis in
        light
        of our earnings, financial condition and market opportunities. We currently
        intend to retain any earnings for the future operation and development of
        our
        business.
  **There
        is a limited public market for our shares of common stock.**
  There
        is
        presently a limited public market for our common stock. There is no assurance
        that an active trading market will develop or be sustained. Accordingly,
        you may have to hold the shares of common stock indefinitely and may have
        difficulty selling them if an active trading market does not development.
   
  **The
        current capitalization could delay, defer, or prevent a change of
        control.**
  We
        are
        authorized to issue up to 490,000,000 shares of common stock and up to
        10,000,000 shares of preferred stock, in one or more series, and to determine
        the price, rights, preferences and privileges of the shares of each such
        series
        without any further vote or action by the stockholders. The issuance of
        preferred stock could have the effect of making it more difficult for a third
        party to acquire a majority of our outstanding voting stock, thereby delaying,
        deferring, or preventing a change of control that might be beneficial to
        investors.
  **Recent
        Accounting Pronouncements**
  In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        No.
        157, Fair Value Measurements (“SFAS 157”), which provides enhanced guidance for
        using fair value to measure assets and liabilities. SFAS 157 also responds
        to
        investors’ requests for expanded information about the extent to which company’s
        measure assets and liabilities at fair value, the information used to measure
        fair value, and the effect of fair value measurements on earnings. SFAS 157
        applies whenever other standards require (or permit) assets or liabilities
        to be
        measured at fair value, but does not expand the use of fair value in any
        new
        circumstances. SFAS 157 is effective for financial statements issued for
        fiscal
        years beginning after November 15, 2007. We have not yet determined the impact,
        if any, of adopting SFAS 157 on our consolidated financial
        statements.
 
 In
        July
        2006, the FASB issued FASB Interpretation No. 48 “Accounting For Uncertain Tax
        Positions” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income
        taxes recognized in an enterprise’s financial statements in accordance with FASB
        Statement No. 109 “Accounting for Income Taxes”. It prescribes a recognition
        threshold and measurement attribute for the financial statement recognition
        and
        measurement of a tax position taken or expected to be taken in a tax return.
        FIN
        48 also provides guidance on derecognition, classification, interest and
        penalties, accounting in interim periods, disclosure, and transition. FIN
        48 is
        effective for fiscal years beginning after December 15, 2006. We are currently
        evaluating the impact of FIN 48 on our financial position and results of
        operations.
 
 **Inflation
        and Seasonality**
  We
        do not
        believe that our operations are significantly impacted by inflation. Our
        business is not seasonal in nature.
  **Item
        7. Financial Statements.**
  The
        financial statements and schedules are included herewith commencing on page
        F-1.
  Independent
                  Auditors’ Report
              F-1Consolidated
                  Balance Sheet
              F-2Consolidated
                  Statement of Operations
              F-3Consolidated
                  Statement of Changes in Stockholders’ Equity (Deficit)
              F-4Consolidated
                  Statement of Cash Flows
              F-5Notes
                  to Financial Statements
              F-6
 
 
 **Item
        8. Changes in and Disagreements with Accountants on Accounting and Financial
        Disclosure.**
  None.
   
  **Item
        8A. Controls and Procedures.**
  We
        maintain disclosure controls and procedures that are designed to ensure that
        information required to be disclosed in our Exchange Act reports is recorded,
        processed, summarized and reported within the time periods specified in the
        Securities and Exchange Commission’s rules and forms, and that such information
        is accumulated and communicated to our management, including our Chief Executive
        Officer and Chief Financial Officer, as appropriate, to allow for timely
        decisions regarding required disclosure. In designing and evaluating the
        disclosure controls and procedures, management recognizes that any controls
        and
        procedures, no matter how well designed and operated, can provide only
        reasonable assurance of achieving the desired control objectives, and management
        is required to apply its judgment in evaluating the cost-benefit relationship
        of
        possible controls and procedures.
 
 As
        of the
        end of the period covered by this report (the “Evaluation Date” ), we carried
        out an evaluation, under the supervision and with the participation of our
        management, including our Chief Executive Officer and our Chief Financial
        Officer, of the effectiveness of the design and operation of our disclosure
        controls and procedures. Based on the foregoing, our Chief Executive Officer
        and
        Chief Financial Officer concluded that, as of the Evaluation Date, our
        disclosure controls and procedures were not effective at the reasonable
        assurance level and in compliance with Section 404 of the Sarbanes-Oxley
        Act.
        While conducting the audit of the financial statements as of and for the
        period
        ended December 31, 2006, our independent auditors found numerous audit
        adjustments that indicated a material weakness in our controls over financial
        reporting. It is our plan with additional funding to devote more resources
        to
        this very critical function.
 
 To
        the
        best of our knowledge and belief, there has been no change in our internal
        controls over financial reporting during the period ended December 31, 2006
        that
        has materially affected, or is reasonably likely to materially affect, our
        internal control over financial reports.
 
 **Item
        8B. Other Information.**
 
 None.
 
 **PART
        III**
 **Item
        9.** **Directors,
        Executive Officers, Promoters, Control Persons and Corporate Governance;
        Compliance with Section 16(a) of the Exchange Act.**
  *Robert
        E. Chamberlain, Jr., Chairman & Director.* Mr.
        Chamberlain has a B.S. in Chemical Engineering and a B.S. in Biomedical
        Engineering from Northwestern University's Technological Institute and an
        MBA
        from Northwestern University's Kellogg Graduate School of Management. Mr.
        Chamberlain served as Vice President with Solomon Brothers Inc. (1986 to
        1992),
        where his responsibilities included mergers, acquisitions, leveraged buyouts,
        merchant banking, divestitures, corporate finance, capital raises,
        restructurings and new product development in both the private and public
        markets. From 1992 through 1995, Mr. Chamberlain served as Vice President
        for
        Laidlaw Securities and Dickinson & Co. where he was responsible for
        generating public and private equity transactions. Since 1995, Mr. Chamberlain
        has assisted small emerging growth companies gain access to the capital markets
        and develop well articulated strategic objectives through consulting companies
        he controlled. Most recently, Mr. Chamberlain served as Chairman, CEO, CFO
        and
        Director of a publicly traded energy company involved in the development
        of oil
        and gas opportunities, primarily in the Barnett Shale of Texas.
 
 *Ronald
        E. Smith, President, Chief Executive Officer and Director* .
        Mr.
        Smith co-founded Deep Down in 1997. Mr. Smith graduated from Texas A&M
        University with a Bachelor of Science degree in Ocean Engineering in 1981.
        Mr.
        Smith worked both onshore and offshore in management positions for Ocean
        Drilling and Exploration Company (ODECO), Oceaneering Multiflex, Mustang
        Engineering and Kvaerner before founding Deep Down. Mr. Smith’s interests
        include all types of offshore technology, nautical innovations, state of
        the art
        communications, diving technology, hydromechanics, naval architecture, dynamics
        of offshore structures, diving technology and marketing of new or innovative
        concepts. Mr. Smith is directly responsible for the invention or development
        of
        many innovative solutions for the offshore industry, including the first
        steel
        tube flying lead installation system.
 
  
  *Mary
        L. Budrunas, Vice-President.* Ms.
        Budrunas, co-founder of Deep Down, Inc. along with current chief executive
        officer Ron Smith, is currently responsible for the Company’s administrative
        functions including human resources and accounting. Ms. Budrunas has more
        than
        30-years of logistical management experience in manufacturing, fabrication,
        and
        industrial sourcing in the oil and gas industry. Prior to Ms. Budrunas
        co-founding Deep Down in 1997, she managed the purchasing efforts of many
        projects over a 10-year period for Mustang Engineering, and also previously
        directed procurement for a large petroleum drilling and production facility
        project in Ulsan, Korea.
 
 *John
        C. Siedhoff, Chief Financial Officer and Director* .
        Mr.
        Siedhoff graduated from Iowa State University in 1982 and holds a Bachelor
        of
        Science degree in Mechanical Engineering. Mr. Siedhoff has spent the past
        24
        years with manufacturing companies in the petrochemical, industrial and offshore
        domains. He started working in operations with his first turnaround opportunity
        and has purchased and operated six manufacturing companies since 1996. He
        has
        served on the Board of Directors for many different companies and has spent
        considerable time assisting companies in need of his operational and financial
        skills.
 
 *Steven
        C. Pahls, Sales Manager* .
        Mr.
        Pahls graduated from Widener University in 1970 and holds a Bachelor of Arts
        degree and an MBA. He has a wide range of sales experience in the offshore
        oil
        industry selling and managing product lines for Linnenbank International,
        Hamanaka International, Technor Wire Rope, Wellstream Corporation and Kvaerner
        Oilfield before joining Deep Down. His expertise is in syntactic foam buoyancy
        products, mooring hardware, wire products and flexible pipe
        applications.
 
 *John
        B. VanHyfte, Vice President* .
        Mr.
        VanHyfte graduated from Texas A&M University in 1997 and holds a Master of
        Science degree and a Bachelor of Science degree in Bioengineering. While
        working
        for Texas A & M University, Motorola, Linntech Engineering and Deep Down,
        John has been published many times on topics ranging from “A New Microfluidic
        System for the Detection of Biological Agents on Contaminated Surfaces” to
“Removal of Contaminants from Soil Using an Enhanced Phytoextraction Process”
along with patents such as “Electric Winching System for the Deployment and
        Retrieval of Subsea and Subterranean Packages”. John was a National Science
        Foundation Fellow and is affiliated with the Institute for Electrical &
Electronics Engineering and the Biomedical Engineering Society.
 
 *David
        C. Allensworth, Engineering Manager* .
        Mr.
        Allensworth graduated from Texas A&M University in 1991 and holds a Bachelor
        of Science degree in Ocean Engineering. He has many years of design, engineering
        and project management experience for the manufacturing of umbilicals, bend
        stiffener latches, flying lead heads, cablers and carousels while with
        Oceaneering Multiflex, Western Atlas International, Kvaerner, FMC Kongsberg
        and
        DUCO before arriving at Deep Down. He is also proficient in Solid Works 3D
        solid
        modeling, Pro-Engineer Wildfire, Algor Linear FEA and AutoCAD.
 
 *Stanley
        O. Stuckey, Jr., Operations Manager* .
        Mr.
        Stuckey is a graduate of Cleveland High School and has spent the past 19
        years
        servicing the offshore oil industry. He has worked offshore for Oceaneering
        Multiflex, KD Services and Deep Down. His strengths are in manpower utilization,
        umbilical installations, SIT services, FAT testing, fabrication and welding.
        Like all of his service technicians, Mr. Stuckey has Water Survival Training
        and
        is a Level 1 Service Technician.
 
  **Corporate
        Governance**
  The
        Company promotes accountability for adherence to honest and ethical conduct;
        endeavors to provide full, fair, accurate, timely and understandable disclosure
        in reports and documents that the Company files with the Commission and in
        other
        public communications made by the Company; strive to be compliant with
        applicable governmental laws, rules and regulations; and promotes prompt
        internal reporting of violations of the code of ethics to an appropriate
        person
        or persons. The Company has not formally adopted a written code of business
        conduct and ethics that governs to the Company’s employees, officers and
        directors as the Company is not required to do so.
 
 There
        were no material changes to the procedures by which shareholders may recommend
        nominees to the Company’s board of directors.
   
  In
        lieu
        of an Audit Committee, the Company’s Board of Directors is responsible for
        reviewing and making recommendations concerning the selection of outside
        auditors, reviewing the scope, results and effectiveness of the annual audit
        of
        the Company's financial statements and other services provided by the Company’s
        independent public accountants. The Board of Directors also reviews the
        Company's internal accounting controls, practices and policies. No director
        qualifies as an audit committee financial expert as defined in Item 407(d)
        (5)
        (ii) of Regulation S-B.
 
 **Section
        16(a) Beneficial Ownership Reporting Compliance**
  Section
        16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
        and executive officers, as well as persons beneficially owning more than
        10% of
        our outstanding common stock, to file reports of ownership and changes in
        ownership with the Securities and Exchange Commission (the “SEC”) within
        specified time periods. Such officers, directors and shareholders are also
        required to furnish us with copies of all Section 16(a) forms they
        file.
  Based
        solely on its review of such forms received by us, or written representations
        from certain reporting persons, we believe that all Section 16(a) filing
        requirements applicable to our officers, directors and 10% shareholders were
        complied with during the fiscal year ended December 31, 2006.
  **Item
        10. Executive Compensation.**
  The
        following table summarizes all compensation paid to our Chief Executive Officer,
        our two highest compensated named executive officers, and our two highest
        compensated non-executives for the period from inception June 29, 2006 through
        December 31, 2006. The Company does not currently have a stock compensation
        plan; there were no non-equity incentive compensation grants, or deferred
        compensation earnings by the executives of the Company. Additionally, there
        have
        been no warrant or option grants to executives during the period
        noted.
 
 **SUMMARY
        COMPENSATION TABLE**
  
 **Name
                  and Principal Position**
              **Salary
                  ($)**
              **Bonus
                  ($)**Ronald
                  E. Smith(1)
                President,
                  Chief Executive Officer and Director
              $
                  27,110
              $
                  1,710John
                  C. Siedhoff(2)
                Chief
                  Financial Officer, Treasurer and Director
              $
                  20,220
              $
                  12,415Robert
                  E. Chamberlain
                Chairman
                  (1)
              $
                  16,670
              $
                  0Mary
                  L. Budrunas
                Vice-President
              $
                  13,070
              $
                  12,670Stanley
                  O. Stuckey, Jr.
                Operations
                  Manager
              $
                  16,040
              $
                  4,065
 ----------
 (1)
              Mr.
                  Chamberlain was paid for consulting services he performed through
                  Strategic Capital Services, Inc.
 
 
 **Employment
        Agreements**
  None
  **Compensation
        of Directors**
  For
        the
        period from inception June 29, 2006 to December 31, 2006, there were no cash
        payments or equity grants for compensation to the Company’s non-employee
        director, Daniel L. Ritz, Jr. Mr. Ritz resigned as a director of the Company
        effective March 20, 2007.
   
  **Item
        11. Security Ownership of Certain Beneficial Owners and Management and Related
        Stockholder Matters.**
  **EQUITY
        COMPENSATION PLAN INFORMATION**
  As
        of
        December 31, 2006, the Company had no equity compensation plans.
  **Item
        12. Certain Relationships and Related Transactions, and Director
        Independence.**
 
 The
        following table sets forth certain information, as of March 31, 2007, concerning
        the beneficial ownership of shares of Common Stock of the Company by (i)
        each
        person known by the Company to beneficially own more than 5% of the Company’s
        Common Stock; (ii) each Director; (iii) the Company’s Chief Executive Officer;
        and (iv) all directors and executive officers of the Company as a group.
        To the
        knowledge of the Company, all persons listed in the table have sole voting
        and
        investment power with respect to their shares, except to the extent that
        authority is shared with their respective spouse under applicable
        law.
 
  **Amount
                  and Nature of Beneficially Ownership****(1)****Name
                  and Address of Beneficial Owner****(2)**
              **Shares**
              **Options/Warrants**
              **Percent****(1)**Ronald
                  E. Smith (3)
              23,287,500
              0
              25.8%John
                  C. Siedhoff
              25,000,000
              0
              37.2%Robert
                  E. Chamberlain, Jr.
              25,000,000
              0
              37.2%All
                  directors and officers as a group
              73,287,500
              0
              76.7%
 
 ----------
 (1)
              A
                  person is deemed to be the beneficial owner of securities that
                  can be
                  acquired within 60 days from the date set forth above through the
                  exercise
                  of any option, warrant or right. Shares of common stock subject
                  to
                  options, warrants or rights that are currently exercisable or exercisable
                  within 60 days are deemed outstanding for computing the percentage
                  of the
                  person holding such options, warrants or rights, but are not deemed
                  outstanding for computing the percentage of any other person. The
                  amounts
                  and percentages are based upon 67,142,673 shares of common stock
                  outstanding as of March 31, 2007.
  (2)
              The
                  address of each of the beneficial owners is c/o Deep Down, Inc.,
                  15473
                  East Freeway, Channelview, Texas
                  77530.
  (3)
              Reflects
                  6,655,050 shares owned by Ron Smith and 16,632,450 shares owned
                  by Mary L.
                  Budrunas through the conversion of Series D Preferred Stock. Ron
                  Smith and
                  Mary Budrunas are married.
   **Item
        13. Exhibits.**
  The
        exhibits as indexed immediately following the signature page of this Report
        are
        included as part of this Form 10-KSB.
   
  **Item
        14. Principal Accountant Fees and Services.**
 
 The
        following table sets forth fees billed to us by our auditors during the period
        from inception, June 29, 2006 to December 31, 2006 for: (i) services rendered
        for the audit of our annual financial statements and the review of our quarterly
        financial statements, (ii) services by our auditors that are reasonably related
        to the performance of the audit or review of our financial statements and
        that
        are not reported as Audit Fees, (iii) services rendered in connection with
        tax
        compliance, tax advice and tax planning, and (iv) all other fees for services
        rendered.
 December
                    31, 2006(i)
                Audit
                    Fees
                $
                    42,000(ii)
                Audit
                    Related Fees
                $
                    118,000(iii)
                Tax
                    Fees
                $
                    -(iv)
                All
                    Other Fees
                $
                    -
 **SIGNATURES**
  In
        accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
        the
        Registrant caused this Report to be signed on its behalf by the undersigned,
        thereunto duly authorized.
 
 DEEP
        DOWN, INC.
  /s/
        RONALD E. SMITH
 Ronald
        E.
        Smith, President and Chief Executive Officer and Director (Principal Executive
        Officer)
  Dated:
        April 24, 2007
  /s/
        JOHN C. SIEDHOFF
 John
        C.
        Siedhoff, Chief Financial Officer and Director (Principal Financial
        Officer)
  Dated:
        April 24, 2007
  
 
  
 **POWER
        OF ATTORNEY**
  KNOWN
        ALL
        MEN BY THESE PRESENTS, that each person whose signature appears below
        constitutes and appoints RONALD E. SMITH and JOHN C. SIEDHOFF, and each of
        them,
        his or her true and lawful attorneys-in-fact and agents, with full power
        of
        substitution and resubstititon for him or her and in his or her name, place
        and
        stead, in any and all capacities, to sign any and all amendments to this
        Annual
        Report on Form 10-KSB, and to file the same, with all exhibits thereto, and
        other documents in connection therewith with the Securities and Exchange
        Commission, granting unto said attorneys-in-fact and agents, and each of
        them,
        full power and authority to do and perform each and every act and thing
        requisite and necessary to be done in and about the premises, as fully and
        to
        all intents and purposes as he might or could do in person hereby ratifying
        and
        confirming all that said attorneys-in-fact and agents, or his substitute
        or
        substitutes, may lawfully do or cause to be done by virtue hereof.
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed by the following persons on behalf of the Registrant and in the
        capacities and on the dates indicated.
  
 Signatures
              Title
              Date/s/
                  RONALD E. SMITH
              President,
                  CEO and Director
              April
                  24, 2007Ronald
                  E. Smith
              (Principal
                  Executive Officer)/s/
                  JOHN C. SIEDHOFF
              Chief
                  Financial Officer and Director
              April
                  24, 2007John
                  C. Siedhoff
              (Principal
                  Financial Officer)/s/
                  ROBERT E. CHAMBERLAIN, JR.
              Chairman
                  and Director
              April
                  24, 2007Robert
                  E. Chamberlain, Jr.
 
  
  
 **INDEX
        TO FINANCIAL STATEMENTS**
 
 
 Report
                  of Independent Registered Public Accounting Firm
              F-1Balance
                  Sheet
              F-2Statements
                  of Operations
              F-3Statements
                  of Stockholders’ Equity (Deficit)
              F-4Statements
                  of Cash Flows
              F-5Notes
                  to the Financial Statements
              F-6
 
  
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Board of Directors and Stockholders of Deep Down, Inc. Houston,
        Texas
  We
        have
        audited the accompanying balance sheet of Deep Down, Inc. (the “Company”), as of
        December 31, 2006 and the related statements of operations, stockholders’
equity, and cash flows for the period of inception, June 29, 2006 to December
        31, 2006. These financial statements are the responsibility of the Company’s
        management. Our responsibility is to express an opinion on these financial
        statements based on our audit.
  We
        conducted our audit in accordance with the standards of Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audit provides a
        reasonable basis for our opinion.
  In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Deep Down, Inc. as of December
        31,
        2006, and the results of its operations and cash flows for the period of
        inception, June 29, 2006 to December 31, 2006, in conformity with U.S. generally
        accepted accounting principles.
  /s/
        Malone & Bailey, PC
 Malone
        & Bailey, PC
 www.malone-bailey.com
 Houston,
        Texas
 April
        15,
        2007
 
 
 
 **Deep
        Down, Inc.**
 **Balance
        Sheet**
  **December
                  31,****2006****Assets**Cash
                  and equivalents
              
              $
                  12,462Receivables
              
              1,264,228Inventory
              
              145,487Prepaid
                  expenses and other current assets
              
              11,488Construction
                  in progress
              
              916,485Total
                  current assets
              
              2,350,150Property
                  and equipment, net
              
              845,200Goodwill
              
              6,934,213Total
                  assets
              
              $
                  10,129,563**Liabilities
                  and Stockholders' Equity**Accounts
                  payable and accrued liabilities
              
              $
                  816,490Deferred
                  Revenue
              
              190,000Current
                  portion of long-term debt
              
              410,731Total
                  current liabilities
              
              1,417,221Long-term
                  debt
              
              757,617Series
                  E redeemable exchangeable preferred stock, face value and liquidation
                  preference of 1,000 per share, no dividend preference, 5,000 shares
                  authorized, issued and outstanding
              
              3,486,376Series
                  G redeemable exchangeable preferred stock, face value and liquidation
                  preference of 1,000 per share, no dividend preference, 1,000 shares
                  authorized, issued and outstanding
              
              697,275Total
                  liabilities
              
              6,358,489Commitments
                  and contingencies (Note 10)Temporary
                  equity:Series
                  D redeemable convertible preferred stock, $0.01 par value, face
                  value and
                  liquidation preference of $1,000 per share, no dividend preference,
                  5,000
                  shares authorized, issued and outstanding
              
              4,419,244Series
                  F redeemable convertible preferred stock, $0.01 par value, face
                  value and
                  liquidation preference of $1,000 per share, no dividend preference,
                  3,000
                  shares authorized, issued and outstanding
              
              2,651,547Total
                  temporary equity
              
              7,070,791Stockholders’
                  equity:Series
                  C convertible preferred stock, $0.001 par value, 7% cumulative
                  dividend,
                  30,000 shares authorized, 22,000 shares issued and
                  outstanding
              
              22Common
                  stock, 0.01 par value, 490,000,000 shares authorized, 82,870,171
                  shares
                  issued and outstanding
              
              828,702Paid
                  in capital
              
              (828,624)Retained
                  earnings
              
              (3,299,817)Total
                  stockholders' equity
              
              (3,299,717)Total
                  liabilities and stockholders' equity
              
              $
                  10,129,563
 See
        accompanying notes to financial statements.
  
 
 Deep
      Down, Inc. **Statement
        of Operations**
 **For
        the Period Since Inception, June 29, 2006 to December 31,
        2006**
  Revenues
              $
                  978,047Cost
                  of sales
              565,700Gross
                  profit
              412,347Operating
                  expenses:Selling,
                  general & administrative
              3,600,627Depreciation
              27,161Total
                  operating expenses
              3,627,788Operating
                  income (loss)
              (3,215,441)Other
                  income (expense):Interest
                  expense
              (62,126)Total
                  other income (expense)
              (62,126)Income
                  (loss) from continuing operations
              (3,277,567)Income
                  tax provision
              (22,250)Net
                  income (loss)
              $
                  (3,299,817)Net
                  loss per share:Basic
                  and diluted
              $
                  (0.04)Weighted
                  average common shares outstandingBasic
                  and diluted
              76,701,659
 See
          accompanying notes to financial statements.
 
 
   
 **Common
                  Stock****(a)**
              
              **Series
                  C Preferred Stock**
              **Paid-in**
              
              **Retained****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              **Capital**
              
              **Earnings**
              
              **Total****Balance
                  at June 29, 2006 (inception)**
              
              75,000,000
              
              $
                  750,000
              
              -
              
              $
                  -
              $
                  (749,900)
              
              $
                  -
              
              $
                  100Net
                  income
              
              -
              
              -
              
              -
              
              -
              -
              
              (3,299,817)
              
              (3,299,817)Reverse
                  merger with MediQuip
              
              7,870,171
              
              78,702
              
              22,000
              
              22
              (78,724)
              
              -
              
              --**Balance
                  at December 31, 2006**
              
              82,870,171
              
              $
                  828,702
              
              22,000
              
              $
                  22
              $
                  (828,624)
              
              $
                  (3,299,817)
              
              $
                  (3,299,717)
 
 
 (a) Par
        value changed from $0.00 to $0.01 per share in connection with reverse
        merger
  See
        accompanying notes to financial statements
 
  
 
 **Deep
          Down, Inc.**
 **Statements
          of Cash Flows**
 **For
          the Period Since Inception, June 29, 2006 to December 31,
          2006**
 
 Cash
                    flows from operating activities:Net
                    loss
                
                $
                    (3,299,817)Adjustments
                    to reconcile net loss to net cashused
                    in operating activities:Depreciation
                
                27,163Share-based
                    compensation
                
                3,340,792Amortization
                    of debt discount
                
                48,179Changes
                    in assets and liabilities:Accounts
                    receivable
                
                (251,001)Inventory
                
                23,185Prepaid
                    expenses and other current assets
                
                150Construction
                    in progress
                
                (90,326)Accounts
                    payable
                
                145,433Net
                    cash used in operating activities
                
                (56,242)Cash
                    flows from investing activities:Cash
                    acquired in acquisition of a business
                
                101,497Net
                    cash provided by investing activities
                
                101,497Cash
                    flows from financing activities:Payments
                    of long-term debt
                
                (32,893)Net
                    cash used in financing activities
                
                (32,893)Change
                    in cash and equivalents
                
                12,362Cash
                    and equivalents, beginning of year
                
                100Cash
                    and equivalents, end of year
                
                $
                    12,462
 See
          accompanying notes to financial statements.
 
 
 
  
  **Note
        1: Description of Business**
 
 Deep
        Down, Inc, (“the Company”) a Nevada corporation, provides installation
        management, engineering services, support services and storage management
        services for the subsea controls, umbilicals & pipeline industries offshore.
        The Company also fabricates component parts for subsea distribution systems
        and
        assemblies.
 
 On
        June
        29, 2006, Subsea Acquisition Corporation (“Subsea”) was formed by three
        shareholders with the intent to acquire service providers to the offshore
        industry, and designers and manufacturers of subsea equipment, surface equipment
        and offshore rig equipment that are used by major integrated, large independent
        and foreign national oil and gas companies in offshore areas throughout the
        world. On November 21, 2006, Subsea acquired Deep Down, Inc, a Delaware
        corporation founded in 1997. Under the terms of this transaction, all of
        Deep
        Down, Inc.’s shareholders transferred ownership of all of Deep Down Inc.’s
        common stock to Subsea in exchange for 5,000 shares of Subsea’s Series D
        Preferred Stock and 5,000 shares of Subsea’s Series E Preferred Stock resulting
        in Deep Down Inc. becoming a wholly owned subsidiary of Subsea. On the same
        day,
        Subsea then merged with Deep Down, with the surviving company operating as
        Deep
        Down Inc. Unless specifically stated otherwise, all references to Deep Down
        refer to the combined entity comprising Subsea and Deep Down Inc. This
        transaction was accounted for as a purchase with Subsea being the acquirer
        based
        on a change in voting control .Under purchase accounting; we have included
        the
        results of operations of the entity formerly operating as Deep Down from
        the
        acquisition date of November 21, 2006 forward. As Subsea was formed on June
        29,
        2006, the financial statements included herein reflect the results of the
        operations from the date of inception to December 31, 2006.
 
 Additionally
        on November 21, 2006 Subsea acquired all the common stock of Strategic Offshore
        Services Corporation (“SOS”) for 3,000 Series F Preferred Stock and 1,000 Series
        G Preferred Stock from two common shareholders of Subsea. Since the entities
        were under common control and the acquired entity did not constitute a business
        the Company charged compensation expense to shareholders for the fair value
        of
        both series totaling $3,340,792 million.
 
 On
        December 14, 2006 Deep Down exchanged all 9,999,999 shares of Deep Down common
        stock and all 14,000 shares of Deep Down preferred stock for 75,000,000 shares
        of common stock and 14,000 shares of preferred stock of MediQuip Holdings,
        Inc.
        (“MediQuip”) The preferred shares of MediQuip have the same designations as Deep
        Down’s preferred stock. As a result of the acquisition, the shareholders of Deep
        Down own a majority of the voting stock of MediQuip, which changed its name
        to
        Deep Down, Inc. The merger has been accounted for as a reverse merger whereby
        Deep Down is the accounting acquirer resulting in a recapitalization of Deep
        Down’s equity. The acquisition did not require the approval of shareholders of
        MediQuip. In connection and simultaneously with this reverse merger, Westmeria
        Healthcare Limited, a wholly owned subsidiary of MediQuip was transferred
        to
        MediQuip’s majority shareholder in exchange for the cancellation of 31,351,256
        common share equivalents. The MediQuip Series C convertible preferred stock
        outstanding prior to the reverse merger remains outstanding.
 
 The
        Company’s historical financial statements reflect those of Deep Down, Inc, and
        do not include the results of MediQuip or Westmeria Healthcare Limited for
        periods prior to the merger date.
 
 **Note
        2: Summary of Significant Accounting Policies**
 
 ***Use
        of Estimates***
 
 The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial statements
        and
        reported amounts of revenues and expenses during the reporting period. Actual
        results could differ from those estimates.
 
  
  ***Cash
        and Equivalents***
 
 The
        Company considers all highly liquid investments with maturities from date
        of
        purchase of three months or less to be cash equivalents. Cash and equivalents
        consist of cash on deposit with foreign and domestic banks and, at times,
        may
        exceed federally insured limits.
 
 ***Accounts
        Receivable***
 
 The
        Company provides an allowance for doubtful accounts on trade receivables
        based
        on historical collection experience and a specific review of each customer’s
        trade receivable balance.
 
 ***Inventory***
 
 Inventory
        is stated at the lower of cost (first-in, first out) or net realizable value.
        Inventory mainly consists of supplies used in the offshore industry such
        as
        fittings and valves.
 
 ***Property
        and Equipment***
 
 Property
        and equipment are stated at cost, net of accumulated depreciation. Depreciation
        and amortization is computed using the straight-line method over the estimated
        useful lives of the respective assets, generally three to seven years. Leasehold
        improvements are amortized on a straight-line basis over the shorter of the
        assets' useful lives or lease terms.
 
 ***Goodwill***
 
 Goodwill
        represents the cost in excess of the fair value of net assets acquired in
        business combinations. Statement of financial accounting standards (SFAS)
        No.
        142, “Goodwill and Other Intangible Assets” (SFAS 142), prescribes the process
        for impairment testing of goodwill on an annual basis or more often if a
        triggering event occurs. Goodwill is not amortized, and there were no indicators
        of impairment at December 31, 2006.
 
 The
        Company evaluates the carrying value of goodwill during the fourth quarter
        of
        each year and between annual evaluations if events occur or circumstances
        change
        that would more likely than not reduce the fair value of the reporting unit
        below its carrying amount. Such circumstances could include a significant
        adverse change in legal factors or in business or the business climate or
        unanticipated competition. When evaluating whether goodwill is impaired,
        the
        Company compares the fair value of the business to its carrying amount,
        including goodwill. The fair value of the reporting unit is estimated using
        a
        combination of the income, or discounted cash flows, approach and the market
        approach, which utilizes comparable companies’ data. If the carrying amount of
        the business exceeds its fair value, then the amount of the impairment loss
        must
        be measured. The impairment loss would be calculated by comparing the implied
        fair value of reporting unit goodwill to its carrying amount.
 
 ***Revenue
        Recognition***
 
 Revenue
        from fabrication and sale of equipment is recognized upon transfer of title
        to
        the customer (which is upon shipment or when customer-specific acceptance
        requirements are met). Service revenue is recognized as the service is provided.
 
 ***Impairment
        of Long-Lived Assets***
 
 Long-lived
        assets, including property, plant and equipment, capitalized software costs,
        and
        assets held for sale are reviewed for impairment whenever events or changes
        in
        circumstances indicate that the carrying amount of the long-lived asset may
        not
        be recoverable. The carrying amount of a long-lived asset is not recoverable
        if
        it exceeds the sum of the undiscounted cash flows expected to result from
        the
        use and eventual disposition of the asset. If it is determined that an
        impairment loss has occurred, the loss is measured as the amount by which
        the
        carrying amount of the long-lived asset exceeds its fair value.
 
  
  ***Income
        Taxes***
 
 The
        Company has adopted the provisions of SFAS No. 109, *“Accounting
        for Income Taxes"* which
        requires recognition of deferred tax liabilities and assets for the expected
        future tax consequences of events that have been included in the consolidated
        financial statements or tax returns. Under this method, deferred tax liabilities
        and assets are determined based on the difference between the financial
        statement and tax basis of assets and liabilities using enacted tax rates
        in
        effect for the year in which the differences are expected to reverse.
 
 ***Earnings
        per Common Share***
 
 Earnings
        per common share are computed based on the weighted average number of common
        shares outstanding during each period. There were no dilutive securities
        outstanding during any periods presented.
 
 ***Dividends***
 
 The
        Company has no formal dividend policy or obligations. Dividends are paid
        solely
        at the discretion of management.
 
 ***Stock
        Based Compensation***
 
 Effective
        with it’s inception, June 29, 2006, the Company accounts for stock-based
        compensation issued to employees and non-employees as required by SFAS No.
        123(R) “Accounting for Stock Based Compensation” (“SFAS No. 123(R)”). Under
        these provisions, the Company records expense based on the fair value of
        the
        awards utilizing the Black-Scholes pricing model for options and warrants.
        There
        were no stock based compensation grants for the period from inception June
        29,
        2006 to December 31, 2006.
  ***Recent
        Accounting Pronouncements***
  In
        December 2004, the Financial Accounting Standards Board issued SFAS No. 123R,
        “Share-Based Payment”. Under this new standard, companies will no longer be able
        to account for share-based compensation transactions using the intrinsic
        method
        in accordance with APB 25. Instead, companies will be required to account
        for
        such transactions using a fair-value method and to recognize the expense
        over
        the service period. This new standard also changes the way in which companies
        account for forfeitures of share-based compensation instruments. The Company
        adopted the provisions of SFAS No. 123R from the date of inception, June
        29,
        2006.
 
 In
        July
        2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertain Tax
        Positions” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income
        taxes recognized in an enterprise’s financial statements in accordance with FASB
        Statement No. 109 “Accounting for Income Taxes”. It prescribes a recognition
        threshold and measurement attribute for the financial statement recognition
        and
        measurement of a tax position taken or expected to be taken in a tax return.
        FIN
        48 also provides guidance on derecognition, classification, interest and
        penalties, accounting in interim periods, disclosure, and transition. FIN
        48 is
        effective for fiscal years beginning after December 15, 2006. We are currently
        evaluating the impact, if any, of FIN 48 on our financial position and results
        of operations.
 
 In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        No.
        157, Fair Value Measurements (“SFAS 157”), which provides enhanced guidance for
        using fair value to measure assets and liabilities. SFAS 157 also responds
        to
        investors’ requests for expanded information about the extent to which company’s
        measure assets and liabilities at fair value, the information used to measure
        fair value, and the effect of fair value measurements on earnings. SFAS 157
        applies whenever other standards require (or permit) assets or liabilities
        to be
        measured at fair value, but does not expand the use of fair value in any
        new
        circumstances. SFAS 157 is effective for financial statements issued for
        fiscal
        years beginning after November 15, 2007. The Company has not yet determined
        the
        impact, if any, of adopting SFAS 157 on its consolidated financial
        statements.
 
  
  **Note
        3: Business Combination**
 
 On
        November 21, 2006, Subsea acquired Deep Down, Inc, a Delaware corporation
        founded in 1997. Under the terms of this transaction, all of Deep Down, Inc.’s
        shareholders transferred ownership of all of Deep Down Inc.’s common stock to
        Subsea in exchange for 5,000 shares of Subsea’s Series D Preferred Stock and
        5,000 shares of Subsea’s Series E Preferred Stock resulting in Deep Down Inc.
        becoming a wholly owned subsidiary of Subsea. On the same day, Subsea then
        merged with Deep Down, with the surviving company operating as Deep Down
        Inc.
        The purchase price based on the fair value of the Series D and E Preferred
        stock
        was $7,865,471. This transaction was accounted for as a purchase, with Subsea
        being the acquirer based on the change in voting control. The acquisition
        price
        was allocated to the assets acquired and liabilities assumed based upon their
        estimated fair values with the excess being recorded in goodwill. The following
        table summarizes the estimated preliminary fair values of the assets acquired
        and liabilities assumed at the date of acquisition:
 
 Cash
                  and cash equivalents
              $
                  101,497Accounts
                  receivable
              1,013,227Inventory
              168,672Prepaid
                  expenses
              11,638Construction
                  in progress
              826,159Property,
                  plant and equipment, net
              872,363Goodwill
              6,934,213Total
                  assets acquired
              $
                  9,927,869Accounts
                  payable and accrued liabilities
              671,057Deferred
                  Revenue
              190,000Current
                  portion of long term debt
              403,057Long
                  term debt
              798,184Total
                  liabilities acquired
              $
                  2,062,298Net
                  assets acquired
              $
                  7,865,471
 
 The
        allocation of the purchase price was based upon preliminary valuations.
        Estimates and assumptions are subject to change upon the receipt and
        management’s review of the final valuations and final tax returns. The final
        valuation of net assets is expected to be completed no later than one year
        from
        the acquisition date and any future changes in the value of net assets will
        be
        offset by a corresponding chance in goodwill.
  The
        following unaudited pro forma consolidated results of operations have been
        prepared as if the acquisition of Deep Down had occurred at January 1, 2005.
        The
        pro forma information is presented for informational purposes only and is
        not
        necessarily indicative of the results of operations that actually would have
        been achieved had the acquisition been consummated as of that time, nor is
        it
        intended to be a projection of future results. The unaudited pro forma results
        were as follows:
 
 
 
 **Note
        3: Business Combination (continued):**
 **Deep
          Down, Inc.**
 **Pro
          forma Statements of Operations**
 **Year
                    Ended December 31,****2006**
                
                **2005**Revenues
                $
                    8,821,149
                
                $
                    5,417,872Cost
                    of sales
                5,155,399
                
                2,531,148Gross
                    profit
                3,665,750
                
                2,886,724Operating
                    expenses:Selling,
                    general & administrative (2)
                5,710,324
                
                1,819,103Depreciation
                166,468
                
                200,313Loss
                    on sale of assets
                -
                
                14,293Total
                    operating expenses
                5,876,792
                
                2,033,709Operating
                    income (loss)
                (2,211,042)
                
                853,015Other
                    income (expense):Interest
                    expense (1)
                (578,335)
                
                (555,087)Total
                    other income (expense)
                (578,335)
                
                (555,087)Income
                    (loss) from continuing operations
                (2,789,377)
                
                297,928Discontinued
                    operations:Loss
                    from operations of discontinued businesses
                -
                
                (5,292)Loss
                    on disposal of business segment
                -
                
                (72,107)Loss
                    on discontinued operations
                -
                
                (77,399)Income
                    tax provision
                (22,250)
                
                -Net
                    income (loss)
                $
                    (2,811,627)
                
                $
                    220,529Net
                    loss per share:Basic
                    and diluted
                $
                    (0.04)
                
                $
                    0.00Weighted
                    average common shares outstandingBasic
                    and diluted
                75,862,484
                
                75,000,000
 (1)
          Includes approximately $423,258 and $381,310, respectively, additional
          interest
          expense from the accretion of the Series E preferred shares.
 (2)
          Includes $3.3 million compensation expense from the issuance of Preferred
          series
          F and G stock in 2006 and $237,430 in 2005.
  
 **Note
        4: Accounts Receivable**
 
 Management
        has established an allowance for uncollectible accounts of $81,809 as of
        December 31, 2006. Bad debt expense totaled $1,294 for the period from inception
        June 29, 2006 to December 31, 2006.
 
 The
        Company factors certain accounts receivables with a bank. Under the terms
        of the
        arrangement, the Company receives proceeds equal to 80% of the value of the
        receivable at the date of transfer. Upon collection of the receivable, the
        bank
        remits the remaining 20%, less fees and interest. Fees range from 0.25% to
        2%
        depending on the age of the receivable and interest is prime plus 2%. The
        arrangement contains provisions that indicate the Company is responsible
        for up
        to 20% of end-user customer payment defaults on factored receivables.
 
 Accounts
        receivable are comprised of the following:
 
 December
                  31, 2006Receivables
                  assigned to factor
              
              $
                  1,245,183Advances
                  from factor
              
              (996,147)Amounts
                  due from factor
              
              249,036Unfactored
                  accounts receivable
              
              1,097,001Reserve
                  for uncollectible accounts
              
              (81,809)Accounts
                  receivable, net
              
              $
                  1,264,228
 
 
 
 **Note
        5: Property and Equipment**
 
 Property
        and equipment consisted of the following as of December 31, 2006:
 
 December
                  31, 2006Building
              $
                  46,474Furniture
                  and fixtures
              11,806Vehicles
                  and trailers
              66,662Equipment
              747,419Total
              872,361Less:
                  Accumulated depreciation
              (27,161)Property
                  and equipment, net
              $
                  845,200
 
 Depreciation
        expense was $27,161 for the period from inception June 29, 2006 to December
        31,
        2006.
 
 **Note
        6: Concentrations**
 
 The
        Company maintains cash balances at one bank. Accounts at the institution
        are
        insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000.
        The
        Company had no uninsured cash balances at December 31, 2006.
 
 As
        of
        December 31, 2006, four of the Company’s customers accounted for 15%, 13%, 9%
        and 8% of total accounts receivable, respectively. For the period from inception
        June 29, 2006 to December 31, 2006, the Company’s four largest customers
        accounted for 16%, 14%, 13% and 11% of total revenues,
        respectively.
 
  
  **Note
        7: Long-Term Debt**
 
 During
        2006, the Company entered into a loan agreement with a bank and received
        gross
        proceeds of $496,800 which were used for working capital and to repay existing
        debt balances. The debt is secured by the assignment of a lease for equipment
        date August 1, 2006 and the related equipment.
 
 Under
        both its long-term debt agreements, the Company is required to maintain certain
        financial covenants, including maintaining a current ratio in excess of 1
        to 1,
        debt service coverage in excess of 1.3 to 1, tangible net worth in excess
        of
        $850,000, and debt/net worth ratio less than 2 to 1, as each term is defined
        in
        the credit agreement
 
 At
        December 31, 2006 long-term debt consisted of the following:
 
  **December
                  31, 2006**Note
                  payable with a bank, monthly principal andinterest
                  payments, interest fixed at 7.5%,due
                  September 2008; secured by equipmentunder
                  lease contract to a third party
              
              $
                  438,812Note
                  payable with a bank, monthly principal andinterest
                  payments, interest fixed at 7.5%,due
                  November 2010; secured by machinery,equipment,
                  furniture and fixtures
              
              
              729,536Total
              
              
              1,168,348Current
                  portion of long-term debt
              
              (410,731)Long-term
                  debt, net of current portion
              
              $
                  757,617
 
  As
        of
        December 31, 2006, aggregate principal maturities of long-term debt were
        as
        follows for years ended December 31:
 
 
 2007
              $
                  410,7312008
              375,4122009
              194,1402010
              188,065Thereafter
              -$
                  1,168,348
  **Note
        8: Income Taxes**
 
 Prior
        to
        the reverse merger, the Company was a Subchapter S entity and the tax attributes
        flowed through to the individual owners. Thus any prior net operating losses
        will not be available to be utilized to offset future taxable
        income.
  Income
        tax expense for the period from inception June 29, 2006 to December 31, 2006
        totaled $22,250.
 
  
  **Note
        8: Income Taxes (continued)**
 
 A
        reconciliation of the differences between the effective and statutory income
        tax
        rates are as follows for the period from inception June 29, 2006 to December
        31,
        2006:
 
 **Amount**
              **Percent**Federal
                  statutory rates
              $
                  (1,121,938)
              (34.0)%Stock
                  based compensation
              1,135,869
              35.0%Other
              8,319
              0.0%Effective
                  rate
              $
                  22,250
              0.01%
 
 Deferred
        tax assets (liabilities) at December 31, 2006 are not significant.
 
 **Note
        9: Preferred Stock**
 
 As
        discussed in Note 1, in November 2006, all of Deep Down’s shareholders
        transferred ownership of all of Deep Down’s common stock to Subsea a newly
        formed acquisition corporation two-thirds owned by two shareholders who also
        owned in aggregate 25% of Deep Down, in exchange for 5,000 shares of Subsea’s
        Series D Preferred Stock and 5,000 shares of Subsea’s Series E Preferred Stock
        resulting in Deep Down becoming a wholly owned subsidiary of Subsea. On the
        same
        day, Subsea then merged with Deep Down; with the surviving company operating
        as
        Deep Down Inc. Subsea also issued 3,000 Series F shares and 1,000 Series
        G
        shares to two common shareholders of Subsea.
 
 *Series
        E and G Classified as Liabilities*
 
 The
        Series E and G redeemable exchangeable preferred stock have a face value
        and
        liquidation preference of $1,000 per share, no dividend preference, and are
        exchangeable at the holder’s option after June 30, 2007 into 6% Subordinated
        Notes due three years from the date of the exchange. These shares carry voting
        rights equal to 690 votes per share.
 
 The
        Series E and G Preferred Stock was valued based on the discounted value of
        its
        expected future cash flows (using a discount rate of 20%).  The fair value
        of the Series E and G were $3,446,227 and $689,245, respectively, at November
        21, 2006 and is reflected as a liability in the accompanying balance sheet.
        For
        the Series G shares, the Company reflected a charge to compensation expense
        which is included in the statement of operations under Selling, general and
        administrative expenses. The Company evaluated Series E and G and has classified
        them as debt instruments at inception due to the fact that they are exchangeable
        into Notes or redeemable at the Company’s option.
 
 The
        Company will accrete the discount on Series E and G of $1,864,500 on the
        instruments up to their face value of $6,000,000 using the effective interest
        method from the date of issuance over the term of the Note. Interest expense
        related to the accretion of the discount totaled $48,179 for the period ending
        December 31, 2006.
 
 *Series
        D and F Classified as Temporary equity*
 
 The
        Series D redeemable convertible preferred stock have a face value and
        liquidation preference of $1,000 per share, no dividend preference, and are
        convertible into shares of common stock determined by dividing the face amount
        by a conversion price of $0.1933. These shares carry voting rights equal
        to one
        vote for every share of common stock into which the preferred stock is
        convertible. These shares are redeemable at their face value on an annual
        basis
        within 120 days after each calendar year-end beginning with the year ending
        December 31, 2007 based on an amount equal to 15.625% of annual net income.
        In
        the event that a holder declines redemption, such amounts are reallocated
        to the
        other preferred stock holders that have elected to redeem.
 
 The
        Series F redeemable convertible preferred stock have a face value and
        liquidation preference of $1,000 per share, no dividend preference, and are
        convertible into shares of common stock determined by dividing the face amount
        by a conversion price of $0.1933. These shares carry voting rights equal
        to one
        vote for every share of common stock into which the preferred stock is
        convertible. These shares are redeemable at their face value on an annual
        basis
        within 120 days after each calendar year-end beginning with the year ending
        December 31, 2007 based on an amount equal to 9.375% of annual net income.
        In
        the event that a holder declines redemption, such amounts are reallocated
        to the
        other preferred stock holders that have elected to redeem
 
 As
        the
        Series D and F Preferred Stock functions as a debt instrument with an embedded
        option, the Company valued this instrument based on the discounted value
        of its
        expected future cash flows (using a discount rate of 20%) attributable to
        its
        redemption feature plus the value of the embedded option using the Black
        Scholes
        option pricing model with the following assumptions - exercise price $0.1933,
        stock price $0.10, volatility 200%, risk free rate 5%.  Based on these
        assumptions, the fair value of Series D and Series F were $4,419,244 and
        $2,651,547 respectively at November 21, 2006 and reflected as temporary equity
        in the accompanying balance sheet. For the Series F shares, the Company
        reflected a charge to compensation expense which is included in the statement
        of
        operations under Selling, general and administrative expenses.
 
 The
        Company evaluated Series D and F for liability or equity presentation and
        determined that the instruments were more appropriately classified as temporary
        equity due to the conditionality of the instruments, as events triggering
        the
        redemption or conversion were uncertain at inception.
 
 *Series
        C Preferred Stock Classified as Equity*
 
 On
        April
        22, 2005 MediQuip issued 22,000 Series C convertible preferred stock which
        remained after the reverse merger. The Series C shares have a face value
        and a
        liquidation preference of $12.50 per share, a cumulative dividend of 7% payable
        at the conversion date, and are convertible into shares of common stock
        determined by dividing the face amount by a conversion price of $0.0625.
        These
        shares carry no voting rights.
 
 **Note
        10: Commitments and Contingencies**
 
 *Litigation*
 
 The
        Company is from time to time involved in legal proceedings arising from the
        normal course of business. As of the date of this report, the Company is
        not
        currently involved in any legal proceedings.
 
 *Operating
        Leases*
 
 The
        Company leases land and buildings under two noncancelable operating leases
        and
        is responsible for the related maintenance, insurance and property taxes.
        One of
        these leases is with a company that is wholly owned by one of the Officer’s and
        a Director of the Company. This lease calls for 60 monthly payments of $11,000
        and began as of September, 2006.
 
 At
        December 31, 2006, future minimum lease payments were as follows:
 
 2007
              $
                  194,9082008
              174,7692009
              132,0002010
              132,0002011
              88,000Thereafter
              -$
                  721,677
 
 
 Rent
        expense totaled $69,856 for the period from inception June 29, 2006 to December
        31, 2006.
 
 **Note
        11: Fair Value of Financial Instruments**
 
 The
        estimated fair value of the Company’s financial instruments is as follows at
        December 31, 2006:
 
 **w**
            Cash
                and equivalents, accounts receivable and accounts payable - The carrying
                amounts approximated fair value due to the short-term maturity of
                these
                instruments. **w**
            Preferred
                Stock - Series D, E, F and G - The carrying amounts approximate the
                fair
                value given the limited time the instruments have been
                outstanding. **w**
            Long-term
                debt - The fair value closely approximates the carrying value of
                the
                Company’s debt instruments. 
 **Note
        12: Subsequent Events**
 
 *Private
        Placement*
  On
        March
        20, 2007, the Company completed the sale of 10,000,000 shares of common stock
        in
        a private placement for $1,000,000. This private placement was initiated
        prior
        to the closing of the Agreement and Plan of Reorganization between the Company
        and Deep Down. Pursuant to the terms thereof, 10,000,000 shares of common
        stock
        were reserved to complete this private placement. The shares are restricted
        as
        defined in Rule 144 of the Securities Act of 1933 and contain a restrictive
        legend, which restricts the ability of the holders to sell these shares for
        a
        period of no less than one year. Funds will be used to redeem certain
        outstanding exchangeable preferred stock and for working capital.
 
 *Stock
        Transactions*
  In
        March,
        2007 the Company finalized the terms of an agreement with Daniel L. Ritz,
        Jr.
        (shareholder and director), who agreed to surrender 25,000,000 shares of
        common
        stock; 1,500 shares of Series F convertible preferred stock and 500 shares
        of
        Series G exchangeable preferred stock to the Company for cancellation. For
        these
        actions, Mr. Ritz will receive 1,250 shares of Series E exchangeable preferred
        stock and $250,000 cash. In addition, Mr. Ritz will keep 500 shares of Series
        E
        exchangeable preferred stock he currently owns and agreed to tender his
        resignation from the Board. As a result of this exchange, Mr. Ritz will own
        1,750 shares of Series E exchangeable preferred stock.
 
 In
        March,
        2007 the Company agreed to issue 2,000 shares of Series E exchangeable preferred
        stock to John C. Siedhoff (shareholder, Chief Financial Officer, and director)
        for the surrender of his ownership of 1,500 shares of Series F convertible
        preferred stock and 500 shares of Series G exchangeable preferred stock,
        which
        will be returned to the transfer agent for cancellation.
 
 In
        February the Company redeemed 250 shares of Series E exchangeable preferred
        stock at the face value of $1,000 per share for a total of
        $250,000.
 
 *Acquisition
        of ElectroWave*
  On
        April
        2, 2007, the Company consummated an Asset Purchase Agreement with ElectroWave
        USA, Inc. (“ElectroWave”) a Texas corporation that provided for the acquisition
        of substantially all of the assets of ElectroWave. The Company formed a
        wholly-owned subsidiary, ElectroWave USA, Inc., a Nevada Corporation, to
        complete the acquisition. ElectroWave offers products and services in the
        fields
        of electronic monitoring and control systems for the energy, military, and
        commercial business sectors.
 
 The
        purchase price the payment of approximately $400,000 in bank and other debts
        of
        ElectroWave and the assumption of leases of real and personal property and
        ongoing accounts payable in exchange for substantially all of the assets,
        including inventory, fixed assets and accounts receivable and the transfer
        of
        all employees. In addition, the Company may issue up to an aggregate of 517
        shares of Series H Redeemable Convertible Preferred Stock (redeemable at
        $1,000
        per share at the Company’s option) over the next three years, as an additional
        contingent purchase cost, if the operations of ElectroWave reach certain
        financial milestones based on net income for the fiscal years ending December
        31, 2007, 2008 and 2009. Such Redeemable Convertible Preferred Stock, if
        issued
        in the future, would have a conversion price equal to the greater of (a)
        $0.50
        per share or (b) 120% of the volume weighted average price of the last reported
        trades for the 20 consecutive trading days immediately prior to December
        31 of
        the respective year for which the Redeemable Convertible Preferred Shares
        are
        issued.
 
 The
        Company funded the payments of the bank and other debt primarily through
        the
        sale of the accounts receivable of ElectroWave to a bank. The terms of this
        factoring agreement are substantially the same as the Company’s other agreements
        with the same bank as described in Note 4.