Deep Down, Inc. (Form: 10-K, Received: 04/15/2010 17:00:09)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C., 20549

FORM 10-K

T ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

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

Commission File No. 0-30351

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.)

8827 W. Sam Houston Pkwy N., Suite 100, Houston, Texas		77040
(Address of Principal Executive Office)		(Zip Code)

Registrant’s telephone number, including area code: (281) 517-5000

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ

Indicate by check mark 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 requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosures of delinquent filers in response to Item 405 of Regulations S-K is not contained in this form, and will not 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-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company þ

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

The aggregate market value of the voting stock and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of June 30, 2009, the last business day of our most recently completed second quarter, was approximately $16,051,857.

At March 31, 2010, the issuer had 180,450,630 shares outstanding of Common Stock, par value $0.001 per share.

DOCUMENTS INCORPORATED BY REFERENCE

None.

TABLE OF CONTENTS

PART I

Item 1	Description of Business	4
Item 1B	Unresolved Staff Comments	12
Item 2	Properties	12
Item 3	Legal Proceedings	13
Item 4	Reserved	13

PART II

Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	13
Item 6	Selected Financial Data	14
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	25
Item 8	Financial Statements and Supplementary Data	26
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	26
Item 9A	Controls and Procedures	27
Item 9B	Other Information	28

PART III

Item 10	Directors, Executive Officers and Corporate Governance	29
Item 11	Executive Compensation	31
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	37
Item 13	Certain Relationships and Related Transactions, and Director Independence	38
Item 14	Principal Accountant Fees and Services	38
Item 15	Exhibits	40
	Signatures	43

Forward-Looking Information

Unless otherwise indicated, the terms “Deep Down, Inc.”, “Deep Down”, “Company,” “we,” “our” and “us” are used in this report to refer to Deep Down, Inc., a Nevada corporation, and its wholly-owned subsidiaries.

In this Annual Report on Form 10-K (“the Report”), we may make certain forward-looking statements, including statements regarding our plans, strategies, objectives, expectations, intentions and resources that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We do not undertake to update, revise or correct any of the forward-looking information. The following discussion should also be read in conjunction with the audited consolidated financial statements and the notes thereto.

The statements contained in this Report 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. We wish to caution the reader that these forward-looking statements that are not historical facts are only predictions. No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these projections and other forward-looking statements are based upon a variety of assumptions relating to the business of the Company, which, although considered reasonable by us, may not be realized. Because of the number and range of assumptions underlying our projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond the reasonable control of us, 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 we assume no obligation to update this information. Therefore, our actual experience 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 us 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.

PART I

Item 1.

DESCRIPTION OF BUSINESS.

History

Deep Down, Inc. is a Nevada corporation engaged in the oilfield services industry. As used herein, “Deep Down,” “Company,” “we,” “our” and “us” may refer to Deep Down, Inc. and/or its subsidiaries. Deep Down, Inc. (OTCBB:DPDW), a publicly traded Nevada corporation, was incorporated on December 14, 2006, through a reverse merger with MediQuip Holdings, Inc. (“MediQuip”), a publicly-traded Nevada corporation.

Deep Down is the parent company to its wholly-owned subsidiaries: Deep Down, Inc., a Delaware corporation (“Deep Down Delaware”), ElectroWave USA, Inc., a Nevada corporation, since its acquisition April 2, 2007, Mako Technologies, LLC, a Nevada limited liability company (“Mako”), since its acquisition effective December 1, 2007, Flotation Technologies, Inc., a Maine corporation (“Flotation”), since its acquisition effective May 1, 2008, and Deep Down International Holdings, LLC, a Nevada limited-liability company (“DDIH”) since its formation in February 2009. DDIH currently has no material assets or operations.

On April 2, 2007, we acquired substantially all of the assets of ElectroWave USA, Inc., a Texas corporation. We formed a wholly-owned subsidiary, ElectroWave USA, Inc. (“ElectroWave”), a Nevada corporation, to complete the acquisition. In 2009 we rebranded ElectroWave as the Marine Technologies division of Deep Down Delaware, to enhance the clarity of the products and services offered by this division. Located in Channelview, Texas, Deep Down Marine Technologies offers products and services in the fields of electronic monitoring and control systems for the energy, military and commercial business sectors.

Effective December 1, 2007, we acquired all of the common stock of Mako Technologies, Inc. We formed a wholly-owned subsidiary, Mako Technologies, LLC (“Mako”) to complete the acquisition. Located in Morgan City, Louisiana, Mako serves the offshore petroleum and marine industries with technical support services, and equipment vital to offshore petroleum production, through the provision of highly qualified technicians, remotely operated vehicle (“ROV”) services, topside and subsea equipment and support systems used in diving operations, maintenance and repair operations, and offshore construction.

On June 5, 2008, we completed the acquisition of Flotation Technologies, Inc. (“Flotation”). We effectively dated the acquisition for accounting purposes as of May 1, 2008 and consummated the closing on June 6, 2008. Flotation engineers, designs and manufactures deepwater buoyancy systems using high-strength Flotec TM syntactic foam and polyurethane elastomers from its facilities in Biddeford, Maine.

In February 2009, we formed Deep Down International Holdings, LLC, a Nevada limited-liability company (“DDIH”) and wholly-owned subsidiary of the Company, for the purpose of holding securities for foreign companies organized or acquired by the Company. DDIH currently has no material assets or operations.

Our current operations are the result of the significant acquisitions of Deep Down Delaware, Mako and Flotation. In addition to our strategy of continuing to grow and strengthen our operations, including by expanding our services and products in accordance with our customers’ demands, we intend to continue to seek strategic acquisitions of complementary service providers, product manufacturers and technologies that are focused primarily on supporting offshore deepwater exploration, development and production of oil and gas reserves and other maritime operations.

Business Overview

We provide services to the offshore energy industry to support deepwater exploration, development and production of oil and gas and other maritime operations. We are primarily a service company, and we also produce custom engineered products that assist us in fulfilling service objectives for specific projects on a contractual basis. We design and manufacture a broad line of deep water, surface and offshore rig equipment, as well as buoyancy solutions, that are used by major integrated, large independent and foreign national oil and gas companies in offshore areas throughout the world. We also manufacture monitoring and control systems used by offshore energy and other maritime operations. Our products are often initially developed in direct response to customer requests for solutions to critical problems in the field. We also serve the growing offshore petroleum and maritime industries with technical management and support services. One of our greatest strengths is the extensive knowledge base of our service, engineering and management personnel in many aspects of the deep water industry. Set forth below is a more detailed description of important services and products we provide.

Our goal is to provide superior services and products which are designed to provide safer, more cost-effective solutions in a quicker timeframe for our clients. We believe there is significant demand for, and brand name recognition of, our established products due to the technological capabilities, reliability, cost effectiveness, timely delivery and operational timesaving features of these products. Since our formation, we have introduced many new products that continue to broaden the market currently served by us.

We market our services and products primarily through our offices in Houston, Texas, Biddeford, Maine and Morgan City, Louisiana. Additionally, we added two foreign sales consultants to more actively pursue the markets in Europe / West Africa and Brazil. Our sales representatives travel worldwide to the major international energy and maritime markets. We generally manufacture and fabricate our products at our facilities, although we also work with third parties who provide manufacturing and fabrication support through their own facilities in the Houston, Texas metroplex.

For the fiscal years ended December 31, 2009 and 2008, the operations of Deep Down’s operating segments, Deep Down Delaware, Electro Wave, Mako and Flotation, have been aggregated into a single reporting segment. Additionally, during the year ended December 31, 2009, we have aggregated ElectroWave’s operations into Deep Down Delaware as a single operating segment due to similar production processes and cost savings related to office and administrative support. While the operating segments have different product lines; they are very similar. They are all service-based operations revolving around our personnel’s expertise in the deep water industry, and any equipment is produced to a customer specified design and engineered using Deep Down personnel’s expertise, with installation and project management as part of our service revenue to the customer. Additionally, the segments have similar customers and distribution methods, and their economic characteristics are similar with regard to their gross margin percentages. Our operations are located in the United States, though we occassionally make sales to international customers.

Services and Products

Services. We provide a wide variety of project engineering and management services, including the design, installation and retrieval of subsea equipment and systems, connection and termination operations, well-commissioning services, as well as construction support and ROV operations support. We pride ourselves on the ability to collaborate with the engineering departments of oil and gas operators, installation contractors and subsea equipment manufacturers to find the quickest, safest, and most cost-effective solutions to address all manner of issues in the subsea world. We also provide various products in connection with the use of our installation, retrieval, storage and management services.

Offshore Project Management . Our installation management team specializes in deepwater subsea developments. We are often contracted by our customers to assist with the preparation and evaluation of subsea development bids and requests for quotes. Our experience comes from working with installation contractors, oil and gas operators, controls suppliers, umbilical manufacturers and other subsea equipment manufacturers, who often hire us to help ensure that a project progresses smoothly, on time and on budget.

Project Engineering . Our engineers have experience ranging from the initial conceptual design phases through manufacturing and installation, and concluding with topside connections and commissioning. Our experience provides us with a level of “hands on” and practical understanding that has proven to be indispensable in enabling us to offer customer solutions to the many problems encountered both subsea and topside. Because of our wide knowledge base, our engineering team is often hired by oil and gas operators, installation contractors and subsea equipment manufacturers to provide installation management and engineering support services. Our engineering team has been involved in most of the innovative solutions used today in deepwater subsea systems. We specialize in offshore installation engineering and the writing of practical installation procedures. We deal with issues involving flying leads, compliant umbilical splices, bend stiffener latchers, umbilical hardware, hold-back clamps, and the development of distribution system components. We are heavily involved in the fabrication of installation aids to simplify offshore executions, and offer hydraulic, fiber optic, and electrical testing services and various contingency testing tools.

Installation Support and Management . Our installation management services are centered on the utilization of standardized hardware, proven, well-tested installation techniques, and an experienced, consistent team that has proven to be safe and skilled in all aspects of the installation process. We pride ourselves on supporting installation contractors through our installation management and engineering services, installation aids and equipment, and our offshore installation support services, including spooling operations, offshore testing, and flying lead installation support. Many installation contractors find it beneficial to utilize our services to help reduce on-board personnel since our specialized technicians can perform multiple tasks. We have designed and fabricated many different installation tools and equipment over the years. We have been involved in the design of the following equipment to help make installations run as smoothly as possible: steel flying leads, steel flying lead deployment systems, umbilical hardware and termination systems, umbilical bell mouths, lay chutes, rapid deployment cartridges, horizontal drive units, mud mats, flying lead installation and parking frames, umbilical termination assembly stab & hinge over systems, and numerous other pieces of offshore equipment. Our team has vast experience with the installation of flexible and rigid risers and flowlines, umbilicals, flexible and rigid jumpers, steel tube and thermoplastic hose flying leads, pipeline end terminations (“PLETs”) and manifolds. In addition, we provide an extensive array of installation aids, including steel flying lead installation systems, a 5-ton Caterpillar ® tensioner, a 10-foot radius lay chute with work platform, many varieties of buoyancy, clump weights, VIV strakes, mud mats, dual tank skids, gang boxes, work vans, pumping and testing skids, control booths, fluid drum carriers, crimping systems, load cells, 300 and 340-ton under-rollers, a 200-ton and 400-ton carousel, UTA running and parking deployment frames, termination shelters, pipe straightners, ROV hooks and shackles, intervention tooling, stackable SeaStax ® tanks, baskets, and boxes, and ballgrab rental rigging.

Spooling Services . Our experienced personnel are involved in the operation of spooling equipment on many projects, including operations for other companies to run their spooling equipment. We have developed a very efficient (in both time and cost) system for spooling, utilizing our horizontal drive units, under-rollers, tensioners, carousels and rapid deployment cartridges.

Pull-In Operations . We are involved in the pull-in operations for most of the major umbilical projects in the Gulf of Mexico. Our familiarity with offshore systems is important, and our pull-ins run smoothly because the same engineers who plan the pull-in operations are also involved in supervising the offshore operations. Our offshore servicemen comprise the topside umbilical support team and are familiar with the umbilical termination hardware. These same servicemen are often involved in terminating the umbilicals at the manufacturers’ yard several weeks prior to the installation. Everything is thoroughly tested prior to installation, including winches at the rental contractor’s yard and after set-up on the platform. Load cells are tested onshore, and the same load cells are used to test the system offshore. This eliminates variables and validates the condition of the pull-in system. We then perform pull-ins under more controlled conditions with increased confidence, resulting in safer operations.

Terminations . Deep Down and members of its team have been involved in umbilical terminations since 1988. Our team was involved with the designs for the armored thermo plastic umbilicals at Multiflex, the first steel tube umbilical in the Gulf of Mexico for the Shell Popeye ® umbilical, and the standardization of many steel tube umbilical terminations. We have also pioneered the concept of the compliant Moray ® section that enables a traditional helically wound umbilical to be used for direct well step outs, or long field flying leads. Our management believes we are the only company that can terminate umbilicals provided by any manufacturer with the same termination system.

Testing Services . Umbilical manufacturers, control suppliers, installation contractors, and oil and gas operators utilize our services to perform all aspects of testing, including initial Factory Acceptance Testing (“FAT”), Extended Factory Acceptance Testing (“EFAT”) and System Integration Testing (“SIT”), relating to the connecting of the umbilical termination assemblies, the performing of installations, and the completion of the commissioning of the system thereafter. To execute these services, we have assembled a variety of personnel and equipment to ensure that all testing operations are done in the safest and time-efficient manner, ensuring a reduced overall project cost. We also work hard to utilize the most detailed digital testing and monitoring equipment to ensure that the most accurate data is provided to our clients. We have been hired to perform coiled tubing flushing, cleaning, and hydro testing, umbilical filling, flushing, pressure, flow rate, and cleanliness testing, load out monitoring and testing, installation monitoring, post installation testing, system commissioning, umbilical intermediate testing, and umbilical termination assembly cleanliness, flow, and leak testing. We believe we have one of the best filling, flushing and testing teams in the business. Deep Down employs a variety of different pumping systems to meet industry needs and offers maximum flexibility. Our philosophy is to flush through the maximum number of lines at the highest flow rate possible to maximize efficiency. We have assembled a comprehensive list of offshore pumping units and an assortment of chemical pumping skids. Our equipment can be used to pump all of the standard offshore water-based chemicals as well as all offshore commissioning fluids such as Methanol and diesel. We have been involved in the design, procurement, testing, installation, and operation of the testing equipment. Deep Down’s engineers and service technicians can also assist in writing the testing procedures and sequences from simple FAT to very extensive multiple pressures and fluids testing up to full system SIT procedures.

System Integration Testing . We have led the offshore industry move into the digital age with our use of digital transducers to provide much greater levels of accuracy compared to information gathered from conventional chart recorders. We have a wide variety of digital pressure transducers, flow meters, and temperature gauges. We have two wire data systems (4 port and one 16 port) as well as 25 individual digital pressure and temperature recorders that are often employed for installation monitoring activities. In addition to these units, we also have three desks set up with data systems that are capable of tracking from 4 to 15 individual sensors simultaneously. These capabilities, in combination with subsea handling equipment, experienced personnel, and a fully-equipped facility, render Deep Down ideal for managing SIT operations.

Commissioning . We have been involved in most of the topside connections and commissioning (the removal of inert fluids used during the umbilicals’ transportation and installation) projects in the Gulf of Mexico since its formation in 1997. Our commissioning team is often identified early in the project and participates in all aspects of planning and risk assessment for the project. Due to the limited time associated with project commissioning, it is extremely important to perform detailed planning and engineering prior to arrival at the offshore production platform location to reduce any possible shut in or down time. Our engineers and technicians work closely with the project managers and production platform engineers to help ensure that all aspects of the installation or retrieval project, including potential risks and dangers, are identified, planned for, and eliminated prior to arrival on the production platform. Due to the different requirements for testing and commissioning of subsea systems, we have an assortment of pumps and equipment to deploy to ensure a safe and efficient commissioning program. We have experience handling all types of commissioning fluids, including asphaltine dispersants, diesel, methanol, xylene, corrosion inhibitors, water-based control fluids, oil-based control fluids, 100 percent glycol, paraffin inhibitors, and alcohol.

Storage Management . Our facility in Channelview covers more than 50,000 square feet of internal high quality warehousing capacity and 300,000 square feet of external storage and is strategically located in Houston's Ship Channel area. Our warehouse is designed to provide clients with flexible and cost effective warehousing and storage management alternatives. Our professional and experienced warehouse staff, combined with the very latest in information technology, results in a fully integrated warehousing package designed to deliver effective solutions to client needs. Among other capabilities, we are capable of providing long-term specialized contract warehousing; long and short-term storage; modern materials handling equipment; undercover loading areas; quality security systems; integrated inventory management; packing and repacking; computerized stock controls; and labeling.

Marine Technical Support Services

We serve the growing offshore petroleum and marine industries with technical support services and products vital to offshore petroleum production. Our offerings in this area are primarily through the provision of remotely operated vehicle (“ROV”) services which include the provision of skilled ROV operators/technicians and ROV equipment, as well as topside and subsea equipment, and support systems used in diving operations, maintenance and repair operations, and offshore construction.

ROV and ROV Tooling Services. We provide the latest ROV tooling technology as part of our ROV services. Our ROV tooling services are constantly growing, with the addition of tools as they are requested by our customers. As part of our ROV services, we have observation and light work class ROV units capable of operating in depths of 10,000 feet. Our services include platform inspection (Level I, II and III, jack-up and template), platform installation and abandonment, search and recovery, salvage, subsea intervention (hot stab operations, torque tool, well, pipeline commissioning, and stack landings), telecommunication cable inspections (existing and as built), anchor handling (mooring and anchor chain monitoring), ROV consulting and project management, ROV pilots and technicians, and underwater cinematography. We provide an extensive line of ROV intervention tooling, ROV clamps and ROV-friendly hooks and shackles that are state-of-the-art in design. Recently, we began providing maintenance and fleet management services to other ROV owners as an outsourced support function to their ROV fleet.

Offshore Construction Equipment Rental. We employ a permanent staff of highly qualified technicians and mechanics to maintain and refurbish our equipment in-between rentals. We carry a wide array of equipment to service the diving industry, including water blasting equipment, breathing air dive compressors, hot water units with feed pumps, man rider winches, hydraulic tools and hose reels, underwater video units, sonar units, magnetic gradiometers, dive radios, lift bags, volume tanks, decompression chambers, and hot water pressure washers.

Products. We provide installation support equipment and component parts and assemblies for subsea distribution systems. We believe the key to successful installations of hardware is to design the subsea system by considering installation issues first, working backwards to the design of the hardware itself. This is why we have been instrumental in the development of hardware and techniques to simplify deepwater installations. We design, manufacture, fabricate, inspect, assemble, test and market subsea equipment, surface equipment and offshore rig equipment that are used by major integrated, large independent and foreign national oil and gas companies in offshore areas throughout the world. Our products are used during oil and gas exploration, development and production operations on offshore drilling rigs, such as floating rigs and jack-ups, and for drilling and production of oil and gas wells on offshore platforms, tension leg platforms and moored vessels such as floating production storage and offloading vessels (“FPSO”). We have significant involvement in umbilical and steel flying lead installations in the Gulf of Mexico and throughout the world. A few of our major product lines are highlighted below.

Flying Leads . We have developed a method to pull individual steel tubes, hoses, or electrical cables to create a loose steel tube flying lead or short umbilical. We can manufacture steel flying leads up to 10,000 feet in length with any J-plate desired, with or without electrical cables included. We have built flying leads with up to 14 tubes. Additional electrical lines and fiber optic cables can be added to produce any combination required for the transportation of various fluids, chemicals or data. The flying leads are then fitted with our terminations and Morays ® that are attached to the multiple quick connection plate, and finished off with our elastomeric bend limiters. The non-helix wound design allows for our flying leads to be very installation friendly with minimal-bending stiffness. A Moray ® is the termination head on the flying lead and connects the tubing assembly to the junction plate. A compliant Moray ® consists of a 20-foot flexible flying lead with an electro-hydraulic Moray ® that is connected to a full-sized umbilical with the installation tension being applied through an armor pot and slings extending by the compliant section.

Umbilical Hardware . Our operational team has been involved in more umbilical installations than probably any other team in the industry. Our blend of experiences with drilling contractors, umbilical manufacturers, subsea engineers and installation contractors has been effective in positioning us to act on behalf of oil and gas operators to ensure key hardware installation is performed in the most efficient and safe manner. This breadth of experiences gives us a unique perspective when fabricating and designing terminations for umbilical manufacturers. Our designs are often much lighter in weight and smaller than the typical hardware that has been created and used in the past by our competitors. Our engineering team has designed and fabricated bending restrictors, armor pots, split barrels, tubing fittings and unions, hinging umbilical splices and topsides terminations with our unique threaded welded fittings, the compliant umbilical splice, and the bend stiffener latcher. Our umbilical hardware has enabled our clients to use installation friendly techniques for deploying hardware on the ocean floor.

Bend Limiters . We offer both polymer and steel bend limiters. Steel bend limiters are typically utilized for steel tube umbilicals and have been designed with a simple and reliable hinged attachment system which significantly decreases installation time. Polymer bend limiters are typically provided for small diameter umbilicals or flying leads, as well as for their compliant umbilical section, which turn a traditional umbilical into a ROV-friendly, installable flying lead. Due to our ability to design and manufacture bend limiters in-house, delivery time is greatly reduced.

Compliant Splice . We have created a unique method of converting spare umbilicals into actual production umbilicals by splicing spare umbilicals together to produce any length required. This methodology is achieved through our Compliant Splice, which is a patent-pending termination system that eliminates the burdens of dealing with umbilical splices during installation. This design is capable of housing both electrical and fiber optic Fiber Termination Assemblies while still allowing for the splice to be spooled up onto a reel or carousel. This allows oil and gas operators to save significant costs through utilization of existing capital investments in spare umbilicals, which reduces field development costs and delivery time. An optional mud mat is used to assist in carrying the splice over the chute and functions to keep the splice out of the mud for easy inspection.

SeaStax ® . SeaStax ® embodies our concept for offshore storage and space management to help optimize available deck space on offshore installation vessels, drilling rigs and production platforms. The key philosophy behind SeaStax ® is to take common offshore items and store them in a standard-sized container to allow for the storage system to be stackable and interchangeable in subsurface conditions. The current system utilizes newly-designed 550 gallon tote tanks, baskets, and tool boxes that are all inter-changeable and stackable. Using common dimensions and designs allows a variety of different items to all be commonly stored and stacked, to minimize required storage area. The stacking philosophy can be applied to other custom applications if required. In order to maximize accessibility and to reduce maintenance, a variety of options are available such as galvanizing, ladders, and drip pans.

Installation Aids . To help our clients and to meet our own internal needs, we have developed an extensive array of installation aids, including steel flying lead installation systems, a 5-ton Caterpillar ® tensioner, a 10-foot radius lay chute with work platform, many varieties of buoyancy, clump weights, VIV strakes, mud mats, dual tank skids, gang boxes, work vans, pumping and testing skids, control booths, fluid drum carriers, crimping systems, load cells, 300 and 340-ton under-rollers, a 200-ton carousel, UTA running and parking deployment frames, termination shelters, pipe straightners, ROV hooks and shackles, stackable SeaStax ® tanks, baskets, and boxes, and ballgrab rental rigging.

Buoyancy Products

We engineer, design and manufacture deepwater buoyancy systems using high-strength Flotec TM syntactic foam and polyurethane elastomers. Our product offerings include distributed buoyancy for flexible pipes and umbilicals, drilling riser buoyancy modules, CoreTec TM drilling riser buoyancy modules, ROVits TM buoyancy, Hydro-Float TM mooring buoys, Stablemoor TM low-drag ADCP deployment solution, Quick-Loc™ cable floats, Hardball TM umbilical floats, Flotec™ cable and pipeline protection, Inflex TM polymer bend restrictors, and installation buoyancy of any size and depth rating.

The majority of our buoyancy product offerings are made with Flotec TM syntactic foam, a product composed of hollow glass microballoons, combined with an epoxy resin system. These microballoons (also known as “microspheres”) are very small, 20-120 microns in diameter, and provide buoyancy. The epoxy system provides the strength to the system. The result is a light weight composite with low thermal conductivity and resistance to compressive stress that far exceeds other types of foams. The foam comes in different densities and strengths which are required for greater depth applications. In some applications, the liquid syntactic foam resulting from the combination of ingredients is poured into high-density polyethylene shells that form the flotation device and encase and protect the syntactic foam from damage. Some of our products are produced with proprietary, high-strength macrospheres.

Our facility in Biddeford, Maine, has been ISO 9001:2000 certified since 2003. This certification enables us to provide our buoyancy products to oil and gas companies, giving us a competitive edge over suppliers who are not certified. In 2009 we added an in-house rotational molding facility, having designed and built one of the largest rotational molding machines in the world. This additional capability allows us to control yet another aspect of the manufacturing process, ensuring better quality and lead time. While the majority of our buoyancy products revenue comes from buoyancy products for the petroleum production sector, we also serve the oceanographic, industrial and military markets.

Marine Products

We offer products and services in the fields of electronic monitoring and control systems for the energy, military, and commercial business sectors. We design, manufacture, install, and commission integrated Programmable Logic Controller (“PLC”) and Supervisory Control and Data Acquisition (“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. We can take projects from conceptual/system design through installation, commissioning, and support. Our understanding of system requirements and our ability to quickly understand our customer’s needs allows us to produce quality products and services on time and on budget.

We have supplied equipment on drilling production rigs operating throughout the world, including Abu Dhabi, Angola, Australia, Azerbaijan, Brazil, Congo, Dubai, Egypt, Equatorial Guinea, India, Indonesia, Kuwait, Mexico, Nigeria, Norway, Russia, the United Kingdom, United States, Vietnam, and other areas. We are also a supplier of integrated marine systems for ships with design, manufacture, and delivery of machinery plant control and monitoring systems and/or alarm monitoring systems for 3 Molinari Class Staten Island ferries, a United States Coast Guard ice breaker, one of the world’s largest hopper dredges, and other vessels.

Manufacturing

Our manufacturing facilities in Channelview, Texas, a suburb of Houston, house a broad variety of processes, including machining, fabrication, inspection, assembly and testing. We are devoted to the design, manufacturing, testing, and commissioning of heavy equipment used in both on- and offshore operations in a variety of markets and industries.

Our manufacturing plant is ISO 9001 and American Petroleum Institute certified. We maintain our high standards of product quality through the use of quality assurance specialists who work with product manufacturing personnel throughout the manufacturing process and inspect and document equipment as it is processed through our manufacturing facility. We have the capability to manufacture various products from each of our product lines at our major manufacturing facility and believe that this localized manufacturing capability is essential in order to compete with our major competitors. We maintain valuable relationships with several other companies that own additional fabrication facilities in and around Houston, Texas. These other companies provide excellent subcontract manufacturing support on an as-needed basis. Our manufacturing process includes heat treatment, machining, fabrication, inspection, assembly and testing.

Our buoyancy manufacturing facility is located in Biddeford, Maine. We have designed, developed, and assembled our own enhanced foam production capabilities. This allows us to produce the large volume of foam required to make the 7-14 foot-long drilling pipe flotation risers that appear to be in high demand for offshore drilling in very deep waters. These drill pipe risers will operate effectively in water depths of up to 4,000 meters (13,000 feet). Our foam is capable of operating in water depths of up to 7,000 meters (23,000 feet). Our drilling riser buoyancy design is unique in the industry, and our CoreTec™ Drilling Riser Buoyancy Module has been patented.

Customers

Demand for our deep water services, surface equipment and offshore rig equipment is substantially dependent on the condition of the oil and gas industry to invest in substantial capital expenditures as well as continual maintenance and improvements on its offshore exploration, drilling and production operations. The level of these expenditures is generally dependent upon various factors such as expected prices of oil and gas, exploration and production costs of oil and gas, the level of offshore drilling and production activity. The prevailing view of future oil and gas prices are influenced by numerous factors affecting the supply and demand for oil and gas. These factors include worldwide economic activity, interest rates, cost of capital, environmental regulation, tax policies, and production levels and prices set and maintained by producing nations and OPEC. Capital expenditures are also dependent on the cost of exploring for and producing oil and gas, the sale and expiration dates of domestic and international offshore leases, the discovery rate of new oil and gas reserves in offshore areas and technological advances. Oil and gas prices and the level of offshore drilling and production activity have historically been characterized by significant volatility.

Our principal customers are major integrated oil and gas companies, large independent oil and gas companies, foreign national oil and gas companies, subsea equipment manufacturers and subsea equipment installation contractors involved in offshore exploration, development and production. Offshore drilling contractors, engineering and construction companies, the military and other companies involved in maritime operations represent a smaller customer base.

We are not dependent on any one customer or group of customers. The number and variety of our products required in a given period by a customer depends upon their capital expenditure budget as well as the results of competitive bids. Consequently, a customer may account for a material portion of revenues in one period and may represent an immaterial portion of revenues in a subsequent period. While we are not dependent on any one customer or group of customers, the loss of one or more of our significant customers could, at least on a short-term basis, have an adverse effect on the results of our operations.

Marketing and Sales

We market our products and services throughout the world directly through our sales personnel in our Houston, Texas, Biddeford, Maine and Morgan City, Louisiana offices. We periodically advertise in trade and technical publications of our customer base. We also participate in industry conferences and trade shows to enhance industry awareness of our products and services. Our customers generally order products and services after consultation with us on their project. Orders are typically completed within two weeks to three months depending on the type of product or service. Larger and more complex products may require four to six months to complete, though we have accepted several longer-term projects, including one that has exceeded a year completion. Our customers select our products and services based on the quality, reliability and reputation of the product or service, price, timely delivery and advance technology. For large drilling and production system orders, we engage our project management team to coordinate customer needs with engineering, manufacturing and service organizations, as well as with subcontractors and vendors. Our profitability on projects is dependent on performing accurate and cost-effective bids as well as performing efficiently in accordance with bid specifications. Various factors can adversely affect our performance on individual projects that could potentially adversely affect the profitability of a project.

Product Development and Engineering

The technological demands of the oil and gas industry continue to increase as offshore exploration and drilling operations expand into deeper and more hostile environments. Conditions encountered in these environments include well pressures of up to 15,000 psi, mixed flows of oil and gas under high pressure that may also be highly corrosive, and water depths in excess of 5,000 feet. We are continually engaged in product development activities to generate new products and to improve existing products and services to meet our customers’ specific needs. We also focus our activities on reducing the overall cost to the customer, which includes not only the initial capital cost but also operating costs associated with its products.

We have an established track record of introducing new products and product enhancements. Our product development work is conducted at our facilities in Channelview, Texas, Biddeford, Maine and in the field. Our application engineering staff also provides engineering services to customers in connection with the design and sales of our products. Our ability to develop new products and maintain technological advantages is important to our future success.

We believe that the success of our business depends more on the technical competence, creativity and marketing abilities of our employees than on any individual patent, trademark or copyright. Nevertheless, as part of our ongoing product development and manufacturing activities, our policy is to seek patents when appropriate on inventions concerning new products and product improvements. All patent rights for products developed by employees are assigned to us.

Competition

The principal competitive factors in the petroleum drilling, development and production and maritime equipment markets are quality, reliability and reputation of the product, price, technology, and timely delivery. We face significant competition from other manufacturers of exploration, production, buoyancy and maritime equipment. Several of our primary competitors are diversified multinational companies with substantially larger operating staffs and greater capital resources and have a longer history in the manufacturing of these types of equipment. We compete principally with Dynacon, FMC, Kvaerner, Norson, Ocean Works, Oceaneering, VFL, and Halliburton Product Pipeline Services on our umbilical services; Dynacon, Ocean Works and Odem on our Launch and Recovery Systems; and Entech, Technip, Manatec and Pegasus on our installation management services.

Our principal competitors in the polyurethane area are Trelleborg AB, Balmoral Group, Dunlaw Engineering Ltd., ABCO Industries Limited, and Whitefield Plastics Corporation. Our principal competitor in the syntactic foam market is Trelleborg Offshore, Inc. Other competitors include Cumming Corp., located in Massachusetts; Matrix Composites & Engineering Ltd., located in Australia; Balmoral Group, located in Scotland; Syntech Materials, Inc., located in Virginia; and Marine Subsea Group, located in Norway.

Employees

We had 159 employees as of March 31, 2010, of which approximately 156 are full time employees. Our employees are not covered by collective bargaining agreements and we consider our employee relations to be good. Our operations depend in part on our ability to attract a skilled labor force. While we believe that our wage rates are competitive and that our relationship with our skilled labor force is good, a significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we pay or both.

Governmental Regulations

A significant portion of our business activities are subject to federal, state, local and foreign laws and regulations and similar agencies of foreign governments. The technical requirements of these laws and regulations are becoming increasingly expensive, complex and stringent. These regulations are administered by various federal, state and local health and safety and environmental agencies and authorities, including the Occupational Safety and Health Administration of the U.S. Department of Labor and the U.S. Environmental Protection Agency. From time to time, we are also subject to a wide range of reporting requirements, certifications and compliance as prescribed by various federal and state governmental agencies. Expenditures relating to such regulations are made in the normal course of our business and are neither material nor place us at any competitive disadvantage. We do not currently expect that compliance with such laws will require us to make material expenditures.

We are also affected by tax policies, price controls and other laws and regulations generally relating to the oil and gas industry, including those specifically directed to offshore operations. Adoption of laws and regulations that curtail exploration and development drilling for oil and gas could adversely affect our operations by limiting demand for our services or products.

Increased concerns about the environment have resulted in offshore drilling in certain areas being opposed by environmental groups, and certain areas have been restricted. To the extent that new or additional environmental protection laws that prohibit or restrict offshore drilling are enacted and result in increased costs to the oil and gas industry in general, our business could be materially affected. In addition, these laws may provide for "strict liability" for damages to natural resources or threats to public health and safety, rendering a party liable for the environmental damage without regard to negligence or fault on the part of such party. Sanctions for noncompliance may include revocation of permits, corrective action orders, administrative or civil penalties and criminal prosecution. Certain environmental laws provide for joint and several strict liabilities for remediation of spills and releases of hazardous substances. In addition, companies may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances, as well as damage to natural resources. Such laws and regulations may also expose us to liability for the conduct of or conditions caused by others, or for our acts that were in compliance with all applicable laws at the time such acts were performed. Compliance with environmental laws and regulations may require us to obtain permits or other authorizations for certain activities and to comply with various standards or procedural requirements.

We cannot determine to what extent our future operations and earnings may be affected by new legislation, new regulations or changes in existing regulations. We believe that our facilities are in substantial compliance with current regulatory standards. Based on our experience to date, we do not currently anticipate any material adverse effect on our business or consolidated financial position as a result of future compliance with existing environmental laws and regulations controlling the discharge of materials into the environment. However, future events, such as changes in existing laws and regulations or their interpretation, more vigorous enforcement policies of regulatory agencies, or stricter or different interpretations of existing laws and regulations, may require additional expenditures which may be material.

Patents, Trademarks and Copyrights

We currently hold three patents covering riser tensioner sensor assembly, method and apparatus for manufacture of a non-helical subsea umbilical and method and apparatus for installing an undersea umbilical. An additional five patents have been applied for and are in process. Trademarked names of the Company include DEEP DOWN INC TM , FLOTATION TECHNOLOGIES TM , MAKO TECHNOLOGIES TM , DRILSYS TM , ELECTROWAVE TM , MUDSYS TM , AQUASOX TM , MORAY TM and SEASTAX TM , QUICK-LOC ® , FLOTEC ® , and PROTEUS ™.

We also obtained all the rights to the following inventions, including all provisional applications in connection with the acquisition of Flotation:

Drilling Riser Buoyancy Produced with Plastic Shell (inventors Timothy H. Cook, Fred Maguire and David Capotosto);

Drilling Riser Auxiliary Claim with Integral Mux Clamp (inventors Timothy H. Cook, Fred Maguire and David Capotosto);

Clam for Holding Distributed Buoyancy Modules (inventors David Capotosto and William Stewart); and

Hinged Distributed Buoyancy Module (inventors Timothy H. Cook and David Capotosto).

Item 1B.

UNRESOLVED STAFF COMMENTS

None.

Item 2.

DESCRIPTION OF PROPERTY

Our principal corporate offices were relocated to 8827 W. Sam Houston Parkway N., Suite 100, Houston, TX 77040 on February 21, 2009. The 89-month lease term began on that date and includes an allowance for leasehold improvements by the landlord, plus a charge for monthly common area expenses (“CAM charges”) on a pro-rata basis of the total building expenses (including insurance, security, maintenance, property taxes and utilities) beginning on the sixth month of the lease term. Monthly lease costs range from $12,177 to $14,391 plus CAM charges, due to a rent escalation clause over the term of the lease.

Our operating facilities for Deep Down Delaware continue to be located at 15473 East Freeway, Channelview, Texas 77530. We purchased the Channelview property from the lessor in May 2009, which consists of approximately 8 acres of land that houses 60,000 square feet of manufacturing space and 7,000 square feet of office space. See Item 13 “ Certain Relationships and Related Transactions, and Director Independence” included in this Report for information regarding the related nature of the former lessor.

Mako leases its property and buildings from Sutton Industries at a base rate of $7,300 per month. Mako is located at 125 Mako Lane, Morgan City, LA 70380. The 5-year lease term commenced on June 1, 2006, and includes an additional 5-year renewal option at the end of the initial term.

In connection with the purchase of Flotation in May 2008, we acquired the operating facilities and administrative offices located at 20 Morin Street, Biddeford, Maine 04005 for a fair market value of $3.3 million. The facility consists of 3.61 acres of land, including a 46,925 square-foot light industrial manufacturing facility and administrative offices. Additionally, in October 2008, Flotation entered into a 60-month lease for 18,000 square feet of warehouse space, which was increased to 21,900 square feet in April 2009, within a 107,000 square foot warehouse located at 26 Morin Street, Biddeford, Maine and purchased a three-quarter acre parcel, which are both adjacent to Flotation’s operating facility.

We believe that our current space is suitable, adequate and of sufficient capacity to support our current operations.

Item3.

LEGAL PROCEEDINGS

Periodically, we may be involved in legal proceedings arising in the normal course of business. As of the date of this Report, we are currently not involved in any pending, material legal proceedings.

Item4.

RESERVED

This item is not applicable.

PART II

Item 5.

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Common Stock

Our common stock trades publicly on the OTC Bulletin Board under the symbol “DPDW.” The OTCBB is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities. The OTCBB securities are traded by a community of market makers that enter quotes and trade reports. This market is extremely limited and any prices quoted may not be a reliable indication of the value of our common stock.

Prior to the reverse merger with MediQuip on December 14, 2006, no public market in our common stock existed. Beginning December 14, 2006, our common stock was quoted on the OTC Bulletin Board. These quotes represent inter-dealer quotations, without adjustment for retail mark-up, markdown or commission and may not represent actual transactions. The following table sets, for the periods indicated, the high and low sales prices for our common stock as reported by the OTC Bulletin Board.

	High		Low
Fiscal Year 2009:
December 31, 2009	$	0.28	$	0.11
September 30, 2009	$	0.16	$	0.10
June 30, 2009	$	0.17	$	0.10
March 31, 2009	$	0.19	$	0.08
Fiscal Year 2008:
December 31, 2008	$	0.62	$	0.11
September 30, 2008	$	0.95	$	0.44
June 30, 2008	$	1.27	$	0.68
March 31, 2008	$	1.24	$	0.35

Holders

As of March 31, 2010, there were approximately 1,060 holders of record of our common stock and we believe there were 1,060 beneficial owners of our common stock, including shares held in street name.

Dividend Policy

To date, we have not paid any cash dividends and our present policy is to retain earnings for working capital use. Under the terms of our credit agreement with Whitney Bank, we are restricted from paying cash dividends on our common stock, unless no default under the credit agreement exists at the time of or would arise after giving effect to any such distribution. We intend to retain operating capital for the growth of the company operations.

Equity Compensation Plan Information

The following table sets forth the outstanding equity instruments as of December 31, 2009:

	Number of securities to be issued upon exercise of outstanding options,	Weighted-average exercise price of outstanding options,	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected
Plan Category	warrants and rights	warrants and rights	in first column)
Equity compensation plans approved by securityholders	20,025,000 (1)	$0.35	2,743,000 (1)
Equity compensation plans not approved by securityholders	638,812 (2)	$0.78	N/A
TOTAL	20,663,812	$0.36	2,743,000

(1) Represents 20,025,000 shares of common stock that may be issued pursuant to options granted as of December 31, 2009 and approximately 2,743,000 additional shares of common stock available for future grant under the 2003 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan (the “Plan”). Shares available for grant is net of 4,300,000 restricted shares that were granted under the Plan to executives and employees in 2008 and 2009 (see additional discussion of terms and vesting under Executive Compensation). These restricted shares are included in the shares outstanding as of December 31, 2009. Under the Plan, the total number of shares subject to grants and awards is 15 percent of issued and outstanding shares of common stock. Effective in March 2010, we cancelled 2,000,000 outstanding options held by two executives which were scheduled to vest on February 14, 2011, and did not reissue any replacement options, thus increasing the number of securities available for future issuance. We recorded the remaining unamortized stock-based compensation in March 2010 when the shares were cancelled.

(2) Represents 438,812 shares of common stock underlying warrants, granted in 2007 as part of our prior borrowing facility, plus an additional 200,000 warrants issued in 2008 in connection with the purchase of Flotation. See Note 8 to our consolidated financial statements included in this Report with regard to material terms of such warrants.

Recent Sales of Unregistered Securities

None.

Item 6.

SELECTED FINANCIAL DATA

This item is not applicable for smaller reporting companies.

Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, our actual results may differ materially from those anticipated in our forward-looking statements.

In this Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all dollar and share amounts are in thousands of dollars and shares, unless otherwise indicated.

General

We are an oilfield services company specializing in complex deepwater and ultra-deepwater oil production distribution system support services, serving the worldwide offshore exploration and production industry. Our services and technological solutions include distribution system installation support and engineering services, umbilical terminations, loose-tube steel flying leads, flotation and drill riser buoyancy, ROVs and toolings. We support subsea engineering, installation, commissioning, and maintenance projects through specialized, highly experienced service teams and engineered technological solutions. Our primary focus is on more complex deepwater and ultra-deepwater oil production distribution system support services and technologies, used between the platform and the wellhead.

Executive Overview

Operations for the past year have been negatively impacted by the worldwide recession, lower oil prices and customer-based delays in many of our major projects, including on a large floatation order. As a result of the current downturn in the industry, our operations in 2009 were significantly lower than expected, though we have been proactive in addressing these challenges and are seeing improved results of operations in the third and fourth quarters of 2009 and moving into fiscal 2010.

Revenues and gross profits improved in the third and fourth quarters of 2009 over the first half of the year, and we expect operations to continue to improve in fiscal 2010. We have commenced the production cycle of a large floatation order, had a majority of our ROVs working at the end of the fourth quarter and our offshore jobs are increasing. As of December 31, 2009, our backlog was approximately $16,500.

As part of our ongoing analysis of all aspects of our business to provide growth and sustained revenue and generate profit in this difficult economic climate, we have made several changes in 2009 to enhance our future profitability. The cost containment program, which was commenced in the second quarter of 2009, is continuing and beginning to have a positive effect on general and administrative expenses. Our ElectroWave subsidiary has been experiencing pricing and gross profit pressure over the past couple years related to their computerized marine technology, which intensified in 2009 due to the overall decline in the economy. We made a business decision in August 2009 to discontinue production of some products which had declining gross profits, and we integrated the remaining ElectroWave operations into Deep Down Delaware during the third quarter of 2009. This change will generate cost savings from common management and administrative staff.

Segments

For the fiscal years ended December 31, 2009 and 2008, the operations of Deep Down’s operating segments, Deep Down Delaware, ElectroWave, Mako and Flotation, have been aggregated into a single reporting segment. Additionally, during the year ended December 31, 2009, we have aggregated ElectroWave’s operations into Deep Down Delaware as a single operating segment due to similar production processes and cost savings related to office and administrative support. While the operating segments have different product lines; they are very similar. They are all service-based operations revolving around our personnel’s expertise in the deep water industry, and any equipment is produced to a customer specified design and engineered using Deep Down personnel’s expertise, with installation and project management as part of our service revenue to the customer. Additionally, the segments have similar customers and distribution methods, and their economic characteristics are similar with regard to their gross margin percentages. Our operations are located in the United States though we occasionally make sales to international customers.

Results of Operations

Revenues

		2009				2008				Change				%
Revenues		$	29,449			$	35,770			$	6,321				-17.7%

Revenues decreased by approximately $6,321, or 17.7 percent to approximately $29,449 for the year ended December 31, 2009 from approximately $35,770 for the previous year. However, revenues improved in the third and fourth quarters of 2009 to approximately $8,426 and $7,720, respectively, over approximately $6,201 in the second quarter. The annual reduction in revenue over the same prior year period was primarily a result of customers delaying ongoing projects or slowing down many of their offshore and deepwater projects. Specifically, our ROV technician charges and tooling were reduced compared to the prior year due to the economic conditions affecting our customers, which accounted for approximately $3,100 of the current year decrease. Though we had more ROV jobs during the year, the revenue per job tended to be less than the previous year. Additionally, due to pricing pressures related to marine technology as discussed above, we made a business decision in August 2009 to discontinue production of some products which had declining gross profits, and we integrated the remaining ElectroWave operations into Deep Down Delaware during the third quarter of 2009. Also during 2009, a large buoyancy job that was originally scheduled to be completed late in 2009 was delayed to fiscal 2010 due to customer delays. This job is progressing in the first quarter of 2010 and is approximately 46 percent complete at the end of March 2010.

Cost of sales

	2009		2008		Change			%
Cost of sales	$	19,888	$	21,686	$	(1,798	)		-8.3%
Gross Profit	$	9,561	$	14,084	$	(4,523	)		-32.1%
Gross Profit %		33%		39%		72%

Gross profit was approximately $9,561 for the year ended December 31, 2009 compared to approximately $14,084 for the previous year, reflecting an overall reduction in gross profit margin from 39 percent to 33 percent. The decrease in cost of sales over the prior year was partially driven by the decrease in total revenue as discussed above, offset by increases as discussed in more detail below. Our gross profit has begun to improve in the fourth quarter of 2009 compared to the third quarter, due to our efforts at close review of gross profit by job and specific costs, increased ROV tooling and technician billings, and the discontinuation of low-gross profit products as discussed in Revenue above.

For the year ended December 31, 2009, the cost of sales increase that was not related to revenue, and the resulting gross profit margin decrease, was impacted by several factors. Our ROV revenues decreased due to customer delays, while we have fixed costs of sales expenses related to ROV technician retainers and maintenance that continue even when the ROVs do not generate revenue. During the year ended December 31, 2008, we completed a high gross profit buoyancy job which was not repeated during 2009, which had increased the prior year margins. The gross profit on our other service and product offerings improved slightly from the prior year to partially offset these decreases.

We record depreciation expense related to revenue-generating fixed assets as cost of sales, which totaled approximately $1,616 and $1,078 for the years ended December 31, 2009 and 2008, respectively. The increase in 2009 resulted from the addition of assets from the Flotation acquisition in May 2008, and the purchase of ROVs and other capital expenditures to increase capacity in 2009.

Selling, general and administrative expenses

		2009				2008				Change				%
Selling, general & administrative		$	14,371			$	14,295			$	76				0.5%

Selling, general and administrative expenses (“SG&A”) included rent, utilities, general office expenses, insurance, personnel and other costs necessary to conduct business operations. SG&A for the year ended December 31, 2009 was approximately $14,371 compared to approximately $14,295 for the same period last year for an increase of approximately $76. Management began a company-wide cost reduction program during the second quarter of 2009 which will continue through 2010, which accounted for a reduction of approximately $367 in 2009. During fiscal 2009, bad debt expense was reduced by approximately $1,315 due to some customer bankruptcy-related writeoffs in the prior year, which was offset by personnel and related cost increases of approximately $1,921 due to the expansion of our businesses, thereby requiring more personnel, including the addition of Flotation for the full year in 2009 compared to eight months in the prior year. In fiscal 2009, we paid approximately $415 less than the prior year in professional, accounting and legal fees, which in 2008 partially related to the updating of a registration statement. In 2009, stock-based compensation increased by approximately $252 over the same prior year period, due to stock options that were issued during 2009 and due to the accelerated vesting of restricted stock in 2009.

Depreciation and amortization expense (excluded from Cost of sales)

	2009		2008		Change		%
Depreciation	$	343	$	236	$	107		45.3%
Amortization		6,195		1,049		5,146		490.6%
Depreciation and amortization	$	6,538	$	1,285	$	5,253		408.8%

Depreciation and amortization expense consists primarily of depreciation of our fixed assets that are not related to revenue generation, plus amortization of intangible assets, including our customer lists, technology and trademarks. Depreciation and amortization expense, excluded from “Cost of sales” in the accompanying statements of operations, was approximately $6,538 and $1,285 for the years ended December 31, 2009 and 2008, respectively. The increase in depreciation expense detailed in the table above, resulted from the addition of assets from the Flotation acquisition in May 2008, and the purchases of furniture and fixtures and office equipment during 2009.

In addition, amortization of intangible assets for the year ended December 31, 2009 was approximately $1,309 compared to approximately $1,049 for the year ended 2008 due to amortizing the Flotation intangible assets for a full year in 2009 compared to eight months for fiscal 2008. Also included in amortization for 2009 was an impairment charge to certain long-lived intangible assets totaling $4,616, due partially to a change in the estimated useful life of some technology intangible assets from twenty-five years to ten years, which impacted the undiscounted cash flows from that asset over a shorter time-frame, thereby reducing the fair value of the asset. See further discussion regarding the specific assumptions and test results in Note 5 to the consolidated financial statements included in this Report.

Goodwill impairment

As of December 31, 2009, we recognized an impairment to goodwill in the amount of $5,537 related to the Deep Down Delaware and Mako reporting units. See further discussion of the related analysis in Note 5 to the consolidated financial statements included in this Report.

Net interest expense and loss on extinguishment of debt

Net interest expense for the year ended December 31, 2009 was approximately $356 compared to approximately $3,401 for the same prior year period. Net interest expense for the year ended December 31, 2009 was generated by our outstanding bank debt, capital leases and subordinated debenture. For the year ended December 31, 2008, net interest expense was generated mainly by borrowings under a secured credit agreement. On June 12, 2008, we paid the balance due under that credit agreement, thus there were no related expenses since that date. For the year ended December 31, 2008, cash interest approximated $932. During 2008, we incurred non-cash deferred financing and debt discount amortization approximating $2,466, plus paid early termination fees of approximately $446 recognized as a loss on early extinguishment of debt. We completed the accretion of preferred stock issued in 2006 and recognized approximately $114 as interest expense.

Adjusted EBITDA

Our management evaluates our performance based on a non-GAAP measure, Adjusted EBITDA, which consists of earnings (net income or loss) available to common shareholders before cumulative effect of accounting change, net interest expense, income taxes, non-cash stock compensation expense, non-cash impairments, depreciation and amortization and other non-cash items. This measure may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in accordance with U.S. GAAP. The measure should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing or financing activities, or other cash flow data prepared in accordance with U.S. GAAP. The amounts included in the Adjusted EBITDA calculation, however, are derived from amounts included in the historical Consolidated Statements of Operations data.

We believe Adjusted EBITDA is useful to an investor in evaluating our operating performance because it is widely used by investors in our industry to measure a company’s operating performance without regard to items such as income taxes, net interest expense, depreciation and amortization, and non-cash stock compensation expense which can vary substantially from company to company depending upon accounting methods and book value of assets, financing methods, capital structure and the method by which assets were acquired; it helps investors more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest) and asset base (primarily depreciation and amortization) and actions that do not affect liquidity (stock compensation expense and goodwill impairment) from our operating results; and it helps investors identify items that are within our operational control. Depreciation and amortization charges, while a component of operating income, are fixed at the time of the asset purchase or acquisition in accordance with the depreciable lives of the related asset and as such are not a directly controllable period operating charge.

The following is a reconciliation of net loss to Adjusted EBITDA for the years ended December 31, 2009 and 2008 (in thousands, except percentages):

	2009			2008			Change			%
Net loss	$	16,142		$	(4,323	)	$	11,819			273.4%
Add back interest expense, net of interest income		356			3,401			(3,045	)		-89.5%
Add back depreciation and amortization		8,154			2,363			5,791			245.1%
Deduct income tax benefit		(1,026	)		(1,042	)		16			-1.5%
Add back stock based compensation - non-cash		836			584			252			43.2%
Add back goodwill impairment - non-cash		5,537			-			5,537			100.0%
Adjusted EBITDA	$	(2,285	)	$	983		$	(3,268	)		(332.5%	)

Adjusted EBITDA decreased by approximately $3,268 to $(2,285) for the year ended December 31, 2009 from approximately $983 positive EBITDA for the previous year. This decrease was impacted by the reduced revenues in 2009, particularly in the first two quarters, and has been improving since the end of June 2009. Amortization expense, which is added back to net loss for Adjusted EBITDA, was higher in 2009 due to the impairment to two intangible assets, as discussed above, and the goodwill impairment was the result of our impairment test as of December 31, 2009.

Capital Resources and Liquidity

Overview

As a deep water service provider, our revenue, profitability, cash flows, and future rate of growth are substantially dependent on the condition of the oil and gas industry generally and our customers ability to invest capital for offshore exploration, drilling and productions and maintain or increase levels of expenditures for maintenance of offshore drilling and production facilities. Oil and gas prices and the level of offshore drilling and production activity have historically been characterized by significant volatility. We enter into large, fixed-price contracts which may require significant lead time and investment. A decline in offshore drilling and production activity could result in lower contract volume or delays in significant contracts which could negatively impact our earnings and cash flows. Our earnings and cash flows could also be negatively affected by delays in payments by significant customers or delays in completion of our contracts for any reason. We are dependent on our cash flows from operations to fund our working capital requirements and the uncertainties noted above create risk that we may not achieve our planned earnings or cash flows from operations, which could result in violation of certain of our loan covenants and require us to raise additional debt or equity capital. There can be no assurance that we could raise additional capital.

Our Credit Agreement imposes covenant restrictions on us that increase our vulnerability in the current adverse economic and industry climate, and limits our ability to obtain additional financing. We have recently obtained amendments to our credit facility, as discussed below and in Note 6, Long-Term Debt , to waive our covenant noncompliance as of December 31, 2009 and to provide us more latitude in our covenants through the term of the agreement. Our ability to meet these covenants is primarily dependent on the adequacy of earnings before interest, taxes, depreciation and amortization. Our inability to satisfy the covenants contained in our Credit Agreement would constitute an event of default. An uncured default could result in our outstanding debt becoming immediately due and payable. If this were to occur, we may not be able to obtain waivers or secure alternative financing to satisfy our obligations, either of which would have a material adverse impact on our business.

Although we believe that we will have adequate liquidity to meet our future operating requirements and to remain compliant with the covenants under our Credit Agreement, the factors described above create uncertainty.

As discussed in Note 6, Long-Term Debt, in the notes to our consolidated financial statements, we have entered into an Amended and Restated Credit Agreement, dated as of April 14, 2010, to address covenant violations we have had under our Credit Agreement with Whitney National Bank (“Whitney”) that we originally entered into on November 11, 2008. Under the new Amended and Restated Credit Agreement (the “New Agreement”), we no longer have any further capacity to draw upon a revolving line of credit and the maturity of all outstanding debt under the New Agreement is scheduled to mature on April 15, 2011. Under the terms of the New Agreement, our noncompliance with the prior terms of the financial covenants and certain other covenants under the Credit Agreement have been waived (the effect of such noncompliance would have entitled the holders of all debt under the Credit Agreement and under a loan agreement between Flotation and TD Bank, N.A. (“TD Bank”) to call such debt immediately due and payable and would have required us to classify all debt outstanding under these facilities as current in our audited consolidated balance sheet at December 31, 2009). We continue to remain current on payments of our principal, interest and fee obligations with Whitney and TD Bank. However, under the terms of the New Agreement, all of the indebtedness outstanding under such agreement, which is a currently approximately an aggregate principal amount of $3,592, will all be due on April 15, 2011, unless we are able to refinance all or a portion of such indebtedness.

The effect of our entry into the New Agreement means that we no longer have access to a line of credit for capital resources and we must rely solely on our cash position and cash flows to fund our operating requirements. The New Agreement provides for a letter of credit facility of $1,150.

Whitney Credit Agreement

We originally entered into our Credit Agreement with Whitney in November 2008. The Credit Agreement originally provided a commitment to lend to us the lesser of $2,000 or 80 percent of eligible receivables (generally defined as current due accounts receivables in which the lender has a first priority security interest). All of this commitment was also available for Whitney to issue letters of credit (“L/C”) for our benefit. In December 2008, we then entered into an amendment of the Credit Agreement that provided for us to receive a term loan in the principal amount of $1,150. Then, in May 2009, we entered into another amendment to the Credit Agreement providing for us to receive another term loan in the principal amount of $2,100. We used the proceeds from the December 2008 term loan to purchase a piece of equipment (a remotely operated vehicle) and we used the proceeds of the May 2009 term loan to purchase real property in Channelview, Texas from JUMA (see additional discussion in Note 4, Property and Equipment). There was $850 and $0 outstanding under the revolving credit line available under the Credit Agreement on December 31, 2009 and 2008, respectively. We have issued an irrevocable transferable standby L/C, with an annual commission rate of 2.4 percent for $1,107 during the year ended December 31, 2009 related to a large contract that is expected to be completed in fiscal year 2010. The borrowing capacity under the revolving line of credit was approximately $43 at December 31, 2009.

We were originally obligated to repay the December 2008 term loan on the basis of monthly installments of approximately $35, with the initial payment on February 1, 2009 and a final payment of all unpaid principal and accrued interest on January 2, 2012. Outstanding amounts of principal of the December 2008 term loan accrue interest at a rate of 6.5 percent per annum. As of the entry into the New Agreement, the outstanding principal amount of the December 2008 term loan is approximately $730. Under the terms of the New Agreement, we are required to continue to make monthly installment payments for the December 2008 term loan in the amount of approximately $35 and the outstanding principal amount of such loan continues to accrue interest at the rate of 6.5 percent per annum. However, the final payment of all unpaid principal and accrued interest on the December 2008 term loan of approximately $343 is now due on April 15, 2011.

We were originally obligated to repay the May 2009 term loan on the basis of monthly installments of approximately $18, with the initial payment on June 1, 2009 and a final payment of all unpaid principal and accrued interest on May 1, 2024. Outstanding amounts of principal of the May 2009 term loan accrue interest at a rate of 6.5percent per annum. As of the entry into the New Agreement, the outstanding principal amount of the December 2008 term loan is approximately $2,012. Under the terms of the New Agreement, we are required to continue to make monthly installment payments for the May 2009 term loan in the amount of approximately $18 and the outstanding principal amount of such loan continues to accrue interest at the rate of 6.5 percent per annum. However, the final payment of all unpaid principal and accrued interest on the May 2009 term loan of approximately $1,927 is now due on April 15, 2011.

Upon entry into the New Agreement, our indebtedness in the amount of $850 outstanding under the revolving credit line of the Credit Agreement was converted to a term loan. This April 2010 term loan requires us to make monthly installments in the amount of $40 plus the amount of accrued and unpaid interest beginning on May 1, 2010 and a final payment of all unpaid principal and accrued interest on April 15, 2011. Outstanding amounts of principal of the April 2010 term loan accrue interest at a rate of 6.5 percent per annum.

The amounts of L/Cs issued under the New Agreement accrue fees at a rate of 3.5 percent to 2.5 percent (based on our leverage ratio) of the principal amount of the applicable L/C, and unused amounts under the letter of credit facility incur unused fees of 0.5 percent to 0.25 percent (based on our leverage ratio).

Each of our subsidiaries has guaranteed our obligations under the Credit Agreement, including as amended and restated under the New Agreement, and as such, our obligations in connection with the New Agreement are generally secured by a first priority lien on all of our subsidiaries’ non-real property assets. With regard to the Channelview, Texas property purchased with the proceeds of the May 2009 term loan, we also entered into a Deed of Trust, Security Agreement and UCC Financing Statement for Fixture Filing (collectively, the “Deed of Trust”) creating a lien on such property.

As noted above, under the Credit Agreement, including as amended and restated under the New Agreement, we have and continue to have certain covenant obligations, including certain leverage ratio, fixed charge coverage ratio and tangible net worth covenants. Prior to entry into the New Agreement, we were not in compliance with these covenants as of December 31, 2009. However, the New Agreement provides for the waiver of such noncompliance and establishes new covenants in this regard. From and after April 1, 2010, for each quarter we are obligated to adhere to the following: (i) total debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) of not greater than 3.0 to 1.0 (“Leverage Ratio”), consolidated EBITDA to consolidated net interest expense and principal payments on the total debt greater than 1.5 to 1.0 (“Fixed Charge Coverage Ratio”), and consolidated net worth after deducting other assets as are properly classified as “Intangible Assets” (“Tangible Net Worth”) in excess of $15,000. The calculation of EBITDA for purposes of the Leverage Ratio and Fixed Charge Coverage Ratio provides for adding back amounts deducted from net income related to charges we have taken in regards to the financial statements as of December 31, 2009 relating to impairment of goodwill and other intangible assets. Under the New Agreement, we continue to have obligations for other covenants, including limitations on issuance of common stock, liens, transactions with affiliates, additional indebtedness and permitted investments, among others.

The New Agreement also removed a provision that permitted us to obtain other funded indebtedness from a third party in the event we had requested Whitney to increase the amount of its commitment or approve additional credit extensions under the Credit Agreement and Whitney refused to do so. Thus, we expect to have to refinance the indebtedness outstanding under the New Agreement at any such time as we seek to obtain new financing from a third party.

TD Bank Loan Agreement

On March 5, 2009, Flotation, our wholly-owned subsidiary, obtained loan proceeds from TD Bank in the principal amount of $1,840. The TD Bank loan also provided a further commitment to Flotation for advancement of principal in the amount of $320. Under the terms of the TD Bank loan agreement we are obligated to make payments in monthly installments of approximately $13, with an initial payment on March 13, 2009 and a final payment of the unpaid principal and accrued interest in February 2029. We drew the additionally committed $320 principal amount in July 2009. As a result, our monthly installment payments increased effective August 2009 to approximately $15. The interest rate on the TD Bank Loan is 5.75 percent.

The TD Bank loan is secured by Flotation’s operational premises in Biddeford, Maine under a mortgage and security agreement and a collateral assignment of leases and rents. The TD Bank loan required us to enter into a debt subordination agreement that subordinated any debt Flotation owes to Deep Down, other than accounts payable between them arising in the ordinary course of business. Additionally, the TD Bank Loan required a “negative pledge” that prohibits Flotation and Deep Down from granting security interests in Flotation’s personal property, other than such security interests granted in respect of our Revolver with Whitney.

On February 13, 2009, we entered into an amendment to our Credit Agreement in connection with our entry into the TD Bank loan. This amendment permitted Flotation to incur the TD Bank loan and provide the mortgage and security arrangements required for such loan.

Under the TD Bank loan, we are required to meet certain covenants and restrictions. The financial covenants are reportable annually beginning with the year ended December 31, 2009, and are specific to the Flotation subsidiary financials. The TD Bank Loan financial covenants include maintaining debt service coverage ratios, pre and post distributions, which are ratios of Flotation’s earnings after tax plus interest, depreciation, amortization and distributions to consolidated net interest expense and principal payments on the total debt, below 1.5 to 1.0 and including distributions of 2.0 to 1.0, and consolidated net worth after deducting other assets as are properly classified as “Intangible Assets” (“Tangible Net Worth”) in excess of $9,500. Other covenants include limitations on issuance of liens, transactions with affiliates, and additional indebtedness among others. At December 31, 2009, we were not in compliance with the debt service coverage ratios or the Tangible Net Worth covenant, and on April 15, 2010, we have obtained a waiver for these covenants as of December 31, 2009.

Cash Flows

For the year ended December 31, 2009, cash provided by operating activities was approximately $2,532 as compared to cash used of approximately $202 for the prior year. Our working capital balances vary due to delivery terms and payments on key contracts, costs and estimated earnings in excess of billings on uncompleted contracts, and outstanding receivables and payables. We used some of the operating cash flow to reduce accounts payable and accrued liabilities by approximately $1,454 compared to approximately $328 in 2008. Billings in excess of costs on uncompleted contracts increased by approximately $2,119 for 2009 compared to approximately $2,127 for 2008 mostly related to a large job that will be completed during 2010, while increases in costs and estimated earnings in excess of billings of $441 for 2009 was compared to increases of $1,483 for 2008 due to timing of various jobs in process at each year end. Additionally, we recorded the following non-cash charges during 2009: goodwill impairment of approximately $5,537, share-based compensation of approximately $836, bad debt expense of approximately $192 and depreciation and amortization of approximately $8,154, which included $4,616 additional amortization due to the impairment of two long-lived intangible assets. For the year ended December 31, 2008, we recorded the following non-cash charges: share-based compensation of approximately $584, bad debt expense of approximately $1,507 due to some customer-related bankruptcy write-offs, depreciation and amortization of approximately $2,363, and amortization of deferred financing costs and debt discount related to the extinguishment of long-term debt totaling approximately $2,580.

For the year ended December 31, 2009, cash used in investing activities was approximately $6,611 compared to approximately $30,964 for the prior year. The majority of the 2008 activity related to the cash paid to Flotation shareholders offset by cash acquired, which totaled approximately $22,162, and was funded by the net proceeds of the Private Placement. Additionally, in accordance with the terms of the purchase of Mako, we made the final cash payment to the original Mako shareholders in the amount of approximately $4,237 net of some adjustments to purchase price expenses. The restricted cash balance of approximately $375 as of December 31, 2007 was released during 2008 in connection with the payoff of the Credit Agreement, offset by the increase in restricted cash of approximately $136 required under a letter of credit entered into during fiscal year 2008. The restriction was released during 2009 after the related building project was completed. We used approximately $6,117 for equipment purchases for the year ended December 31, 2009 as compared to approximately $4,804 for the prior year period. During 2009, we used approximately $614 cash to fund our new ERP system, which is projected to be installed in early fiscal 2010.

For the year ended December 31, 2009, cash provided by financing activities was approximately $2,496 compared to approximately $31,455 for the prior year period. During the year ended December 31, 2009, we borrowed approximately $3,000 and made principle payments of approximately $504. During the year ended December 31, 2008, we completed the Private Placement of our common stock for net proceeds of approximately $37,060. In 2008, we paid approximately $13,275, to a secured creditor to pay the balance due under a credit agreement and related interest and early termination fees (such early termination fees were included in operations as loss on debt extinguishment). In January 2008, in accordance with the terms of the purchase of Mako, we paid approximately $916 of notes payable and received proceeds from a secured creditor totaling approximately $5,604.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements in accordance with US GAAP requires us to make estimates and judgments that may affect assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition and related allowances, costs and estimated earnings incurred in excess of billings on uncompleted contracts, inventory, impairments of long-lived assets, including intangible assets, impairments of goodwill, income taxes including the valuation allowance for deferred tax assets, billings in excess of costs and estimated earnings on uncompleted contracts; contingencies and litigation, and share-based payments. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following accounting policies are critical to our business operations and the understanding of our operations and include the more significant judgments and estimates used in the preparation of our consolidated financial statements. The consolidated financial statements include the accounts of Deep Down, Inc. and its wholly-owned subsidiaries.

All intercompany transactions and balances have been eliminated in consolidation.

Collectability of Accounts Receivable

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Estimates are used in determining our allowance for doubtful accounts and are based on our historical level of write-offs and judgments management makes about the creditworthiness of significant customers based on ongoing credit evaluations. Further, we monitor current economic trends that might impact the level of credit losses in the future. Since we cannot predict with certainty future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. Additional allowances may be required if the economy or the financial condition of our customers deteriorates. If we determined that a smaller or larger allowance was appropriate, we would record a credit or a charge to selling, general and administrative expense in the period in which we made such a determination.

Revenue Recognition

We recognize revenue once the following four criterions are met: (i) persuasive evidence of an arrangement exists, (ii) delivery of the equipment has occurred or services have been rendered, (iii) the price of the equipment or service is fixed and determinable and (iv) collectability is reasonably assured. For certain fabrication projects, revenue is recognized upon shipment or when customer-specific contract elements (“milestone(s)”) are met. Fabrication and sale of equipment billings are contingent upon satisfaction of a significant condition of sale milestone, including but not limited to, factory acceptance testing and customer approval, and recognized upon transfer of title to the customer. Service revenue is recognized as the service is provided, and “time and material” contracts are billed on a monthly basis as costs are incurred. Customer billings for shipping and handling charges are included in revenue.

From time to time, we enter into large fixed price contracts which we determine that recognizing revenues for these types of contracts is appropriate using the percentage-of-completion method, which compares the percentage of costs incurred to date to the estimated total costs for the contract. This method is preferred because management considers total costs the best available measure of progress.

Total costs include all direct material and labor costs plus all indirect costs related to contract performance, such as supplies, equipment repairs, employee travel and supervisor time. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts (if any) are made in the period in which such losses are determined. Changes in job performance, job conditions, and total contract values may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Unapproved change orders are accounted for in revenue and cost when it is probable that the costs will be recovered through a change in the contract price. In circumstances where recovery is considered probable but the revenues cannot be reliably estimated, costs attributable to change orders are deferred pending determination of contract price.

Costs and estimated earnings in excess of billings on uncompleted contracts arise when revenues are recorded on a percentage-of-completion basis but cannot be invoiced under the terms of the contract. Such amounts are invoiced upon completion of contractual milestones. Billings in excess of costs and estimated earnings on uncompleted contracts arise when milestone billings are permissible under the contract, but the related costs have not yet been incurred. All contract costs are recognized currently on jobs formally approved by the customer and contracts are not shown as complete until virtually all anticipated costs have been incurred and the items are shipped to the customer.

Assets and liabilities related to costs and estimated earnings in excess of billings on uncompleted contracts, as well as billings in excess of costs and estimated earnings on uncompleted contracts, have been classified as current. The contract cycle for certain long-term contracts may extend beyond one year, thus complete collection of amounts related to these contracts may extend beyond one year, though such long-term contracts include contractual milestone billings as discussed above.

All intercompany revenue balances and transactions were eliminated in consolidation.

Long-Lived Assets

Long-lived assets include property, plant and equipment and long-lived intangible assets. Our intangible assets generally consist of assets acquired in the purchases of the Mako and Flotation subsidiaries and are comprised of customer lists, non-compete covenants with key employees and trademarks related to Mako’s ROVs and to Flotation’s branding, processes, materials and technology. We amortize intangible assets over their useful lives ranging from three to forty years on a straight-line basis. We make judgments and estimates in conjunction with the carrying value of these assets, including amounts to be capitalized, depreciation and amortization methods, useful lives and the valuation of acquired long-lived intangible assets.

We test for the impairment of long-lived assets upon the occurrence of a triggering event. We base our evaluation on impairment indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present. If these impairment indicators are present or other factors exist that indicate the carrying amount of an asset may not be recoverable, we determine whether an impairment has occurred through the use of an undiscounted cash flows analysis of the asset at the lowest level for which identifiable cash flows exist. The undiscounted cash flow analysis consists of estimating the future cash flows that are directly associated with and expected to arise from the use and eventual disposition of the asset over its remaining useful life. These cash flows are inherently subjective and require significant estimates based upon historical experience and future expectations reflected in our budgets and internal projections. If the undiscounted cash flows do not exceed the carrying value of the long-lived asset, an impairment has occurred, and we recognize a loss for the difference between the carrying amount and the estimated fair value of the asset. The fair value of the asset is measured using quoted market prices or, in the absence of quoted market prices, is based on an estimate of discounted cash flows. Cash flows are generally discounted at an interest rate commensurate with our weighted average cost of capital for a similar asset.

We have assessed the current market conditions and have concluded, as of December 31, 2009, that a triggering event had occurred that required an impairment analysis of long-lived intangible assets (see further discussion below related to Goodwill annual testing). For the year ended December 31, 2009, we recorded impairment charges totaling $4,616 to several long-lived intangible assets, which total impairment charges were recorded on the statement of operations as amortization expense. There was no impairment of long-lived assets for the year ended December 31, 2008. Unanticipated changes in revenue, gross margin, or long-term growth factor could result in a material impact on the estimated fair values of our long-lived assets which could result in long-lived asset impairments in future periods. See further discussion in Note 5 to the consolidated financial statements included in this Report.

Goodwill

Goodwill represents the cost in excess of the fair value of net assets acquired in business combinations. We evaluate the carrying value of goodwill annually on December 31 and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include a significant adverse change in legal factors or in business or the business climate or unanticipated competition.

The test for goodwill impairment is a two-step approach. The first step is to compare the estimated fair value of any reporting units within the Company that have goodwill with the recorded net book value (including the goodwill) of the reporting unit. If the estimated fair value of the reporting unit is higher than the recorded net book value, no impairment is deemed to exist and no further testing is required. If, however, the estimated fair value of the reporting unit is below the recorded net book value, then a second step must be performed to determine the goodwill impairment required, if any. In this second step, the estimated fair value from the first step is used as the purchase price in a hypothetical acquisition of the reporting unit. Purchase business combination accounting rules are followed to determine a hypothetical purchase price allocation to the reporting unit’s assets and liabilities. The residual amount of goodwill that results from this hypothetical purchase price allocation is compared to the carrying value of goodwill for the reporting unit, and the carrying value is written down to the hypothetical amount, if lower.

At December 31, 2009, our management completed the annual impairment test of goodwill. Management’s calculations indicated, due to a number of factors, including the current global economic environment, increased costs of capital and the decrease in our market capitalization, that the calculations for the reporting units of Deep Down Delaware, Mako and Flotation each indicated their respective net book value exceeded its fair value and, accordingly, goodwill for each unit was considered to be potentially impaired. We used the estimated fair value of each reporting unit from the first step as the purchase price in a hypothetical acquisition of the respective reporting unit. See Note 5 to the consolidated financial statements for a discussion of testing inputs and assumptions. We recognized a goodwill impairment of $3,056 for Deep Down Delaware, $2,481 for Mako and $0 for Flotation for the year ended December 31, 2009. Remaining goodwill by reporting unit was $4,472, $2,874 and $2,083 for the Deep Down Delaware, Mako and Flotation reporting units, respectively, as of December 31, 2009. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others. Unanticipated changes in revenue, gross margin, long-term growth factor or discount rate could result in a material impact on the estimated fair values of our reporting units, which could result in additional goodwill impairments in future periods.

Stock-Based Compensation

We record share-based payment awards exchanged for employee services at fair value on the date of grant and expense the awards in the consolidated statements of operations over the requisite employee service period. Stock-based compensation expense includes an estimate for forfeitures and is generally recognized over the expected term of the award on a straight-line basis. At December 31, 2009, we had two types of stock-based employee compensation: stock options and restricted stock.

Key assumptions used in the Black-Scholes model for both stock options and warrant valuations include (1) expected volatility (2) expected term (3) discount rate and (4) expected dividend yield. Since we do not have a sufficient trading history to determine the volatility of our own stock, we based our estimates of volatility on a representative peer group consisting of companies in the same industry, with similar market capitalizations and similar stage of development. Additionally, we continue to use the simplified method related to employee option grants.

Income Taxes

We follow the liability method of accounting for income taxes. This method takes into account the differences between financial statement treatment and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. Our effective tax rates for 2009 and 2008 were 5.98 percent, and 19.6 percent, respectively.

We record a valuation allowance to reduce the carrying value of our deferred tax assets when it is more likely than not that some or all of the deferred tax assets will expire before realization of the benefit or that future deductibility is not probable. The ultimate realization of the deferred tax assets depends upon our ability to generate sufficient taxable income of the appropriate character in the future. This requires management to use estimates and make assumptions regarding significant future events such as the taxability of entities operating in the various taxing jurisdictions. In evaluating our ability to recover our deferred tax assets, we consider all reasonably available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions, including the amount of future state, and federal pretax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment. When the likelihood of the realization of existing deferred tax assets changes, adjustments to the valuation allowance are charged, in the period in which the determination is made, either to income or goodwill, depending upon when that portion of the valuation allowance was originally created.

We record an estimated tax liability or tax benefit for income and other taxes based on what we determine will likely be paid in the various tax jurisdictions in which we operate. We use our best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent upon various matters, including resolution of tax audits, and may differ from amounts recorded. An adjustment to the estimated liability would be recorded as a provision or benefit to income tax expense in the period in which it becomes probable that the amount of the actual liability or benefit differs from the recorded amount.

Our future effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets or liabilities or changes in tax laws or interpretations thereof. At such time, if any, that we no longer have a reserve for our deferred tax assets, we will begin to provide for taxes at the full statutory rate. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

Recent Accounting Pronouncements

Recent Accounting Pronouncements are included in “Part II, Item 8. Financial Statements” Note 1 to the consolidated financial statements, “Summary of Significant Accounting Policies.”

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Inflation and Seasonality

We do not believe that our operations are significantly impacted by inflation. Our business is not seasonal in nature.

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This item is not applicable for smaller reporting companies.

Item 8.

FINANCIAL STATEMENTS

The financial statements and schedules are included herewith commencing on page F-1.

Reports of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets	F-4

Consolidated Statements of Operations	F-5

Consolidated Statements of Changes in Stockholders’ Equity	F-6

Consolidated Statements of Cash Flows	F-7

Notes to Consolidated Financial Statements	F-8

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures . We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were not effective due to the material weakness described below to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting . There have been no changes to our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended December 31, 2009 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting. Management is responsible for the fair presentation of the consolidated financial statements of Deep Down, Inc. Management is also responsible for establishing and maintaining a system of internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of our management and directors; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded our internal control over financial reporting was not effective as of December 31, 2009.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We have identified the following material weakness.

As of December 31, 2009, we did not maintain effective controls over the control environment. Specifically, we have not formally adopted a written code of business conduct and ethics that governs our employees, officers and directors. Further, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-B. We did not maintain the following controls: sufficient policies and procedures over the administration of our accounting and fraud risk policies, and a sufficient segregation of duties to decrease the risk of inappropriate accounting. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness. Additionally, this control deficiency could result in another material weakness that could result in a material misstatement of the consolidated financial statements that would not be prevented or detected.

As a result of the material weakness described above, we concluded that we did not maintain effective internal control over financial reporting as of December 31, 2009 based on criteria established in the Framework.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only the management's report in this annual report.

Management’s remediation plans. In our efforts to continuously improve our internal controls, management has taken steps to enhance the following controls and procedures subsequent to December 31, 2009 as part of our remediation efforts in addressing the material weakness above:

· Management is in the process of increasing the Board of Directors with independent members, including a financial expert as defined in Item 407(d)(5)(ii) of Regulation S-B. An independent director was appointed by the Board effective April 12, 2010; Mark R. Hollinger has joined the Board as an independent director and was appointed Chairman of the Audit Committee of the Board of Directors.

· Management has prepared a Code of Conduct for Management and Board of Directors and circulated these documents and obtain signed acknowledgements from management and the Board of Directors in April 2010. See Corporate Governance under Item 10. Directors, Executives Officers and Corporate Governance included in this Report for a description of the codes, which are filed as Exhibits to this Report.

· Management implemented an anonymous “whistleblower” hotline effective April 2010.

Item 9B.

OTHER INFORMATION

None.

PART III

Item 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table sets forth the names, ages and positions of our directors and executive officers.

Name	Age	Position Held With Deep Down
Ronald E. Smith*	51	President, Chief Executive Officer and Director
Eugene L. Butler (1)	68	Chief Financial Officer and Chairman of the Board
Mary L. Budrunas*	58	Vice President, Corporate Secretary and Director
Michael J. Newbury	42	Vice President Business Development
Mark R Hollinger	52	Director

_________________________

*Ronald E. Smith and Mary L. Budrunas are married to each other.

(1)	Mr. Butler was appointed our Chairman of the Board effective September 1, 2009.

Biographical information regarding each of our directors is as follows. The following paragraphs also include specific information about each director’s experience, qualifications, attributes or skills that led the Board of Directors to the conclusion that the individual should serve on the Board as of the time of this filing, in light of our business and structure:

Ronald E. Smith, President, Chief Executive Officer and Director . Mr. Smith co-founded Deep Down in 1997 and has served as our Chief Executive Officer, President and Director since December 2006. Prior to December 2006, Mr. Smith was Deep Down’s President. Mr. Smith graduated from Texas A&M University with a Bachelor of Science degree in Ocean Engineering in 1981. Mr. Smith worked both onshore and offshore in management positions for Ocean Drilling and Exploration Company (ODECO), Oceaneering Multiflex, Mustang Engineering and Kvaerner before founding Deep Down. Mr. Smith’s interests include all types of offshore technology, nautical innovations, state of the art communications, diving technology, hydromechanics, naval architecture, dynamics of offshore structures, diving technology and marketing of new or innovative concepts. Mr. Smith is directly responsible for the invention or development of many innovative solutions for the offshore industry, including the first steel tube flying lead installation system.

Mr. Smith is qualified for service on the Board due to his extensive background in many aspects of the offshore industry, spanning almost three decades. Mr. Smith’s wide range of knowledge and experience with the various technologies and platforms in the deep water industry brings invaluable expertise to our Board.

Eugene L. Butler, Chief Financial Officer and Chairman of the Board. Mr. Butler has served as Chief Financial Officer and Director with Deep Down since June 2007, and was appointed Chairman of the Board effective September 1, 2009. Mr. Butler was Managing Director of CapSources, Inc., an investment banking firm specializing in mergers, acquisitions and restructurings, from 2002 until 2007. Prior to this, he has served in various capacities as a director, president, chief executive officer, chief financial officer and chief operating officer for Weatherford International, Inc., a multi-billion multinational service and equipment corporation serving the worldwide energy market, from 1974 to 1991. He was elected to Weatherford’s Board of Directors in May of 1978, elected president and chief operating officer in 1979, and president and chief executive officer in 1984. He successfully developed and implemented a turnaround strategy eliminating debt and returning the company to profitability during a severe energy recession. Mr. Butler also expanded operations into international markets allowing Weatherford to become a major worldwide force with its offshore petroleum products and services. Mr. Butler graduated from Texas A&M University in 1963, and served as an officer in the U.S. Navy until 1969 when he joined Arthur Andersen & Co. Mr. Butler is distinguished by numerous medals and decorations, including the Bronze Star with combat “V” and the Presidential Unit Citation for his service with the river patrol force in Vietnam. Mr. Butler also serves on the Board of Powell Industries, Inc. since 1991, where he is the Chairman of the Audit Committee and on the Governance Committee.

In addition to his extensive knowledge of us, Mr. Butler is qualified for service on the Board based on his leadership skills and long-standing senior management experience in the energy and petroleum industries. Additionally, his background in public accounting and investment banking, familiarity with complex accounting issues and financial statements, as well as his service on the board, including various committees, of another public company, provide invaluable financial expertise and overall insight to our Board.

Mary L. Budrunas, Vice-President, Corporate Secretary and Director. Ms. Budrunas, co-founder of Deep Down, Inc. along with current chief executive officer Ronald E. Smith, and has served as our Vice-President, Corporate Secretary and Director since December 2006. Ms. Budrunas is responsible for our administrative functions, including human resources and accounting. Ms. Budrunas has more than 30 years of logistical management experience in manufacturing, fabrication, and industrial sourcing in the oil and gas industry. Prior to Ms. Budrunas co-founding Deep Down in 1997, she managed the purchasing efforts of many projects over a 10-year period for Mustang Engineering, and previously directed procurement for a large petroleum drilling and production facility project in Ulsan, Korea.

Ms. Budrunas is qualified for service on the Board based on her extensive oil and gas industry experience. Such expertise provides valuable insight to the Board.

Michael J. Newbury, Vice President Business Development. Mr. Newbury joined Deep Down in March 2009 in the role of Corporate Business Development Manager, bringing more than 19 years of international experience and relationships in offshore business development, sales and marketing, and subsea service project support. Mr. Newbury’s initial role at Deep Down was the improvement in our marketing, sales and commercial aspects, additionally to oversee large project opportunities and to strengthen our contractual functions. In February 2010, Mr. Newbury was promoted to Vice President Business Development and was tasked with the additional responsibilities of corporate operations and interfacing with all of our business units. Prior to joining us, Mr. Newbury held various positions with increasing authority and responsibility with such companies as Subsea 7 from 2002 to 2009, a $2 billion multi-national service and equipment corporation serving the worldwide energy market, General Manager, North and Central America – i-Tech Division, Commercial Manager, North and Central America – ROV, Survey & DGPS, Business Development Manager, North America; Halliburton Subsea (US) 1999 – 2002, Senior Manager – Business Development, Operations Project Manager – ROV and Marine; Subsea International (US) 1997 – 1999, Safety, Quality and Environmental Group Manager & Human Resources & Payroll Manager, and Subsea Offshore Limited (Great Yarmouth and Aberdeen UK) 1990-1997, General Manager, HSEQ Global Manager, Quality Assurance Global Manager, Quality Assurance Engineer. Mr. Newbury has worked in most major oil producing regions of the world, including the Gulf of Mexico, Central America, North Sea, Asia, and Australia. Mr. Newbury’s main areas of focus over the past eight years have been in offshore business development, tendering, and contract negotiation. Mr. Newbury graduated in 1990 with a Bachelor of Science in Business Management.

Mark R. Hollinger, Director. Mr. Hollinger joined the Board as an independent director effective April 12, 2010, and was appointed Chairman of the Audit Committee of the Board of Directors. Mr. Hollinger is currently President of Offshore Solutions at MacDermid, Inc. (“MacDermid”), which provides specialty fluids to hydraulic controls of valves in the offshore drilling and production systems; a position he has held since September 2007. Prior to MacDermid, Mr. Hollinger served as President of Merix Corporation, a holding company of Merix Asia (formerly, Eastern Pacific Circuits Limited) from May 1999 to January 2007 and Chief Executive Officer from September 1999 to January 2007. During the past five years, Mr. Hollinger served on the board of directors of Merix Corporation and Simple Tech, as well as several non-profit board of directors.

Mr. Hollinger is qualified for service on the Board based on his experience and expertise in management, plus his knowledge of the international energy market and business strategy. Also, Mr. Hollinger’s past and current service on the Boards of other public companies brings a depth of experience and perspective to our Board.

Corporate Governance

We promote accountability for adherence to honest and ethical conduct; we endeavor to provide full, fair, accurate, timely and understandable disclosure in reports and documents that we file with the SEC and in other public communications made by us and strive to be compliant with applicable governmental laws, rules and regulations. We have adopted a Directors Code of Business Conduct to promote honest and ethical conduct and compliance with applicable laws, rules, regulations and standards on the part of our board of directors. This code addresses several matters, including conflicts of interest, corporate opportunities, confidentiality, fair dealing, protection and proper use of Company assets, compliance with laws, rules and regulations (including insider trading laws), and encouraging the reporting of any illegal or unethical behavior. We have also adopted Financial Officer’s Code of Business Conduct to promote honest and ethical conduct, proper disclosure of financial information in the Company’s periodic reports, and compliance with applicable laws, rules, and regulations by the Company’s officers and management personnel, including the Company’s chief executive officer, chief financial officer and controller. The policies established by this code are aimed at preventing wrongdoing and at promoting honest and ethical conduct, including ethical handling of actual and apparent conflicts of interest, the full, fair, accurate, timely and understandable disclosure in public communications, compliance with applicable laws, rules and regulations, and accountability for adherence to the code through prompt internal reporting of violations of the code.

Until the addition of Mr. Hollinger to our Board, in lieu of an Audit Committee, our Board of Directors was responsible for reviewing and making recommendations concerning the selection of outside auditors, reviewing the scope, results and effectiveness of the annual audit of our financial statements and other services provided by our independent public accountants. We created an Audit Committee in April 2010 who will perform these functions. The Board of Directors reviews our internal accounting controls, practices and policies. Our Board of Directors has determined that no director qualifies as an independent audit committee financial expert as defined in Item 407(d) (5) (ii) of Regulation S-K.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of securities ownership and changes in such ownership with the SEC. Officers, directors and greater than ten percent shareholders also are required by rules promulgated by the SEC to furnish us with copies of all Section 16(a) forms they file.

Based solely upon a review of the copies of such forms furnished to us or written representations of our officers and directors, we believe that all Section 16(a) filing requirements were filed on a timely basis, except two Form 4 filings for Mr. Chamberlain for two transactions regarding sales of common stock, which were subsequently filed November 18, 2009, and one late Form 4 filing for Mr. Butler related to one transaction regarding the issuance of stock options on September 1, 2009 which was subsequently filed on October 27, 2009.

Item 11.

EXECUTIVE COMPENSATION

The following table sets forth information concerning the total compensation earned in the years ended December 31, 2009 and 2008 by our Chief Executive Officer, our two highest compensated executive officers other than our CEO and one additional individual who would have qualified as one of the two highest compensated executive officers but for the fact that he was not serving as an executive officer of Deep Down as the end of fiscal year 2009 (collectively, our “Named Executive Officers” or “NEOs”).

Summary Compensation Table

Name and Principal Position	Year	Salary ($)		Bonus ($) (6)		Stock Awards ($) (1)		Option Awards ($) (1)		All Other Compensation ($) (2)		Total

Ronald E. Smith	2009	$	345,000	$	-	$	93,000	$	-	$	12,000	$	450,000
President, Chief Executive Officer and Director	2008	$	250,000	$	175,000	$	147,000	$	48,588	$	12,000	$	632,588
Eugene L. Butler	2009	$	310,000	$	-	$	93,000	$	771,600	$	24,348	$	1,198,948
Chairman of the Board and Chief Financial Officer (4)	2008	$	225,000	$	175,000	$	147,000	$	48,588	$	28,204	$	623,792
Michael J. Newbury	2009	$	109,615	$	-	$	-	$	-	$	-	$	109,615
Vice President of Business Development (5)	2008	$	-	$	-	$	-	$	-	$	-	$	-
Robert E. Chamberlain, Jr.	2009	$	302,889	$	-	$	93,000	$	-	$	24,074	$	419,963
Former Chairman of the Board and Chief Acquisitions Officer (3)	2008	$	225,000	$	175,000	$	147,000	$	48,588	$	32,440	$	628,028

(1) Included in the “Stock Awards” and “Option Awards” columns are the aggregate grant date fair values of restricted stock awards and option awards made in 2009 and 2008. The grant date fair values of the awards were computed in accordance with FASB ASC Topic 718. A total of 1,000,000 and 0 option awards granted to NEOs were forfeited during 2009 and 2008, respectively. A total of 2,000,000 option awards which were originally issued on February 14, 2008 were cancelled in March 2010 and not reissued, see discussion below (such cancellation has no impact on compensation, since we are required to expense the remaining unamortized stock based compensation at the time of cancellation). For a discussion of the assumptions and methodologies used to value the stock and option awards reported in the table above, see Note 7 “Stock-Based Compensation” to our consolidated financial statements included in this Report. All options are for the purchase of our common stock. Stock awards are grants of restricted stock representing time-vesting shares.

(2) The amounts in the “All Other Compensation” column for 2009 were attributed to the following:

Mr. Butler: Amounts included for the year ended 2009 consisted of a vehicle allowance ($1,000 per month) and $12,348 for reimbursement for federal and state payroll withholdings customarily withheld for an employee.

Mr. Smith: Amounts included for the year ended 2009 consisted of a vehicle allowance ($1,000 per month).

Mr. Chamberlain: Amounts for the year ended 2009 included a vehicle allowance ($1,000 per month) and $12,074 for reimbursement for federal and state payroll withholdings customarily withheld for an employee.

(3) Mr. Chamberlain resigned as Chairman of the Board and Chief Acquisitions Officer effective as of August 31, 2009. There were no severance or other payments made to Mr. Chamberlain in connection with his separation, though he will remain a consultant of the Company through August 2010 under terms of a Severance and Separation Agreement. A portion of Mr. Chamberlain’s consulting payments, included in the Salary column above, were made with restricted stock. The fair value of the shares granted totals $75,000, which is being amortized over the one year remaining term of Mr. Chamberlain’s consulting agreement, and $25,000 was included in the Salary column above for the appropriate months in fiscal 2009.

Mr. Chamberlain forfeited a total of 1,000,000 options which were originally granted February 14, 2008 in connection with his resignation (666,667 options were unvested, and 333,333 were vested, which were cancelled 90 days after his resignation, under terms of the Plan). See further discussion below.

(4) Mr. Butler was appointed Chairman of the Board effective September 1, 2009.

(5) Mr. Newbury was hired by Deep Down effective March 30, 2009. His original title was Manager of Business Development, which was changed to Vice President of Business Development effective February 17, 2010.

(6) In June 2008, Messrs. Smith, Chamberlain and Butler were each awarded and paid a cash performance bonus in the amount of $100,000. Additionally, in December 2008, Deep Down awarded Messrs. Smith, Chamberlain and Butler with cash performance bonuses of $75,000 relating to fiscal year 2008 (the amounts were paid in January 2009). There were no bonuses granted for 2009 due to our current cost containment efforts.

Narrative Disclosure to Summary Compensation Table

All of the compensation described in the foregoing table, other than those amounts shown in the “Bonus”, “Stock Awards” and “Option Awards” columns, was paid to the NEOs pursuant to agreements with Deep Down, with the exception of Mr. Newbury, who signed an employment agreement effective February 17, 2010.

Mr. Smith has an employment agreement to serve as our President and Chief Executive Officer, which provides for annual cash compensation of $345,000, and a monthly vehicle allowance of $1,000. Effective January 1, 2010, Mr. Smith’s annual cash compensation was increased to $362,250, and a monthly vehicle allowance of $1,500. The term of Mr. Smith’s employment agreement is through January 1, 2013, and is subject to further automatic renewals for annual periods up to an additional two years.

For the years ended December 31, 2008 and 2009, Mr. Butler had a consulting agreement between Deep Down and Eugene L. Butler & Associates to serve as our Chief Financial Officer. Mr. Butler’s consulting agreement provided for annual cash compensation of $225,000, which was increased to $310,000 effective January 1, 2009; also a monthly vehicle allowance of $1,000 and reimbursement for federal and state payroll withholdings customarily withheld for an employee which are included in the “All Other Compensation” column. Effective January 1, 2010, Mr. Butler’s consulting agreement was replaced by an employment agreement. The employment agreement provides cash compensation of $325,500 and a monthly vehicle allowance of $1,500. The term of Mr. Butler’s employment agreement is through January 1, 2013, and is subject to further automatic renewals for annual periods up to an additional two years.

Mr. Chamberlain served as our Chairman of the Board and Chief Acquisitions Officer pursuant to a consulting agreement we had with Strategic Capital Services, Inc. (“Strategic”). The consulting agreement with Strategic provided that we pay Mr. Chamberlain an annual base salary of $180,000, which was increased to $225,000 effective as of January 1, 2008 and to $310,000 effective as of January 1, 2009. Additionally, Mr. Chamberlain received a vehicle allowance of $1,000 per month and reimbursement for federal and state payroll withholdings customarily withheld for an employee, which are included in the “All Other Compensation” column. The consulting agreement with Strategic for Mr. Chamberlain’s services had an initial term through August 6, 2010.

On September 3, 2009, we accepted the resignation of Mr. Chamberlain as Chief Acquisitions Officer and Chairman; such resignation was effective on August 31, 2009. The resignation of Mr. Chamberlain did not involve any disagreement with us. We continue to engage Mr. Chamberlain’s services under the Severance and Separation Agreement with Strategic which replaced the original consulting agreement dated August 6, 2007, and expires August 5, 2010. Under terms of the Agreement, we will pay Strategic a total of 22 bi-monthly payments of $10,910 plus a final payment on August 5, 2010 of $3,519. Additionally, Mr. Chamberlain was granted 750,000 restricted shares of common stock at a price of $0.10, which will vest in full on August 5, 2010 provided he remains our consultant through such date, and all previously granted restricted shares vested immediately on September 1, 2009.

The amounts included for 2008 in the “Bonus” column reflect the following: in June 2008, Messrs. Smith, Chamberlain and Butler were each awarded and paid a cash performance bonus in the amount of $100,000 related to fiscal 2008 achievements. Additionally, in December 2008, Deep Down awarded Messrs. Smith, Chamberlain and Butler with cash performance bonuses of $75,000 relating to fiscal year 2008 (the amounts were paid in January 2009). There were no bonuses granted for 2009 due to our current cost containment efforts.

The amounts included for 2008 in the “Stock Awards” and the “Option Awards” columns above reflect awards to purchase 1,000,000 shares of our common stock and grants of 350,000 restricted shares of our common stock provided to each of Messrs. Smith, Chamberlain and Butler on February 14, 2008. In each case, the awards and grants were made under the Plan. The options vest over three years and have an exercise price of $1.50. Each of the grants of restricted shares of our common stock was scheduled to vest in its entirety on February 14, 2010, provided that the officer continues to be employed with Deep Down through the vesting date. Mr. Chamberlain’s 350,000 restricted shares vested on September 1, 2009 under terms of his Severance and Separation Agreement. The remaining 700,000 restricted shares vested upon their original schedule on February 14, 2010. Mr. Chamberlain forfeited 1,000,000 options in connection with his resignation September 1, 2009, and the 1,000,000 options granted to each of Mr. Smith and Mr. Butler were cancelled and not reissued, effective March 5, 2010.

The amounts included for 2009 in the “Stock Awards” column above reflect grants of 750,000 restricted shares of our common stock provided to each of Messrs. Smith, Chamberlain and Butler on March 29, 2009. In each case, grants were made under the Plan. Each of the grants of restricted shares of our common stock is scheduled to vest in its entirety on March 29, 2011, provided that the officer continues to be employed with Deep Down through the vesting date. Mr. Chamberlain’s restricted shares were accelerated in vesting on September 1, 2009 under terms of his Severance and Separation Agreement; such shares have a grant date fair value of $93,000.

The amounts included for Mr. Butler for 2009 in the “Option Awards” column above reflect awards to purchase 2,000,000 and 10,000,000 shares of our common stock granted to Mr. Butler on March 29, 2009 and September 1, 2009, respectively. In each case, grants were made under the Plan. The options vest over three years ratably beginning one year from grant date, and have an exercise price of $0.124 and $0.10, respectively.

Outstanding Equity Awards at December 31, 2009

The following tables present information regarding the outstanding equity awards held by each of the NEOs as of December 31, 2009. Messrs. Chamberlain and Newbury had no outstanding option awards as of that date; Mr. Chamberlain had outstanding restricted stock as noted on the Stock Awards table below.

Option Awards

Name	Option Grant Date	Number of Securities Underlying Unexercised Options Exercisable (#)		Number of Securities Underlying Unexercised Options Unexercisable (#)			Option Exercise Price ($/Sh)		Option Expiration Date
Ronald E. Smith	2/14/2008		333,333		666,667	(1)		1.50	2/14/2013
Eugene L. Butler	9/1/2009		-		10,000,000	(4)		0.10	9/1/2014
	3/23/2009		-		2,000,000	(3)		0.12	3/23/2014
	2/14/2008		333,333		666,667	(1)		1.50	2/14/2013
	5/31/2007		2,000,000		1,000,000	(2)		0.52	8/31/2010

(1)

These options were vesting over three years, with substantially one-third vesting on the first, second and third anniversary of the date of grant, provided that the officer continued to be employed with Deep Down through each vesting date. We cancelled these options on March 5, 2010 and did not issue replacement options.

(2)	The remaining unvested portion of this option award is scheduled to vest on May 31, 2010, provided that Mr. Butler continues to be employed with Deep Down through that vesting date.

(3)	The remaining unvested portion of this option award is scheduled to vest in equal installments on March 29, 2010, March 29, 2011 and March 29, 2012, provided that Mr. Butler continues to be employed with Deep Down through those vesting dates.

(4)	The remaining unvested portion of this option award is scheduled to vest in equal installments on September 1, 2010, September 1, 2011 and September 1, 2012, provided that Mr. Butler continues to be employed with Deep Down through those vesting dates.

Stock Awards

Name	Award Grant Date	Number of Shares or Units of Stock That Have Not Vested (#)			Market Value of Shares or Units of Stock that Have Not Vested ($) (1)
Ronald E. Smith	3/29/2009		750,000	(3)		97,500
	2/14/2008		350,000	(2)		45,500
Robert E. Chamberlain, Jr.	9/1/2009		750,000	(4)		97,500
	3/29/2009		-	(3)		-
	2/14/2008		-	(3)		-
Eugene L. Butler	3/29/2009		750,000	(3)		97,500
	2/14/2008		350,000	(2)		45,500

(1)	The market value is calculated by multiplying the number of shares by the closing price of our common stock of $ 0.13 on December 31, 2009.

(2)

This restricted stock award is scheduled to vest in its entirety on February 14, 2010, provided that the officer continues to be employed with Deep Down through the vesting date. Mr. Chamberlain’s shares granted on this date were accelerated on September 1, 2009 in connection with his Severance and Separation Agreement. The award vested for Messrs. Smith and Butler on February 10, 2010.

(3)

This restricted stock award is scheduled to vest in its entirety on March 29, 2012, provided that the officer continues to be employed with Deep Down through the vesting date. Mr. Chamberlain’s shares granted on this date were accelerated on September 1, 2009 in connection with his Severance and Separation Agreement.

(4)	This restricted stock award is was issued in connection with Mr. Chamberlain’s Severance and Separation Agreement and is scheduled to vest in its entirety on September 1, 2010, provided that he continues as a consultant under terms of his Severance and Separation Agreement through such date.

Benefits payable upon change in control

Both Mr. Butler and Mr. Smith’s (the “Executive”) employment agreements contain provisions related to change in control.

In the event of termination of the Executive’s employment for any reason, he will be entitled to receive all accrued, unpaid salary and vacation time through the date of termination and all benefits to which the Executive is entitled or vested under the terms of all employee benefit and compensation plans, agreements and arrangements in which the Executive is a participant as of the date of termination. In addition, subject to executing a general release in favor of us, the Executive will be entitled to receive certain severance payments in the event his employment is terminated by the Company “other than for cause” or by the Executive with “good reason.” These severance payments include the following:

(i) a lump sum in cash equal to one times the Executive’s annual base salary (at the rate in effect on the date of termination), provided, however, that is such termination occurs prior to the date that is twelve months following a change of control, then such payment will be equal to three times the Executive’s annual base salary (at the rate in effect on the date of termination);

(ii) a lump sum in cash equal to the average annual bonus paid to the Executive for the prior two full fiscal years preceding the date of termination; provided, however, that is such termination occurs prior to the date that is twelve months following a change of control, then such payment will be equal to two times the average annual bonus paid to the Executive for the prior two full fiscal years preceding the date of termination;

(iii) a lump sum in cash equal to a pro rata portion of the annual bonus payable for the period in which the date of termination occurs based on the actual performance under our annual incentive bonus arrangement; provided, however, that such pro rata portion shall be calculated based on the Executive’s annual bonus for the previous fiscal year; provided further that if no previous annual bonus has been paid to the Executive, then the lump sum cash payment shall be no less than fifty percent of Executive’ annual base salary; and

(iv) if the Executive’s termination occurs prior to the date that is twelve months following a Change of Control (as defined in the Employment Agreement), then each and every share option, restricted share award and other equity-based award that is outstanding and held by the Executive shall immediate vest and become exercisable.

Each of the Executives have agreed to not, during the respective term of his employment and for a one-year period after his termination, engage in Competition (as defined in the Employment Agreement) with us, solicit business from any of our customer or potential customers, solicit the employment or services of any person employed by or a consultant us on the date of termination or with six months prior thereto, or otherwise knowingly interfere with our business or accounts or any of our subsidiaries.

The Employment Agreements also provide that we, to the extent permitted by applicable law and our by-laws, will defend, indemnify and hold harmless the Executive from any and all claims, demands or causes of action, including reasonable attorneys’ fees and expenses, suffered or incurred by the Executive as a result of the assertion or filing of any claim, demand, litigation or other proceedings based upon statements, acts or omissions made by or on behalf of the Executive pursuant to the Employment Agreement or in the course and scope of the Executive’s employment with us. We will also maintain and pay all applicable premiums for directors’ and officers’ liability insurance which shall provide full coverage for the defense and indemnification of the Executives, to the fullest extent permitted by applicable law.

Compensation Committee Interlocks and Insider Participation

None of our directors or executive officers served as members of the board of directors of another entity that has or had an executive officer who served as a member of our Board during 2009. We do not have a separate compensation committee. The entire board participated in deliberations concerning executive officer compensation in the fiscal year ended December 31, 2009.

Compensation Committee Report

We do not have a separate compensation committee. Accordingly, to the extent that decisions are made regarding the compensation policies pursuant to which our named executive officers are compensated, they are made by our Board.

In light of the foregoing, the Board has reviewed and discussed with management the Compensation Discussion and Analysis set forth above and determined that it be included in this annual report for the year ended December 31, 2009.

Submitted by:

Ronald E. Smith

Mary L. Budrunas

Eugene L. Butler

Mark R. Hollinger

Notwithstanding anything to the contrary set forth in any previous filings under the Securities Act, as amended, or the Exchange Act, as amended, that incorporate future filings, including this annual report, in whole or in part, the foregoing Compensation Committee Report shall not be incorporated by reference into any such filings.

Option Exercises and Stock Vested During the Year Ended December 31, 2009

There were no options exercised by NEOs during the year ended December 31, 2009. All of the restricted stock issued on February 14, 2008 becomes fully vested on February 14, 2010, except the 350,000 shares issued to Mr. Chamberlain, which vested September 1, 2009 in connection with his Severance and Separation Agreement. All of the restricted stock issued on March 29, 2009 becomes fully vested on March 29, 2012, except the 750,000 shares issued to Mr. Chamberlain, which vested September 1, 2009 in connection with his Severance and Separation Agreement. All of the restricted stock issued on September 1, 2009 becomes fully vested on September 1, 2010.

Compensation of Directors

Each of our directors who also serve as our executive officers do not receive any additional compensation for their performance of services as directors. We may agree to provide compensation to these directors in the future. We are in the process of determining the form and amounts of compensation for our independent directors.

Compensation Policy Related to Risk Management

We do not believe that there are any risks arising from our compensation policies and practices for our employees that are reasonably likely to have a material adverse effect on us.

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information, as of March 31, 2010, concerning the beneficial ownership of shares of Common Stock of Deep Down by (i) each person known by us to beneficially own more than 5 percent of the outstanding shares of our common stock; (ii) each Director; (iii) our “Named Executive Officers” (as determined under Item 402(m) of Regulation S-K); and (iv) all directors and executive officers of Deep Down as a group. To our knowledge, all persons listed in the table have sole voting and investment power with respect to their shares, except to the extent that authority is shared with their respective spouse under applicable law. In addition, all persons named below can be reached at Deep Down, Inc., 8827 W. Sam Houston Pkwy N., Suite 100, Houston, Texas 77040.

Name of Beneficial Owner (1)	Shares of Common Stock Beneficially Owned		Percent of Common Stock Outstanding
Ronald E. Smith (2)	45,229,876		25.1%
Mary L. Budrunas (2)	45,229,876		25.1%
Robert E. Chamberlain, Jr. (3)(5)	23,064,975		12.8%
Eugene L. Butler (4)	3,766,667		2.1%
Michael J. Newbury	-		*
Mark D. Hollinger	-		*
All directors and officers as a group (5 persons)	72,061,518	(5)	39.4%

* - Less than 1%

(1)

A person is deemed to be the beneficial owner of securities that can be acquired within 60 days from the date set forth above through the exercise of any option, warrant or right. Shares of common stock subject to options, warrants or rights that are currently exercisable or exercisable within 60 days are deemed outstanding for computing the percentage of the person holding such options, warrants or rights, but are not deemed outstanding for computing the percentage of any other person. The amounts and percentages are based upon 180,450,630 shares of common stock outstanding as of March 31, 2010.

(2)

Mr. Smith and Ms. Budrunas are husband and wife. Shares include 26,816,871 shares owned directly by Mr. Smith and 18,413,005 shares owned directly by Ms. Budrunas. Such shares also include 350,000 shares of restricted stock issued to Mr. Smith on February 14, 2008 which became fully vested on the second anniversary of the grant, February 14, 2010, and 750,000 shares of restricted stock issued to Mr. Smith on March 29, 2009 which w fully vested on the second anniversary of the grant, March 29, 2011.

(3)

Shares include 350,000 shares of restricted stock issued to Mr. Chamberlain on February 14, 2008, and 750,000 shares of restricted stock issued to Mr. Chamberlain on March 29, 2009 which were fully vested on September 1, 2009 in connection with Mr. Chamberlain’s Severance and Separation Agreement, plus 750,000 shares of restricted stock issued to Mr. Chamberlain on September 1, 2009 which will vest on the one year anniversary of the grant, September 1, 2010, in connection with such Severance and Separation Agreement.

(4)

Shares include 350,000 shares of restricted stock issued to Mr. Butler on February 14, 2008 which become fully vested on the second anniversary of the grant, February 14, 2010, and 750,000 shares of restricted stock issued to Mr. Butler on March 29, 2009 which will be fully vested on the second anniversary of the grant, March 29, 2011, plus 2,666,667 shares of Deep Down’s common stock that Mr. Butler has the right to acquire by exercise of stock options which vested during 2008 and 2009.

(5)

Shares include 2,666,667 shares of Deep Down’s common stock that executive officers and directors have the right to acquire by exercise of stock options.

Disclosure regarding our equity compensation plans as required by this item is incorporated by reference to the information set forth under Item 5 “Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II of this report.

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Review and Approval of Related Person Transactions

Our Board of Directors and Management recognize that related person transactions present a heightened risk of conflicts of interest, and therefore we review all relationships and transactions in which we and our directors, director nominees and executive officers or their immediate family members, as well as holders of more than 5% of any class of our voting securities and their family members, have a direct or indirect material interest. As required under SEC rules, transactions that are determined to be directly or indirectly material to us or a related person are disclosed in our annual Form 10-K statement.

Ron Smith, Eugene Butler and Robert Chamberlain (until his resignation from this partnership effective September 1, 2009) are partners in Ship and Sail, Inc., a vendor of Deep Down. During 2009, we made payments of $582,851 to Ship and Sail, and we had a prepaid balance of $37,500 as of December 31, 2009 which has been expensed in 2010. The payments to Ship and Sail related to services provided by that entity for the support of the development of marine technology which is planned for production in fiscal 2010, including specialized services for provision of vessel access for design and testing, and office space and related utilities, plus a down-payment for a fixed asset under construction that will be completed in 2010. All transactions were conducted on an arms-length basis and in accordance with normal terms and conditions.

On May 29, 2009, we consummated a purchase transaction with JUMA Properties, LLC (“JUMA”), a company owned by Ronald E. Smith, President, CEO and Director of Deep Down and wife Mary L. Budrunas, Vice President, Corporate Secretary and Director of Deep Down. Pursuant to a Purchase and Sale Agreement dated May 22, 2009, we acquired certain property and improvements located in Channelview, Texas, where certain of our operations are currently located (the “Channelview Property”). The Channelview Property consists of 8.203 acres and was purchased for $2,600,000. The transaction was conducted on an arms-length basis and in accordance with normal terms and conditions. See additional discussion in Note 6, Long-Term Debt.

Until the addition of Mr. Hollinger to our Board in April 2010, none of our Directors was independent. We feel independent directors will add strength and perspective to our Board of Directors and will increase our internal control process as discussed above in Item 9A Controls and Procedures in this Report, thus we are actively working towards adding additional independent members to our Board, including member(s) who qualify as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-B.

Item 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

We retained PricewaterhouseCoopers LLP (“PwC”) as our principal accountant in 2009. We had no relationship with PwC prior to their retention as our principal accountant. The following table sets forth the aggregate fees paid to PwC for audit services rendered in connection with our consolidated financial statements and reports for the year ended December 31, 2009, and for other services rendered during that year on behalf of Deep Down and its subsidiaries, and fees billed to us by Malone & Bailey, PC for audit and other services during 2008:

	December 31, 2009		December 31, 2008
(i) Audit Fees	$	502,023	$	503,714
(ii) Audit Related Fees		-		86,634
(iii) Tax Fees		5,250		49,130
(iv) All Other Fees		-		-

Audit Fees : Consists of fees billed for professional services rendered for the audit of Deep Down’s consolidated financial statements, the review of interim condensed consolidated financial statements included in quarterly reports, registration statements and other offering documentation, services that are normally provided in connection with statutory and regulatory filings or engagements and attest services, except those not required by statute or regulation.

Audit-Related Fees : Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit and review of Deep Down’s consolidated financial statements and are not reported under "Audit Fees." These services include auditing work on proposed transactions, including the audit of Mako Technologies, Inc., and Flotation Technologies, Inc., attest services that are not required by statute or regulation, and consultations concerning financial accounting and reporting standards.

Tax Fees : Consists of tax compliance, tax preparation and other tax services. Tax compliance and tax preparation consists of fees billed for professional services related to assistance with tax returns. Other tax services consist of fees billed for other miscellaneous tax consulting.

All Other Fees : None.

Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

The Board of Directors pre-approves all audit and permissible non-audit services provided by PwC. These services may include audit services, audit-related services, tax services and other services. The Board of Directors may also pre-approve particular services on a case-by-case basis and may delegate pre-approval authority to one or more directors. If so delegated, the director must report any pre-approval decision to the Board of Directors at its first meeting after the pre-approval was obtained.

PART IV

Item 15.

Exhibits, Financial Statement Schedules

(a)	Financial Statements and Schedules. See the consolidated financial statements and related schedules commencing on page F-1 of this report.

(b)	Exhibits.


2.1		Agreement and Plan of Reorganization among MediQuip Holdings, Inc., Deep Down, Inc., and the majority shareholders of Deep Down, Inc. (incorporated by reference from Exhibit 2.1 to our Form 10-KSB/A filed with the Commission on May 1, 2008).

3.1		Articles of Incorporation of Deep Down, Inc. (conformed to include the amendment of the Articles of Incorporation filed with the Secretary of State of the State of Nevada on September 29, 2008 (incorporated by reference from Exhibit A to our Schedule 14C filed on August 15, 2008).

3.2		Amended and Restated By Laws of Deep Down, Inc. (incorporated by reference from Exhibit B to our Schedule 14C filed on August 15, 2008).

3.3		Form of Certificate of Designations of Series D Redeemable Convertible Preferred Stock (incorporated herein by reference from Exhibit 3.4 to our Form 10-KSB/A filed with the Commission on May 1, 2008).

3.4		Form of Certificate of Designations of Series E Redeemable Exchangeable Preferred Stock (incorporated herein by reference from Exhibit 3.5 to our Form 10-KSB/A filed with the Commission on May 1, 2008).

3.5		Form of Certificate of Designations of Series F Redeemable Convertible Preferred Stock (incorporated herein by reference from Exhibit 3.6 to our Form 10-KSB/A filed with the Commission on May 1, 2008).

3.6		Form of Certificate of Designations of Series G Redeemable Exchangeable Preferred Stock (incorporated herein by reference from Exhibit 3.7 to our Form 10-KSB/A filed with the Commission on May 1, 2008).

4.1		Common Stock Purchase Warrant for 320,000 shares of common stock of Deep Down, Inc. issued to Dragonfly Capital Partners, LLC dated August 6, 2007 (incorporated herein by reference from Exhibit 4.2 to our Form 10-KSB filed with the Commission on April 1, 2008).

4.2		Common Stock Purchase Warrant for 118,812 shares of common stock of Deep Down, Inc. issued to Dragonfly Capital Partners, LLC dated January 4, 2008 (incorporated herein by reference from Exhibit 4.3 to our Form 10-KSB filed with the Commission on April 1, 2008).

4.3		Common Stock Purchase Warrant for 200,000 shares of common stock of Deep Down, Inc. issued to Subsea, LLC dated June 6, 2008 (incorporated herein by reference from Exhibit 4.1 to our Form 8-K/A (Amendment No. 2) filed with the Commission on June 9, 2008).

4.4		Registration Rights Agreement, dated August 6, 2007, among Deep Down, Inc. and Prospect Capital Corporation (incorporated herein by reference from Exhibit 4.4 to our Form 10-KSB/A filed with the Commission on May 1, 2008).

4.5		Private Placement Memorandum, dated May 16, 2008 (incorporated herein by reference from Exhibit 20.1 to our Form 8-K/A (Amendment No. 2) filed with the Commission on June 9, 2008).

4.6		Amended and Restated Supplement No. 1 to Private Placement Memorandum, dated June 2, 2008 (incorporated herein by reference from Exhibit 4.6 to our Form S-1 Registration Statement (file no. 333-152435) filed with the Commission on July 21, 2008).

4.7		Purchase Agreement, dated June 2, 2008, among Deep Down, Inc., and the Purchasers named therein (incorporated herein by reference from Exhibit 10.1 to our Form 8-K/A (Amendment No. 2) filed with the Commission on June 9, 2008).

4.8		6% Subordinated Debenture of Deep Down, Inc. dated March 31, 2008 (incorporated herein by reference from Exhibit 4.1 to our Form 10-Q filed with the Commission on May 16, 2008).

4.9†		Stock Option, Stock Warrant and Stock Award Plan (incorporated herein by reference from Exhibit 4.10 to our Form S-1 Registration Statement (file no. 333-152435) filed with the Commission on July 21, 2008).

4.10		Certificate of Articles of Organization of Deep Down International Holdings, LLC (filed with the Secretary of State for the state of Nevada on February 3, 2009) (incorporated by reference from Exhibit 4.11 to Amendment No. 3 to our Form S-1/A filed on April 10, 2009).

4.11		Operating Agreement of Deep Down International Holdings, LLC, a Nevada limited liability company (incorporated by reference from Exhibit 4.11 to Amendment No. 3 to our Form S-1/A filed on April 9, 2009).

10.1

Credit Agreement, dated as of November 11, 2008, among Deep Down, Inc. as borrower and Whitney National Bank, as lender (incorporated herein by reference from Exhibit 10.1 to our Form 10-Q filed with the Commission on November 14, 2008).

10.2		First Amendment to Credit Agreement entered into as of December 18, 2008, among Deep Down, Inc. as borrower and Whitney National Bank, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. (incorporated herein by reference from Exhibit 10.1 to our Form 8-K filed with the Commission on December 19, 2008).

10.3		Second Amendment to Credit Agreement entered into as of February 13, 2009, among Deep Down, Inc., as borrower, and Whitney National Bank, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. (incorporated herein by reference from Exhibit 10.3 to our Form 10-K filed with the Commission on March 16, 2009).

10.4		Guaranty, dated as of November 11, 2008, by ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. for the benefit of Whitney National Bank (incorporated herein by reference from Exhibit 10.2 to our Form 10-Q filed with the Commission on November 14, 2008).

10.5		Joinder to Guaranty, dated as of February 13, 2009, by Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.5 to our Form 10-K filed with the Commission on March 16, 2009).

10.6		Security Agreement, dated as of November 11, 2008, among Deep Down, Inc., ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. for the benefit of Whitney National Bank (incorporated herein by reference from Exhibit 10.3 to our Form 10-Q filed with the Commission on November 14, 2008).

10.7		Joinder to Security Agreement, dated as of February 13, 2009, by Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.7 to our Form 10-K filed with the Commission on March 16, 2009).

10.8		Second Amendment to Security Agreement, dated as of February 13, 2009, by Deep Down, Inc., ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. for the benefit of Whitney National Bank (incorporated herein by reference from Exhibit 10.3 to our Form 8-K filed with the Commission on December 19, 2008).

10.9		Term Note, dated December 18, 2008, executed by Deep Down, Inc. and paid to order to Whitney National Bank (incorporated herein by reference from Exhibit 10.2 to our Form 8-K filed with the Commission on December 19, 2008).

10.10†		Consulting Agreement, dated as of August 6, 2007, between Deep Down, Inc. and Strategic Capital Services, Inc. regarding the services of Robert Chamberlain (incorporated herein by reference from Exhibit 10.1 to our Form 10-KSB filed with the Commission on April 1, 2008).

10.11†		Employment Agreement, dated as of August 6, 2007, between Deep Down, Inc. and Ronald E. Smith (incorporated herein by reference from Exhibit 10.2 to our Form 10-KSB filed with the Commission on April 1, 2008).

10.12		Agreement and Plan of Merger among Deep Down, Inc., Mako Technologies, LLC, Mako Technologies, Inc. and the shareholders of Mako Technologies, Inc. dated December 17, 2007 (incorporated herein by reference from Exhibit 2.1 to our Form 10-KSB filed with the Commission on April 1, 2008).

10.13		Agreement and Plan of Reorganization among Deep Down, Inc., ElectroWave (USA), Inc., a Nevada corporation, ElectroWave (USA) Inc., a Texas corporation, Pinemont IV, Martin L. Kershman and Ronald W. Nance (incorporated herein by reference from Exhibit 10.10 to our Form 10-KSB/A filed with the Commission on May 1, 2008).

10.14		Office Building Lease, dated November 24, 2008, between Deep Down, Inc. and A-K-S-L 49 Beltway 8, L.P. (incorporated herein by reference from Exhibit 10.18 to our Form 10-K filed with the Commission on March 16, 2009).

10.15†		Severance and Separation Agreement, dated September 1, 2009, by and between Strategic Capital Services, Inc. and Robert E. Chamberlain, Jr. (“Consultant”) and Deep Down, Inc. (incorporated herein by reference from Exhibit 10.3 to our Form 10-Q filed with the Commission on November 16, 2009).

10.16		Stock Purchase Agreement, dated April 17, 2008, among Deep Down, Inc., Flotation Technologies, Inc. and the selling stockholders named therein (incorporated herein by reference from Exhibit 10.1 to our Form 8-K filed with the Commission on April 21, 2008).

10.17†		Employment Agreement with David A. Capotosto, dated June 5, 2008 (incorporated herein by reference from Exhibit 10.12 to our Form S-1 Registration Statement (file no. 333-152435) filed with the Commission on July 21, 2008).

10.18		Loan Agreement entered into as of February 13, 2009, by and among Flotation Technologies, Inc., Deep Down, Inc., and TD Bank, N.A. (incorporated herein by reference from Exhibit 10.22 to our Form 10-K filed with the Commission on March 16, 2009).

10.19		Mortgage and Security Agreement entered into as of February 13, 2009, by Flotation Technologies in favor of TD Bank, N.A. (incorporated herein by reference from Exhibit 10.23 to our Form 10-K filed with the Commission on March 16, 2009).

10.20		Collateral Assignment of Leases and Rents entered as of February 13, 2009, by Flotation Technologies, Inc. in favor of TD Bank, N.A. (incorporated herein by reference from Exhibit 10.24 to our Form 10-K filed with the Commission on March 16, 2009).

10.21		Commercial Note entered into as of February 13, 2009 by Flotation Technologies, Inc. in favor of TD Bank, N.A. (incorporated herein by reference from Exhibit 10.25 to our Form 10-K filed with the Commission on March 16, 2009).

10.22		Debt Subordination Agreement entered into as of February 13, 2009, by and among Flotation Technologies, Inc., Deep Down, Inc., and TD Bank, N.A. (incorporated herein by reference from Exhibit 10.26 to our Form 10-K filed with the Commission on March 16, 2009).

10.23		Purchase and Sale Agreement, dated May 22, 2009, by and between Deep Down, Inc. and JUMA Properties, LLC (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on June 2, 2009).

10.24		Deed of Trust, Security Agreement and UCC Financing Statement for Fixture Filing, executed as of May 29, 2009, by Deep Down, Inc., as grantor, in favor of Gary M. Olander, as trustee, for the benefit of Whitney National Bank, as beneficiary (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on June 2, 2009).

10.25		Third Amendment to Credit Agreement, entered into as of May 29, 2009, between Deep Down, Inc., as borrower, and Whitney National Bank, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. (incorporated by reference from Exhibit 10.3 to our Form 8-K filed on June 2, 2009).

10.26		Second Amendment to Security Agreement, executed as of May 29, 2009, by Deep Down, Inc. ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc., for the benefit of Whitney National Bank (incorporated by reference from Exhibit 10.4 to our Form 8-K filed on June 2, 2009).

10.27†		Employment Agreement, dated effective as of January 1, 2010, between Deep Down, Inc. and Eugene L. Butler (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on January 15, 2010).

10.28†		Amended and Restated Employment Agreement, dated effective as of January 1, 2010, between Deep Down, Inc. and Ronald E. Smith (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on January 15, 2010).

10.29		Environmental Indemnity Agreement entered as of February 13, 2009 in favor of TD Bank, N.A. (incorporated herein by reference from Exhibit 10.27 to our Form 10-K filed with the Commission on March 16, 2009).

10.30*†		Employment Agreement, dated effective as of February 17, 2010, between Deep Down, Inc. and Michael J. Newbury.

10.31*		Amended and Restated Credit Agreement, entered into as of April 14, 2010, between Deep Down, Inc., as borrower, and Whitney National Bank, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc.

10.32*		ROV Term Note, dated April 14, 2010, executed by Deep Down, Inc. and paid to the order of Whitney National Bank.

10.33*		RE Term Note, dated April 14, 2010, executed by Deep Down, Inc. and paid to the order of Whitney National Bank.

10.34*		RLOC Term Note, dated April 14, 2010, executed by Deep Down, Inc. and paid to the order of Whitney National Bank.

10.35*		LC Note, dated April 14, 2010, executed by Deep Down, Inc. and paid to the order of Whitney National Bank.

10.36*		Ratification of Guaranty, Security Agreement, and Intercreditor Agreement, dated April 14, 2010, among Deep Down, Inc., a Nevada corporation, as borrower, and Electrowave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC, Deep Down Inc., a Delaware corporation, each a guarantor, and Whitney National Bank, a national banking association, as lender.

10.37*		First Modification to Deed of Trust, dated April 14, 2010, executed by Deep Down, Inc., as grantor, for the benefit of Whitney National Bank, as lender.

10.38*		First Modification to Assignment of Leases and Rents, dated April 14, 2010, executed by Deep Down, Inc., as assignor, and Whitney National Bank, as assignee.

14.1*		Directors Code of Business Conduct.

14.2*		Financial Officer's Code of Business Conduct.

16.1		Letter, dated July 14, 2009, from Malone & Bailey, PC to the Securities and Exchange Commission (incorporated by reference from Exhibit 16.1 to our Form 8-K filed on July 14, 2009).

21.1*		Subsidiary list.

24.1*		Power of Attorney (set forth immediately following the registrant’s signatures to this report).

31.1*		Rule 13a-14(a)/15d-14(a) Certification of the President and Chief Executive Officer of Deep Down, Inc.

31.2*		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of Deep Down, Inc.

32.1*		Section 1350 Certification of the President and Chief Executive Officer of Deep Down, Inc.

32.2*		Section 1350 Certification of the Chief Financial Officer of Deep Down, Inc.

* Filed or furnished herewith.

† Exhibit constitutes a management contract or compensatory plan or arrangement.

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DEEP DOWN, INC.

(Registrant)

/s/ RONALD E. SMITH

Ronald E. Smith, President and Chief Executive Officer

Dated: April 15, 2010

/s/ EUGENE L. BUTLER

Eugene L. Butler

Chief Financial Officer

Dated: April 15, 2010

POWER OF ATTORNEY

KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints RONALD E. SMITH and EUGENE L. BUTLER, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signatures	Title	Date
/s/ RONALD E. SMITH	President, Chief Executive Officer and Director
Ronald E. Smith	(Principal Executive Officer)	April 15, 2010

/s/ EUGENE L. BUTLER	Chief Financial Officer and Director
Eugene L. Butler	(Principal Financial Officer and Principal Accounting Officer)	April 15, 2010

/s/ MARY L. BUDRUNAS	Vice-President, Corporate Secretary and Director
Mary L. Budrunas		April 15, 2010

/s/ MARK D. HOLLINGER	Director
Mark D. Hollinger		April 15, 2010

EXHIBIT INDEX

Exhibit Number		Description of Exhibit
2.1		Agreement and Plan of Reorganization among MediQuip Holdings, Inc., Deep Down, Inc., and the majority shareholders of Deep Down, Inc. (incorporated by reference from Exhibit 2.1 to our Form 10-KSB/A filed with the Commission on May 1, 2008).

3.1		Articles of Incorporation of Deep Down, Inc. (conformed to include the amendment of the Articles of Incorporation filed with the Secretary of State of the State of Nevada on September 29, 2008 (incorporated by reference from Exhibit A to our Schedule 14C filed on August 15, 2008).

3.2		Amended and Restated By Laws of Deep Down, Inc. (incorporated by reference from Exhibit B to our Schedule 14C filed on August 15, 2008).

3.3		Form of Certificate of Designations of Series D Redeemable Convertible Preferred Stock (incorporated herein by reference from Exhibit 3.4 to our Form 10-KSB/A filed with the Commission on May 1, 2008).

3.4		Form of Certificate of Designations of Series E Redeemable Exchangeable Preferred Stock (incorporated herein by reference from Exhibit 3.5 to our Form 10-KSB/A filed with the Commission on May 1, 2008).

3.5		Form of Certificate of Designations of Series F Redeemable Convertible Preferred Stock (incorporated herein by reference from Exhibit 3.6 to our Form 10-KSB/A filed with the Commission on May 1, 2008).

3.6		Form of Certificate of Designations of Series G Redeemable Exchangeable Preferred Stock (incorporated herein by reference from Exhibit 3.7 to our Form 10-KSB/A filed with the Commission on May 1, 2008).

4.1		Common Stock Purchase Warrant for 320,000 shares of common stock of Deep Down, Inc. issued to Dragonfly Capital Partners, LLC dated August 6, 2007 (incorporated herein by reference from Exhibit 4.2 to our Form 10-KSB filed with the Commission on April 1, 2008).

4.2		Common Stock Purchase Warrant for 118,812 shares of common stock of Deep Down, Inc. issued to Dragonfly Capital Partners, LLC dated January 4, 2008 (incorporated herein by reference from Exhibit 4.3 to our Form 10-KSB filed with the Commission on April 1, 2008).

4.3		Common Stock Purchase Warrant for 200,000 shares of common stock of Deep Down, Inc. issued to Subsea, LLC dated June 6, 2008 (incorporated herein by reference from Exhibit 4.1 to our Form 8-K/A (Amendment No. 2) filed with the Commission on June 9, 2008).

4.4		Registration Rights Agreement, dated August 6, 2007, among Deep Down, Inc. and Prospect Capital Corporation (incorporated herein by reference from Exhibit 4.4 to our Form 10-KSB/A filed with the Commission on May 1, 2008).

4.5		Private Placement Memorandum, dated May 16, 2008 (incorporated herein by reference from Exhibit 20.1 to our Form 8-K/A (Amendment No. 2) filed with the Commission on June 9, 2008).

4.6		Amended and Restated Supplement No. 1 to Private Placement Memorandum, dated June 2, 2008 (incorporated herein by reference from Exhibit 4.6 to our Form S-1 Registration Statement (file no. 333-152435) filed with the Commission on July 21, 2008).

4.7		Purchase Agreement, dated June 2, 2008, among Deep Down, Inc., and the Purchasers named therein (incorporated herein by reference from Exhibit 10.1 to our Form 8-K/A (Amendment No. 2) filed with the Commission on June 9, 2008).

4.8		6% Subordinated Debenture of Deep Down, Inc. dated March 31, 2008 (incorporated herein by reference from Exhibit 4.1 to our Form 10-Q filed with the Commission on May 16, 2008).

4.9†		Stock Option, Stock Warrant and Stock Award Plan (incorporated herein by reference from Exhibit 4.10 to our Form S-1 Registration Statement (file no. 333-152435) filed with the Commission on July 21, 2008).

4.10		Certificate of Articles of Organization of Deep Down International Holdings, LLC (filed with the Secretary of State for the state of Nevada on February 3, 2009) (incorporated by reference from Exhibit 4.11 to Amendment No. 3 to our Form S-1/A filed on April 10, 2009).

4.11		Operating Agreement of Deep Down International Holdings, LLC, a Nevada limited liability company (incorporated by reference from Exhibit 4.11 to Amendment No. 3 to our Form S-1/A filed on April 9, 2009).

10.1		Credit Agreement, dated as of November 11, 2008, among Deep Down, Inc. as borrower and Whitney National Bank, as lender (incorporated herein by reference from Exhibit 10.1 to our Form 10-Q filed with the Commission on November 14, 2008).

10.2		First Amendment to Credit Agreement entered into as of December 18, 2008, among Deep Down, Inc. as borrower and Whitney National Bank, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. (incorporated herein by reference from Exhibit 10.1 to our Form 8-K filed with the Commission on December 19, 2008).

10.3		Second Amendment to Credit Agreement entered into as of February 13, 2009, among Deep Down, Inc., as borrower, and Whitney National Bank, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. (incorporated herein by reference from Exhibit 10.3 to our Form 10-K filed with the Commission on March 16, 2009).

10.4		Guaranty, dated as of November 11, 2008, by ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. for the benefit of Whitney National Bank (incorporated herein by reference from Exhibit 10.2 to our Form 10-Q filed with the Commission on November 14, 2008).

10.5		Joinder to Guaranty, dated as of February 13, 2009, by Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.5 to our Form 10-K filed with the Commission on March 16, 2009).

10.6		Security Agreement, dated as of November 11, 2008, among Deep Down, Inc., ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. for the benefit of Whitney National Bank (incorporated herein by reference from Exhibit 10.3 to our Form 10-Q filed with the Commission on November 14, 2008).

10.7		Joinder to Security Agreement, dated as of February 13, 2009, by Deep Down International Holdings, LLC (incorporated herein by reference from Exhibit 10.7 to our Form 10-K filed with the Commission on March 16, 2009).

10.8		Second Amendment to Security Agreement, dated as of February 13, 2009, by Deep Down, Inc., ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. for the benefit of Whitney National Bank (incorporated herein by reference from Exhibit 10.3 to our Form 8-K filed with the Commission on December 19, 2008).

10.9		Term Note, dated December 18, 2008, executed by Deep Down, Inc. and paid to order to Whitney National Bank (incorporated herein by reference from Exhibit 10.2 to our Form 8-K filed with the Commission on December 19, 2008).

10.10†		Consulting Agreement, dated as of August 6, 2007, between Deep Down, Inc. and Strategic Capital Services, Inc. regarding the services of Robert Chamberlain (incorporated herein by reference from Exhibit 10.1 to our Form 10-KSB filed with the Commission on April 1, 2008).

10.11†		Employment Agreement, dated as of August 6, 2007, between Deep Down, Inc. and Ronald E. Smith (incorporated herein by reference from Exhibit 10.2 to our Form 10-KSB filed with the Commission on April 1, 2008).

10.12		Agreement and Plan of Merger among Deep Down, Inc., Mako Technologies, LLC, Mako Technologies, Inc. and the shareholders of Mako Technologies, Inc. dated December 17, 2007 (incorporated herein by reference from Exhibit 2.1 to our Form 10-KSB filed with the Commission on April 1, 2008).

10.13		Agreement and Plan of Reorganization among Deep Down, Inc., ElectroWave (USA), Inc., a Nevada corporation, ElectroWave (USA) Inc., a Texas corporation, Pinemont IV, Martin L. Kershman and Ronald W. Nance (incorporated herein by reference from Exhibit 10.10 to our Form 10-KSB/A filed with the Commission on May 1, 2008).

10.14		Office Building Lease, dated November 24, 2008, between Deep Down, Inc. and A-K-S-L 49 Beltway 8, L.P. (incorporated herein by reference from Exhibit 10.18 to our Form 10-K filed with the Commission on March 16, 2009).

10.15†		Severance and Separation Agreement, dated September 1, 2009, by and between Strategic Capital Services, Inc. and Robert E. Chamberlain, Jr. (“Consultant”) and Deep Down, Inc. (incorporated herein by reference from Exhibit 10.3 to our Form 10-Q filed with the Commission on November 16, 2009).

10.16		Stock Purchase Agreement, dated April 17, 2008, among Deep Down, Inc., Flotation Technologies, Inc. and the selling stockholders named therein (incorporated herein by reference from Exhibit 10.1 to our Form 8-K filed with the Commission on April 21, 2008).

10.17†		Employment Agreement with David A. Capotosto, dated June 5, 2008 (incorporated herein by reference from Exhibit 10.12 to our Form S-1 Registration Statement (file no. 333-152435) filed with the Commission on July 21, 2008).

10.18		Loan Agreement entered into as of February 13, 2009, by and among Flotation Technologies, Inc., Deep Down, Inc., and TD Bank, N.A. (incorporated herein by reference from Exhibit 10.22 to our Form 10-K filed with the Commission on March 16, 2009).

10.19		Mortgage and Security Agreement entered into as of February 13, 2009, by Flotation Technologies in favor of TD Bank, N.A. (incorporated herein by reference from Exhibit 10.23 to our Form 10-K filed with the Commission on March 16, 2009).

10.20		Collateral Assignment of Leases and Rents entered as of February 13, 2009, by Flotation Technologies, Inc. in favor of TD Bank, N.A. (incorporated herein by reference from Exhibit 10.24 to our Form 10-K filed with the Commission on March 16, 2009).

10.21		Commercial Note entered into as of February 13, 2009 by Flotation Technologies, Inc. in favor of TD Bank, N.A. (incorporated herein by reference from Exhibit 10.25 to our Form 10-K filed with the Commission on March 16, 2009).

10.22		Debt Subordination Agreement entered into as of February 13, 2009, by and among Flotation Technologies, Inc., Deep Down, Inc., and TD Bank, N.A. (incorporated herein by reference from Exhibit 10.26 to our Form 10-K filed with the Commission on March 16, 2009).

10.23

Purchase and Sale Agreement, dated May 22, 2009, by and between Deep Down, Inc. and JUMA Properties, LLC (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on June 2, 2009).

10.24		Deed of Trust, Security Agreement and UCC Financing Statement for Fixture Filing, executed as of May 29, 2009, by Deep Down, Inc., as grantor, in favor of Gary M. Olander, as trustee, for the benefit of Whitney National Bank, as beneficiary (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on June 2, 2009).

10.25		Third Amendment to Credit Agreement, entered into as of May 29, 2009, between Deep Down, Inc., as borrower, and Whitney National Bank, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc. (incorporated by reference from Exhibit 10.3 to our Form 8-K filed on June 2, 2009).

10.26		Second Amendment to Security Agreement, executed as of May 29, 2009, by Deep Down, Inc. ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc., for the benefit of Whitney National Bank (incorporated by reference from Exhibit 10.4 to our Form 8-K filed on June 2, 2009).

10.27†		Employment Agreement, dated effective as of January 1, 2010, between Deep Down, Inc. and Eugene L. Butler (incorporated by reference from Exhibit 10.2 to our Form 8-K filed on January 15, 2010).

10.28†		Amended and Restated Employment Agreement, dated effective as of January 1, 2010, between Deep Down, Inc. and Ronald E. Smith (incorporated by reference from Exhibit 10.1 to our Form 8-K filed on January 15, 2010).

10.29		Environmental Indemnity Agreement entered as of February 13, 2009 in favor of TD Bank, N.A. (incorporated herein by reference from Exhibit 10.27 to our Form 10-K filed with the Commission on March 16, 2009).

10.30*†		Employment Agreement, dated effective as of February 17, 2010, between Deep Down, Inc. and Michael J. Newbury.

10.31*		Amended and Restated Credit Agreement, entered into as of April 14, 2010, between Deep Down, Inc., as borrower, and Whitney National Bank, including the Guarantor’s Consent and Agreement as signed on behalf of ElectroWave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC and Deep Down, Inc.

10.32*		ROV Term Note, dated April 14, 2010, executed by Deep Down, Inc. and paid to the order of Whitney National Bank.

10.33*		RE Term Note, dated April 14, 2010, executed by Deep Down, Inc. and paid to the order of Whitney National Bank.

10.34*		RLOC Term Note, dated April 14, 2010, executed by Deep Down, Inc. and paid to the order of Whitney National Bank.

10.35*		LC Note, dated April 14, 2010, executed by Deep Down, Inc. and paid to the order of Whitney National Bank.

10.36*		Ratification of Guaranty, Security Agreement, and Intercreditor Agreement, dated April 14, 2010, among Deep Down, Inc., a Nevada corporation, as borrower, and Electrowave USA, Inc., Flotation Technologies, Inc., Mako Technologies, LLC, Deep Down Inc., a Delaware corporation, each a guarantor, and Whitney National Bank, a national banking association, as lender.

10.37*		First Modification to Deed of Trust, dated April 14, 2010, executed by Deep Down, Inc., as grantor, for the benefit of Whitney National Bank, as lender.

10.38*		First Modification to Assignment of Leases and Rents, dated April 14, 2010, executed by Deep Down, Inc., as assignor, and Whitney National Bank, as assignee.

14.1*		Directors Code of Business Conduct.

14.2*		Financial Officer's Code of Business Conduct.

16.1		Letter, dated July 14, 2009, from Malone & Bailey, PC to the Securities and Exchange Commission (incorporated by reference from Exhibit 16.1 to our Form 8-K filed on July 14, 2009).

21.1*		Subsidiary list.

24.1*		Power of Attorney (set forth immediately following the registrant’s signatures to this report).

31.1*		Rule 13a-14(a)/15d-14(a) Certification of the President and Chief Executive Officer of Deep Down, Inc.

31.2*		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of Deep Down, Inc.

32.1*		Section 1350 Certification of the President and Chief Executive Officer of Deep Down, Inc.

32.2*		Section 1350 Certification of the Chief Financial Officer of Deep Down, Inc.

__________________________________

* Filed or furnished herewith.

† Exhibit constitutes a management contract or compensatory plan or arrangement.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets	F-4

Consolidated Statements of Operations	F-5

Consolidated Statements of Changes in Stockholders’ Equity	F-6

Consolidated Statements of Cash Flows	F-7

Notes to the Consolidated Financial Statements	F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Deep Down, Inc.

We have audited the accompanying consolidated balance sheet of Deep Down, Inc. and its subsidiaries as of December 31, 2009, and the related consolidated statement of income, shareholders' equity and cash flows for the year ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Deep Down, Inc. and their subsidiaries at December 31, 2009, and the results of their operations and their cash flows for the year ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

/s/ PRICEWATERHOUSE COOPERS, LLP

Houston, Texas

April 15, 2010

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Deep Down, Inc.

Houston, Texas

We have audited the accompanying consolidated balance sheet of Deep Down, Inc. (the "Company") as of December 31, 2008 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company, as of December 31, 2008, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ MALONE & BAILEY, PC

www.malone-bailey.com

Houston, Texas

March 12, 2009

F-3

Deep Down, Inc.

Consolidated Balance Sheets

(In thousands, except par value amounts)	December 31, 2009			December 31, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	912		$	2,495
Restricted cash		-			136
Accounts receivable, net		7,662			10,772
Inventory		896			1,362
Costs and estimated earnings in excess of billings on uncompleted contracts		267			708
Deferred tax asset		-			217
Prepaid expenses and other current assets		225			634
Total current assets		9,962			16,324
Property, plant and equipment, net		20,011			13,799
Intangibles, net		12,166			18,091
Goodwill		9,429			15,024
Other assets, net		1,136			458
Total assets	$	52,704		$	63,696

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	2,865		$	4,319
Billings in excess of costs and estimated earnings on uncompleted contracts		4,434			2,315
Current portion of long-term debt		1,497			383
Total current liabilities		8,796			7,017
Long-term debt, net		5,379			1,718
Deferred tax liabilities		-			1,126
Total liabilities		14,175			9,861

Commitments and contingencies (Note 11)

Stockholders' equity:
Common stock, $0.001 par value, 490,000 shares authorized, 180,451 and 177,351 shares issued and outstanding, respectively		180			177
Additional paid-in capital		61,161			60,328
Accumulated deficit		(22,812	)		(6,670	)
Total stockholders' equity		38,529			53,835
Total liabilities and stockholders' equity	$	52,704		$	63,696

The accompanying notes are an integral part of the financial statements.

F-4

Deep Down, Inc.

Consolidated Statements of Operations

For the Years Ended December 31, 2009 and 2008

	Years Ended
	December 31,
(In thousands, except per share amounts)	2009			2008

Revenues	$	29,449		$	35,770
Cost of sales		19,888			21,686
Gross profit		9,561			14,084
Operating expenses:
Selling, general & administrative		14,371			14,295
Depreciation and amortization		6,538			1,285
Goodwill impairment		5,537			-
Total operating expenses		26,446			15,580
Operating loss		(16,885	)		(1,496	)
Other income (expense):
Interest income		10			110
Interest expense		(366	)		(3,511	)
Loss on debt extinguishment		-			(446	)
Other income (expense)		73			(22	)
Total other expense		(283	)		(3,869	)
Loss before income taxes		(17,168	)		(5,365	)
Income tax benefit		1,026			1,042
Net loss	$	(16,142	)	$	(4,323	)

Net loss per share, basic and diluted	$	(0.09	)	$	(0.03	)
Weighted-average common shares
outstanding, basic and diluted		179,430			143,962

The accompanying notes are an integral part of the financial statements.

F-5

Deep Down, Inc.

Statements of Changes in Sto ckholders' Equity

For the Years Ended December 31, 2009 and 2008

					Additional
	Common Stock				Paid-in			Accumulated
(In thousands)	Shares (#)		Amount ($)		Capital			Deficit			Total

Balance at December 31, 2007		85,977	$	86	$	14,850		$	(2,347	)	$	12,589

Net loss		-		-		-			(4,323	)		(4,323	)
Exchange of Series D preferred stock		25,867		26		4,393						4,419
Stock issued for acquisition of Mako		2,803		3		1,959						1,962
Stock issued for acquisition of Flotation		1,714		2		1,421						1,423
Warrants issued for acquisition of Flotation		-		-		122						122
Restricted stock issued for service		1,200		1		(1	)					-
Stock issued in private placement, net of $2,940 fees		57,143		57		37,003						37,060
Cashless exercise of stock options		29		-		-						-
Stock issued for exercise of warrants		2,618		2		(3	)					(1	)
Stock-based compensation		-		-		584						584

Balance at December 31, 2008		177,351	$	177	$	60,328		$	(6,670	)	$	53,835

Net loss		-		-		-			(16,142	)		(16,142	)
Restricted stock issued for service		3,100		3		(3	)		-			-
Stock-based compensation		-		-		836			-			836
Balance at December 31, 2009		180,451	$	180	$	61,161		$	(22,812	)	$	38,529

The accompanying notes are an integral part of the financial statements.

F-6

Deep Down, Inc.

C onsolidated Statement of Cash Flows

For the Years Ended December 31, 2009 and 2008

	Years Ended
	December 31,
(In thousands)	2009			2008
Cash flows from operating activities:
Net loss	$	(16,142	)	$	(4,323	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Interest income		-			(55	)
Non-cash amortization of debt discount		-			1,817
Non-cash amortization of deferred financing costs		-			763
Non-cash impairment of goodwill		5,537			-
Share-based compensation		836			584
Bad debt expense		192			1,507
Depreciation and amortization		8,154			2,363
Loss on disposal of equipment		78			228
Deferred taxes		(909	)		(856	)
Changes in assets and liabilities:
Accounts receivable		2,918			(3,087	)
Inventory		466			(1,932	)
Costs and estimated earnings in excess of billings on uncompleted contracts		441			1,483
Prepaid expenses and other current assets		409			(493	)
Other assets		(113	)		-
Accounts payable and accrued liabilities		(1,454	)		(328	)
Billings in excess of costs and estimated earnings on uncompleted contracts		2,119			2,127
Net cash provided by (used in) operating activities		2,532			(202	)

Cash flows from investing activities:
Cash paid for acquisition of Flotation, net of cash acquired of $235		-			(22,162	)
Proceeds from final settlement of acquisition of Flotation		58			-
Cash paid for acquisition of Mako, net of expenses		-			(4,237	)
Purchases of property and equipment		(6,117	)		(4,804	)
Proceeds from sale of property and equipment		148			-
Cash paid for capitalized software		(614	)		-
Purchase of investment		(200	)		-
Note receivable, net of repayments		(22	)		-
Change in restricted cash		136			239
Net cash used in investing activities		(6,611	)		(30,964	)

Cash flows from financing activities:
Proceeds from sale of common stock, net of expenses		-			37,060
Proceeds from sales-type lease		-			587
Borrowings on long-term debt		3,000			6,769
Repayments on long-term debt		(504	)		(12,961	)
Net cash provided by financing activities		2,496			31,455
Change in cash and equivalents		(1,583	)		289
Cash and cash equivalents, beginning of period		2,495			2,206
Cash and cash equivalents, end of period	$	912		$	2,495

Supplemental Disclosures:
Cash paid for interest	$	373		$	909
Cash paid for taxes	$	-		$	332
Cash paid for pre-payment penalties	$	-		$	446

The accompanying notes are an integral part of the financial statements.

F-7

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

Note 1: Description of Business and Summary of Significant Accounting Policies

Description of Business

Deep Down, Inc., and its wholly-owned subsidiaries (“Deep Down”, “we”, “us” or the “Company”) is an oilfield services company serving the worldwide offshore exploration and production industry. Our services and technological solutions include distribution system installation support and engineering services, umbilical terminations, loose-tube steel flying leads, flotation and drill riser buoyancy, Remote Operated Vehicles (“ROVs”) and toolings. We support subsea engineering, installation, commissioning, and maintenance projects through specialized, highly experienced service teams and engineered technological solutions. Deep Down’s primary focus is on more complex deepwater and ultra-deepwater oil production distribution system support services and technologies, used between the platform and the wellhead.

In the notes to the consolidated financial statements, all dollar and share amounts are in thousands of dollars and shares, unless otherwise indicated.

Liquidity

Our Credit Agreement imposes covenant restrictions on us that increase our vulnerability in the current adverse economic and industry climate, and limits our ability to obtain additional financing. We have recently obtained amendments to our credit facility, as discussed in Note 6, to waive our covenant noncompliance as of December 31, 2009 and to provide us more latitude in our covenants through the term of the agreement. Our ability to meet these covenants is primarily dependent on the adequacy of earnings before interest, taxes, depreciation and amortization. Our inability to satisfy the covenants contained in our Credit Agreement would constitute an event of default. An uncured default could result in our outstanding debt becoming immediately due and payable. If this were to occur, we may not be able to obtain waivers or secure alternative financing to satisfy our obligations, either of which would have a material adverse impact on our business.

Summary of Significant Accounting Policies

Principles of consolidation

The consolidated financial statements include the accounts of Deep Down and its wholly-owned subsidiaries for the years ended December 31, 2009 and 2008. All intercompany transactions and balances have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Segments

For the fiscal years ended December 31, 2009 and 2008, the operations of our operating segments, Deep Down Delaware, ElectroWave, Mako and Flotation, have been aggregated into a single reporting segment. Additionally, during the year ended December 31, 2009, we have combined ElectroWave’s operations into Deep Down Delaware as a single operating segment due to similar production processes and cost savings related to office and administrative support. While the operating segments have different product lines; they are very similar. They are all service-based operations revolving around our personnel’s expertise in the deep water industry, and any equipment is produced to a customer specified design and engineered using Deep Down personnel’s expertise, with installation and project management as part of our service revenue to the customer. Additionally, the segments have similar customers and distribution methods, and their economic characteristics are similar with regard to their gross margin percentages.

Other comprehensive income

Deep Down has no items that comprise other comprehensive income for the years ended December 31, 2009 and 2008.

Reclassifications

Prior period information presented in these financial statements includes reclassifications which were made to conform to the current period presentation. These reclassifications had no effect on our previously reported net loss or stockholders' equity.

F-8

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

Cash and Cash Equivalents and Restricted Cash

We consider all highly liquid investments with maturities from date of purchase of three months or less to be cash equivalents. Cash and equivalents consist of cash on deposit with foreign and domestic banks and, at times, may exceed federally insured limits.

At December 31, 2008, we had restricted cash of $136 related to a letter of credit for a vendor, which was released due to completion of the project during 2009. See further details at Note 11 Commitments and Contingencies.

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We utilize a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 - Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.

Our financial instruments consist primarily of cash equivalents, trade receivables and payables and debt instruments. The carrying values of cash, accounts receivable, and accounts payable approximate their fair values due to the short-term maturity of these instruments. Our long term debt was valued using techniques that require inputs that are both significant to the fair value measurement and unobservable (Level 3), specifically treasury rates adjusted for our credit risk premium. At December 31, 2009, our debt, excluding capital leases, had a carrying value of approximately $6,383 and a fair value of approximately $5,710.

Considerable judgment is required in interpreting data to develop the estimates of fair value. Accordingly, the estimates presented above are not necessarily indicative of the amounts we could realize in a current market exchange. As no active market exists for a significant portion of our financial instruments, fair value estimates were based on judgments regarding current economic conditions, future expected cash flows and loss experience, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and therefore cannot be calculated with precision (Level 3). There may be inherent weaknesses in calculation techniques, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, which could significantly affect the results.

For discussion of assets and liabilities measured at fair value on a non-recurring basis, see Note 5 Goodwill and Intangibles.

Accounts Receivable

We provide an allowance for doubtful accounts on trade receivables based on historical collection experience, the level of past due accounts and a specific review of each customer’s trade receivable balance with respect to their ability to make payments and expectations of future conditions that could impact the collectability of accounts receivable. When specific accounts are determined to be uncollectable, they are expensed as bad debt expense in that period. At December 31, 2009 and 2008, we estimated the allowance for doubtful accounts to be $304 and $575, respectively. Bad debt expense totaled $192 and $1,507 for the years ended December 31, 2009 and 2008, respectively.

F-9

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

Concentration of Credit Risk

As of December 31, 2009, four of our customers accounted for 22 percent, 9 percent, 8 percent and 5 percent of total accounts receivable, respectively. For the year ended December 31, 2009, our five largest customers accounted for 12 percent, 10 percent, 8 percent, 6 percent and 5 percent of total revenues, respectively. For the year ended December 31, 2008, our four largest customers accounted for 20 percent, 11 percent, 9 percent and 4 percent of total revenues, respectively.

Inventory and Work in Progress

Inventory is stated at lower of cost (first-in, first out) or net realizable value (in thousands).

	December 31, 2009		December 31, 2008
Raw materials	$	765	$	790
Work in progress		84		426
Finished goods		47		146
Total Inventory	$	896	$	1,362

A portion of work in progress represents costs that have been incurred for time and materials that are not appropriate to be billed to customers at such date, according to the contractual terms. Some of the billings are contingent upon satisfaction of a significant condition of sale (“milestone”), including but not limited to, factory acceptance testing (“FAT”) and customer approval. Milestone billings at December 31, 2009 and 2008 were $29 and $136, respectively.

Long-Lived Assets

Property, Plant and Equipment Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets. Buildings are depreciated between seven and thirty-six years, and leasehold improvements are amortized over the shorter of the assets' useful lives or lease terms. Equipment lives range from two to ten years, computers and office equipment lives are generally from two to three years, and furniture and fixtures are two to seven years. Replacements and betterments are capitalized, while maintenance and repairs are expensed as incurred. It is our policy to include depreciation expense on assets acquired under capital leases with depreciation expense on owned assets. Additionally, we record depreciation expense related to revenue-generating assets as Cost of Sales on the accompanying statements of operations.

Other Assets We capitalize certain internal and external costs related to the acquisition and development of internal use software during the application development stages of projects. Such costs consist primarily of custom-developed and packaged software and the direct labor costs of internally-developed software and are included with Other Assets on the accompanying balance sheets. Capitalized costs are amortized using the straight-line method over the estimated lives of the software, which range from three to five years. The costs capitalized in the application development stage include the costs of design, coding, installation of hardware and testing. We capitalize costs incurred during the development phase of the project as permitted. Costs incurred during the preliminary project or the post-implementation/operation stages of the project are expensed as incurred.

F-10

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

L ong-lived intangible assets . Our intangible assets generally consist of assets acquired in the purchases of the Mako and Flotation subsidiaries and are comprised of customer lists, non-compete covenants with key employees and trademarks related to Mako’s ROVs and to Flotation’s branding, processes, materials and technology. We amortize intangible assets over their useful lives ranging from three to forty years on a straight-line basis. We make judgments and estimates in conjunction with the carrying value of these assets, including amounts to be capitalized, depreciation and amortization methods, useful lives and the valuation of acquired long-lived intangible assets.

We have assessed the current market conditions and have concluded, as of December 31, 2009, that a triggering event had occurred that required an impairment analysis of long-lived intangible assets. For the year ended December 31, 2009, we recorded impairment charges totaling $4,616 to several long-lived intangible assets, which total impairment charges were recorded on the statement of operations as amortization expense. There was no impairment of long-lived assets for the year ended December 31, 2008. See further discussion in Note 5 regarding the testing and conclusions.

Goodwill

Lease Obligations

We lease land, buildings, vehicles and certain equipment under non-cancellable operating leases. Until the purchase of the facilities in May 2009, we leased our Channelview, Texas, operating location from JUMA Properties, LLC (“JUMA”), a company owned by Ronald E. Smith, President, CEO and Director of Deep Down and his wife Mary L. Budrunas, Vice President, Corporate Secretary and Director of Deep Down. See further discussion in Note 4 Property, Plant and Equipment. Additionally, since February 2009, we lease our corporate headquarters in Houston, Texas, under a non-cancellable operating lease. Mako leases office, warehouse and operating space in Morgan City, Louisiana, under a non-cancellable operating lease, and Flotation leases their manufacturing, warehousing and office locations in Biddeford, Maine under non-cancellable operating leases. We also lease certain office and other operating equipment under capital leases; the related assets are included with Property, Plant and Equipment on the consolidated balance sheets.

F-11

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

At the inception of a lease, we evaluate each agreement to determine whether the lease will be accounted for as an operating or capital lease. The term of the lease used for such an evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty.

Revenue Recognition

All intercompany revenue balances and transactions were eliminated in consolidation.

F-12

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

Income Taxes

F-13

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

Stock-Based Compensation

The fair value of each stock option or warrant grant is estimated on the date of the grant using the Black-Scholes model and is based on the following key assumptions for the year ended December 31, 2009 and 2008:

	December 31, 2009	December 31, 2008
Dividend yield	0%	0%
Risk free interest rate	1.69% - 2.33%	2.52% - 2.84%
Expected life of options	3 years	2-3 years
Expected volatility	88.5% - 92.8%	51.7% - 63.3%

Earnings/(Loss) per Common Share

Basic EPS is calculated by dividing net income/(loss) by the weighted average number of common shares outstanding for the period. Diluted EPS is calculated by dividing net income/(loss) by the weighted average number of common shares and dilutive common stock equivalents (stock awards and stock options) outstanding during the period. Dilutive EPS reflects the potential dilution that could occur if options and warrants to purchase common stock were exercised for shares of common stock. The following is a reconciliation of the number of shares (denominator) used in the basic and diluted EPS computations (in thousands, except per share amounts):

	Years Ended
	December 31,
In thousands, except per share amounts	2009			2008
Numerator:
Net loss	$	(16,663	)	$	(4,323	)

Denominator:
Weighted average number of common shares outstanding		179,430			143,962
Effect of dilutive securities		-			-
Denominator for diluted earnings per share		179,430			143,962

Net loss per common share outstanding, basic and diluted	$	(0.09	)	$	(0.03	)

Potentially dilutive securities representing 0 and 502 shares of common stock for the years ended December 31, 2009 and 2008, respectively, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.

F-14

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

Recent Accounting Pronouncements

In June 2009, the FASB approved the FASB Accounting Standards Codification (“the Codification”) as the single source of authoritative nongovernmental GAAP. All existing accounting standard documents, such as the FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the SEC, will be superseded by the Codification. All non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. The Codification does not change GAAP, but instead introduces a new structure that will combine all authoritative standards into a comprehensive, topically organized online database. The Codification was effective for interim and annual periods ending after September 15, 2009. We adopted the Codification during the third quarter of fiscal 2009. The Codification impact is limited to financial statement disclosures, as all references to authoritative accounting literature are referenced in accordance with the Codification.

In October 2009 the FASB issued Accounting Standards Update No. 2009-13, "Multiple-Deliverable Revenue Arrangements" ("ASU No. 2009-13"). ASU No. 2009-13 provides principles for allocation of consideration among its multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement. The statement also introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. This guidance is effective for us for all new or materially modified arrangements entered into on or after January 1, 2011 with earlier application permitted as of the beginning of a fiscal year. Full retrospective application of the new guidance is optional. We are currently assessing implementation of this new guidance, but do not expect a material impact on our consolidated financial statements.

In April 2008, the FASB issued amendments to ASC 350, “Intangibles — Goodwill and Other.” These provisions amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of the position is to improve the consistency between the determination of the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. The amended guidance is effective for fiscal years beginning after December 15, 2008. We adopted these provisions effective January 1, 2009; there was no impact to our consolidated financial statements.

In December 2007, the FASB issued guidance included in ASC Topic 805, "Business Combinations" (formerly FASB Staff Position SFAS No. 141R-1), which amends and clarifies SFAS No. 141R, "Business Combinations"). The new provisions of ASC Topic 805 require the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their respective acquisition-date fair values if fair value can be reasonably estimated, changes the recognition of assets acquired and liabilities assumed arising from contingencies, changes the recognition and measurement of contingent consideration, and requires the expensing of acquisition-related costs as incurred. If the fair value cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with ASC Topic 450, "Contingencies". ASC Topic 805 also requires additional disclosure of information surrounding a business combination, such that users of the entity's financial statements can fully understand the nature and financial impact of the business combination. The new provisions of ASC Topic 805 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008; we adopted the new provisions of ASC Topic 805 effective January 1, 2009. There was no impact to our consolidated financial statements.

F-15

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

Note 2: Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts

The components of costs and estimated earnings in excess of billings on uncompleted contracts are summarized below (in thousands):

	December 31, 2009			December 31, 2008
Costs incurred on uncompleted contracts	$	4,051		$	2,115
Estimated earnings		2,212			4,969
		6,263			7,084
Less: Billings to date		10,430			8,691
	$	(4,167	)	$	(1,607	)

Included in the accompanying consolidated balance sheets under the following captions:
Costs and estimated earnings in excess of billings on uncompleted contracts	$	267		$	708
Billings in excess of costs and estimated earnings on uncompleted contracts		(4,434	)		(2,315	)
	$	(4,167	)	$	(1,607	)

At December 31, 2009, the asset balance of $267 was related to two contracts that are projected to be completed during fiscal 2010. At December 31, 2008, the asset balance of $708 was related to a contract that was 90 percent complete at December 2008, based on the percentage-of-completion method. The remainder of the revenue was recognized in the first quarter of fiscal 2009. The balance in billings in excess of costs and estimated earnings on uncompleted contracts at December 31, 2009 and 2008, was $4,434 and $2,315, respectively, and consisted of significant milestone payments, primarily related to a large contract that is expected to be completed in fiscal year 2010.

Note 3: Acquisitions

Purchase of Flotation Technologies, Inc.

On May 1, 2008, we acquired Flotation Technologies, Inc. (“Flotation”), pursuant to the stock purchase agreement. Under the terms of the agreement, the purchase price may be adjusted upward or downward, depending on certain working capital targets. We resolved a dispute concerning the working capital adjustment for the purchase pursuant to the arbitration proceeding in May 2009. The arbitrator awarded us a cash purchase price adjustment of $84. The impact of this adjustment after legal expenses was $58 and was recorded as a reduction to goodwill as of the balance sheet date. The acquisition of Flotation has been accounted for using the purchase method of accounting since we acquired substantially all of the assets, certain liabilities, employees, and business of Flotation. The allocation of the purchase price was finalized upon the receipt of management’s review of final amounts and recording of the net goodwill adjustment discussed above in June 2009.

The purchase price of Flotation was $23,883 and consisted of $22,016 in cash and 1,714 shares of common stock valued at $0.83 per common share, plus transaction costs of $323. In addition, warrants to purchase 200 shares of common stock at $0.70 per share were issued to an entity affiliated with the selling shareholders for the acquisition of technology related to the operations of Flotation. The warrants are exercisable at any time from June 3, 2009 through September 3, 2011 and include piggyback registration rights with respect to the underlying shares of common stock. We valued the warrants at $122 based on the Black-Scholes option pricing model.

We sold 57,143 shares of common stock to accredited investors on June 5, 2008, at a price of $0.70 per share, for approximately $37,060 in net proceeds. We used approximately $22,100 in proceeds from this Private Placement to fund the cash requirement of the Flotation acquisition.

We also issued 600 options to employees of Flotation for their continued services with an exercise price of $1.15 per share. These options vest one-third of the original amount each year and may be exercised in whole or in part after vesting. We valued these options at $264 based on the Black-Scholes option pricing model, and are recognizing the related compensation cost ratably over the requisite service period and not in the purchase price of the transaction.

F-16

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

Mako Technologies, Inc .

Effective December 1, 2007, we purchased 100 percent of the common stock of Mako Technologies, Inc. for $11,307. Pursuant to the agreement and plan of merger, final installments of the purchase price were paid to the Mako shareholders during the year ended December 31, 2008, which included $4,160 cash to the Mako shareholders plus $77 of transaction expenses. In March 2008, we issued the second installment of 2,803 restricted shares of common stock of Deep Down, valued at $0.70 per share, totaling $1,962, including non-cash adjustments to purchased asset values in goodwill totaling $174. See Note 5 regarding the adjustment to goodwill related to final tax return adjustments during 2008. The allocation of the purchase price was finalized upon the receipt of management’s review of final amounts and final tax returns in December 2008.

Note 4: Property, Plant and Equipment

Property and equipment consisted of the following as of December 31, 2009 and 2008 (in thousands):

	December 31, 2009			December 31, 2008			Useful Life
Land	$	1,954		$	482			-
Buildings and improvements		5,458			3,181		7 - 36 years
Leasehold improvements		313			344		2 - 5 years
Equipment		13,773			8,713		2 - 10 years
Furniture, computers and office equipment		1,154			634		2 - 7 years
Construction in progress		954			2,131

Total		23,606			15,485
Less: Accumulated depreciation		(3,595	)		(1,686	)
Property and equipment, net	$	20,011		$	13,799

Depreciation expense, excluded from “Cost of sales” in the accompanying statements of operations, was approximately $343 and $236 for the years ended December 31, 2009 and 2008, respectively. Depreciation expense, included in “Cost of sales” in the accompanying statements of operations, was approximately $1,616 and $1,078 for the years ended December 31, 2009 and 2008, respectively. During the year ended December 31, 2009, we acquired the following assets under capital leases: $92 in office equipment and $32 in equipment. Accumulated depreciation on equipment under capital leases was $247 and $138 at December 31, 2009 and 2008, respectively.

On May 29, 2009, we consummated a purchase transaction with JUMA; pursuant to a Purchase and Sale Agreement dated May 22, 2009, we acquired certain property and improvements located in Channelview, Texas, where certain of our operations are currently located (the “Channelview Property”). The Channelview Property consists of 8.203 acres and was purchased for $2,600. The transaction was conducted on an arms-length basis and in accordance with normal terms and conditions. We used $2,100 loan proceeds from Whitney Bank as discussed in Note 6, Long-Term Debt. Prior to the purchase, we leased the Channelview Property from JUMA at a base rate of $15 per month. In connection with the purchase of the Channelview Property, the lease between us and JUMA was terminated. We incurred no early termination penalties from JUMA in connection with this termination.

At December 31, 2009 and 2008, construction in progress represents assets that are not ready for service or are in the construction stage. The 2009 balance included approximately $954 for equipment in progress that will be placed in service in 2010. The 2008 balance included approximately $1,509 for a new ROV which was completed in September 2009. We will begin depreciating these assets once they are ready for or put into use.

F-17

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

Note 5: Intangible Assets and Goodwill

Goodwill

Goodwill represents the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses.

The change in the carrying value of goodwill during the years ended December 31, 2009 and 2008 is set forth below (in thousands):

Carrying amount as of December 31, 2007	$	10,594
Adjustments to previously reporting purchase price		2,289
Adjustments related to acquisitions, net		2,141
Carrying amount as of December 31, 2008		15,024
Adjustments to previously reporting purchase price		(58	)
Goodwill impairment		(5,537	)
Carrying amount as of December 31, 2009	$	9,429

The increases to goodwill in 2008 include an adjustment to the Mako purchase price due to the finalization of tax returns, whereby we determined that approximately $1,840 of the purchase price was to be allocated to a deferred tax liability due to the difference in the tax balance sheet and book balance sheet related to the intangible and fixed assets. The remainder of the 2008 increases relate to the purchase of Flotation and to the final adjustments to net asset values of Mako. The decrease in 2009 was primarily due to the non-cash impairment charge as discussed below, plus an adjustment to reduce the purchase price of Flotation by $58, net of legal fees, due to the resolution of a dispute concerning the working capital adjustment for the purchase price calculation.

Because quoted market prices for our individual reporting units are not available, management must apply judgment in determining the estimated fair value of our reporting units for purposes of performing the annual goodwill impairment test. Management uses all available information to make these fair value determinations, including the discounting of reporting units’ projected cash flow, publicly traded company multiples and recent merger and acquisition transaction values as a multiple of earnings. A key component of these fair value determinations is an assessment of the fair value using discounted cash flows and other market-related valuation models in relation to our market capitalization.

The accounting principles regarding goodwill acknowledge that the observed market prices of individual trades of a company’s stock (and thus its computed market capitalization) may not be representative of the fair value of the entity as a whole. Substantial value may arise from the ability to take advantage of synergies and other benefits that flow from control over another entity. Consequently, measuring the fair value of a collection of assets and liabilities that operate together in a controlled entity is different from measuring the fair value of that entity’s individual common stock. In most industries, including Deep Down’s, an acquiring entity typically is willing to pay more for equity securities that give it a controlling interest than an investor would pay for a number of equity securities representing less than a controlling interest. Therefore, the above fair value calculations using discounted cash flows and other market-related valuation models are compared to market capitalization plus a control premium.

At December 31, 2009, our management completed the annual impairment test of goodwill. Management’s calculations indicated, due to a number of factors, including the current global economic environment, increased costs of capital and the decrease in our market capitalization, that the calculations for the reporting units of Deep Down Delaware, Mako and Flotation each indicated their respective net book value exceeded its fair value and, accordingly, we estimated the implied fair value of the goodwill for each reporting unit. We used the estimated fair value of each reporting unit from the first step as the purchase price in a hypothetical acquisition of the respective reporting unit. We recognized a goodwill impairment of $3,056 for Deep Down Delaware, $2,481 for Mako and $0 for Flotation reporting units for the year ended December 31, 2009. After adjusting the Flotation carrying value of intangible assets to fair value, there was no goodwill impairment for that reporting unit. See detailed discussion of intangible asset impairment below. The impairment was recorded in operating expenses in the consolidated statement of operations for the year ended December 31, 2009. This non-cash charge did not impact our liquidity position, debt covenants or cash flows.

F-18

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

We estimated the fair value of the reporting units using discounted cash flows and earnings multiples of comparable publicly traded companies. The key discounted cash flow assumptions used to determine the fair value of our reporting units included: a) cash flow periods of six years with a four percent estimated annual growth rate, b) terminal values based on the terminal cash flow growth rate and the capitalization rate (weighted average cost of capital – terminal growth rate) and c) a weighted average cost of capital of 20.8 percent. The remaining goodwill by reporting unit was $4,472, $2,874 and $2,083 for the Delaware, Mako and Flotation reporting units, respectively, as of December 31, 2009. As a result of the adjustments discussed above, approximately $7,346 of our goodwill is recorded at fair value as of December 31, 2009, based upon Level 3 inputs. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others. Unanticipated changes in revenue, gross margin, long-term growth factor or discount rate could result in a material impact on the estimated fair values of our reporting units which could result in additional goodwill impairment in future periods.

Intangible Assets

Identifiable intangible assets acquired in business combinations are recorded based upon fair market value at the date of acquisition. Amounts allocated to intangible assets are amortized on a straight-line basis over their estimated useful lives. Estimated intangible asset values, net of recognized amortization expense include the following (in thousands):

		December 31, 2009							December 31, 2008
	Estimated	Gross Carrying		Accumulated			Net Carrying		Gross Carrying		Accumulated			Net Carrying
	Useful Life	Value		Amortization			Amount		Value		Amortization			Amount

Customer relationship	6-14 Years	$	3,515	$	(786	)	$	2,729	$	3,515	$	(403	)	$	3,112
Non-compete covenant	3-5 Years		1,334		(893	)		441		1,334		(294	)		1,040
Trademarks	25-40 Years		3,110		(174	)		2,936		3,110		(80	)		3,030
Technology	10 Years		11,209		(5,149	)		6,060		11,209		(300	)		10,909
Total		$	19,168	$	(7,002	)	$	12,166	$	19,168	$	(1,077	)	$	18,091

We have assessed the current market conditions and have concluded, as of December 31, 2009, that a triggering event had occurred that required an impairment analysis of long-lived intangible assets. Specifically, recent developments in technology have shortened the estimated useful life (and related projected cash flows) of certain intangible assets. Fair values for technology and customer relationships were based upon an excess earnings methodology. Fair value for non-compete agreements was based on the expected differential cash flow of the reporting unit between “with non-compete agreements” and “without” non-compete agreements scenarios.

For the year ended December 31, 2009, we recorded impairment charges totaling $4,616 to the following long-lived intangible assets: $4,401 reduction in the carrying value of the technology intangibles primarily due to a change in the estimated useful life from twenty-five years to ten years based on recent technology developments in the buoyancy industry, which shorter life lessened the projected cash flows generated by this asset, and $215 reduction in the non-compete covenants. As a result, approximately $6,110 of long-lived intangible assets are recorded at fair value based upon Level 3 inputs at December 31, 2009. We recorded the adjustment as amortization expense on the statement of operations. Additionally, we reduced the estimated useful lives of the following intangible assets based upon current market trends and estimated future cash flows: customer lists from a range of eight to twenty-five years to a range of six to fourteen years, and technology from twenty-five to ten years. The estimated amortization expense below reflects the adjusted carrying values and useful lives.

Estimated amortization expense for each of the five subsequent fiscal years is expected to be (in thousands):

Years ended December 31,:
2010	$	1,230
2011		1,143
2012		1,099
2013		1,099
2014		1,099
Thereafter		6,496
	$	12,166

F-19

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

Note 6: Long-Term Debt

At December 31, 2009 and 2008 long-term debt consisted of the following (in thousands):

	December 31, 2009			December 31, 2008
Secured credit agreements	$	5,819		$	1,150
Other bank loans		63			15
Total bank debt		5,882			1,165
6% Subordinated Debenture		500			500
Capital lease obligations		494			436
Total debt		6,876			2,101
Current portion of long-term debt		(1,497	)		(383	)
Long-term debt, net of current portion	$	5,379		$	1,718

Overview

We have entered into an Amended and Restated Credit Agreement, dated as of April 14, 2010, to address covenant violations we have had under our Credit Agreement with Whitney National Bank (“Whitney”) that we originally entered into on November 11, 2008. Under the new Amended and Restated Credit Agreement (the “New Agreement”), we no longer have any further capacity to draw upon a revolving line of credit and the maturity of all outstanding debt under the New Agreement is scheduled to mature on April 15, 2011. Under the terms of the New Agreement, our noncompliance with the prior terms of the financial covenants and certain other covenants under the Credit Agreement have been waived (the effect of such noncompliance would have entitled the holders of all debt under the Credit Agreement and under a loan agreement between Flotation and TD Bank, N.A. (“TD Bank”) to call such debt immediately due and payable and would have required us to classify all debt outstanding under these facilities as current in our audited consolidated balance sheet at December 31, 2009). We continue to remain current on payments of our principal, interest and fee obligations with Whitney and TD Bank. However, under the terms of the New Agreement, all of the indebtedness outstanding under such agreement, which is a currently approximately an aggregate principal amount of $3,592, will all be due on April 15, 2011, unless we are able to refinance all or a portion of such indebtedness.

Furthermore, Flotation was not in compliance as of December 31, 2009 with its covenant obligations under the TD Bank loan. The noncompliance with such covenants under either of the Credit Agreement with Whitney and the loan agreement with TD Bank would constitute cross defaults for purposes of the other debt facility. Flotation has also obtained a waiver of its noncompliance so that such cross default has not occurred with respect to our fiscal quarter ended December 31, 2009. The effect of our entry into the New Agreement means that we no longer have access to a line of credit for capital resources and we must rely solely on our cash position and cash flows to fund our operating requirements.

Whitney Credit Agreement

F-20

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

We were originally obligated to repay the May 2009 term loan on the basis of monthly installments of approximately $18, with the initial payment on June 1, 2009 and a final payment of all unpaid principal and accrued interest on May 1, 2024. Outstanding amounts of principal of the May 2009 term loan accrue interest at a rate of 6.5 percent per annum. As of the entry into the New Agreement, the outstanding principal amount of the December 2008 term loan is approximately $2,012. Under the terms of the New Agreement, we are required to continue to make monthly installment payments for the May 2009 term loan in the amount of approximately $18 and the outstanding principal amount of such loan continues to accrue interest at the rate of 6.5 percent per annum. However, the final payment of all unpaid principal and accrued interest on the May 2009 term loan of approximately $1,927 is now due on April 15, 2011.

F-21

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

TD Bank Loan Agreement

Net interest expense, fiscal 2008 debt transactions and loss on debt extinguishment

For the year ended December 31, 2008, we amortized into net interest expense $1,703 of debt discount and $763 of deferred financing costs associated with the fair market value of warrants and the cash-based expenses, related to third party fees and prepaid lender fees, over the life of a secured credit agreement, which was entered into in August 2007 and amended in December 2007, using the effective interest rate method. During the year ended December 31, 2008, we paid $13,275 to the lender to pay the outstanding balance under the credit agreement, related interest of $829 and early termination fees, recognized as a loss on early extinguishment of debt, of $446. Additionally, during the year ended December 31, 2008, we recorded $114 in net interest expense for the accretion of the Series E Preferred Stock up to face value, that was exchanged into a 6 percent subordinated debenture in the amount of $500.

Payment table

Aggregate principal maturities of long-term debt, excluding capital leases which are detailed in Note 11, were as follows for years ended December 31:

	Long-Term Debt
	Maturities
Years ended December 31,:
2010	$	1,398
2011		1,094
2012		225
2013		185
2014		197
Thereafter		3,283
	$	6,382

F-22

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

Note 7: Stock-Based Compensation

We have a stock-based compensation plan, the “2003 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan” (the “Plan”). Stock based compensation is recognized as provided under the applicable authoritative guidance which requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the requisite service period (generally the vesting period) in the financial statements based on their fair values. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity. The options granted under the Plan have vesting periods that range from immediate vesting to vesting over five years, and the contract terms of the options granted are up to ten years. Under the Plan, the total number of options permitted is 15 percent of issued and outstanding common shares.

During the year ended December 31, 2009, we granted 14,475 options and 3,100 shares of restricted stock, and cancelled 2,517 options subject to forfeitures under the Plan. Based on the shares of common stock outstanding at December 31, 2009, there were approximately 2,743 options available for grant under the Plan as of that date.

Restricted Stock

On March 23, 2009, we granted 2,350 restricted shares, total par value $2, to executives and employees which vest on March 23, 2011, with continued employment. The shares had a fair value grant price of $0.12 per share based on the closing price of common stock on March 20, 2009. The shares vest on the second anniversary of the grant date, and we are amortizing the related stock-based compensation of $291 over the two-year requisite service period.

On September 1, 2009, we granted 750 restricted shares, total par value $1, to an executive in connection with his Severance and Separation Agreement. The shares had a fair value grant price of $0.10 per share based on the closing price of common stock on September 1, 2009. The shares vest on the anniversary of the grant date, and we are amortizing the related stock-based compensation of $75 over the one-year requisite service period.

In connection with the departure of two executives during the third quarter of 2009, we accelerated the vesting of 850 shares of restricted stock granted on March 29, 2009, and 350 shares granted in February 2008, and recognized the related stock-based compensation of $106. During the year ended December 31, 2009 and 2008, we recognized a total of $464 and $221, respectively, in stock-based compensation related to all outstanding shares of restricted stock. The unamortized portion of the estimated fair value of restricted stock was $186 at December 31, 2009.

The following table summarizes our restricted stock activity for the year ended December 31, 2009. The aggregate intrinsic value is based upon the closing price of $0.13 of our common stock on December 31, 2009.

In thousands, except per share amounts	Restricted Shares		Weighted- Average Fair Value Grant Price		Aggregate Intrinsic Value
Outstanding at December 31, 2007		-	$	-
Grants		1,200	$	0.42
Outstanding at December 31, 2008		1,200	$	0.42
Grants		3,100	$	0.12
Outstanding at December 31, 2009		4,300	$	0.20	$	37

F-23

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

Summary of Stock Options

During the years ended December 31, 2009 and 2008, we granted 14,475 and 4,200 options, respectively. Based on the shares of common stock outstanding at December 31, 2009, there were approximately 2,743 options available for grant under the Plan as of that date. We expense all stock options on a straight-line basis, net of forfeitures, over the requisite expected service periods. Additionally, during the year ended December 31, 2009, we revised the estimated rate of forfeitures to 30 percent from 0 percent based on the history of stock option cancellations and management’s estimates of expected future forfeiture rates, resulting in a reduction of stock-based compensation expense of $116 for the year ended December 31, 2009. The total stock-based compensation expense recognized for stock options for the years ended December 31, 2009 and 2008 was $372 and $364, respectively. As of December 31, 2009, the unamortized portion of the estimated fair value of outstanding stock options was $1,189.

The following table summarizes our stock option activity for the year ended December 31, 2009. The aggregate intrinsic value is based on the closing price of $0.13 on December 31, 2009.

In thousands, except per share amounts	Shares Underlying Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (In-The-Money)
Outstanding at December 31, 2007		5,500		$	0.58
Grants		4,200			1.35
Exercises		(50	)		0.50
Cancellations & Forfeitures		(1,583	)		0.70
Outstanding at December 31, 2008		8,067		$	0.96		2.3	$	-
Grants		14,475			0.11
Exercises		-			-
Cancellations & Forfeitures		(2,517	)		0.90
Outstanding at December 31, 2009		20,025		$	0.35		2.5	$	323
Exerciseable at December 31, 2009		3,225		$	0.75		1.8	$	-

The following summarizes our outstanding options and their respective exercise prices at December 31, 2009 (shares in thousands):

Exercise Price		Shares Underlying Options
$ 0.10 - 0.49		13,850
$ 0.50 - 0.69		3,525
$ 0.70 - 0.99		50
$ 1.00 - 1.29		600
$ 1.30 - 1.50		2,000
		20,025

The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes model and is based on the following key assumptions for the year ended December 31, 2009:

	December 31, 2009
Dividend yield	0%
Risk free interest rate	1.69% - 2.33%
Expected life of options	3 years
Expected volatility	88.5% - 92.8%

F-24

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

Note 8: Warrants

In connection with the purchase of Flotation during the year ended December 31, 2008, we issued warrants to purchase 200 common shares at $0.70 per share to an entity affiliated with the selling shareholders in consideration for the acquisition of related technology. The warrants are exercisable at any time from June 3, 2009 through September 3, 2011 and include piggyback registration rights with respect to the underlying shares of common stock. We valued the warrants at $122 based on the Black Scholes option pricing model and included this value in the purchase price allocation relating to Flotation.

A summary of warrant transactions follows. The aggregate intrinsic value is based on the closing price of $0.13 on December 31, 2009.

In thousands, except per share amounts	Shares Underlying Warrants			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (In-The-Money)
Outstanding at December 31, 2007		5,399		$	0.53
Grants		200		$	0.70
Exercised		(4,960	)	$	0.51
Outstanding at December 31, 2008		639		$	0.78		4.0	$	-
Outstanding and exercisable at December 31, 2009		639		$	0.78		2.3	$	-

The following summarizes our outstanding warrants and their respective exercise prices at December 31, 2009 (share amounts in thousands):

Exercise Price		Shares Underlying Warrants
$	0.70 – 0.99		520
$	1.01		119
			639

Note 9: Common Stock

Private Placement, fiscal year 2008

On June 5, 2008, we sold 57,143 shares of our common stock in a private placement to accredited investors, for $40,000 at a per-share price of $0.70 (the “Private Placement”). After transaction costs, we had net proceeds of $37,060. Dahlman Rose & Company, LLC acted as exclusive placement agent for the equity financing.

We used approximately $22,100 of the net proceeds to fund the cash portion of the Flotation purchase, and used approximately $12,493 to repay outstanding debt, along with early termination fees, to Prospect in June, 2008. We retained the remaining net proceeds for working capital purposes.

F-25

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

Note 10: Income Taxes

The provision for income taxes on income from continuing operations is comprised of the following for the years ended December 31, 2009 and 2008. The provision for income taxes differs from the amount computed by applying the U.S. statutory income tax rate to income from continuing operations before income taxes for the reasons set forth below for the years ended December 31, 2009 and 2008. Amounts are in thousands, except percentages.

	December 31, 2009			December 31, 2008
Federal:
Current	$	603		$	(453	)
Deferred		(1,474	)		(856	)
Total Federal	$	(871	)	$	(1,309	)
State:
Current	$	50		$	267
Deferred		(205	)		-
Total State	$	(155	)	$	267
Total income tax benefit	$	(1,026	)	$	(1,042	)

	Year ended
	December 31, 2009		December 31, 2008
Income tax expense at federal statutory rate	34.00%		34.00%
State taxes, net of federal expense	0.98%		(3.30%	)
Goodwill impairment	(10.27%	)	0.00%
Deferred financing	0.00%		(7.60%	)
Accretion	0.00%		(2.10%	)
Valuation allowance	(15.44%	)	0.00%
Permanent differences	(2.5%	)	0.00%
Other, net	(0.79%	)	(1.40%	)
Total effective rate	5.98%		19.60%

Income tax benefit was $1,026 and $1,042, respectively, for the years ended December 31, 2009 and 2008.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss and tax credit carry forwards. The tax effects of the temporary differences and carry forwards are as follow at December 31, 2009 and 2008 (in thousands):

	December 31, 2009			December 31, 2008
Deferred tax assets:
Allowance for bad debt	$	106		$	195
Net operating loss		3,779			1,061
Stock based compensation		546			316
Section 263 (a) adjustment		52			21
Other		48			-
Total deferred tax assets	$	4,531		$	1,593
Deferred tax liabilities:
Depreciation on property and equipment	$	(1,874	)	$	(797	)
Intangible amortization		314			(1,390	)
Total deferred tax liabilities	$	(1,560	)	$	(2,187	)
Less: valuation allowance		(2,971	)		(316	)
Net deferred tax liabilities	$	-		$	(910	)

We have $10,605 in net operating loss (“NOL”) carry forwards available to offset future or prior taxable income. These federal NOL’s will expire in 2028. As of December 31, 2009, these NOL’s are not limited under Section 382.

F-26

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

During the year ended December 31, 2008, we recorded a deferred tax liability of $1,841 for the temporary difference arising from the intangible assets acquired in the Mako transaction.

A valuation allowance is established when it is more likely than not that some of the deferred tax assets will not be realized. Management analyzed its current operating results and future projections and determined that a full valuation allowance was needed due to our cumulative losses in recent years.

Note 11: Related Party Transactions

Ron Smith, Eugene Butler and Robert Chamberlain (until his resignation from this partnership effective September 1, 2009), are partners in Ship and Sail, Inc., a vendor of Deep Down. During 2009, we made payments of $583 to Ship and Sail, and we had a prepaid balance of $38 as of December 31, 2009 which has been expensed in 2010. The payments to Ship and Sail related to services provided by that entity for the support of the development of marine technology which is planned for production in fiscal 2010, including specialized services for provision of vessel access for design and testing, and office space and related utilities.

On May 29, 2009, we consummated a purchase transaction with JUMA. Pursuant to a Purchase and Sale Agreement dated May 22, 2009, we acquired the Channelview Property, which consists of 357 square feet and was purchased for $2,600. The transaction was conducted on an arms-length basis and in accordance with normal terms and conditions. See additional discussion in Note 5, Property, Plant and Equipment and Note 6, Long-Term Debt.

Note 12: Commitments and Contingencies

Litigation

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 material legal proceedings.

Leases

We lease certain offices, facilities, equipment and vehicles under non-cancellable operating and capital leases expiring at various dates through 2016.

At December 31, 2009, future minimum contractual obligations were as follows (in thousands):

Years ended December 31,:	Capital Leases			Operating Leases
2010	$	143		$	518
2011		143			380
2012		125			325
2013		109			287
2014		20			175
Thereafter		-			226
Total minimum lease payments	$	540		$	1,911
Residual principal balance		105
Amount representing interest		(151	)
Present value of minimum lease payments	$	494
Less current maturities of capital lease obligations		88
Long-term contractal obligations	$	406

F-27

Notes to Consolidated Financial Statements for the Years ended December 31, 2009 and 2008

Rent expense totaled $711 and $526 for the years ended December 31, 2009 and 2008, respectively. The increase is due partially to increased leased space at Flotation, and their inclusion for the full year in 2009, plus the new corporate offices in Houston, Texas.

Letters of Credit

Certain customers could require us to issue a standby letter of credit (“L/C”) to ensure performance under terms of the contract and with associated vendors and subcontractors. In the event of default, the creditor could demand payment from the issuing bank for the amount of the L/C.

In December 2008, we amended the Revolver with Whitney to provide for L/Cs. During the year ended December 31, 2009, we issued an irrevocable transferrable standby L/C in the normal course of business, with an annual commission rate of 2.4 percent, for $1,107. This L/C reduces the borrowing capacity under the Revolver.

F-28

EXHIBIT 10.30

Executive Employment

Agreement

This Employment Agreement (the “ Agreement ”), dated as of the 17th day of February 2010 (the “ Effective Date ”), is by and between Deep Down, Inc., a Nevada corporation (the “ Company ”), and Michael Newbury, a resident of Richmond, TX (the “ Executive ”).

WHEREAS, the Company is a parent organization that oversees the financial, manufacturing and service operations of a group of companies that serve both domestic and international clients related to various activities in deep-water oil and gas exploration and production (the “ Business ”);

WHEREAS, the Company desires to engage the services of the Executive and the Executive desires to be employed by the Company;

WHEREAS, the Company desires to be assured that the unique and expert services of the Executive will be substantially available to the Company, and that the Executive is willing and able to render such services on the terms and conditions hereinafter set forth; and

WHEREAS, the Company desires to be assured that the confidential information and good will of the Company will be preserved for the exclusive benefit of the Company, and the Executive acknowledges that Executive will receive specific confidential information and training relating to the businesses of the Company, which confidential information and training is necessary to enable Executive to perform Executive’s duties and to receive future compensation and Executive will play a significant role in the development and management of the businesses of the Company and will be entrusted with the Company’s confidential information relating to the Company and its customers, manufacturers, distributors and others;

NOW, THEREFORE, in consideration of such employment and the mutual covenants and promises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Executive agree as follows:

Section 1. Employment and Position .

Subject to Section 2, the Company hereby employs Executive as its Vice President Business Development, and Executive hereby accepts such employment, under and subject to the terms and conditions hereinafter set forth.

Section 2. Term .

The term of employment under this Agreement shall begin on the Effective Date and, unless sooner terminated as provided in Section 6, shall conclude on the 1st anniversary of the date hereof (the “ Initial Term ”). This Agreement shall be renewed automatically for additional one (1) year periods (each a “ Renewal Term ”) unless either party shall provide written notice to the other party not less than ninety (90) days prior to the end of the Initial Term or such applicable Renewal Term that it or (s)he does not wish to renew the Agreement. The Initial Term and any Renewal Term are sometimes collectively referred to herein as the “ Employment Period ”. Executive represents to the Company that (s)he has no present intention to terminate employment with the Company.

Section 3. Duties .

During the Employment Period, Executive shall serve as Vice President Business Development of the Company and Executive shall perform services in a manner consistent with the Executive's position as Vice President Business Development of the Company, subject to the general supervision of the CEO/President of the Company. Executive shall devote his/her full business time attention and energies and use his/her best efforts to the faithful performance of such duties and to the promotion and forwarding of the business and affairs of the Company for the Employment Period; provided , however , that during the Employment Period it shall not be a violation of this Agreement for the Executive to (a) serve on corporate, civic or charitable boards or committees, (b) deliver lectures, fulfill speaking engagements or teach at educational institutions and (c) manage personal investments, so long as such activities in clause (a), (b), and (c) together do not interfere in any material respect with the performance of the Executive's duties and responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that such activities have been conducted by the Executive prior to the date hereof, and are listed on Exhibit A , the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the date hereof shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. Executive acknowledges and agrees that Executive owes a fiduciary duty of loyalty, fidelity and allegiance to act at all time in the best interests of the Company and to do no act which would injure the Company’s business, its interests or its reputation.

Section 4. Compensation .

Section 4.01. Salary .

In consideration of the services rendered by Executive under this Agreement, the Company shall pay the Executive a base salary (the “ Base Salary ”) as set forth on the attached Exhibit B (or, if an Exhibit B is not attached, the base salary shall be as agreed between Executive and the Company), and by paying such additional bonus, commissions and/or pay raises as may be approved by the Company. The Board of Directors of the Company may review from time to time the Base Salary payable to Executive hereunder and may, in its sole discretion, increase but not decrease, the Executive’s rate of compensation. Any such increased Base Salary shall be and become the “Base Salary” for purposes of this Agreement. Any increase in the Base Salary may not serve to limit or reduce any other obligation to the Executive under this Agreement.

Section 4.02. Annual Performance Bonus .

During the Employment Period, Executive shall be eligible to receive an annual performance bonus (the “ Annual Bonus ”) payable in cash for each fiscal year of service completed by Executive within the Employment Period in accordance with such incentive bonus programs as the Board of Directors of the Company (the “ Board ”) may adopt from time to time.

Section 5. Benefits .

In addition to the compensation detailed in Section 4 of this Agreement, as full compensation for Executive’s services during the Employment Period Executive shall be entitled to the following benefits:

Page 2 of 20

Section 5.01. Paid Vacation .

Executive shall be entitled to accrue three, (3) weeks paid vacation per calendar year, such vacation to extend for such periods and shall be taken at such intervals as shall be appropriate and consistent with the proper performance of the Executive’s duties hereunder. Any vacation time not taken by Executive in one year may be carried forward to the next year. The maximum amount of carryover will be determined by approved company policies. Executive shall be entitled to reimbursement for any unused vacation time as directed by approved company policy.

Section 5.02. Reimbursement of Expenses .

The Company shall reimburse Executive for all reasonable and necessary expenses actually incurred by Executive directly in connection with the business affairs of the Company and the performance of his/her duties hereunder, upon presentation of proper receipts or other proof of expenditure and subject to such reasonable guidelines or limitations provided by the Company from time to time. Executive shall comply with such reasonable limitations and reporting requirements with respect to such expenses as the Board of Directors or other authorized management personnel of the Company may establish from time to time.

Section 5.03. Benefit Plans .

During the Employment Period, upon satisfaction of the applicable eligibility requirements, Executive shall be entitled to participate in all employee benefit plans, practices, policies and programs, applicable generally to other employees of the Company as determined by the Board of Directors of the Company from time to time. Nothing in this Section 5.03 is to be construed or interpreted to provide greater rights, participation, coverage or benefits under such savings and retirement plans, practices, policies and programs than provided to similarly situated employees pursuant to the terms and conditions thereof.

Section 5.04. Fringe Benefits .

During the Employment Period, the Executive shall be entitled to such business-related fringe benefits (including, without limitation, payment of cellular telephone, vehicle allowance in the amount of one thousand dollars ($1000.00) per month, payment of club dues, payment of professional or organizational fees, tolls and taxes and related expenses, as appropriate) in accordance with the plans, practices, programs and policies of the Company for other peer executives at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company. Notwithstanding the foregoing, no amounts shall be payable under this section to the extent considered under U.S. Internal Revenue Service (IRS) Internal Revenue Code (IRC) Section 409(a) amounts.

Section 5.05. Absence of Limitations .

The Company shall not by reason of this Section 5 be obligated to institute, maintain or refrain from changing, amending or discontinuing any such incentive compensation or employee benefit program or plan, so long as such actions are similarly applicable to covered employees similarly situated.

Page 3 of 20

Section 6. Termination .

This Agreement shall be terminated at the end of the Employment Period or earlier as follows:

Section 6.01. Death .

This Agreement shall automatically terminate upon the death of the Executive.

Section 6.02. Permanent Disability .

In the event of any physical or mental disability of the Executive rendering the Executive substantially unable to perform his/her duties in any material respect hereunder for a continuous period of at least 90 days or 120 days out of any twelve-month period and the further determination that the disability is permanent with regard to the Executive’s ability to return to work in his/her full capacity, in such event, the Executive's employment with the Company shall terminate effective thirty (30) days after receipt of such notice by the Executive (the " Disability Effective Date "), provided that within the thirty (30)-day period after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. Any determination of disability shall be made by the Board of Directors of the Company in consultation with a qualified physician or physicians selected by the Board and reasonably acceptable to the Executive. The failure of the Executive to submit to a reasonable examination by such physician or physicians shall act as an estoppel to any objection by the Executive to the determination of disability by the Board. In such event, the Disability Effective Date shall be thirty (30) days after receipt of such notice by the Company.

Section 6.03. By the Company For Cause .

The employment of the Executive may be terminated by the Company for Cause (as defined below) at any time effective upon written notice to the Executive. For purposes hereof, the term “ Cause ” shall mean that the Board has determined that any one or more of the following has occurred:

(a)

the Executive shall have been convicted of, or shall have pleaded guilty or nolo contendere to, any felony;

(b)

the Executive shall have willfully or intentionally failed or refused to carry out the reasonable and lawful instructions, policies and procedures, whether written or oral, of the CEO/President or Board (other than as a result of illness or disability) concerning duties or actions consistent with the Executive's position as Vice President Business Development and such failure or refusal shall have continued for a period of five (5) days following written notice from the CEO/President or Board;

(c)

the Executive shall have breached any material provision of this Agreement (including Section 8 or 9 hereof) or any approved Company policies in effect at the time of such breach or been negligent or incompetent in the performance of his/her duties with respect to employment;

Page 4 of 20

(d)

the Executive shall have engaged in any conduct or course of conduct that has the effect of materially damaging the reputation of the Company or its business;

(e)

the Executive shall have excessive absenteeism, including, without limitation, an unapproved or unexcused absence after one prior warning for either an unapproved or unexcused absence; or

(f)

the Executive shall have committed any fraud, embezzlement, misappropriation of funds, misrepresentation, sexual harassment, breach of fiduciary duty or other act of dishonesty against the Company.

(g)

the commission by the Executive of any deliberate and premeditated act taken by the Executive in bad faith against the interests of the Company.

Notwithstanding the foregoing, the occurrence of the event specified in (c) above shall not constitute Cause unless the Company gives Executive written notice that such event constitutes Cause and, provided that such breach or action is reasonably capable of being cured, the Executive thereafter fails to cure such event within thirty (30) days after receipt of such notice.

Section 6.04. By the Company without Cause .

The Company may terminate the Executive’s employment at any time without Cause effective upon written notice to the Executive.

Section 6.05. By the Executive Voluntarily .

The Executive may terminate this Agreement at any time effective upon at least fifteen (15) days prior written notice to the Company.

Section 6.06. By the Executive for Good Reason .

The Executive may terminate this Agreement effective upon written notice to the Company for Good Reason. Such notice must provide a detailed explanation of the Good Reason. Any such termination shall be treated for purposes of this Agreement as a termination by the Company without Cause. For this purpose, the term “ Good Reason ” shall mean: (i) the assignment to the Executive of any duties inconsistent in any substantial respect with the Executive’s position, authority or responsibilities as contemplated by Section 1 of this Agreement or any duties which are illegal or unethical or any diminution of any of the Executive’s significant duties; (ii) any material reduction or discontinuance in any of the benefits described in Sections 4 or 5 of this Agreement (other than any such reduction or discontinuance applicable generally to employees of the Company); (iii) the relocation by the Company of the Executive's primary place of employment with the Company to a location not within a fifty (50) mile radius of the Executive’s principal place of employment as of the date of employment; or (iv) other material breach of this Agreement by the Company. Notwithstanding the foregoing, in the event the Executive provides notice of Good Reason contained in subclauses (i) or (iv) of the immediately preceding sentence, the Company shall have the opportunity to cure such Good Reason within 30 days of receiving such notice. If such termination occurs, the exercising of any outstanding options and awards shall be governed by the “Deep Down, Inc. 2003 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan, (the “Option Plan”) as amended and executed in EXIBIT C.

Page 5 of 20

Section 7. Termination Payments and Benefits .

Section 7.01. Death, Voluntary Termination, Termination For Cause .

Upon any termination of Executive’s employment under this Agreement either (i) voluntarily by the Executive, (ii) by the Company for Cause as provided in Section 6.03 or (ii) as a result of the Executive’s death, all payments, salary and other benefits hereunder shall cease at the effective date of termination. Notwithstanding the foregoing, the Executive shall be entitled to receive from the Company (a) all salary earned or accrued through the date the Executive’s employment is terminated, (b) reimbursement for any and all monies advanced in connection with the Executive’s employment for reasonable and necessary expenses incurred by the Executive through the date the Executive’s employment is terminated and (c) all other payments and benefits to which the Executive may be entitled under the terms of any applicable compensation arrangement or benefit plan or program of the Company, including any earned and accrued, but unused vacation pay (collectively, “ Accrued Benefits ”), except that, for this purpose, Accrued Benefits shall not include any entitlement to severance under any Company severance policy generally applicable to the Company’s salaried employees.

Section 7.02. Termination without Cause or for Good Reason .

In the event that this Agreement is terminated by the Company without Cause, or by the Executive for Good Reason, the Executive shall be entitled to receive, as his/her exclusive right and remedy in respect of such termination, (i) his/her Accrued Benefits, except that, for this purpose, Accrued Benefits shall not include any entitlement to severance under any Company severance policy generally applicable to the Company’s salaried employees, (ii) as long as the Executive does not violate the provisions of Section 8 and Section 9 hereof, severance pay equal to the Executive’s then current monthly Base Salary, payable in accordance with the Company’s regular pay schedule, for twelve (12) months from the date of termination of employment, and (iii) the Executive shall continue to be covered, upon the same terms and conditions as described hereinabove, by the same or equivalent medical, dental, and life insurance coverages, if any, as in effect for the Executive immediately prior to the termination of his/her employment, until the earlier of (A) the expiration of the period for which (s)he receives severance pay pursuant to clause (ii) above and (B) the date the Executive has commenced new employment and has thereby become eligible for comparable benefits, subject to the Executive’s rights under COBRA. Any amount to be paid by the Company under subclauses (ii) and (iii) of this Section 7.02 shall be paid to Executive in accordance with the payroll and insurance payment policies from time to time in effect at the Company.

Page 6 of 20

Section 7.03. Termination due to Permanent Disability .

In the event that this Agreement is terminated due to the Permanent Disability of the Executive, the Executive shall receive (i) Accrued Benefits, except that, for this purpose, Accrued Benefits shall not include any entitlement to severance under any Company severance policy generally applicable to the Company’s salaried employees and (ii) an amount equal to the Executive’s salary as is in effect at the effective date of termination for a period of twelve (12) months from the effective date of termination, pursuant to the Company’s normal payroll practices; provided , however , that the such payments by the Company shall be reduced by the amount of any disability insurance payments made to the Executive pursuant to insurance, if any, provided under Section 5.03 above. Any amount to be paid by the Company under Section 7.03(ii) shall be paid to Executive in accordance with the payroll policies from time to time in effect at the Company.

Section 7.04. Accrued Benefits .

Notwithstanding anything else herein to the contrary, all Accrued Benefits to which the Executive (or his/her estate or beneficiary) is entitled shall be payable in cash promptly upon termination of his/her Employment Period, except as otherwise specifically provided herein or under the terms of any applicable policy, plan or program under which an applicable Accrued Benefit arises.

Section 7.05.. No Other Benefits .

Except as specifically provided in this Section 7, upon termination of this Agreement for any reason whatsoever, the Executive shall not be entitled to any compensation, severance or other benefits from the Company or any of its subsidiaries or affiliates. Payment by the Company of all Accrued Benefits and other amounts and contributions to the cost of the Executive’s confirmed participation in the Company’s medical, dental and life insurance plans that may be due to the Executive under the applicable termination provision of this Section 7 shall constitute the entire obligation of the Company to the Executive. Acceptance by the Executive of performance by the Company and any such payments shall constitute full settlement of and release for any claims that the Executive might otherwise assert against the Company, its affiliates or any of their respective shareholders, partners, directors, officers, employees or agents relating to such termination to the maximum extent permitted by law.

Section 7.06. Survival of Certain Provisions .

Provisions of this Agreement shall survive any termination of employment if so provided herein or if necessary or desirable fully to accomplish the purposes of such provision, including, without limitation, the obligations of the Executive under Section 8 and 9 hereof. The obligation of the Company to make payments to or on behalf of the Executive under Section 7 hereof is expressly conditioned upon the Executive’s continued full performance of obligations under Section 8 and Section 9 hereof and Executive acknowledges and agrees that the Company shall be entitled to deduct from any amounts due to Executive hereunder any obligations owned by Executive to the Company. The Executive recognizes that, except as expressly provided in this Section 7, no compensation is earned after termination of employment.

Page 7 of 20

Section 8. Confidential Information; Inventions in the Field .

Section 8.01. Confidential Information .

As a condition of Executive's employment hereunder, the Company agrees to provide Executive with, and to give him/her access to, Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all trade secrets, confidential information, knowledge and data relating to the Company, its subsidiaries and their respective businesses, affiliates employees, partners, managers, agents and representatives, which shall have been obtained by the Executive during the Executive's employment by the Company and/or its subsidiaries which shall not have been or hereafter become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement) (hereinafter being collectively referred to as " Confidential Information "). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate, use, disclose or divulge any such trade secrets, information, knowledge or data to anyone other than the Company and those designated by the Company. Any termination of the Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 8.01 . The Executive agrees to return all Confidential Information, including all photocopies, extracts and summaries thereof, and any such information stored electronically on tapes, computer disks or in any other manner to the Company at any time upon request by the Company and upon the termination of his/her employment hereunder for any reason. In no event shall an asserted violation of the provision of this Section 8.01 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement.

Section 8.02. Fiduciary Obligations .

The Executive agrees that Confidential Information is of critical importance to the Company and a violation of this Section 8.02 and Section 8.03 would seriously and irreparably impair and damage the Company’s business. The Executive agrees that (s)he shall keep all Confidential Information in a fiduciary capacity for the sole benefit of the Company and its applicable subsidiaries and affiliates. Executive further agrees to take all reasonable measures to prevent unauthorized persons or entities from obtaining or using Confidential Information. Executive acknowledges understands and acknowledges that the provision of Confidential Information to Executive for the performance of his/her duties of employment is distinct consideration for the Company’s obligations in this Agreement, and that the provisions of Section 9 are intended in part to protect the Confidential Information provided to Executive.

Section 8.03. Non-Use and Non-Disclosure .

The Executive shall not during the Employment Period or at any time thereafter (a) disclose, directly or indirectly, any Confidential Information to any person other than the Company or employees thereof at the time of such disclosure who, in the reasonable judgment of the Executive, need to know such Confidential Information or such other persons to whom the Executive has been specifically instructed or authorized to make disclosure by the Board or CEO/President and in all such cases only to the extent required in the course of the Executive’s service to the Company or (b) use any Confidential Information, directly or indirectly, for his/her own benefit or for the benefit of any other person or entity.

Page 8 of 20

Section 8.04. Assignment of Inventions .

The Executive agrees that all Inventions in the Field (as defined below) shall be the sole and exclusive property of the Company and Executive agrees, on his/her behalf and on behalf of his/her heirs, assigns and representatives, to assign and transfer to the Company or its designee, without any separate remuneration or compensation, his/her entire right, title and interest in and to all Inventions in the Field, together with all United States and foreign rights with respect thereto, and, at the Company’s expense, to execute, acknowledge and deliver all papers and to do any and all other things necessary for or incident to the applying for, obtaining and maintaining of such letters patent, copyrights, trademarks or other intellectual property rights and to perform all lawful acts, including giving testimony, and to execute and deliver all such instruments that may be necessary or proper to vest all such Inventions in the Field and patents and copyrights with respect thereto in the Company, and to assist the Company in the prosecution or defense of any interference which may be declared involving any of said patent applications, patents, copyright applications or copyrights. In the event the Company is unable, after reasonable efforts and, in any event, after ten (10) business days, to secure Executive’s signature on a written assignment to the Company, of any application for letters patent, trademark registration or to any common law or statutory copyright or other property right therein, whether because of his/her physical or mental incapacity, or for any other reason whatsoever, Executive irrevocably designates and appoints the Secretary of the Company as Executive’s attorney-in-fact to act on Executive’s behalf to execute and file any such applications and to do all lawfully permitted acts to further the prosecution or issuance of such assignments, letters patent, copyright or trademark. Executive agrees to fully and promptly disclose to the Company any Inventions in the Field. For purposes of this Agreement, the words “ Inventions in the Field ” shall include any and all inventions, developments, applications, techniques, discoveries, innovations, writings, domain names, improvements, trade secrets, designs, drawings, business processes, secret processes and know-how, whether or not patentable or constituting a copyright or trademark and whether reduced to practice or not, which Executive may create, conceive, develop or make, either alone or in conjunction with others and related or in any way connected with the Company, its strategic plans, products, processes, apparatus or business now or hereafter carried on by the Company. The provisions of this Section 8.04 shall not apply to any Inventions in the Field for which it can be reasonably demonstrated that no equipment, supplies, facility, or trade secret information of the Company or any affiliate of the Company is used by Executive and which is developed entirely on Executive’s own time, unless (a) such Inventions in the Field relate (i) to the business of the Company or an Affiliate or (ii) to the actual or demonstrably anticipated research or development of the Company or an affiliate of the Company, or (b) such Inventions in the Field result from work performed by Executive for the Company. Executive represents, warrants and covenants on the date hereof that (i) (s)he does not have any applications for patents or copyright registrations pending, either domestic or foreign, (ii) his/her performance of the foregoing disclosure and assignment provisions will not breach any invention assignment or proprietary information agreement with any former employer or other party, and (iii) there is no invention or works or authorship now in his/her possession which (s)he will claim to be excluded herefrom.

Page 9 of 20

Section 8.05. Return of Documents .

All notes, letters, documents, records, tapes and other media of every kind and description relating to the business, present or otherwise, of the Company or its affiliates and any copies, in whole or in part, thereof (collectively, the “ Documents ”), whether or not prepared by the Executive and whether or not containing Confidential Information, shall be the sole and exclusive property of the Company. The Executive shall safeguard all Documents and shall surrender to the Company at the time his/her employment terminates, or at such earlier time or times as the Board or its designee or CEO/President may specify, all Documents (including all photocopies, extracts and summaries thereof) and other property of the Company then in the Executive’s possession or control.

Section 9. Restrictions on Activities of the Executive .

Section 9.01. Acknowledgments .

The Executive and Company agree that (s)he is being employed hereunder in a key capacity with the Company under an agreement-for-term (and not at-will ) and that the Company is engaged in a highly competitive business and that the success of the Company’s business in the marketplace depends upon its goodwill and reputation for quality and dependability. The Executive and Company further agree that reasonable limits may be placed on the Executive’s ability to compete against the Company as provided herein to the extent that they protect and preserve the legitimate business interests and good will of the Company.

Section 9.02. General Restrictions .

(a)

For the Non-Competition Period (as defined below), the Executive will not (anywhere in the world where the Company or any of its subsidiaries then conducts business) engage or participate in, directly or indirectly, as principal, agent, employee, employer, consultant, investor or partner, or assist in the management of, or provide advisory or other services to, or own any stock or any other ownership interest in, or make any financial investment in, any business which is Competitive with the Company (as defined below); provided that the ownership of not more than five percent (5%) of the outstanding securities of any class listed on an exchange or regularly traded in the over-the-counter market shall not constitute a violation of this Section 9.02. Because it is impossible to know which business or operations Executive will participate in during Executive’s employment by the Company, Executive agrees that a reasonable definition of any business which is “ Competitive with the Company ” is any business which engages in any business or operations that are engaged in, or committed to be engaged in, by the Company during Executive’s employment with the Company.

(b)

For purposes of this Agreement, the “ Non-Competition Period ” shall mean a period beginning on the Effective Date and ending on the earlier to occur of (i) the expiration of a period of twelve (12) consecutive months after the Executive's employment with the Company terminates and (ii) the date on which the Company ceases paying any amounts to the Executive hereunder or otherwise providing benefits to the Executive.

Page 10 of 20

(c)

Executive also agrees that, during the Non-Competition Period, Executive will not, directly or indirectly, make any statement or perform any acts intended to advance the interest of any person engaged in or proposing to engage in a business which is Competitive with the Company in any way that could injure the interests of the Company.

Section 9.03. Executives, Customers and Suppliers .

During the Non-Competition Period, the Executive will not directly or indirectly

(a)	solicit, or attempt to solicit, any officer, director, consultant or employee of the Company or any of its subsidiaries or affiliates to leave his/her or her engagement with the Company or such subsidiary or affiliate,

(b)

solicit, or attempt to solicit, any person or entity that was an officer, director, consultant, agent or employee of the Company or any of its subsidiaries or affiliates at any time within six (6) months prior to any proposed solicitation to work for a third party that is engaged in a business that is Competitive with the Company; nor

(c)	call upon, solicit, divert, entice away or in any other manner persuade, or attempt to do any of the foregoing, from the Company or any of its subsidiaries or affiliates any of their customers or suppliers, or potential customers or suppliers, to either;

(i)	become a customer or supplier of any third party; or

(ii)

cease doing business with the Company or any of its subsidiaries or affiliates; provided , however , that nothing in this Section 9.03 shall be deemed to prohibit the Executive from calling upon or soliciting a customer or supplier during the Non-Competition Period if such action relates solely to a business which is not Competitive with the Company; and provided , further , however , that nothing in this Section 9.03 shall be deemed to prohibit the Executive

(A)	from soliciting or hiring any Executive of the Company or any of its subsidiaries or affiliates, if such Executive is a member of the Executive’s immediate family;

(B)	from placing advertisements in newspapers or other media of general circulation advertising employment opportunities; and

(C)	from hiring persons who respond to such advertisements, provided that they were not otherwise solicited by the Executive in violation of this section.

Section 9.04. Executive’s Capability of Support .

THE EXECUTIVE REPRESENTS AND WARRANTS THAT THE KNOWLEDGE, SKILLS AND ABILITIES THE EXECUTIVE POSSESSES AT THE TIME OF COMMENCEMENT OF EMPLOYMENT HEREUNDER ARE SUFFICIENT TO PERMIT THE EXECUTIVE, IN THE EVENT OF TERMINATION OF THE EXECUTIVE’S EMPLOYMENT HEREUNDER, TO EARN A LIVELIHOOD SATISFACTORY TO THE EXECUTIVE WITHOUT VIOLATING ANY PROVISION OF SECTION 8 OR 9 HEREOF, FOR EXAMPLE, BY USING SUCH KNOWLEDGE, SKILLS AND ABILITIES, OR SOME OF THEM, IN THE SERVICE OF A NON-COMPETITOR. Furthermore, Executive represents and warrants that Executive is not bound by the terms of a confidentiality agreement, non-competition or other agreement with a third party that would conflict with Executive’s obligations hereunder.

Page 11 of 20

Section 10. Remedies in Respect of Restrictive Covenants .

Section 10.01. Specific Performance; Election of Remedies .

It is specifically understood and agreed that any breach of the provisions of Section 8 or 9 of this Agreement is likely to result in irreparable injury to the Company and that the remedy at law alone will be an inadequate remedy for such breach, and that in addition to any other remedy it may have, the Company shall be entitled to enforce the specific performance of this Agreement by the Executive and to seek both temporary and permanent injunctive relief (to the extent permitted by law) without bond and without liability should such relief be denied, modified or violated. Neither the right to obtain such relief nor the obtaining of such relief shall be exclusive or preclude the Company from any other remedy.

Section 10.02. Extension of Obligations .

The period of time during which the restrictions set forth in Section 9 hereof will be in effect will be extended by the length of time during which Executive is in breach of the terms of those provisions as determined by any court of competent jurisdiction on the Company’s application for injunctive relief.

Section 10.03. No Right to Continued Employment .

Nothing in Sections 8 or 9 of this Agreement shall confer upon Executive any right to continue in the employ of the Company or shall interfere with or restrict in any way the rights of the Company, which, subject to the terms of this Agreement, are hereby reserved, to discharge Executive at any time for any reason whatsoever, with or without cause.

Section 10.04. Resolution of Disputes Relating to Restrictive Covenants .

In respect of any controversy or claim arising out of or relating to Section 8 or 9 of this Agreement, Executive and the Company agree to the following regarding resolution thereof:

(a)

Early Resolution Conference . Each of Sections 8 and 9 of this Agreement is understood to be clear and enforceable as written and is executed by both parties on that basis. However, should Executive determine to later challenge any provision as unclear, unenforceable or inapplicable to an activity that Executive intends to engage in, Executive will first notify the Company in writing and meet with a representative of the Company and a neutral mediator (if the Company elects to retain one at its expense) to discuss resolution of any dispute between the parties with respect to such challenge. Executive will provide this notification at least fourteen (14) days before Executive engages in any activity on behalf of a business that is Competitive with the Company or engages in other activity that could foreseeably fall within a questioned restriction. The failure to comply with this requirement shall waive parties right to challenge the reasonable scope, clarity, applicability or enforceability of this Agreement and its restrictions at a later time. All rights of the parties will be preserved if the early resolution conference requirement is complied with even if no agreement is reached in the conference.

Page 12 of 20

(b)

Legal Action . If Executive or the Company shall institute action to enforce or interpret the terms and conditions of either of Section 8 or 9 (or both) of this Agreement or to collect any monies under it, venue for any such action shall be in Houston, Texas. Executive irrevocably consents to the jurisdiction of the courts located in the State of Texas for all suits or actions arising out of or relating to Section 8 or 9 of this Agreement. Each of Executive and the Company waives to the fullest extent possible, the defense of an inconvenient forum, and each agrees that a final judgment in any action shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. THE COMPANY AND EXECUTIVE AGREE THAT THEY HEREBY IRREVOCABLY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY SUCH ACTION TO ENFORCE OR INTERPRET THIS AGREEMENT OR TO COLLECT MONIES UNDER IT.

Section 11. Severable Provisions.

The provisions of this Agreement are severable and the invalidity of any one or more provisions shall not affect the validity of any other provision. In the event that a court of competent jurisdiction shall determine that any provision of this Agreement or the application thereof is unenforceable in whole or in part because of the duration or scope thereof, the parties hereto agree that said court in making such determination shall have the power to reduce the duration and scope of such provision to the extent necessary to make it enforceable, and that the Agreement in its reduced form shall be valid and enforceable to the full extent permitted by law.

Section 12. Notices .

Any notice, request, consent or other communication required, permitted or desired to be given hereunder, to be effective, shall be in writing and shall be deemed to have been sufficiently delivered for all purposes when telecopied (with electronic confirmation of receipt), delivered by hand or received by registered or certified mail, postage and fees prepaid, or by overnight courier service addressed to the party to receive such notice, request, consent or communication at the following address or any other address substituted therefore by notice pursuant to these provisions:

If to the Company:

With a copy to:

If to the Executive:

Deep Down, Inc.

8827 W. Sam Houston Pkwy N.

Suite 100

Houston, Texas 77040

Facsimile No: +1-281-517-5001

Attention: General Counsel

Looper Reed & McGraw, P.C.

1300 Post Oak Blvd.

Suite 2000

Houston, Texas 77056

Michael Newbury

At the address set forth in his

personnel file at Deep Down, Inc,

Page 13 of 20

Section 13. Miscellaneous .

Section 13.01. Amendment .

This Agreement may not be amended, modified or revised except by a writing signed by the parties.

Section 13.02. Assignment and Transfer.

The provisions of this Agreement shall be binding on and shall inure to the benefit of any such successor in interest to the Company. Neither this Agreement nor any of the rights, duties, interests or obligations of the Executive shall be assignable or delegable by the Executive (except for a delegation of duties to qualified personnel of the Company made in the routine performance of Executive’s position), nor shall any of the payments required or permitted to be made to the Executive by this Agreement be encumbered, transferred or in any way anticipated, except as required by applicable laws. However, all rights of the Executive under this Agreement shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, estates, executors, administrators, heirs and beneficiaries. All amounts payable to the Executive hereunder shall be paid, in the event of the Executive’s death, to the Executive’s estate, heirs or representatives.

Section 13.03. Waiver .

No term or condition of this Agreement will be deemed to have been waived except in writing by the party charged with waiver. The failure of the Company to enforce at any time any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor in any way affect the validity of this Agreement or any provision hereof or the right of the Company to enforce thereafter each and every provision of this Agreement. A waiver by the Company or the Executive of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other or subsequent breach by the other party.

Section 13.04. Entire Agreement .

This Agreement contains the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior understandings and agreements among the parties, whether written or oral.

Section 13.05. Withholding .

The Company shall be entitled to withhold from any amounts to be paid or benefits provided to the Executive hereunder any United States of America federal, state, or local withholding or other taxes or charges which it is from time to time required to withhold. Any foreign withholdings will be addressed on a case by case basis in writing and agreed to by both Parties.

Page 14 of 20

Section 13.06. Captions .

Captions herein have been inserted solely for convenience of reference and in no way define, limit or describe the scope or substance of any provision of this Agreement.

Section 13.07. Binding Arbitration; Fees and Expenses.

(a)

Resolution of Disputes Generally . Executive and the Company hereby agree that any controversy or claim arising out of or relating to this Agreement, the employment relationship between Executive and the Company, or the termination thereof, including the arbitrability of any controversy or claim, which cannot be settled by mutual agreement will be finally settled by binding arbitration in accordance with the Federal Arbitration Act (or if not applicable, the applicable state arbitration law) as follows: Any party who is aggrieved will deliver a notice to the other party setting forth the specific points in dispute. Any points remaining in dispute twenty (20) days after the giving of such notice may, upon ten (10) days’ notice to the other party, be submitted to arbitration in Houston, Texas, to the American Arbitration Association, before a single arbitrator appointed in accordance with the Commercial Dispute Resolution Procedures and Rules of the American Arbitration Association, as such procedures and rules may be amended from time to time and modified only as herein expressly provided. The arbitrator may enter a default decision against any party who fails to participate in the arbitration proceedings. Notwithstanding the foregoing, Executive and the Company agree that resolution of any controversy or claim arising out of or relating to Section 8 or 9 of this Agreement shall be resolved in accordance with the provisions of Section 10 of this Agreement.

(b)

Binding Effect . The decision of the arbitrator on the points in dispute will be final, unappealable and binding, and judgment on the award may be entered in any court having jurisdiction thereof. The parties agree that this provision has been adopted by the parties to rapidly and inexpensively resolve any disputes between them and that this provision will be grounds for dismissal of any court action commenced by either party with respect to this Agreement, other than post-arbitration actions seeking to enforce an arbitration award. In the event that any court determines that this arbitration procedure is not binding, or otherwise allows any litigation regarding a dispute, claim, or controversy covered by this Agreement to proceed, the parties hereto hereby waive any and all right to a trial by jury in or with respect to such litigation.

(c)

Confidentiality . The parties will keep confidential, and will not disclose to any person, except as may be required by law, the existence of any controversy under this Section 13.07, the referral of any such controversy to arbitration or the status or resolution thereof. In addition, the confidentiality restrictions set forth in Section 8 of this Agreement shall continue in full force and effect.

(d)

Waiver . Executive acknowledges that this agreement to submit to arbitration includes all controversies or claims of any kind ( e.g ., whether in contract or in tort, statutory or common law, legal or equitable) now existing or hereafter arising under any federal, state, local or foreign law (except for any claims or controversy arising out of Section 8 or 9 of this Agreement), including, but not limited to, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1866, the Employee Retirement Income Security Act, the Family and Medical Leave Act, the Americans With Disabilities Act and all similar federal, state and local laws, and Executive hereby waives all rights thereunder to have a judicial tribunal and/or a jury determine such claims.

Page 15 of 20

(e)

Fees and Expenses . In the event that any action is brought to enforce any of the provisions of this Agreement, or to obtain money damages for the breach thereof, and such action results in the award of a judgment for money damages or in the granting of any injunction in favor of one of the parties to this Agreement, all expenses, including reasonable attorneys’ fees, shall be paid by the non-prevailing party. Any arbitrator appointed to resolve a dispute under this Section 13.07 shall be authorized to apportion its fees and expenses and the reasonable attorneys’ fees and expenses of either part as the arbitrator deems appropriate. In the absence of apportionment of fees and expenses by a court of competent jurisdiction or an arbitrator (as the case may be), the fees and expenses of the arbitrator will be borne equally be each party, and each party will bear the fees and expenses of its own attorney.

Section 13.08. Drug Test .

The Executive agrees that, if requested by the Company, (s)he shall submit to a drug test at the commencement of his/her employment hereunder and thereafter at the Company’s reasonable request in accordance with the Company policy and procedures and that failure of such drug test shall constitute Cause.

Section 13.09. Counterparts .

This Agreement may be executed in one or more counterparts (including by facsimile), each of which shall be deemed an original and shall have the same effect as if the signatures hereto and thereto were on the same instrument.

Section 13.10. Governing Law .

This Agreement shall be construed under and enforced in accordance with the laws of the State of Texas and its validity, interpretation, performance and enforcement will be governed by the laws of that state applicable to contracts made and to be performed entirely within that state, notwithstanding any conflicts of laws or principles thereof.

Section 13.11. Acknowledgement .

PARTIES ACKNOWLEDGE THAT BEFORE ENTERING INTO THIS AGREEMENT, PARTIES HAVE HAD THE OPPORTUNITY TO CONSULT WITH ANY ATTORNEY OR OTHER ADVISOR OF PARTIES CHOICE, PARTIES FURTHER ACKNOWLEDGES THAT PARTIES HAVE ENTERED INTO THIS AGREEMENT OF PARTIES OWN FREE WILL, AND THAT NO PROMISES OR REPRESENTATIONS HAVE BEEN MADE TO PARTIES BY ANY PERSON TO INDUCE PARTIES TO ENTER INTO THIS AGREEMENT OTHER THAN THE EXPRESS TERMS SET FORTH HEREIN. PARTIES FURTHER ACKNOWLEDGES THAT PARTIES HAS READ THIS AGREEMENT AND UNDERSTANDS ALL OF ITS TERMS, INCLUDING THE WAIVER OF RIGHTS SET FORTH IN SECTION 13.07(d) OF THIS AGREEMENT.

Page 16 of 20

Section 13.12. Indemnity .

To the extent permitted by applicable law, and the By-Laws of the Company, the Company agrees to defend, indemnify and hold harmless the Executive from any and all claims, demands or causes of action, including reasonable attorneys' fees and expenses, suffered or incurred by the Executive as a result of the assertion or filing of any claim, demand, litigation or other proceedings based, in whole or in part, upon statements, acts or omissions made by or on behalf of the Executive in the course and scope of the Executive's employment by the Company. Within ten (10) days after notice from the Executive of the filing or assertion of any claim for which indemnification is provided (or sooner if action is required sooner in order to properly defend the Executive), the Company shall designate competent, experienced counsel to represent the Executive, at the Company's expense, which counsel shall be subject to the Executive's approval, which shall not be unreasonably withheld. Should the Company fail to so designate or pay, or make arrangements for payment of, such counsel, then Executive shall have the right to engage counsel of the Executive's choosing, and the Company shall be obligated to pay or reimburse any and all fees and expenses incurred by the Executive in defending himself in connection with any such claim.

[Remainder of page left intentionally blank]

Page 17 of 20

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as a sealed instrument as of the day and year first above written.

DEEP DOWN, INC.

By: /s/ Ronald E. Smith

Name: Mr. Ron Smith

Title: President/CEO

/s/ Michael J. Newbury

Executive signature: Michael Newbury

Michael J. Newbury

Printed Name: Michael Newbury

Page 18 of 20

Exhibit A

Activities of Executive

/s/ Michael J. Newbury Signature of Executive	/s/ Ronald E. Smith Signature of Hiring Manager


February 17, 2010 Date	February 17, 2010 Date

Page 19 of 20

Exhibit B

Base Salary

Executive Summary Compensation Sheet

The agreed annual cash compensation for Michael Newbury of Deep Down, Inc., as of April 14, 2010, is as follows:

Executive Annual Base Salary: $7307.6923 per bi-weekly pay cycle.

/s/ Michael J. Newbury Signature of Executive	/s/ Ronald E. Smith Signature of Hiring Manager


February 17, 2010 Date	February 17, 2010 Date

Page 20 of 20

EXHIBIT 10.31

AMENDED AND RESTATED

CREDIT

AGREEMENT

between

DEEP DOWN, INC.

as Borrower

and

WHITNEY NATIONAL BANK

as Lender

TABLE OF CONTENTS

			Page

	SCHEDULES AND EXHIBITS		iv

SECTION 1		DEFINITIONS AND TERMS.	1
	1.1	Definitions	1
	1.2	Interpretive Provisions	12
	1.3	Accounting Terms	12
	1.4	References to Documents	13
	1.5	Time	13

SECTION 2		LOAN COMMITMENTS.	13
	2.1	ROV Term Facility, RE Term Facility, and RLOC Term Facility	13
	2.2	Loan Procedure	13
	2.3	Prepayment	13
	2.4	LC Facility	14

SECTION 3		TERMS OF PAYMENT.	16
	3.1	Notes and Payments	16
	3.2	ROV Term Facility, RE Term Facility, and RLOC Term Facility	16
	3.3	Order of Application	17
	3.4	Interest	17
	3.5	Default Rate	17
	3.6	Interest Calculations	17
	3.7	Maximum Rate	18
	3.8	Set off	18
	3.9	Debit Account	18

SECTION 4		FEES.	18
	4.1	Treatment of Fees	18
	4.2	Letter of Credit Fees	19
	4.3	Unused Fees	19
	4.4	Modification Fee	19

SECTION 5		CONDITIONS PRECEDENT	19
	5.1	Conditions to Initial Loans	19
	5.2	Conditions to All Loans	19
	5.3	No Waiver	19

SECTION 6		SECURITY AND GUARANTIES	19
	6.1	Collateral	19
	6.2	Financing Statements	20
	6.3	Guaranties	20

SECTION 7		REPRESENTATIONS AND WARRANTIES	20
	7.1	Existence, Good Standing, and Authority to do Business	20
	7.2	Subsidiaries	20

	7.3	Authorization, Compliance, and No Default	20
	7.4	Enforceability	20
	7.5	Litigation	20
	7.6	Taxes	20
	7.7	Environmental Matters	20
	7.8	Ownership of Assets; Intellectual Property	21
	7.9	Liens	21
	7.10	Debt	21
	7.11	Insurance	21
	7.12	Place of Business; Real Property	21
	7.13	Purpose of Credit Facilities	21
	7.14	Transactions with Affiliates	21
	7.15	Financial Information	21
	7.16	Material Agreements and Funded Debt	21
	7.17	ERISA	22

SECTION 8		AFFIRMATIVE COVENANTS	22
	8.1	Items to be Furnished	22
	8.2	Books, Records, Inspections, and Field Audits	23
	8.3	Taxes	23
	8.4	Compliance with Laws	24
	8.5	Maintenance of Existence, Assets, and Business	24
	8.6	Insurance	24
	8.7	Environmental Laws	24
	8.8	ERISA	24
	8.9	Use of Proceeds	24
	8.10	Application of Insurance and Eminent Domain Proceeds	24
	8.11	New Subsidiaries	25
	8.12	Expenses	25
	8.13	Maintenance of Cash Management Agreement	25
	8.14	Further Assurances	25

SECTION 9		NEGATIVE COVENANTS	26
	9.1	Debt	26
	9.2	Liens	26
	9.3	Compliance	26
	9.4	Loans and Investments	26
	9.5	Dividends	26
	9.6	Acquisition, Mergers, and Dissolutions	26
	9.7	Assignment	27
	9.8	Fiscal Year and Accounting Methods	27
	9.9	Sale of Assets	27
	9.10	New Businesses	27
	9.11	Transactions with Affiliates	27
	9.12	Payroll Taxes	27
	9.13	Prepayment of Debt	27

SECTION 10		FINANCIAL COVENANTS	27
	10.1	Leverage Ratio	27
	10.2	Fixed Charge Coverage Ratio	27

	10.3	Tangible Net Worth	28
	10.4	Testing and Calculation	28
	10.5	Financial Covenant Waiver	28

SECTION 11		DEFAULT	28
	11.1	Payment of Obligation	28
	11.2	Covenants	28
	11.3	Debtor Relief	29
	11.4	Judgments	29
	11.5	Misrepresentation	29
	11.6	Default Under Other Agreements	29
	11.7	Validity and Enforceability of Loan Documents	29
	11.8	Swap Agreement	29
	11.9	Change of Management	29
	11.10	Ownership of Other Companies	29
	11.11	Material Adverse Event	29

SECTION 12		RIGHTS AND REMEDIES	29
	12.1	Remedies Upon Default	29
	12.2	Waivers	30
	12.3	No Waiver	30
	12.4	Performance by Lender	30
	12.5	Cumulative Rights	30

SECTION 13		MISCELLANEOUS	30
	13.1	Governing Law	30
	13.2	Invalid Provisions	30
	13.3	Multiple Counterparts and Facsimile Signatures	30
	13.4	Notice	30
	13.5	Binding Effect; Survival	31
	13.6	Amendments	31
	13.7	Participants	31
	13.8	Discharge Only Upon Payment in Full; Reinstatement in Certain Circumstances	31
	13.9	Waiver of Jury Trial	31
	13.10	Indemnity	31
	13.11	ENTIRETY	32
	13.12	Confidentiality	32
	13.13	Non-Business Days	32
	13.14	Amendment and Restatement	32

iii

SCHEDULES AND EXHIBITS

SCHEDULE 1.1	Parties, Addresses, and Wiring Information
SCHEDULE 1.2	Existing Debt and Liens
SCHEDULE 5	Conditions Precedent
SCHEDULE 7.2	Subsidiaries
SCHEDULE 7.5	Litigation
SCHEDULE 7.12	Place of Business
SCHEDULE 7.14	Transactions with Affiliates
SCHEDULE 7.16	Material Agreements
SCHEDULE 9.13	Subordinated Debt that May be Prepaid

EXHIBIT A-1	ROV Term Note
EXHIBIT A-2	RE Term Note
EXHIBIT A-3	RLOC Term Note
EXHIBIT A-4	LC Note
EXHIBIT B	Guaranty (Corporate Guarantors)
EXHIBIT C	Loan Request
EXHIBIT D	Compliance Certificate

AMENDED AND RESTATED CREDIT AGREEMENT

THIS AMENDED AND RESTATED CREDIT AGREEMENT is entered into as of November 11, 2008, and amended and restated through April 14, 2010, between DEEP DOWN, INC., a Nevada corporation (“ Borrower ”), and WHITNEY NATIONAL BANK, a national banking association (the “ Lender ”).

RECITALS

A. Borrower and Lender are parties to that certain Credit Agreement entered into as of November 11, 2008 (as amended by the First Amendment to Credit Agreement dated December 18, 2008, the Second Amendment to Credit Agreement dated February 13, 2009, the Third Amendment to Credit Agreement dated May 29, 2009, and as may be further amended, the " Existing Credit Agreement "). Pursuant to the terms of the Existing Credit Agreement, Lender extended credit to Borrower in the form of a revolving credit facility (the “ Revolving Credit Facility ”), including a letter of credit subfacility, and two single advance term loans.

B. The parties to the Existing Credit Agreement desire to amend and restate the Existing Credit Agreement on the terms set out in this Agreement.

C. To evidence the credit facilities requested hereunder, Borrower and Lender have agreed that this Agreement is an amendment and restatement of the Existing Credit Agreement, not a new or substitute credit agreement or novation of the Existing Credit Agreement.

D. Borrower has requested that Lender renew or modify the credit extended under the Existing Credit Agreement as follows:

1. the single advance term loan in the original principal amount of 1,150,000 used to purchase a new Super Mohawk 21 remote operated vehicle (the “ ROV ”) will continue on the same terms but will have a maturity date of April 15, 2011 (the current principal balance is $730,464);

2. the single advance term loan in the original principal amount of $2,100,000 used to acquire the Properties will continue on the same terms but will have a maturity date of April 15, 2011 (the current principal balance is $2,012,545);

3. convert the outstanding $850,000 principal amount of the Revolving Credit Facility into a term loan in the amount of $850,000;

4. convert the Revolving Credit Facility with a letter of credit subfacility into a letter of credit facility in the maximum amount of $1,150,000 to be used to support Existing LCs (defined below) and new LCs which are approved by Lender.

Accordingly, Borrower and Lender agree as follow:

SECTION 1 DEFINITIONS AND TERMS.

1.1 Definitions . As used in the Loan Documents:

Affiliate means as to any Person, any other Person that directly or indirectly controls, or is controlled by, or is under common control with, that Person. For purposes of this definition (a) “ control ,” “ controlled by ,” and “ under common control with ” mean possession, directly or indirectly, of power to direct (or cause the direction of) management or policies of a Person, whether through ownership of voting interests or other ownership interests, by contract, or otherwise, and (b) the term “ Affiliate ” includes each director or executive officer of Borrower, and each of the following as “ Affiliates ” of the others (i) each Guarantor, (ii) Borrower, (iii) any corporation, partnership or limited liability company whose primary shareholders, partners or members are the spouse, children or other family member of any Management Shareholder, and (iv) any trust whose primary beneficiaries are the spouse, children or other family member of any Management Shareholder.

Agreement means this Amended and Restated Credit Agreement, and all exhibits and schedules to this Agreement, in each case as amended, supplemented or restated from time to time.

Amendment Date means April 14, 2010.

Applicable Rate means, the applicable rate for LIBOR Loans, the applicable rate for LCs, and the applicable rate for the unused fees, in each case, is based on the Leverage Ratio as follows:

Level	Leverage Ratio	Applicable Rate for LC Fees	Applicable Rate for Unused Fees
I	Greater than 1.50 to 1.00	3.50%	0.50%
II	Less than or equal 1.50 to 1.00 but greater than or equal to 1.00 to 1.00	3.00%	0.375%
III	Less than 1.00 to 1.00	2.50%	0.25%

The Applicable Rate will be determined from Borrower’s most recent Compliance Certificate (and Current Financials) received by Lender in accordance with this Agreement. Until Lender receives the first Compliance Certificate (and Current Financials), the Applicable Rate shall be the Level I Applicable Rate. Upon receipt of the Compliance Certificate (and Current Financials), the Applicable Rate will be in effect from the first day of the month following the due date for such Compliance Certificate (or the Current Financials) until the due date for the next Compliance Certificate (or Current Financials). If any Compliance Certificate is (or Current Financials are) not delivered on time, the Applicable Rate from the due date of such Compliance Certificate (or Current Financials) until the date Borrower delivers such items (or until the Default Rate becomes applicable) shall be the Level III Applicable Rate.

Appraised Value means with respect to the Properties, a written statement in Proper Form independently and impartially prepared by a state-certified appraiser acceptable to Lender which complies with Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and 12 C.F.R. Section 34 (each as amended and revised from time to time) of such real property’s Fair Market Sales Value as of the date of the appraisal. For purposes of this definition, “Fair Market Sales Value” means the amount (not less than zero) that would be paid in cash for the ownership of the applicable property in an arm’s-length transaction between an informed and willing purchaser and an informed and willing seller, neither of whom is under any compulsion to purchase or sell. The Fair Market Sales Value shall be determined based on the assumption that the property is in good condition, properly maintained and repaired, ordinary wear and tear excepted.

Borrower means Deep Down, Inc., a Nevada corporation.

Business Day means any day other than a Saturday, Sunday or other day on which commercial banks are authorized to close under the Laws of, or are in fact closed in, the state where Lender’s Office is located and, if such day relates to any LIBOR Loan, means any such day on which banks in London are open for business and dealing in offshore dollars.

Cash Collateralize means to pledge and deposit with or deliver to Lender, as collateral for the LC Exposure, cash or deposit account balances in an amount equal to at least 105% of the face amount of all outstanding LCs pursuant to documentation in form and substance satisfactory to Lender.

Change of Management means that (a) Ronald E. Smith ceases to be an executive officer of the Borrower, or (b) Eugene L. Butler ceases to be an executive officer of the Borrower.

Closing Date means November 11, 2008.

Collateral is defined in Section 6.1 .

Commitment means Lender’s obligation and commitment under this Agreement to make Loans to Borrower or maintain, issue, amend, or renew LCs for Borrower’s account.

Company or Companies means, at any time, the Borrower and its Subsidiaries.

Compliance Certificate means a certificate substantially in the form of Exhibit D signed by a Responsible Officer.

Current Financials means, when determined, the consolidated financial statements of the Companies most recently delivered to Lender under Section 8.1 .

Debt means (without duplication), for any Person, (a) all obligations required by GAAP to be classified upon such Person’s balance sheet as liabilities, (b) liabilities to the extent secured (or for which and to the extent the holder of the Debt has an existing right, contingent or otherwise, to be so secured) by any Lien existing on property owned or acquired by that Person, (c) capital leases and other obligations that have been (or under GAAP should be) capitalized for financial reporting purposes, (d) all guaranties, endorsements, letters of credit, and other contingent liabilities with respect to Debt or obligations of others, and (e) the net obligation of such Person under any Swap Contract (which, on any date, shall be deemed to be the Swap Termination Value as of such date). For purposes hereof, the Debt of any Person shall include the Debt of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or a joint venturer, unless such Debt is expressly made non-recourse to such Person.

Debtor Relief Laws means Title 11 of the United States Code and all other applicable liquidation, conservatorship, bankruptcy, fraudulent transfer, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, suspension of payments, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally.

Deed of Trust means each Deed of Trust in Proper Form and executed by any Company, as debtor, for the benefit of Lender, to secure the Obligation, as the same may be amended, restated, or supplemented from time to time.

Default is defined in Section 11 .

Default Rate means, from day-to-day, an annual rate of interest equal to the lesser of (a) 11.5% and (b) the Maximum Rate.

Disposition means the sale, lease, transfer, conveyance, assignment, license, or other disposition (including any sale and leaseback transaction) of any asset by any Person, including any sale, assignment, transfer, conveyance, or other disposition, with or without recourse, of any notes or accounts receivable or any rights and claims associated therewith.

Dollar , Dollars or $ mean lawful money of the U. S.

EBITDA means consolidated net income of the Companies, plus income taxes, plus Interest Expense, plus depreciation and amortization, plus non-cash stock-based compensation, in each case to the extent subtracted in calculating net income. For the fiscal quarters ended December 31, 2009, March 31, 2010, June 30, 2010, and September 30, 2010, EBITDA shall be calculated by adding back to consolidated net income up to $13,000,000 of the amounts written down related to impairment of good will and other intangible assets for the fiscal quarter ended December 31, 2009.

Eminent Domain Event means any Governmental Authority or any Person acting under a Governmental Authority institutes proceedings to condemn, seize or appropriate all or part of any asset of a Company.

Eminent Domain Proceeds means all amounts received by any Company as a result of any Eminent Domain Event.

Employee Plan means a pension, profit-sharing, or stock bonus plan intended to qualify under Section 401(a) of the Tax Code, maintained or contributed to by Borrower or any ERISA Affiliate, including any multiemployer plan within the meaning of Section 4001(a)(3) of ERISA.

Environmental Law means any Law that relates to the pollution or protection of the environment, the release of any materials into the environment, including those related to Hazardous Substances, air emissions and discharges to waste or public systems, or to health and safety.

ERISA means the Employee Retirement Income Security Act of 1974 , as amended, and its related rules, regulations, and published interpretations.

ERISA Affiliate means any trade or business (whether or not incorporated) under common control with Borrower within the meaning of Section 414(b) or (c) of the Tax Code (including any multiemployer plan within the meaning of Section 4001(a)(3) of ERISA).

Existing LC means any LC issued before the Amendment Date.

Finance Code means, Chapter 303 of the Texas Finance Code.

Fixed Charge Coverage Ratio means, when determined, for the most recently completed four fiscal quarter period, the ratio of (a) EBITDA to (b) the sum of Interest Expense, plus the amount of principal payments made on Subordinated Debt, plus the amount of scheduled principal payments on senior Funded Debt.

Flotation Technologies means Flotation Technologies, Inc., a Maine corporation.

Flotation Technologies Real Estate means that certain real property located at 20 Morin Street, Biddeford, Maine 04005.

Funded Debt means, when determined, (a) all Debt of the Companies for borrowed money (whether as a direct obligor on a promissory note, a reimbursement obligor on a letter of credit, a guarantor, or otherwise), and (b) all capital lease obligations of the Companies.

GAAP means generally accepted accounting principles in the U.S. set out in the opinions and pronouncements of the of the Accounting Principles Board of the American Institute of Certified Public Accountants and the Financial Accounting Standards Board as in effect from time to time.

Governmental Authority means any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, administrative tribunal, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of, or pertaining to, government.

Guarantor means each of, and Guarantors means all of, (a) Deep Down Inc., a Delaware corporation, ElectroWave USA, Inc., a Nevada corporation, Mako Technologies, LLC, a Nevada limited liability company, and Flotation Technologies, Inc., a Maine corporation, (b) any of Borrower’s other Subsidiaries, or (c) any other Person which signs a Guaranty.

Guaranty means a guaranty substantially in the form of Exhibit B .

Hazardous Substance means (a) any explosive or radioactive substance or waste, all hazardous or toxic substances, waste, or other pollutants, and any other substance the presence of which requires removal, remediation or investigation under any applicable Environmental Law, (b) any substance that is defined or classified as a hazardous waste, hazardous material, pollutant, contaminant, or toxic or hazardous substance under any applicable Environmental Law, or (c) petroleum, petroleum distillates, petroleum products, oil, polychlorinated biphenyls, radon gas, infectious medical wastes, and asbestos or asbestos-containing materials.

Honor Date has the meaning given such term in Section 2.4(b)(i) .

ICC has the meaning given such term in Section 2.4(e) .

Indemnified Liabilities is defined in Section 13.10 .

Indemnitees is defined in Section 13.10.

Insurance Proceeds means all proceeds in respect of any insurance policy maintained by any Company under the terms of this Agreement.

Interest Expense means, for any period, total interest expense of the Companies for such period in respect of all outstanding Debt of the Companies, whether paid, accrued, expensed or capitalized, and includes, without limitation, all commissions, discounts, commitment fees and other fees and charges owed in respect of such Debt (after taking into account the costs or benefits under any Swap Agreement), including that portion of any lease payment under a capital lease which would be treated as interest under GAAP, and interest on Debt used to finance working capital.

Laws means, collectively, all international, foreign, federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority (whether or not such orders, requests, licenses, authorizations, permits or agreements have the force of law).

LC means each standby letter of credit issued by Lender on or after the Closing Date for the account of Borrower under this Agreement and under an LC Application.

LC Application means an application and agreement for the issuance or amendment of a standby letter of credit for the account of Borrower in the form from time to time in use by Lender.

LC Borrowing means an extension of credit under the LC Facility resulting from a drawing under any LC which has not been timely reimbursed by Borrower.

LC Committed Amount means $1,150,000.

LC Credit Extension means, with respect to any LC, the issuance, extension of the expiry date, amendment, renewal, or increase of the amount of such LC.

LC Exposure means, at any time and without duplication, the sum of (a) the aggregate undrawn maximum face amount of each LC at such time, plus (b) the aggregate unpaid obligations of Borrower to reimburse the issuer for amounts paid by the issuer under LCs issued under Section 2.4 .

LC Facility means the facility for the issuance of LCs, as described in Section 2.4 .

LC Fee is defined in Section 4.2 .

LC Note means a promissory note substantially in the form of Exhibit A-4 , executed by Borrower and made payable to Lender, and all renewals, extensions, modifications, amendments, supplements, restatements, and replacements of, or substitutions for, that promissory note.

LC Termination Date means the earlier of (a) April 15, 2011, and (b) the acceleration of maturity of the LC Facility in accordance with Section 12 of this Agreement.

Lender’s Office means Lender’s address, and, as appropriate, account as set out on Schedule 1.1 , or such other address or account as Lender may from time to time notify Borrower.

Leverage Ratio means, as of any date of determination, the ratio of (a) the consolidated Funded Debt of all Companies as of such date to (b) consolidated EBITDA of all Companies for the period of the four fiscal quarters most recently ended.

Lien means any lien (statutory or other), mortgage, security interest, financing statement, collateral assignment, pledge, assignment, charge, hypothecation, deposit arrangement, or preference, priority or other security interest or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, and any financing lease having substantially the same economic effect as any of the foregoing), or encumbrance of any kind, and any other right of or arrangement with any creditor (whether based on common law, constitutional provision, statute or contract) to have its claim satisfied out of any property or assets, or their proceeds, before the claims of the general creditors of the owner of the property or assets.

Litigation means any action by or before any Governmental Authority, arbitrator, or arbitration panel.

Loan means any amount disbursed by Lender (a) to, or on behalf of, Borrower under the Loan Documents, whether or not such amount constitutes an original disbursement of funds, or (b) in accordance with, and to satisfy the obligations of Borrower under, any Loan Document.

Loan Date means for any Loan requested by a Borrower under a Loan Request, the date on which funds are to be transferred to, or made available to, Borrower.

Loan Documents means (a) this Agreement, certificates and requests delivered under this Agreement, and exhibits and schedules to this Agreement, (b) the Notes, (c) all Guaranties, (d) the Security Documents, (e) all Swap Contracts, (f) all other agreements, documents, and instruments in favor of Lender ever delivered in connection with or under this Agreement, and (g) all renewals, extensions, amendments, modifications, supplements, restatements, and replacements of, or substitutions for, any of the foregoing.

Loan Request means a request substantially in the form of Exhibit C .

Management Shareholder means each of, and Management Shareholders means all of, Eugene L. Butler and Ronald E. Smith.

Material Adverse Event means any circumstance or event that, individually or collectively with other circumstances or events, could reasonably be expected to result in (a) impairment of the ability of any Company to perform any of its payment or other material obligations under any Loan Document, (b) impairment of the ability of Lender to enforce any Company’s material obligations, or Lender’ rights, under any Loan Document, (c) a material adverse effect upon the legality, validity, binding effect or enforceability against any Company of any Loan Document to which it is a party, (d) a material and adverse change in, or a material adverse effect upon, the operations, business, properties, liabilities (actual or contingent), or condition (financial or otherwise) of any Company as represented in the initial financial statements delivered to Lender on or about the Closing Date in respect of such Company, and (e) a material and adverse change in, or a material adverse effect upon, the operations of the Companies, taken as a whole (excluding general economic conditions that do not have a disproportion of impact on the Companies taken as a whole).

Material Agreement means, for any Person, any agreement (excluding purchase orders for material or inventory in the ordinary course of business) to which that Person is a party by which that Person is bound, or to which any assets of that Person may be subject, and that is not cancelable by that Person upon 30 or fewer days’ notice without liability for further payment other than nominal penalty, and that requires that Person to pay more than $250,000 in the aggregate during the term of such agreement.

Maximum Amount and Maximum Rate respectively mean the maximum non-usurious amount and the maximum non-usurious rate of interest that, under applicable Law, Lender is permitted to contract for, charge, take, reserve or receive on the Obligation.

Moody’s means Moody’s Investors Service, Inc. and any successor thereto.

Net Proceeds means with respect to (a) any Disposition of any asset by any Person, the aggregate amount of cash and non-cash proceeds from such Disposition received by, or paid to or for the account of, such Person, net of customary and reasonable out-of-pocket costs, fees, and expenses, (b) with respect to the issuance of equity securities, debt securities, Subordinated Debt, or similar instruments, or the incurrence of Debt, the cash and non-cash proceeds received from such issuance or incurrence, net of attorneys’ fees, investment banking fees, accountants fees, underwriting discounts and commissions and other customary fees and expenses actually incurred in connection with such issuance, (c) Insurance Proceeds, the aggregate amount of such cash proceeds received by, or paid to or for the account of, such Person, net of customary and reasonable legal fees, out-of-pocket expenses, fees and expenses, and (d) Eminent Domain Proceeds, the aggregate amount of such cash proceeds received by, or paid to or for the account of, such Person, net of customary and reasonable legal fees, out-of-pocket costs, fees and expenses. Non-cash proceeds include any proceeds received by way of deferred payment of principal pursuant to a note, installment receivable, purchase price adjustment receivable, or otherwise, but only as and when received.

Net Worth means, when determined, (a) the aggregate amount at which all assets of the Companies would be shown on a consolidated balance sheet at such date, less (b) Total Liabilities of the Companies.

Notes means the ROV Term Note, the RE Term Note, the RLOC Term Note, and the LC Note.

Obligation means all present and future Debt, liabilities and obligations (including the Loans, LC Borrowings, and the obligations under any Swap Contract), whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, and all renewals, increases and extensions thereof, or any part thereof, now or in the future owed to Lender by any Company under any Loan Document, together with all interest accruing thereon, reasonable fees, costs and expenses payable under the Loan Documents or in connection with the enforcement of rights under the Loan Documents, including (a) fees and expenses under Section 8.12 , and (b) interest and fees that accrue after the commencement by or against any Company or any Affiliate thereof of any proceeding under any Debtor Relief Law naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding.

Participant has the meaning given such term Section 13.7 .

Permitted Debt means (a) the Obligation, (b) Debt arising from endorsing negotiable instruments for collection in the ordinary course of business, (c) purchase money Debt and capital lease obligations incurred in the ordinary course of business which, in the aggregate do not exceed $250,000, (d) Debt among the Companies and guaranties by any Company of Permitted Debt, (e) Debt existing on the Closing Date and described on Schedule 1.2 , (f) indemnities arising under agreements entered into by any Company in the ordinary course of business, (g) trade payables, Tax liabilities and other current liabilities incurred in the ordinary course of business, (h) any Debt approved in writing by Lender after the Closing Date, and (i) the TD Bank Debt to the extent that the aggregate principal amount of the TD Bank Debt does not at any time exceed $2,500,000.

Permitted Investments means (a) marketable obligations backed by the full faith and credit of the U.S. (and investments in mutual funds investing primarily in those obligations), (b) certificates of deposit or banker’s acceptances that are fully insured by the Federal Deposit Insurance Corporation and are issued by Lender, (c) cash or cash equivalents, (d) eurodollar time deposits or investments managed by Lender, (e) commercial paper and similar obligations rated “P-1” or better by Moody’s or “A-1” or better by S&P, (f) investments in securities purchased by any Company under repurchase obligations pursuant to which arrangements are made with selling financial institutions (being a financial institution having unimpaired capital and surplus of not less than $500,000,000 and with a rating of “A-1” by S&P or “P-1” by Moody’s) for such financial institutions to repurchase such securities within 30 days from the date of purchase by such Company, and other similar short term investments made in connection with the Company’s cash management practices, (g) non-cash proceeds from Dispositions permitted under Section 9.9, (h) investments by any Company in its wholly-owned Subsidiaries which are Guarantors, and (i) cash or cash equivalents on deposit with, or issued by, Lender.

Permitted Liens means (a) Liens securing the Obligation, (b) Liens existing on the Closing Date and described on Schedule 1.2 , (c) Liens which secure purchase money Debt and capital lease obligations permitted under clause (c) of the definition of Permitted Debt, (d) easements, rights-of-way, encumbrances and other restrictions on the use of real property which do not materially impair the use thereof, (e) Liens for Taxes; provided that, (i) no amounts are due and payable and no Lien has been filed or agreed to, or (ii) the validity or amount thereof is being contested in good faith by lawful proceedings diligently conducted, and reserve or other provision required by GAAP has been made, (f) judgments and attachments permitted by Section 11.4 , (g) pledges or deposits made to secure payment of workers’ compensation, unemployment insurance or other forms of governmental insurance or benefits or to participate in any fund in connection with workers’ compensation, unemployment insurance, pensions or other social security programs, (h) rights of offset or statutory banker’s Liens arising in the ordinary course of business in favor of commercial banks; provided that, any such Lien shall only extend to deposits and property in possession of such commercial bank and its Affiliates, (i) good-faith pledges or deposits made in the ordinary course of business to secure (i) performance of bids, tenders, trade contracts ( other than for the repayment of borrowed money) or leases, (ii) statutory obligations, or (iii) surety or appeal bonds, or indemnity, performance or other similar bonds, which, in the aggregate under this clause (i) , do not exceed $50,000 at any time, (j) Liens ( other than for Taxes) imposed by operation of law (including Liens of mechanics, materialmen, warehousemen, carriers and landlords and similar Liens); provided that, (i) the validity or amount thereof is being contested in good faith by lawful proceedings diligently conducted, (ii) reserve or other provision required by GAAP has been made, and (iii) within 60 days after the entry thereof, levy and execution thereon have been (and continue to be) stayed or payment thereof is covered in full by insurance (subject to the customary deductible), (k) Liens which secure any Company’s obligations under any lease for equipment used by such Company in the ordinary course of its business, (l) Liens which secure the Funded Debt permitted under clause (i) of the definition of Permitted Debt, and (m) Liens arising pursuant to the TD Bank Loan Documents.

Person means any individual, partnership, limited partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, syndicate, Governmental Authority or other entity or organization of whatever nature.

PGBC means Pension Benefit Guaranty Corporation, or any successor thereof, established under ERISA.

Pledge Agreement means each Pledge Agreement in Proper Form, and executed by any Company, as pledgor, and by Lender, as secured party, granting Lender a Lien on, and security interest in, among other things, such Person’s equity interests in any Company or its Subsidiaries.

Potential Default means the occurrence of any event or the existence of any circumstance that would, with the giving of notice or lapse of time or both, become a Default.

Proper Form means in form and substance satisfactory to Lender and its legal counsel.

Property means each of (and Properties means all of) the (a) the 4.9106 acres located at 15473 Interstate Highway No. 10 (aka East Freeway), Channelview, Texas 77530, and (b) 3.306 acres located at 15473 East Freeway, Channelview, Texas 77530.

RE Term Facility is defined in Section 2.1(b) .

RE Term Loan Committed Amount means $2,012,545.

RE Term Loan Maturity Date means the earlier of (a) April 15, 2011, and (b) the acceleration of maturity of RE Term Loan in accordance with Section 12 of this Agreement.

RE Term Note means a promissory note substantially in the form of Exhibit A-2 , executed by Borrower and made payable to Lender in the original principal amount of the RE Term Loan Committed Amount, together with all renewals, extensions, modifications, amendments, supplements, restatements and replacements of, or substitutions for, each such promissory note.

RE Term Principal Amount means, when determined, the outstanding principal balance of the RE Term Note

Representatives means agents, representatives, officers, directors, employees, consultants, contractors and attorneys.

Responsible Officer means the president, chief executive officer, or chief financial officer of Borrower.

RLOC Term Committed Amount means $850,000.

RLOC Term Facility is defined in Section 2.1(c).

RLOC Term Maturity Date means the earlier of (a) April 15, 2011, and (b) the acceleration of maturity of the RLOC Term Facility in accordance with Section 12 of this Agreement.

RLOC Term Note means a promissory note substantially in the form of Exhibit A-3 , executed by Borrower and made payable to Lender in the original principal amount of the RLOC Term Committed Amount, together with all renewals, extensions, modifications, amendments, supplements, restatements and replacements of, or substitutions for, each such promissory note.

RLOC Term Principal Amount means, when determined, the outstanding principal balance of the RLOC Term Note.

ROV Term Committed Amount means $730,464.

ROV Term Facility is defined in Section 2.1(a).

ROV Term Maturity Date means the earlier of (a) April 15, 2011, and (b) the acceleration of maturity of the ROV Term Facility in accordance with Section 12 of this Agreement.

ROV Term Note means a promissory note substantially in the form of Exhibit A-1 , executed by Borrower and made payable to Lender in the original principal amount of the ROV Term Committed Amount, together with all renewals, extensions, modifications, amendments, supplements, restatements and replacements of, or substitutions for, each such promissory note.

ROV Term Principal Amount means, when determined, the outstanding principal balance of the ROV Term Note.

S&P means Standard & Poor’s Ratings Group (a division of The McGraw-Hill Companies, Inc.).

Security Agreement means each Security Agreement in Proper Form, and executed by any Company, as debtor, and by Lender, as secured party, granting Lender a Lien on, and security interest in, among other things, such Company’s accounts receivable, inventory, equipment, goods, general intangibles, intellectual property, chattel paper, instruments, and documents, as the same may be amended, restated, or supplemented from time to time.

Security Documents means all Security Agreements, Deeds of Trust, Pledge Agreements, and all documents executed in connection therewith to create or perfect a Lien on the Collateral.

Subordinated Debt means Debt which is contractually subordinated in right of payment, collection, enforcement and lien rights to the prior payment in full of the Obligation on terms satisfactory to Lender, and includes Debt in the form of subordinated convertible debentures or subordinated promissory notes.

Subsidiary of a Person means a corporation, partnership, joint venture, limited liability company or other business entity of which a majority of the voting interests are at the time beneficially owned, or the management of which is otherwise controlled, directly, or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise specified, all references in this Agreement or the Loan Documents to a “Subsidiary” or to “Subsidiaries” shall refer to a Subsidiary or to Subsidiaries of Borrower.

Swap Contract means, to the extent any Company and Lender or an Affiliate of Lender is a party thereto, (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a “ Master Agreement ”), including any such obligations or liabilities under any Master Agreement.

Swap Termination Value means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a) , the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include Lender or any Affiliate of Lender).

Tangible Net Worth means, when determined, the Companies’ consolidated Net Worth after deducting capitalized interest, debt discount and expense, goodwill, patents, trademarks, copyrights, franchises, licenses and such other assets as are properly classified as “intangible assets”.

Tax Code means the Internal Revenue Code of 1986 , as amended, and related rules, regulations and published interpretations.

Taxes means, for any Person, taxes, assessments or other governmental charges or levies imposed upon that Person, its income, or any of its properties, franchises or assets.

TD Bank means TD Bank, N.A., a national banking association.

TD Bank Debt means the indebtedness owed by Flotation Technologies to TD Bank pursuant to the TD Bank Loan Documents which (a) does not, in the aggregate principal amount, at any time exceed $2,500,000, and (b) is secured solely by the TD Bank Loan Documents.

TD Bank Loan Agreement means that certain Loan Agreement dated February 13, 2009, between Flotation Technologies, as borrower, and TD Bank.

TD Bank Loan Documents means (a) the TD Bank Loan Agreement, (b) the TD Bank Mortgage, and (c) all other documents and instruments executed in connection therewith.

TD Bank Mortgage means that certain Mortgage and Security Agreement dated February 13, 2009, from Flotation Technologies to TD Bank, pursuant to which Flotation Technologies granted a lien on the Flotation Technologies Real Estate in favor of TD Bank to secure the repayment of the TD Bank Debt.

TD Bank Negative Pledge means the prohibition on the pledge of assets by Flotation Technologies set forth in Section 23 of the TD Bank Mortgage.

Total Liabilities means, when determined, all obligations required by GAAP to be classified as liabilities upon the Companies’ consolidated balance sheet, including the aggregate amount of all Debt, liabilities (including tax and other proper accruals) and reserves of the Companies.

UCC means the Uniform Commercial Code, as adopted in Texas and as amended from time to time.

Unreimbursed Amount is defined in Section 2.4(b)(i) .

U.S. means United States of America.

voting interests of any Person means the capital stock (or other equity interest) of such Person having ordinary voting power for the election of directors (or other governing body).

1.2 Interpretive Provisions .

(a) Terms used but not defined in this Agreement, but which are defined in the UCC, have the meaning given them in the UCC.

(b) The meanings of words and defined terms are equally applicable to the singular and plural forms of the defined terms and words. Defined terms in respect of one gender include each other gender where appropriate. Derivatives of defined terms have corresponding meanings.

(c) Any conflict or ambiguity between this Agreement and any other Loan Document is controlled by the terms and provisions of this Agreement.

(d) The headings and captions used in this Agreement and the other Loan Documents are for convenience only and will not be deemed to limit, amplify or modify the terms of this Agreement or the Loan Documents.

(e) Article, Section, Exhibit and Schedule references are to the Loan Document in which such reference appears, unless otherwise indicated.

(f) In the computation of periods of time from a specified date to a later specified date, the word “ from ” means “ from and including ;” the words “ to ” and “ until ” each mean “ to but excluding ;” and the word “ through ” means “ to and including .”

(g) The words “ herein ,” “ hereto ,” “ hereof ” and “ hereunder ” and words of similar import when used in any Loan Document shall refer to such Loan Document as a whole and not to any particular provision of such Loan Document.

(h) The term “ including ” is by way of example and not limitation.

1.3 Accounting Terms .

(a) All accounting terms not specifically or completely defined in this Agreement shall be construed in conformity with, and all financial data (including financial ratios and other financial calculations) required to be submitted pursuant to this Agreement shall be prepared in conformity with, GAAP, with all accounting principles being consistently applied from period to period and on a basis consistent with the most recent audited consolidated financial statements of Borrower and its Subsidiaries. All accounting and financial terms and financial calculations (including the calculation of all financial covenants, ratios, and related definitions) in respect of Borrower are on a consolidated basis for all Companies, unless otherwise indicated.

(b) If at any time any change in GAAP would affect the computation of any financial ratio or requirement set out in any Loan Document, and Borrower or Lender shall so request, Lender and Borrower shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP (subject to the approval of Lender); provided that , until so amended, (i) such ratio or requirement shall continue to be computed in accordance with GAAP as in effect prior to such change and (ii) Borrower shall provide to Lender financial statements and other documents required under this Agreement or as reasonably requested hereunder setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP.

1.4 References to Documents . Unless otherwise expressly provided in this Agreement, (a) references to corporate formation or governance documents, contractual agreements (including this Agreement and the Loan Documents) and other contractual instruments shall be deemed to include all subsequent amendments, restatements, extensions, supplements and other modifications thereto, but only to the extent that such amendments, restatements, extensions, supplements and other modifications are not prohibited by any Loan Document; and (b) references to any Law shall include all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting such Law.

1.5 Time . Unless otherwise indicated, all time references ( e.g. , 11:00 a.m.) are to Central time (daylight or standard, as applicable).

SECTION 2 LOAN COMMITMENTS.

2.1 ROV Term Facility, RE Term Facility, and RLOC Term Facility .

(a) Subject to the terms and conditions of this Agreement, and effective as of the Amendment Date, Lender agrees to continue a term loan to Borrower in an amount equal to the ROV Term Committed Amount which, when paid or prepaid, may not be reborrowed (the “ ROV Term Facility ”).

(b) Subject to the terms and conditions of this Agreement, and effective as of the Amendment Date, Lender agrees to continue a term loan to Borrower in an amount equal to the RE Term Loan Committed Amount which, when paid or prepaid, may not be reborrowed (“ RE Term Facility ”).

(c) Subject to the terms and conditions of this Agreement, and effective as of the Amendment Date, Lender agrees to refinance a portion of the existing revolving credit facility by making a term loan to Borrower in an amount equal to the RLOC Term Loan Committed Amount in a single Loan on the Amendment Date which, when paid or prepaid, may not be reborrowed (“ RLOC Term Facility ”).

2.2 Loan Procedure .

(a) Subject to compliance with Section 5 , each Loan under the ROV Term Facility, the RE Term Facility, or the RLOC Term Facility will be deemed to be made, advanced or continued on the Amendment Date without the requirement that Borrower submit a Loan Request to Lender.

2.3 Prepayment .

(a) Subject to Section 2.3(b) , Borrower may voluntarily pay or prepay all or any part of the ROV Term Principal Amount, the RE Term Principal Amount, or the RLOC Principal Amount without premium or penalty, at any time, subject to the following conditions:

(i) Lender must receive Borrower’s written or telephonic prepayment notice by 10:00 a.m. on the prepayment date;

(ii) Borrower’s prepayment notice shall (A) specify the prepayment date, (B) specify the amount of the Loan to be prepaid, and (C) indicate whether the ROV Term Principal Amount, the RE Term Principal Amount, or the RLOC Term Principal Amount is to be repaid;

(iii) each partial prepayment must be in a minimum amount of not less than (A) $10,000 or a greater integral multiple of $1,000 or (B) if less than the minimum amount, the outstanding balance of the ROV Term Principal Amount, the RE Term Principal Amount, or the RLOC Term Principal Amount, as applicable;

(iv) all accrued and unpaid interest on the portion of the ROV Term Principal Amount, the RE Term Principal Amount, or the RLOC Term Principal Amount prepaid must also be paid in full on the prepayment date; and

(v) each partial prepayment of the ROV Term Facility, the RE Term Facility, or the RLOC Term Facility, as applicable, shall be applied to the scheduled principal payments in the inverse order of their maturity.

(b) All prepayments under this Section 2.3 shall be without premium or penalty.

(c) If the LC Exposure at any time exceeds the LC Committed Amount, then Borrower shall Cash Collateralize the LC Exposure, in at least the amount of that excess.

(d) On the date such amounts are received by, or for the account of, Borrower, the following amounts shall be paid to Lender in the form received with any endorsement or assignment and shall be applied first, to the RLOC Term Principal Amount, second, to the RE Term Principal Amount, and third, to the ROV Term Principal Amount, in each case in accordance with this Section 2.3 : (i) 100% of the Net Proceeds from the issuance of any Subordinated Debt; and (ii) 100% of the Net Proceeds from the Disposition of any asset not permitted by Section 9.9 . The non-cash portion of all Net Proceeds Lender is entitled to receive under this Section 2.3 , shall be pledged to Lender concurrently with the applicable Disposition.

(e) Unless otherwise specified in this Agreement, prepayments under this Section 2.3 shall be applied (i) first, to the prepayment of the outstanding RLOC Term Principal Amount, and shall be applied to the scheduled principal payments in the inverse order of their maturity until the RLOC Term Principal Amount is paid in full, (ii) second, to the prepayment of the outstanding RE Term Principal Amount, and shall be applied to the scheduled principal payments in the inverse order of their maturity until the RE Term Principal Amount is paid in full, and (iii) third, to the prepayment of the outstanding ROV Term Principal Amount, and shall be applied to the scheduled principal payments in the inverse order of their maturity until the ROV Term Principal Amount is paid in full.

(f) After proper application of all proceeds under this Section 2.3 , any remaining proceeds shall be applied (A) to Cash Collateralize all LC Exposure, and (B) the excess, if any, being payable to Borrower.

2.4 LC Facility .

(a) The LC Commitment .

(i) Subject to the terms and conditions set out in this Agreement, Lender agrees, to honor drafts under the Existing LCs and any renewals or amendments thereto.

(ii) Lender is not obligated to issue any LCs other than the Existing LCs.

(iii) With respect to any LC which is not an Existing LC, Lender may from time to time on any Business Day during the period from the Amendment Date until the LC Termination Date, issue new LCs for the account of Borrower, and amend or renew LCs previously issued by it, provided that, Lender shall not be obligated to make any LC Credit Extension with respect to any new LC described under this subsection (a)(ii) , if:

(A) the issuance of such new LC has not been approved by Lender in its sole discretion;

(B) as of the date of and after giving effect to such LC Credit Extension, the LC Exposure would exceed the LC Committed Amount;

(C) the expiry date of such requested LC would occur after the LC Termination Date, unless Lender has approved such expiry date;

(D) the issuance of such LC would violate one or more policies of Lender; or

(E) it is denominated in a currency other than Dollars.

(iv) Lender shall be under no obligation to amend any LC if (A) Lender would have no obligation at such time to issue such LC in its amended form under the terms of this Agreement, or (B) the beneficiary of such LC does not accept the proposed amendment to such LC.

(b) Drawings and Reimbursements .

(i) Upon receipt from the beneficiary of any LC of any notice of a drawing under such LC, Lender shall notify Borrower thereof. Not later than 12:00 noon on the date of any payment by Lender under an LC (each such date, an “ Honor Date ”), Borrower shall reimburse Lender in an amount equal to the amount of such drawing. If Borrower fails to so reimburse Lender by such time, Borrower shall be deemed to have incurred from Lender an LC Borrowing, to be disbursed on the Honor Date in an amount equal to the amount of the unreimbursed drawing (the “ Unreimbursed Amount ”), without regard to any minimum Loan amount or to the conditions set out in Section 5 . Any notice given by Lender pursuant to this Section 2.4(b)(i) may be given by telephone if immediately confirmed in writing; provided that , the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice.

(ii) With respect to any Unreimbursed Amount that is deemed to be an LC Borrowing, such LC Borrowing shall be due and payable immediately (together with interest) and shall bear interest at the Default Rate.

(c) Obligations Absolute . The obligation of Borrower to reimburse Lender for each drawing under each LC and to repay each LC Borrowing shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, Borrower shall promptly examine a copy of each LC and each amendment thereto that is delivered to it and, in the event of any claim of noncompliance with Borrower’s instructions or other irregularity, Borrower will immediately notify Lender. Borrower shall be conclusively deemed to have waived any such claim against Lender and its correspondents unless such notice is given.

(d) Cash Collateral . Upon the request of Lender, (i) if Lender has honored any full or partial drawing request under any LC and such drawing has resulted in an LC Borrowing, (ii) Lender has approved the issuance of an LC with an expiry date which expires after the LC Termination Date, or (iii) if, as of the LC Termination Date, any LC for any reason remains outstanding and partially or wholly undrawn, Borrower shall immediately Cash Collateralize the then outstanding LC Exposure (in an amount equal to the excess of the LC Exposure over the LC Committed Amount, determined as of the date of such LC Borrowing or the LC Termination Date, as the case may be). Borrower hereby grants to Lender, a security interest in and Lien upon all such cash, deposit accounts and all balances therein and all proceeds of the foregoing cash collateral shall be maintained in blocked, non-interest bearing deposit accounts at Lender.

(e) Applicability of ISP98 and UCP . Unless otherwise expressly agreed by Lender and Borrower when an LC is issued, (i) the rules of the “International Standby Practices 1998” published by the Institute of International Banking Law & Practice (or such later version thereof as may be in effect at the time of issuance) shall apply to each standby LC, and (ii) the rules of the Uniform Customs and Practice for Documentary Credits, as most recently published by the International Chamber of Commerce (the “ ICC ”) at the time of issuance shall apply to each commercial LC.

(f) Conflict with LC Application . In the event of any conflict between the terms hereof and the terms of any LC Application, the terms hereof shall control.

SECTION 3 TERMS OF PAYMENT.

3.1 Notes and Payments .

(a) The Loans shall be evidenced as follows:

(i) The Loan under the ROV Term Facility shall be evidenced by the ROV Term Note;

(ii) The Loan under the RE Term Facility shall be evidenced by the RE Term Note;

(iii) The Loan under the RLOC Term Facility shall be evidenced by the RLOC Term Note; and

(iv) Any LC Borrowings under the LC Facility shall be evidenced by the LC Note.

(b) Borrower must make each payment on the Obligation, without offset, counterclaim or deduction to Lender’s Office, in funds that will be available for immediate use by Lender by 12:00 noon on the day due. Payments received after such time (and payments received on a day which is not a Business Day) will be deemed received on the next Business Day but interest shall continue to accrue during such period.

3.2 ROV Term Facility, RE Term Facility, and RLOC Term Facility .

(a) Payments of principal and accrued and unpaid interest on the Loan made under the ROV Term Facility in the amount of $35,246.35 are due and payable monthly in arrears beginning on the first day of May 2010, and continuing on the first day of each month thereafter.

(b) All outstanding principal and all accrued and unpaid interest in respect of the ROV Term Facility is due and payable on the ROV Term Maturity Date.

(c) Payments of principal and accrued and unpaid interest on the RE Term Facility in the amount of $18,293.25 are due and payable monthly in arrears beginning on the first day of May 2010, and continuing on the first day of each month thereafter.

(d) All outstanding principal and all accrued and unpaid interest in respect of the RE Term Facility is due and payable on the RE Term Loan Maturity Date.

(e) Payments of principal in the amount of $40,000, plus accrued and unpaid interest on the RLOC Term Principal Amount, are due and payable monthly in arrears beginning on the first day of May 2010, and continuing on the first day of each month thereafter.

(f) All outstanding principal and all accrued and unpaid interest in respect of the RLOC Term Facility is due and payable on the RLOC Term Loan Maturity Date.

3.3 Order of Application .

(a) All payments and prepayments shall be applied as specified in this Agreement and, if not specified, shall be applied in the following order: (i) to all fees, expenses, late charges, collection costs, and other charges, costs and expenses for which Lender has not been paid or reimbursed under the Loan Documents, (ii) accrued and unpaid interest on the Notes in the order Lender elects, (iii) to the remaining outstanding principal balance of the Notes in the order Lender elects, and (iv) to the remaining Obligation in the order and manner Lender deems appropriate in its sole discretion.

(b) All proceeds from the exercise of any rights shall be applied at Lender’s discretion among principal, interest, fees, expenses, late charges, collection costs, and other charges, costs and expenses, for which Lender has not been paid or reimbursed under the Loan Documents.

3.4 Interest . Except as otherwise provided in this Agreement.

(a) The ROV Term Principal Amount shall accrue interest at an annual rate equal to the lesser of (i) 6.50% and (ii) the Maximum Rate.

(b) The RE Term Principal Amount shall accrue interest at an annual rate equal to the lesser of (i) 6.50% and (ii) the Maximum Rate.

(c) The RLOC Term Principal Amount shall accrue interest at an annual rate equal to the lesser of (i) 6.50% and (ii) the Maximum Rate.

(d) Each change in the Maximum Rate is effective has of the date of such change without notice to Borrower or any other Person.

3.5 Default Rate . To the extent permitted by Law, while a Default exists, the Obligation shall accrue interest at the lesser of (a) the Default Rate and (b) the Maximum Rate, until all past due amounts are paid (whether payment is made before or after entry of a judgment or the Default is otherwise cured or waived). Subject to Section 3.7 , if a Default exists, Lender may, in its sole discretion, to the extent permitted by Law, add accrued and unpaid interest to the outstanding principal amount of all Loans and such amount will accrue interest until paid at the applicable interest rate.

3.6 Interest Calculations . Interest on Loans and on the amount of all fees and other amounts due under the Loan Documents will be calculated on the basis of actual number of days elapsed (including the first day but excluding the last day), but computed as if each calendar year consisted of 360 days (unless computation would result in an interest rate in excess of the Maximum Rate, in which event the computation is made on the basis of a year of 365 or 366 days, as the case may be). All interest rate determinations and calculations by Lender are conclusive and binding, absent manifest error.

3.7 Maximum Rate . It is the intention of the parties to comply with applicable usury laws. The parties agree that the total amount of interest contracted for, charged, collected or received by Lender under this Agreement shall not exceed the Maximum Rate. To the extent, if any, that Chapter 303 of the Texas Finance Code (the “ Finance Code ”) is relevant to Lender for purposes of determining the Maximum Rate, the parties elect to determine the Maximum Rate under the Finance Code pursuant to the “weekly ceiling” from time to time in effect, as referred to and defined in § 303.001-303.016 of the Finance Code; subject, however, to any right Lender subsequently may have under applicable law to change the method of determining the Maximum Rate. Notwithstanding any contrary provisions contained herein, (a) the Maximum Rate shall be calculated on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be; (b) in determining whether the interest hereunder exceeds interest at the Maximum Rate, the total amount of interest shall be spread throughout the entire term of this Agreement until its payment in full; (c) if at any time the interest rate chargeable under this Agreement would exceed the Maximum Rate, thereby causing the interest payable under this Agreement to be limited to the Maximum Rate, then any subsequent reductions in the interest rate(s) shall not reduce the rate of interest charged under this Agreement below the Maximum Rate until the total amount of interest accrued from and after the date of this Agreement equals the amount of interest which would have accrued if the interest rate(s) had at all times been in effect; (d) if Lender ever charges or receives anything of value which is deemed to be interest under applicable Texas law, and if the occurrence of any event, including acceleration of maturity of obligations owing to Lender, should cause such interest to exceed the maximum lawful amount, any amount which exceeds interest at the Maximum Rate shall be applied to the reduction of the unpaid principal balance of all Loans under this Agreement or any other indebtedness owed to Lender by Borrower, and if this Agreement and such other indebtedness are paid in full, any remaining excess shall be paid to the applicable Borrower; and (e) Chapter 346 of the Finance Code shall not be applicable to this Agreement or the indebtedness outstanding hereunder.

3.8 Set off . While a Default exists, Lender (and each of its Affiliates) is hereby authorized at any time and from time to time, to the fullest extent permitted by Law, to set off and apply (a) any and all deposits (general or special, time or demand, provisional or final) at any time held by Lender (or its Affiliates) and (b) any other Debt at any time owing by Lender (or any of its Affiliates) to or for the credit or the account of any Company, against the Obligation even if Lender has not made demand under this Agreement and the Obligation is unmatured. Lender agrees to promptly notify the applicable Company after any such set off and application is made; provided that, the failure to give such notice shall not affect the validity of such set off and application. The rights of Lender under this Section 3.8 are in addition to other rights and remedies (including other rights of set off) that Lender may have.

3.9 Debit Account . Borrower agrees that the interest and principal payments and any fees will be deducted automatically on the due date from such of Borrower’s accounts with Lender as designated in writing by Borrower. This authorization shall not affect the obligation of Borrower to pay such sums when due, without notice, if there are insufficient funds in such account to make such payment in full on the due date thereof, or if Lender fails to debit such account.

SECTION 4 FEES.

4.1 Treatment of Fees . To the extent permitted by Law, the fees described in this Section 4 (a) do not constitute compensation for the use, detention, or forbearance of money, (b) are in addition to, and not in lieu of, interest and expenses otherwise described in this Agreement or in any other Loan Document, (c) are non-refundable, (d) accrue interest, if not paid when due, at the Default Rate, and (e) are calculated on the basis of actual number of days elapsed (including the first day but excluding the last day), but computed as if each calendar year consisted of 360 days (unless computation would result in an interest rate in excess of the Maximum Rate, in which event the computation is made on the basis of a year of 365 or 366 days, as the case may be). The fees described in this Section 4 are in all events subject to the provisions of Section 3.7 .

4.2 Letter of Credit Fees . Borrower shall pay to Lender, a letter of credit fee (the “ LC Fee ”) for each LC in an amount equal to (a) the Applicable Rate multiplied by (b) the maximum daily amount available to be drawn under such LC. LC Fees shall be (a) computed on a quarterly basis in advance and (b) due and payable on the first Business Day of each April, July, October and January, commencing with the first such date to occur after the issuance of such LC, on the LC Termination Date, and thereafter on demand. In addition, Borrower shall pay to Lender an issuance fee equal to $500, and all other applicable fees customarily charged by its letter of credit department.

4.3 Unused Fees . Borrower shall pay to Lender, a fee in an amount equal to (a) the Applicable Rate multiplied by (b) the actual daily amount by which the LC Committed Amount exceeds the LC Exposure, which fee shall be due and payable quarterly in arrears, on the first day of each April, July, October and January (beginning January 1, 2009) until the LC Termination Date.

4.4 Modification Fee . On the Amendment Date, Borrower shall pay to Lender for its own account a modification fee in the amount of $20,000. Such fee shall be fully earned when paid and shall not be refundable for any reason whatsoever.

SECTION 5 CONDITIONS PRECEDENT .

5.1 Conditions to Initial Loans . This Agreement will become effective once all parties have executed and delivered this Agreement. Lender will not be obligated to make the initial Loans until (i) Lender has received all of the items described on Schedule 5 , each in Proper Form, (ii) Lender has received a field audit in proper form, and (iii) Borrower has established with Lender an operating account acceptable to Borrower and Lender.

5.2 Conditions to All Loans . Lender will not be obligated to make any Loan unless on the applicable Loan Date or LC Credit Extension Date (and after giving effect to the requested Loan or LC): (a) Lender has timely received a Loan Request, (b) all of the representations and warranties of the Companies in the Loan Documents are true and correct in all material respects (except to the extent that the representations and warranties speak to a specific date), (c) Lender has received and continues to maintain evidence of insurance as set out in Section 8.6 (including certificates and endorsements), (d) no Material Adverse Event exists, and (e) no Default or Potential Default exists or will result from such funding, issuance, amendment or renewal. Each Loan Request delivered to Lender constitutes the representation and warranty by the Companies that the statements in clauses (b), (c), (d), and (e) above are true and correct in all material respects.

5.3 No Waiver . Each condition precedent in this Agreement (including matters listed on Schedule 5 ) is material to the transactions contemplated by this Agreement, and time is of the essence with respect to each condition precedent. Lender may make any Loan without all conditions being satisfied, but such Loan shall not be deemed a waiver of any condition precedent for any subsequent Loan.

SECTION 6 SECURITY AND GUARANTIES .

6.1 Collateral . The complete payment and performance of the Obligation shall be secured by all of the items and types of property described as “Collateral” in the Security Agreement, and as “Mortgaged Property” in the Deed of Trust (collectively, the “ Collateral ”). Each Company shall execute all applicable Security Documents to pledge all of the Collateral it owns, provided that , Flotation Technologies shall not be required to grant a Lien on the Flotation Technologies Real Estate in favor of Lender.

6.2 Financing Statements . Each Company hereby authorizes Lender to file in Proper Form, if requested, financing statements, continuation statements, or termination statements, or take other action reasonably requested by Lender relating to the Collateral, including any Lien search required by Lender.

6.3 Guaranties . Each Guarantor shall guaranty the complete payment and performance of the Obligation by executing and delivering a Guaranty to Lender on the Closing Date. Each other Company (other than Borrower) shall execute and deliver to Lender a Guaranty in Proper Form within 30 days after such Company is created or acquired.

SECTION 7 REPRESENTATIONS AND WARRANTIES . Each Company represents and warrants to Lender as follows:

7.1 Existence, Good Standing, and Authority to do Business . Borrower is a corporation, duly organized and validly existing and in good standing under the Laws of the jurisdiction in which it is organized. Each other Company is duly organized, validly existing, and in good standing under the Laws of the jurisdiction in which it is organized. In each state in which each Company does business and the nature and extent thereof requires it to be duly qualified to transact business in such state, it is properly licensed, in good standing, and, where required, in compliance with fictitious name statutes.

7.2 Subsidiaries . Schedule 7.2 lists the name, address, entity type and jurisdiction of organization of each Company, the number of issued and outstanding shares (or other equity interests) of such Company and Borrower’s (or other Company’s) percentage ownership of each other Company.

7.3 Authorization, Compliance, and No Default . The execution and delivery by each Company of the Loan Documents to which it is a party and each Company’s performance of its obligations under the Loan Documents are within such Company’s organizational powers, have been duly authorized, do not violate any of its organizational documents, and do not violate any Law or Material Agreement by which such Company is bound.

7.4 Enforceability . Each Loan Document has been executed and delivered by each Company which is a party to it, and the Loan Documents are enforceable against each Company in accordance with their respective terms, except as enforceability may be limited by applicable Debtor Relief Laws and general principles of equity.

7.5 Litigation . Except as disclosed on Schedule 7.5 , no Company is subject to, or aware of the threat of, any Litigation involving any Company which, (a) purports to affect or pertain to this Agreement, any other Loan Document, or any of the transactions contemplated by the Loan Documents, or (b) if determined adversely to any Company could reasonably be expected to result in a Material Adverse Event.

7.6 Taxes . All Tax returns of each Company required to be filed have been timely filed (or extensions have been granted) and all Taxes imposed upon any Company that are due and payable have been paid before delinquency, other than Taxes which are being contested in good faith by lawful proceedings diligently conducted, against which reserve or other provision required by GAAP has been made.

7.7 Environmental Matters . No facility of any Company is used for, or to the knowledge of any Company has been used for, storage, treatment, or disposal of any Hazardous Substance in violation of any applicable Environmental Law, other than violations that individually or collectively would not constitute a Material Adverse Event. Except for the items disclosed to Lender in writing prior to the Closing Date, no Company knows of any environmental condition or circumstance adversely affecting its assets, properties, or operations that could reasonably be expected to result in a Material Adverse Event.

7.8 Ownership of Assets; Intellectual Property . Each Company has (a) indefeasible title to its real property, (b) a vested leasehold interest in all of its leased property, and (c) good and marketable title to its personal property, all as reflected on the Current Financials (except for property that has been disposed of as permitted by Section 9.9 ). Each Company is conducting its business without infringement or claim of infringement of any license, patent, copyright, service mark, trademark, trade name, trade secret or other intellectual property right of others, other than any infringements or claims that, if successfully asserted against or determined adversely to any Company, could not, individually or collectively, reasonably be expected to result in a Material Adverse Event.

7.9 Liens . No Lien exists on any asset of any Company, other than Permitted Liens.

7.10 Debt . No Company is an obligor on any Debt, other than Permitted Debt.

7.11 Insurance . The Companies maintain the insurance required under Section 8.6 .

7.12 Place of Business; Real Property . The location of each Company’s place of business or chief executive office is set out on Schedule 7.12 . The books and records of each Company are located at its place of business or chief executive office. Except for the locations set out on Schedule 7.12 , Borrower has no ownership, leasehold, or other interest in real estate.

7.13 Purpose of Credit Facilities .

(a) The original proceeds of the ROV Term Facility were used to finance (or refinance) Borrower’s acquisition of the ROV. The original proceeds of the RE Term Facility were used to finance (or refinance) Borrower’s acquisition of the Properties. The proceeds of the RLOC Term Facility will be used to refinance a portion of the Revolving Credit Facility under the Existing Credit Agreement as a term loan. The LC Facility will be used to support all Existing LCs and any additional LCs approved by Lender.

(b) No part of the proceeds of any Loan will be used, directly or indirectly, for a purpose that violates any Law, including the provisions of Regulation U .

7.14 Transactions with Affiliates . Except as disclosed on Schedule 7.14 , no Company is a party to a material agreement or transaction with any of its Affiliates (excluding other Companies), other than transactions in the ordinary course of business and upon fair and reasonable terms not materially less favorable than it could obtain or could become entitled to in an arm’s-length transaction with a Person that was not its Affiliate.

7.15 Financial Information . Each material fact or condition relating to the Loan Documents or the Companies’ financial condition, business, property, or prospects has been disclosed to Lender in writing. All financial and other information supplied to Lender is sufficiently complete to give Lender accurate knowledge of each Company's financial condition, including all material contingent liabilities. Since the date of the most recent financial statement provided to Lender, there has been no material adverse change in the business condition (financial or otherwise), operations or properties of the Companies.

7.16 Material Agreements and Funded Debt . No Company is a party to any Material Agreement, other than the Loan Documents and the Material Agreements described on attached Schedule 7.16 . No Company has breached or is in default under any Material Agreement or Funded Debt obligation.

7.17 ERISA .

(a) Each Employee Plan (i) (other than a multiemployer plan) is in compliance in all material respects with the applicable provisions of ERISA, the Tax Code and other federal or state law, and (ii) has received a favorable determination letter from the IRS and to the best knowledge of Borrower, nothing has occurred which would cause the loss of such qualification.

(b) Borrower has fulfilled its material obligations, if any, under the minimum funding standards of ERISA and the Tax Code with respect to each Employee Plan, and has not incurred any liability with respect to any Employee Plan under Title IV of ERISA.

(c) There is no Litigation (including by any Governmental Authority), and there has been no prohibited transaction or violation of the fiduciary responsibility rules, with respect to any Employee Plan which is or could reasonably be expected to be a Material Adverse Event.

(d) With respect to any Employee Plan subject to Title IV of ERISA: (i) no reportable event has occurred under Section 4043(c) of ERISA for which the PBGC requires 30 day notice, (ii) no action by Borrower or any ERISA Affiliate to terminate or withdraw from any Employee Plan has been taken and no notice of intent to terminate a Employee Plan has been filed under Section 4041 of ERISA, and (iii) no termination proceeding has been commenced with respect to a Employee Plan under Section 4042 of ERISA, and, to the best knowledge of Borrower, no event has occurred or condition exists which might constitute grounds for the commencement of such a proceeding.

SECTION 8 AFFIRMATIVE COVENANTS . So long as Lender is committed to make any Loan under this Agreement, and thereafter until the Obligation is paid in full, each Company agrees as follows:

8.1 Items to be Furnished . Borrower shall cause the following to be furnished to Lender:

(a) Promptly after preparation, and no later than 90 days after the last day of each fiscal year of Borrower beginning with the fiscal year ending December 31, 2008, audited financial statements (including statements of operations, stockholders’ equity, and cash flows and a balance sheet) showing the consolidated financial condition and results of operations of the Companies as of, and for the year ended on, that last day, and accompanied by:

(i) the opinion of a firm of independent certified public accountants satisfactory to Lender, based on an audit using generally accepted auditing standards, that the financial statements were prepared in accordance with GAAP and present fairly, in all material respects, the consolidated financial condition and results of operations of Companies, and

(ii) a Compliance Certificate with respect to such financial statements to be delivered under this clause (a) , calculating and certifying as to the Companies’ compliance with the financial covenants under this Agreement.

(b) Promptly after preparation, and no later than 45 days after the last day of each March, June, September and December unaudited financial statements (including statements of operations, stockholders’ equity, and cash flows and a balance sheet) showing the consolidated financial condition and results of operations of the Companies for the prior quarter and for the period from the beginning of the current fiscal year to the last day of that quarter, accompanied by a Compliance Certificate, with respect to such financial statements to be delivered under this clause (b) , calculating and certifying as to the Companies’ compliance with the financial covenants under this Agreement and certifying that no Default or Potential Default exists.

(c) Notice, promptly after any Company receives notice of, or otherwise becomes aware of, (i) the institution of any Litigation involving any Company for which the monetary amount at issue is greater than $250,000, individually, or $250,000 in the aggregate, (ii) any liability or alleged liability under any Environmental Law arising out of, or directly affecting, the properties or operations of such Company, (iii) any substantial dispute with any Governmental Authority, (iv) the incurrence of any material contingent Debt other than performance guaranties in respect of contracts entered into by any Company in the ordinary course of its business, and (v) a Default or Potential Default, specifying the nature thereof and what action each Company has taken, is taking, or proposes to take.

(d) Promptly after preparation, but no later than 10 days after the date of filing, a completed tax return of Borrower, together with a certificate of Responsible Officer of Borrower certifying as to the dividends or distributions declared or made in respect of the calendar year covered by such tax return.

(e) To the extent it is not part of the Borrower’s consolidated tax return, promptly after preparation, but no later than 10 days after the date of filing, a completed tax return of each Guarantor.

(f) Concurrently with the occurrence of (i) such change, notify Lender of any change in the name, legal structure, place of business, or chief executive office of any Company, or (ii) any acquisition or creation of a Subsidiary by any Company, notify Lender that any Person has become a Subsidiary of such Company.

(g) Upon Lender’s request, but in any event on at least an annual basis, true and correct current financial statements of Borrower and each Guarantor in form and substance satisfactory to Lender. The financial statements shall include, among other things, detailed information regarding (i) any entities such as corporations, partnerships, or limited liability companies of which Borrower or any Guarantor is the majority owner and (ii) any entities of which Borrower or any Guarantor is not the majority owner, but for which Borrower or such Guarantor is directly or contingently liable on debts or obligations of any kind incurred by those entities.

(h) Promptly upon reasonable request by Lender, information and documents not otherwise required to be furnished under the Loan Documents respecting the business affairs, assets and liabilities of the Companies.

8.2 Books, Records, Inspections, and Field Audits . Each Company shall maintain books, records, and accounts necessary to prepare the financial statements required by Section 8.1 . Upon reasonable notice (not less than 2 Business Days), each Company shall allow Lender (or its Representatives) during business hours or at other reasonable times to inspect each Company’s properties and examine, audit, and make copies of books and records. If any of the Companies’ properties, books or records are in the possession of a third party, the applicable Company shall authorize that third party to permit Lender or its Representatives to have access to perform inspections or audits and to respond to Lender's requests for information concerning such properties, books and records. Lender may discuss, from time to time, any of the Companies’ affairs, conditions and finances with its directors, officers, and certified public accountants. Each Company shall permit Lender to perform (or engage an third party to perform) a field audit of Borrower’s operations, inventory, accounts receivables, accounts payable, and other assets once each year; provided that while a Default exists, Lender may perform (or engage an third party to perform) a field audit at any time.

8.3 Taxes . Each Company will promptly pay when due any and all Taxes, other than Taxes which are being contested in good faith by lawful proceedings diligently conducted, against which reserve or other provision required by GAAP has been made, and in respect of which levy and execution of any Lien are stayed.

8.4 Compliance with Laws . Each Company shall comply in all material respects of the requirements of all Laws (including fictitious or trade name statutes) and all orders, writs, injunctions and decrees applicable to it or its business or property, except in such instances in which (a) such requirement is deemed contested in good faith by lawful proceedings diligently conducted, against which reserve or other provision required by GAAP has been made, and (b) the failure to comply would not result in a Material Adverse Event.

8.5 Maintenance of Existence, Assets, and Business . Except as otherwise permitted by Section 9.6 , each Company will (a) maintain its existence and good standing in its state of organization and its authority to transact business and good standing in all other jurisdictions where the nature and extent of its business and properties require due qualification and good standing, (b) maintain all licenses, permits and franchises necessary for its business where failure to do so is a Material Adverse Event, and (c) keep all of its assets that are useful in and necessary to its business in good working order and condition (ordinary wear and tear excepted) and make all necessary repairs and replacements.

8.6 Insurance . Each Company shall maintain insurance with responsible and reputable insurance companies or associations concerning its property and business against casualties and contingencies and of the types and amounts customarily maintained by similar businesses (including coverage for contractual liability and product liability). Each policy shall provide for at least 30 days prior notice to Lender of any cancellation thereof, and insurance policies covering the tangible property comprising the Collateral. Upon Lender’s request, Borrower shall deliver to Lender a certificate of insurance listing all insurance in force.

8.7 Environmental Laws . Each Company shall (a) conduct its business so as to comply with (i) all applicable Environmental Laws, and (ii) the requirements of any purchase agreement under which it acquired any Property, (b) promptly take corrective action to remedy any violation of any Environmental Law, and (c) immediately notify Lender of any claims or demands in excess of $100,000 by any Governmental Authority or Person with respect to any Environmental Law or Hazardous Substance.

8.8 ERISA . Promptly during each year (a) pay contributions adequate to meet at least the minimum funding standards under ERISA with respect to each and every Employee Plan, (b) file each annual report required to be filed pursuant to ERISA in connection with each Employee Plan for each year, and (c) notify Lender within 10 days of the occurrence of any reportable event under Section 4043(c) of ERISA that might constitute grounds for termination of any capital Employee Plan by the Pension Benefit Guaranty Corporation or for the appointment by the appropriate United States District Court of a trustee to administer any Employee Plan.

8.9 Use of Proceeds . Borrower shall use the proceeds of any Loan or LC only for the purposes represented in this Agreement.

8.10 Application of Insurance and Eminent Domain Proceeds .

(a) Lender and each Company agree (i) that all Insurance Proceeds shall be paid by the insurers directly to Lender (as loss payee or additional insured), and (ii) to cause all Eminent Domain Proceeds to be paid by the condemning Governmental Authority directly to Lender.

(b) If any Insurance Proceeds or Eminent Domain Proceeds are paid to any Company, such Insurance Proceeds or Eminent Domain Proceeds shall be received only in trust for Lender, shall be segregated from other funds of the Companies and shall promptly be paid over to Lender in the same form as received (with any necessary endorsement).

(c) Notwithstanding anything to the contrary in this Section 8.10 , reimbursement under any liability insurance maintained by any Company may be paid directly to the Person who incurred the liability, cost, or expense covered by such insurance.

(d) Any Eminent Domain Proceeds arising from the Properties or Insurance Proceeds arising from losses incurred by Borrower shall be applied (i) first, to the RLOC Term Facility, (ii) second, to the RE Term Facility, (ii) third, to the ROV Term Facility, (iv) fourth, to Cash Collateralize LC Exposure, with the excess, if any, payable to Borrower.

(e) Notwithstanding anything in this Agreement to the contrary, Borrower may retain the first $100,000 of Insurance Proceeds or Eminent Domain Proceeds paid to Borrower under this Agreement and use such proceeds to repair or replace damaged property or for working capital purposes.

8.11 New Subsidiaries . Each Company shall promptly cause each newly created or acquired Subsidiary to comply with Section 6 .

8.12 Expenses . Borrower shall promptly pay upon demand (a) all reasonable costs, fees and expenses paid or incurred by Lender (including those incurred under Section 6 ) in connection with the negotiation, preparation, delivery and execution of any Loan Document, and any related or subsequent amendment, waiver, or consent (including in each case, the reasonable fees and expenses of Lender’s counsel), (b) all due diligence, closing, and post-closing costs including filing fees, recording costs, lien searches, corporate due diligence, third-party expenses, appraisals (if required), title insurance (if required), environmental surveys, annual field audits, and other related due diligence, closing and post-closing costs and expenses, and (c) all costs, fees and expenses of Lender incurred in connection with the enforcement of the Loan Documents or the exercise of any rights arising under the Loan Documents or the negotiation, workout, or restructure and any action taken in connection with any Debtor Relief Laws (including in each case, the reasonable fees and expenses of Lender’s counsel), all of which shall be a part of the Obligation and shall accrue interest, if not paid upon demand, at the Default Rate until repaid.

8.13 Maintenance of Cash Management Agreement . Borrower shall at all times maintain a Cash Management Agreement established in compliance with Section 5.1 (or an alternate treasury management arrangement acceptable to Lender).

8.14 Further Assurances . Each Company shall take such action as Lender may reasonably request to carry out the intent of this Agreement and the terms of the Loan Documents (including to perfect and protect its security interests and Liens or comply with applicable Laws), including executing, acknowledging, authorizing, delivering or recording or filing additional instruments or documents or obtaining and delivering new or updated surveys, appraisals, title commitments, or environmental site assessments. Because Borrower agrees that Lender’s remedies at Law for failure of Borrower to comply with the provisions of this Section 8.14 would be inadequate and that failure would not be adequately compensable in damages, Borrower agrees that the covenants of this Section 8.14 may be specifically enforced.

SECTION 9 NEGATIVE COVENANTS . So long as Lender is committed to make any Loan or issue any LC under this Agreement, and thereafter until the Obligation is paid in full, each Company agrees as follows:

9.1 Debt . No Company may create, incur, or permit any Debt except Permitted Debt. The Funded Debt permitted under clause (i) of the defined term “Permitted Debt”, shall be pari passu in right of payment with the Obligation, and the Liens which secure such Funded Debt shall be pari passu in right of priority with the Liens which secure the Obligation.

9.2 Liens . No Company shall create, incur, or permit any Lien upon any of its assets, except Permitted Liens. No Company shall enter into any agreement (other than the Loan Documents ]or the TD Bank Documents]) prohibiting the creation or assumption of any Lien upon its assets or revenues or prohibiting or restricting the ability of any Company to amend or otherwise modify this Agreement or any other Loan Document.

9.3 Compliance . No Company may violate the provisions of any Laws applicable to it, any agreement to which it is a party, or the provisions of its organizational documents, if such violations individually or collectively would constitute a Material Adverse Event. No Company will modify, repeal, replace or amend any provision of its organizational or governing documents in any manner which would be adverse to the interests of Lender.

9.4 Loans and Investments .

(a) No Company may extend credit to any other Person, other than (i) existing extensions of credit disclosed to Lender in writing, (ii) extensions of credit among the Companies which have recourse liability for the Obligation, (iii) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business to Persons which are not Affiliates, (iv) demand deposit accounts maintained in the ordinary course of business, (v) expense accounts for employees in the ordinary course of business which do not, in the aggregate, at any time exceed $50,000, (vi) extensions of credit that do not exceed an aggregate amount of $20,000 outstanding at any one time, and (vii) Permitted Investments.

(b) No Company may make any investment in, or purchase or commit to purchase any equity interests in, any other Person, other than Permitted Investments.

9.5 Dividends . No Company may (a) declare or make any dividend or other distribution ( other than (i) dividends or distributions declared or made by such Company wholly in the form of its capital stock, (ii) dividends or distributions by a Company to Borrower, and (iii) Borrower may from time to time make cash distributions to its shareholders if no Default exists prior to or after giving effect to any such distribution, (b) retire, redeem, purchase, withdraw, or otherwise acquire any equity interests in such Company (including the purchase of warrants or other options to acquire such interests), or (c) declare or make any distribution of assets to the holders of its equity interests (in that capacity), whether in cash, assets, or in its obligations. No Company may enter into or permit to exist any arrangement or agreement ( other than this Agreement) that prohibits it from paying dividends or making other distributions.

9.6 Acquisition, Mergers, and Dissolutions .

(a) Except as provided in this Section 9.6 , no Company may (whether in one transaction or a series of transactions) (i) acquire all or any substantial portion of the stock issued by, equity interest in, voting interest in, or assets of, any other Person, (ii) merge or consolidate with any other Person, (iii) liquidate, wind up or dissolve (or suffer any liquidation or dissolution), (iv) suspend operations, or (v) acquire any Subsidiaries.

(b) Any Company may merge or consolidate with, or acquire stock issued by, equity interest in, or assets of, another Company (and, in the case of such merger or consolidation or, in the case of the conveyance or distribution of all of such assets, the non-surviving or selling entity, as the case may be, may be liquidated, wound up or dissolved); provided that, if the surviving entity is a Guarantor it shall comply with Section 6 and if Borrower is a party to such merger or consolidation, Borrower must be the surviving entity.

9.7 Assignment . No Company may assign or transfer any of its rights, duties or obligations under any of the Loan Documents.

9.8 Fiscal Year and Accounting Methods . No Company may change its fiscal year or its method of accounting ( other than immaterial changes in methods or as required by GAAP).

9.9 Sale of Assets . No Company may make any Disposition or enter into any agreement to make any Disposition, except (a) Dispositions in the ordinary course of business, (b) Dispositions of (i) obsolete or worn out assets, (ii) assets which are no longer needed in such Company’s business, (iii) inventory in the ordinary course of business, or (iv) delinquent accounts receivable in the ordinary course of business for purposes of collection; provided that , all of the consideration of each such Disposition is cash, and (c) to the extent permitted by Section 9.6 .

9.10 New Businesses . No Company may engage in any business except the business in which it is engaged as of the Closing Date.

9.11 Transactions with Affiliates . Except as disclosed on Schedule 7.14 , no Company may enter into any Material Agreement or any material transaction with any of its Affiliates, provided that , any Company may enter into a Material Agreement or any material transaction with any of its Affiliates if (a) such transaction is in the ordinary course of business, and (b) is on fair and reasonable terms not materially less favorable to such Company than such Company could obtain in an arms’ length transaction with a Person that was not an Affiliate.

9.12 Payroll Taxes . No Company may use any portion of the proceeds of any Loan to pay the wages of employees, unless a timely payment to or deposit with the appropriate Governmental Authority of all amounts of Tax required to be deducted and withheld with respect to such wages is also made.

9.13 Prepayment of Debt . No Company may voluntarily prepay principal of, or interest on, any Debt, other than the Obligation, if a Default or Potential Default exists or would result after giving effect to such payment. No Company may prepay, repurchase, redeem or defease Subordinated Debt (other than Subordinated Debt listed on Schedule 9.13 ) prior to the irrevocable payment and performance in full of the Obligation without the prior written consent of Lender.

SECTION 10 FINANCIAL COVENANTS . So long as Lender is committed to make any Loan or issue any LC under this Agreement, and thereafter until the Obligation is paid in full, the Companies agree as follows:

10.1 Leverage Ratio . The Leverage Ratio may not at any time from and after April 1, 2010 be greater than 3.00 to 1.00.

10.2 Fixed Charge Coverage Ratio . The Fixed Charge Coverage Ratio may not at any time from and after April 1, 2010 be less than 1.50 to 1.00.

10.3 Tangible Net Worth . The Tangible Net Worth may not at any time from and after April 1, 2010 be less than an amount equal to the sum of (a) $15,000,000, plus (b) 50% of the Companies’ net income, if positive, after provision for Taxes, for each whole or partial fiscal year completed after the Amendment Date.

10.4 Testing and Calculation .

(a) Each of the foregoing financial covenants shall be calculated and tested quarterly, as of the last day of each quarter, beginning with the quarter ending June 30, 2010.

(b) For the quarter ending June 30, 2010, and each quarter thereafter, the Leverage Ratio and the Fixed Charge Coverage Ratio shall be calculated for the four immediately preceding quarters; provided that , for the four fiscal quarter period ending June 30, 2010, the quarter ending September 30, 2009 shall be omitted from such calculation and the Leverage Ratio and the Fixed Charge Coverage Ratio for such period shall be calculated by multiplying their respective constituent components for such periods by 4/3.

10.5 Financial Covenant Waiver . Lender (a) waives any noncompliance with Section 8.1(a) and Sections 10.1 , 10.2 , and 10.3 of the Existing Credit Agreement for the fiscal quarter ended December 31, 2009, and all prior fiscal quarters, (b) waives any implied noncompliance with Sections 10.1 , 10.2 , and 10.3 of this Agreement, or under the Existing Credit Agreement, for the fiscal quarter ended March 31, 2010, and (c) agrees not to exercise any of the rights or remedies available to Lender under the Loan Documents solely as a result of the noncompliance described in the immediately preceding clauses (a) and (b). Except as set out in the preceding sentence, Borrower hereby agrees that the foregoing waiver does not constitute a waiver of any present or future violation of or noncompliance with any provision of any Loan Document or a waiver of Lender’s right to insist upon strict compliance with each term, covenant, condition, and provision of the Loan Documents.

SECTION 11 DEFAULT . The term “Default” means the occurrence of any one or more of the following events:

11.1 Payment of Obligation . The failure of any Company to pay any part of the Obligation within 2 days after the date when it becomes due and payable under the Loan Documents.

11.2 Covenants . The failure of any Company to punctually and properly perform, observe and comply with:

(a) Any covenant, agreement, or condition contained in (i) Sections 6.1, 6.3, 8.2, 8.6, 8.8, 8.9 , or 8.10 and such failure continues for 10 days or (ii) Sections 9 and 10 , or

(b) Any other covenant, agreement, or condition contained in any Loan Document, (other than the covenants to pay the Obligation as set out in Section 11.1 above, the covenants in clause (a) preceding and as set out below in this Section 11 ), and such failure continues for 30 days.

11.3 Debtor Relief . Any Company (a) voluntarily seeks, consents to, or acquiesces in the benefit of any Debtor Relief Law, other than a voluntary liquidation or dissolution permitted by Section 9.6 , (b) becomes a party to or is made the subject of any proceeding provided for by any Debtor Relief Law ( other than as a creditor or claimant), and (i) the petition is not controverted within 10 days and is not dismissed within 60 days, or (ii) an order for relief is entered under Title 11 of the United States Code , (c) makes an assignment for the benefit of creditors, or (d) fails (or admits in writing its inability) to pay its debts generally as they become due.

11.4 Judgments . Any Company fails, within 30 days after entry, to pay, bond or otherwise discharge any (a) a final non-appealable judgment or arbitration award for the payment of money in the amount exceeding $250,000 (individually or in the aggregate and net of applicable insurance if the insurer has accepted coverage) or (b) one or more non-monetary judgments that could be, or could reasonably be expected to be, individually or in the aggregate, a Material Adverse Event, and, in either case enforcement of such judgment or award is not stayed.

11.5 Misrepresentation . Any representation or warranty made to Lender by any Company or contained in any Loan Document at any time proves to have been incorrect in any material respect when made.

11.6 Default Under Other Agreements .

(a) Except for trade payables in the ordinary course of business, any Company fails to pay when due (after any applicable grace period) any Debt which (individually or in the aggregate) exceeds $100,000, or any default exists under any agreement which permits any Person to cause any Debt which (individually or in the aggregate) exceeds $100,000 to become due and payable by any Company before its stated maturity.

(b) Any Company breaches or defaults under any material term, condition, provision, representation or warranty contained in any Material Agreement, including any agreement with Lender (other than the Loan Documents), and such Company fails for 10 Business Days to commence and thereafter diligently pursue a cure.

11.7 Validity and Enforceability of Loan Documents . Except in accordance with its terms, any Loan Document at any time after its execution and delivery (a) ceases to be in effect in any material respect or is declared by a Governmental Authority to be null and void, or (b) its validity or enforceability is contested by a Company or a Company denies that it has any further liability or obligations under any Loan Document.

11.8 Swap Agreement . Notwithstanding Section 11.2(b) above, any Company breaches any provision of any Swap Agreement and the breach is not cured or waived within any applicable grace period.

11.9 Change of Management . (a) A Change of Management occurs or (b) an agreement, letter of intent, or agreement in principle is executed which by its terms will result in a Change of Management.

11.10 Ownership of Other Companies . Borrower fails to own, beneficially and of record, with power to vote, 66 2/3% of the issued and outstanding shares of capital stock, partnership interests or other equity interests of any Subsidiary that has executed a Loan Document (except as a result of a transaction permitted by this Agreement).

11.11 Material Adverse Event . A Material Adverse Event exists.

SECTION 12 RIGHTS AND REMEDIES .

12.1 Remedies Upon Default .

(a) If a Default exists under Section 11.3 , the Commitment under this Agreement automatically terminates and the unpaid balance of the Obligation automatically becomes due and payable without any action of any kind.

(b) If a Default exists, Lender may do any one or more of the following: (i) if the maturity of the Obligation has not already been accelerated under Section 12.1(a) , declare the unpaid balance of the Obligation immediately due and payable and to the extent permitted by applicable Law, the Obligation shall accrue interest at the Default Rate; (ii) terminate the Commitment; (iii) reduce any claim to judgment; (iv) exercise the rights of set-off or banker’s Lien under Section 3.9 to the extent of the full amount of the Obligation; (v) require Borrower to Cash Collateralize all LC Exposure; and (vi) exercise any and all other legal or equitable rights afforded by the Loan Documents, the Laws of the State of Texas, or any other applicable jurisdiction.

12.2 Waivers . To the extent permitted by Law, each Company waives presentment and demand for payment, protest, notice of intention to accelerate, notice of acceleration and notice of protest and nonpayment, and agrees that its liability with respect to all or any part of the Obligation is not affected by any renewal or extension in the time of payment of all or any part of the Obligation, by any indulgence, or by any release or change in any security for the payment of all or any part of the Obligation.

12.3 No Waiver . No waiver of any Default shall be deemed to be a waiver of any other then-existing or subsequent Default. No delay or omission by Lender in exercising any right under the Loan Documents will impair that right or be construed as a waiver thereof or any acquiescence therein, nor will any single or partial exercise of any right preclude other or further exercise thereof or the exercise of any other right. The acceptance by Lender of any partial payment shall not be deemed to be a waiver of any Default then existing.

12.4 Performance by Lender . If any covenant, duty or agreement of any Company is not performed in accordance with the terms of the Loan Documents, Lender may, but is not obligated to, perform or attempt to perform that covenant, duty or agreement on behalf of that Company (and any amount expended by Lender in its performance or attempted performance is payable on demand, becomes part of the Obligation, and bears interest at the Default Rate from the date of Lender’s expenditure until paid).

12.5 Cumulative Rights . All rights available to Lender under the Loan Documents are cumulative of, and in addition to, all other rights granted at law or in equity, whether or not the Obligation is due and payable and whether or not Lender has instituted any suit for collection, foreclosure, or other action in connection with the Loan Documents.

SECTION 13 MISCELLANEOUS .

13.1 Governing Law . Each Loan Document (other than the Deed of Trust) must be construed, and its performance enforced, under Texas law.

13.2 Invalid Provisions . If any provision of this Agreement or the other Loan Documents is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Agreement and the other Loan Documents shall not be affected or impaired thereby and (b) the parties shall engage in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

13.3 Multiple Counterparts and Facsimile Signatures . Each Loan Document may be executed in any number of counterparts with the same effect as if all signatories had signed the same document. All counterparts must be construed together to constitute one and the same instrument. Loan Documents may be transmitted and signed by facsimile or portable document format (PDF) and shall have the same effect as manually-signed originals and shall be binding on all Companies and Lender.

13.4 Notice . Unless otherwise provided in this Agreement, all notices or consents required under this Agreement shall be personally delivered or sent by first class mail, postage prepaid, or by overnight courier, or sent by facsimile. Notices and other communications shall be effective (a) if mailed, upon the earlier of receipt or 5 days after properly addressed, sealed and deposited in the U.S. mail, first class, postage prepaid, return receipt requested, (b) if faxed, when transmitted, or (c) if hand-delivered, by courier or otherwise (including telegram, lettergram or mailgram), when delivered. Until changed by notice pursuant to this Agreement, the addresses and facsimile numbers for each party is set out on Schedule 1 . Lender shall be entitled to rely and act upon any notices (including telephonic Loan Requests) purportedly given by or on behalf of Borrower even if (i) such notices were not made in a manner specified in this Section, were incomplete or were not preceded or followed by any other form of notice specified in this Section, or (ii) the terms of the notice, as understood by the recipient, varied from any confirmation of the notice. Borrower shall indemnify Lender and its Affiliates and representatives from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of Borrower except to the extent of the Lender’s and its Affiliates gross negligence or willful misconduct relating to reliance and action upon any such notices. All telephonic notices to and other communications with Lender may be recorded by Lender, and each of the parties to this Agreement hereby consents to such recording.

13.5 Binding Effect; Survival . This Agreement is binding upon, and inures to the benefit of, the parties hereto and their respective successors and permitted assigns. Unless otherwise provided, all covenants, agreements, indemnities, representations and warranties made in any of the Loan Documents survive and continue in effect as long as the Commitment is in effect or the Obligation is outstanding.

13.6 Amendments . The Loan Documents may be amended, modified, supplemented or be the subject of a waiver only by a writing executed by Lender and Borrower.

13.7 Participants . Lender may, at any time, sell to one or more Persons (each a “ Participant ”) participating interests in the Obligation; provided that , (a) Lender remains the holder of the Principal Amount, (b) Lender’s obligations under this Agreement remain unchanged and Lender remains solely responsible for the performance of those obligations, and (c) each Company continues to deal solely and directly with Lender regarding the Loan Documents. Lender may furnish any information concerning the Companies in its possession from time to time to assignees and Participants (including prospective assignees and Participants), provided that, to the extent applicable, such information is subject to the terms of Section 13.12 hereof.

13.8 Discharge Only Upon Payment in Full; Reinstatement in Certain Circumstances . Each Company’s obligations under the Loan Documents remain in full force and effect until the aggregate Commitment is terminated and the Obligation is paid in full (except for provisions under the Loan Documents which by their terms expressly survive payment of the Obligation and termination of the Loan Documents). If at any time any payment of the principal of or interest on any Note or any other amount payable by any Company or any other obligor on the Obligation under any Loan Document is rescinded or must be restored or returned upon the insolvency, bankruptcy or reorganization of Borrower or otherwise, the obligations of each Company under the Loan Documents with respect to that payment shall be reinstated as though the payment had been due but not made at that time.

13.9 Waiver of Jury Trial . Borrower and Lender irrevocably and voluntarily waive any right they may have to a trial by jury in respect of any claim. This provision is a material inducement for the parties entering into this Agreement and the other Loan Documents.

13.10 Indemnity . Whether or not the transactions contemplated by this Agreement are consummated, Borrower, jointly and severally, shall indemnify and hold harmless Lender and its Affiliates and representatives (collectively the “ Indemnitees ”) from and against any and all liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses and disbursements (including reasonable fees and expenses of counsel) of any kind or nature whatsoever which may at any time be imposed on, incurred by or asserted against any such Indemnitee in any way relating to or arising out of or in connection with (i) the execution, delivery, enforcement, performance or administration of any Loan Document or any other agreement, letter or instrument delivered in connection with the transactions contemplated thereby or the consummation of the transactions contemplated thereby, (ii) any use or proposed use of the proceeds therefrom, (iii) any actual or alleged presence or release of Hazardous Substance on or from any property currently or formerly owned or operated by Borrower, any Subsidiary or any other Company, or any liability in respect of any Environmental Law related in any way to Borrower, or any other Company, or (iv) any actual or prospective Litigation, claim, or investigation relating to any of the foregoing, whether based on contract, tort or any other theory (including any investigation of, preparation for, or defense of any pending or threatened claim, investigation, litigation or proceeding) and regardless of whether any Indemnitee is a party thereto (all the foregoing, collectively, the “ Indemnified Liabilities ”) , IN ALL CASES, WHETHER OR NOT CAUSED BY OR ARISING, IN WHOLE OR IN PART, OUT OF THE NEGLIGENCE OF THE INDEMNITEE ; provided that , such indemnity shall not, as to any Indemnitee, be available to the extent that such liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses or disbursements are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. All amounts due under this Section shall be payable within 10 Business Days after demand. The agreements in this Section shall survive the termination of the Commitment and the repayment, satisfaction or discharge of the Obligation.

13.11 ENTIRETY . THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

13.12 Confidentiality . Lender may not disclose to any Person any material non-public information that is now or in the future required to be furnished to Lender under the express terms of this Agreement or any other Loan Document (“ Confidential Information ”) without the consent of the Borrower, other than (a) Lender’s Affiliates and their officers, directors, employees, agents, attorneys, and advisors, (b) prospective assignees or Participants, field auditors, appraisers and valuation consultants, or other third parties engaged to assist Lender in connection with its monitoring or evaluation of the Borrower’s collateral, credit quality, or financial covenant compliance, (c) as required by any Laws or judicial process, (d) in connection with any Litigation to which the Lender or any of its Affiliates may be a party with notice to the Borrower, (e) in connection with any right or remedy under any Loan Document or (f) as such information has become generally available to the public other than by virtue of a breach of this clause by the Lender or any other Person to whom the Lender has provided such information as permitted by this Section; provided that, to the extent practicable and permitted by applicable Laws, the Lender shall notify the Borrower of any disclosure under clause (c) and shall reasonably cooperate with the Borrower to the extent the Borrower seeks to obtain confidential treatment of such Confidential Information.

13.13 Non-Business Days . Any payment or action that is due under any Loan Document on a non-Business Day may be delayed until the next-succeeding Business Day.

13.14 Amendment and Restatement . This Agreement amends and restates in its entirety, but does not extinguish, the Existing Credit Agreement. All Security Documents, as defined in the Existing Credit Agreement, shall constitute Security Documents as defined in this Agreement, and they shall continue to secure all Obligations of Borrower under this Agreement.

[Signatures appear on following page.]

EXECUTED as of the day and year set out in the Preamble.

	BORROWER:

	DEEP DOWN, INC., a Nevada corporation

	By:	/s/ Eugene L. Butler
		Eugene L. Butler
		Chief Financial Officer

Signature Page to Amended and Restated Credit Agreement

	LENDER:

	WHITNEY NATIONAL BANK, a national banking association

	By:	/s/ Paul W. Cole
		Paul W. Cole
		Vice President

Signature Page to Amended and Restated Credit Agreement

EXHIBIT 10.32

ROV TERM NOTE

$730,464

Houston, Texas

April 14, 2010

FOR VALUE RECEIVED, DEEP DOWN, INC., a Nevada corporation (“ Borrower ”), hereby promises to pay to the order of WHITNEY NATIONAL BANK, a national banking association (“ Lender ”), on or before the ROV Term Maturity Date, the principal amount of $730,464 or so much thereof as may then be outstanding under this note, together with interest, as described below.

This note has been executed and delivered under, and is subject to the terms of, the Amended and Restated Credit Agreement dated as of November 11, 2008 and amended and restated through April 14, 2010 (as amended, supplemented or restated, the “ Credit Agreement ”), between Borrower and Lender, and is the “ ROV Term Note ” referred to in the Credit Agreement. Unless defined in this note, or the context requires otherwise, capitalized terms used in this note have the meanings given to such terms in the Credit Agreement. Reference is made to the Credit Agreement for provisions affecting this note regarding applicable interest rates, principal and interest payment dates, final maturity, voluntary and mandatory prepayments, acceleration of maturity, exercise of rights, payment of attorneys’ fees, court costs and other costs of collection, certain waivers by Borrower and others now or hereafter obligated for payment of any sums due under this note, and security for the payment of this note. This note is a Loan Document and, therefore, is subject to the applicable provisions of Section 13 of the Credit Agreement, all of which applicable provisions are incorporated into this note by reference as if set forth in this note verbatim.

Specific reference is made to Section 3.7 of the Credit Agreement for usury savings provisions.

This note is issued in replacement of, but is not a novation or an accord and satisfaction of, that certain Term Note dated December 18, 2008, in the original principal amount of $1,150,000 executed by Borrower and payable to the order of Lender, and any accrued and unpaid interest under the Term Note remains accrued and unpaid under this note.

the rights and obligations of the parties hereto shall be determined solely from written agreements, documents, and instruments, and any prior oral agreements between the parties are superseded by and merged into such writings. this note, the credit agreement and the other written loan documents executed by the borrower and the lender (or by the borrower for the benefit of the lender) represent the final agreement between the borrower and the lender and may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements by the parties. there are no unwritten oral agreements between the parties.

This note must be construed — and its performance enforced — under Texas law.

[ Signature appears on the following page .]

EXECUTED as of the date first written above.

	BORROWER: DEEP DOWN, INC., a Nevada corporation

	By:	/s/ Eugene L. Butler
		Eugene L. Butler
		Chief Financial Officer

Signature Page to ROV Term Note

EXHIBIT 10.33

RE TERM NOTE

$2,012,545

Houston, Texas

April 14, 2010

FOR VALUE RECEIVED, DEEP DOWN, INC., a Nevada corporation (“ Borrower ”), hereby promises to pay to the order of WHITNEY NATIONAL BANK, a national banking association (“ Lender ”), on or before the RE Term Loan Maturity Date, the principal amount of $2,012,545 or so much thereof as may then be outstanding under this note, together with interest, as described below.

This note has been executed and delivered under, and is subject to the terms of, the Amended and Restated Credit Agreement dated as of November 11, 2008 and amended and restated through April 14, 2010 (as amended, supplemented or restated, the “ Credit Agreement ”), between Borrower and Lender, and is the “ RE Term Note ” referred to in the Credit Agreement. Unless defined in this note, or the context requires otherwise, capitalized terms used in this note have the meanings given to such terms in the Credit Agreement. Reference is made to the Credit Agreement for provisions affecting this note regarding applicable interest rates, principal and interest payment dates, final maturity, voluntary and mandatory prepayments, acceleration of maturity, exercise of rights, payment of attorneys’ fees, court costs and other costs of collection, certain waivers by Borrower and others now or hereafter obligated for payment of any sums due under this note, and security for the payment of this note. This note is a Loan Document and, therefore, is subject to the applicable provisions of Section 13 of the Credit Agreement, all of which applicable provisions are incorporated into this note by reference as if set forth in this note verbatim.

Specific reference is made to Section 3.7 of the Credit Agreement for usury savings provisions.

This note is issued in replacement of, but is not a novation or an accord and satisfaction of, that certain RE Term Note dated May 29, 2009, in the original principal amount of $2,100,000 executed by Borrower and payable to the order of Lender, and any accrued and unpaid interest under the RE Term Note remains accrued and unpaid under this note.

This note must be construed — and its performance enforced — under Texas law.

[ Signature appears on the following page .]

EXECUTED as of the date first written above.

	BORROWER: DEEP DOWN, INC., a Nevada corporation

	By:	/s/ Eugene L. Butler
		Eugene L. Butler
		Chief Financial Officer

Signature Page to RE Term Note

EXHIBIT 10.34

RLOC TERM NOTE

$850,000

Houston, Texas

April 14, 2010

FOR VALUE RECEIVED, DEEP DOWN, INC., a Nevada corporation (“ Borrower ”), hereby promises to pay to the order of WHITNEY NATIONAL BANK, a national banking association (“ Lender ”), on or before the RLOC Term Maturity Date, the principal amount of $850,000 or so much thereof as may then be outstanding under this note, together with interest, as described below.

This note has been executed and delivered under, and is subject to the terms of, the Amended and Restated Credit Agreement dated as of November 11, 2008 and amended and restated through April 14, 2010 (as amended, supplemented or restated, the “ Credit Agreement ”), between Borrower and Lender, and is the “ RLOC Term Note ” referred to in the Credit Agreement. Unless defined in this note, or the context requires otherwise, capitalized terms used in this note have the meanings given to such terms in the Credit Agreement. Reference is made to the Credit Agreement for provisions affecting this note regarding applicable interest rates, principal and interest payment dates, final maturity, voluntary and mandatory prepayments, acceleration of maturity, exercise of rights, payment of attorneys’ fees, court costs and other costs of collection, certain waivers by Borrower and others now or hereafter obligated for payment of any sums due under this note, and security for the payment of this note. This note is a Loan Document and, therefore, is subject to the applicable provisions of Section 13 of the Credit Agreement, all of which applicable provisions are incorporated into this note by reference as if set forth in this note verbatim.

Specific reference is made to Section 3.7 of the Credit Agreement for usury savings provisions.

This note is issued to refinance a portion of the revolving credit facility under the Existing Credit Agreement (as defined in the Credit Agreement).

This note must be construed — and its performance enforced — under Texas law.

[ Signature appears on the following page .]

EXECUTED as of the date first written above.

	BORROWER: DEEP DOWN, INC., a Nevada corporation

	By:	/s/ Eugene L. Butler
		Eugene L. Butler
		Chief Financial Officer

Signature Page to RLOC Term Note ($850,000)

EXHIBIT 10.35

LC NOTE

$1,150,000

Houston, Texas

April 14, 2010

FOR VALUE RECEIVED, DEEP DOWN, INC., a Nevada corporation (“ Borrower ”), hereby promises to pay to the order of WHITNEY NATIONAL BANK, a national banking association (“ Lender ”), on or before the LC Termination Date, the principal amount of $1,150,000 or so much thereof as may then be outstanding under this note, together with interest, as described below.

This note has been executed and delivered under, and is subject to the terms of, the Amended and Restated Credit Agreement dated as of November 11, 2008 and amended and restated through April 14, 2010 (as amended, supplemented or restated, the “ Credit Agreement ”), between Borrower and Lender, and is the “ LC Note ” referred to in the Credit Agreement. Unless defined in this note, or the context requires otherwise, capitalized terms used in this note have the meanings given to such terms in the Credit Agreement. Reference is made to the Credit Agreement for provisions affecting this note regarding applicable interest rates, principal and interest payment dates, final maturity, voluntary and mandatory prepayments, acceleration of maturity, exercise of rights, payment of attorneys’ fees, court costs and other costs of collection, certain waivers by Borrower and others now or hereafter obligated for payment of any sums due under this note, and security for the payment of this note. This note is a Loan Document and, therefore, is subject to the applicable provisions of Section 13 of the Credit Agreement, all of which applicable provisions are incorporated into this note by reference as if set forth in this note verbatim.

Specific reference is made to Section 3.7 of the Credit Agreement for usury savings provisions.

This note is issued to refinance a portion of the revolving credit facility under the Existing Credit Agreement (as defined in the Credit Agreement).

This note must be construed — and its performance enforced — under Texas law.

[ Signature appears on the following page .]

EXECUTED as of the date first written above.

	BORROWER: DEEP DOWN, INC., a Nevada corporation

	By:	/s/ Eugene L. Butler
		Eugene L. Butler
		Chief Financial Officer

Signature Page to LC Note

EXHIBIT 10.36

RATIFICATION OF GUARANTY,

SECURITY AGREEMENT, AND INTERCREDITOR AGREEMENT

THIS RATIFICATION OF GUARANTY, SECURITY AGREEMENT, AND INTERCREDITOR AGREEMENT (as amended, restated, or supplemented from time to time, this “ Agreement ”) is dated as of April 14, 2010, among Deep Down, Inc., a Nevada corporation (“ Borrower ”), Electrowave USA, Inc., a Nevada corporation (“ Electrowave ”), Flotation Technologies, Inc., a Maine corporation (“ Flotech ”), Mako Technologies, LLC, a Nevada limited liability company (“ Mako ”), Deep Down Inc., a Delaware corporation (“ DD Delaware ”, and together with Electrowave, Flotech, and Mako, each a “ Guarantor ”, and collectively, the “ Guarantors ”), and Whitney National Bank, a national banking association (together with its successors and assigns, “ Lender ”).

RECITALS

A. Borrower, as borrower, and Lender, as lender, previously entered into that certain Credit Agreement dated as of November 11, 2008 (as amended by that certain First Amendment to Credit Agreement dated December 18, 2008, that certain Second Amendment to Credit Agreement dated February 13, 2009, that certain Third Amendment to Credit Agreement dated May 29, 2009, and as may be further amended, the “ Existing Credit Agreement ”).

B. To support the “Obligation” under, and as defined in, the Existing Credit Agreement, each of the Guarantors executed that certain Guaranty, dated as of November 11, 2008 (as amended, restated, or supplemented from time to time, the “ Guaranty ”), in favor of Lender.

C. To secure (i) the “Obligation” under, and as defined in, the Existing Credit Agreement, and (ii) the “Guaranteed Obligations” under, and as defined in, the Guaranty, Borrower and each Guarantor executed that certain Security Agreement dated as of November 11, 2008 (as amended by that certain First Amendment to Security Agreement dated December 18, 2008, that certain Second Amendment to Security Agreement dated May 29, 2009, and as further amended, restated, or supplemented from time to time, the “ Security Agreement ”), pursuant to which Borrower and each Guarantor granted a lien on all of their respective assets in favor of Lender.

D. Flotech, as borrower, and TD Bank, N.A., a corporation organized under the laws of the United States of America (together with its successors and assigns, “ TD Bank ”), as lender, previously entered into that certain Loan Agreement dated February 13, 2009 (as amended, restated or supplemented, the “ TD Bank Loan Agreement ”).

E. In connection with the execution of the TD Bank Loan Agreement, Lender and TD Bank previously executed that certain Intercreditor Agreement dated as of February 13, 2009 (as amended, restated, or supplemented, the “ Intercreditor Agreement ”), which was acknowledged by Borrower and Flotech, and pursuant to which, subject to the terms and conditions therein, the Lender and TD Bank agreed to certain terms regarding their respective rights, title, and interest to (i) certain collateral securing the obligations of Flotech under the TD Bank Loan Agreement, and (ii) certain collateral securing the obligations of Borrower under the Existing Credit Agreement.

F. Borrower and Lender have amended and restated the terms of the Existing Credit Agreement by entering into that certain Amended and Restated Credit Agreement dated as of November 11, 2008, and amended and restated through the date hereof (as amended, restated, or supplemented from time to time, the “ Amended and Restated Credit Agreement ”).

G. The execution and delivery of this Agreement is a material inducement for Lender’s agreement to continue to extend credit to Borrower under the Amended and Restated Credit Agreement.

H. Capitalized terms used but not defined in this Agreement shall have the meanings given them in the Amended and Restated Credit Agreement.

AGREEMENTS

NOW, THEREFORE, for the premises and other valuable consideration, the receipt and adequacy of which is hereby acknowledged, Borrower and each Guarantor agree as follows in respect of the Loan Documents or other documents to which it is a party:

1. Ratification and Amendment of Guaranty . Each Guarantor hereby (a) ratifies and confirms its obligations and liabilities under the Guaranty, (b) agrees that all references in the Guaranty to the “Credit Agreement” shall be amended and shall refer to the Amended and Restated Credit Agreement, (c) agrees that all references in the Guaranty to the “Obligation” shall be amended to mean the “Obligation” under, and as defined in, the Amended and Restated Credit Agreement, (d) agrees that all references in the Guaranty to the “Loan Documents” shall be amended to mean the “Loan Documents” under, and as defined in, the Amended and Restated Credit Agreement, and (e) releases Lender from any liability for actions or omissions in connection with the Existing Credit Agreement prior to the date of this Agreement. Each Guarantor acknowledges and agrees that the Guaranty continues in full force and effect and that under the Guaranty, the Guarantor guarantees to Lender the full payment and performance of the Borrower’s obligations under the Amended and Restated Credit Agreement and the other Loan Documents (as defined in the Amended and Restated Credit Agreement).

2. Ratification and Amendment of Security Agreement . Borrower and each Guarantor hereby (a) ratifies and confirms its obligations and liabilities under the Security Agreement, (b) agrees that all references in the Security Agreement to the “Credit Agreement” shall be amended and shall refer to the Amended and Restated Credit Agreement, (c) agrees that all references in the Security Agreement to the “Obligation” shall be amended to mean the “Obligation” under, and as defined in, the Amended and Restated Credit Agreement, (d) agrees that all references in the Security Agreement to the “Loan Documents” shall be amended to mean the “Loan Documents” under, and as defined in, the Amended and Restated Credit Agreement, and (e) releases Lender from any liability for actions or omissions in connection with the Existing Credit Agreement and the Security Agreement prior to the date of this Agreement. Borrower and each Guarantor acknowledges and agrees that the Security Agreement continues in full force and effect and that under the Security Agreement, Borrower and each Guarantor, as applicable, has pledged to Lender the “Collateral” under, and as defined in, the Security Agreement to secure the full payment and performance of the Borrower’s obligations under the Amended and Restated Credit Agreement and the other Loan Documents (as defined in the Amended and Restated Credit Agreement).

3. Ratification of Intercreditor Agreement . Each of Borrower and Flotech hereby (a) ratifies and confirms the agreements set forth in the Intercreditor Agreement, and (b) releases Lender from any liability for actions or omissions in connection with the Existing Credit Agreement or the Intercreditor Agreement prior to the date of this Agreement.

4. Successors and Assigns. This Agreement binds Borrower, Guarantors, and their respective successors and assigns, as applicable, and inures to the benefit of Lender, and its successors and assigns.

5. Governing Law . This Agreement must be construed – and its performance enforced – under Texas law.

6. Counterparts . This Agreement may be executed in any number of counterparts with the same effect as if all signatories had signed the same document. All counterparts must be construed together to constitute one and the same instrument. This Agreement may be transmitted and signed by facsimile or by PDF (portable document format). The effectiveness of any such documents and signatures shall, subject to applicable law, have the same force and effect as manually-signed originals and shall be binding on Borrower, Guarantors, and Lender. Lender may also require that any such documents and signatures be confirmed by a manually-signed original; provided that , the failure to request or deliver the same shall not limit the effectiveness of any facsimile or PDF document or signature.

7. Entire Agreement . THIS AGREEMENT REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

[ Signatures are on the following pages. ]

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date set out in the Preamble.

	BORROWER: DEEP DOWN, INC., a Nevada corporation

	By:	/s/ Eugene L. Butler
		Eugene L. Butler
		Chief Financial Officer

Signature Page to Ratification of Guaranty, Security Agreement,

and Intercreditor Agreement

	GUARANTORS: ELECTROWAVE USA, INC., a Nevada corporation

	By:	/s/ Eugene L. Butler
		Eugene L. Butler
		Chief Financial Officer

	FLOTATION TECHNOLOGIES, INC., a Maine corporation

	By:	/s/ Eugene L. Butler
		Eugene L. Butler
		Chief Financial Officer

	MAKO TECHNOLOGIES, LLC, a Nevada limited liability company

	By:	/s/ Eugene L. Butler
		Eugene L. Butler
		Chief Financial Officer

	DEEP DOWN INC., a Delaware corporation

	By:	/s/ Eugene L. Butler
		Eugene L. Butler
		Chief Financial Officer

Signature Page to Ratification of Guaranty, Security Agreement,

and Intercreditor Agreement

	LENDER: WHITNEY NATIONAL BANK, a national banking association

	By:	/s/ Paul W. Cole
		Paul W. Cole
		Vice President

Signature Page to Ratification of Guaranty, Security Agreement,

and Intercreditor Agreement

EXHIBIT 10.37

NOTICE OF CONFIDENTIALITY RIGHTS: IF YOU ARE A NATURAL PERSON, YOU MAY REMOVE OR STRIKE ANY OR ALL OF THE FOLLOWING INFORMATION FROM ANY INSTRUMENT THAT TRANSFERS AN INTEREST IN REAL PROPERTY BEFORE IT IS FILED FOR RECORD IN THE PUBLIC RECORDS: YOUR SOCIAL SECURITY NUMBER OR YOUR DRIVER’S LICENSE NUMBER.

STATE OF TEXAS	§
	§
COUNTY OF HARRIS	§

FIRST MODIFICATION TO DEED OF TRUST

THIS FIRST MODIFICATION TO DEED OF TRUST (this “ Modification ”), is executed by DEEP DOWN, INC., a Nevada corporation (“ Grantor ”), for the benefit of WHITNEY NATIONAL BANK, a national banking association (together with its successors and assigns, “ Lender ”), and is effective for all purposes as of April 14, 2010.

RECITALS

A. Grantor, as borrower, and Lender previously entered into that certain Credit Agreement dated as of November 11, 2008 (as amended by the First Amendment to Credit Agreement dated as of December 18, 2008, the Second Amendment to Credit Agreement dated as of February 13, 2009, the Third Amendment to Credit Agreement dated as of May 29, 2009, and as further amended, the “ Existing Credit Agreement ”).

B. To secure Grantor’s obligations under the Existing Credit Agreement, Grantor executed, among other documents, that certain Deed of Trust, Security Agreements and UCC Financing Statement for Fixture Filings, to Gary M. Olander, as Trustee, for the benefit of Lender, dated effective May 29, 2009, and recorded on June 1, 2009, in the Real Property Records of Harris County, Texas, under Clerk’s File No. 20090234354 (the “ Deed of Trust ”).

C. Grantor and Lender have agreed to amend and restate the Existing Credit Agreement in its entirety pursuant to that certain Amended and Restated Credit Agreement dated as of November 11, 2008, and amended and restated through the date hereof (as amended, restated, or supplemented, the “ Credit Agreement ”).

D. In connection with the Credit Agreement, and as a material inducement to Lender’s execution thereof, Lender and Grantor have agreed to amend that certain Deed of Trust, subject to the terms and conditions herein.

E. Capitalized terms not defined herein shall have the meanings ascribed to them in that certain Deed of Trust.

In consideration of the mutual promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Grantor and Lender agree to amend that certain Deed of Trust as follows:

1. Modification to Deed of Trust.

(a) Section 1 of the Deed of Trust is amended to delete the defined term “ Credit Agreement ” in its entirety and to replace it with the following:

“ Credit Agreement means that certain Amended and Restated Credit Agreement dated as of November 11, 2008, and amended and restated through April 14, 2010, and executed by Grantor, as borrower, and Beneficiary, as lender, as the same may be amended, restated, or supplemented from time to time.”

2. Scope of Modification; Ratification . Except as specifically amended by this Modification, the Deed of Trust is unchanged and continues in full force and effect. Grantor hereby ratifies and confirms the terms of the Deed of Trust (as the same is affected by this Modification), reaffirms its obligations under the Deed of Trust, and agrees the Deed of Trust remains in full force and effect and continues to be a legal, valid, and binding obligation enforceable in accordance with its terms (as the same is affected by this Modification.)

3. Lien Continuation . The liens granted in the Deed of Trust are hereby ratified and confirmed as continuing to secure the payment of the indebtedness described therein, including but not limited to, the Obligation (as defined in the Credit Agreement). Nothing herein shall in any manner diminish, impair or extinguish the indebtedness under the Credit Agreement or the liens securing such indebtedness.

4. Governing Law . This Modification shall be governed by and construed in accordance with, and its performance enforced, under laws of the State of Texas.

5. Severability of Provisions . Any provision of this Modification which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction.

6. Execution in Counterparts . This Modification may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which counterpart, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Modification.

7. Successors and Assigns . This Modification binds Grantor and its successors and assigns, and inures to the benefit of Lender and its successors and assigns.

8. Entire Agreement . THE DEED OF TRUST AS AMENDED BY THIS MODIFICATION AND ALL OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[ Signature and Acknowledgment appear on following page. ]

IN WITNESS WHEREOF, this Modification us executed as of the date set forth in the notary acknowledgement below but is to be effective for all purposes as of the date set forth in the preamble to this Modification.

	GRANTOR: DEEP DOWN, INC., a Nevada corporation

	By:	/s/ Eugene L. Butler
		Eugene L. Butler
		Chief Financial Officer

STATE OF TEXAS	§
	§
COUNTY OF HARRIS	§

This instrument was acknowledged before me on April 13, 2010, by Eugene L. Butler, Chief Financial Officer, of Deep Down, Inc., a Nevada corporation, on behalf of said corporation, and for the purpose and consideration therein stated.

(notary seal)

/s/ Karen D. Billiot, Notary Public

NOTARY PUBLIC IN AND FOR THE

STATE OF TEXAS

RECORD AND RETURN TO:

Porter & Hedges, L.L.P.

1000 Main Street, 36th Floor

Houston, Texas 77002

Attention: Janine E. Yee

Signature and Acknowledgment Page to the First Modification of Deed of Trust

EXHIBIT 10.38

STATE OF TEXAS	§
	§
COUNTY OF HARRIS	§

FIRST MODIFICATION TO ASSIGNMENT OF LEASES AND RENTS

THIS FIRST MODIFICATION TO ASSIGNMENT OF LEASES AND RENTS (this “ Modification ”), is executed by DEEP DOWN, INC., a Nevada corporation (“ Grantor ”), and WHITNEY NATIONAL BANK, a national banking association (together with its successors and assigns, “ Assignee ”), and is effective for all purposes as of April 14, 2010.

RECITALS

B. To secure Grantor’s obligations under the Existing Credit Agreement, Grantor executed, among other documents, that certain Assignment of Leases and Rents, dated effective May 29, 2009, and recorded on June 1, 2009 in the Real Property Records of Harris County, Texas, under Clerk’s File No. 20090234356, assigning to Lender all of Grantor’s rights, title, and interest to any leases and rents in respect of certain property located in Harris County, Texas (the “ Assignment ”).

D. In connection with the Credit Agreement, and as a material inducement to Assignee’s execution thereof, Assignee and Grantor have agreed to amend the Assignment, subject to the terms and conditions herein.

E. Capitalized terms not defined herein shall have the meanings ascribed to them in the Assignment.

In consideration of the mutual promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Grantor and Assignee agree to amend that certain Assignment as follows:

1. Modification to Assignment.

(a) The first paragraph of the Assignment is amended to delete the last sentence in its entirety and to replace it with the following:

“All capitalized terms used in this Assignment but which are not defined in this Assignment, shall have the meanings given them in that certain Credit Agreement dated as of November 11, 2008, and amended and restated through April 14, 2010, between Assignor, as borrower, and Assignee, as lender (as amended, restated, or supplemented, the “ Credit Agreement ”).”

(b) Section 2 of the Assignment is amended to delete subsection (b)(ii) in its entirety and to replace it with the following:

“(ii) interest, principal, or other amounts with respect to any and all loans secured by deeds of trust on the Property, including, without limitation, that certain Deed of Trust, Security Agreement and UCC Financing Statement for Fixture Filing (as amended, restated, or supplemented, the “ Deed of Trust ”), dated of even date herewith, executed by Assignor to Gary M. Olander, Trustee, for the benefit of Assignee, and covering the Property,”

2. Scope of Modification; Ratification . Except as specifically amended by this Modification, the Assignment is unchanged and continues in full force and effect. Grantor hereby ratifies and confirms the terms of the Assignment (as the same is affected by this Modification), reaffirms its obligations under the Assignment, and agrees that the Assignment remains in full force and effect and continues to be a legal, valid, and binding obligation in accordance with its terms (as the same is affected by this Modification).

3. Lien Continuation . The liens granted in that certain Assignment are hereby ratified and confirmed as continuing to secure the payment of the indebtedness described therein, including but not limited to, the Obligation (as defined in the Credit Agreement). Nothing herein shall in any manner diminish, impair or extinguish the indebtedness under the Credit Agreement or the liens securing such indebtedness.

4. Governing Law . This Modification shall be governed by and construed in accordance with, and its performance enforced, under laws of the State of Texas.

7. Successors and Assigns . This Modification binds Grantor and its successors and assigns, and inures to the benefit of Assignee and its successors and assigns.

8. Entire Agreement . THE ASSIGNMENT AS AMENDED BY THIS MODIFICATION AND ALL OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[ Signatures and Acknowledgments appear on following pages. ]

	GRANTOR: DEEP DOWN, INC., a Nevada corporation

	By:	/s/ Eugene L. Butler
		Eugene L. Butler
		Chief Financial Officer

STATE OF TEXAS	§
	§
COUNTY OF HARRIS	§

This instrument was acknowledged before me on April 13, 2010, by Eugene L. Butler, Chief Financial Officer of Deep Down, Inc., a Nevada corporation, on behalf of said corporation, and for the purpose and consideration therein stated.

(notary public)

/s/ Karen D. Billiot, Notary Public

NOTARY PUBLIC IN AND FOR THE

STATE OF TEXAS

Signature and Acknowledgment Page to the First Modification to Assignment of Leases and Rents

(Harris County, Texas)

	ASSIGNEE: WHITNEY NATIONAL BANK, a national banking association

	By:	/s/ Paul W. Cole
		Paul W. Cole
		Vice President

STATE OF TEXAS	§
	§
COUNTY OF HARRIS	§

This instrument was acknowledged before me on April 13, 2010, by Paul W. Cole, Vice President of Whitney National Bank, a national banking association, on behalf of said banking association, and for the purpose and consideration therein stated.

/s/ Sonya Tate, Notary Republic

NOTARY PUBLIC IN AND FOR THE

STATE OF TEXAS

RECORD AND RETURN TO:

Porter & Hedges, L.L.P.

1000 Main Street, 36th Floor

Houston, Texas 77002

Attention: Janine E. Yee

Signature and Acknowledgment Page to the First Modification to Assignment of Leases and Rents

(Harris County, Texas)

EXHIBIT 14.1

Directors Code of Business

Conduct

BODPOL-CBC-001

Directors Code

of Business Conduct

STATEMENT OF POLICY		3
Purpose and Goals		3
1.0	SCOPE	3
2.0	POLICY	3
2.1 Principles and Practices.		3
3.0	APPENDIX C: DESIGNATED EMPLOYER REPRESENTATIVE	5
4.0	APPENDIX D: ACKNOWLEDGEMENT AND CERTIFICATION OF RECEIPT OF POLICY	6

Page 2 of 6

Directors Code

of Business Conduct

STATEMENT OF POLICY

Purpose and Goals

The purpose of this policy is to define practices, policies, and procedures within the Deep Down, Inc. Corporate Organization that conform to internal business practices, as well as practices and procedures that must comply with state and federal regulations.

1.0

SCOPE

This Code of Ethics (“the Code”) for Directors has been adopted by the Board of Directors of Deep Down, Inc. (“the Company”) to promote honest and ethical conduct and compliance with applicable laws, rules, regulations and standards. The Board recognizes that no code of conduct and ethics can replace the thoughtful behavior of an ethical Director. Such a code, however, can focus attention on areas of ethical risk, provide guidance to help recognize and deal with ethical issues, and help to foster a culture of honesty and accountability.

Any waiver of the Code may be made only by the Board of Directors or a Committee of the Board, and must be disclosed promptly to shareholders.

2.0

POLICY

2.1

Principles and Practices.

In performing his or her duties, a Director of Deep Down, Inc. should abide by the following principles:

●

Conflicts of Interest. Directors should conduct themselves in an honest and ethical manner and avoid any actual or apparent conflict of interest. A conflict of interest occurs when a Director’s private interest interferes, in any way, with the interests of the Company, and/or makes it diffic ult to perform his or her duty objectively and effectively.

Directors should inform the Chairman of the Board and the Chief Executive Officer of the Company prior to accepting a director or officer position or other affiliation with a for-profit entity.

●

Corporate Opportunities. Directors should not (a) take for themselves personally opportunities that are discovered through the use of Company property, information or position; (b) use Company property, information, or position for personal gain; or (c) compete with the Company. Directors owe a duty to the Company to advance its legitimate interests when the opportunity to do so arises.

●

Confidentiality. Directors should maintain the confidentiality of information entrusted to them by the Company or its customers, except when disclosure is authorized or legally mandated. Confidential information includes all non-public information that might be of use to competitors, or harmful to the Company or its customers, if disclosed.

●

Fair Dealing. Directors should endeavor to deal fairly with the Company’s various constituents. No Director should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfair dealing practice.

Page 3 of 6

Directors Code

of Business Conduct

●

Protection and Proper use of Company Assets. Directors should protect the Company’s assets and ensure their efficient use. All Company assets should be used for legitimate business purposes.

●

Compliance with Laws, Rules and Regulations (including Insider Trading Laws). Directors should proactively promote compliance with laws, rules and regulations, including insider trading laws. Insider trading is both unethical and illegal.

●

Encouraging the Reporting of any Illegal or Unethical Behavior. Directors should proactively promote ethical behavior. Directors should ensure that the Company encourages employees to talk to supervisors, managers or other appropriate personnel when in doubt about the best course of action in a particular situation. Directors should ensure that the Company has an effective means for employees to report violations of laws, rules, regulations or the Company’s Code of Ethics for Management Personnel, including Senior Financial Officers or its Standards of Conduct. Directors should ensure that the Company does not allow retaliation for reports made in good faith and that this is policy communicated to the employee.

●

Annual Certification. Directors will annually sign a confirmation that they have read and will comply with this Code.

Page 4 of 6

Directors Code

of Business Conduct

3.0	APPENDIX C: DESIGNATED EMPLOYER REPRESENTATIVE

Deep Down policy requires the designation of an “Employer Representative” who will serve as a central point of contact in the event any interested party(-ies) require further clarifications or communications concerning aspects of this policy. The Designated Employer Representative for Deep Down presenting this Directors Code of Business Conduct Policy is:

Mr. John Van Hyfte

Corporate QHSE – HR Manager

Deep Down, Inc.

8827 West Sam Houston Parkway N.

Suite 100

Houston, Texas 77040

Telephone: +1-281-517-5000

Fax: +1-281-949-5805

Page 5 of 6

Directors Code

of Business Conduct

4.0	APPENDIX D: ACKNOWLEDGEMENT AND CERTIFICATION OF RECEIPT OF POLICY

POLICY AWARENESS INFORMATION

●

I have received a copy of the latest Deep Down Directors Code of Business Conduct Policy (Document Number BODPOL-CBC-001) dated 4/14/2010.

●

I have read or shall read the current Deep Down Directors Code of Business Conduct Policy BODPOL-CBC-001dated 4/14/2010.

●

I understand that my employer, Deep Down, adheres to all of its policies, and that I agree to abide by those policies, as well as any new or revised policies made available to me, as is the right of Deep Down to do from time to time.

●

I understand that this Deep Down Directors Code of Business Conduct Policy is not a contract, either expressed or implied, between my employer, Deep Down, its affiliates, subsidiaries, and me, and unless superseded by an executed contract, it does not alter the “at will” nature of my employment with Deep Down or its subsidiaries.

●

I understand that by my signing this Acknowledgement and Certification of receipt of Policy and associated information, that I am not being threatened or coerced in any way to sign this document, in fear of losing my job if I am an existing employee of Deep Down.

_____________________________	_____________________________
Signature of Employee	Social Security Number of Employee
	(Last four digits)

_____________________________	_____________________________
Printed Name of Employee	Date

Page 6 of 6

EXHIBIT 14.2

Financial Officer’s Code of

Business Conduct

BODPOL-CBC-002

Financial Officer's Code

of Business Conduct

Table of Contents

STATEMENT OF POLICY		3
Purpose and Goals		3
1.0	SCOPE	3
2.0	POLICY	3
2.1 Principles and Practices.		3
2.2 Waiver.		3
2.3 Compliance and Accountability.		4
3.0	APPENDIX A: DESIGNATED EMPLOYER REPRESENTATIVE	5
4.0	APPENDIX B: ACKNOWLEDGEMENT AND CERTIFICATION OF RECEIPT OF POLICY	6

Page 2 of 6

Financial Officer's Code

of Business Conduct

STATEMENT OF POLICY

Purpose and Goals

1.0

SCOPE

This Code of Ethics (“the Code”) for management personnel, including Senior Financial Officers, has been adopted by the Board of Directors of Deep Down, Inc. (“the Company”) to promote honest and ethical conduct, proper disclosure of financial information in the Company’s periodic reports, and compliance with applicable laws, rules, and regulations by the Company’s officers and management personnel. It is an integral part of the Company’s Standards of Conduct applicable to the Company’s employees generally, but is set out in this special Code of Ethics because of the importance of the topic.

As used in this Code, the term “Senior Financial Officer” shall mean and include the Company’s Chief Executive Officer, Chief Financial Officer and Controller.

2.0

POLICY

2.1

Principles and Practices.

In performing his or her duties, each of the management personnel, including Senior Financial Officers, must:

(1)

conduct him or herself in an honest and ethical manner and avoid any actual or apparent conflict of interest as defined in the Company’s Standards of Business Conduct;

(2)

in the case of the Senior Financial Officers, report to the Audit Committee of the Board any conflict of interest that may arise, and any transaction or relationship that reasonably could be expected to give rise to a conflict, and in the case of all others, to senior management;

(3)

provide, or cause to be provided, full, fair, accurate, timely, and understandable disclosure in reports and documents that the Company files with, or submits to, the Securities and Exchange Commission and in its other public communications;

(4)

comply, and take all reasonable actions to cause others to comply, with applicable governmental laws, rules, and regulations; and

(5)

in the case of the Senior Financial Officers, promptly report violations of this Code to the Audit Committee, and in the case of all others, to senior management.

2.2

Waiver.

Any request for a waiver of any provision of this Code by or on behalf of any Senior Financial Officer must be in writing and addressed to the Audit Committee. Any waiver of this Code by or on behalf of any Senior Financial Officer will be disclosed promptly on Form 8-K or any other means approved by the Securities and Exchange Commission.

Page 3 of 6

Financial Officer's Code

of Business Conduct

2.3

Compliance and Accountability.

The Audit Committee will assess compliance with this Code, report material violations to the Board of Directors, and recommend to the Board appropriate action.

(The balance of this page intentionally left blank)

Page 4 of 6

Financial Officer's Code

of Business Conduct

3.0	APPENDIX A: DESIGNATED EMPLOYER REPRESENTATIVE

Mr. John Van Hyfte

Corporate QHSE – HR Manager

Deep Down, Inc.

8827 West Sam Houston Parkway N.

Suite 100

Houston, Texas 77040

Telephone: +1-281-517-5000

Fax: +1-281-949-5805

Page 5 of 6

Financial Officer's Code

of Business Conduct

4.0	APPENDIX B: ACKNOWLEDGEMENT AND CERTIFICATION OF RECEIPT OF POLICY

POLICY AWARENESS INFORMATION

●

I have received a copy of the latest Deep Down Financial Officer’s Code of Business Conduct Policy (Document Number BODPOL-CBC-002) dated 4/14/2010.

●

I have read or shall read the current Deep Down Financial Officer’s Code of Business Conduct Policy BODPOL-CBC-002dated 4/14/2010.

●

I understand that this Deep Down Financial Officer’s Code of Business Conduct Policy is not a contract, either expressed or implied, between my employer, Deep Down, its affiliates, subsidiaries, and me, and unless superseded by an executed contract, it does not alter the “at will” nature of my employment with Deep Down or its subsidiaries.

●

_____________________________	_____________________________
Signature of Employee	Social Security Number of Employee
	(Last four digits)

_____________________________	_____________________________
Printed Name of Employee	Date

Page 6 of 6

EXHIBIT 21.1

SUBSIDIARIES OF REGISTRANT

Company		State of Incorporation

Deep Down, Inc.		Delaware
ElectroWave USA, Inc.		Nevada
Mako Technologies, LLC		Louisiana
Flotation Technologies, Inc.		Maine
Deep Down International Holdings, LLC		Nevada

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULES 13a-14(a) AND 15d-14(a)

OF THE SECURITIES EXCHANGE ACT OF 1934

I, Ronald E. Smith, President and Chief Executive Officer of Deep Down, Inc. (the “Company”), certify that:

(1) I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2009;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods represented in this report;

(4) The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

(5) The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and to the audit committee of the board of directors (or persons fulfilling the equivalent function):

(i) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

April 15, 2010

By: /s/ RONALD E. SMITH

Ronald E. Smith

President and Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO RULES 13a-14(a) AND 15d-14(a)

OF THE SECURITIES EXCHANGE ACT OF 1934

I, Eugene L. Butler, Chief Financial Officer of Deep Down, Inc. (the “Company”), certify that:

(1) I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2009;

(ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

April 15, 2010

By: /s/ EUGENE L. BUTLER

Eugene L. Butler

Chief Financial Officer

EXHIBIT 32.1

DEEP DOWN, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Deep Down, Inc. (the “Company”) for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Ronald E. Smith, President and Chief Executive Officer of the Company hereby certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By: /s/ RONALD E. SMITH

Ronald E. Smith

President and Chief Executive Officer

April 15, 2010

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Deep Down, Inc. (the “Company”) for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Eugene L Butler, Chief Financial Officer of the Company hereby certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By: /s/ EUGENE L. BUTLER

Eugene L. Butler

Chief Financial Officer

April 15, 2010