**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


**_______________________**





**FORM
      10-QSB**





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





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





**o 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 $0.001
      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 þ   No
o





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. o




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





At
      November 13, 2007, the issuer had outstanding 78,302,452 shares of Common Stock,
      par value $0.001 per share.




Transitional
      Small Business Disclosure
      Format:Yes o 
 No
þ








**DEEP
      DOWN, INC.**


**Report
      on Form 10-QSB**





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





**INDEX**


**Page**




**PART
                I – FINANCIAL INFORMATION**
            **2****Item
                1. Financial Statements.**
            **3****Consolidated
                Balance Sheets (unaudited)**
            **3****Consolidated
                Statement of Operations (unaudited)**
            **4****Consolidated
                Statement of Cash Flows (unaudited)**
            **5****Notes**
            **7****Item
                2. Management's Discussion and Analysis**
            **18****Item
                3. Controls and Procedures**
            **22****PART
                II – OTHER INFORMATION**
            **23****Item
                1. Legal Proceedings.**
            **23****Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds**
            **23****Item
                3. Defaults Upon Senior Securities**
            **23****Item
                4. Submission of Matters to a Vote of Security
                Holders**
            **23****Item
                5. Other Information.**
            **23****Item
                6. Exhibits**
            **24****SIGNATURES**
            **25**







**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.




2


**Item
      1.  Financial
      Statements**





**Deep
                Down, Inc.****Consolidated
                Balance Sheets****(unaudited)****September
                30, 2007**
            
            
            **December
                31, 2006****Assets**Cash
                and equivalents
            
            $
            687,436
            
            
            $
            12,462Restricted
                cash
            
            
            375,000
            
            
            
            -Accounts
                receivable, net of allowance of $14,447 and $81,809
            
            
            3,388,058
            
            
            
            1,264,228Prepaid
                expenses and other current assets
            
            
            108,069
            
            
            
            11,488Inventory
            
            
            100,487
            
            
            
            145,487Finished
                goods
            
            
            515,601
            
            
            
            -Lease
                receivable, short term
            
            
            414,000
            
            
            
            -Work
                in progress
            
            
            1,935,643
            
            
            
            916,485Total
                current assets
            
            
            7,524,294
            
            
            
            2,350,150Property
                and equipment, net
            
            
            1,760,888
            
            
            
            845,200Other
                assets, net of accumulated amortization of $15,988 and $0
            
            
            809,424
            
            
            
            -Lease
                receivable, long term
            
            
            276,500
            
            
            
            -Goodwill
            
            
            7,279,075
            
            
            
            6,934,213Total
                assets
            
            $
            17,650,181
            
            
            $
            10,129,563**Liabilities
                and Stockholders' Equity**Accounts
                payable and accrued liabilities
            
            $
            3,598,562
            
            
            $
            816,490Deferred
                revenue
            
            
            -
            
            
            
            190,000Other
                current liabilities
            
            
            74,480
            
            
            
            -Shareholder
                payable
            
            
            560,000
            
            
            
            -Current
                portion of long-term debt
            
            
            -
            
            
            
            410,731Total
                current liabilities
            
            
            4,233,042
            
            
            
            1,417,221Long-term
                debt, net of accumulated discount of $1,605,784 and $0
            
            
            4,885,893
            
            
            
            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
                stock1,750
                and 5,000 issued and outstanding, respectively
            
            
            1,365,975
            
            
            
            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
            
            
            10,484,910
            
            
            
            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'
                equity: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, $0.001 par value, 490,000,000 shares authorized,
                70,120,171and
                82,870,171 shares issued and outstanding, respectively
            
            
            70,120
            
            
            
            82,870Paid
                in capital
            
            
            4,939,525
            
            
            
            (82,792
            )Retained
                earnings
            
            
            (2,263,640
            )
            
            
            (3,299,817
            )Total
                stockholders' equity
            
            
            2,746,027
            
            
            
            (3,299,717
            )Total
                liabilities and stockholders' equity
            
            $
            17,650,181
            
            
            $
            10,129,563See
                accompanying notes to unaudited consolidated financial
                statements.


3






**Deep
                Down, Inc.****Consolidated
                Statements of Operations****For
                the Three and Nine Months Ended September 30,
                2007****(unaudited)****Three
                Months Ended**
            
            
            **Nine
                Months Ended****September
                30, 2007**
            
            
            **September
                30, 2007**Revenues
            
            $
            4,885,555
            
            
            $
            12,128,737Cost
                of sales
            
            
            3,552,599
            
            
            
            8,098,001Gross
                profit
            
            
            1,332,956
            
            
            
            4,030,736Operating
                expenses:Selling,
                general & administrative
            
            
            949,376
            
            
            
            2,712,997Depreciation
            
            
            93,282
            
            
            
            247,503Total
                operating expenses
            
            
            1,042,658
            
            
            
            2,960,500Operating
                income
            
            
            290,298
            
            
            
            1,070,236Other
                income (expense):Gain
                on disposal of assets
            
            
            15,052
            
            
            
            15,052Gain
                on debt extinguishment
            
            
            -
            
            
            
            2,000,000Interest
                income
            
            
            32,645
            
            
            
            48,935Interest
                expense
            
            
            (241,639
            )
            
            
            (1,750,296
            )Total
                other income
            
            
            (193,942
            )
            
            
            313,691Income
                from continuing operations
            
            
            96,356
            
            
            
            1,383,927Income
                tax benefit (expense)
            
            
            99,613
            
            
            
            (347,750
            )Net
                income
            
            $
            195,969
            
            
            $
            1,036,177Basic
                earnings per share
            
            $
            -
            
            
            $
            0.01Shares
                used in computing basic per share amounts
            
            
            68,285,932
            
            
            
            72,210,830Diluted
                earnings per share
            
            $
            -
            
            
            $
            0.01Shares
                used in computing diluted per share amounts
            
            
            100,307,773
            
            
            
            100,584,062See
                accompanying notes to unaudited consolidated financial
                statements.




4





**Deep
                Down, Inc.****Consolidated
                Statements of Cash Flows****For
                the Nine Months Ended September 30, 2007****(unaudited)**Cash
                flows from operating activities:Net
                income
            
            $
            1,036,177Adjustments
                to reconcile net income to net cashused
                in operating activities:Gain
                on extinguishment of debt
            
            
            (2,000,000
            )Depreciation
            
            
            247,503Gain
                on disposal of equipment
            
            
            7,948Bad
                debt expense
            
            
            16,305Share-based
                compensation
            
            
            113,480Amortization
                of debt discount
            
            
            1,427,960Amortization
                of deferred financing costs
            
            
            15,988Changes
                in assets and liabilities:Lease
                receivable
            
            
            (788,520
            )Accounts
                receivable
            
            
            (2,006,548
            )Prepaid
                expenses and other current assets
            
            
            (96,581
            )Inventory
            
            
            45,000Finished
                goods
            
            
            (515,601
            )Construction
                in progress
            
            
            (913,435
            )Accounts
                payable and accrued liabilities
            
            
            2,072,684Deferred
                revenue
            
            
            (190,000
            )Net
                cash used in operating activities
            
            $
            (1,527,640
            )Cash
                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
            )Restricted
                cash
            
            
            (375,000
            )Purchases
                of equipment
            
            
            (600,636
            )Net
                cash used in investing activities
            
            $
            (1,166,017
            )Cash
                flows from financing activities:Proceeds
                from sales-type lease
            
            
            172,500Borrowings
                on debt - related party
            
            
            (150,000
            )Payments
                on debt - related party
            
            
            150,000Borrowings
                on long-term debt
            
            
            6,000,000Creation
                of debt discount due to lender's fees
            
            
            (180,000
            )Payments
                of deferred financing fees
            
            
            (442,198
            )Payments
                of long-term debt
            
            
            (2,641,671
            )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
            
            $
            3,368,631Change
                in cash and equivalents
            
            $
            674,974Cash
                and equivalents, beginning of year
            
            $
            12,462Cash
                and equivalents, end of period
            
            $
            687,436See
                accompanying notes to unaudited consolidated financial
                statements.




5





**Deep
                Down, Inc.****Consolidated
                Statements of Cash Flows****For
                the Nine Months Ended September 30, 2007****(unaudited)**Supplemental
                schedule of noncash investingand
                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
            
            $
            3,685,463Creation
                of debt discount due to warrants issued to lender
            
            $
            1,479,189Creation
                of deferred financing fee due to warrants issued to third
                party
            
            $
            113,120Correction
                of common stock par value to paid in capital
            
            $
            114,750Supplemental
                Disclosures:Cash
                paid for interest
            
            $
            306,349Cash
                paid for taxes
            
            $
            14,970See
                accompanying notes to unaudited consolidated financial
                statements.


6
 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 was based
      on the fair value of the Series D and E Preferred stock of
      $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 September 30, 2007 and for
      the
      nine 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 period then ended included in Deep Down’s annual report on Form
      10-KSB/A for the period 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.  During the course of preparing
      the unaudited financial statements as of September 30, 2007, Deep Down
      discovered that it had erroneously recorded and reflected the par value of
      its
      common stock as $0.01.  Since the correction of this error resulted in
      a reclass within equity between common stock and additional paid in capital
      totaling $745,832 as of December 31, 2006 and $(114,750) as of September 30,
      2007, Deep Down did not consider the need to restate its previously issued
      financial statements.




7
 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
            
            
            (133,980
            )
            
            
            (172,500
            )
            
            
            38,520Lease
                balance September 30, 2007
            
            $
            616,020
            
            
            $
            690,500
            
            
            $
            (74,480
            )Current
                portion
            
            
            
            
            
            $
            414,000
            
            
            $
            (74,480
            )Long-term
                portion
            
            
            
            
            
            $
            276,500




**Note
      3: Property and Equipment**





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





September
                30, 2007
            
            
            December
                31, 2006Building
            
            $
            169,464
            
            
            $
            46,474Furniture
                and fixtures
            
            
            18,706
            
            
            
            11,806Vehicles
                and trailers
            
            
            72,662
            
            
            
            66,662Leasehold
                improvements
            
            
            75,149
            
            
            
            -Equipment
            
            
            1,698,772
            
            
            
            747,419Total
            
            
            2,034,753
            
            
            
            872,361Less:
                Accumulated depreciation
            
            
            (273,865
            )
            
            
            (27,161
            )Property
                and equipment, net
            
            $
            1,760,888
            
            
            $
            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.


8
 DEEP
              DOWN, INC. AND SUBSIDIARIES
 **NOTES
              TO UNAUDITED CONSOLIDATED FINANCIAL
              STATEMENTS**


**Note
      4:  Purchase Accounting**





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
            
            
            344,862Total
                assets acquired
            
            $
            899,768Cash
                deficit
            
            
            18,974Accrued
                liabilities
            
            
            709,387Total
                liabilities acquired
            
            $
            728,361Net
                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.


9
 DEEP
              DOWN, INC. AND SUBSIDIARIES
 **NOTES
              TO UNAUDITED CONSOLIDATED FINANCIAL
              STATEMENTS**




**Note
      5: Long-Term Debt**





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





**September
                30, 2007**Secured
                credit agreement with an investment firmquarterly
                principal payments of $75,000 beginningSeptember
                30, 2008; monthly interest payments,interest
                fixed at 15.5%; balance due August 2011;secured
                by all assets
            
            $
            6,000,000Debt
                discount, net of amortization of  $53,405
            
            
            (1,605,784
            )Total
                secured credit agreement
            
            
            4,394,216Capital
                lease of equipment, monthly lease payments,interest
                imputed at 11.2%
            
            
            491,677Total
                long-term debt
            
            
            4,885,893Current
                portion of long-term debt
            
            
            -Long-term
                debt, net of current portion
            
            $
            4,885,893




*Secured
      credit agreement*





On
      August
      6, 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.   Indebtedness through the Agreement
      is secured by all of Deep Down’s assets.





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.  Interest
      paid through September 30, 2007 was $139,500.  Deep Down paid the full
      15.5% and did not exercise the PIK feature for the three month period ending
      September 30, 2007.





Terms
      of
      the Agreement also include a detachable 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 6, 2009.  The proceeds of the debt were
      allocated to the warrants based on its estimated relative fair value at the
      measurement date of when the final agreement was signed and announced and
      reflected as a discount to the debt.  Although the terms of the
      warrant were agreed to on May 24, 2007, the measurement date for valuation
      was
      determined to be the date of closing of the Prospect financing.  The
      relative fair value of the warrant was estimated to be $1,479,189 based on
      the
      Black Scholes pricing model.  The assumptions used in the model
      included (1) expected volatility of 52.7%, (2) expected term of 3.5 years,
      (3)
      discount rate of 5% and (4) zero expected dividends.   Provisions
      in the warrant agreement allow for a cashless exercise provision, not to exceed
      2% of outstanding common stock at the time of exercise.





Additionally,
      Deep Down pre-paid $180,000 in points to the lender which was treated as a
      discount to the note.   The discount associated with the value of
      the warrants and the pre-paid points are being amortized into interest expense
      over the life of the note agreement using the effective interest
      method.   A total of $53,405 has been amortized into interest
      expense through September 30, 2007.





In
      connection with the warrant, Deep Down entered into a registration rights
      agreement where the holder has certain demand registration rights in the
      future.  There are no stipulated liquidated damages in the
      agreement.  The company evaluated the warrants and the registration
      rights agreement for liability treatment under SFAS 133 and EITF 00-19 and
      determined that the warrants and registration rights did not meet the definition
      of a liability under the authoritative guidance.




10
 DEEP
              DOWN, INC. AND SUBSIDIARIES
 **NOTES
              TO UNAUDITED CONSOLIDATED FINANCIAL
              STATEMENTS**




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
      below 3.5 to 1, consolidated EBITDA to consolidated net interest expense on
      the
      total debt greater than 2 to 1, free cash flow to debt service greater than
      1 to
      1, and EBITDA in excess of $2,000,000 (annual calculation only) as each term
      is
      defined in the credit agreement.  Other covenants include limitations
      on issuance of common stock, liens, transactions with affiliates, additional
      indebtedness and permitted investments, among others.  The Company
      must also maintain a debt service reserve account of $375,000 which is reflected
      as restricted cash on the balance sheet.  Management expects changes
      to these covenants to accommodate additional borrowings for growth capital
      and
      acquisitions as mutually determined.





Deep
      Down
      capitalized a total of $555,318 in deferred financing costs related to this
      agreement.  Of this amount, $442,198 was paid in cash to various third
      parties related to the financing, and the remainder of $113,120 represents
      the
      Black Scholes valuation of warrants issued to one of these third party
      vendors.  The warrant is a detachable warrant to purchase up to
      320,000 shares of common stock at an exercise price of $0.75 per share
      (calculated as the volume weighted average closing price of the common stock
      for
      the ten days immediately preceding the closing of the Prospect financing which
      took place on August 6, 2007).  The warrant has a five-year term and
      becomes exercisable on the two-year anniversary of the financing, August 6,
      2009.  The assumptions used in the Black Scholes model included (1)
      expected volatility of 52.7%, (2) expected term of 3.5 years, (3) discount
      rate
      of 5% and (4) zero expected dividends.   The deferred financing
      cost is being amortized using the effective interest method over the term of
      the
      note.  A total of $15,988 of deferred financing cost was amortized
      into interest expense through September 30, 2007.





*Payment
      of bank loans and accounts receivable factoring arrangement*





On
      August
      7, 2007 Deep Down paid the remaining balances due on the bank loans for a total
      of $936,073, including accrued interest through that date. Total principal
      payments on these loans for the nine months ended September 30, 2007 were
      $1,168,348. As of September 30, 2007, Deep Down is no longer factoring accounts
      receivable with this bank. As of the balance sheet date a small amount of
      factored receivables remained, which have been paid during the fourth quarter
      of
      2007.





*Payment
      of shareholder payable*





During
      the third quarter of 2007, Deep Down made the initial payment of $1,400,000
      under the terms of the securities redemption agreement, and 2 payments of
      $20,000 each.  The final balance due of $560,000 was paid with common
      stock on October 2, 2007.  See Notes 6 and 13.





*Capital
      lease*





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.  The off-setting lease obligation is $491,677 at
      September 30, 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.


11
 DEEP
              DOWN, INC. AND SUBSIDIARIES
 **NOTES
              TO UNAUDITED CONSOLIDATED FINANCIAL
              STATEMENTS**




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 $(16,950) and $1,376,114 for the three and nine months
      ended September 30, 2007. The nine month total includes the accelerated
      accretion of approximately $1,017,707 to accrete to face value 4,000 shares
      of
      Series E preferred stock that were redeemed during the quarter ended June 30,
      2007.  The three month total includes an adjustment to the accretion
      booked in the second quarter of $(82,290) for the 4,000 shares
      redeemed.   The nine 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.





On
      September 13, 2007, Deep Down redeemed 2,250 shares owned by the Chief Executive
      Officer and director, and his wife, a Vice-President of Deep
      Down.  The Preferred Series E were redeemed for 2,250,000 shares of
      common stock at the closing price of $0.655 totaling
      $1,473,750.  Since the shareholders are related parties, no accretion
      interest was recorded related to the redemption.  The difference
      between the carrying value of the Series E shares of $1,685,463 and the common
      stock market value was recorded to Paid in Capital.





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 $1,017,707
      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, with the remaining shares
      to being redeemed monthly beginning August 31, 2007 at a rate of 40 shares
      at
      $500 per share, or $20,000 per month.  The final balance outstanding
      of $560,000 was paid with common stock subsequent to September 30, 2007 (see
      Note 13).  The amounts are reflected as a current payable to
      shareholder 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:





September
                30,
              2007
            
            
            December
                31,
              2006Series
                E preferred stock - face value at $1,000 per share
            
            $
            1,750,000
            
            
            $
            5,000,000Less
                unamortized discount
            
            
            (384,025
            )
            
            
            (1,513,624
            )Balance
                net of unamortized discount
            
            $
            1,365,975
            
            
            $
            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$
            1,365,975
            
            
            $
            4,183,651




A
      summary
      of Series E and Series G preferred stock transactions follows:





**Series
                E**
            
            **Series
                G**Outstanding
                at December 31, 2006
            
            5,000
            
            1,000Shares
                issued
            
            3,250
            
            -Shares
                redeemed
            
            (6,500)
            
            (1,000)Outstanding
                at September 30, 2007
            
            1,750
            
            -





See
      Note
      13 for additional information regarding redemption of Series E preferred stock
      subsequent to September 30, 2007.


12
 DEEP
              DOWN, INC. AND SUBSIDIARIES
 **NOTES
              TO UNAUDITED CONSOLIDATED FINANCIAL
              STATEMENTS**




*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”.





**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
      September 13, 2007, Deep Down redeemed 2,250 shares of Series E preferred stock
      owned by the Chief Executive Officer and director, and his wife, a
      Vice-President of Deep Down.  The Series E preferred shares were
      redeemed for 2,250,000 shares of common stock at the closing price of
      $0.66.  See Note 6.





**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.




13
 DEEP
              DOWN, INC. AND SUBSIDIARIES
 **NOTES
              TO UNAUDITED CONSOLIDATED FINANCIAL
              STATEMENTS**


*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
      September 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 services) and are subject to the
      following vesting schedule:





•
187,500
      vested on June 30, 2007 and September 30, 2007


•
187,500
      vest quarterly through for the following 6 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.





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 three and nine months ended September 30, 2007 was $73,915 and $113,480
      respectively.





The
      unamortized portion of the estimated fair value of these stock options is
      $710,570 at September 30, 2007.


14
 DEEP
              DOWN, INC. AND SUBSIDIARIES
 **NOTES
              TO UNAUDITED CONSOLIDATED FINANCIAL
              STATEMENTS**




*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 September 30, 2007
            
            
            5,500,000
            
            
            $
            0.58
            
            
            
            3.5
            
            
            $
            1,900,000Exerciseable
                at September 30, 2007
            
            
            375,000
            
            
            $
            0.76
            
            
            
            4.5
            
            
            $
            86,250





The
      following summarizes Deep Down’s outstanding options and their respective
      exercise prices at September 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





On
      August
      6, 2007, as part of the secured financing agreement described in Note 5, Deep
      Down issued 4,960,585 warrants to its creditor.  All warrants were issued
      with an exercise price of $0.507, expire in five years (or earlier in the event
      of termination) and vest on the second anniversary of the agreement.  The
      aggregate relative fair value of such warrants (excluding estimated forfeitures)
      was approximately $1,479,189 based on the Black-Scholes option pricing model
      using the following estimates:  5% risk free rate, 52.7% volatility, and an
      expected life of 3.5 years.





Additionally,
      related to the secured financing agreement described in Note 5, Deep Down issued
      warrants to a third party related to the financing.  The warrant is a
      detachable warrant to purchase up to 320,000 shares of common stock at an
      exercise price of $0.75 per share (calculated as the volume weighted average
      closing price of the common stock for the ten days immediately preceding the
      closing of the Prospect financing which took place on August 6,
      2007).  The warrant has a five-year term and becomes exercisable on
      the two-year anniversary of the financing, August 6, 2009.  The
      assumptions used in the Black Scholes model included (1) expected volatility
      of
      52.7%, (2) expected term of 3.5 years, (3) discount rate of 5% and (4) zero
      expected dividends.





A
      summary
      of warrant 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
            
            
            5,280,585
            
            
            $
            0.51Outstanding
                at September 30, 2007
            
            
            5,280,585
            
            
            $
            0.52
            
            
            
            4.8
            
            
            $
            1,997,510Exerciseable
                at September 30, 2007
            
            
            -
            
            
            $
            -
            
            
            
            -
            
            
            $
            -




15
 DEEP
              DOWN, INC. AND SUBSIDIARIES
 **NOTES
              TO UNAUDITED CONSOLIDATED FINANCIAL
              STATEMENTS**




The
      following summarizes Deep Down’s outstanding warrants and their respective
      exercise prices at September 30, 2007:





**Exercise
                Price**
            
            **Number
                of Shares**$
            0.50
                - 0.52
            
            
            4,960,585$
            0.75
            
            
            320,0005,280,585





**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.





**Note
      10: Earnings per share**





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





**Three
                Months Ended**
            
            
            **Nine
                Months Ended****September
                30, 2007**
            
            
            **September
                30, 2007****Numerator
                for basic and diluted earnings per share:**Net
                income
            
            $
            195,969
            
            
            $
            1,036,177**Denominator
                for basic earnings per share:**Weighted
                average shares outstanding (basic)
            
            
            68,285,932
            
            
            
            72,210,830**Denominator
                for diluted earnings per share:**Weighted
                average shares outstanding (basic)
            
            
            68,285,932
            
            
            
            72,626,591Effect
                of dilutive securities
            
            
            32,021,841
            
            
            
            27,957,471Weighted
                aversage shares outstanding (diluted)
            
            
            100,307,773
            
            
            
            100,584,062





**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
      paid the loan balance in full during the third quarter of 2007.





On
      September 13, 2007, Deep Down redeemed 2,250 shares of Series E preferred stock
      owned by the Chief Executive Officer and director, and his wife, a
      Vice-President of Deep Down.  The Series E preferred shares were
      redeemed for 2,250,000 shares of common stock at the closing price of
      $0.655.  See Note 6.





**Note 12 —
      Recent Accounting Pronouncements**





In
      June 2006, the Financial Accounting Standards Board (“FASB”) issued
      Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN
      48”). The interpretation clarifies the accounting for uncertainty in income
      taxes recognized in the Company’s financial statements in accordance with
      Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting
      for Income Taxes.  FIN 48 is effective for financial statements issued
      for fiscal years beginning after December 15, 2006. The effect of adoption
      of
      FIN 48 did not have a material impact on Deep Down’s consolidated financial
      statements.





In
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
      which clarifies the definition of fair value, establishes a framework for
      measuring fair value within GAAP and expands the disclosures regarding fair
      value measurements. SFAS No. 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007. Deep Down does
      not expect the adoption of SFAS No. 157 to have a material impact on its
      financial condition, results of operations or cash flows.




16
 **DEEP
              DOWN, INC. AND SUBSIDIARIES**
 **NOTES
              TO UNAUDITED CONSOLIDATED FINANCIAL
              STATEMENTS**




In
      February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
      Financial Assets and Financial Liabilities, which permits entities to choose
      to
      measure many financial instruments and certain other items at fair value. SFAS
      No. 159 is effective for fiscal years beginning after November 15,
      2007. Deep Down does not expect the adoption of SFAS No. 159 to have a
      material impact on its financial condition, results of operations or cash
      flows.


**Note
      13:  Subsequent Events**





*Letter
      of intent to purchase Mako Technologies*





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.





*Payment
      of shareholder payable*





On
      October 2, 2007, Deep Down made the final payment of $560,000 under the terms
      of
      the securities redemption and shareholder payable agreement by issuing 543,689
      shares of common stock at the closing price of $1.03.





*Preferred
      Series E redemption*





On
      October 2, 2007, Deep Down exchanged 1,250 shares ($1,250,000 aggregate face
      value) of Series E Redeemable Exchangeable Preferred Stock for 1,213,592 shares
      of common stock at the closing price of $1.03 per share.  Deep Down
      accreted the remaining discount of $260,520 attributable to such shares on
      the
      date of redemption.





*Private
      placement*





On
      October 12, 2007, Deep Down closed an agreement with Ironman Energy Capital,
      L.P. for a private placement of 3,125,000 shares of common stock of the company
      at $0.96 per share, or $3,000,000 in the aggregate, in an agreement reached
      on
      October 2, 2007 when the closing price was $1.03 per share.





In
      connection with this private placement, the Deep Down entered into registration
      rights agreement where upon demand registration by the holder after December
      31,
      2008, Deep Down could be subjected to liquidated damages in the amount of 1%
      of
      the proceeds for every 30 days a registration statement is not declared
      effective. Deep Down is currently evaluating the probability of incurring these
      liquidated damages as a contingent liability and not yet determined the
      potential impact on the financial statements.





*Preferred
      Series C redemption*





During
      October 2007, 16,500 shares of Series C convertible preferred stock were
      converted into 3,300,000 shares of common stock.   After the
      redemptions 5,500 shares of Series C convertible preferred stock, convertible
      into 1,100,000 shares of common stock, remain outstanding.




17


**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, and 2 payments of $20,000 each were
      made
      during August and September 2007.  The final balance due of $560,000
      was paid with common stock on October 2, 2007.


18




On
      August
      6, 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. The aggregate relative fair value of such warrants (excluding
      estimated forfeitures) was approximately $1,479,189 based on the Black-Scholes
      option pricing model.





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.





**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 nine 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.





·
            Completed
                and installed Active Have Compensated In-Line Winch System for offshore
                deepwater use.




19


**Results
      of operations**





*Nine
      months ended September 30, 2007*





Deep
      Down
      generated revenue of $12,128,737 for the nine months ended September 30, 2007,
      with cost of sales of $8,098,001 for a gross profit of $4,030,736, or a 33%
      gross margin.  Revenue included ElectroWave revenue of approximately
      $2.0 million, combined with increased activity from our offshore subsea
      business, including the delivery of launch and recovery systems; loose tube
      steel flying leads; winch system refurbishments; and an active heave compensated
      in-line winch system.  In addition, we experienced increased levels of
      service activity related to installations and recoveries of subsea
      equipment.  Gross margins were impacted by increased engineering and other
      costs associated with new product development, including our new line of
      ProteusTM
      custom-engineered active heave compensated in-line winches, deep water rated
      (4000 meter) launch and retrieval systems, and other products in development.
      Management expects gross margins on these products to increase on future
      orders.





Deep
      Down
      had selling, general and administrative (“SG&A”) expenses of $2,712,997, or
      19 % of revenue, for the nine months ended September 30, 2007. SG&A expense
      included approximately $533,560 related to the addition of ElectroWave,
      purchased in April 2007.  Additionally, we incurred increasing
      personnel related costs to meet the increasing demands of the offshore subsea
      business.  SG&A expense included approximately $623,763 of
      expenses for SEC, Legal, and Accounting costs related to meeting its initial
      filing and ongoing review requirements as a public company.





Interest
      expense for the nine months ended September 30, 2007 totaled $1,750,296, of
      which $306,349 was cash interest expense related to bank loans and capital
      lease
      financing. We incurred non-cash interest expense of $1,374,555 related to the
      accretion of the Series E and G preferred stock, including the accelerated
      accretion of $1,017,707or 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.  Additionally, we amortized $53,405 in debt discount and
      $15,988 of deferred financing fees related to the $6.0 million credit
      agreement.





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
      $1,017,707 attributable to such shares on the date of redemption.





Net
      income for the nine months ended September 30, 2007 totaled $1,036,177, net
      of
      tax expense of $347,750.  Excluding the one-time gain on debt
      extinguishment discussed above and non-cash interest and stock based
      compensation charges, earnings before depreciation, interest, amortization,
      taxes and other non-cash charges (“EBITDA”) for the nine months ended September
      30, 2007 was $1,431,219.





**Liquidity
      and Capital Resources**





During
      the nine months ended September 30, 2007, we continued to strengthen the balance
      sheet with conversions of Series E, F and G preferred stock to common
      stock.  We raised $1,000,000 from a private placement of common stock
      in March 2007.  With the profitable growth of our business, our
      working capital position continues to strengthen, and our liquidity ratios
      are
      improving dramatically.  We had operating income of $1,070,236, and we
      incurred capital expenditures of $600,636 for equipment purchases.





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
      or $1,400,000 cash and $560,000 shareholder payable.  In October 2007
      we satisfied this obligation with 543,689 shares of stock with a market value
      of
      $560,000 at closing.





At
      September 30, 2007, we had cash totaling $687,436 plus restricted cash of
      $375,000 and working capital of $3,758,919 net of the accrued payable for the
      redemption of Series E preferred stock, which was paid using common stock in
      October 2007.  In October, 2007, we raised $3,000,000 through a
      private placement of our common stock.  Management believes that the
      Company has adequate capital resources, combined with its cash position and
      cashflow from operations to meet the Company’s current operating
      requirements.




20


***Sources
      and Uses of Cash***





The
      cash
      provided from operations exceeds operating costs, capital expenditures and
      debt
      requirements.  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.  During the third quarter of 2007, Deep Down made
      the initial payment of $1,400,000 and 2 payments of $20,000 each, under the
      terms of the securities redemption agreement, with the final balance due of
      $560,000 paid during the fourth quarter of 2007 using common stock.
      Additionally, during the third quarter of 2007, Deep Down paid the full balances
      due on the bank loans for a total of $936,073, including accrued interest
      through that date.





Deep
      Down
      has completed a private placement offering of 3,125,000 shares of common stock
      of the company at $0.96 per share, or $3,000,000 in the aggregate, in an
      agreement reached on October 2, 2007.  This cash provides the Company
      with the ability to continue its growth.





We
      believe we have raised sufficient capital to finance our growth, and we may
      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.





***Analysis
      of Cash flows***





During
      the nine months ended September 30, 2007, we had net operating cash outflows
      of
      $(1,527,640).  We had net income from continuing operations of
      $1,383,927 for the nine months ended September 30, 2007, which included non-cash
      expenses of depreciation of $247,503 and amortization of debt discount of
      $1,374,555 on the Series E and G preferred stock and $53,405 related to the
      $6.0
      million credit agreement debt discount. In connection with the redemption of
      Series E Preferred Shares, 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 of $2.0 million.  Also, we
      substantially completed a large contract during the third quarter of 2007 and
      therefore recognized $270,000 in deferred revenue related to this
      job.  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 $1,166,017, consisting of the purchase of equipment
      of
      $600,636 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.  Also, in connection with the
      $6.0 million credit agreement, we are required to maintain a $375,000 cash
      reserve balance.





We
      had
      financing cashflows of $3,368,631 for the nine months ended September 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
      September 30, 2007 which was used for working capital purposes and paid during
      the third quarter with proceeds of the $6.0 million credit
      agreement.  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 for a launch and retrieval system made by the
      Company.  We received cash payments totaling $172,500 from the lessee
      during the nine months ended September 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 third quarter of 2007, Deep Down made the initial payment of $1,400,000
      and
      2 payments of $20,000 each, under the terms of the securities redemption
      agreement.  Additionally, during nine months ended September 30, 2007,
      Deep Down paid the remaining balances due on the bank loans for a total of
      $1,168,348, net of interest expense, and made principal payments of $33,323
      on
      the capital lease payable during that same period.


21


We
      plan
      to meet our cash requirements in 2007 with cash generated from operations in
      addition to the $4,000,000 raised in the private placements in March and October
      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.




**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
      September 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 September 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 nine months ended September 30,
      2007 that has materially affected, or is reasonably likely to materially affect,
      our internal control over financial reports.




22


**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.




On
      September 13, 2007, Deep Down redeemed 2,250 shares of Series E preferred stock
      owned by the Chief Executive Officer and director, and his wife, a
      Vice-President of Deep Down.  The Series E preferred shares were
      redeemed for 2,250,000 shares of common stock at the closing price of
      $0.66.





On
      October 2, 2007, Deep Down exchanged 1,250 shares ($1,250,000 aggregate face
      value) of Series E Redeemable Exchangeable Preferred Stock for 1,213,592 shares
      of common stock at the closing price of $1.03 per share.





On
      October 12, 2007, Deep Down closed an agreement with Ironman Energy Capital,
      L.P. for a private placement of 3,125,000 shares of common stock of the company
      at $0.96 per share, or $3,000,000 in the aggregate, in an agreement reached
      on
      October 2, 2007 when the closing price was $1.03 per share.





During
      October 2007, 16,500 shares of Series C convertible preferred stock were
      converted into 3,300,000 shares of common stock.





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


23




**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




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**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
            November
                14, 2007Ronald
                E. Smith
            (Principal
                Executive Officer)/s/
                EUGENE L. BUTLER
            Chief
                Financial Officer
            November
                14, 2007Eugene
                L. Butler
            (Principal
                Financial Officer)




25