**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


**_______________________**





**FORM
      10-QSB**




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





**For
      the quarterly period ended June 30, 2007; or**




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





**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 (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
      [X ]
      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 [X ]




At
      August
      15, 2007, the issuer had outstanding 67,870,171 shares of Common Stock, par
      value $0.01 per share.




Transitional
      Small Business Disclosure Format: Yes
      [   ] No [X ]













**DEEP
      DOWN, INC.**


**Report
      on Form 10-QSB**





**For
      the Quarter Ended June 30, 2007**





**INDEX**







Page


**PART
                I - FINANCIAL INFORMATION**
            **1****Item
                1. Financial Statements.**
            **2****Consolidated
                Balance Sheets (unaudited)**
            **2****Consolidated
                Statement of Operations (unaudited)**
            **3****Consolidated
                Statement of Cash Flows (unaudited)**
            **4****Notes**
            **5****Item
                2. Management's Discussion and Analysis**
            **14****Item
                3. Controls and Procedures**
            **19****PART
                II - OTHER INFORMATION**
            **20****Item
                1. Legal Proceedings.**
            **20****Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds**
            **20****Item
                3. Defaults Upon Senior Securities**
            **20****Item
                4. Submission of Matters to a Vote of Security
                Holders**
            **20****Item
                5. Other Information.**
            **20****Item
                6. Exhibits**
            **21****SIGNATURES**
            **22**







**PART
      I - FINANCIAL INFORMATION**





**Forward-Looking
      Information**




The
      statements contained in this Quarterly Report on Form 10-QSB 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. Deep Down 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 Deep Down,
      which, although considered reasonable by Deep Down, may not be realized. Because
      of the number and range of assumptions underlying Deep Down’s projections and
      forward-looking statements, many of which are subject to significant
      uncertainties and contingencies that are beyond the reasonable control of Deep
      Down, 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 Deep Down
      assumes no obligation to update this information. Therefore, the actual
      experience of Deep Down 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 Deep Down 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.




1




**Item
      1.Financial
      Statements.**




**Deep
        Down, Inc.**
 **Consolidated
          Balance Sheets**
 **(unaudited)**
  **June
                  30, 2007**
              
              **December
                  31, 2006****Assets**Cash
                  and equivalents
              
              $
              263,305
              
              $
              12,462Accounts
                  receivable
              
              
              1,929,171
              
              
              1,264,228Prepaid
                  expenses and other current assets
              
              
              9,833
              
              
              11,488Inventory
              
              
              115,487
              
              
              145,487Finished
                  goods
              
              
              502,253
              
              
              -Lease
                  receivable, short term
              
              
              414,000
              
              
              -Work
                  in process
              
              
              1,141,760
              
              
              916,485Total
                  current assets
              
              
              4,375,809
              
              
              2,350,150Property
                  and equipment, net
              
              
              1,704,269
              
              
              845,200Other
                  assets
              
              
              270,094
              
              
              -Lease
                  receivable, long term
              
              
              380,000
              
              
              -Goodwill
              
              
              7,260,527
              
              
              6,934,213Total
                  assets
              
              $
              13,990,699
              
              $
              10,129,563**Liabilities
                  and Stockholders' Deficit**Accounts
                  payable and accrued liabilities
              
              $
              3,466,316
              
              $
              816,490Deferred
                  revenue
              
              
              270,628
              
              
              190,000Other
                  current liabilities
              
              
              72,202
              
              
              -Payable
                  to shareholder, current portion
              
              
              1,598,681
              
              
              -Current
                  portion of long-term debt
              
              
              468,810
              
              
              410,731Total
                  current liabilities
              
              
              5,876,637
              
              
              1,417,221Other
                  liabilities
              
              
              24,508
              
              
              -Payable
                  to shareholder, long-term portion
              
              
              401,319
              
              
              -Long-term
                  debt
              
              
              1,002,231
              
              
              757,617Series
                  E redeemable exchangeable preferred stock, face value andliquidation
                  preference of $1,000 per share, no dividend preference,authorized
                  10,000,000 aggregate shares of all series of Preferred
                  stock4,000
                  and 5,000 issued and outstanding, respectively
              
              
              3,068,389
              
              
              3,486,376Series
                  G redeemable exchangeable preferred stock, face value andliquidation
                  preference of $1,000 per share, no dividend preference,authorized
                  10,000,000 aggregate shares of all series of Preferred
                  stock0
                  and 1,000 issued and outstanding, respectively
              
              
              -
              
              
              697,275Total
                  liabilities
              
              
              10,373,084
              
              
              6,358,489Temporary
                  equity:Series
                  D redeemable convertible preferred stock, $0.01 par value, face
                  value andliquidation
                  preference of $1,000 per share, no dividend preference,authorized
                  10,000,000 aggregate shares of all series of Preferred
                  stock5,000
                  issued and outstanding
              
              
              4,419,244
              
              
              4,419,244Series
                  F redeemable convertible preferred stock, $0.01 par value, face
                  value andliquidation
                  preference of $1,000 per share, no dividend preference,authorized
                  10,000,000 aggregate of all series of Preferred stock0
                  and 3,000 issued and outstanding, respectively
              
              
              -
              
              
              2,651,547Total
                  temporary equity
              
              
              4,419,244
              
              
              7,070,791Stockholders'
                  deficit:Series
                  C convertible preferred stock, $0.001 par value, 7% cumulative
                  dividend,authorized
                  10,000,000 aggregate shares of all series of Preferred
                  stock22,000
                  shares issued and outstanding
              
              
              22
              
              
              22Common
                  stock, $0.01 par value, 490,000,000 shares authorized,
                  67,870,171and
                  82,870,171 shares issued and outstanding, respectively
              
              
              678,702
              
              
              828,702Paid
                  in capital
              
              
              979,256
              
              
              (828,624
              )Retained
                  earnings
              
              
              (2,459,609
              )
              
              (3,299,817
              )Total
                  stockholders' deficit
              
              
              (801,629
              )
              
              (3,299,717
              )Total
                  liabilities and stockholders' deficit
              
              $
              13,990,699
              
              $
              10,129,563
  See
        accompanying notes to unaudited consolidated financial statements.


2




**Deep
          Down, Inc.** **Consolidated
            Statement of Operations** **For
              the Three and Six Months Ended June 30, 2007** **(unaudited)**
  **Three
                    Months Ended**
                
                **Six
                    Months Ended****June
                    30, 2007**
                
                **June
                    30, 2007**Revenues
                
                $
                5,144,788
                
                $
                7,243,182Cost
                    of sales
                
                
                3,293,313
                
                
                4,545,402Gross
                    profit
                
                
                1,851,475
                
                
                2,697,780Operating
                    expenses:Selling,
                    general & administrative
                
                
                1,087,680
                
                
                1,747,331Depreciation
                
                
                90,196
                
                
                154,221Total
                    operating expenses
                
                
                1,177,876
                
                
                1,901,552Operating
                    income
                
                
                673,599
                
                
                796,228Other
                    income (expense):Gain
                    on debt extinguishment
                
                
                2,000,000
                
                
                2,000,000Interest
                    expense
                
                
                (1,276,770
                )
                
                (1,508,657
                )Total
                    other income
                
                
                723,230
                
                
                491,343Income
                    from continuing operations
                
                
                1,396,829
                
                
                1,287,571Income
                    tax expense
                
                
                (447,363
                )
                
                (447,363
                )Net
                    income
                
                $
                949,466
                
                $
                840,208Basic
                    earnings per share
                
                $
                0.01
                
                $
                0.01Diluted
                    earnings per share
                
                $
                0.01
                
                $
                0.01Shares
                    used in computing basic per share amounts
                
                
                67,870,171
                
                
                74,417,132Shares
                    used in computing diluted per share amounts
                
                
                93,799,839
                
                
                100,315,405
  See
          accompanying notes to unaudited consolidated financial statements.


3




**Deep
          Down, Inc.**
 **Consolidated
            Statements of Cash Flows**
 **For
              the Six Months Ended June 30, 2007**
 **(unaudited)**
  Cash
                    flows from operating activities:Net
                    income
                
                $
                840,208Adjustments
                    to reconcile net income to net cash provided
                    by operating activities:Gain
                    on extinguishment of debt
                
                
                (2,000,000
                )Interest
                    income
                
                
                (16,290
                )Depreciation
                
                
                154,221Share-based
                    compensation
                
                
                39,565Amortization
                    of debt discount
                
                
                1,391,506Changes
                    in assets and liabilities:Lease
                    receivable
                
                
                (750,000
                )Accounts
                    receivable
                
                
                (531,356
                )Prepaid
                    expenses and other current assets
                
                
                1,655Inventory
                
                
                30,000Finished
                    goods
                
                
                (502,253
                )Work
                    in process
                
                
                (119,552
                )Accounts
                    payable and accrued liabilities
                
                
                1,808,987Deferred
                    revenue
                
                
                80,628Net
                    cash provided by operating activities
                
                
                427,319Cash
                    flows from investing activities:Cash
                         paid for third party debt
                
                
                (432,475
                )Cash
                    received from sale of ElectroWave receivables
                
                
                261,068Cash
                    deficit acquired in acquisition of a business
                
                
                (18,974
                )Purchases
                    of equipment
                
                
                (442,788
                )Net
                    cash used in investing activities
                
                
                (633,169
                )Cash
                    flows from financing activities:Proceeds
                    from sales-type lease
                
                
                69,000Borrowings
                    on debt - related party
                
                
                150,000Payments
                    of long-term debt
                
                
                (222,307
                )Proceeds
                    from sale of common stock, net of expenses
                
                
                960,000Payment
                    for cancellation of common stock
                
                
                (250,000
                )Redemption
                    of preferred stock
                
                
                (250,000
                )Net
                    cash provided by financing activities
                
                
                456,693Change
                    in cash and equivalents
                
                
                250,843Cash
                    and equivalents, beginning of year
                
                
                12,462Cash
                    and equivalents, end of period
                
                $
                263,305Supplemental
                    schedule of noncash investing and
                    financing activities:Acquisition
                    of a business
                
                $
                (190,381
                )Exchange
                    of receivables for acquisition of a business
                
                $
                171,407Fixed
                    assets purchased with capital lease
                
                $
                525,000Exchange
                    of preferred stock
                
                $
                3,366,778Redemption
                    of preferred stock
                
                $
                2,000,000Supplemental
                    Disclosures:Cash
                    paid for interest
                
                $
                117,151Cash
                    paid for taxes
                
                $
                -
  See
        accompanying notes to unaudited consolidated financial statements.


4




DEEP
      DOWN, INC. AND SUBSIDIARIES


NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL
      STATEMENTS




**Note
      1:Description of
      Business**





Deep
      Down, Inc, (“Deep Down”) a Nevada corporation, provides installation management,
      engineering services, support services and storage management services for
      the
      subsea controls, umbilicals & pipeline industries offshore. Deep Down also
      fabricates component parts for subsea distribution systems and
      assemblies.




On
      June
      29, 2006, Subsea Acquisition Corporation (“Subsea”) was formed 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. The purchase price based
      on
      the fair value of the Series D and E Preferred stock was $7,865,471.




On
      April
      2, 2007, Deep Down purchased all of the assets and certain liabilities of
      Electrowave USA, Inc. a Texas Corporation. Deep Down formed a wholly-owned
      subsidiary, ElectroWave USA, Inc., (“ElectroWave”) , 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.




*Basis
      of Presentation*




All
      accounts of Deep Down and its wholly owned subsidiaries are included in the
      consolidated financial statements for the appropriate periods. All significant
      inter-company transactions and accounts have been eliminated in consolidation.
      Since Deep Down was formed on June 29, 2006, comparative financial statements
      are not presented.




The
      accompanying unaudited financial statements as of June 30, 2007 and for the
      six
      months then ended have been prepared in accordance with generally accepted
      accounting principles for interim financial information. Accordingly, they
      do
      not include all of the information and footnotes required by generally accepted
      accounting principles for audited financial statements. In the opinion of Deep
      Down’s management, the interim information includes all adjustments, consisting
      only of normal recurring adjustments, necessary for a fair presentation of
      the
      results for the interim periods. The footnote disclosures related to the interim
      financial information included herein are also unaudited. Such financial
      information should be read in conjunction with the consolidated financial
      statements and related notes thereto as of December 31, 2006 and for the year
      then ended included in Deep Down’s annual report on Form 10-KSB/A for the fiscal
      year ended December 31, 2006.




The
      preparation of financial statements in accordance with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amount of assets and liabilities at the date of the
      financial statements and the reported amount of revenues and expenses during
      the
      reporting period. Significant estimates and assumptions have been used by
      management in conjunction with the estimated useful lives of fixed assets and
      the valuation of preferred stock. Actual results could differ from these
      estimates. Certain prior period amounts have been revised to conform to the
      current period presentation.




5




DEEP
        DOWN, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED CONSOLIDATED FINANCIAL
        STATEMENTS


**Note
      2:Lease
      receivable**




On
      May
      18, 2007, Deep Down entered into a sales lease agreement with an unrelated
      third
      party. The leased equipment includes an a-frame, winching system, and hydraulic
      power unit, all constructed by Deep Down. The term of the lease is two years,
      and includes a purchase option for $35,000 at the conclusion of this term.
      Monthly rental payments, in the amount of $34,500 are due beginning May, 2007
      through April 2009. The lease has been accounted for as a sales-type lease
      under
      the rules of FASB No. 13, Accounting for Leases.




Principal
                
                Unearned
                    incomeMinimum
                    lease payments receivable
                
                $
                828,000Estimated
                    residual value of leased property
                
                
                35,000863,000
                
                
                863,000
                
                
                (113,000
                )Less:
                    Unearned interest income
                
                
                (113,000
                )Net
                    investment in sales-type leases
                
                
                750,000Net
                    payments received during the quarter
                
                
                (52,710
                )
                
                (69,000
                )
                
                16,290Lease
                    balance June 30, 2007
                
                $
                697,290
                
                $
                794,000
                
                $
                (96,710
                )Current
                    portion
                
                
                
                
                
                414,000
                
                
                (72,202
                )Long-term
                    portion
                
                
                
                
                
                380,000
                
                
                (24,508
                )
  **Note
        3:Property and
        Equipment**




Property
      and equipment consisted of the following as of June 30, 2007:


June
                    30, 2007
                
                December
                    31, 2006Building
                
                $
                46,476
                
                $
                46,474Furniture
                    and fixtures
                
                
                13,505
                
                
                11,806Vehicles
                    and trailers
                
                
                71,196
                
                
                66,662Equipment
                
                
                1,630,050
                
                
                747,419Construction
                    in progress
                
                
                124,424
                
                
                -Total
                
                
                1,885,651
                
                
                872,361Less:
                    Accumulated depreciation
                
                
                (181,382
                )
                
                (27,161
                )Property
                    and equipment, net
                
                $
                1,704,269
                
                $
                845,200
  In
        February 2007, Deep Down entered into a capital lease transaction for the
        lease
        of a 100-ton mobile gantry crane valued at $525,000, which is included with
        Equipment above. Deep Down is constructing office space on its land for
        additional office space for ElectroWave, these assets are included above
        as
        construction in process, and not depreciated until placed in
        service.




6


DEEP
        DOWN, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED CONSOLIDATED FINANCIAL
        STATEMENTS


**Note
      4:Acquisition of
      ElectroWave USA, Inc.**





On
      April
      2, 2007, Deep Down purchased all of the assets and certain liabilities of
      Electrowave USA, Inc. a Texas Corporation. Deep Down formed a wholly-owned
      subsidiary, ElectroWave USA, Inc., (“ElectroWave”) , 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
      acquisition of ElectroWave has been accounted for using purchase accounting
      as
      the company acquired substantially all of the assets, debts, employees,
      intangible contracts and business of ElectroWave.




The
      purchase price of $171,407 includes the payment of bank and other debts of
      ElectroWave totaling $432,475, net of $261,068 received from the factoring
      of
      ElectroWave’s receivables. The purchase included 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. 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 fair values of the assets acquired and
      liabilities assumed at the date of acquisition:




Purchase
                      Price:Cash
                      paid for third party debt
                  
                  $
                  432,475Cash
                      received from sale of ElectroWave receivables
                  
                  
                  (261,068
                  )Cash
                      purchase price
                  
                  
                  171,407Accounts
                      receivable
                  
                  $
                  133,587Construction
                      in progress
                  
                  
                  105,723Property,
                      plant and equipment, net
                  
                  
                  45,502Capitalized
                      R&D assets
                  
                  
                  270,094Goodwill
                  
                  
                  326,314Total
                      assets acquired
                  
                  $
                  881,220Cash
                      deficit
                  
                  
                  18,974Accrued
                      liabilities
                  
                  
                  690,839Total
                      liabilities acquired
                  
                  $
                  709,813Net
                      assets acquired
                  
                  $
                  171,407


The
      allocation of the purchase price was based on preliminary estimates. Estimates
      and assumptions are subject to change upon the receipt of management’s review of
      the final amounts and final tax returns. This final evaluation of net assets
      acquired is expected to be completed no later than one year from the acquisition
      date and any future changes in the value of the net assets acquired will be
      offset by a corresponding change in goodwill.




In
      addition, Deep Down may issue up to an aggregate of 460 shares of convertible
      preferred stock 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.
      This
      contingent consideration is not considered in the initial purchase price
      allocation due to its uncertain nature.




7


DEEP
        DOWN, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED CONSOLIDATED FINANCIAL
        STATEMENTS


**Note
      5: Long-Term
      Debt**





At
      June
      30, 2007 long-term debt consisted of the following:


**June
                    30, 2007**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
                
                $
                319,279Note
                    payable with a bank, monthly principal andinterest
                    payments, interest fixed at 7.5%,due
                    November 2010; secured by machinery,equipment,
                    furniture and fixtures
                
                
                649,904Total
                    bank loans
                
                
                969,183Capital
                      lease of equipment, monthly lease payments, interest
                      imputed at 11.2%
                
                
                501,858Total
                    long-term debt
                
                
                1,471,041Current
                    portion of long-term debt
                
                
                (468,810
                )Long-term
                    debt, net of current portion
                
                $
                1,002,231


Deep
      Down
      paid the outstanding bank loans in full in August 2007 with some of the proceeds
      of the financing received subsequent to June 30, 2007. See additional discussion
      in Note 12 Subsequent Events.




In
      February 2007, Deep Down purchased under a seller-financed capital lease, a
      100-ton mobile gantry crane and related equipment. The equipment was delivered
      and placed into service in March, 2007. In accordance with Financial Accounting
      Standards Board SFAS 13 “Accounting for Leases” as amended, the lease was
      capitalized and the lease obligation and related assets recognized on Deep
      Down’s consolidated balance sheet. The total value of the lease payments
      discounted at an 11.2% interest rate, or $525,000, was capitalized and the
      offsetting lease obligation was recorded during the first quarter of
      2007.




**Note
      6:Preferred Stock**




*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 were
      valued based on the discounted value of their expected future cash flows (using
      a discount rate of 20%). Deep Down evaluated the Series E and G preferred stock
      and has classified them as debt instruments from the date of issuance due to
      the
      fact that they are exchangeable at the option of the Holder into Notes. The
      difference between the face value of the Series E and G preferred stock and
      the
      discounted book value recorded on the balance sheet, or original issue discount,
      is deemed to be non-cash interest expense from the date of issuance through
      the
      term of the Notes.




Deep
      Down
      has been accreting this original issue discount using the effective interest
      method. Interest expense related to the accretion of the original issue discount
      totaled $1,211,919 and $1,391,506 for the three and six months ended June 30,
      2007. The three and six month totals include the accelerated accretion of
      approximately $1,102,385 to accrete to face value 4,000 shares of Series E
      preferred stock that were redeemed during the quarter ended June 30, 2007.
      The
      six month total also includes the accelerated accretion of approximately $72,799
      to accrete to face value 250 shares of Series E preferred stock that were
      redeemed during the quarter ended March 31, 2007.




8




DEEP
        DOWN, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED CONSOLIDATED FINANCIAL
        STATEMENTS




In
      May
      2007, Deep Down executed a Securities Redemption Agreement (the “Agreement”)
      with a stockholder (the former CFO of Deep Down) to redeem 4,000 shares of
      Series E exchangeable preferred stock at a discounted price of $500 per share
      for a total of $2,000,000. The discount of $500 per share from the face value
      of
      $1,000 was accounted for as a substantial modification of debt, thereby
      generating a gain on extinguishment of debt which is reflected in other income.
      Deep Down accreted the remaining discount of $1,102,385 attributable to such
      shares on the date of redemption. The shareholder placed all 4,000 shares into
      an escrow account as of the execution of this agreement. Terms of the payment
      to
      the shareholder are: 2,800 shares at $500 for a total of $1,400,000 paid in
      August, 2007 (See Note 12), with the remaining shares to be redeemed monthly
      beginning August 31, 2007 at a minimum rate of 40 shares at $500 per share,
      or $20,000 per month. Interest has been imputed on this payable at Deep Down’s
      borrowing rate of 12.5%, as a result of a “Secured Credit Agreement” discussed
      in Note 12. The amounts are reflected as a payable to shareholder, current
      and
      long term portions, on the accompanying balance sheets.




All
      Series G preferred shares were cancelled and exchanged during the three months
      ended March 31, 2007. Accordingly, there is no future discount accretion
      relating to the Series G preferred shares. See “Series F and G Cancellation and
      Issuance of Additional Series E” below.




Additionally,
      in February 2007, Deep Down redeemed 250 shares of Series E exchangeable
      preferred stock at the face value of $1,000 per share for a total of $250,000.
      Deep Down accreted the remaining discount of $72,799 attributable to such shares
      on the date of redemption.




The
      unamortized discounts related to the Series E and Series G preferred stock
      were
      as follows:




June
                  30, 2007
              
              December
                  31, 2006Series
                  E preferred stock - face value at $1,000 per share
              
              $
              4,000,000
              
              $
              5,000,000Less
                  unamortized discount
              
              
              (931,611
              )
              
              (1,513,624
              )Balance
                  net of unamortized discount
              
              
              3,068,389
              
              
              3,486,376Series
                  G preferred stock - face value at $1,000 per share
              
              
              -
              
              
              1,000,000Less
                  unamortized discount
              
              
              -
              
              
              (302,725
              )Balance
                  net of unamortized discount
              
              
              -
              
              
              697,275$
              3,068,389
              
              $
              4,183,651




*Series
      F and G Cancellation and Issuance of Additional Series E*




On
      March
      20, 2007 Deep Down 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 for $250,000 in cash (par value). The market value of those shares was
      $7,250,000. Additionally, he surrendered 1,500 shares of Series F convertible
      preferred stock with a value of $1,325,773 and 500 shares of Series G
      exchangeable preferred stock with a value of $357,615 to Deep Down for
      cancellation in exchange for 1,250 shares of Series E exchangeable preferred
      stock valued at $945,563. The Series E Preferred Stock was valued based on
      the
      discounted value of its expected future cash flows (using a discount rate of
      20%). The difference between the values of the preferred shares surrendered
      and
      the newly issued was $737,826 which is reflected in paid in capital on the
      accompanying consolidated balance sheet. In addition, Mr. Ritz also kept 500
      shares of Series E exchangeable preferred stock he previously owned and agreed
      to tender his resignation from the Board.




On
      March
      20, 2007 Deep Down issued 2,000 shares of Series E exchangeable preferred stock
      to John C. Siedhoff, then Chief Financial Officer, and director, valued at
      $1,512,901 for the surrender of his ownership of 1,500 shares of Series F
      convertible preferred stock valued at $1,325,773 and 500 shares of Series G
      exchangeable preferred stock valued at $357,616, which were returned to the
      transfer agent for cancellation. The Series E Preferred Stock was valued based
      on the discounted value of its expected future cash flows (using a discount
      rate
      of 20%).  The difference between the values of the surrendered shares and
      the newly issued was $170,489 which is reflected in paid in capital on the
      accompanying consolidated balance sheet. Deep Down has treated this as a
      modification of a share-based payment in accordance with the provisions of
      SFAS
      No. 123R, “Share-Based Payments”.





9




DEEP
        DOWN, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED CONSOLIDATED FINANCIAL
        STATEMENTS


**Note
      7:Common
      Stock**





*Private
      Placement*




On
      March
      20, 2007, Deep Down completed the sale of 10,000,000 shares of common stock
      in a
      private placement for $1,000,000. A total of 1,025,000 shares were purchased
      by
      the Chief Executive Officer and director, and his wife, a Vice-President of
      Deep
      Down. 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 were used to redeem certain outstanding exchangeable preferred stock
      and for working capital.




On
      May
      17, 2007, the former CFO, returned 20,000,000 shares of common stock to the
      CEO,
      a director and an employee as part of a dispute between such
      shareholders.




**Note
      8:Stock Options**




*Adoption
      of FAS 123(R)*




Effective
      April 21, 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS
      123(R), which is a revision of SFAS 123. SFAS 123(R) supersedes APB 25 and
      amends Statement of Accounting Standards No. 95, “Statement of Cash Flows”.
      Generally, the approach in SFAS 123(R) is similar to the approach described
      in
      SFAS 123. However, SFAS123(R) requires all share-based payments to employees,
      including grants of employee stock options, to be recognized in Deep Down’s
      Statement of Operations based on their fair values. Deep Down adopted the
      provisions of SFAS 123(R) in the first quarter of 2007. As Deep Down had no
      outstanding stock options at December 31, 2006, the initial adoption of SFAS
      123(R) had no impact to Deep Down.




*Stock
      Options Granted During 2007*




Deep
      Down
      has a stock based compensation plan - the 2003 Directors, Officers and
      Consultants Stock Option, Stock Warrant and Stock Award Plan (the “Plan”). The
      exercise price of the options, as well as the vesting period, is established
      by
      Deep Down’s board of directors. The options granted under the Plan have vesting
      periods that range from immediate vesting to vesting over five years, and lives
      of the options granted are up to ten years. Under the Plan the total number
      of
      options permitted is 15% of issued and outstanding common shares. As of June
      30,
      2007, 5,500,000 options have been granted under the Plan.




In
      April,
      2007, Deep Down issued an aggregate of 1,500,000 stock options to various
      consultants, of which 300,000 were issued with an exercise price of $0.30,
      $0.50, $0.75, $1.00, and $1.25, respectively. All of the shares underlying
      the
      stock options granted were Incentive Stock Options as defined by the Internal
      Revenue Code. Such options expire in five years (or earlier in the event of
      termination of employment) and are subject to the following vesting
      schedule:





•187,500
      vested June 30, 2007


•187,500
      vest quarterly through for the following 7 calendar quarters through March
      31,
      2009





Deep
      Down
      estimated that the aggregate fair value of such stock options totaled $125,850
      based on the Black-Scholes option pricing model using the following estimates:
      5% risk free rate, 55% volatility, expected life of 4 years and zero dividends.




Additionally,
      in April, 2007, Deep Down issued an aggregate of 1,000,000 stock options to
      various employees with an exercise price of $0.50. All of the shares underlying
      the stock options granted were Incentive Stock Options as defined by the
      Internal Revenue Code. Such options expire on July 10, 2010 (or earlier in
      the
      event of termination of employment) and are subject to the following vesting
      schedule:





•333,333
      vest annually on April 2, 2008, 2009 and 2010





Deep
      Down
      estimated that the aggregate fair value of such stock options totaled $79,900
      based on the Black-Scholes option pricing model using the following estimates:
      5% risk free rate, 53.3% volatility, expected life of 3 years and zero
      dividends.




10




DEEP
        DOWN, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED CONSOLIDATED FINANCIAL
        STATEMENTS


Additionally,
      in May, 2007, Deep Down issued an aggregate of 3,000,000 stock options to an
      officer and director with an exercise price of $0.515. All of the shares
      underlying the stock options granted were Incentive Stock Options as defined
      by
      the Internal Revenue Code. Such options expire on August 10, 2010 (or earlier
      in
      the event of termination of employment) and are subject to the following vesting
      schedule:





•1,000,000
      vest annually on May 31, 2008, 2009 and 2010





Deep
      Down
      estimated that the aggregate fair value of such stock options totaled $618,300
      based on the Black-Scholes option pricing model using the following estimates:
      5% risk free rate, 52.7% volatility, expected life of 3 years and zero
      dividends.





Since
      Deep Down does not have a sufficient trading history to determine the volatility
      of its own stock, it based its estimates of volatility on a representative
      peer
      group consisting of companies in the similar industry, with similar market
      capitalizations and similar stage of development. Deep Down is expensing all
      stock options on a straight line basis over their respective expected service
      periods. Total stock based compensation expense for the six months ended June
      30, 2007 was $39,565.




*Summary
      of Stock Options*




A
      summary
      of stock option transactions follows:


**Number
                    of Shares**
                
                **Weighted-
                    Average Exercise Price**
                
                **Weighted-
                    Average Remaining Contractual Term**
                  **(in
                    years)**
                
                **Aggregate
                    Intrinsic Value**
                  **(In-The-Money)
                    Options)**Outstanding
                    at December 31, 2006
                
                
                -
                
                $
                -Grants
                
                
                5,500,000
                
                $
                0.58Outstanding
                    at June 30, 2007
                
                
                5,500,000
                
                $
                0.58
                
                
                3.5
                
                $
                -Exerciseable
                    at June 30, 2007
                
                
                187,500
                
                $
                0.76
                
                
                4.0
                
                $
                -


The following summarizes Deep Down’s outstanding options and
        their respective exercise prices at June 30, 2007:
 **Exercise
                      Price**
                  
                  **Number
                      of Shares**$
                  0.30
                  
                  
                  300,000$
                  0.50
                    - 0.52
                  
                  
                  4,300,000$
                  0.75
                  
                  
                  300,000$
                  1.00
                  
                  
                  300,000$
                  1.25
                  
                  
                  300,0005,500,000


11




DEEP
        DOWN, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED CONSOLIDATED FINANCIAL
        STATEMENTS


**Note
      9:Commitments and
      Contingencies**





*Litigation*





Deep
      Down
      is from time to time involved in legal proceedings arising in the normal course
      of business. As of the date of this report, there are no pending or threatened
      legal proceedings.





*Operating
      Leases*





Deep
      Down
      leases land and buildings under two non-cancelable 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 the Chief Executive
      Officer and director and his wife, a Vice President and director. This lease
      calls for 60 monthly payments of $11,000 and began as of September,
      2006.





*Capital
      Lease*





Deep
      Down
      leases a 100-ton mobile gantry crane under a non-cancelable capital lease and
      is
      responsible for the related maintenance, insurance and property taxes. The
      terms
      of the lease require Deep Down to make 84 monthly payments of $8,035 including
      sales tax which began March 10, 2007.





**Note
      10:Earnings per
      share**





Calculation
      of the numerator and denominator used in computing per share amounts is
      summarized as follows:


**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30, 2007**
              
              **June
                  30, 2007****Numerator
                  for basic and diluted earnings per share:**Net
                  income
              
              $
              949,466
              
              $
              840,208**Denominator
                  for basic earnings per share:**Weighted
                  average shares outstanding (basic)
              
              
              67,870,171
              
              
              74,417,132**Denominator
                  for diluted earnings per share:**Weighted
                  average shares outstanding (basic)
              
              
              67,870,171
              
              
              74,417,132Effect
                  of dilutive securities
              
              
              25,929,668
              
              
              25,898,273Weighted
                  average shares outstanding (diluted)
              
              
              93,799,839
              
              
              100,315,405


**Note
      11:Related party
      transactions**





Deep
      Down
      borrowed $150,000 from an officer, with no stated interest, due on demand,
      as of
      June 30, 2007 which was used for working capital purposes. Deep Down expects
      to
      pay the loan balance in full in the third quarter of 2007.





12





DEEP
        DOWN, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED CONSOLIDATED FINANCIAL
        STATEMENTS


**Note
      12:Subsequent
      Events**




*Secured
      credit agreement*





On
      August
      7, 2007 Deep Down, Inc. entered into a $6 million secured credit agreement
      (the
“Agreement”) with Prospect Capital Corporation to pay off bank indebtedness,
      redeem some of the preferred shares outstanding, payoff $150,000 owing to an
      officer, and to provide working capital to accelerate development of its
      corporate growth strategies.





The
      Agreement provides for a 4-year term, an annual interest rate of 15.5% with
      the
      ability to defer up to 3.0% through a PIK (paid-in-kind) feature and principal
      payments of $75,000 per quarter beginning September 30, 2008, with the remaining
      balance outstanding due August 6, 2011. Interest payments are payable monthly,
      in arrears, on each month end commencing on August 31, 2007.





Terms
      of
      the Agreement also include a warrant to purchase up to 4,960,585 shares of
      common stock at an exercise price of $0.507 per share. The warrant has a
      five-year term and becomes exercisable on the two-year anniversary of the
      financing, August 7, 2009.





Under
      the
      Agreement, Deep Down is required to meet certain covenants and restrictions,
      in
      addition to maintaining “key man” life insurance with respect to the CEO in the
      amount of at least $3.0 million. The financial covenants are reportable each
      quarter, and fluctuate over defined time frames, with the initial period being
      the quarters ending December 31, 2007 through June 30, 2008. Covenants include
      maintaining total debt to consolidated EBITDA in excess of 3.5 to 1,
      consolidated EBITDA to consolidated net interest expense on the total debt
      of 2
      to 1, free cash flow to debt service of 1 to 1, and EBITDA in excess of
      $2,000,000 as each term is defined in the credit agreement. Other covenants
      include limitations on liens, transactions with affiliates, additional
      indebtedness and permitted investments, among others. The Company must also
      maintain a debt service reserve account of $375,000. Management expects changes
      to these covenants to accommodate additional borrowings for growth capital
      and
      acquisitions as mutually determined.





*Payment
      of bank loans*





On
      August
      7, 2007 Deep Down paid the full balances due on the bank loans for a total
      of
      $936,073, including accrued interest through that date.





*Payment
      of shareholder payable*





On
      August
      16, 2007 Deep Down made the initial payment of $1,400,000 under the terms of
      the
      securities redemption agreement. See Note 6.





13




**Item
        2.** **Management's
        Discussion and Analysis**
 
 *The
        following plan of operation discussion and analysis provides information
        that
        management believes is relevant for an assessment and understanding of our
        plans
        and financial condition.  The following selected financial information is
        derived from our historical financial statements 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. This
        information should also be read in conjunction with our audited historical
        consolidated financial statements which are included in our Form 10-KSB/A
        for
        the fiscal year ended December 31, 2006 filed with the Securities and Exchange
        Commission on April 24, 2007.*
 
 **Corporate
        History**
 
 Deep
        Down, Inc, (“Deep Down”) a Nevada corporation, provides installation management,
        engineering services, support services and storage management services for
        the
        subsea controls, umbilicals & pipeline industries offshore. Deep Down also
        fabricates component parts for subsea distribution systems and
        assemblies.
  On
        June
        29, 2006, Subsea Acquisition Corporation (“Subsea”) was formed 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. The purchase price based
        on
        the fair value of the Series D and E Preferred stock was $7,865,471.
 
 **Recent
        Developments**
 
 On
        April
        2, 2007, Deep Down acquired substantially all of the assets of ElectroWave
        USA,
        Inc. a Texas corporation. Deep Down formed a wholly-owned subsidiary,
        ElectroWave USA, Inc. (“ElectroWave”), 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 of $171,407 includes the payment of 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. Prior to the date of acquisition, Deep Down paid $432,475
        to
        three creditors of ElectroWave and received
        $261,068 of proceeds from the sale of Electrowave’s receivables. In
        addition, Deep Down may issue up to an aggregate of 460 shares of convertible
        preferred stock 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.
 
 On
        May
        15, 2007, Deep Down accepted John C. Siedhoff’s resignation from the board of
        directors and his resignation as Chief Financial Officer, effective April
        30,
        2007. On
        June
        5, 2007, Deep Down engaged Eugene L. Butler to serve as its new Chief Financial
        Officer. Mr. Butler will also fill a vacancy on the board of directors.
        Additionally, Mary L. Budrunas was appointed to the board of
        directors.
 
 During
        the second quarter, Deep Down executed a Securities Redemption Agreement
        (the
“Agreement”) with the former CFO of Deep Down to redeem 4,000 shares of Series E
        exchangeable preferred stock at a discounted price of $500 per share for
        a total
        of $2,000,000. The discount of $500 per share from the face value of $1,000
        was
        accounted for as a substantial modification of debt, thereby generating a
        gain
        on extinguishment of debt which is reflected as other income on the income
        statement. Deep Down accreted the remaining discount of $1,102,385 attributable
        to such shares on the date of redemption. On
        August
        16, 2007 Deep Down made the initial payment of $1,400,000 under the terms
        of the
        securities redemption agreement.
 
 On
        August
        7, 2007 Deep Down, Inc. entered into a $6 million secured credit agreement
        (the
“Agreement”) with Prospect Capital Corporation to pay off bank indebtedness,
        redeem some of the preferred shares outstanding, payoff $150,000 owing to
        an
        officer and to provide working capital to accelerate development of its
        corporate growth strategies.  The
        Agreement provides for a 4-year term, an annual interest rate of 15.5% with
        the
        ability to defer up to 3.0% through a PIK (paid-in-kind) feature and principal
        payments of $75,000 per quarter beginning September 30, 2008, with the remaining
        balance outstanding due August 6, 2011. Interest payments are payable monthly,
        in arrears, on each month end commencing on August 31, 2007. The Agreement
        requires Deep
        Down
        to maintain certain reporting and financial covenants. Terms of
        the Agreement also include a warrant to purchase up to 4,960,585 shares of
        common stock at an exercise price of $0.507 per share. The warrant has a
        five-year term and becomes exercisable on the two-year anniversary of the
        financing.
  14
  On
        June
        21, 2007 Deep Down, Inc. entered into a non-binding Letter of Intent to purchase
        Mako Technologies, Inc., a Louisiana corporation for a total acquisition
        price
        of approximately $14,500,000 consisting of a combination of cash, unsecured
        notes, and common stock. This transaction has not been completed as of the
        filing of this report. Completion of this acquisition is subject to satisfactory
        due diligence and financing.
 
 **Recent
        Sales of Unregistered Securities**
 
 On
        March
        20, 2007, Deep Down completed the sale of 10,000,000 shares of common stock
        in a
        private placement for $1,000,000. A total of 1,025,000 shares were purchased
        by
        the Chief Executive Officer, and director and his wife, a Vice-President
        of Deep
        Down. 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.
  On
        March
        20, 2007 Deep Down 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 for $250,000 in cash (par value). The market value of those shares
        was
        $7,250,000. Additionally, he surrendered 1,500 shares of Series F convertible
        preferred stock with a value of $1,325,773 and 500 shares of Series G
        exchangeable preferred stock with a value of $357,615 to Deep Down for
        cancellation in exchange for 1,250 shares of Series E exchangeable preferred
        stock valued at $945,563. The Series E Preferred Stock was valued based on
        the
        discounted value of its expected future cash flows (using a discount rate
        of
        20%).  The difference between the values of the preferred shares
        surrendered and the newly issued was $737,826 which is reflected in paid
        in
        capital on the accompanying consolidated balance sheet. In addition, Mr.
        Ritz
        also kept 500 shares of Series E exchangeable preferred stock he previously
        owned and agreed to tender his resignation from the Board.
 
 On
        March
        20, 2007 Deep Down issued 2,000 shares of Series E exchangeable preferred
        stock
        to John C. Siedhoff (Chief Financial Officer, and director) valued at $1,512,901
        for the surrender of his ownership of 1,500 shares of Series F convertible
        preferred stock valued at $1,325,773 and 500 shares of Series G exchangeable
        preferred stock valued at $357,616, which were returned to the transfer agent
        for cancellation. The Series E Preferred Stock was valued based on the
        discounted value of its expected future cash flows (using a discount rate
        of
        20%).  The difference between the values of the surrendered shares and the
        newly issued was $170,489 which is reflected in paid in capital on the
        accompanying consolidated balance sheet. Deep Down has treated this as a
        modification of a share-based payment in accordance with the provisions of
        SFAS
        No. 123R, “Share-Based Payments”.
 
 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.
  15
  **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
        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.
 
 The
        acquisition of ElectroWave has expanded our product lines to include products
        and services in the fields of electronic monitoring and control systems for
        the
        energy, military, and commercial business sectors. ElectroWave designs,
        manufactures, installs, and commissions integrated PLC and SCADA based
        instrumentation and control systems, including ballast control and monitoring,
        drilling instrumentation, vessel management systems, marine advisory systems,
        machinery plant control and monitoring systems, and closed circuit television
        systems.
 
 *Product
        and service innovations and capabilities during the first six months of 2007
        include the following highlights:*
  ·
            Use
                of nine new Rapid Deployment Cartridges (“RDC”) increased productivity for
                the installation of Steel Flying Leads (“SFLs”) and greatly improved the
                ability to carry more flying leads on the deck of an installation
                vessel,
                saving valuable vessel time and reducing the number of trips to and
                from
                the dock. Deep Down can carry up to eighteen SFLs within a very small
                footprint on the deck of a marine vessel with these RDCs. 
 ·
            Successful
                installation of new Electrical Hydraulic Loose Tube SFLs. This new
                product
                innovation greatly extends the typical range for delivering electronic
                capabilities in SFLs up to 10,000 feet and reduces the need for in-field
                umbilicals in certain applications. 
 ·
            Successful
                installation of umbilical bend stiffeners on the Independence HUB
                has
                established a new standard in the BS Latcher design for ultra high
                bending
                moment applications in 8,000 foot and deeper water
                depths. 
 ·
            Successful
                completion of the relocation of the ElectroWave assets, operations
                and
                personnel to Deep Down’s headquarters during April and the commencement of
                operations in that location.  **Results
        of operations**
 
 *Six
        months ended June 30, 2007*
 
 Deep
        Down
        generated revenue of $7,243,182 for the six months ended June 30, 2007, with
        cost of sales of $4,545,402 for a gross profit of $2,697,780, or 37.3%. Revenues
        for the second quarter ended June 30, 2007 were $5,144,788, up 145% from
        $2,098,394 in revenue reported for the three months ended March 31, 2007.
        Gross
        profit for the second quarter ended June 30, 2007 was $1,851,475, or 36.0%
        of
        revenue, up from $846,305 in gross profit, or 40.3% of revenue, reported
        for the
        three months ended March 31, 2007. While gross profit was up 119%, gross
        margins
        declined from 40.3% to 36.0%. This decline in profit margins was due in part
        to
        increased third-party subcontracting costs incurred to meet delivery schedules
        on certain products. The increase in revenue resulted from the inclusion
        of
        ElectroWave revenue of approximately $950,000 during the second quarter,
        combined with increased activity from our offshore subsea business. Excluding
        Electrowave revenue, our core business was still up over 100% with revenue
        of
        approximately $4,194,788 for the three months ended June 30, 2007, compared
        to
        $2,098,394 for the three months ended March 31, 2007.
 
 16
  Deep
        Down
        had selling, general and administrative (“SG&A”) expenses of $1,747,331, or
        24.1 % of revenue, for the six months ended June 30, 2007. SG&A expenses for
        the second quarter ended June 30, 2007 were $1,087,680, or 21.1% of revenue,
        as
        compared to $659,651, or 31.4 % of revenue, for the first quarter ended March
        31, 2007. The increase in SG&A expense was related to the addition of
        ElectroWave personnel and other personnel to meet the increasing demands
        of the
        offshore subsea business. SG&A expense included approximately $438,500 of
        expenses for SEC, Legal, and Accounting costs related to meeting its initial
        filing requirements as a public company.
 
 Interest
        expense for the six months ended June 30, 2007 totaled $1,508,657, of which
        $117,151 was cash interest expense related to bank loans and capital lease
        financing. The remaining non-cash interest expense of $1,391,506 was related
        to
        the accretion of the Series E and G preferred stock, including the accelerated
        accretion of $1,102,385 for the remaining discount on 4,000 shares of Series
        E
        preferred stock redeemed in May 2007 and the accelerated accretion of $72,799
        for the remaining discount on 250 shares of Series E preferred stock redeemed
        in
        March 2007.
 
 During
        the second quarter, we executed a Securities Redemption Agreement (the
“Agreement”) with the former CFO of Deep Down to redeem 4,000 shares of Series E
        exchangeable preferred stock at a discounted price of $500 per share for
        a total
        of $2,000,000. The discount of $500 per share from the face value of $1,000
        was
        accounted for as a substantial modification of debt, thereby generating a
        gain
        on extinguishment of debt which is reflected as other income on the income
        statement. Deep Down accreted the remaining discount of $1,102,385 attributable
        to such shares on the date of redemption.
 
 Net
        income for the six months ended June 30, 2007 totaled $840,208, net of tax
        expense of $447,363. Included in net income is a one-time gain of $2,000,000
        related to the extinguishment of debt, and non-cash interest expense of
        $1,102,385, associated with the 4,000 shares of Series E preferred stock
        that
        was redeemed at a 50% discount to face value. Excluding this one-time gain,
        earnings before depreciation, interest, amortization, taxes and other non-cash
        charges for the three months ended June 30, 2007 was $763,795, up 309% from
        $186,654 for the three months ended March 31, 2007.
 
 **Liquidity
        and Capital Resources**
 
 During
        the six months ended June 30, 2007, we had operating cash flows of $427,319.
        Deep Down incurred capital expenditures of approximately $442,788 for equipment
        purchases. During the first quarter, we raised $1,000,000 from a private
        placement of common stock. We redeemed 250 shares of the Series E preferred
        stock for $250,000, and an additional $250,000 was used as part of the stock
        exchange agreement with a former director of Deep Down. At June 30, 2007,
        we had
        cash totaling $263,305 and working capital of $97,853 net of the accrued
        payable
        for the redemption of Series E preferred stock, which will be paid using
        the
        funds provided by the secured credit agreement.
 
 Management
        believes that operating cash flows exceeds the Company’s operating costs. On
        August 6, 2007 Deep Down entered into a secured credit agreement for
        $6,000,000. These funds provided significant working capital for the growth
        and
        expansion of the business as well as for the redemption of $4,000,000 of
        debt
        related to the Series E preferred stock at a 50% discount to face
        value.
 
 ***Sources
        and Uses of Cash***
 
 We
        use
        cash to pay for materials and payroll related costs to build the equipment
        our
        customers have ordered prior to receipt of related progress payments. On
        occasion we may use cash to sub-contract fabrication to meet specific contract
        deadlines. The cash provided from operations exceeds operating costs, capital
        expenditures and debt requirements.
 
 Deep
        Down, with the $6,000,000 credit agreement, has secured adequate financing
        to
        retire the debt associated with the Series E preferred stock redemption
        completed in the second quarter. See “Recent Developments” above for additional
        discussion of the terms of the financing agreement and the preferred stock
        redemption. On August 16, 2007 Deep Down made the initial payment of $1,400,000
        under the terms of the securities redemption agreement. Additionally, on
        August
        7, 2007 Deep Down paid the full balances due on the bank loans for a total
        of
        $936,073, including accrued interest through that date.
 
 We
        believe we have raised sufficient capital to finance our operations. However,
        we
        may strategically seek sources of financing to expand our product development
        efforts and pursue strategic acquisitions. Additionally, unanticipated events
        may negatively impact our ability to increase revenue-generating activities
        and
        we may need to obtain future sources of financing to continue existing
        operations. Such future sources may include cash from equity offerings, exercise
        of warrants and stock options and proceeds from debt instruments. There can
        be
        no assurance that such equity or borrowings will be available or, if available,
        will be at rates or prices acceptable to us.
  17
 ***Analysis
        of Cash flows***
 
 During
        the six months ended June 30, 2007, we had net operating cash flows of $427,319.
        We had net income from continuing operations of $1,287,571 for the six months
        ended June 30, 2007, which included non-cash expenses of depreciation of
        $154,221 and amortization of debt discount of $1,391,506 on the Series E
        and G
        preferred stock. While we had significant changes in various operating assets
        and liabilities, these changes did not have a significant impact on our
        operating cash flows as the impacts largely offset each other.
 
 Deep
        Down
        had investing outflows of $633,169, consisting of the purchase of equipment
        of
        $442,788 and payment of ElectroWave debt of $432,475 and cash deficit from
        the
        purchase of ElectroWave of $18,974, which was partially offset by the sale
        of ElectoWave’s receivables for $261,068.
 
 We
        had
        financing cashflows of $456,693 for the six months ended June 30, 2007. We
        received proceeds from a private placement offering of stock for $1,000,000,
        which were partially used to redeem 250 shares of Series E preferred shares
        for
        $250,000 and a cash payment to a shareholder for the cancellation of common
        stock totaling $250,000. Deep Down borrowed $150,000 from an officer, with
        no
        stated interest, due on demand, as of June 30, 2007 which was used for working
        capital purposes. Deep Down expects to pay this loan balance in full in the
        third quarter of 2007. Also, Deep Down entered into an 84 month capital lease
        for a 100-ton mobile gantry crane, where the equipment and offsetting capital
        lease liability of $525,000 were reflected as noncash investing and financing
        activities.
 
 During
        the second quarter, we entered into a two year sales lease agreement with
        an
        unrelated third party. We received cash payments totaling $69,000 from the
        lessee during the six months ended June 30, 2007. The equipment sold and
        the
        offsetting lease receivable of $750,000 and unearned income of $96,710 were
        reflected as operating activities.
 
 During
        the second quarter, we executed a securities redemption Agreement with the
        former CFO of Deep Down to redeem 4,000 shares of Series E exchangeable
        preferred stock at a discounted price of $500 per share for a total of
        $2,000,000. The discount of $500 per share from the face value of $1,000
        was
        accounted for as a substantial modification of debt, thereby generating a
        gain
        on extinguishment of debt which is reflected as other income on the income
        statement. Deep Down accreted the remaining discount of $1,102,385 attributable
        to such shares on the date of redemption.
 
 We
        plan
        to meet our cash requirements in 2007 with cash generated from operations
        in
        addition to the $1,000,000 raised in the private placement in March 2007, and $6,000,000
        from
        the secured credit agreement in August 2007. We will continue to expand our
        product line offerings, and we are projecting to spend a minimum of $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.
 
 **Critical
        Accounting Policies**
 
 For
        a
        discussion of our critical accounting matters, please refer to Item 7,
“Management’s Discussion and Analysis or Plan of Operation,” in our 2006 10-K/A
        under the heading “Critical Accounting Policies.”
 
 **Inflation
        and Seasonality**
 
 We
        do not
        believe that our operations are significantly impacted by inflation. Our
        business is not seasonal in nature.
  18
  **Item
        3.** **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
        June 30, 2007, (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 review of the interim financial
        statements as of and for the period ended June 30, 2007, our independent
        auditors found numerous 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 six months ended June 30, 2007
        that
        has materially affected, or is reasonably likely to materially affect, our
        internal control over financial reports.
 
 19
  **PART
        II - OTHER INFORMATION**
 
 **Item
        1.** **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
        2.** **Unregistered
        Sales of Equity Securities and Use of Proceeds**
  On
        March
        20, 2007, Deep Down completed the sale of 10,000,000 shares of common stock
        in a
        private placement for $1,000,000. A total of 1,025,000 shares were purchased
        by
        the Chief Executive Officer, and director, and his wife, a Vice-President
        of
        Deep Down. 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
        were
        used to redeem certain outstanding exchangeable preferred stock and for working
        capital.
  Deep
        Down
        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 for
        $250,000 in cash (par value). Additionally, he surrendered 1,500 shares of
        Series F convertible preferred stock and 500 shares of Series G exchangeable
        preferred stock to Deep Down for cancellation. For these actions, Mr. Ritz
        received 1,250 shares of Series E exchangeable preferred stock. In addition,
        Mr.
        Ritz kept 500 shares of Series E exchangeable preferred stock he previously
        owned and agreed to tender his resignation from the Board.
  Deep
        Down
        issued 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 were 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
        3.** **Defaults
        Upon Senior Securities**
  None
 
 **Item
        4.** **Submission
        of Matters to a Vote of Security Holders.**
  None
 
 **Item
        5.** **Other
        Information.**
  None
  20
  **Item
      6.** **Exhibits** **.**






**Exhibit**
              **Number**
            **Description**
            **By
                Reference**
              **from****Document**31.1
            Certification
                of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14 of
                the
                Securities Exchange Act of 1934
            *31.2
            Certification
                of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of
                the
                Securities Exchange Act of 1934
            *32.1
            Certification
                Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002
            *32.2
            Certification
                Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002
            *


*  Filed
      herewith





21





**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned, thereunto
      duly authorized.







**DEEP
                DOWN, INC.**(Registrant)Signature
            
            Title
            
            Date/s/RONALD
                E. SMITH
            
            President,
                CEO and Director
            
            August
                20, 2007Ronald
                E. Smith
            
            (Principal
                Executive Officer)/s/EUGENE
                L. BUTLER
            
            Chief
                Financial Officer
            
            August
                20, 2007Eugene
                L. Butler
            
            (Principal
                Financial Officer)












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