10-K

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, 2008

£  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 Exchange 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 Exchange Act during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes þ No £

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.   £

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 þ         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 £   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, 2008, the last business day of our most recently completed second quarter, was approximately $98,131,000.

At March 13, 2009, the issuer had outstanding 177,350,630 shares of Common Stock, par value $0.001 per share.

Explanatory Note

Pursuant to subsection (3) of “Accelerated Filer and Large Accelerated Filer” as defined under Rule 12(b)-2 of the Exchange Act, Deep Down, Inc. is filing this Annual Report on Form 10-K for its fiscal year ended December 31, 2008 with a determination that we have become an “accelerated filer” after having been a “smaller reporting company” for Exchange Act reporting purposes.  However, in accordance with subsection (4) of “Smaller Reporting Company”, Deep Down, Inc. is continuing to reflect its status as a smaller reporting company in the disclosure we provide in this Annual Report (as such subsection (4) requires us to reflect the determination that we are no longer a “smaller reporting company” in the information we provide in our quarterly report on Form 10-Q for the first fiscal quarter of 2009).

TABLE OF CONTENTS

PART I
Item 1	Description of Business	3
Item 1A	Risk Factors	13
Item 1B	Unresolved Staff Comments	13
Item 2	Description of Property	13
Item 3	Legal Proceedings	14
Item 4	Submission of Matters to a Vote of Security Holders	14
PART II
Item 5	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15
Item 6	Selected Financial Data	16
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	27
Item 8	Financial Statements	27
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	27
Item 9A	Controls and Procedures	27
Item 9B	Other Information	28
PART III
Item 10	Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act	29
Item 11	Executive Compensation	31
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	34
Item 13	Certain Relationships and Related Transactions, and Director Independence	35
Item 14	Principal Accountant Fees and Services	35
Item 15	Exhibits, Financial Statement Schedules	36
	Signatures	37

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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, 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 Annual Report on Form 10-K that are not historical fact are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements contained herein are based on current expectations that involve a number of risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “intend,” “plan,” “could,” “is likely,” or “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. The Company wishes to caution the reader that these forward-looking statements that are not historical facts are only predictions. No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these projections and other forward-looking statements are based upon a variety of assumptions relating to the business of the Company, which, although considered reasonable by the Company, may not be realized. Because of the number and range of assumptions underlying the Company’s projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond the reasonable control of the Company, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances may occur subsequent to the date of this report. These forward-looking statements are based on current expectations and the Company assumes no obligation to update this information. Therefore, the actual experience of the Company and the results achieved during the period covered by any particular projections or forward-looking statements may differ substantially from those projected. Consequently, the inclusion of projections and other forward-looking statements should not be regarded as a representation by the Company or any other person that these estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate.

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PART I

Item 1.          DESCRIPTION OF BUSINESS.

History

Deep Down, Inc. (OTCBB:DPDW), a publicly traded Nevada corporation, originated on December 14, 2006, through a reverse merger with Mediquip Holdings, Inc. (“Mediquip”), a publicly traded Nevada corporation.  Deep Down, Inc., the operating company, was originally a Delaware corporation founded in 1997, but had been acquired in a series of transactions on November 21, 2006, by Subsea Acquisition Corporation (“Subsea”).

On June 29, 2006, Subsea, a Texas corporation, was formed by three shareholders with the intent to acquire offshore energy service providers. On November 21, 2006, Subsea acquired all the common stock of Strategic Offshore Services Corporation (“SOS”), a Texas corporation, for 3,000 shares of Subsea’s Series F preferred stock and 1,000 shares of Series G preferred stock from two common shareholders (who were also shareholders of Subsea).  Since the entities were under common control, and SOS did not constitute a business, the Company was charged compensation expense to shareholders for the fair value of both series of preferred stock totaling $3.3 million.

Additionally, on November 21, 2006, Subsea acquired Deep Down, Inc., a Delaware corporation founded in 1997. Under the terms of this transaction, all of Deep Down, Inc.’s shareholders transferred ownership of all of Deep Down Inc.’s common stock to Subsea in exchange for 5,000 shares of Subsea’s Series D preferred stock and 5,000 shares of Subsea’s Series E preferred stock resulting in Deep Down Inc. becoming a wholly-owned subsidiary of Subsea. On the same day, Subsea then merged with Deep Down, Inc., with the surviving company operating as Deep Down, Inc. This transaction was accounted for as a purchase, with Subsea being the accounting acquirer based on a change in voting control.

On December 14, 2006, after divesting its Westmeria Healthcare Limited subsidiary, MediQuip acquired all 9,999,999 outstanding shares of Deep Down common stock and all 14,000 outstanding shares of Deep Down preferred stock in exchange for 75,000,000 shares of common stock and 14,000 shares of preferred stock of MediQuip.  The shares of preferred stock of MediQuip were issued with the same designations, rights and privileges as the Deep Down preferred stock existing immediately prior to such transaction.  As a result of the acquisition, the shareholders of Deep Down obtained ownership of a majority of the outstanding voting stock of MediQuip.  MediQuip changed its name to Deep Down, Inc. as part of the transaction, and Deep Down, Inc. continued as a Nevada corporation following consummation of the acquisition. The merger was accounted for as a reverse merger whereby Deep Down was the accounting acquirer resulting in a recapitalization of Deep Down’s equity.

On April 2, 2007, Deep Down acquired substantially all of the assets of ElectroWave USA, Inc., a Texas corporation for a total purchase price of $0.2 million. Deep Down formed a wholly-owned subsidiary, ElectroWave USA, Inc. (“ElectroWave”), a Nevada corporation, to complete the acquisition.  Located in Channelview, Texas, ElectroWave offers design, assembly, installation and commissioning of electronic monitoring and control systems for the energy, military, and commercial business markets. This was not a "significant" acquisition; therefore, no pro forma results are included for this acquisition in this Form 10-K.

Effective December 1, 2007, Deep Down acquired all of the common stock of Mako Technologies, Inc. for a total purchase price of $11.3 million including transaction fees.  Deep Down 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 rentals of its remotely operated vehicles (“ROV”), topside and subsea equipment and support systems used in diving operations, maintenance and repair operations, offshore construction and environmental and marine surveys.

On June 5, 2008, Deep Down completed the acquisition of Flotation Technologies, Inc. (“Flotation”), for a total purchase price of $23.9 million. Deep Down also purchased related technology from an entity affiliated with the selling shareholders. Deep Down 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 FlotecTM 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 and wholly owned subsidiary of the Company, for the purpose of holding securities for foreign companies organized or acquired by Deep Down. Deep Down International Holdings, LLC currently has no material assets or operations.

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Our current operations are the result of the acquisitions of Deep Down, ElectroWave, 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 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 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.  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.  Set forth below is a more detailed description of important services and products we provide.

Our goal is to provide superior products and services 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 products and services primarily through our offices in Houston, Texas, Biddeford, Maine and Morgan City, Louisana. 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.

Segments

For the fiscal years ended December 31, 2008 and 2007, the operations of Deep Down’s subsidiaries have been aggregated into a single reporting segment under the provisions of SFAS 131 “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”). We determined that the operating segments of Delaware, ElectroWave, Mako and Flotation (as of their respective acquisition dates) may be aggregated into a single reporting segment because aggregation is consistent with the objective and basic principles of paragraph 17 of SFAS 131. While the operating segments have different product lines, they are very similar with regards to the five criteria for aggregation. 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 as part of our service revenue to the customer. Additionally, the segments have similar customers and distribution methods, and their economic characteristics were similar with regard to their gross margin percentages for the fiscal years ended December 31, 2008 and 2007.

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 equipment rentals.  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.

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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 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.

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.  The Company’s team was involved with the designs for the armored thermo plastic umbilicals at Multiflex, the first steel tube umbilical in the Gulf of Mexico for the Shell Popeye® umbilical, and the standardization of many steel tube umbilical terminations.  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.

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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.  The Company has been involved in the design, procurement, testing, installation, and operation of the testing equipment.  Deep Down’s engineers and service technicians can also assist in writing the testing procedures and sequences from simple FAT to very extensive multiple pressures and fluids 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, the Company also has 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% 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.

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.

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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 electrometric 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.  Electrometric bend limiters are typically provided for small diameter umbilicals or flying leads, as well as for their compliant umbilical section, which turns a traditional umbilical into a ROV-friendly, installable flying lead.  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.

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Services and Products from Acquisitions

Through our acquisitions of Flotation, Mako and ElectroWave, we have further increased our service and product offerings.  Several of such increased offerings are described below.

Flotation

Flotation engineers, designs and manufactures deepwater buoyancy systems using high-strength FlotecTM syntactic foam and polyurethane elastomers.  Flotation’s  product offerings include distributed buoyancy for flexible pipes and umbilicals, drilling riser buoyance modules, CoreTecTM drilling riser buoyancy modules, ROVitsTM buoyancy, Hydro-Float mooring buoys, StablemoorTM low-drag ADCP deployment solution, Quick-Loc™ cable floats, HardballTM umbilical floats, Flotec™ cable and pipeline protection, InflexTM polymer bend restrictors, and installation buoyancy of any size and depth rating.

The majority of Flotation’s product offerings are made with FlotecTMsyntactic foam, a product composed of hollow glass microballoons, combined with epoxy resin and a catalyst. These microballoons or microspheres are very small, 20-120 microns in diameter, and provide the buoyancy to syntactic foam.  The microballoons give syntactic foam its light weight, low thermal conductivity and resistance to compressive stress that far exceeds other types of foams.  The microballoons come 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.

Because of historic purchaser dissatisfaction with Flotation’s principal competitor, Flotation was asked by oil companies to provide buoyancy products to the oil and gas exploration and production sector.  The most significant step for Flotation to take in order to get into the oil business was to secure an ISO 9001:2000 registration for its manufacturing operation.  Receipt of those certificates allowed oil and gas clients to place their first orders with Flotation Technologies.

Flotation’s drilling riser product is marketed under the name CoreTec™. Flotation also manufactures polyurethane products, including bend restrictors, impact protection, drill riser auxiliary clamps and other custom-designed products, including some buoyancy products with macrospheres.  While the overwhelming majority of Flotation‘s revenue comes from buoyancy products for the petroleum production sector, Flotation also serves the oceanographic and military markets.

Mako

Located in Morgan City, Louisiana, Mako serves the growing offshore petroleum and marine industries with technical support services and products vital to offshore petroleum production.  Mako’s offerings are primarily, through rentals of its remotely operated vehicles ("ROV"), topside and subsea equipment, and support systems used in diving operations, maintenance and repair operations, offshore construction, and environmental/marine surveys.

Diving and Offshore Constuction Equipment Rental.  We employ a permanent staff of highly qualified technicians and mechanics to maintain and refurbish Mako's 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, hot water pressure washers, and saturation systems.

ROV Equipment Rental.  We provide the latest ROV tooling technology as part of Mako’s rental fleet.  Mako's ROV tooling rental fleet is constantly growing, with the addition of tools as they are requested by our customers.  We have, as part of Mako’s rental inventory, a 2,000-foot depth-rated inspection / light work class remotely-operated vehicle (ROV) complete with a control van and launch / recovery system.  We also have, as part of Mako’s inventory, a 300-meter depth-rated Seaeye Falcon and a 1,500-meter depth rated Seaeye Lynx observation class ROV.  Our services include platform inspection (Level I, II and III, jack-up and template), platform installation and abandonment, surveys (environmental, pipeline existing and as built, oceanographic, nuclear and hydroelectric), search and recovery, salvage, subsea intervention (hot stab operations, torque tool, well, pipeline commissioning, and stack landings), telecommunication cable inspections (existing and as built), research (fisheries, scientific and marine archeology), 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 tools, ROV clamps and ROV-friendly hooks and shackles that are state-of-the-art in design.

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Marine Surveys.  Mako provides the offshore industry with a responsive marine survey service.  Mako’s surveyors have extensive experience in the marine industry, and provide a reliable and timely service, encompassing on-and-off hire surveys, damage surveys, engine surveys, loading / securing of cargo (warranty), trip and tow, suitability surveys, valuation surveys, hull audio gauging, owner representatives, and regulatory vessel compliance.

ElectroWave

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. ElectroWave is 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.

Below are some of ElectroWave’s major services:

Drillers Display System.  We have two proprietary drillers display systems.  One of the proprietary systems was provided by one of our customers and is installed only on that customer’s rigs.  The other proprietary drillers display system was developed internally and is installed in rigs worldwide. Drillers display systems allow the driller to keep an eye on all the important parameters required for monitoring activity. Viewing of mud pits, trip pits, flow rates, weight on bit, hook load, and other activities are available to the driller at a glance. Logging software provides data analysis at a whole new level, bringing more efficient drilling operations and increased production from each working rig.  Our two largest customers for ElectroWave’s drillers display systems are Transocean Offshore and Diamond Offshore Drilling.

Machinery Plant Control System.  The Machinery Plant Control and Monitoring Systems (MPCMS) allow the operators of a vessel to reduce manning requirements by integrating all of the machinery controls and monitoring systems into one. The MPCMS can reduce the number of crew on one vessel by more than 50%, allowing the vessel owner to save personnel expenses or allocate personnel to more critical areas.  ElectroWave's largest MPCMS system consists of over 5,000 points, consisting of hard wired sensors, contacts, and data over industrial protocols such as Ethernet, Modbus, and Profibus.  We have integrated systems such as fire, flooding, ballast, fueling, bridge, propulsion, engines, HVAC, deck machinery, air systems, emergency generators, lighting, and more, into one system.  An entire vessel can now almost be operated from one station by a very minimal crew.  Our MPCMS is currently in use on the United States Coast Guard Ice Breaker Mackinaw.

Ballast Console.  ElectroWave designs replacement ballast control consoles for a number of customers. The consoles they are replacing have fallen out of service and are typically only partially functioning. ElectroWave first sends out a technician to perform a "site survey" during which our technician will take copious notes about the existing installation, all of the wiring, and any manuals that exist for the system. Our team then brings this information back to our facility where we design replacement consoles that fit exactly where the old console was, reducing hot work and re-wiring.  After designing a new console, drawings are sent to the rig managers, electricians, and company electricians for verification. After drawings are verified, the console is released for production. Upon receiving the console at our factory, our electricians (some of which are ex-rig electricians) wire the console to match the old system wiring. After through testing at our factory, the console is shipped to the customer where it is installed by our field service personnel. The new console is wired to operate exactly like the old system to reduce re-training of ballast control officers and rig hands. After the console is commissioned, our technicians will provide any support and training necessary before leaving the site.  We have installed ballast control systems that are full touch screen capable, operating over 80 valves and more than 30 tanks.

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CCTV System.  ElectroWave has tackled some very difficult Closed-circuit Television (“CCTV”) security and monitoring requirements.  Post-911, the New York Department of Transportation (NYDOT) wanted cameras to watch every available compartment of their three new ferries. ElectroWave stepped up to the challenge and provided NYDOT one of the most sophisticated CCTV systems available on passenger transportation ferries. A system of cameras, coupled with digital video recording, allow post-event tracing and security on one of the most-used transportation devices in New York.  CCTV is more than just security, many (if not all) oil rigs have CCTV systems installed to keep an eye on the safety of those working on the rig.  Cameras watch unmanned spaces, machinery spaces, and potential hazard zones for trouble. This helps to keep the manning requirement on the rigs to a minimum while allowing for a safer working environment.  ElectroWave typically provides Pelco camera systems, but is capable of integrating existing camera systems into new CCTV installations. ElectroWave has also developed hardware and software in-house to allow the use of Pan/Tilt/Zoom (“P/T/Z”) cameras from hazardous locations where PTZ keyboards cannot be installed.

Manufacturing

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

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 the Company's 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.  

We have designed, developed, and assembled our own continuous liquid syntactic foam production machine.  This machine allows Flotation 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 such as those in Brazil.  These drill pipe risers will operate effectively in water depths of up to 4,000 meters (13,000 feet).   Flotation has foam that is capable of operating in water depths of up to 7,000 meters (23,000 feet).  Flotation’s drilling riser buoyancy design is unique in the industry, and a patent application has been filed.

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.

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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.  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 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 and production and maritime equipment markets are quality, reliability and reputation of the product, price, technology, the ability to provide quality service and timely delivery.  We face significant competition from other manufacturers of exploration, production 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, Halliburton Product Pipeline Services, 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.

Flotation’s principal competitors in the polyurethane area are Trelleborg AB, Balmoral Group, Dunlaw Engineering Ltd., ABCO Industries Limited, and Whitefield Plastics Corporation.  Flotation’s principal competitor in the syntactic foam is Trelleborg AB. CRP Group was acquired by Trelleborg AB in January 2006 and now operates worldwide as Trelleborg Offshore, with North American operations under the name 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.

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Employees

We had 169 employees as of March 13, 2009.  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 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.

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Patents, Trademarks and Copyrights

The Company currently holds one patent covering riser tensioner sensor assembly.  An additional five patents have been applied for and are in process.  Trademarked names of the Company include 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 1A.         RISK FACTORS

This item is not applicable for smaller reporting companies.

Item 1B.         UNRESOLVED STAFF COMMENTS

On August 27, 2008, Deep Down received a letter from the SEC whereby the SEC requested additional information related to issues disclosed in our Form 10-KSB for the year ended December 31, 2007, filed April 1, 2008, regarding the following topics: corporate history, segment disclosures, critical accounting policies, non-GAAP presentation of financial information, predecessor financial statements and the Mako purchase disclosures. We responded to the SEC in a comment response letter dated October 7, 2008 filed as correspondence with the SEC with the information requested on all topics.

On December 4, 2008, Deep Down received a response letter from the SEC whereby the SEC requested additional information related to our response letter dated October 7, 2008. The SEC comments in the December 4 letter requested further clarification to our responses regarding the following topics: corporate history, segment disclosures, predecessor financial statements and the Mako purchase disclosures. We responded to the SEC in a comment response letter dated January 28, 2009 filed as correspondence with the SEC with the information requested on all topics.

On February 26, 2009, Deep Down received a response letter from the SEC stating that they require that we amend the Form 10-KSB for December 31, 2007 to present supplemental audited predecessor financial statements for Deep Down, Inc. for the period January 1, 2006 through November 20, 2006, in accordance with Rule 310(a) of Regulation S-B. There were no further questions regarding the other issues in our response dated January 28, 2009. We are working to complete the predecessor financial statements along with the additional disclosure items and footnotes that would be necessary to explain the predecessor statements and to appropriately disclose the predecessor operating results for Deep Down, Inc. for the noted accounting period. We anticipate completing the noted financial statements and required audit procedures shortly after this Form 10-K is filed. We replied to the SEC with this same information on March 11, 2009.

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 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 cost ranges from $12,177 to $14,391 plus CAM charges, due to a rent escalation clause over the term of the 89-month lease.

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Our operating facilities for Deep Down and ElectroWave continue to be located at 15473 East Freeway, Channelview, Texas 77530.  We lease the Channelview property, 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.  We lease all buildings, structures, fixtures and other improvements from JUMA, LLC, a related party. See Item 13 “Certain Relationships and Related Transactions, and Director Independence” included in this report. The base rate of $15,000 per month is payable to JUMA, LLC through August 31, 2013, together with all costs of maintaining, servicing, repairing and operating the premises, including insurance, utilities and property taxes.

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, Deep Down 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 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.

Item 3.          LEGAL PROCEEDINGS

We are from time to time involved in legal proceedings arising in the normal course of business. As of the date of this Annual Report on Form 10-K, we are currently not involved in any pending, material legal proceedings except as noted below.

Deep Down is currently in arbitration with the former stockholders of Flotation Technologies, Inc. regarding the proper calculation of the “Cash Price Adjustment” pursuant to the Stock Purchase Agreement by and between Deep Down, Flotation Technologies, Inc. and its stockholders dated April 17, 2008.

In connection with the private placement of our common stock in June 2008 (the “Private Placement”), Deep Down entered into a registration rights agreement with the purchasers in the Private Placement (the “Registration Rights Agreement”) pursuant to which the purchasers have certain demand registration rights. Deep Down filed a Registration Statement on Form S-1 on July 21, 2008. Pursuant to the Registration Rights Agreement, Deep Down was obligated to have the Registration Statement declared effective by September 3, 2008 (the “Required Effective Date”), or the Company would be required to pay damages to the purchasers in the Private Placement for each day following the Required Effective Date, until but excluding the date the Commission declares the Registration Statement effective. Deep Down has evaluated this obligation under the Registration Rights Agreement for liability treatment under FASB Statement No. 5,“Accounting for Contingencies” (“SFAS 5”) and Financial Statement Staff Position (FSP) EITF 00-19(2) “Accounting for Registration Payment Arrangements” and determined that the registration rights meet the definition of a liability under the authoritative guidance and has reserved $1.2 million in potential damages under the terms of the Private Placement for the 90-day period September 4 to December 4, 2008, when we obtained a legal opinion allowing the removal of the related stock’s restrictive legends.

Item 4.          SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of our security holders during the period covered by this Annual Report on Form 10-K.

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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 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
Fiscal Year 2007:
December 31, 2007	$	2.35	$	0.76
September 30, 2007	$	0.94	$	0.51
June 30, 2007	$	0.78	$	0.27
March 31, 2007	$	0.42	$	0.16

Holders

As of March 13, 2009, there were 1,081 holders of record of our common stock and we believe there were 1,081 beneficial owners.

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.

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Equity Compensation Plan Information

The following table sets forth the outstanding equity instruments as of December 31, 2008:

	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	8,066,667 (1)	$0.96	17,336,000 (1)
Equity compensation plans not approved by securityholders	638,812 (2)	$0.78	N/A
TOTAL	8,705,479	$0.95	17,336,000

____________

(1)       Represents 8,066,667 shares of common stock that may be issued pursuant to options granted as of December 31, 2008 and approximately 17,336,000 additional 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 include 1,200,000 restricted shares that were granted under the Plan to executives and employees on February 14, 2008 which vest on February 14, 2010, provided such respective recipient remains employed with the Company on such date. These restricted shares are included in the shares outstanding as of December 31, 2008.  Under the Plan, the total number of shares subject to grants and awards is 15% of issued and outstanding shares of common stock.

(2)       Represents 638,812 shares of common stock underlying warrants approved by the Company’s Board of Directors, including 320,000 warrants granted to a consultant as part of our prior $6.5 million borrowing facility entered into on August 6, 2007, plus an additional 118,812 warrants granted to a consultant as part of the additional $6.0 million advanced under the amendment to that same borrowing facility effective December 31, 2007, plus an additional 200,000 warrants issued on June 5, 2008 in connection with the purchase of Flotation.  See Note 11 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

History

Deep Down, Inc., a publicly traded Nevada corporation, originated on December 14, 2006, through a reverse merger with Mediquip, a publicly traded Nevada corporation.  Deep Down, Inc., the operating company, was originally a Delaware corporation founded in 1997, but had been acquired in a series of transactions on November 21, 2006, by Subsea.

On June 29, 2006, Subsea, a Texas corporation, was formed by three shareholders with the intent to acquire offshore energy service providers. On November 21, 2006, Subsea acquired all the common stock of SOS, a Texas corporation, for 3,000 shares of Subsea’s Series F preferred stock and 1,000 shares of Series G preferred stock from two common shareholders (who were also shareholders of Subsea).  Since the entities were under common control, and SOS did not constitute a business, the Company charged compensation expense to shareholders for the fair value of both series of preferred stock totaling $3.3 million.

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Additionally, on November 21, 2006, Subsea acquired Deep Down, Inc., a Delaware corporation founded in 1997. Under the terms of this transaction, all of Deep Down, Inc.’s shareholders transferred ownership of all of Deep Down Inc.’s common stock to Subsea in exchange for 5,000 shares of Subsea’s Series D preferred stock and 5,000 shares of Subsea’s Series E preferred stock resulting in Deep Down Inc. becoming a wholly-owned subsidiary of Subsea. On the same day, Subsea then merged with Deep Down, Inc., with the surviving company operating as Deep Down, Inc. This transaction was accounted for as a purchase, with Subsea being the acquirer based on a change in voting control.

On December 14, 2006, after divesting its Westmeria Healthcare Limited subsidiary, MediQuip acquired all 9,999,999 outstanding shares of Deep Down common stock and all 14,000 outstanding shares of Deep Down preferred stock in exchange for 75,000,000 shares of common stock and 14,000 shares of preferred stock of MediQuip.  The shares of preferred stock of MediQuip were issued with the same designations, rights and privileges as the Deep Down preferred stock existing immediately prior to such transaction.  As a result of the acquisition, the shareholders of Deep Down obtained ownership of a majority of the outstanding voting stock of MediQuip.  MediQuip changed its name to Deep Down, Inc. as part of the transaction, and Deep Down, Inc. continued as a Nevada corporation following consummation of the acquisition. The transaction was accounted for as a reverse merger, whereby Deep Down was considered to be the accounting acquirer resulting in a recapitalization of Deep Down’s equity.

On April 2, 2007, Deep Down acquired substantially all of the assets of ElectroWave USA, Inc., a Texas corporation for a total purchase price of $0.2 million. Deep Down formed a wholly-owned subsidiary, ElectroWave, a Nevada corporation, to complete the acquisition.  Located in Channelview, Texas, ElectroWave offers design, assembly, installation and commissioning of electronic monitoring and control systems for the energy, military, and commercial business markets. This was not a "significant" acquisition; therefore, no pro forma results are included for this acquisition in this Form 10-K.

Effective December 1, 2007, Deep Down acquired all of the common stock of Mako Technologies, Inc. for a total purchase price of $11.3 million including transaction fees.  Deep Down formed a wholly-owned subsidiary, 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 rentals of its ROV, topside and subsea equipment and support systems used in diving operations, maintenance and repair operations, offshore construction and environmental and marine surveys.

On June 5, 2008, Deep Down completed the acquisition of Flotation, for a total purchase price of $23.9 million. Deep Down also purchased related technology from an entity affiliated with the selling shareholders. Deep Down 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 FlotecTM 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 and wholly owned subsidiary of the Company, for the purpose of holding securities for foreign companies organized or acquired by Deep Down. Deep Down International Holdings, LLC currently has no material assets or operations.

Our current operations are the result of the acquisitions of Deep Down, ElectroWave, 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.

Critical Accounting Policies

The accompanying discussion and analysis of our financial condition and results of operations is based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. See Note 1 “Nature of Business and Summary of Significant Accounting Policies” of our consolidated financial statements included in this report for additional details. The following discussion addresses our most critical accounting policies, which are those that require significant judgment and use of assumptions.

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Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest.  The allowance for doubtful accounts on trade receivables is our best estimate of the probable amount of credit losses in our existing accounts receivables.  A considerable amount of judgment is required in assessing the realization of receivables.  Relevant assessment factors include the credit worthiness of the customers and prior collection history.  Account balances are charged off against the allowance after all reasonable means are exhausted and the potential for recovery is considered remote.  The allowance requirements are based on the most current facts available and are re-evaluated and adjusted on a regular basis and as additional information is received.  We do not expect to have any off-balance sheet credit exposure related to our customers.

Consolidation 

The accompanying audited financial statements include the results of Deep Down and all of its wholly-owned subsidiaries, including Deep Down Delaware since its inception on June 29, 2006, ElectroWave since its acquisition on April 2, 2007, Mako since its acquisition on December 1, 2007 and Flotation since its acquisition on May 1, 2008.  All significant intercompany balances and transactions have been eliminated.

Long-Lived Assets

We evaluate long-lived assets for impairment whenever changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset.  If assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts exceed the fair values of the assets.  Assets to be disposed are reported at the lower of carrying values or fair values, less costs of disposal. We found no significant adjustments during our review of fixed assets.

Stock-Based Compensation  

We account for stock-based compensation issued to employees and non-employees as required by SFAS No. 123(R) “Share-based Payment”. Under these provisions, we record expense ratably over the requisite service period based on the fair value of the awards determined at the grant date utilizing the Black-Scholes pricing model for options and warrants.  We first granted stock options in April 2007, and thus do not have extensive history upon which to evaluate our estimates. For the year ended 2008, we estimated forfeitures to be 0%. We expect to increase our forfeiture estimate in future periods as we accumulate our history with regard to forfeitures.

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, Deep Down continues to use the simplified method related to employee option grants as allowed by Staff Accounting Bulletin ("SAB") 110, Share-Based Payment.

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, 2008:

Dividend yield	0%
Risk free interest rate	2.52% - 2.84%
Expected life of options	2-3 years
Expected volatility	51.7% - 61.3%

Revenue Recognition

We generally recognize revenue once the following four criterion 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.

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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 under Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”), 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.

In accordance with industry practice, 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 collection of amounts related to these contracts may extend beyond one year.

All intercompany revenue balances and transactions were eliminated in consolidation.

Goodwill and Intangible Assets  

Goodwill represents the cost in excess of the fair value of net assets acquired in business combinations. SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), prescribes the process for impairment testing of goodwill on an annual basis or more often if a triggering event occurs. Goodwill is not amortized, and there were no indicators of impairment at December 31, 2008.

We evaluated the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include a significant adverse change in legal factors or in business or the business climate or unanticipated competition. When evaluating whether goodwill is impaired, we compare the fair value of the business to its carrying amount, including goodwill. The fair value of the reporting unit is estimated using the income or discounted cash flows method. If the carrying amount of the business exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount.

Our intangible assets consist of assets acquired in the purchases of the Mako and Flotation subsidiaries and is comprised of customer lists, non-compete covenants with key employees and trademarks related to Mako’s ROVs and to Flotation’s processes, materials and technology.  We amortize the intangible assets over their useful lives ranging from three to forty years on a straight-line basis.

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Income Taxes

We have adopted the provisions of SFAS No. 109, “Accounting for Income Taxes" which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes,” by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. If a tax position is more likely than not to be sustained upon examination, then an enterprise would be required to recognize in its financial statements the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. We have determined that there was no FIN 48 tax liability at December 31, 2008.

Executive Overview

2008 has been a very difficult year economically and on Wall Street, however it has been a very good year for Deep Down in continuing our dramatic growth operationally. We are continuing to mature and develop into an elite deepwater offshore energy service provider. We acquired Flotation in May 2008, which significantly expanded our operations in the buoyancy products and services area. We announced a major contract of $11.0 million for our riser buoyancy products and services which will be used in a deepwater project off the coast of Brazil. We also expanded our fleet of ROVs in Louisiana by five ROVs during the year.

In June 2008, we completed a Private Placement sale of stock which allowed us to acquire Flotation, as well as retire the very expensive Prospect Capital Corporation (“Prospect”) debt of over $12.0 million. The sale of this stock required the Company to file a registration statement with the Securities and Exchange Commission in order to register the shares. The registration statement has taken much longer and is significantly more costly than expected, however, the acquisition of Flotation has allowed us to become an essential service company to the offshore deepwater energy industry, which is the best market place, and we are expanding rapidly with new technology during a major down turn in the industry.

Deep Down’s balance sheet is very strong with healthy liquidity ratios. During the year, we incurred a significant number of one-time cash expenses along with a significant number of non-cash expenses. Deep Down expensed over $2.9 million in amortization of debt discounts and deferred financing costs and costs related to the extinguishment of the $12.0 million Prospect debt. Our bad debt expense increased by $1.4 million as a result of substantially increasing our reserves as well as expensing a receivable for a large customer in Louisiana that filed for bankruptcy during the year. Our general and administrative expenses are up by almost $1.2 million for professional fees in connection with the acquisition of Flotation and the registration statement. General and administrative expense is also increased by $1.2 million in accrual of penalty fees associated with not having the registration statement declared effective by the SEC. These one-time expenses total over $6.7 million. We look forward to 2009 when most of these expenses will not be a part of our operations.

Recent developments

On March 5, 2009, the Company’s wholly owned subsidiary, Flotation, obtained loan proceeds in the principal amount of approximately $1.8 million pursuant to a loan agreement Flotation and the Company entered into with TD Bank, N.A. (“TD Bank”) as of February 13, 2009.  This loan agreement provides a further commitment to Flotation for advancement of principal in the amount of $0.3 million.  Loans under the loan agreement are generally secured by Flotation’s operational premises in Biddeford, Maine under a mortgage and security agreement and a collateral assignment of leases and rents.  In connection with the loan agreement, TD Bank required that the Company enter into a debt subordination agreement that subordinated any debt Flotation owes to the Company other than accounts payable between them arising in the ordinary course of business.  Furthermore, as part of the loan agreement, TD Bank required a “negative pledge” that prohibits Flotation and the Company from granting security interests in Flotation’s personal property, other than such security interests granted in respect of the Company’s primary facility for borrowed money (as currently held with Whitney National Bank (“Whitney Bank”)).  The Company is obligated to repay proceeds funded on March 5, 2009 based on a schedule of monthly installments of approximately $13,000, with an initial payment on March 13, 2009 and a final payment of all remaining outstanding and unpaid principal and accrued interest in February 2016. However, upon advancement of additional principal amounts available under the loan agreement, TD Bank will recalculate the monthly installments to an amount that will fully amortize the then outstanding principal balance over a 20-year amortization schedule.

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In connection with such loan for Flotation, the Company entered into a second amendment of its existing credit facility with Whitney Bank to permit such loan and the security and other arrangements relating to Flotation’s loan agreement.  The terms of the second amendment also included a guarantor’s consent and agreement, to be signed by each of the Company’s subsidiaries as guarantors of the obligations of the Company under such existing credit facility, that Whitney required as a condition to the effectiveness of the second amendment.  Additionally, Whitney Bank required that Deep Down International Holdings, LLC, a Nevada limited liability company and wholly owned subsidiary of the Company formed in February 2009, enter into joinder agreements for the guaranty and security agreement arrangements generally required of the Company’s subsidiaries under the existing credit facility.  Deep Down International Holdings, LLC currently has no material assets or 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.

Results of Operations

Revenues

	2008		2007		Change		%
Revenues	$	35,769,705	$	19,389,730	$	16,379,975		84.5%

Revenues increased by approximately $16.4 million, or 84.5% to $35.8 million for the year ended December 31, 2008 from approximately $19.4 million for the previous year. This increase in revenue was primarily attributable to strong demand for our services and equipment from our customers in the oil and gas industry and the impact of the inclusion of our acquisitions of Mako and Flotation, which accounted for $17.3 million of the increase. The remainder of the change in revenue is due to not repeating some large construction projects that we billed in fiscal 2007, since they had low gross margins and did not meet our criteria for continuing orders.

Cost of sales

	2008		2007		Change		%
Cost of sales	$	21,686,033	$	13,306,086	$	8,379,947		63.0%
Gross Margin	$	14,083,672	$	6,083,644	$	8,000,028		131.5%
Gross Margin %		39%		31%		49%

Gross profit was $14.1 million for the year ended December 31, 2008 compared to $6.1 million for the previous year, reflecting an overall improvement in gross profit margin from 31% to 39%. Gross margins were positively impacted by the inclusion of our acquisitions of Flotation and Mako, which had slightly better margins than the rest of the Company operations.

Selling, general and administrative expenses

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, 2008 was $14.3 million compared to $4.3 million for the same period last year for an increase of $10.0 million. The acquisitions of Mako and Flotation represented $3.8 million of the increase. Bad debt increased by $1.4 million due to the write off of certain accounts, one of which filed for bankruptcy protection. Personnel and related costs (not included in the Mako and Flotation amount) increased by $2.3 million due to expansion of our businesses requiring more personnel and the related requirements to administer a public company and comply with reporting requirements. Additionally, we paid approximately $2.0 million more than the prior year in professional, accounting and legal fees to support our various initiatives during fiscal 2008 relating to the filing of a registration statement and to support the referenced acquisitions. Stock-based compensation related to employee stock options and restricted stock was approximately $0.6 million in the current fiscal year compared to approximately $0.2 million for the comparable prior year period.

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Depreciation and amortization expense

	2008		2007		Change		%
Depreciation	$	1,314,138	$	398,611	$	915,527		229.7%
Amortization		1,048,968		28,353		1,020,615		3599.7%
Depreciation and amortization	$	2,363,106	$	426,964	$	1,936,142		453.5%

Depreciation and amortization expense for the year ended December 31, 2008 was $2.4 million compared to $0.4 million for the year ended 2007 due mainly to the acquisitions of Mako and Flotation, though Flotation has only eight months of depreciation expense since it was acquired May 1, 2008. Fixed assets acquired in the Mako and Flotation subsidiaries totaled $7.9 million. A total of $1.1 million of the depreciation expense is recorded as cost of sales related to revenue-producing assets, compared to $0.3 million for the previous year. In addition, amortization of intangible assets for the year ended December 31, 2008 was $1.0 million compared to approximately $28,000 for the year ended 2007. For the year ended December 31, 2008 we recorded eight months of amortization for Flotation intangible assets plus a full year of Mako intangible assets, whereas only one month of Mako amortization was included for 2007.

We depreciate our assets using the straight-line method over the estimated useful lives of the respective assets. Buildings are depreciated between 10 and 36 years, and leasehold improvements are amortized over the shorter of the assets' useful lives or lease terms. We depreciate equipment from two to seven years, computers and electronics from two to four years, and furniture and fixtures from two to seven years.  Deep Down’s intangible assets consist of $19.2 million in specifically identified intangible assets acquired in the purchase of the Flotation and Mako subsidiaries, including customer relationships, non-compete covenants, trademarks and various technology rights. We are amortizing the intangible assets over their estimated useful lives on the straight-line basis between three and forty years.

Interest expense

Interest expense for the year ended December 31, 2008 was $3.5 million compared to $2.4 million for the prior year.  In connection with the early payoff of our credit agreement with Prospect in June 2008, we accelerated the remaining deferred financing costs totaling $0.7 million and recorded this charge to interest expense. Additionally, $1.5 million in debt discounts were accelerated and recorded as interest expense. We paid cash interest related to such credit agreement totaling $0.9 million for the year ended December 31, 2008 compared to $0.5 million in the prior year. During the year ended December 31, 2008, we recognized $0.1 million of interest related to accretion on the redemption of Series E Preferred Stock. For the prior year, $1.6 million of the total interest related to accretion on the redemption of Series G and Series E Preferred Stock.

Gain/(loss) on debt extinguishment

In connection with the early payoff of our credit agreement with Prospect in June 2008, early termination fees of approximately $0.4 million were recognized as a loss on early extinguishment of debt. During the year ended December, 31, 2007, we executed a Securities Redemption Agreement with our former chief financial officer to redeem 4,000 shares of Series E exchangeable preferred stock at a discounted price of $500 per share for a total of $2.0 million.  The discount of $500 per share from the face value of $1,000 was accounted for as a substantial modification of debt, thereby generating a gain on extinguishment of debt of $2.0 million.  

Net Income (loss)

Net loss was $4.3 million for the year ended December 31, 2008 as compared to net income of approximately $1.0 million for the prior year. This is due primarily to the costs incurred with private placement of stock and the related registration statement penalty costs of $1.2 million, the costs associated with the acquisition of Flotation, and a $1.4 million increase to bad debt expense to increase reserves and write off a large receivable from a customer in Louisiana that filed for bankruptcy.

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EBITDA

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is a non-GAAP financial measure. We use EBITDA as an unaudited supplemental financial measure to assess the financial performance of our assets without regard to financing methods, capital structures, taxes or historical cost basis; our liquidity and operating performance over time in relation to other companies that own similar assets and that we believe calculate EBITDA in a similar manner; and the ability of our assets to generate cash sufficient for us to pay potential interest costs. We also understand that such data are used by investors to assess our performance. However, the term EBITDA is not defined under generally accepted accounting principles and EBITDA is not a measure of operating income, operating performance or liquidity presented in accordance with generally accepted accounting principles. When assessing our operating performance or liquidity, investors should not consider this data in isolation or as a substitute for net income, cash flow from operating activities, or other cash flow data calculated in accordance with generally accepted accounting principles.

EBITDA decreased by approximately $3.7 million to $0.4 million for the year ended December 31, 2008 from approximately $4.1 million for the previous year. This decrease includes one-time charges of $1.4 million for increased bad debt expense, and in connection with the acquisition of Flotation and the registration statement, approximately $1.2 million in professional fees plus $1.2 million in accrued penalties associated with the delay in the approval of the registration statement.

The following is a reconciliation of net income (loss) to EBITDA for the years ended December 31, 2008 and 2007:

	2008			2007			Change			%
Net income (loss)	$	(4,322,893	)	$	952,509		$	(5,275,402	)		-553.8%
Add back interest expense		3,511,177			2,430,149			1,081,028			44.5%
Deduct interest income		(110,504	)		(92,664	)		(17,840	)		19.3%
Add back depreciation and amortization		2,363,106			426,964			1,936,142			453.5%
Add back tax expense (benefit)		(1,042,372	)		369,673			(1,412,045	)		-382.0%
EBITDA	$	398,514		$	4,086,631		$	(3,688,117	)		(90.2)%

Capital Resources and Liquidity

We believe that the liquidity we derived from the Private Placement and cash flows attributable to our operations is sufficient to fund our capital expenditures, debt maturities and other business needs. We generated our liquidity and capital resources primarily through operations and available capital markets. At December 31, 2008, long-term debt was $2.1 million, of which $0.4 million was current.

Notwithstanding the foregoing, on November 11, 2008, we entered into a $2.0 million revolving credit agreement (the “Revolver”) with Whitney Bank as lender.  On December 18, 2008, we amended the Revolver and added an additional $1.2 million to the credit agreement as a term loan.  We expect that such financing will sufficiently support our working capital needs. At December 31, 2008, we have not drawn any amounts available under the Revolver. The $1.2 million term loan was used to pay 75% of the new Super Mohawk 21 ROV which was delivered in January 2009. See Note 7 to the consolidated financial statements included in this report.

Our credit agreement with Whitney Bank provides for letters of credit, which we executed an irrevocable transferrable standby letter of credit with a customer for $1.1 million on February 10, 2009. The letter of credit was executed as a guarantee of performance by Deep Down and its subsidiaries on a long-term contract, allows partial and multiple drawings, and expires August 31, 2009 with an automatic one-year extension period unless cancelled 90 days in advance of the expiration date.

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On March 5, 2009, Flotation, obtained loan proceeds in the principal amount of approximately $1.8 million pursuant to a loan agreement Flotation and the Company entered into with TD Bank as of February 13, 2009. This loan agreement provides a further commitment to Flotation for advancement of principal in the amount of $0.3 million. In connection with the loan agreement, TD Bank required that the Company enter into a debt subordination agreement that subordinated any debt Flotation owes to the Company other than accounts payable between them arising in the ordinary course of business.  Furthermore, as part of the loan agreement TD Bank required a “negative pledge” that prohibits Flotation and the Company from granting security interests in Flotation’s personal property, other than such security interests granted in respect of the Company’s primary facility for borrowed money (as currently held with Whitney Bank).  See Note 15 to the consolidated financial statements included in this report for further information on this loan agreement.

In connection with such loan for Flotation, the Company entered into a second amendment of its existing credit facility with Whitney Bank.  The terms of the second amendment included a guarantor’s consent and agreement, to be signed by each of the Company’s subsidiaries as guarantors of the obligations of the Company under such existing credit facility, that Whitney Bank required as a condition to the effectiveness of the second amendment. Additionally, Whitney Bank required that Deep Down International Holdings, LLC enter into joinder agreements for the guaranty and security agreement arrangements generally required of the Company’s subsidiaries under the existing credit facility.

As of December 31, 2008, our cash and cash equivalents were $2.6 million, which includes restricted cash of $0.1 million.  Cash and cash equivalents were $2.6 million including restricted cash of $0.4 million as of December 31, 2007.  Management believes that we have adequate capital resources when combined with our cash position and cash flow from operations to meet current operating requirements for the 12 months ending December 31, 2009.

On June 5, 2008, we sold 57,142,857 shares of Deep Down’s common stock in the Private Placement at a price of $0.70 per share, for a total purchase price of $40.0 million and net proceeds to us of approximately $37.1 million. We used $22.1 million of the net proceeds to fund the cash portion of the Flotation purchase, and used approximately $12.5 million to repay outstanding debt, interest and early termination fees on June 12, 2008. We retained the balance from the Private Placement to be used for working capital purposes. In connection with the Registration Rights Agreement associated with the Private Placement and under guidance of SFAS 5, we have reserved $1.2 million in potential damages for the 90-day period September 4 to December 4, 2008. See Item 3. Legal Proceedings included in this report with regard to the Registration Rights Agreement.

On January 4, 2008, in accordance with the terms of the purchase of Mako, the original shareholders of Mako received the first cash installment of $2.9 million, and on April 11, 2008 they received the final cash installment of $1.2 million pursuant to the securities redemption and shareholder payable agreement.

Cash Flow from Operating Activities

For the year ended December 31, 2008, cash used in operating activities was $0.2 million as compared to $3.0 million 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 $0.3 million compared to an increase of $1.0 million in 2007. Billings in excess of costs on uncompleted contracts increased by $2.1 million for 2008 mostly related to a large job that will be completed during 2009. Additionally, we recorded the following non-cash charges during 2008: amortization of deferred financing costs and debt discount related to the extinguishment of long-term debt totaling $2.6 million, share-based compensation of $0.6 million, bad debt expense of $1.5 million and depreciation and amortization of $2.4 million. In fiscal 2007, we had a gain on extinguishment of debt of $2.0 million related to the redemption of preferred stock at a discount, recognition of a sales type lease receivable of $0.9 million, an increase of finished goods of $0.5 million, depreciation and amortization of $0.4 million and amortization of deferred financing costs, debt discounts and accretion on preferred stock totaling $1.8 million.

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Cash Flow from Investing Activities

For the year ended December 31, 2008, cash used in investing activities was $31.0 million as compared to $1.4 million for the prior year. The majority of the 2008 activity related to the cash paid to Flotation shareholders totaling $22.1 million offset by cash acquired of $0.2 million, which was funded by the net proceeds of the Private Placement as discussed above. Additionally, in accordance with the terms of the purchase of Mako, we made the cash payments to the original Mako shareholders in the amount of $4.2 million plus some adjustments to purchase price expenses. The restricted cash balance of $0.37 million as of December 31, 2007 was released in connection with the payoff of the Credit Agreement, offset by the increase in restricted cash of $0.1 million required under a letter of credit entered into during fiscal year 2008. We used $4.8 million for equipment purchases for the year ended December 31, 2008 as compared to $0.8 million for the prior year period.

Cash Flow from Financing Activities

For the year ended December 31, 2008, cash provided by financing activities was $31.5 million compared to $6.6 million for the prior year period.  During the year ended December 31, 2008, we completed the foregoing described Private Placement for net proceeds of $37.1 million. In June 2008, we paid approximately $12.5 million to Prospect to pay the balance due under its Credit Agreement and related interest and early termination fees. In January 2008, in accordance with the terms of the purchase of Mako, we paid $0.9 million of notes payable plus accrued interest of $2,664, and received proceeds from Prospect totaling $5.6 million. During the third quarter of 2008, we received the balance due under the sales lease receivable, bringing the annual receipts to $0.6 million.

For the year ended December 31, 2007, net cash provided from financing activities was $6.6 million.  This was primarily due to long-term debt issuances totaling $6.2 million, which was offset by payments on long term debt of $2.8 million. Additionally, we received proceeds from the issuance of common stock net of expenses of $4.0 million.

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.

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Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value under generally accepted accounting procedures and expands disclosures on fair value measurements. This statement applies under previously established valuation pronouncements and does not require the changing of any fair value measurements, though it may cause some valuation procedures to change. Under SFAS No. 157, fair value is established by the price that would be received to sell the item or the amount to be paid to transfer the liability of the asset as opposed to the price to be paid for the asset or received to transfer the liability. Further, it defines fair value as a market specific valuation as opposed to an entity specific valuation, though the statement does recognize that there may be instances when the low amount of market activity for a particular item or liability may challenge an entity’s ability to establish a market amount. In the instances that the item is restricted, this pronouncement states that the owner of the asset or liability should take into consideration what effects the restriction would have if viewed from the perspective of the buyer or assumer of the liability. This statement is effective for all assets valued in financial statements for fiscal years beginning after November 15, 2007.  Deep Down adopted SFAS 157 for financial assets and liabilities in 2008 with no material impact to the consolidated financial statements but with additional required consolidated financial statement footnote disclosures. We do not anticipate the application of SFAS 157 to nonfinancial assets and nonfinancial liabilities will have a material impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141(R)”) and No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 141(R) and SFAS No. 160 are products of a joint project between the FASB and the International Accounting Standards Board.  The revised standards continue the movement toward the greater use of fair values in financial reporting. SFAS No. 141(R) will significantly change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. These changes include the expensing of acquisition related costs and restructuring costs when incurred, the recognition of all assets, liabilities and noncontrolling interests at fair value during a step-acquisition, and the recognition of contingent consideration as of the acquisition date if it is more likely than not to be incurred.  SFAS No. 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity.  SFAS No. 141(R) and SFAS No. 160 are effective for both public and private companies for fiscal years beginning on or after December 15, 2008 (January 1, 2009 for companies with calendar year-ends). SFAS No. 141(R) will be applied prospectively. SFAS No. 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS No. 160 shall be applied prospectively. Early adoption is prohibited for both standards.  We will apply the requirements of SFAS No. 141(R) to all business combinations after January 1, 2009; SFAS No. 160 will have no impact on our consolidated financial statements as we have no minority interests.

In December 2007, the SEC staff issued Staff Accounting Bulletin (“SAB”) 110, Share-Based Payment, which amends SAB 107, Share-Based Payment, to permit public companies, under certain circumstances, to use the simplified method in SAB 107 for employee option grants after December 31, 2007. Use of the simplified method after December 2007 is permitted only for companies whose historical data about their employees’ exercise behavior does not provide a reasonable basis for estimating the expected term of the options. Deep Down did not have stock options outstanding until 2007, and thus does not have adequate historical data to determine expected option lives. Therefore, we will continue to use the simplified method as allowed under the provision of SAB 110.

In June 2008, EITF 07-5, “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” was issued. This standard triggers liability accounting on all options and warrants exercisable at strike prices denominated in any currency other than the Company’s functional currency or where instruments’ exercise prices is reset under certain future events. This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. We are currently evaluating the impact that EITF 07-5 will have on our consolidated financial position or result of operations.

In June 2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4 is to provide transition guidance for conforming changes made to EITF No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Issue is effective for financial statements issued for fiscal years ending after December 15, 2008. Early application is permitted. Management is currently evaluating the impact of adoption of EITF No. 08-4.

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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-5
Consolidated Statements of Operations	F-6
Consolidated Statements of Changes in Stockholders’ Equity	F-7
Consolidated Statements of Cash Flows	F-8
Notes to Consolidated Financial Statements	F-10

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 principal executive officer and principal 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 principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. This determination was in response to the SEC comment letter received February 26, 2009, in which the SEC stated that they require that we present the audited predecessor financial statements for Deep Down, Inc. for the period January 1, 2006 through November 20, 2006, in accordance with Rule 310(a) of Regulation S-B. Management will remediate this as soon as practicable by supplementing the amounts reported in Form 10-KSB for December 31, 2007 with the predecessor audited financial information for Deep Down from January 1, 2006 to November 20, 2006. See Item 1B. Unresolved Staff Comments, included in this report on Form 10-K for further information on the SEC response.

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs.  Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

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Management’s Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act, as amended.  Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.  We have identified the following material weaknesses.

1.

As of December 31, 2008, 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 the Company’s 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 an accounting and fraud risk policy, sufficient documentation on the review and follow-up on the remediation of deficiencies, 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.

2.

Management has determined that we did not maintain effective controls over the accuracy of revenue recognition. Specifically, there was not sufficient review, supervision, and monitoring in regards to projects accounted for under the percentage-of-completion method.

Because of these material weaknesses, management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2008, based on the criteria established in "Internal Control-Integrated Framework" issued by the COSO.

Changes in Internal Control Over Financial Reporting.

In our efforts to continuously improve our internal controls, management has taken steps to enhance the following controls and procedures subsequent to December 31, 2008 as part of our remediation efforts in addressing the material weaknesses above:

·        Management is in the process of implementing a new system-wide accounting and management software program to address the revenue recognition and gross margin analysis of projects accounted for under the percentage-of-completion method.

·        Management has prepared an Employee Handbook and Code of Conduct and plans to circulate these documents throughout the organization and obtain signed acknowledgements from employees.

·        Management plans to document its accounting policies and procedures to increase consistency among divisions.

·        Management has increased documentation around certain authorization and review controls.

This annual report includes an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting.  

Item 9B.                 OTHER INFORMATION

None.

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PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

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

Name	Age	Position Held With The Company
Robert E. Chamberlain, Jr.	50	Chairman of the Board, Chief Acquisitions Officer and Director
Ronald E. Smith*	50	President, Chief Executive Officer and Director
Eugene L. Butler	67	Chief Financial Officer and Director
Mary L. Budrunas*	57	Vice-President, Corporate Secretary and Director
Bradley M. Parro	51	Vice-President

_________________________

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

Robert E. Chamberlain, Jr., Chairman of the Board, Chief Acquisitions Officer, and Director. Mr. Chamberlain has served as Chairman and Director of the Company since December 2006.  Mr. Chamberlain has a B.S. in Chemical Engineering and a B.S. in Biomedical Engineering from Northwestern University's Technological Institute and an MBA from Northwestern University's Kellogg Graduate School of Management. Mr. Chamberlain served as Vice President with Solomon Brothers Inc. (1986 to 1992), where his responsibilities included mergers, acquisitions, leveraged buyouts, merchant banking, divestitures, corporate finance, capital raises, restructurings and new product development in both the private and public markets. From 1992 through 1995, Mr. Chamberlain served as Vice President for Laidlaw Securities and Dickinson & Co. where he was responsible for generating public and private equity transactions. Since 1995, Mr. Chamberlain has assisted small emerging growth companies gain access to the capital markets and develop well articulated strategic objectives through consulting companies he controlled. Previously, Mr. Chamberlain served as Chairman, CEO, CFO and Director of a publicly-traded energy company involved in the development of oil and gas opportunities, primarily in the Barnett Shale of Texas.

Ronald E. Smith, President, Chief Executive Officer and Director . Mr. Smith co-founded Deep Down in 1997 and has served as President and Director of the Company since December 2006. 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.

Eugene L. Butler, Chief Financial Officer and Director.   Mr. Butler has served as Chief Financial Officer and Director with Deep Down since June 2007. 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 $2 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.

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 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, has served as Vice-President and Director of the Company since December 2006.  Ms. Budrunas is responsible for the Company’s administrative functions, including human resources and accounting.  Ms. Budrunas has more than 30 years of logistical management experience in manufacturing, fabrication, and industrial sourcing in the oil and gas industry. Prior to Ms. Budrunas co-founding Deep Down in 1997, she managed the purchasing efforts of many projects over a 10-year period for Mustang Engineering, and previously directed procurement for a large petroleum drilling and production facility project in Ulsan, Korea.

Bradley M. Parro, Vice President.  Mr. Parro has served as Vice President since May 2008.  Prior to this, he was the Managing Director for Continental Shelf Associates where he was responsible for business development for that company’s Houston, Texas office.  From 1998 through 2004, he served in various executive capacities, including chief financial officer, chief operating officer and chief executive officer of PetroCom, LLC, a $30 million wireless communications company serving the offshore oil and gas industry.  He also held the position of chief financial officer for oilfield service providers Ceanic Corporation and Perry Tritech, Inc.  His experience includes mergers and acquisitions, corporate restructuring, equity and sub-debt placement, strategic planning and execution and executive financial and operational management. Mr. Parro has a Bachelor of Science degree in finance from the University of Illinois at Champaign-Urbana and a Master of Business Administration degree from Loyola University of Chicago.

Corporate Governance

The Company promotes accountability for adherence to honest and ethical conduct; endeavors to provide full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with the SEC and in other public communications made by the Company and strives to be compliant with applicable governmental laws, rules and regulations. The Company has not formally adopted a written code of business conduct and ethics that governs the Company’s employees, officers and directors as the Company is not required to do so.

In lieu of an Audit Committee, the Company’s Board of Directors is responsible for reviewing and making recommendations concerning the selection of outside auditors, reviewing the scope, results and effectiveness of the annual audit of the Company's financial statements and other services provided by the Company’s independent public accountants. The Board of Directors reviews the Company's 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.

Changes to the Procedures for Stockholder’s Nomination of Directors

By action approved by the Company’s stockholders during fiscal year 2008 and under provisions of amendments to the Company’s Articles of Incorporation filed with the Secretary of State of the State of Nevada on September 29, 2008, the Company established the following rules for stockholder nominations for directors to serve on the Company’s Board of Directors:

·   In order to make a nomination, a stockholder must give notice of such nomination to the Secretary of the Company in writing, delivered or mailed by first class United States mail, postage prepaid, not less than 30 days or more than 60 days prior to the meeting at which directors are to be elected; provided, however, that if the Company gives less than 40-days’ notice of such meeting of stockholders, such written notice shall be delivered or mailed to the Secretary of the Company no later than the close of the tenth day following the day on which notice of the meeting was mailed to the stockholders.

·   Each notice given by a stockholder with respect to any nomination of directors shall set forth (1) the name, age, business address and, if known, residence address of each nominee proposed in the notice, (2) the principal occupation or employment of each such nominee, and (3) the number of shares of stock of the Company which are beneficially owned by each such nominee.

·   The stockholder making any such nomination shall promptly provide any other information reasonably requested by the Company.

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Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company’s officers and directors, and persons who own more than ten percent of a registered class of the Company’s 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 the Company with copies of all Section 16(a) forms they file.

Based solely upon a review of the copies of such forms furnished to the Company or written representations that no Forms 5 were required, the Company believes that all Section 16(a) filing requirements were not met during fiscal year 2008.  There were two Form 4 filings due on April 1, 2008, required by Mary Budrunas and Ron Smith for conversions of Series D Preferred Stock into common stock on March 28, 2008, representing 16,627,005 and 6,652,871 shares of common stock, respectively. These Form 4 filings have not been completed. Additionally, there were two Form 3 filings that were filed late during the year ended December 31, 2008. The first was required by Bradley M. Parro, to report the issuance of 350,000 stock options granted on May 1, 2008.  The second was required by Jacob Marcell, to report the issuance of 7,032,781 shares of common stock granted on January 22, 2008. A total of three Form 4 filings were filed late for the reporting of issuance of 1,000,000 stock options and 350,000 shares of restricted common stock to each of Ron Smith, Robert Chamberlain and Eugene Butler. These Form 4 filings were due on February 19, 2008 and filed on February 28, 2008.

Item 11.          EXECUTIVE COMPENSATION

The following table sets forth information concerning the total compensation earned in the years ended December 31, 2008 and 2007 by our Chief Executive Officer and our two highest compensated executive officers other than our CEO (collectively, our “Named Executive Officers” or “NEOs”).

Summary Compensation Table

Name and Principal Position	Year	Salary ($)		Bonus ($)		Stock Awards  ($) (1)		Option Awards ($) (1)		All Other Compensation ($) (2)		Total
Ronald E. Smith	2008	$	250,000	$	175,000	$	64,313	$	14,172	$	12,000	$	515,485
President, Chief Executive Officer and Director	2007	$	250,000	$	19,231	$	-	$	-	$	-	$	269,231
Robert E. Chamberlain, Jr.	2008	$	225,000	$	175,000	$	64,313	$	14,172	$	32,440	$	510,925
Chairman of the Board, Chief Acquisitions Officer and Director	2007	$	180,000	$	-	$	-	$	-	$	20,265	$	200,265
Eugene L. Butler	2008	$	225,000	$	175,000	$	64,313	$	220,272	$	28,204	$	712,789
Chief Financial Officer and Director	2007	$	105,000	$	-	$	-	$	120,225	$	14,568	$	239,793

(1)           “Stock Awards” and “Option Awards” are quantified in the table according to the amount included in 2008 and 2007 share-based compensation expense for the equity awards granted to each NEO through the end of 2008 as determined in accordance with SFAS 123(R). No stock awards or option awards granted to NEOs were forfeited during 2008 and 2007. For a discussion of the assumptions and methodologies used to value the stock and option awards reported in the table above, see Note 10 “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 2008 were attributed to the following:

·      Mr. Smith: Amounts included for the year ended 2008 consisted of a vehicle allowance ($1,000 per month).

·      Mr. Chamberlain: Amounts included for the year ended 2008 consisted of a vehicle allowance ($1,000 per month) and $20,440 for reimbursement for federal and state payroll withholdings customarily withheld for an employee.

·      Mr. Butler: Amounts included for the year ended 2008 consisted of a vehicle allowance ($1,000 per month) and $16,204 for reimbursement for federal and state payroll withholdings customarily withheld for an employee.

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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.

Mr. Smith has an employment agreement to serve as our President and Chief Executive Officer.  Mr. Smith’s employment agreement provides for an annual base salary of $250,000, which was increased to $345,000 effective January 1, 2009, plus a vehicle allowance of $1,000 per month.  The term of Mr. Smith’s employment agreement is through August 6, 2010, and is subject to further automatic renewals for annual periods up to an additional two years.

Mr. Chamberlain serves as our Chairman of the Board and Chief Acquisitions Officer pursuant to a consulting agreement we have with Strategic Capital Services, Inc. (“Strategic”).  The consulting agreement with Strategic provides 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 receives 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 has an initial term through August 6, 2010, and is subject to further automatic renewals for annual periods up to an additional two years.

Effective May 31, 2007, we hired Mr. Butler as our Chief Financial Officer and provided for his compensation under an employment agreement.  This employment agreement provided that Mr. Butler receive an annual base salary of $180,000.  The agreement also provided that he receive an aggregate of options to purchase 3,000,000 shares of our common stock. These options will vest over three years, with substantially one-third vesting on the first, second and third anniversary of the date of grant. The per share exercise price of $0.515 for such options was determined by the closing market price of the common stock on the date of grant.  Effective August 6, 2007, Mr. Butler’s employment agreement was replaced by a consulting agreement between Deep Down and Eugene L. Butler & Associates.  We increased compensation payable to Mr. Butler to $225,000 effective as of January 1, 2008 and to $310,000 effective as of January 1, 2009. Additionally, Mr. Butler receives 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 for Mr. Butler’s services has an initial term through August 6, 2010, and is subject to automatic renewals for annual periods up to an additional two years.

The amounts included in the “Bonus” column of the foregoing table represent specific cash bonuses paid to the NEOs.  In June 2008, Messrs. Smith, Chamberlain and Butler were each awarded and paid a cash performance bonus in the amount of $100,000. Additionally, 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). The amount included in the 2007 “Bonus” column of $19,168 for Mr. Smith represents offshore bonuses that are paid by the Company in respect of time the Company requires of its employees to spend offshore.

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 our 2003 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award 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 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.

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Outstanding Equity Awards at December 31, 2008

The following tables present information regarding the outstanding equity awards held by each of the NEOs as of December 31, 2008.

Option Awards

	Option Grant	Number of Securities Underlying Unexercised Options			Number of Securities Underlying Unexercised Options			Option Exercise Price		Option Expiration
Name	Date	Exercisable (#)			Unexercisable (#)			($/Sh)		Date
Ronald E. Smith	2/14/2008		-			1,000,000	(1)		1.50	2/14/2013
Robert W. Chamberlain	2/14/2008		-			1,000,000	(1)		1.50	2/14/2013
Eugene L. Butler	2/14/2008		-			1,000,000	(1)		1.50	2/14/2013
	5/31/2007		1,000,000	(2)		2,000,000	(2)		0.52	8/31/2010

(1)   These options will vest over three years, with substantially one-third vesting on the first, second and third anniversary of the date of grant, provided that the officer continues to be employed with Deep Down through each vesting date.

(2)   The remaining unvested portion of this option award is scheduled to vest in equal installments on May 31, 2009 and May 31, 2010, provided that Mr. Butler continues to be employed with Deep Down through each vesting date.

Stock Awards

	Award	Number of Shares or Units of Stock That Have Not Vested	Market Value of Shares or Units of Stock that Have Not Vested
Name	Grant Date	(#) (2)	($) (1)
Ronald E. Smith	2/14/2008	350,000	56,000
Robert W. Chamberlain	2/14/2008	350,000	56,000
Eugene L. Butler	2/14/2008	350,000	56,000

(1)   The market value is calculated by multiplying the number of shares by the closing price of our common stock of $ 0.16 on December 31, 2008.

(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.

Option Exercises and Stock Vested During the Year Ended December 31, 2008

There were no options exercised by NEOs during the year ended December 31, 2008. All of the restricted stock issued on February 14, 2008 becomes fully vested on February 14, 2010.

Compensation of Directors

The directors of the Company are all also executive officers of the Company and as directors do not receive any additional compensation for their performance of services as directors.  The Company may agree to provide compensation to directors in the future.

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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information, as of March 13, 2009, concerning the beneficial ownership of shares of Common Stock of the Company by (i) each person known by the Company to beneficially own more than 5% of the  outstanding shares of the Company’s common stock; (ii) each Director; (iii) the Company’s “Named Executive Officers” (as determined under Item 402(m) of Regulation S-K); and (iv) all directors and executive officers of the Company as a group. To the knowledge of the Company, all persons listed in the table have sole voting and investment power with respect to their shares, except to the extent that authority is shared with their respective spouse under applicable law. In addition, unless otherwise indicated, 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	Shares of Common Stock Beneficially Owned (1)	Percent of Common Stock Outstanding
Ronald E. Smith (2)	44,963,209	25.3%
Mary L. Budrunas (2)	44,963,209	25.3%
Robert E. Chamberlain, Jr.(3)	25,691,708	14.5%
Eugene L. Butler (4)	1,683,333	*
All directors and officers as a group (4 persons)	72,338,250   (5)	40.3%
* - 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 177,350,630 shares of common stock outstanding as of March 13, 2009.

(2)     Mr. Smith and Ms. Budrunas are husband and wife. Shares include 26,216,871 shares owned directly by Mr. Smith and 18,413,005 shares owned directly by Ms. Budrunas. Shares also include 350,000 shares of restricted stock issued to Mr. Smith on February 14, 2008 which become fully vested on the second anniversary of the grant, February 14, 2010, plus 333,333 shares of Deep Down’s common stock that Mr. Smith has the right to acquire by exercise of stock options which vested on February 14, 2009.

(3)     Shares include 350,000 shares of restricted stock issued to Mr. Chamberlain on February 14, 2008 which become fully vested on the second anniversary of the grant, February 14, 2010, plus 333,333 shares of Deep Down’s common stock that Mr. Chamberlain has the right to acquire by exercise of stock options which vested on February 14, 2009.

(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, plus 333,333 and 1,000,000 shares of Deep Down’s common stock that Mr. Butler has the right to acquire by exercise of stock options which vested on February 14, 2009 and which vested on May 31, 2008, respectively.

(5)     Shares include 1,999,999 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, and Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II of this report.

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Item 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

We lease all buildings, structures, fixtures and other improvements at our Channelview, Texas location from JUMA, LLC, a company owned by Ronald E. Smith, CEO and a director of Deep Down and Mary L. Budrunas, a vice president and a director of Deep Down. The base rate of $15,000 per month is payable to JUMA, LLC through August 31, 2013, together with all costs of maintaining, servicing, repairing and operating the premises, including insurance, utilities and property taxes.

On March 28, 2008, Deep Down redeemed 4,500 shares of Series D preferred stock owned by Ronald Smith and Mary Budrunas.  The Series D preferred shares were redeemed for 23,279,876 shares of common stock.

None of the Company’s Directors are independent. Under the NASDAQ® standards for “independence”, none of our directors would qualify as independent generally or with respect to any specific independence requirements for any committee member. However, as the Company is not traded on the NASDAQ®, the Company is not required to comply with NASDAQ® independence requirements at this time.  At such time, if ever, as the Company is traded on NASDAQ® or any alternative exchange, which requires director independence, the Company plans to take steps at that time to comply with such independence requirements.

Item 14.          PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the aggregate fees paid to Malone & Bailey, PC for audit services rendered in connection with the Company's consolidated financial statements and reports for the years ended December 31, 2008 and 2007, respectively, and for other services rendered during those years on behalf of Deep Down and its subsidiaries:

	December 31, 2008	December 31, 2007
(i) Audit Fees	$             503,714	$           205,967
(ii) Audit Related Fees	86,634	165,931
(iii) Tax Fees	49,130	16,260
(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 by Malone & Bailey, PC 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 Malone & Bailey, PC. 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.

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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.

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 ByLaws 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).
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).

36

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.
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.
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.
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†	Consulting Agreement, dated effective as of August 6, 2007, between Deep Down, Inc. and Eugene L. Butler & Associates regarding the services of Eugene L. Butler (incorporated herein by reference from Exhibit 10.3 to our Form 10-KSB filed with the Commission on April 1, 2008).
10.13	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).
10.14	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).
10.15	Lease Agreement, dated September 1, 2006, between Deep Down, Inc., a Delaware corporation, as tenant, and JUMA, L.L.C. (incorporated herein by reference from Exhibit 10.4 to our Form 10-KSB filed with the Commission on April 1, 2008).
10.16	Lease Amendment and Extension Agreement, dated as of May 1, 2008, between Deep Down, Inc. a Delaware corporation, and JUMA, L.L.C. (incorporated herein by reference from Exhibit 10.8 to our Form 10-Q filed with the Commission on August 15, 2008).
10.17	Lease Agreement dated June 1, 2006, between Mako Technologies, Inc., as Lessee and Sutton Industries, as Lessor (incorporated herein by reference from Exhibit 10.12 to our Form 10-KSB/A filed with the Commission on May 1, 2008).
10.18*	Office Building Lease, dated November 24, 2008, between Deep Down, Inc. and A-K-S-L 49 Beltway 8, L.P.
10.19	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).
10.20†	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).

37

10.21†	Employment Agreement with Bradley M. Parro, dated May 1, 2008 (incorporated herein by reference from Exhibit 10.13 to our Form S-1 Registration Statement (file no. 333-152435) filed with the Commission on July 21, 2008).
10.22*	Loan Agreement entered into as of February 13, 2009, by and among Flotation Technologies, Inc., Deep Down, Inc., and TD Bank, N.A.
10.23*	Mortgage and Security Agreement entered into as of February 13, 2009, by Flotation Technologies, Inc. in favor of TD Bank, N.A.
10.24*	Collateral Assignment of Leases and Rents entered into as of February 13, 2009, by Flotation Technologies, Inc. in favor of TD Bank, N.A.
10.25*	Commercial Note entered into as of February 13, 2009, by Flotation Technologies, Inc. in favor of TD Bank, N.A.
10.26*	Debt Subordination Agreement entered into as of February 13, 2009, by and among Flotation Technologies, Inc., Deep Down, Inc., and TD Bank, N.A.
10.27*	Environmental Indemnity Agreement entered as of February 13, 2009 in favor of TD Bank, N.A.
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.

38

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: March 16, 2009

/s/ EUGENE L. BUTLER                                                      

 Eugene L. Butler

Chief Financial Officer

Dated: March 16, 2009

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	March 16, 2009
Ronald E. Smith	(Principal Executive Officer)
/s/ EUGENE L. BUTLER	Chief Financial Officer and Director	March 16, 2009
Eugene L. Butler	(Principal Financial Officer and Principal Accounting Officer)
/s/ ROBERT E. CHAMBERLAIN, JR.	Chairman, Chief Acquisitions Officer and Director	March 16, 2009
Robert E. Chamberlain, Jr.
/s/ MARY L. BUDRUNAS	Vice-President, Corporate Secretary and Director	March 16, 2009
Mary L. Budrunas

39

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 ByLaws 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).
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).

40

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.
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.
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.
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†	Consulting Agreement, dated effective as of August 6, 2007, between Deep Down, Inc. and Eugene L. Butler & Associates regarding the services of Eugene L. Butler (incorporated herein by reference from Exhibit 10.3 to our Form 10-KSB filed with the Commission on April 1, 2008).
10.13	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).
10.14	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).
10.15	Lease Agreement, dated September 1, 2006, between Deep Down, Inc., a Delaware corporation, as tenant, and JUMA, L.L.C. (incorporated herein by reference from Exhibit 10.4 to our Form 10-KSB filed with the Commission on April 1, 2008).
10.16	Lease Amendment and Extension Agreement, dated as of May 1, 2008, between Deep Down, Inc. a Delaware corporation, and JUMA, L.L.C. (incorporated herein by reference from Exhibit 10.8 to our Form 10-Q filed with the Commission on August 15, 2008).
10.17	Lease Agreement dated June 1, 2006, between Mako Technologies, Inc., as Lessee and Sutton Industries, as Lessor (incorporated herein by reference from Exhibit 10.12 to our Form 10-KSB/A filed with the Commission on May 1, 2008).
10.18*	Office Building Lease, dated November 24, 2008, between Deep Down, Inc. and A-K-S-L 49 Beltway 8, L.P.
10.19	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).
10.20†	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).

41

10.21†	Employment Agreement with Bradley M. Parro, dated May 1, 2008 (incorporated herein by reference from Exhibit 10.13 to our Form S-1 Registration Statement (file no. 333-152435) filed with the Commission on July 21, 2008).
10.22*	Loan Agreement entered into as of February 13, 2009, by and among Flotation Technologies, Inc., Deep Down, Inc., and TD Bank, N.A.
10.23*	Mortgage and Security Agreement entered into as of February 13, 2009, by Flotation Technologies, Inc. in favor of TD Bank, N.A.
10.24*	Collateral Assignment of Leases and Rents entered into as of February 13, 2009, by Flotation Technologies, Inc. in favor of TD Bank, N.A.
10.25*	Commercial Note entered into as of February 13, 2009, by Flotation Technologies, Inc. in favor of TD Bank, N.A.
10.26*	Debt Subordination Agreement entered into as of February 13, 2009, by and among Flotation Technologies, Inc., Deep Down, Inc., and TD Bank, N.A.
10.27*	Environmental Indemnity Agreement entered as of February 13, 2009 in favor of TD Bank, N.A.
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.

42

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-5
Consolidated Statements of Operations	F-6
Consolidated Statements of Changes in Stockholders’ Equity	F-7
Consolidated Statements of Cash Flows	F-8
Notes to the Consolidated Financial Statements	F-10

F-1

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 sheets of Deep Down, Inc. (the "Company") as of December 31, 2008 and 2007 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 2008 and 2007.  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 audits.

We conducted our audits 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 audits provide 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 2007, and the results of its operations and its cash flows for the years ended December 31, 2008 and 2007 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 12, 2009, expressed an adverse opinion.

/s/  MALONE & BAILEY, PC

www.malone-bailey.com

Houston, Texas

March 12, 2009

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Shareholders of Deep Down, Inc., Houston, Texas

We have audited Deep Down, Inc.’s (“the Company”)  internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Deep Down, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

Management excluded from its assessment of the effectiveness of the Company’s disclosure controls and procedures and internal control over financial reporting, the disclosure controls and procedures and internal controls of the Flotation business. Management was unable to assess the effectiveness of the disclosure controls and procedures and internal control over financial reporting of the Flotation businesses because of the integration of the business. Management expects to update its assessment of the effectiveness of the disclosure controls and procedures and internal control over financial reporting to include the Flotation businesses as soon as practicable. The business accounts for approximately 32% of the consolidated revenue of Deep Down, and approximately 43% of consolidated assets.

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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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 the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment:

·    Management has determined that the Company did not maintain an effective entity level control environment.  Specifically:

o    The Company has not yet implemented all the necessary policies and procedures to ensure that they have an effective control environment based on criteria established in the COSO framework. Specifically, the Company needs to fully implement controls to help prevent or detect the circumvention of controls by employees or management. The Company also needs to perform a formal risk profile and analysis of the Company.

o    The Company did not maintain sufficient policies and procedures over the administration of an accounting and fraud risk policy.

o    The Company did not maintain sufficient documentation on the review and follow up on the remediation of deficiencies.

o    The Company did not maintain a sufficient segregation of duties to decrease the risk of inappropriate accounting.

F-3

·    Management has determined that the Company did not maintain effective controls over the accuracy of revenue recognition. Specifically, there was not sufficient review, supervision, and monitoring in regards to projects accounted for under the percentage-of-completion method.

These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the fiscal year 2008 consolidated financial statements and this report does not affect our report dated March 12, 2009 on those financial statements.

In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, Deep Down, Inc. has not maintained effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Deep Down, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the years ended December 31, 2008 and 2007 and our report dated March 12, 2009 expressed an unqualified opinion thereon.

/s/ Malone & Bailey, PC

www.malone-bailey.com

Houston, Texas

March 12, 2009

F-4

Deep Down, Inc.

Consolidated Balance Sheets

	December 31, 2008			December 31, 2007
ASSETS
Cash and cash equivalents	$	2,495,464		$	2,206,220
Restricted cash		135,855			375,000
Accounts receivable, net		10,772,097			7,190,466
Prepaid expenses and other current assets		633,868			720,886
Inventory		1,224,170			502,253
Costs and estimated earnings in excess of billings on uncompleted contracts		707,737			-
Work in progress		137,940			749,455
Deferred tax asset		216,900			75,810
Receivable from Prospect, net		-			2,687,333
Total current assets		16,324,031			14,507,423
Property and equipment, net		13,799,196			5,368,961
Other assets, net		457,836			1,211,514
Intangibles, net		18,090,680			4,369,647
Goodwill		15,024,300			10,594,144
Total assets	$	63,696,043		$	36,051,689
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities	$	4,318,394		$	3,569,826
Billings in excess of costs and estimated earnings on uncompleted contracts		2,315,043			188,030
Payable to Mako shareholders		-			3,205,667
Current portion of long-term debt		382,912			995,177
Total current liabilities		7,016,349			7,958,700
Long-term debt, net of accumulated discount of $0 and $1,703,258 respectively		1,718,475			10,698,818
Deferred tax liabilities		1,125,945			-
Series E redeemable exchangeable preferred stock, par value $0.01, face value and liquidation
preference of $1,000 per share, no dividend preference, authorized 10,000,000 aggregate shares of all series of preferred stock, -0- and 500 issued and outstanding, respectively		-			386,411
Total liabilities		9,860,769			19,043,929
Temporary equity:
Series D redeemable convertible preferred stock, $0.01 par value, face value and liquidation
preference of $1,000 per share, no dividend preference, authorized 10,000,000 aggregate shares of all series of preferred stock, -0- and 5,000 issued and outstanding, respectively		-			4,419,244
Total temporary equity		-			4,419,244
Stockholders' equity:
Common stock, $0.001 par value, 490,000,000 shares authorized, 177,350,630
and 85,976,532 shares issued and outstanding, respectively		177,351			85,977
Additional paid-in capital		60,328,124			14,849,847
Accumulated deficit		(6,670,201	)		(2,347,308	)
Total stockholders' equity		53,835,274			12,588,516
Total liabilities and stockholders' equity	$	63,696,043		$	36,051,689

See accompanying notes to consolidated financial statements.

F-5

Deep Down, Inc.

Consolidated Statements of Operations

For the Years Ended December 31, 2008 and 2007

	For the Twelve Months Ended
	December 31,
	2008			2007
Revenues	$	35,769,705		$	19,389,730
Cost of sales		21,686,033			13,306,086
Gross profit		14,083,672			6,083,644
Operating expenses:
Selling, general & administrative		14,290,440			4,284,553
Depreciation and amortization		1,285,079			141,247
Total operating expenses		15,575,519			4,425,800
Operating income (loss)		(1,491,847	)		1,657,844
Other income (expense):
Gain (loss) on debt extinguishment		(446,412	)		2,000,000
Interest income		110,504			92,664
Interest expense		(3,511,177	)		(2,430,149	)
Other (expense) income		(26,333	)		1,823
Total other expense		(3,873,418	)		(335,662	)
Income (loss) before income taxes		(5,365,265	)		1,322,182
Benefit from (provision for) income taxes		1,042,372			(369,673	)
Net income (loss)	$	(4,322,893	)	$	952,509
Earnings (loss) per share:
Basic	$	(0.03	)	$	0.01
Weighted-average common shares outstanding		142,906,616			73,917,190
Diluted	$	(0.03	)	$	0.01
Weighted-average common shares outstanding		142,906,616			104,349,455

See accompanying notes to consolidated financial statements.

F-6

Deep Down, Inc.

Statements of Changes in Stockholders' Equity

For the Years Ended December 31, 2008 and 2007

													Additional
	Common Stock						Series C Preferred Stock						Paid-in			Accumulated
	Shares (#)			Amount ($)			Shares (#)			Amount ($)			Capital			Deficit			Total
Balance at December 31, 2006		82,870,177		$	82,870			22,000		$	22		$	(82,792	)	$	(3,299,817	)	$	(3,299,717	)
Net income		-			-			-			-			-			952,509			952,509
Shares repurchased		(25,000,000	)		(25,000	)								(225,000	)					(250,000	)
Redemption of Series E Preferred Stock		3,463,592			3,464									3,840,314						3,843,778
Redemption of Series C Preferred Stock		4,400,000			4,400			(22,000	)		(22	)		(4,378	)					-
Stock issued for debt payment		543,689			544									559,456						560,000
Stock issued for acquisition of a business		6,574,074			6,574									4,989,723						4,996,297
Private Placement offering		13,125,000			13,125									3,946,875						3,960,000
Stock based compensation		-			-									187,394						187,394
Warrants issued to lender														1,479,189						1,479,189
Warrants issued to third party for deferred financing costs														159,066						159,066
Balance at December 31, 2007		85,976,532		$	85,977			-			-		$	14,849,847		$	(2,347,308	)	$	12,588,516
Net loss		-			-			-			-			-			(4,322,893	)		(4,322,893	)
Exchange of Series D preferred stock		25,866,518			25,867									4,393,377						4,419,244
Stock issued for acquisition of Mako		2,802,969			2,803									1,959,275						1,962,078
Stock issued for acquisition of Flotation		1,714,286			1,714									1,421,143						1,422,857
Warrants issued for acquisition of Flotation					-									121,793						121,793
Restricted stock issued for service		1,200,000			1,200									(1,200	)					-
Stock issued in private placement, net of $2,940,331 fees		57,142,857			57,143									37,002,527						37,059,670
Cashless exercise of stock options		29,339			29									(29	)					-
Stock issued for exercise of warrants		2,618,129			2,618									(2,618	)					-
Stock based compensation		-			-									584,009						584,009
Balance at December 31, 2008		177,350,630		$	177,351			-			-		$	60,328,124		$	(6,670,201	)	$	53,835,274

See accompanying notes to consolidated financial statements.

F-7

Deep Down, Inc.

Consolidated Statement of Cash Flows

For the Years Ended December 31, 2008 and 2007

	2008			2007
Cash flows from operating activities:
Net income (loss)	$	(4,322,893	)	$	952,509
Adjustments to reconcile net income to net cash used in operating activities:
Gain on extinguishment of debt		-			(2,000,000	)
Interest income		(54,975	)		-
Non-cash amortization of debt discount		1,816,847			1,780,922
Non-cash amortization of deferred financing costs		762,700			54,016
Share-based compensation		584,009			187,394
Bad debt expense		1,507,494			108,398
Depreciation and amortization		2,363,106			426,964
Loss on disposal of equipment		228,352			24,336
Deferred taxes payable		(855,708	)		-
Changes in assets and liabilities:
Lease receivable		-			(863,000	)
Accounts receivable		(3,087,260	)		(4,388,146	)
Prepaid expenses and other current assets		(493,100	)		(54,310	)
Inventory		(1,224,170	)		-
Finished goods		-			(502,253	)
Costs and estimated earnings in excess of billings on uncompleted contracts		1,482,698			-
Work in progress		(707,737	)		246,278
Accounts payable and accrued liabilities		(328,788	)		1,022,726
Billings in excess of costs and estimated earnings on uncompleted contracts		2,127,013			(1,970	)
Net cash used in operating activities	$	(202,412	)	$	(3,006,136	)
Cash flows used in investing activities:
Cash paid for acquisition of Flotation, net of cash acquired of $235,040		(22,161,864	)		-
Cash paid for acquisition of Mako, net of cash acquired of $280,841		(4,236,634	)		280,841
Cash deficit acquired in ElectroWave acquisition		-			(18,974	)
Cash paid for third party debt		-			(432,475	)
Cash received from sale of ElectroWave receivables		-			261,068
Cash paid for final acquisition costs		-			(242,924	)
Purchases of equipment		(4,803,795	)		(830,965	)
Restricted cash		239,145			(375,000	)
Net cash used in investing activities	$	(30,963,148	)	$	(1,358,429	)
Cash flows from financing activities:
Payment for cancellation of common stock		-			(250,000	)
Redemption of preferred stock		-			(250,000	)
Proceeds from sale of common stock, net of expenses		37,059,670			3,960,000
Proceeds from sales-type lease		587,000			276,000
Borrowings on debt - related party		-			150,000
Payments on debt - related party		-			(150,000	)
Borrowings on long-term debt		6,769,087			6,204,779
Increase in deferred financing fees		-			(442,198	)
Creation of debt discount due to lender's fees		-			(180,000	)
Payments of long-term debt		(12,960,953	)		(2,760,258	)
Net cash provided by financing activities	$	31,454,804		$	6,558,323
Change in cash and equivalents		289,244			2,193,758
Cash and cash equivalents, beginning of period		2,206,220			12,462
Cash and cash equivalents, end of period	$	2,495,464		$	2,206,220

See accompanying notes to consolidated financial statements.

F-8

Deep Down, Inc.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2008 and 2007

	2008			2007
Supplemental schedule of noncash investing and financing activities:
Warrants issued for acquisition of Flotation	$	121,793		$	-
Stock issued for acquisition of Flotation	$	1,422,857		$	-
Stock issued for acquisition of Mako	$	1,962,078		$	4,996,297
Receivable from lender - Prospect Capital Corporation	$	-		$	5,604,000
Payable to Mako Shareholders	$	-		$	(2,916,667	)
Non-cash increases to Mako Goodwill	$	(371,728	)	$	-
Deferred tax adjustment to Mako Goodwill	$	(1,840,563	)	$	-
Correction of common stock par value to paid in capital	$	-		$	114,750
Fixed assets purchased with capital lease	$	-		$	525,000
Fixed assets transferred from Inventory	$	502,253		$	110,181
Exchange of Series D preferred stock	$	4,419,244		$	-
Exchange of Series E preferred stock	$	-		$	3,366,778
Redemption of Series E preferred stock	$	-		$	4,935,463
Common stock issued for notes payable	$	-		$	560,000
Exchange of Series E preferred stock for subordinated debenture	$	500,000		$	-
Common shares issued as restricted stock	$	1,200		$	-
Creation of debt discount due to warrants issued to lender	$	-		$	1,479,189
Creation of deferred financing fee due to warrants issued to third party	$	-		$	159,066
Supplemental Disclosures:
Cash paid for interest	$	909,027		$	594,667
Cash paid for pre-payment penalties	$	446,413		$	-
Cash paid for taxes	$	332,009		$	114,970

See accompanying notes to consolidated financial statements.

F-9

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

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

Nature of Business

Deep Down, Inc., a 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 (“ElectroWave”), since its acquisition effective April 2, 2007, Mako Technologies, LLC, a Nevada limited liability company (“Mako”), since its acquisition effective December 1, 2007, and Flotation Technologies, Inc., a Maine corporation (“Flotation”), since its acquisition effective May 1, 2008.

Deep Down Delaware provides installation management, engineering services, support services and storage management services for the subsea controls, umbilicals and offshore pipeline industries. Deep Down Delaware also fabricates component parts for subsea distribution systems and assemblies.

ElectroWave offers products and services in the fields of electronic monitoring and control systems for the energy, military, marine and commercial business sectors.

Mako serves the growing offshore petroleum and marine industries with technical support services and products vital to offshore petroleum production, through rentals of its remotely operated vehicles (“ROV”), topside and subsea equipment and diving support systems used in diving operations, maintenance and repair operations, offshore construction, and environmental/marine surveys.

Flotation engineers, designs and manufactures deepwater buoyancy systems using high-strength FlotecTM syntactic foam and polyurethane elastomers.  Flotation’s  product offerings include distributed buoyancy for flexible pipes and umbilicals, drilling riser buoyance modules, CoreTecTM drilling riser buoyancy modules, ROVitsTM buoyancy, Hydro-Float mooring buoys, StablemoorTM low-drag ADCP deployment solution, Quick-Loc™ cable floats, HardballTM umbilical floats, Flotec™ cable and pipeline protection, InflexTM polymer bend restrictors, and installation buoyancy of any size and depth rating.

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, 2008 and 2007.

All significant inter-company transactions and balances have been eliminated in consolidation.

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.

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 income (loss) or stockholders' equity. For example, Deep Down reclassified a portion of total depreciation expense, $1,078,027 and $285,717, into Cost of sales from Operating expenses for the years ended December 31, 2008 and 2007, respectively. The remainder of depreciation expense for each respective year is reported in the Operating expenses section of the Statements of Operations.

F-10

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Cash and Cash Equivalents and Restricted Cash

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

Per the terms of its secured credit agreement with Prospect Capital Corporation, Deep Down was required to keep cash on hand equal to the previous six months interest payment on the debt arising under such credit agreement. At December 31, 2007, this amount approximated $375,000 which is reflected on the balance sheet as restricted cash. When the credit agreement was paid in June 2008, this amount was released from all restrictions.

At December 31, 2008, Deep Down has restricted cash of $135,855 related to a letter of credit for a vendor. See further details at Note 14 Commitments and Contingencies.

Fair Value of Financial Instruments

The estimated fair value of Deep Down’s financial instruments is as follows at December 31, 2008:

· Cash and equivalents, accounts receivable and accounts payable - the carrying amounts approximated fair value due to the short-term maturity of these instruments.

· Long-term debt - the carrying value of Deep Down’s debt instruments closely approximates the fair value due to the recent date of the debt and that the line of credit portion has a LIBOR-based rate.

Accounts Receivable

Deep Down provides 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, 2008 and 2007, Deep Down estimated its allowance for doubtful accounts to be $574,975 and $139,787, respectively. Bad debt expense totaled $1,507,494 and $110,569 for the years ended December 31, 2008 and 2007, respectively.

Concentration of Credit Risk

Deep Down maintains cash balances at several banks. Accounts at the institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. Deep Down had approximately $932,000 of uninsured cash balances at December 31, 2008.

As of December 31, 2008, four of Deep Down’s customers accounted for 20%, 11%, 9% and 4% of total accounts receivable, respectively. For the year ended December 31, 2008, Deep Down’s five largest customers accounted for 20%, 7%, 7%, 4% and 3% of total revenues, respectively.  

As of December 31, 2007, four of Deep Down’s customers accounted for 11%, 9%, 7% and 7% of total accounts receivable, respectively.  For the year ended December 31, 2007, Deep Down’s four largest customers accounted for 7%, 7%, 6% and 6% of total revenues, respectively.  

F-11

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Inventory and Work in Progress

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

	December 31, 2008		December 31, 2007
Raw materials	$	789,815	$	-
Finished goods		145,928		502,253
Work in progress		288,427		-
Total Inventory	$	1,224,170	$	502,253

Work in progress at December 31, 2008 and 2007 not presented in inventory above, 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 our billings are contingent upon satisfaction of a significant condition of sale (“milestone”), including but not limited to, FAT and customer approval. Amounts at December 31, 2008 and 2007 were $137,940 and $749,455, respectively.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the respective assets. Buildings are depreciated between 10 and 36 years, and leasehold improvements are amortized over the shorter of the assets' useful lives or lease terms. Equipment lives range from two to seven years, computers and electronic lives are generally from two to four 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 Deep Down’s policy to include depreciation expense on assets acquired under capital leases with depreciation expense on owned assets.

Goodwill and Intangible Assets

Goodwill represents the cost in excess of the fair value of net assets acquired in business combinations. SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), prescribes the process for impairment testing of goodwill on an annual basis or more often if a triggering event occurs. Goodwill is not amortized, and there were no indicators of impairment at December 31, 2008.

Deep Down evaluates the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include a significant adverse change in legal factors or in business or the business climate or unanticipated competition. When evaluating whether goodwill is impaired, Deep Down compares the fair value of the business to its carrying amount, including goodwill. The fair value of the reporting unit is estimated using an income, or discounted cash flow approach. If the carrying amount of the business exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount.

Deep Down’s intangible assets, net of accumulated amortization consist of $18.1 million in specifically identified intangible assets acquired in the purchase of the Flotation and Mako subsidiaries, including customer relationships, non-compete covenants, trademarks and various technology rights.  We are amortizing the intangible assets over their estimated useful lives on the straight line basis between three and forty years.

Long-Lived Assets

SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," requires that Deep Down periodically review the carrying amounts of its property and equipment and its finite-lived intangible assets to determine whether current events or circumstances indicate that such carrying amounts may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If it is determined that an impairment loss has occurred, the loss is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value.

F-12

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Lease Obligations

Deep Down leases land and buildings under noncancelable operating leases.  Deep Down leases its Channelview, Texas, operating location for Delaware and ElectroWave from an entity owned by the CEO and his wife, a Vice President and Director, in addition to several vehicles, modular office buildings and office equipment which are also recorded as operating leases and are expensed.  Additionally, beginning in February 2009, Deep Down leases its office headquarters in Houston, Texas, under a noncancellable operating lease. Mako leases office, warehouse and operating space in Morgan City, Louisana, under a noncancellable operating lease. Flotation entered into a noncancellable operating lease for warehouse facilities in Biddeford, Maine, in October 2008. Deep Down also leases a 100-ton mobile gantry crane under a capital lease, which is included with Property and Equipment on the consolidated balance sheet.

At the inception of a lease, Deep Down evaluates 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.

Deep Down accounts for tenant incentives received from its landlords in connection with certain of its operating leases as a deferred rent liability within lease obligations and amortizes such amounts over the relevant lease term. For leases that contain rent escalations, Deep Down records the total rent payable during the lease term, as determined above, on a straight-line basis over the term of the lease (including any “rent abatement” period beginning upon possession of the premises), and records the difference between the minimum rents paid and the straight-line rent as a lease obligation.

Revenue Recognition

Deep Down’s contract revenue is made up of customized product and service revenue.  Revenue from fabrication and sale of equipment is recognized upon transfer of title to the customer which is upon shipment or when customer-specific acceptance requirements are met. Service revenue is recognized as the service is provided.  Rental revenue is recognized pro-rata over the rental period based on daily or monthly rates.  Shipping and handling charges paid by Deep Down are included in cost of goods sold.

From time to time, Deep Down enters into large fixed price contracts which Deep Down determines that recognizing revenues for these contracts were appropriate using the percentage-of-completion method under Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”), measured by the percentage of costs incurred-to-date to estimated total costs for the contract.  This method is preferred because management considers the total cost to be the best available measure of progress on the contracts. 

Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as supplies, equipment repairs, employee travel and supervisor time. Selling, general and administrative costs are expensed as incurred.  Provisions for estimated losses on uncompleted contracts (if any) are accrued in the same period as the estimated loss is 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.  Change orders are accounted for in revenue and cost when it is probable that the costs will be recovered. In such circumstances where recovery is considered probable but the revenues cannot be reliably estimated, costs attributable to change orders are deferred pending re-negotiation of contract terms.

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 subsequently invoiced upon satisfaction of contractual requirements or “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 substantially all of the anticipated costs have been incurred and the items have been shipped to the customer.

In accordance with industry practice, 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 collection of amounts related to these contracts may extend beyond one year.

F-13

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Income Taxes

In accordance with SFAS No. 109, Accounting for Income Taxes, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

During 2008, Deep Down adopted the Financial Accounting Standards Board’s (“FASB”) Financial Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. FIN 48 changes the accounting for uncertainty in income taxes by creating a new framework for how companies should recognize, measure, present, and disclose uncertain tax positions in their financial statements. Under FIN 48, Deep Down may recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. FIN 48 also provides guidance on the reversal of previously recognized tax positions, balance sheet classifications, accounting for interest and penalties associated with tax positions, and income tax disclosures. See Note 12, “Income Taxes” for additional information, including the effects of adoption on Deep Down’s consolidated financial statements.

Stock-Based Compensation

Deep Down accounts for stock-based compensation issued to employees and non-employees as required by SFAS No. 123(R) “Share-based Payment” (“SFAS No. 123(R)”). Under these provisions, Deep Down records an expense based on the fair value of the awards utilizing the Black-Scholes pricing model for options and warrants.  Additionally, Deep Down continues to use the simplified method related to employee option grants as allowed by Staff Accounting Bulletin ("SAB") 110, Share-Based Payment.

SFAS No. 123(R) prohibits recognition of a deferred tax asset for an excess tax benefit that has not been realized. The Company will recognize a benefit from stock-based compensation in equity if an incremental tax benefit is realized by following the ordering provisions of the tax law.

Earnings (Loss) per Common Share

SFAS No. 128, Earnings (Loss) Per Share (“EPS”) requires earnings (loss) per share to be calculated and reported as both basic EPS and diluted EPS. 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 by the weighted average number of common shares and dilutive common stock equivalents (convertible notes and interest on the notes, stock awards and stock options) outstanding during the period. Dilutive EPS reflects the potential dilution that could occur if options 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:

	For the Twelve Months Ended
	December 31,
	2008			2007
Numerator:
Net income (loss)	$	(4,322,893	)	$	952,509
Denominator:
Weighted average shares outstanding		142,906,616			73,917,190
Effect of dilutive securities		-			30,432,265
Denominator for diluted earnings per share		142,906,616			104,349,455
Basic earnings per share	$	(0.03	)	$	0.01
Diluted earnings per share	$	(0.03	)	$	0.01

Potentially dilutive securities representing 501,615 shares of common stock for the year ended December 31, 2008 were excluded from the computation of diluted earnings per share for this year because their effect would have been anti-dilutive.

F-14

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Dividends

Deep Down has no formal dividend policy or obligations. Under the terms of a $2 million borrowing facility from Whitney National Bank signed on November 11, 2008, we are restricted from paying cash dividends on our common stock, though the terms do allow that we may from time to time make cash distributions to our shareholders if no default exists prior to or after giving effect to any such distribution. Deep Down intends to retain operating capital for the growth of the company operations.

Advertising costs:

Advertising and promotion costs, which totaled $412,202 and $114,209 during the year ended December 31, 2008 and 2007, respectively, are expensed as incurred.

Segment information

For the fiscal year ended December 31, 2008, the operations of Deep Down’s subsidiaries have been aggregated into a single reporting segment under the provisions of SFAS 131 “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”). We determined that the operating segments of Delaware, ElectroWave, Mako and Flotation may be aggregated into a single reporting segment because aggregation is consistent with the objective and basic principles of paragraph 17 of SFAS 131. While the operating segments have different product lines, they are very similar with regards to the five criteria for aggregation. 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 as part of our service revenue to the customer. Additionally, the segments have similar customers and distribution methods, and their economic characteristics were similar with regard to their gross margin percentages for the fiscal year ended December 31, 2008.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value under generally accepted accounting procedures and expands disclosures on fair value measurements. This statement applies under previously established valuation pronouncements and does not require the changing of any fair value measurements, though it may cause some valuation procedures to change. Under SFAS No. 157, fair value is established by the price that would be received to sell the item or the amount to be paid to transfer the liability of the asset as opposed to the price to be paid for the asset or received to transfer the liability. Further, it defines fair value as a market specific valuation as opposed to an entity specific valuation, though the statement does recognize that there may be instances when the low amount of market activity for a particular item or liability may challenge an entity’s ability to establish a market amount. In the instances that the item is restricted, this pronouncement states that the owner of the asset or liability should take into consideration what affects the restriction would have if viewed from the perspective of the buyer or assumer of the liability. This statement is effective for all assets valued in financial statements for fiscal years beginning after November 15, 2007. Deep Down adopted SFAS 157 for financial assets and liabilities in 2008 with no material impact to the consolidated financial statements but with additional required consolidated financial statement footnote disclosures. Deep Down does not anticipate the application of SFAS 157 to nonfinancial assets and nonfinancial liabilities will have a material impact on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141(R)”) and No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 141(R) and SFAS No. 160 are products of a joint project between the FASB and the International Accounting Standards Board.  The revised standards continue the movement toward the greater use of fair values in financial reporting. SFAS No. 141(R) will significantly change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. These changes include the expensing of acquisition related costs and restructuring costs when incurred, the recognition of all assets, liabilities and noncontrolling interests at fair value during a step-acquisition, and the recognition of contingent consideration as of the acquisition date if it is more likely than not to be incurred.  SFAS No. 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity.  SFAS No. 141(R) and SFAS No. 160 are effective for both public and private companies for fiscal years beginning on or after December 15, 2008 (January 1, 2009 for companies with calendar year-ends). SFAS No. 141(R) will be applied prospectively. SFAS No. 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS No. 160 shall be applied prospectively. Early adoption is prohibited for both standards.  Deep Down will apply the requirements of SFAS No. 141(R) to all business combinations after January 1, 2009. SFAS No. 160 will have no impact on Deep Down’s financial statements as the Company has no minority interests.

F-15

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

In December 2007, the SEC staff issued SAB 110, Share-Based Payment, which amends SAB 107, Share-Based Payment, to permit public companies, under certain circumstances, to use the simplified method in SAB 107 for employee option grants after December 31, 2007. Use of the simplified method after December 2007 is permitted only for companies whose historical data about their employees’ exercise behavior does not provide a reasonable basis for estimating the expected term of the options. Deep Down did not have stock options outstanding until 2007, thus does not have adequate historical data to determine option lives. Therefore, Deep Down will continue to use the simplified method as allowed under the provision of SAB 110.

In June 2008, EITF 07-5, “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” was issued. This standard triggers liability accounting on all options and warrants exercisable at strike prices denominated in any currency other than the Company’s functional currency. This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Deep Down is currently evaluating the impact that EITF 07-5 will have on its consolidated financial position or result of operations.

In June 2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4 is to provide transition guidance for conforming changes made to EITF No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Issue is effective for financial statements issued for fiscal years ending after December 15, 2008. Early application is permitted. Management is currently evaluating the impact of adoption of EITF No. 08-4.

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:

	December 31, 2008			December 31, 2007
Costs incurred on uncompleted contracts	$	2,114,714		$	-
Estimated earnings		4,969,444			-
		7,084,158			-
Less: Billings to date		8,691,464			188,030
	$	(1,607,306	)	$	(188,030	)
Included in the accompanying consolidated balance sheets under the following captions:
Costs and estimated earnings in excess of billings on uncompleted contracts		707,737			-
Billings in excess of costs and estimated earnings on uncompleted contracts		(2,315,043	)		(188,030	)
	$	(1,607,306	)	$	(188,030	)

The asset balance of $707,737 at December 31, 2008 is related to a large contract that was completed during December 2008 except for the final documentation. This retention amount is in accordance with applicable provisions of engineering and construction contracts and became due upon completion of contractual requirements in January 2009. Deep Down has recognized approximately 90% of the related revenue based on the percentage-of-completion method. The billings in excess of costs and estimated earnings on uncompleted contracts of $2,315,043 at December 31, 2008 consists mainly of a deposit on a large job that will be completed in fiscal year 2009.

F-16

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Note 3:          Acquisitions

Purchase of Mako Technologies, Inc.

Effective December 1, 2007, Deep Down purchased 100% of the common stock of Mako Technologies, Inc. for $11,307,000.  Pursuant to the agreement and plan of merger, two installments were paid to the Mako shareholders. The first installment of $2,916,667 in cash and 6,574,074 restricted shares of common stock of Deep Down, valued at $0.76 per share ($4,996,297), were paid on January 4, 2008. The second installment of 2,802,969 restricted shares of common stock of Deep Down, valued at $0.70 per share ($1,962,090), was issued on March 28, 2008. The final cash payment of $1,243,571 which was paid on April 11, 2008, was included in the “Payable to Mako shareholders” on the historical consolidated balance sheets at December 31, 2007. The total purchase price of $11,307,000 included $188,369 of transaction expenses.

The first payment to the shareholders of Mako was reflected on the accompanying consolidated balance sheet as of December 31, 2007 due to the certainty of payment and the intention of all the parties to complete this payment prior to fiscal year end.  The second payment of $3,205,667 was reflected as a payable to shareholders due to the timing of payments in the subsequent fiscal year. The financing with Prospect was also reflected as of December 31, 2007 since the funds were generally used to pay the shareholders of Mako. The net proceeds from Prospect of $5,604,000 are offset by the first cash payment to shareholders of Mako of $2,916,667 resulting in a balance of $2,687,333 reflected as “Receivable from Prospect,” on the consolidated balance sheet at December 31, 2007.

The acquisition of Mako was accounted for using the purchase method of accounting in accordance with SFAS 141, “Business Combinations” (“SFAS 141”) since Deep Down acquired substantially all of the assets, certain liabilities, employees, and business of Mako.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

Purchase of Mako:
Cash and cash equivalents	$	280,841
Accounts receivable		1,411,420
Construction in progress		279,590
Prepaid expenses		179,583
Property, plant and equipment, net		2,994,382
Intangibles		4,371,000
Goodwill		5,354,840
Total assets acquired	$	14,871,656
Accounts payable and accrued expenses		904,709
Deferred tax liability		1,840,563
Long term debt		819,384
Total liabilities assumed	$	3,564,656
Net assets acquired	$	11,307,000

Upon finalization of final tax returns, Deep Down determined that $1,840,563 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 allocation of the purchase price has been finalized upon the receipt of management’s review of final amounts and final tax returns.

F-17

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Purchase of Flotation Technologies, Inc.

On June 5, 2008, Deep Down completed the acquisition of Flotation, pursuant to the Stock Purchase Agreement entered into on April 17, 2008. Deep Down purchased Flotation from three individual shareholder members of the same family and purchased related technology from an entity affiliated with the selling shareholders. Deep Down assumed effective control and dated the acquisition for accounting purposes on May 1, 2008. As such, the consolidated statement of operations include the operating results of Flotation from May 1, 2008 to December 31, 2008.

The acquisition of Flotation has been accounted for using the purchase method of accounting in accordance with SFAS 141 since Deep Down acquired substantially all of the assets, certain liabilities, employees, and business of Flotation.

The purchase price of Flotation was $23,941,554 and consisted of $22,100,000 cash and 1,714,286 shares of common stock valued at $0.83 per common share plus transaction costs of $296,904. In addition, warrants to purchase 200,000 shares of common stock at $0.70 per share were issued to an entity affiliated with the selling shareholders for the acquisition of the 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. Deep Down valued the warrants at $121,793 based on the Black-Scholes option pricing model. The purchase price may be adjusted upward or downward, dependant on certain working capital targets. Both parties are in preliminary negotiations concerning this adjustment and as of the current date, there has been no agreement as to the adjustment.

Deep Down sold 57,142,857 shares to accredited investors on June 5, 2008, for approximately $37,000,000 in net proceeds, at a price of $0.70 per share. Deep Down used $22,100,000 in proceeds from this private placement to fund the cash requirement of the Flotation acquisition.

Deep Down also issued 600,000 incentive common stock purchase options to employees of Flotation for their continued services with an exercise price of $1.15 per share. The employee options vest one-third of the original amount each year and may be exercised in whole or in part after vesting. Deep Down valued the options at $264,335 based on the Black-Scholes option pricing model, and will recognize the related compensation cost ratably over the requisite service period and not in the purchase price of the transaction.

The table below reflects the composition of the purchase price as noted above:

Summary of purchase price:
Cash	$	22,100,000
Certain transaction costs		296,904
Fair market value of common stock		1,422,857
Fair market value of warrants issued		121,793
Total purchase price	$	23,941,554

The purchase price of $23,941,554 was in exchange for all of the outstanding capital stock of Flotation. The acquisition price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values with the excess being recorded in goodwill.  The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition on May 1, 2008:

Summary of net assets acquired:
Cash and cash equivalents	$	235,040
Accounts receivable		2,105,519
Construction in progress		871,183
Prepaid expenses		15,904
Property, plant and equipment, net		4,907,752
Intangibles		14,797,000
Goodwill		2,141,469
Total assets acquired	$	25,073,867
Accounts payable and accrued liabilities		1,132,313
Total liabilities assumed	$	1,132,313
Net assets acquired	$	23,941,554

F-18

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Deep Down obtained an independent valuation of the assets and liabilities as of the purchase date of May 1, 2008. Based on the independent valuation, the fair value of the property, plant and equipment was increased by approximately $1,258,000 and will be depreciated over estimated useful lives of 3 to 40 years using the straight-line method.

Deep Down has estimated the fair value of Flotation’s identifiable intangible assets as follows:

	Estimated Fair Value	Useful Life
Trademarks	$                   2,039,000	40
Technology	11,209,000	25
Non-compete covenant	879,000	3
Customer relationship	670,000	25
	$                 14,797,000

The table below reflects the assumptions used for warrant and option grants related to Flotation during the year ended December 31, 2008:

Dividend yield	0%
Risk free interest rate	2.52% - 2.84%
Expected life of options	2-3 years
Expected volatility	51.7% - 61.3%

The allocation of the purchase price was based on preliminary unaudited estimates.  Estimates and assumptions are subject to change upon the receipt of management’s review of audited final amounts and final tax returns. This final evaluation of net assets acquired will be offset by a corresponding change in goodwill and is expected to be complete within one year of the purchase date.

Unaudited pro forma condensed combined financial statements

The unaudited pro forma combined condensed financial statements are presented for informational purposes only and are not necessarily indicative of the results of operations that actually would have been achieved had each acquisition been consummated as of that time, nor are they intended to be a projection of future results.

The unaudited condensed combined pro forma results were as follows:

F-19

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Unaudited Pro Forma Combined Condensed Statements of Operations
For the Year Ended December 31, 2008
	Historical
				Four Months							Combined
				April 30,			Flotation				Condensed
				2008			Pro Forma				Pro Forma
	Deep Down			Flotation			Entries				Results
Revenues	$	35,769,705		$	5,941,472		$	-			$	41,711,177
Cost of sales		21,686,033			4,005,179			-				25,691,212
Gross profit		14,083,672			1,936,293			-				16,019,965
Total operating expenses		15,575,519			968,179			302,416		(d/e)		16,846,114
Operating income (loss)		(1,491,847	)		968,114			(302,416	)			(826,149	)
Total other expense		(3,873,418	)		(57,335	)		-				(3,930,753	)
Income (loss) from
continuing operations		(5,365,265	)		910,779			(302,416	)			(4,756,902	)
Benefit from (provision for) income taxes		1,042,372			-			(225,094	)	(f)		817,278
Net income (loss)	$	(4,322,893	)	$	910,779		$	(527,510	)		$	(3,939,624	)
Basic earnings (loss) per share	$	(0.03	)								$	(0.02	)
Shares used in computing
basic per share amounts		142,906,616										168,682,522
Diluted earnings (loss) per share	$	(0.03	)								$	(0.02	)
Shares used in computing
diluted per share amounts		142,906,616										168,682,522
See accompanying notes to unaudited pro forma combined condensed financial statements.

The historical results of Deep Down for the year ended December 31, 2008 contain eight months of results for Flotation operations since its acquisition was effective May 1, 2008, thus the four months ending April 30, 2008 are presented as pro forma. The weighted-average shares of stock used in computing basic and diluted per share amounts give effect to the 2,802,969 Mako shares issued on March 28, 2008 and the total of 58,857,143 common shares of Deep Down issued in June 2008, of which such amount 57,142,857 were issued in connection with the Private Placement and 1,714,286 were issued to Flotation’s prior shareholders, as if all these shares were issued January 1, 2008. Taxes are calculated on the pro forma entries at Deep Down’s estimated combined effective rate of 37%.

F-20

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Unaudited Pro Forma Combined Condensed Statement of Operations
For the Year Ended December 31, 2007
	Historical
				Mako
	Deep Down			Eleven			Flotation										Combined
	Year Ended			Months Ended			Year Ended		Mako				Flotation				Condensed
	December 31,			November 30,			December 31,		Pro Forma				Pro Forma				Pro Forma
	2007			2007			2007		Entries				Entries				Results
Revenues	$	19,389,730		$	5,494,388		$	13,410,002	$	-			$	-			$	38,294,120
Cost of sales		13,306,086			2,298,597			8,117,600		-				-				23,722,283
Gross profit		6,083,644			3,195,791			5,292,402		-				-				14,571,837
Total operating expenses		4,425,800			2,455,728			2,001,047		448,679		(a)		907,247		(d/e)		10,238,501
Operating income (loss)		1,657,844			740,063			3,291,355		(448,679	)			(907,247	)			4,333,336
Total other income (expense)		(335,662	)		(65,702	)		766,477		(1,059,573	)	(b)		-				(694,460	)
Income (loss) from continuing operations		1,322,182			674,361			4,057,832		(1,508,252	)			(907,247	)			3,638,876
Benefit from (provision for) income taxes		(369,673	)		(319,432	)		-		558,053				(1,165,716	)	(f)		(1,296,768	)
Net income (loss)	$	952,509		$	354,929		$	4,057,832	$	(950,199	)		$	(2,072,963	)		$	2,342,108
Basic earnings per share	$	0.01															$	0.02
Shares used in computing basic per share amounts		73,917,190														(c/g)		142,133,381
Diluted earnings per share	$	0.01															$	0.01
Shares used in computing diluted per share amounts		104,349,455														(c/g)		172,565,646
See accompanying notes to unaudited pro forma combined condensed financial statements.

The Unaudited Pro Forma Combined Condensed Statements include the following pro forma assumptions and entries for Mako (net of estimated taxes at Deep Down’s estimated combined effective rate of 37%):

(a)   Amortization of the intangible assets at a rate of $40,789 per month for the eleven months ended November 30, 2007. One month is included in the historical Deep Down total for the year ended December 31, 2007.

(b)   Represents cash interest plus amortization of deferred financing costs and debt discounts for the Credit Agreement.  Interest was payable at 15.5% on the outstanding principal, and the related fees were amortized using the effective interest method over the four-year life of the loan.

(c)   A total of 9,377,043 shares were issued for the total transaction. These pro forma amounts give effect as if shares were issued January 1, 2007.

The Unaudited Pro Forma Combined Condensed Statements include the following pro forma assumptions and entries for Flotation:

(d)   Recognition of stock based compensation from employee stock options issued in connection with the acquisition of Flotation. Deep Down estimated $7,343 per month for the respective time periods.

(e)   Amortization of the intangible assets at a rate of $68,261 per month based on the remaining useful lives in the table above.

(f)   Represents estimated income tax accruals for the historical income plus all pro forma adjustments for the respective periods at Deep Down’s estimated combined effective rate of 37%. Flotation was an S-Corp, and as such did not accrue income taxes in its historical financial statements.

(g)   A total of 58,857,143 common shares of Deep Down were issued; 57,142,857 in connection with the Private Placement, and 1,714,286 to Flotation shareholders. These pro forma amounts give effect as if shares were issued January 1, 2007.

F-21

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Note 4:          Property and Equipment

Property and equipment consisted of the following as of December 31, 2008 and 2007:

	December 31, 2008			December 31, 2007			Useful Life
Land	$	461,955		$	-			-
Building		3,201,301			195,305		7 - 36 years
Leasehold improvements		344,485			75,149		2 - 5 years
Furniture and fixtures		160,443			63,777		2 - 7 years
Vehicles and trailers		120,847			112,161		3 - 5 years
Equipment		3,897,475			1,809,474		2 - 10 years
Rental Equipment		4,694,681			3,144,559		7 - 10 years
Computer and office equipment		473,518			194,693		2 - 5 years
Construction in progress		2,130,068			196,157
Total		15,484,773			5,791,275
Less: Accumulated depreciation		(1,685,577	)		(422,314	)
Property and equipment, net	$	13,799,196		$	5,368,961

Depreciation expense for the years ended December 31, 2008 and 2007 was $1,314,138 and $398,611, respectively. Deep Down recorded $1,078,027 and $285,717, respectively, of the total depreciation as Cost of Sales on the accompanying statements of operations. Accumulated depreciation on equipment under capital lease is $137,500 and $62,500 at December 31, 2008 and 2007, respectively.

During the year ended December 31, 2008, we leased additional property from JUMA, LLC, a related party, and incurred $342,430 in leasehold improvements. See additional discussion in Note 13 regarding the nature of the related party.

In connection with the purchase of Flotation, Deep Down acquired land along with a building and improvements with a fair market value of approximately $3,300,000. This 3.61 acre site in Maine houses a 46,925 square foot light industrial manufacturing facility.

On June 30, 2008, Deep Down transferred equipment with a cost basis of $502,253 from inventory to its rental equipment fleet.

At December 31, 2008, construction in progress represents assets that are not ready for service or are in the construction stage. The balance includes approximately $1,509,000 for a new ROV which was completed in January 2009. Deep Down will begin depreciating these assets once they are put into use.

Note 5:          Other Assets

Other assets consisted of the following as of December 31, 2008 and 2007:

	December 31, 2008		December 31, 2007
Patents	$	174,434	$	5,172
Capitalized R&D		270,097		270,097
Deferred financing costs, net of amortization of $0 and $54,560		-		762,700
Lease receivable, long term				173,000
Other		13,305		545
Total other assets	$	457,836	$	1,211,514

See further discussion of the deferred financing costs in Note 7 under the heading Secured Credit Agreement.

F-22

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Note 6:          Intangible Assets and Goodwill

Amounts allocated to intangible assets are amortized on a straight-line basis over their estimated useful lives. Deep Down is in the process of finalizing the valuations of certain intangible assets related to the Flotation acquisition; consequently, the initial allocations of the respective purchase price amounts are preliminary and subject to change for a period of one year following the acquisition, although management believes amounts are materially accurate as of December 31, 2008. Estimated intangible asset values, net of recognized amortization expense include the following:

		December 31, 2008							December 31, 2007
	Estimated	Gross Carrying		Accumulated			Net Carrying		Gross Carrying		Accumulated			Net Carrying
	Useful Life	Value		Amortization			Amount		Value		Amortization			Amount
Customer relationship	8-25 Years	$	3,515,000	$	(403,131	)	$	3,111,869	$	2,869,000	$	(11,157	)	$	2,857,843
Non-Compete Covenant	3-5 Years		1,334,000		(293,916	)		1,040,084		458,000		(7,633	)		450,367
Trademarks	25-40 Years		3,110,000		(80,393	)		3,029,607		1,071,000		(9,563	)		1,061,437
Technology	25 Years		11,209,000		(299,880	)		10,909,120		-		-			-
Total		$	19,168,000	$	(1,077,320	)	$	18,090,680	$	4,398,000	$	(28,353	)	$	4,369,647

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

Years ended December 31,:
2009	$	1,308,588
2010		1,308,588
2011		1,113,243
2012		1,008,017
2013		924,588
Thereafter		12,427,656
	$	18,090,680

The following table presents goodwill as of the dates indicated, as well as changes in the account during the period shown:

	Amount
Carrying amount as of December 31, 2007	$	10,594,144
Goodwill acquired during the year		4,430,156
Carrying amount as of December 31, 2008	$	15,024,300

The increases to goodwill include the adjustment to the Mako purchase price due to the finalization of tax returns as discussed in Note 3 above. Deep Down determined that approximately $1,840,000 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.

F-23

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Note 7:          Long-Term Debt

At December 31, 2008 and 2007 long-term debt consisted of the following:

	December 31, 2008			December 31, 2007
Bank term loan	$	1,150,000		$	-
Secured credit agreement		-			12,000,000
Debt discount, net of amortization of $0 and $135,931 respectively		-			(1,703,258	)
Other bank loans		15,087			916,044
Total secured credit agreements and bank debt		1,165,087			11,212,786
6% Subordinated Debenture		500,000			-
Capital lease obligation		436,300			481,209
Total long-term debt		2,101,387			11,693,995
Current portion of long-term debt		(382,912	)		(995,177	)
Long-term debt, net of current portion	$	1,718,475		$	10,698,818

Revolving Credit Line and Term Loan

On November 11, 2008, Deep Down entered into a new Credit Agreement (the “Revolver”) with Whitney National Bank (“Whitney Bank”) as lender. The Revolver provides a commitment to lend to Deep Down of the lesser of $2,000,000 and 80% of eligible receivables (generally defined as current due accounts receivables in which the lender has a first priority security interest).  All of the commitment under the Revolver is also available in commitments for the lender to issue letters of credit for the benefit of Deep Down. Outstanding amounts under the Revolver generally will bear interest at rates based on the British Bankers Association LIBOR Rate for dollar deposits with a term of one month plus an applicable rate of 2.00% to 3.00% based on the leverage ratio of Deep Down.  Accrued interest under the Revolver is payable monthly. Unused portions of the commitment generally accrue a commitment fee of 0.25% to 0.50% based on the leverage ratio of Deep Down and such fee is due and payable by Deep Down quarterly.  The Revolver has a termination date of November 11, 2010. At December 31, 2008, Deep Down has not drawn on any amounts available under the Revolver.

On December 18, 2008, Deep Down entered into an amendment to the Revolver, (the “Term Loan”) with Whitney Bank and received an advance of $1,150,000 on that date.  The Term Loan provides for a 3-year term loan with an annual interest rate of 6.5%, and monthly principal and interest payments paid in arrears of $35,246 per month beginning February 1, 2009, with a maturity of December 18, 2011 (unless accelerated by default under terms of the Revolver). Funds were used towards the purchase price of a new Super Mohawk 21 ROV for use in Deep Down's operations, which was delivered in January 2009. This Term Loan replaces the provision in the Revolver for a five-year term loan, and is subject to the terms and conditions of the Revolver.

Each of Deep Down’s subsidiaries has guaranteed the obligations of Deep Down under the Revolver and as such, Deep Down’s obligations in connection with the Revolver are secured by a first priority lien generally on all of their non real property assets. The terms of the Revolver and the related loan documents subject Deep Down to several covenants, including requirements to: provide security generally on all of Deep Down's non real property assets, cause Deep Down’s subsidiaries to provide guarantees, provide certain financial information to the lender, give inspection rights to the lender, and apply insurance and eminent domain proceeds to repayment of amounts outstanding under the Revolver.  Furthermore, the terms of the Revolver impose restrictions on the ability of Deep Down and its subsidiaries to incur further indebtedness or liens, to make investments in other businesses, to pay dividends, to engage in mergers, acquisitions or dispositions or other lines of businesses, to enter into transactions with their affiliates, to prepay other indebtedness or to make any change in their respective fiscal year or method of accounting (other than changes as required by generally accepted accounting principles in the U.S.).

F-24

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Under the Revolver, Deep Down is required to meet certain covenants and restrictions.  The financial covenants are reportable each quarter, beginning with the quarter ending March 31, 2009.  Financial covenants include maintaining total debt to consolidated EBITDA below 2.5 to 1, consolidated EBITDA to consolidated net interest expense and principal payments on the total debt greater than 1.5 to 1, and tangible net worth in excess of $20,000,000 as each term is defined in the Credit Agreement. Other covenants include limitations on issuance of common stock, liens, transactions with affiliates, additional indebtedness and permitted investments, among others.  

Secured Credit Agreement

On August 6, 2007, Deep Down entered into a $6,500,000 secured credit agreement, (the “Credit Agreement”) with Prospect Capital Corporation (“Prospect”) and received an advance of $6,000,000 on that date.  The Credit Agreement provided for a 4-year term, an annual interest rate of 15.5%, with the ability to defer up to 3.0% of interest through a PIK (paid-in-kind) feature and principal payments of $75,000 per quarter beginning September 30, 2008, with the remaining balance outstanding due August 6, 2011. Interest payments were payable monthly, in arrears, on each month-end commencing on August 31, 2007.

On December 21, 2007, Deep Down entered into an amendment to the Credit Agreement (the “Amendment”) to provide the funding for the cash portion of the purchase of Mako. The total commitment available under the Amendment was increased to $13,000,000. Amounts borrowed were $6,000,000 on the increased line for a total of $12,000,000 outstanding. Quarterly principal payments increased to $250,000 beginning September 30, 2008.  

Terms of the Credit Agreement also included a detachable warrant to purchase up to 4,960,585 shares of common stock at an exercise price of $0.507 per share.  The warrant had a five-year term and became exercisable on the earlier of the two-year anniversary of the original financing, or upon payment in full of the outstanding balance. The relative fair value of the warrant was estimated to be $1,479,189 based on the Black Scholes pricing model and was recorded as a discount to the note. The assumptions used in the model included (1) expected volatility of 52.7%, (2) expected term of 3.5 years, (3) discount rate of 5% and (4) zero expected dividends. 

Additionally, in connection with the initial advance in August 2007 and the additional advance under the Amendment, Deep Down pre-paid $180,000, respectively, in points to the lender which were each treated as discounts to the note. 

The discounts associated with the value of the warrants and the cash-based expenses were amortized into interest expense over the life of the Credit Agreement using the effective interest rate method. A total of $1,703,258 and $135,931 of debt discount was amortized into interest expense for the years ended December 31, 2008 and 2007, respectively. The fiscal year 2008 amount included acceleration of the remaining balance due to early payoff of the debt as discussed below.

Deep Down capitalized a total of $555,314 in deferred financing costs related to the original amounts borrowed under the Credit Agreement.  Of this amount, $442,194 was paid in cash to various third parties related to the financing, and the remainder of $113,120 represents the Black Scholes valuation of warrants issued to one of these third party vendors.  The warrant is a detachable warrant to purchase up to 320,000 shares of common stock at an exercise price of $0.75 per share. The warrant has a five-year term and becomes exercisable on the earlier of the two-year anniversary of the original financing, or upon payment in full of the outstanding balance. The assumptions used in the Black Scholes model included (1) expected volatility of 52.7%, (2) expected term of 3.5 years, (3) discount rate of 5% and (4) zero expected dividends.  

In connection with the second advance under the Credit Agreement on January 4, 2008, Deep Down capitalized an additional $261,946 in deferred financing costs. Of this amount, $216,000 was paid in cash to various third parties related to the financing, and the remainder of $45,946 represents the Black-Scholes valuation of warrants issued to one of these third party vendors. The detachable warrant was granted to purchase up to 118,812 shares of common stock at an exercise price of $1.01 per share.  The warrant had a five-year term and is immediately exercisable. The fair value of the warrant was estimated to be $45,946 based on the Black Scholes pricing model, using the following assumptions: (1) expected volatility of 61.3%, (2) expected term of 2.5 years, (3) discount rate of 3.2% and (4) zero expected dividends.  

The deferred financing costs associated with the value of the warrants and the cash-based expenses were amortized into interest expense over the life of the Credit Agreement using the effective interest rate method.  A total of $762,700 and $54,560 of deferred financing cost was amortized into interest expense for the years ended December 31, 2008 and 2007, respectively. The fiscal year 2008 amount included acceleration due to early payoff of the debt as discussed below.

F-25

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Cash interest paid for the years ended December 31, 2008 and 2007 was $821,500 and $377,167, respectively. Deep Down paid the full 15.5% and did not exercise the PIK feature for the monthly periods through June 2008 when the debt was paid in full, see details below. Under the Credit Agreement, Deep Down was required to meet certain covenants and restrictions as well as maintain a debt service reserve account.  As of December 31, 2007, $375,000 was classified as “Restricted cash” on the accompanying consolidated balance sheets. 

On June 12, 2008, Deep Down paid $12,492,912 to Prospect to pay off the balance outstanding under the Credit Agreement and related interest and early termination fees. In connection with the early payoff, Deep Down accelerated the remaining deferred financing costs totaling $661,149 and recorded this charge as interest expense. Additionally, $1,490,955 in debt discounts were accelerated and recorded as interest expense. Early termination fees of $446,412 were recognized as a loss on early extinguishment of debt. Since the warrants issued in connection with the original Credit Agreement and the Amendment dated January 4, 2008 were detachable, there was no change to these equity instruments. On July 3, 2008, Prospect exercised their outstanding 4,960,585 warrants in a cashless exercise for a total of 2,618,129 shares of Deep Down common stock.

Other Bank Loans

In December 2008, Deep Down entered into an auto loan with 36 monthly payments of $454, including interest at 5.5%, beginning January 22, 2009 through December 22, 2011. The loan is collateralized by the vehicle purchased.

In January 2008, in accordance with the terms of the purchase of Mako, Deep Down paid $916,044 of notes payable plus accrued interest of $2,664. These notes were payable to various banks, with interest rates between 7.85% and 8.3% and were collateralized by Mako assets and life insurance policy.

Exchange of Series E Redeemable Exchangeable Preferred Stock to 6% Subordinated Debenture

On March 31, 2008, 500 shares of the Series E Redeemable Exchangeable Preferred Stock were exchanged into a 6% Subordinated Debenture (the “Debenture”) in an outstanding principal amount of $500,000.  The Debenture has a fixed interest rate of 6% interest per annum to be paid annually on March 31st through maturity on March 31, 2011. See the additional discussion of the terms of the Series E preferred stock at Note 8. Interest expense on the Debenture of $22,603 has been recognized and recorded as an accrued liability for the year ended December 31, 2008.

Capital lease

In February 2007, Deep Down purchased under a seller-financed capital lease, a 100-ton mobile gantry crane and related equipment.  The equipment was delivered and placed into service in March 2007.  In accordance with SFAS 13 “Accounting for Leases” as amended, the lease was capitalized and the lease obligation and related assets recognized on Deep Down’s consolidated balance sheet.  The total value of the lease payments discounted at an 11.2% interest rate, or $525,000, was capitalized.  The off-setting lease obligation is $436,300 at December 31, 2008. See Note 14 regarding the future minimum payments due on the capital lease.

Payment table

Aggregate principal maturities of long-term debt, excluding capital leases which are detailed in Note 14, were as follows for years ended December 31:

Years ended December 31,:
2009	$	332,720
2010		385,747
2011		911,564
2012		35,056
	$	1,665,087

F-26

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Note 8:          Preferred Stock

Series D Redeemable Convertible Preferred Stock Classified as Temporary Equity Instruments

During the first quarter of fiscal year 2008, the outstanding 5,000 shares of Series D redeemable convertible preferred stock (“Series D”) were converted into 25,866,518 shares of common stock.  The Series D had a face value and liquidation preference of $1,000 per share, no dividend preference, and were convertible into shares of common stock determined by dividing the face amount by a conversion price of $0.1933.  The Series D had been valued at inception at $4,419,244 based on the Black-Scholes fair value of the Series D.

Series E and G Classified as Liabilities

The Series E and G redeemable exchangeable preferred stock (“Series E” and “Series G”) had a face value and liquidation preference of $1,000 per share, no dividend preference, and were exchangeable at the holder’s option into 6% Subordinated Notes due three years from the date of the exchange. These shares carried voting rights equal to 690 votes per share. The Series E and G preferred stock were valued based on the discounted value of their expected future cash flows, using a discount rate of 20%.  Deep Down evaluated the Series E and G preferred stock and classified them as debt instruments from the date of issuance due to the fact that they were exchangeable at the option of the holder thereof into Notes.  The difference between the face value of the Series E and G preferred stock and the discounted book value recorded on the balance sheet, or original issue discount, was deemed to be non-cash interest expense from the date of issuance through the term of the Stock.

Deep Down was accreting this original issue discount using the effective interest rate method.  Interest expense related to the accretion of the original issue discount totaled $113,589 and $1,644,990 for the years ended December 31, 2008 and 2007, respectively.

On March 31, 2008, 500 shares of the Series E preferred stock were exchanged into a 6% Subordinated Debenture in an outstanding principal amount of $500,000.  The Series E had a face value and liquidation preference of $1,000 per share, no dividend preference, and were exchangeable at the holder’s option into a 6% debenture due three years from the date of the exchange. Upon exchange into the Debenture, Deep Down recorded $113,589 in interest expense for the accretion of the Series E up to face value. See additional discussion of the Subordinated Debenture in Note 7.

In February 2007, Deep Down redeemed 250 shares of Series E preferred stock held by its CEO at the face value of $1,000 per share for a total of $250,000.  Deep Down accreted the remaining discount of $72,799 attributable to such shares on the date of redemption as interest expense.

In May 2007, Deep Down executed a Securities Redemption Agreement with the former CFO of Deep Down to redeem 4,000 shares of Series E preferred stock at a discounted price of $500 per share for a total of $2,000,000.  The discount of $500 per share from the face value of $1,000 was accounted for as a substantial modification of debt, thereby generating a gain on extinguishment of debt which is reflected in other income.  Deep Down accreted the remaining discount of $1,017,707 attributable to such shares on the date of redemption as interest expense.  

On September 13, 2007, Deep Down redeemed 2,250 shares of Series E preferred stock owned by the CEO and director, and his wife, a Vice-President and director of Deep Down.  The Series E preferred stock was redeemed for 2,250,000 shares of common stock at the closing price of $0.66 totaling $1,473,750.  Since the shareholders are related parties, no accretion interest was recorded related to the redemption.  The difference between the carrying value of the Series E shares of $1,685,463 and the common stock market value was recorded to Paid in Capital.

Additionally, in October 2007, Deep Down redeemed 1,250 shares of Series E preferred stock at the face value of $1,000 per share for a total of $1,250,000. The Series E preferred shares were redeemed for 1,213,592 shares of common stock at the closing price of $1.03.  Deep Down accreted the remaining discount of $260,520 attributable to such shares on the date of redemption and recorded it as interest expense.

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

F-27

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Series F and G Cancellation and Issuance of Additional Series E

On March 20, 2007, Deep Down finalized the terms of an agreement with a former non-employee director who surrendered 25,000,000 shares of common stock for $250,000 in cash. The market value of those shares was $7,250,000. Additionally, he surrendered 1,500 shares of Series F convertible preferred stock with a value of $1,325,773 and 500 shares of Series G exchangeable preferred stock with a value of $357,615 to Deep Down for cancellation in exchange for 1,250 shares of Series E exchangeable preferred stock valued at $945,563. The Series E Preferred Stock was valued based on the discounted value of its expected future cash flows, using a discount rate of 20%.  The difference between the values of the preferred shares surrendered and the newly issued shares was $737,826 which is reflected in paid in capital on the accompanying consolidated balance sheet. In addition, he also kept 500 shares of Series E exchangeable preferred stock he previously owned and agreed to tender his resignation from the Board.

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

Series C Preferred Stock

The Series C shares had a face value and a liquidation preference of $12.50 per share, a cumulative dividend of 7% payable at the conversion date, and were convertible into shares of common stock determined by dividing the face amount by a conversion price of $0.0625. These shares carried no voting rights.  All of the Series C shares were converted in the fourth quarter of fiscal year 2007 to 4,400,000 shares of Deep Down’s common stock.

Note 9:          Common Stock

Private Placement, fiscal year 2008

On June 5, 2008, Deep Down sold 57,142,857 shares of its common stock in a private placement to accredited investors, for $40,000,000 at a per-share price of $0.70 (the “Private Placement”). After transaction costs, Deep Down had net proceeds of $37,059,670. Dahlman Rose & Company, LLC acted as exclusive placement agent for the equity financing.

Deep Down used $22,100,000 of the net proceeds to fund the cash portion of the Flotation purchase, and used $12,492,912 to repay outstanding debt, along with early termination fees, to Prospect on June 12, 2008. Deep Down retained the remaining net proceeds for working capital purposes.

Private Placements, fiscal year 2007

On March 20, 2007, Deep Down completed the sale of 10,000,000 shares of common stock in a private placement for $1,000,000. A total of 1,025,000 shares were purchased by the CEO and director, and his wife, a Vice-President and director of Deep Down. The shares are restricted securities as defined in Rule 144 of the Securities Act of 1933 and contain a restrictive legend, which restricts the ability of the holders to sell these shares for a period of no less than six months. Funds from such private placement sale were used to redeem certain outstanding exchangeable preferred stock and for working capital.

On October 12, 2007, Deep Down closed an agreement with Ironman Energy Capital, L.P. for a private placement of 3,125,000 shares of common stock at $0.96 per share, or $3,000,000 in the aggregate, pursuant to an agreement reached on October 2, 2007 when the closing price was $1.03 per share. In connection with this private placement, the Deep Down entered into registration rights agreement, under which, upon demand registration by the holder after December 31, 2008, Deep Down could be subject to liquidating damages in the amount of 1% of the proceeds for every 30 days a registration statement is not declared effective. Deep Down is currently evaluating the probability of incurring these liquidated damages as a contingent liability and not yet determined the potential impact on the financial statements.

F-28

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Other stock issuances

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

During the year ended December 31, 2007, we executed a Securities Redemption Agreement with our former chief financial officer to redeem 4,000 shares of Series E exchangeable preferred stock at a discounted price of $500 per share for a total of $2,000,000.  In October 2007, Deep Down made the final payment of $560,000 under the terms of this Securities Redemption Agreement by issuing 543,689 shares of common stock valued at the closing price of $1.03 on the same day.

Note 10:         Stock-Based Compensation

Deep Down has a stock-based compensation plan - the 2003 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan (the “Plan”). Deep Down accounts for stock-based compensation expense under SFAS No. 123 (Revised 2004), “Share-based Payment,” (“SFAS No. 123(R)”). The exercise price of the options, as well as the vesting period, is established by Deep Down’s Board of Directors. The options granted under the Plan have vesting periods that range from immediate vesting to vesting over five years, and the contract terms of the options granted are up to ten years. Under the Plan, the total number of options permitted is 15% of issued and outstanding common shares. During the year ended December 31, 2008, Deep Down granted 4,200,000 options and 1,200,000 shares of restricted stock, and cancelled 875,000 options subject to forfeitures under the Plan. Based on the shares of common stock outstanding at December 31, 2008, there were approximately 17,336,000 options available for grant under the Plan as of that date.

In December 2007, the SEC staff issued Staff Accounting Bulletin (“SAB”) 110, Share-Based Payment, which amends SAB 107, Share-Based Payment, to permit public companies, under certain circumstances, to use the simplified method in SAB 107 for employee option grants after December 31, 2007. Use of the simplified method after December 2007 is permitted only for companies whose historical data about their employees’ exercise behavior does not provide a reasonable basis for estimating the expected term of the options. Deep Down did not have stock options outstanding until fiscal year 2007, and has exercised a relatively small amount of shares, and thus does not have adequate historical data to determine option lives. Therefore, Deep Down will continue to use the simplified method as allowed under the provision of SAB 110.

Shares issued for Service

On February 14, 2008, Deep Down issued 1,200,000 restricted shares to executives and employees on February 14, 2008 which vest on February 14, 2010, provided such respective recipient remains employed with Deep Down on such date. The shares were valued at a price of $0.42 based on the closing price of common stock on that date. The shares vest on the second anniversary of the grant date, and Deep Down is amortizing the related stock-based compensation of $504,000 over the 2 year period. For the year ended December 31, 2008, Deep Down recognized a total of $220,500 in stock-based compensation related to these issued shares of restricted stock; the unamortized portion of the estimated fair value of restricted stock is $283,500 at December 31, 2008.

The following table summarizes Deep Down’s restricted stock activity for the year ended December 31, 2008. The aggregate intrinsic value is based upon the closing price of $0.16 of Deep Down’s common stock on December 31, 2008.

	Restricted Shares		Weighted- Average Grant Price		Aggregate Intrinsic Value
Outstanding at December 31, 2007		-
Grants		1,200,000	$	0.42
Outstanding at December 31, 2008		1,200,000	$	0.42	$	-

F-29

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Stock Option Activity During 2008

During the year ended December 31, 2008, Deep Down granted 4,200,000 options under the Plan as detailed below. On June 17, 2008, Deep Down effected a cashless exercise of 50,000 employee stock options for 29,339 net shares of common stock issued in accordance with terms of the Plan.

During the year ended December 31, 2008, Deep Down granted an aggregate of 350,000 stock options to various employees with exercise prices between $0.71 and $0.88, reflecting the respective closing price on the applicable date of grant. The fair value of such options was $114,737 based on the Black-Scholes option pricing model. Additionally, Deep Down issued 600,000 stock options to employees of Flotation in connection with that acquisition.

On February 14, 2008, Deep Down issued an aggregate of 3,000,000 stock options to Ronald E. Smith, Robert E. Chamberlain, and Eugene L. Butler, with an exercise price per share of $1.50, which was in excess of the day’s closing price of $0.42. The fair value of such options was $145,764 based on the Black-Scholes option pricing model.

Additionally, on January 22, 2008, Deep Down issued 250,000 stock options to an officer with an exercise price of $0.70, the closing price of Deep Down’s common stock on that date.  These options have since been forfeited due to the officer’s departure in May 2008.

All of the options issued during 2008 have terms for vesting at the rate of one third of the total grant annually on the anniversary of their respective grant dates. Since Deep Down does not have a sufficient trading history to determine the volatility of its own stock, it based its estimates of volatility on a representative peer group consisting of companies in the same industry, with similar market capitalizations and similar stage of development.

Stock Options Granted During 2007

During the year ended December 31, 2007, Deep Down granted 5,500,000 options under the Plan.  Deep Down issued an aggregate of 1,500,000 stock options to various consultants, of which 300,000 were issued with an exercise price of $0.30, $0.50, $0.75, $1.00, and $1.25, respectively.  Additionally, Deep Down issued an aggregate of 1,000,000 stock options to various employees with an exercise price of $0.50 and 3,000,000 stock options to an officer and director with an exercise price of $0.515.

Summary of Stock Options

Deep Down is expensing all stock options on a straight line basis over the requisite expected service periods. The total stock-based compensation expense for stock options for the years ended December 31, 2008 and 2007, respectively, was $584,009 and $187,394, respectively. The unamortized portion of the estimated fair value of outstanding stock options is $718,912 at December 31, 2008.

F-30

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

The following table summarizes Deep Down’s stock option activity for the year ended December 31, 2008. The aggregate intrinsic value is based on the closing price of $0.16 on December 31, 2008.

	Shares Underlying Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (In-The-Money)
Outstanding at December 31, 2006		-		$	-
Grants		5,500,000		$	0.58
Outstanding at December 31, 2007		5,500,000		$	0.58
Grants		4,200,000			1.35
Exercises		(50,000	)		0.50
Cancellations & Forfeitures		(1,583,333	)		0.70
Outstanding at December 31, 2008		8,066,667		$	0.96		2.3	$	-
Exerciseable at December 31, 2008		1,720,834		$	0.57		1.6	$	-

The following summarizes Deep Down’s outstanding options and their respective exercise prices at December 31, 2008:

Exercise Price		Shares Underlying Options
	$  0.30 - 0.49		100,000
	$  0.50 - 0.69		3,716,667
	$  0.70 - 0.99		450,000
	$  1.00 - 1.29		800,000
	$  1.30 - 1.50		3,000,000
			8,066,667

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, 2008:

Dividend yield	0%
Risk free interest rate	2.64% - 2.84%
Expected life of options	3 years
Expected volatility	53.3% - 63.3%

Note 11:         Warrants

In connection with the purchase of Flotation, Deep Down issued warrants to purchase 200,000 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.  Deep Down valued the warrants at $121,793 based on the Black Scholes option pricing model and included this value in the purchase price allocation relating to Flotation.

On August 6, 2007, as part of the Credit Agreement with Prospect, described above in Note 7, Deep Down issued detachable warrants to purchase up to 4,960,585 shares of common stock with an exercise price of $0.51, for a term of five years, with vesting occurring on the earlier of the second anniversary of the agreement or upon payment in full of the debt. On July 3, 2008, the holder of these warrants exercised the warrants for a total of 2,618,129 shares of Deep Down’s common stock in a cashless exercise.

Additionally, as part of the Credit Agreement with Prospect, described above in Note 7, Deep Down issued a detachable warrant to purchase up to 320,000 shares of common stock at an exercise price of $0.75, for a term of five years, with vesting occurring on the earlier of the second anniversary of the agreement or upon payment in full of the debt. In connection with the second advance under the Credit Agreement with Prospect, Deep Down granted a detachable warrant to purchase up to 118,812 shares of common stock at an exercise price of $1.01 per share.  This warrant has a five-year term and is immediately exercisable.  

F-31

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

A summary of warrant transactions follows. The aggregate intrinsic value is based on the closing price of $0.16 on December 31, 2008.

	Shares Underlying Warrants			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (In-The-Money)
Outstanding at December 31, 2006		-		$	-
Grants		5,399,397			0.53
Outstanding at December 31, 2007		5,399,397			0.53
Grants		200,000			0.70
Exercised		(4,960,585	)		0.51
Outstanding at December 31, 2008		638,812		$	0.78		4.0	$	-
Exerciseable at December 31, 2008		438,812		$	0.82		4.0	$	-

The following summarizes Deep Down’s outstanding warrants and their respective exercise prices at December 31, 2008:

Exercise Price	Shares Underlying Warrants
$   0.70 - 0.99	520,000
$             1.01	118,812
	638,812

The fair value of each 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 years ended December 31, 2008 and 2007:

	December 31, 2008	December 31, 2007
Dividend yield	0%	0%
Risk free interest rate	2.52%	3.18% - 5.0%
Expected life of options	2 years	2.5 - 3.5 years
Expected volatility	51.70%	52.7% - 61.3%

Note 12:         Income Taxes

The provision for income taxes on income from continuing operations is comprised of the following for the years ended December 31, 2008 and 2007.  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, 2008 and 2007.  

	December 31, 2008			December 31, 2007
Federal:
Current	$	(453,602	)	$	402,619
Deferred		(855,703	)		(75,810	)
Total Federal	$	(1,309,305	)	$	326,809
State:
Current	$	266,933		$	42,864
Deferred		-			-
Total State	$	266,933		$	42,864
Total income tax expense (benefit)	$	(1,042,372	)	$	369,673

F-32

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

		Year ended
		December 31, 2008	December 31, 2007
Income tax expense at federal statutory rate		34.0%	34.0%
State taxes, net of federal expense		-3.3%	0.0%
Deferred financing		-7.6%	0.0%
Accretion		-2.1%	3.2%
Other, net		-1.4%	-9.2%
	Total effective rate	19.6%	28.0%

Income tax benefit was $1,042,372 for the year ended December 31, 2008 compared to income tax expense of $369,673 for the previous year.

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 follows at December 31, 2008 and 2007: 

	December 31, 2008			December 31, 2007
Deferred tax assets:
Allowance For Bad Debt	$	195,492		$	47,528
Net Operating Loss		1,060,998			-
Stock Compensation		315,827			117,264
Section 263 (a) Adjustment		21,354			-
Depreciation on property and equipment		-			32,577
Charitable Contributions		54			54
Other		-			1,616
Total deferred tax assets	$	1,593,725		$	199,039
Deferred tax liabilities:
Depreciation on property and equipment	$	(797,224	)	$	-
Intangible Amortization		(1,389,720	)	$	(5,965	)
Total deferred tax liabilities	$	(2,186,944	)	$	(5,965	)
Less: valuation allowance		(315,826	)	$	(117,264	)
Net deferred tax assets (liabilities)	$	(909,045	)	$	75,810

Deep Down has $3,120,583 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, 2008, these NOL’s are not limited under Section 382. 

Deep Down has recorded a deferred tax liability of $1,840,563 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 valuation allowance was needed to the extent it applied to the future benefits related to the stock based compensation.  A valuation allowance for the NOL and other deferred tax assets was not needed at December 31, 2008, based on the more likely than not threshold of the NOL’s being realized.

Note 13:         Related Party Transactions

Deep Down leases all buildings, structures, fixtures and other improvements at the Channelview, Texas location from JUMA, LLC, a company owned by Ronald E. Smith, President and CEO and a director of Deep Down and Mary L. Budrunas, a Vice President and director of Deep Down. The base rate of $15,000 per month is payable to JUMA, LLC through August 31, 2013, together with all costs of maintaining, servicing, repairing and operating the premises, including insurance, utilities and property taxes.

On March 28, 2008, Deep Down redeemed 4,500 shares of Series D preferred stock owned by Ronald Smith and Mary Budrunas.  The Series D preferred shares were redeemed for 23,279,876 shares of common stock.

F-33

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Note 14:         Commitments and Contingencies

Litigation

Deep Down is from time to time involved in legal proceedings arising from the normal course of business. As of the date of this report, Deep Down is not currently involved in any material legal proceedings except as noted below.

Deep Down is currently in arbitration with the former stockholders of Flotation Technologies, Inc. regarding the proper calculation of the “Cash Price Adjustment” pursuant to the Stock Purchase Agreement by and between Deep Down, Flotation Technologies, Inc. and its stockholders dated April 17, 2008. Any purchase price adjustment will be allocated to the goodwill balance once the preliminary estimates are finalized within the one year time frame.

In connection with the Private Placement in June 2008, Deep Down filed an initial Registration Statement on Form S-1 on July 21, 2008 to register the shares issued. Pursuant to the Registration Rights Agreement, Deep Down was obligated to have the Registration Statement declared effective by September 3, 2008, the Required Effective Date, or the Company would be required to pay damages to the purchasers in the Private Placement for each day following the Required Effective Date, until but excluding the date the Commission declares the Registration Statement effective. The Registration statement has not been declared effective by the SEC. Deep Down has evaluated this obligation under the Registration Rights Agreement for liability treatment under FASB Statement No. 5,“Accounting for Contingencies” (“SFAS 5”) and Financial Statement Staff Position (FSP) EITF 00-19(2) “Accounting for Registration Payment Arrangements” and determined that the registration rights met the definition of a liability under the authoritative guidance and has reserved $1,212,120 in potential damages under terms of the Private Placement for the 90-day period September 4 to December 4, 2008. Deep Down obtained an opinion from legal counsel allowing removal of the related stock’s restrictive legends, which was deemed to be equivalent and thus satisfying the registration rights requirements.

Leases

Deep Down leases certain offices, facilities, equipment and vehicles under noncancelable operating and capital leases expiring at various dates through 2016.

At December 31, 2008, future minimum contractual obligations were as follows:

Years ended December 31,:	Capital Leases			Operating Leases
2009	$	96,428		$	738,264
2010		96,428			646,871
2011		96,428			531,033
2012		96,428			481,531
2013		96,428			384,080
Thereafter		16,072			376,131
Total minimum lease payments	$	498,212		$	3,157,910
Residual principal balance		105,000
Amount representing interest		(166,912	)
Present value of minimum lease payments	$	436,300
Less current maturities of capital lease obligations		50,192
Long-term contractal obligations	$	386,108

Rent expense totaled $525,627 and $186,866 for the years ended December 31, 2008 and 2007, respectively.

F-34

Notes to Consolidated Financial Statements for the Years ended December 31, 2008 and 2007

Letters of Credit

Certain customers require us to post a bank letter of credit guarantee. These letters of credit assure our creditors that we will perform under terms of our contract and with associated vendors and subcontractors. In the event of default, the creditor may demand payment from the bank under a letter of credit. To date, there have been no significant expenses related to letters of credit for the periods reported. We were contingently liable for secured and unsecured letters of credit of $135,000 as of December 31, 2008, which is offset by restricted cash in the same amount.

In December 2008, Deep Down amended the credit agreement with Whitney Bank as more fully described in Note 7. The credit agreement provides for letters of credit, which Deep Down executed a letter of credit with a customer for $1,107,456 subsequent to December 31, 2008. See further discussion at Note 15.

Additionally, Deep Down has a letter of credit in the amount of $135,855 representing a performance guarantee that was filed with the planning office of the City of Biddeford, Maine related to improvements planned to the Flotation site. The offsetting restricted cash is reflected on the balance sheet.

Note 15:         Subsequent Events

Deep Down’s credit agreement with Whitney Bank provides for letters of credit, which Deep Down executed an irrevocable transferrable standby letter of credit with a customer for $1,107,456 on February 10, 2009. The letter of credit was executed as a guarantee of performance by Deep Down and its subsidiaries on a contract, allows partial and multiple drawings, and expires August 31, 2009 with an automatic one-year extension period unless cancelled 90 days in advance of the expiration date.

Amendment to credit agreement and new loan agreement

On March 5, 2009, Deep Down’s wholly owned subsidiary, Flotation, obtained loan proceeds in the principal amount of approximately $1,840,000 pursuant to a loan agreement Flotation and Deep Down entered into with TD Bank, N.A. (“TD Bank”) as of February 13, 2009.  This loan agreement provides a further commitment to Flotation for advancement of principal in the amount of $320,000. Loans under the loan agreement are generally secured by Flotation’s operational premises in Biddeford, Maine under a mortgage and security agreement and a collateral assignment of leases and rents.  In connection with the loan agreement, TD Bank required that Deep Down 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.  Furthermore, as part of the loan agreement TD Bank 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 Deep Down’s primary facility for borrowed money (as currently held with Whitney Bank). Deep Down is obligated to repay proceeds funded on March 5, 2009 based on a schedule of monthly installments of approximately $13,000, with an initial payment on March 13, 2009 and a final payment of all remaining outstanding and unpaid principal and accrued interest in February 2016.  However, upon advancement of any portion of the $320,000 additional principal amount available under the loan agreement, TD Bank will recalculate the monthly installments to an amount that will fully amortize the then outstanding principal balance over a 20-year amortization schedule.

In connection with such loan for Flotation, Deep Down entered into a second amendment of its existing credit facility with Whitney Bank to permit such loan and the security and other arrangements relating to Flotation’s loan agreement.  The terms of the second amendment also included a guarantor’s consent and agreement, to be signed by each of Deep Down’s subsidiaries as guarantors of the obligations of Deep Down under such existing credit facility, that Whitney Bank required as a condition to the effectiveness of the second amendment. Additionally, Whitney Bank required that Deep Down International Holdings, LLC, a Nevada limited liability company and wholly owned subsidiary of Deep Down formed in February 2009, enter into joinder agreements for the guaranty and security agreement arrangements generally required of Deep Down’s subsidiaries under the existing credit facility. Deep Down International Holdings, LLC currently has no material assets or operations.

F-35

EX-10.3

Exhibit 10.3

SECOND AMENDMENT TO CREDIT AGREEMENT

THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this “Amendment”) is entered into as of February 13, 2009, between DEEP DOWN, INC., a Nevada corporation (“Borrower”), and WHITNEY NATIONAL BANK, a national banking association (the “Lender”).  Capitalized terms used but not defined in this Amendment have the meaning given them in the Credit Agreement (defined below).

RECITALS

A.           Borrower and Lender entered into that certain Credit Agreement dated as of November 11, 2008 (as amended by First Amendment to Credit Agreement dated December 18, 2008, and as further amended, restated, or supplemented, the “Credit Agreement”).

B.           Borrower and Lender have agreed to amend the Credit Agreement, subject to the terms and conditions of this Amendment.

NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are acknowledged, the undersigned hereby agree as follows:

1.           Amendments to Credit Agreement.

(a)           Section 1.1 of the Credit Agreement is amended to delete the defined terms “Guarantor,” “Loan Documents,” “Permitted Debt,” and “Permitted Liens” in their entirety and replace them with the following:

“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, Flotation Technologies, Inc., a Maine corporation, and Deep Down International Holdings, LLC, a Nevada limited liability company, (b) any of Borrower’s other Subsidiaries, or (c) any other Person which signs a Guaranty.”

“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.”

“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, (i) if Borrower requests in writing that Lender increase the amount of its Commitment or approve additional credit extensions to Borrower and Lender declines to do so, Borrower may obtain Funded Debt from a third party in an amount equal to or less than the amount of the credit requested pursuant to such written request, and (j) 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 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.”

(b)           Section 1.1 of the Credit Agreement is further amended to add the following new defined terms in the appropriate alphabetical order:

“Deep Down International means Deep Down International Holdings, LLC, a Nevada limited liability company, which is or will become a direct wholly-owned subsidiary of Borrower.”

“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.”

2

“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.”

(c)           Section 6.1 of the Credit Agreement is amended to delete the second sentence thereof in its entirety and replace it with the following:

“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.”

(d)           Section 9.2 of the Credit Agreement is hereby deleted in its entirety and replaced with the following:

“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 and the TD Bank Loan 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.”

(e)           The Credit Agreement is further amended to add the following new Section 11.12 in the appropriate numerical order:

“11.12 Default Under Other Debt Documents.  A default or an event of default exists under the TD Bank Loan Agreement or any other TD Bank Document.”

2.           Schedule 7.2.  Schedule 7.2 to the Credit Agreement is deleted in its entirety and replaced with Schedule 7.2 attached hereto.

3.           Schedule 7.12.  Schedule 7.12 to the Credit Agreement is deleted in its entirety and replaced with Schedule 7.12 attached hereto.

3

4.           Schedule 7.16.  Schedule 7.16 to the Credit Agreement is deleted in its entirety and replaced with Schedule 7.16 attached hereto.

5.           Conditions.  This Amendment shall be effective once each of the following have been delivered to Lender:

(a)           this Amendment executed by Borrower and Lender;

(b)           Guarantors’ Consent and Agreement;

(c)           a Joinder Agreement in Proper Form, pursuant to which Deep Down International becomes a Guarantor under the Guaranty;

(d)           a Joinder Agreement in Proper Form, pursuant to which Deep Down International becomes a “Debtor” under, and as defined in, the Security Agreement and grants a lien on all of its assets in favor of Lender;

(e)           Officer’s Certificate from Deep Down International certifying as to incumbency of officers, specimen signatures, articles of incorporation and bylaws, and resolutions adopted by its Board of Directors authorizing its execution of this Amendment and the Joinder Agreements pursuant to which Deep Down International will become a party to the Guaranty and the Security Agreement;

(f)           Intercreditor Agreement among TD Bank, Lender, Flotation Technologies, and Borrower;

(g)           executed copies of the TD Bank Loan Documents; and

(h)           such other documents as Lender may reasonably request.

6.           Representations and Warranties.  Borrower represents and warrants to Lender that (a) it possesses all requisite power and authority to execute, deliver and comply with the terms of this Amendment, (b) this Amendment has been duly authorized and approved by all requisite corporate action on the part of Borrower, (c) no other consent of any Person (other than Lender) is required for this Amendment to be effective, (d) the execution and delivery of this Amendment does not violate its organizational documents, (e) the representations and warranties in each Loan Document to which it is a party are true and correct in all material respects on and as of the date of this Amendment as though made on the date of this Amendment (except to the extent that such representations and warranties speak to a specific date), (f) it is in full compliance with all covenants and agreements contained in each Loan Document to which it is a party, and (g) no Default or Potential Default has occurred and is continuing.  The representations and warranties made in this Amendment shall survive the execution and delivery of this Amendment.  No investigation by Lender is required for Lender to rely on the representations and warranties in this Amendment.

4

7.           Scope of Amendment; Reaffirmation; Release.  All references to the Credit Agreement shall refer to the Credit Agreement as amended by this Amendment.  Except as affected by this Amendment, the Loan Documents are unchanged and continue in full force and effect.  However, in the event of any inconsistency between the terms of the Credit Agreement (as amended by this Amendment) and any other Loan Document, the terms of the Credit Agreement shall control and such other document shall be deemed to be amended to conform to the terms of the Credit Agreement.  Borrower hereby reaffirms its obligations under the Loan Documents to which it is a party and agrees that all Loan Documents to which they are a party remain in full force and effect and continue to be legal, valid, and binding obligations enforceable in accordance with their terms (as the same are affected by this Amendment).  Borrower hereby releases Lender from any liability for actions or omissions in connection with the Credit Agreement and the other Loan Documents prior to the date of this Amendment.

8.           Miscellaneous.

(a)           No Waiver of Defaults.  Except as expressly set out above, this Amendment does not constitute (i) a waiver of, or a consent to, (A) any provision of the Credit Agreement or any other Loan Document not expressly referred to in this Amendment, or (B) any present or future violation of, or default under, any provision of the Loan Documents, or (ii) a waiver of Lender’s right to insist upon future compliance with each term, covenant, condition and provision of the Loan Documents.

(b)           Form.  Each agreement, document, instrument or other writing to be furnished Lender under any provision of this Amendment must be in form and substance satisfactory to Lender and its counsel.

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

(d)           Costs, Expenses and Attorneys’ Fees.  Borrower agrees to pay or reimburse Lender on demand for all its reasonable out-of-pocket costs and expenses incurred in connection with the preparation, negotiation, and execution of this Amendment, including, without limitation, the reasonable fees and disbursements of Lender’s counsel.

(e)           Successors and Assigns.  This Amendment shall be binding upon and inure to the benefit of each of the undersigned and their respective successors and permitted assigns.

(f)           Multiple Counterparts.  This Amendment 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 Amendment may be transmitted and signed by facsimile or portable document format (PDF).  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 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.

(g)           Governing Law.  This Amendment and the other Loan Documents must be construed, and their performance enforced, under Texas law.

5

(h)           Entirety.  The Loan Documents (as amended hereby) Represent the Final Agreement Between Borrower and Lender 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 page.]

6

The Amendment is executed as of the date set out in the preamble to this Amendment.

BORROWER:

DEEP DOWN, INC.,

a Nevada corporation

By: /s/ Eugene L. Butler                           

Eugene L. Butler

Chief Financial Officer

LENDER:

WHITNEY NATIONAL BANK,

a national banking association

By: /s/ Paul W. Cole                                

Paul W. Cole

Vice President

Signature Page to the Second Amendment to Credit Agreement

GUARANTORS’ CONSENT AND AGREEMENT

TO

SECOND AMENDMENT TO CREDIT AGREEMENT

As an inducement to Lender to execute, and in consideration of Lender’s execution of, this Amendment, each of the undersigned hereby consents to this Amendment and agrees that this Amendment shall in no way release, diminish, impair, reduce or otherwise adversely affect the obligations and liabilities of the undersigned under the Guaranty executed by the undersigned in connection with the Credit Agreement, or under any Loan Documents, agreements, documents or instruments executed by the undersigned to create liens, security interests or charges to secure any of the Obligation (as defined in the Credit Agreement), all of which are in full force and effect.  Each of the undersigned further represents and warrants to Lender that (a) the representations and warranties in each Loan Document to which it is a party are true and correct in all material respects on and as of the date of this Amendment as though made on the date of this Amendment (except to the extent that such representations and warranties speak to a specific date), (b) it is in full compliance with all covenants and agreements contained in each Loan Document to which it is a party, and (c) no Default or Potential Default has occurred and is continuing.  Each Guarantor hereby releases Lender from any liability for actions or omissions in connection with the Loan Documents prior to the date of this Amendment.  This Consent and Agreement shall be binding upon the undersigned, their successors and permitted assigns, and shall inure to the benefit of Lender, and its successors and assigns.

GUARANTORS:

ELECTROWAVE USA, INC.,

a Nevada corporation

FLOTATION TECHNOLOGIES, INC.,

a Maine corporation

MAKO TECHNOLOGIES, LLC,

a Nevada limited liability company

DEEP DOWN INC.,

a Delaware corporation

By: /s/ Eugene L. Butler                                     

Eugene L. Butler

Chief Financial Officer of each of the foregoing companies

Guarantors' Consent and Agreement to Second Amendment to Credit Agreement

SCHEDULE 7.2

Subsidiaries

1.  Electrowave USA, Inc., a Nevada corporation 15473 East Freeway Channelview, Texas 77530 Borrower’s percentage ownership:  100%

2.  Mako Technologies, LLC, a Nevada limited liability company 125 Mako Lane Morgan City, Louisiana 70380 Borrower’s percentage ownership:  100%

3.  Deep Down, Inc., a Delaware corporation 15473 East Freeway Channelview, Texas 77530 Borrower’s percentage ownership:  100%

4.  Flotation Technologies, Inc., a Maine corporation 20 Morin Street Biddeford, Maine 04005 Borrower’s percentage ownership:  100%

5.  Deep Down International Holdings, LLC, a Nevada limited liability company 15473 East Freeway Channelview, Texas 77530 Borrower’s percentage ownership:  100%

Schedule 7.2 - Page 1

SCHEDULE 7.12

Place of Business

Place of Business and Chief Executive Office of each Company:

DEEP DOWN, INC., DEEP DOWN INC., ELECTROWAVE USA, INC., DEEP DOWN INTERNATIOANL HOLDINGS, LLC,  AND MAKO TECHNOLOGIES, LLC

15473 East Freeway

Channelview, Texas 77530

FLOATION TECHNOLOGIES, INC.

20 Morin Street

Biddeford, Maine 04005

Location of Books and Records for each Company:

DEEP DOWN, INC., DEEP DOWN INC., ELECTROWAVE USA, INC., DEEP DOWN INTERNATIONAL HOLDINGS, LLC, AND MAKO TECHNOLOGIES, LLC

15473 East Freeway

Channelview, Texas 77530

FLOATION TECHNOLOGIES, INC.

20 Morin Street

Biddeford, Maine 04005

Schedule 7.12 - Page 1

SCHEDULE 7.16

Material Agreements

1.           Subordinated Debenture issued by Borrower to Charter Capital Holdings, LP, in the amount of $500,000.00, with interest at a rate of six percent (6%) per annum and a maturity date of March 31, 2011.

2.           The TD Bank Loan Documents.

Schedule 7.16 - Page 1

EX-10.5

Exhibit 10.5

JOINDER AGREEMENT

(Guaranty)

February 13, 2009

Re: Guaranty dated as of November 11, 2008 (as amended, restated, or supplemented from time to time, the “Guaranty”) executed by ELECTROWAVE USA, INC., a Nevada corporation, FLOTATION TECHNOLOGIES, INC., a Maine corporation, MAKO TECHNOLOGIES, LLC, a Nevada limited liability company, and DEEP DOWN INC., a Delaware corporation (each an “Existing Guarantor” and, collectively, the “Existing Guarantors”), in favor of WHITNEY NATIONAL BANK, a national banking association (“Lender”).

RECITALS

A.           DEEP DOWN, INC., a Nevada corporation (“Borrower”), and Lender entered into that certain Credit Agreement dated as of November 11, 2008 (as amended by First Amendment to Credit Agreement dated December 18, 2008, Second Amendment to Credit Agreement dated February 13, 2009, and as further amended, restated, or supplemented, the “Credit Agreement”).

B.           DEEP DOWN INTERNATIONAL HOLDINGS, LLC, a Nevada limited liability company (“New Guarantor”), was recently organized and is or will become a direct wholly-owned subsidiary of Borrower.

C.           To comply with the terms and provisions of the Credit Agreement, New Guarantor and Existing Guarantors have agreed to execute this Joinder Agreement for the benefit of Lender.

AGREEMENT

NOW THEREFORE, for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows:

1.           New Guarantor hereby (a) agrees to become a “Guarantor” under the Guaranty, and (b) joins in, becomes a party to, and agrees to comply with and be bound by all of the terms and conditions of the Guaranty to the same extent as if New Guarantor were an original signatory thereto.  New Guarantor shall hereafter be jointly and severally liable for the performance of any and all past, present and future obligations of any Guarantor under the Guaranty, it being understood and agreed that any and all references in the Guaranty to “Guarantor” or “Guarantors” shall include New Guarantor.

2.           New Guarantor acknowledges that (a) Lender has agreed to extend credit to Borrower for the purposes set forth in the Credit Agreement, (b) it is receiving direct and indirect benefits from each such extension of credit, (c) the obligations of the “Guarantor” or “Guarantors” under the Guaranty are the joint and several obligations of each Guarantor, (d) certain representations and warranties set forth in the Credit Agreement are in respect of it, and New Guarantor hereby confirms that each such representation and warranty is true and correct, and (e) certain covenants set forth in the Credit Agreement are in respect of it or shall be imposed upon it, and New Guarantor covenants and agrees to promptly and properly perform, observe, and comply with each such covenant.

3.           Capitalized terms used but not defined herein have the meanings given them in the Credit Agreement

[Signature is on the following page.]

IN WITNESS WHEREOF, each of the undersigned has executed this Joinder Agreement under seal as of the date first written above.

NEW GUARANTOR:

DEEP DOWN INTERNATIONAL HOLDINGS, LLC,

a Nevada limited liability company

By:  /s/ Eugene L. Butler                         

Eugene L. Butler

Chief Financial Officer

EXISTING GUARANTORS:

ELECTROWAVE USA, INC.,

a Nevada corporation

FLOTATION TECHNOLOGIES, INC.,

a Maine corporation

MAKO TECHNOLOGIES, LLC,

a Nevada limited liability company

DEEP DOWN INC.,

a Delaware corporation

By:  /s/ Eugene L. Butler                      

Eugene L. Butler

Chief Financial Officer of each of the foregoing companies

Signature Page to Joinder Agreement

(Guaranty)

EX-10.7

Exhibit 10.7

JOINDER AGREEMENT

(Security Agreement)

February 13, 2009

Re: Security Agreement dated as of November 11, 2008 (as amended, restated, or supplemented from time to time, the “Security Agreement”), executed by 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”), and DEEP DOWN INC., a Delaware corporation (“DD Delaware,” and together with Borrower, Electrowave, FloTech, and Mako, each an “Existing Debtor” and, collectively, the “Existing Debtors”), for the benefit of WHITNEY NATIONAL BANK, a national banking association (“Lender”).

RECITALS

A.           Borrower and Lender entered into that certain Credit Agreement dated as of November 11, 2008 (as amended by First Amendment to Credit Agreement dated December 18, 2008, Second Amendment to Credit Agreement dated February 13, 2009, and as further amended, restated, or supplemented, the “Credit Agreement”).

B.           As a condition precedent to extending credit to Borrower under the Credit Agreement, Lender required that Electrowave, FloTech, Mako, and DD Delaware execute 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 Credit Agreement, and (ii) the “Guaranteed Obligation” under, and as defined in, the Guaranty, Existing Debtors executed the Security Agreement.

D.           DEEP DOWN INTERNATIONAL HOLDINGS, LLC, a Nevada limited liability company (“New Debtor”), was recently organized and is or will become a direct wholly-owned subsidiary of Borrower.

E.           As required under the Credit Agreement, New Debtor and Existing Debtors have executed a Joinder Agreement (Guaranty) dated as of the date hereof, pursuant to which New Debtor has become a “Guarantor” under the Guaranty.

F.           To secure New Debtor’s obligations under the Guaranty, New Debtor and Existing Debtors have agreed to execute this Joinder Agreement for the benefit of Lender.

AGREEMENT

NOW THEREFORE, for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows:

1.           To secure the prompt, unconditional, and complete payment and performance of the Obligation when due, New Debtor hereby pledges and assigns to Lender, and grants to Lender a continuing security interest in all of its right, title and interest in, to, and under the following, wherever located and whether now owned or hereafter acquired or created by New Debtor:  all personal and fixture property of every kind and nature including, without limitation, all goods (including inventory, equipment and any accessions thereto), instruments (including promissory notes), documents, accounts, accounts receivable, chattel paper (whether tangible or electronic), deposit accounts, letter-of-credit rights (whether or not the letter of credit is evidenced by a writing), commercial tort claims, securities and all other investment property, supporting obligations, any other contract rights or rights to the payment of money, insurance claims and proceeds, all software, fixtures, vehicles (whether or not subject to a certificate of title statute), leasehold improvements, and all general intangibles (including all payment intangibles and trademarks and patents).

2.           New Debtor hereby (a) agrees to become a “Debtor” under the Security Agreement, and (b) joins in, becomes a party to, and agrees to comply with and be bound by all of the terms and conditions of the Security Agreement to the same extent as if New Debtor were an original signatory thereto.  New Debtor shall hereafter be jointly and severally liable for the performance of any and all past, present and future obligations of any Debtor under the Security Agreement, it being understood and agreed that any and all references in the Security Agreement to “Debtor” or “Debtors” shall include New Debtor.

3.           New Debtor acknowledges that (a) Lender has agreed to extend credit to Borrower for the purposes set forth in the Credit Agreement, (b) it is receiving direct and indirect benefits from each such extension of credit, (c) the obligations of the “Debtor” or “Debtors” under the Security Agreement are the joint and several obligations of each Debtor, (d) certain representations and warranties set forth in the Security Agreement are in respect of it, and New Debtor hereby confirms that each such representation and warranty is true and correct, and (e) certain covenants set forth in the Security Agreement are in respect of it or shall be imposed upon it, and New Debtor covenants and agrees to promptly and properly perform, observe, and comply with each such covenant.

4.           Capitalized terms used but not defined herein have the meanings given them in the Credit Agreement.

[Signature is on the following page.]

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IN WITNESS WHEREOF, each of the undersigned has executed this Joinder Agreement under seal as of the date first written above.

NEW DEBTOR:

DEEP DOWN INTERNATIONAL HOLDINGS, LLC,

a Nevada limited liability company

By:  /s/ Eugene L. Butler                                         

Eugene L. Butler

Chief Financial Officer

EXISTING DEBTORS:

DEEP DOWN, INC.,

a Nevada corporation

ELECTROWAVE USA, INC.,

a Nevada corporation

FLOTATION TECHNOLOGIES, INC.,

a Maine corporation

MAKO TECHNOLOGIES, LLC,

a Nevada limited liability company

DEEP DOWN INC.,

a Delaware corporation

By:  /s/ Eugene L. Butler                                           

Eugene L. Butler

Chief Financial Officer of each of the foregoing companies

Signature Page to Joinder Agreement

(SecurityAgreement)

EX-10.18

Exhibit 10.18

OFFICE BUILDING LEASE

NEWQUEST OFFICE PARK

BY AND BETWEEN:

DEEP DOWN, INC.

TENANT

A-K-S-L 49 BELTWAY 8, L.P.

LANDLORD

NOVEMBER 24. 2008

TABLE OF CONTENTS

SECTION		PAGE
1.	LEASED PREMISES; COMMON AREA	1
2.	TERM	1
3.	SECURITY DEPOSIT	2
4.	RENT AND OTHER AMOUNTS PAYABLE BY TENANT	2
5.	POSSESSION	7
6.	USE	7
7.	SERVICE TO BE PROVIDED BY LANDLORD	8
8.	REPAIR AND MAINTENANCE	9
9.	LANDLORD'S INSURANCE; FIRE AND CASUALTY	9
10.	COMPLIANCE WITH LAWS AND USAGE	10
11.	INDEMNITY	11
12.	WAIVER OF LIABILITY	11
13.	WAIVER OF SUBROGATION	11
14.	TENANTS INSURANCE	11
15.	ADDITIONS AND FIXTURES	12
16.	ASSIGNMENT AND SUBLETTING	12
17.	SUBORDINATION AND ATTORNMENT	14
18.	RULES AND REGULATIONS	14
19.	EMINENT DOMAIN	15
20.	ACCESS BY LANDLORD	13
21.	LANDLORD'S LIEN AND SECURITY INTEREST	15
22.	DEFAULT AND REMEDIES	15
23.	NONWAIVER	18
24.	HOLDING OVER	18
25.	NOTICE	18
26.	LANDLORD'S MORTGAGEE	18
27.	QUIET ENJOYMENT	19
28,	TIME OF ESSENCE	19
29.	MECHANIC'S LIEN	19
30.	MEMORANDUM OF LEASE	19
31.	INVALIDITY OF PARTICULAR PROVISIONS	19
32.	WAIVER OF BENEFITS	19
33.	WAIVER OF TRIAL BY JURY	19
34.	MISCELLANEOUS TAXES	19
35.	SUBSTITUTE PREMISES	19
36.	BROKERAGE	19
37.	NO REINSTATEMENT	20
38,	LIMITATION OF IMPLIED WARRANTY	20
39.	CAPTIONS AND BINDING EFFECT	20
40.	INTEREST	20
41.	GUARANTY	20
42.	ATTORNEYS' FEES	20
43.	FORCE MAJEURE	20
44.	USE OF LANGUAGE	20
45.	DAMAGE FROM CERTAIN CAUSES	20
46.	GOVERNING LAW	20
47.	ASBESTOS OR OTHER HAZARDOUS SUBSTANCES	20
48.	AMENDMENT	21
49.	ENTIRE AGREEMENT	21

EXHIBIT "A" - DEPICTION OF LEASED PREMISES: I.EGAL DESCRIPTION

EXHIBIT "B" - LANDLORD'S WORK LETTER

EXHIBIT "C" - PYLON SIGN

EXHIBIT "D" - FORM OF SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT EXHIBIT "E" - - RENEWAL OPTION

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OFFICE BUILDING LEASE

THIS OFFICE BUILDING LEASE ("Lease') is entered into by and between A-K-S-L 49 BELTWAY 8. L.P., a Texas limited partnership ("Landlord") and DEEP DOWN. INC., a Nevada corporation ("Tenant").

WITNESSETH:

1.           LEASED PREMISES; COMMON AREA.

(a)           Landlord hereby leases to Tenant and Tenant hereby Leases from Landlord approximately 8,856 square feet of Rentable Area on the first ( 1st) floor designated in the office building within NewQuest Office located at 8827 W. Sam Houston Parkway N., Houston, Harris County, Texas (the Park "Building"). The area hereby leased in the Building is hereinafter called "Leased Premises- and is outlined on the floor plan drawing designated as Exhibit "A" attached hereto and made a part hereof. and the legal description of the land on which the Building is located is described in Exhibit "A". The land on which the Building is located. the Building. and any parking garage or other parking facility for use by tenants of the Building are collectively referred to herein as the "Project'.

The term "Rentable Area as used shall mean: On each floor of the Building on which the entire space rentable to tenants is or will be leased to one tenant, the Rentable Area for such floor ("Single Tenant Floor”) shall be the entire area bounded by the exterior or the exterior walls of the Building on such floor less the area contained within the building stairs, vertical ducts, elevator shafts, flues, vents. Stacks, and pipe shafts. All the area on any Single Tenant Floor that is used for elevator lobbies, corridors, special stairways, restrooms, mechanical rooms, electrical rooms, telephone closets and all vertical penetrations that are included for the special use by Tenant and columns and other structural portions of the Building shall he included within the Rentable Area for such floor.

On each floor of the Building on which space is or will be leased to more than one tenant, the Rentable Area attributable to each such lease shall be the total of ( i) the entire area included within the leased premises covered by such lease, being the area bounded by the exterior of the exterior wall or walls of the Building bounding such leased premises, the exterior of all walls separating such leased premises, from any public corridors or other public areas on such floor, and the centerline of all walls separating such leased premises from other areas leased or to be leased to other tenants on such floor, and (ii) a pro rata portion of the area covered by the elevator lobbies, corridors. restrooms, mechanical rooms, electrical rooms and telephone closets or other common area situated on such floor.

The Rentable Area for the entire Building shall be deemed to be 50,710 square feet for the purposes of this Lease. The Rentable Area contained within the Leased Premises and the Rentable Area of the Building shall be deemed for all purposes of the Lease to be the number of square feet set forth above. regardless of minor variations resulting from construction of the Building and/or tenant improvements.

(b)           Except to the extent that Landlord is obligated to construct improvements in the Leased Premises, as provided on Exhibit "B" attached hereto and made a part hereof for all purposes. the Leased Premises are delivered to Tenant and are being leased "AS IS" and "WITH ALL FAULTS." and Landlord makes no representation or warranty of any kind, expressed or implied, with respect to the condition of the Leased Premises (including habitability, fitness or suitability for particular purpose of the Leased Premises, or that the Building or the improvements to the Leased Premises have been constructed in a good and workmanlike manner). TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, LANDLORD HEREBY DISCLAIMS. AND TENANT WAIVES THE  BENEFIT OF, ANY AND ALL EXPRESS OR IMPLIED WARRANTIES. INCLUDING IMPLIED WARRANTIES OF HABITABILITY, FITNESS OR SUITABILITY FOR ANY PARTICULAR PURPOSE, OR THAT THE BUILDING OR THE IMPROVEMENTS IN THE LEASED PREMISES HAVE BEEN CONSTRUCTED IN A GOOD AND WORKMANLIKE MANNER. TENANT EXPRESSLY ACKNOWLEDGES THAT LANDLORD DID NOT CONSTRUCT OR APPROVE THE QUALITY OF CONSTRUCTION OF THE BUILDING.

(c)           The "Common Area" of the Building as it shall exist from time to time shall be that part of the Building designated by Landlord from time to time for the common use of all tenants, (including among other facilities, elevators. tunnels, skyways, halls, lobbies. delivery passages, drinking fountains, public toilets and the like). Landlord reserves the right to change from time to time the dimensions and location of the Common Area, Tenant, and its employees and invitees, shall have the nonexclusive right to use the Common Area constituted from time to time, such use to be in common with Landlord, other tenants of the Building, and other persons entitled to use the same, and subject to the rules and regulations governing use as Landlord may from time to time prescribe. Tenant shall not solicit business or display merchandise within the Common Area, distribute handbills therein, or take any action which would interfere with the rights of other persons to use the Common Area.

(d)           Tenant shall have the right to use thirty-six (36) unreserved parking spaces on a non-exclusive basis at no charge during the Term of the Lease. Subject to availability, Tenant may lease from Landlord reserved parking spaces on an exclusive basis for Tenant's employees, and Tenant shall pay to Landlord, as Additional Rent therefor, Thirty-Five Dollars ($35.00) per month for each reserved parking space.

2.           TERM. The term of this Lease ("Term") shall be for a period of eighty-nine (89) months, commencing on the date that is five (5) days following the substantial completion by Landlord of the Leasehold Improvements pursuant to Exhibit B attached hereto and terminating on the last day of the eighty-ninth (89th) month thereafter. The estimated date on which Landlord will deliver the Leasehold Improvements is February 15, 2009.

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3.          SECURITY DEPOSIT. Intentionally Deleted.

4.          RENT AND OTHER AMOUNTS PAYABLE BY TENANT.

(a)                   As base rental for the Lease and use of the Leased Premises ("Base Rent"), Tenant will pay landlord at the Building managers office or other location as Landlord may direct, without demand and without deduction. abatement or setoff (except as otherwise expressly provided for in Paragraph 9 or Paragraph 19), the sum of SIXTEEN AND 50/100 DOLLARS ($16.50) per square foot of Rentable Area of the Leased Premises per year at the monthly Rent of Twelve Thousand One Hundred Seventy-Seven and 00/100 Dollars ($12,177.00) for months six (6) through seventeen (17) of the Term; then SEVENTEEN AND 00/100 DOLLARS ($17.00) per square foot of Rentable Area of the Leased Premises per year at the monthly Rent of Twelve Thousand Five Hundred Forty-Six and 00/100 Dollars ($12,546.00) for months eighteen (18) through twenty-nine (29) of the Term; then SEVENTEEN AND 50/100 DOLLARS ($17.50) per square foot of Rentable Area of the Leased Premises per year at the monthly Rent of Twelve Thousand Nine Hundred Fifteen and 00/100 Dollars ($12,915.00) for months thirty (30) through forty-one (41) of the Term; then EIGHTEEN AND 00/100 DOLLARS ($18.00) per square foot of Rentable Area of the Leased Premises per year at the monthly Rent of Thirteen Thousand Two Hundred Eight-Four and 00/100 Dollars ($ 13,284.00) for months forty-two(42) through fifty- three (53) of the Term; then EIGHTEEN AND 50/100 DOLLARS ($18.50) per square foot of Rentable Area of the Leased Premises per year at the monthly Rent of Thirteen Thousand Six Hundred Fifty-Three and 00/100 Dollars ($13,653.00) for months fifty-four (54) through sixty-five (65) of the Term; then NINETEEN AND 00/100 DOLLARS ($19.00) per square foot of Rentable Area of the Leased Premises per year at the monthly Rent of Fourteen Thousand Twenty-Two and 00/100 Dollars ($14,022.00) for months sixty-six (66) through seventy-seven (77) of the Term; then NINETEEN AND 50/100 DOLLARS ($19.50) per square foot of Rentable Area of the Leased Premises per year at the monthly Rent of Fourteen Thousand Three Hundred Ninety-One and 00/100 Dollars ($14,391.00) for months seventy- eight (78) through eighty-nine (89) of the Term. No Base Rent shall be payable during months one (1) through five(5) of the Term. Beginning on the sixth month of' the Term, Base Rent shall be paid in advance on the first day of each calendar month,. for each and every month in the Term, in lawful money of the United States. If the Term does not commence on the first day of a calendar month or end on the last day of a calendar month, Tenant will pay in advance a pro rata part of such sum as Base Rent for such partial month, which pro rata amount shall be figured on the ratio that the number of days from the first day of the Term bears to the total number of days in the first calendar month of the Term.

(b)                   Beginning on the sixth month of the Term, Tenant agrees to pay as additional rent, as hereafter provided, an amount equal to Tenant's "Pro Rata Share" of  ''Operating Expenses" as such quoted terms are herein defined) adjusted from time to time, pursuant to the provisions hereafter stated. As used herein, the term "Pro Rata Share" shall mean 17.46%, which is the percentage obtained by dividing the rentable square feet of area in the Premises, which is stipulated to be 8,856 rentable square feet by the total number of square feet of area in the Building, which is stipulated to be 50,710 rentable square feet. Landlord shall utilize accounting records and procedures conforming to generally accepted accounting principles, consistently applied, with respect to all aspects of determining Tenant's Pro Rata Share of the Total Cost (herein defined). As used herein, the term "Operating Expenses' means all expenses, costs and disbursements of every kind which Landlord shall pay in connection with the operation and maintenance of the Project, including, without limitation, the following:

(i)      wages, salaries and fees of all personnel or entities engaged in the operation, maintenance or security of the Project, including taxes, insurance and benefits relating thereto: provided, however, that if during the Term such personnel or entities are working on other projects periodically developed or operated by Landlord as well as working on the Project, their wages. salaries, fees and related expenses shall be appropriately allocated among all of such projects and only those portions of such expenses reasonably allocable to the Project shall be included as Operating Expenses;

(ii)      all supplies and materials used in the operation, repair, cleaning and maintenance of the Project;

(iii)     cost of all maintenance, security and service agreements for the Project and the equipment thereon, including, without limitation. alarm service, janitorial service, trash removal service, window cleaning, elevator maintenance, landscaping, lawn care and irrigation service, and parking area maintenance;

(iv)     cost of all insurance relating to the Project for which Landlord is responsible hereunder, or which Landlord considers reasonably necessary for the operation of the Project, including. without limitation, the cost of casualty and liability insurance applicable to the Project and Landlord's personal property used in connection therewith, and the cost of business interruption insurance in such amounts as will reimburse Landlord for all losses of earnings and other income attributable to such perils as are commonly insured against by prudent landlords;

(v)    all taxes, assessments, and other governmental charges, whether federal, state, county. or municipal, and whether assessed by taxing districts or authorities presently taxing the Project or by others, subsequently created or otherwise, and any other taxes and assessments attributable to the Project or its operation (including, without limitation, any sales or use taxes), exclusive of any inheritance, gift, franchise, income, corporate or profit taxes which may be assessed against Landlord;

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(vi)           cost of repairs and general maintenance (excluding repairs and general maintenance paid by proceeds of insurance or paid directly by Tenant or other third parties, and excluding alterations, other than those standard for the Project, which are performed for the benefit of tenants on the Project):

(vii)           amortization of the cost of installation of capital improvement items which are primarily to reduce operating costs for the benefit of all tenants on the Project or to enhance the Project or which may be required by any governmental authority. All such costs, including interest costs, shall be amortized over the reasonable life of the capital investment items, with the reasonable life and amortization schedule being determined by Landlord according to generally accepted accounting principles, but in no event to extend beyond the reasonable life of the Building;

(viii)           all charges for utilities (including. but not limited to, water, sewer, electricity and gas) paid by Landlord;

(ix)           rent or rental value of Landlords leasing and management offices on or near the Project;

(x)           Landlord's central accounting costs, together with the costs of all audits required by the terms of this Lease, and legal and appraisal fees relating to the operation of the Project; and

(xi)           the property management fee (not to exceed 4% of total Base Rent per year for the Building) which is from time to time in effect and which is due to the manager of the Project.

Notwithstanding anything to the contrary contained in the Lease, the following items shall be excluded from the calculation of Total Costs:

(A)                Corporate Overhead. All costs associated with the operation of the business of the entity which constitutes "Landlord" or "Landlord's managing agent" (as distinguished from the costs of the operations of the Building/Project) including, but not limited to, Landlord's or Landlord's managing agent's general corporate overhead and general administrative expenses, legal,. risk management, and corporate and/or partnership accounting and legal costs, mortgages, debt costs or other financing charges, asset management fees, administrative fees, any costs that would normally be considered included in a management fee (e.g., property accounting charges, local area network ("LAN") and wide area network ("WAN") charges, travel expenses for company meetings or training. etc.), placement/recruiting fees/costs for employees whether they are assigned to the Building/Project or not, employee training programs, real estate licenses and other industry certifications, health/sports club dues, employee parking and transportation charges, tickets to special events, costs of any business licenses regardless if such costs are considered a form of Real Estate Tax, costs of defending any lawsuits, costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord's interests in the Building/Project, bad debt loss, rent loss or any reserves thereof, and costs incurred in connection with any disputes between Landlord and/or Landlord's management agent and their employees, tenants or occupants, and providers of goods and services to the Building/Project;

(B)                Leasing. Any cost relating to the marketing, solicitation, negotiation and execution of leases of space in the Building/Project, including without limitation, promotional and advertising expenses, commissions, finders fees, and referral fees, accounting, legal and other professional fees and expenses relating to the negotiation and preparation of any lease, license, sublease or other such document, costs of design, plans, permits, licenses, inspection, utilities, construction and clean up of tenant improvements to the Premises or the premises of other tenants or other occupants, the amount at' any allowances or credits paid to or granted to tenants or other occupants of any such design or construction, and all other costs of alterations of space in the Building/Project leased to or occupied by other tenants or occupants;

(C)                Executive/Unrelated/Off-Site Salaries. Wages, salaries, fees, fringe benefits, and any other form of compensation paid to any executive employee of Landlord and/or Landlord's managing agent above the grade of Building Manager as such term is commonly understood in the property management industry, provided, however, all wages, salaries and other compensation otherwise allowed lobe included in Operating Costs shall also exclude any portion of such costs related to any employee's time devoted to other efforts unrelated to the maintenance and operation of the Building/Project;

(D)                Competitively Bid. Any amount paid by Landlord or Landlord's managing agent to a subsidiary or affiliate of Landlord or Landlord's managing agent, or to any party as a result of a non-competitive selection process, for management or other services to the Building/Project, or for supplies or other materials, to the extent the cost of such services, supplies, or materials exceeds the cost that would have been paid had the services, supplies or materials been provided by parties unaffiliated with the Landlord or Landlord's managing agent on a competitive basis and are consistent with those incurred by similar buildings in the same metropolitan area in which the Building/Project is located;

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(E)             Ground Lease. Any rental payments and related costs pursuant to any ground lease of land underlying all or any portion of the Building/Project, and any costs related to any reciprocal easement agreement, and/or covenant, condition and restriction agreement;

(F)             Office & Parking Charges. Any office rental and any parking charges, either actual or nor, for the Landlord's and/or Landlord's managing agent's management, engineering, maintenance, security, parking or other vendor personnel:

(G)             Building Defects. Any costs incurred in connection with the original design, construction, landscaping and clean-up of the Building/Project or any major changes to same, including but not limited to, additions or deletions of floors, renovations of the common areas (except as otherwise expressly permitted under this BOCA), correction of defects in design and/or construction of the Building/Project including defective equipment, replacement of major components which have reached the and of their useful life irrespective of whether the replacement may result in reducing the Total Costs, and the repair of damage to the Building/Project in connection with any type of casualty, event of damage or destruction or condemnation;

(H)            Capital. All costs of a capital nature, including, but not limited to, capital improvements, capital repairs, capital equipment, and capital tools, all as determined in accordance with generally accepted accounting principles, consistently applied. and sound management practices, except (i)any capital improvement made to the Building which actually reduces Total Costs, amortized on a straight- line basis, including interest as the lesser of the interest rate actually paid by Landlord or 7.0% per annum, over the improvement's useful life in accordance with generally accepted accounting principles, provided, however, the annual amortization shall not exceed the annual amount of Total Costs actually saved as a result of such capital improvement, or (ii) capital expenditures required by government regulation or law enacted after the Commencement Date, the amount of such costs to be amortized on a straight-line basis, with interest at the lesser of the interest rate actually paid by Landlord or 7.0% per annum, over the asset's useful life in accordance with generally accepted accounting principles, or (iii) any cost incurred which is not considered annual recurring routine maintenance but maintains the general appearance of the Building/Project (i.e., painting of the common areas, replacement of carpet in common areas. maintenance of stone/tile) with the amount of all such costs to be amortized on a straight-line basis over the useful life, with interest at the lesser of the interest rate actually paid by Landlord or 7.0% per annum;

(I)              Other Capital, Rentals and other related expenses incurred in leasing air conditioning systems, elevators or other equipment, the cost of which if purchased would be excluded from Total Costs as a capital cost, excepting from this exclusion equipment not affixed to the Building/Project which is used in providing janitorial or similar services and, further excepting from this exclusion such equipment rented or leased to remedy or ameliorate an emergency condition in the Building/Project;

(J)             Building Codes/ADA. Any cost incurred in connection with upgrading the Building/Project to comply with insurance requirements, life safety codes, ordinances, statutes, or other laws as such laws are in effect prior to the Commencement Date, including without limitation the Americans With Disabilities Act (or similar laws, statutes, ordinances or rules imposed by the State, County. City, or other agency where the Building/Project is located), including penalties or damages incurred as a result of non-compliance;

(K)            Hazardous Material. Any cost or expense related to monitoring, testing, removal, cleaning, abatement or remediation of any "hazardous material", including toxic mold, in or about the Building/Project or real property, and including, without limitation, hazardous substances in the ground water or soil;

(L)             Reimbursements. Any cost of any service or items sold or provided to tenants or other occupants for which Landlord or Landlord's managing agent has been or is entitled to be reimbursed by such tenants or other occupants for such service or has been or is entitled to be reimbursed by insurance or otherwise compensated by parties other than tenants of the Building/Project to include replacement of any item covered by a warranty;

(M)           Benefits to Others. Expenses in connection with services or other benefits which are provided to another tenant or occupant of the Building/Project and which do not benefit Tenant to include the repairs and maintenance of the common area of a multi-tenant floor (e.g. elevator lobby, restrooms and hallways) if Tenant is a full-floor tenant and such repairs and maintenance are not provided to Tenant;

(N)           Other Taxes. Landlord's gross receipts taxes for the Building/Project, personal and corporate income taxes, inheritance and estate taxes, other business taxes and assessments, franchise, gift and transfer taxes, and all other Real Estate Taxes relating to a period payable or assessed outside the term of the Lease;

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(O)            Special Assessment. Special assessments or special taxes initiated as a means of financing improvements to the Building/Project and the surrounding areas thereof;

(P)            Advertising/Promotion/Gifts. All advertising and promotional costs including any form of entertainment expenses, dining expenses, any costs relating to tenant or vendor relation programs including flowers, gifts, luncheons, parties, and other social events but excluding any cost associated with life safety information services;

(Q)            FinesPenalties. Any fines, costs, lace charges. liquidated damages, penalties, tax penalties or related interest charges, imposed on Landlord or Landlord's managing agent;

(R)            Contributions/Dues/Subscriptions. Any costs, fees, dues, contributions or similar expenses for political, charitable, industry association or similar organizations, as well as the cost of any newspaper, magazine, trade or other subscriptions. excepting the Building's/Project's annual membership dues in the local Building Owners and Managers Association ("BOMA").

(S)            Art. Costs, other than those incurred in ordinary maintenance and repair, for sculptures. paintings, fountains or other objects of art or the display of such items;

(T-)            Concessionaires. Any compensation or benefits paid to or provided to clerks, attendants or other persons in commercial concessions operated by or on behalf of the Landlord;

(U)            Insurance. Costs incurred by Landlord for the repair of damage to the Building/Project caused by fire, windstorm, earthquake or other casualty, condemnation or eminent domain to include terrorism or environmental other than deductibles not to exceed (i) $15,000 to Tenant per occurrence for windstorm, and (ii) Tenant's Pro Rata Share of $10,000 per occurrence for other casualties;

(V)             Other Insurance. Any increase in the cost of Landlord's insurance caused by a specific use of another tenant or by Landlord;

(W)            Reserves. Any reserves of any kind;

(X)            Telecommunications. Any cost incurred in connection with modifying, upgrading, replacing, repairing or maintaining any component of the Building's telecommunication systems which is not used by Tenant; and

(Z)            Parking. Any maintenance, repair or replacementof the canopies installed in the parking area for the exclusive use of certain tenants on a reserved basis.

In determining the amount of Operating Expenses for any calendar year (i) if less than 95% of the Building shall have been occupied by tenants and fully used by them, at any time during the year, Landlord shall make an appropriate adjustment in accordance with industry standards and generally accepted accounting principles, consistently applied, to the Building/Project and Operating Expenses shall be increased to an amount equal to the like operating expense which would normally be expected to be incurred had such occupancy been 95% and had such full utilization been made during the entire period, or (ii) if the Landlord is not furnishing any particular work or service (the cost of which if' performed by the Landlord would constitute an Operating Expense) to tenants who have undertaken to perform such work or service in lieu of the performance thereof by the Landlord, Operating Expenses shall he deemed for the purposes of this Paragraph to he increased by an amount equal to the additional Operating Expense which would have reasonably been incurred during such period by the Landlord if it had at its own expense furnished such work or service. Tenant shall not pay Total Costs that exceed cost actually paid by Landlord.

(C)            Other Adjustments.

(i)   Net Expenses. Operating Expenses. Tax (herein defined) and Insurance Charges (herein defined) shall be "net" only and shall therefore be reduced by all cash discounts, trade discounts, quantity discounts, rebates, refunds, credits, or other amounts received by Landlord or Landlord's managing agent, including any such related amounts from tenants of the Building/Project, for its purchase of or provision of any goods, utilities, or services:

(ii)  Partial Year. Building/Project Operating Expenses that cover a period of  time not entirely within the Term of the Lease shall be prorated based on the actual number of days in the year:

(iii)   Vacancy Credit. Except in the event, Operating Expenses are to be "grossed up”, in the event Tenant ceases to occupy (but still leases) the Premises or any portion thereof, Tenant shall receive a credit against rent (for example, a credit to either Base Rent or Tenant's Pro Rata Share of Operating Costs) equal to Tenant's Pro Rata Share of the reduction in the cost of utilities not incurred as a result of such vacancy;

(iv)   Duplicate Charges. Landlord shall not (i) profit by including items in Operating Costs and/or Real Estate Taxes that are otherwise also charged separately to others, or (ii) collect Operating Costs and/or Real Estate Taxes from Tenant and all other tenants/occupants in the Building/Project in an amount in excess of what Landlord actually incurred for the items included in Operating Costs:

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(d)       Tenant further agrees to pay as part of "Additional Rent", an amount equal to Tenant's Pro Rata Share of the "Tax" and "Insurance Charges" (as hereafter defined) adjusted from time to time, as hereafter provided:

(i)          The phrases "Tax" and "Taxes", as used herein, shall mean all taxes, assessments, impositions, levies, charges, and other sums(whether now existing or hereafter arising, whether foreseen or unforeseen and whether made under the present system of real estate taxation or some other system), levied, assessed. charged or imposed by any governmental authority or other taxing authority (including, but not by way of limitation, municipal utility district taxing authorities) or which accrue upon the Project for any Calendar Year (or portion thereof) during the Term, including, without  limitation, any future tax upon rents received by Landlord (to he distinguished from income, franchise or profit taxes), as well as any costs incurred by Landlord contesting any such Taxes or obtaining consultants relative to any tax assessments, together with all penalties, interest and other charges (with respect to taxes) payable by reason of any delay and/or failure or refusal of Tenant to make timely payment as required under this Lease. "Taxes" shall not include any of Landlord's income, franchise or profit, estate, inheritance or gift taxes.

(ii)          The phrase "Insurance Charges" shall mean the total annual insurance premiums which accrue on all fire and extended coverage insurance, boiler insurance, public liability and properly damage insurance, rent insurance, and any other insurance which, from time to time, may, at Landlord's election, be carried by Landlord with respect to the Project during any Calendar Year (or portion thereof) during the Term; provided, however, that in the event, during any such Calendar Year, all or any part of such coverage is written under a blanket policy or other policy form whereby Landlord is unable to determine a specific insurance premium charge applicable to the Project (or to determine an equitable manner in which to prorate such charge among the properties covered by such policy), then in such event, the amount considered to be the Insurance Charge with respect to such policy shall bethat amount, as reasonably determined by Landlord. which would have been the annual Insurance Charge payable under the rates in effect (at approximately the same time that such policy was issued) for a separate Texas standard form insurance policy generally providing such type and amount of coverage (without any deductible amount) with respect to the Project (considering the type of construction and other relevant matters), even though Landlord carried such insurance, or a portion thereof, under such blanket coverage. Landlord may, from time to time, make a corresponding calculation as such policy is renewed or replaced. The phrase "Insurance Charges" shall also include the amount of any deductibles payable with respect to insurance carried by Landlord with respect to the Project.

(d)          Tenant shall pay to Landlord monthly estimated Operating Expenses, and estimated Tax and Insurance Charges (all of which are hereafter referred to as the "Monthly Estimated Costs"), as determined by Landlord from time to time, which shall be due and payable on or before the first day of each month during the Term hereof. Within one hundred twenty (120) days after the end of each Calendar Year occurring during the Term (and subsequent to the expiration or other termination of this Lease, if such occurs on a date other than the last day of the Calendar Year), Landlord will give Tenant notice of the total amount paid by Tenant for the applicable Calendar Year together with the actual amount of (i) Operating Expenses and (ii) Tax and Insurance Charges for such Calendar Year (collectively referred to in this section as the "Total Costs"). It the actual amount of Tenant's Pro Rata Share the Total Costs with respect to such period exceeds the aggregate amount previously paid by Tenant with respect thereto during such period, Tenant shall pay to Landlord the deficiency within thirty (30) days following notice from Landlord: if, however, the aggregate amount previously paid by Tenant with respect thereto exceeds Tenant's Pro Rata Share of the Total Costs for such period, then, at Landlord's election, such excess (net of any amounts then owing by Tenant  to Landlord) shall be credited against the next installment of any such cost due hereunder by Tenant, or Landlord may refund such net excess to Tenant within thirty (30)days following delivery of Landlord's notice. Periodically, during the Term of this Lease, Tenant shall pay all taxes assessed against Tenant's personal property and leasehold improvements. Notwithstanding anything contained in this Article 4 to the contrary, annual increases in the amount of Tenant's Additional Rent (Tenant's Pro Rata Share of Operating Expenses, Taxes and insurance) shall be capped at ten percent (10%), calculated on a cumulative basis, solely with respect to Controllable Expenses following the first full calendar year of the Project. “Controllable Expenses” specifically does not include ( i) Insurance, (ii) Taxes, (iii) utilities, and (iv) any change in Additional Rent which is a result of an increase in minimum wage, labor unions, or any change mandated by governmental regulation.

(e)          The term "Calendar Year as used herein, means each calendar year and partial calendar year for the full Term hereof. The First (1st) Calendar Year means the period which begins with the Commencement  Date and which ends on the following 31st day of December. Each following Calendar Year period shall be for a term of a full twelve (12) months beginning with the next following January 1st and shall continue for each and every twelve (12) month period thereafter; however the last Calendar Year shall be for less than twelve (12) months if the Lease Term ends on a date other than December 31st.

(f)         For all purposes tinder this Lease, "Rent" shall mean the Base Rent and Additional Rent. Tenant acknowledges that late payment by Tenant to Landlord of all Rent or other charges due from Tenant under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impractical to fix. Such costs include, without limitation, processing accounting charges, and late charges that may be imposed on landlord by the terms of any encumbrance and note secured by any encumbrance covering the demised premises. Therefore, if any installment of Rent or other charges due from Tenant under this Lease is not received within ten (10) days of the date when due, Tenant shall pay to Landlord an additional sum of ten percent (10%) of the overdue Rent or earlier charges due from Tenant under this Lease as a late charge. Further, the parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of late payments by Tenant, however, Landlord's acceptance of any late charge shall not constitute a waiver of Tenant's default with respect to the overdue amount, nor prevent Landlord from exercising any of the other rights and remedies available to Landlord.

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(g) Tenant, at Tenant's sole cost and expense, shall have the right, to be exercised by written notice given to Landlord within ninety (90) days after receipt of aforesaid statement showing Total Costs for the previous calendar year, to audit, at the place where Landlord maintains its books and records, Landlord's books and records pertaining only to such Total Costs for such previous calendar year, provided (A) such audit commences within thirty (30) days after Tenant's notice to Landlord and thereafter proceeds regularly and continuously to conclusion, (B) that Tenant or Tenant's employee is present at all times during the audit, (C) such audit does not unreasonably interfere with the conduct of Landlord's business, (D) such audit is performed by a national or regional auditing Finn which is commonly known to be reputable, and (E) said auditing firm signs a nondisclosure agreement in favor of Landlord, acceptable to Landlord in all respects, agreeing that information derived from such audit shall not be used directly or indirectly in connection with soliciting additional auditing business from other existing, previous or future tenants in the Building, Landlord agrees to cooperate in good faith with Tenant in the conduct of any such audit. Notwithstanding anything to the contrary set forth in this Paragraph, however, in no event shall Tenant ever be permitted to audit or cause to be audited Landlord's records concerning Total Costs through, or with the assistance of auditors or others whose compensation is contingent upon, or the amount of whose compensation is affected by, the outcome of such audit, in whole or in part, or on any payment or reimbursement by Landlord to Tenant in connection with such audit, or which is otherwise done in whole or in part on any basis other than reasonable hourly charges for the hours expended in the performance of such audit, and reimbursement of reasonable out-of-pocket expenses incurred by such auditors in connection with such audit. In the event that the audit determines that the amount charged to Tenant exceeds the correct amount by 5% or more. Landlord will promptly refund the Tenant all amounts overpaid and Landlord shall pay for the reasonable cost of the audit.

5. POSSESSION. If Landlord is unable to deliver possession of the Leased Premises on the date of the commencement of the Term because the Leased Premises are not ready for occupancy, Landlord shall not be subject to any liability for the failure to deliver possession on said date. Under such circumstances, unless the delay is the fault of Tenant, the Rent shall not commence until Leased Premises are ready for occupancy by Tenant, and no such failure to deliver possession on the date of commencement of the Term shall in any way affect the validity of this Lease or the obligations of Tenant hereunder, nor shall same be construed in any way to extend the Term, the delay in the accrual of rent described in the foregoing sentence constitutes full settlement of all claims that Tenant might otherwise have by reason of the Leased Premises not being ready for occupancy on the commencement of the Term. If, at Tenant's request, Landlord shall make the Leased Premises available to Tenant prior to the date of commencement of the Term for the purposes of decorating. constructing, furnishing, and equipping he Leased Premises, the use of the Leased Premises for such work shall not create a landlord-tenant relationship between the parties nor constitute occupancy of the Leased Premises within the meaning of the next sentence, but the provisions of Paragraph 9, 11, 12,13 and 14 of the Lease shall apply from the date the Leased Premises are made available to the Tenant. If with the consent of Landlord, Tenant shall enter into occupancy on the Leased Premises to do business therein prior to the date of commencement of the Term, the provisions of the Lease shall apply and rent shall accrue and he payable from the date of occupancy. If pursuant to the terms of this Paragraph 3, the Term shall commence on any data other than that commencement date noted in Paragraph 2, Tenant agrees to enter into a letter amendment to this Lease identifying the new "Term" hereof. Notwithstanding anything to the contrary contained in this Lease upon execution of this Lease by Landlord and Tenant. Landlord and Tenant hereby agree that they are bound by the terms of this Lease from and after the date both parties executed this Lease.

6.     USE.

(a)          Tenant shall use the Leased Premises solely for the purpose of general office space. Tenant shall use the Leased Premises for no other purpose without the prior written consent of Landlord. In addition, Tenant covenants and agrees to operate its approved business in a first-class, reputable and efficient manner, throughout the Term °runs Lease in or on the Leased Premises.

(b)          Tenant shall be entitled to place, at Tenant's sole cost and expense. a sin panel on the pylon sign to be constructed for the Building, which pylon sign shall be constructed by Landlord at its sole cost and expense within thirty (30) days following the Commencement Date. The location and appearance of such sign and panel are shown on the attached Exhibit "C". Landlord shall furnish and install building standard graphics including Tenant's name and/or logo on all Building directories and at Tenant's entry door, at Landlord's cost.

(c)          The Project will be at all times under the control, management and operation of Landlord: provided. However, nothing in this subparagraph (c) shall create liability on the part of Landlord, if such liability arises out of any obligation undertaken by Tenant under this Lease. Landlord may from time to time (i) alter or redecorate the Project (including any Common Area) or construct additional facilities adjoining or approximate to the Project: (ii) close, temporarily, doors, entryways, public spaces and corridors and interrupt or suspend, temporarily, Building services and facilities in order to perform any redecorating or alteration or in order to prevent the public from acquiring prescriptive rights in any Common Area; (iii) change the name or street address of the Building: and (iv) install, maintain or change a sign or signs on the exterior or interior of the Building.

(d)          Landlord will use commercially reasonable efforts not to disrupt Tenant's operations in the Leased Premises during the proper exercise of Landlord's rights under Paragraph 6(c) or Paragraph 20 hereof, but it is not required to incur any unreasonable expenses in order to minimize the disruption. Tenant hereby waives all claims for damages. injuries or interference with Tenant's business, loss of occupancy, or quiet enjoyment and for claims under any other laws resulting from the proper exercise by Landlord of any right under Paragraph 6(c) or Paragraph 20 hereof. No proper exercise by Landlord of any right under Paragraph 6(c) or Paragraph 20 hereof constitutes actual or constructive eviction or breach of any expressed or implied covenant for quiet enjoyment.

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(e) If, at any time during the Term, Tenant vacates, abandons, or ceases its operation at the Lease Premises for more than ninety (90) days (except as a result of casualty or condemnation). Landlord shall provide written notice to Tenant thereof. and if Tenant shall not have recommenced its occupancy for operation at the Premises within thirty (30) days following receipt of such notice, then Landlord shall have the right to immediately recapture the Leased Premises and in such event, the Lease Term shall expire and end on the date stated in Landlord's notice (the "Recapture Notice"), in which event neither Landlord nor Tenant shall have any further liability hereunder, except for those obligations which expressly survive the expiration or earlier termination of this Lease.

7. SERVICE TO BE PROVIDED BY LANDLORD.

(a) Subject to the Building rules and regulations hereinafter set forth, Landlord shall furnish Tenant, at Landlord's expense, except as provided in Paragraph 4 above, the following services while Tenant is occupying the Leased Premises during the Term:

(i)          During normal business hours (7:00 a.m. - 7:00 p.m.) on Mondays through Fridays, and, Saturdays (9:00. a.m. - 12:00 p.m.) air-conditioning and beating in season, at such temperatures and in such amounts as are considered by Landlord to be standard. but such service outside normal business hours and on Sundays and holidays shall be furnished only at Landlord's discretion and in any event only upon forty-eight (48) hours prior written request by Tenant, who shall bear the standard charges of Landlord therefor, which shall never be less than the cost thereof

(ii)          Hot and cold water at those points of supply provided for general use.

(iii)          Standard building janitor service in and about the Building and the Leased Premises, five (5) days per week, and periodic window washing; however, Tenant shall pay the additional costs attributable to the cleaning of improvements within the Leased Premises other titan building standard improvements.

(iv)          Elevators for ingress to and egress from the Building during normal business hours and other such periods as are considered by Landlord to be standard.

(v)          Proper building standard facilities to furnish sufficient electrical power for standard lighting, typewriters, dictating equipment, calculating machines and other machines of similar low electrical consumption, but not including electricity required for special lighting in excess of building standard, or which, in Landlord's reasonable judgment, exceeds the capacity of existing feeders, conductors, risers, or wiring in or to the Leased Premises or Building, and not including electricity for any other item of electrical equipment which singly consumes more than 0.25 kilowatts per hour at rated capacity, or voltage other than 120 volts or single phase. Tenant shall pay to landlord, monthly as billed, such charges as may be separately metered or as Landlord's engineer may compute for any electrical service furnished to Tenant in excess of that stated above.

(vi)          Replacement of fluorescent lamps in building standard ceiling mounted fixtures installed by Landlord and incandescent bulb replacement in public areas.

(b) No interruption, moratorium or malfunction of any services, or failure of any machinery, equipment or systems, or components thereof, to operate, or malfunction in the operation thereof, for any cause whatsoever shall constitute an eviction or disturbance of Tenant's use and possession of the Leased Premises or Project or a breach by Landlord of any of its obligations hereunder or render Landlord liable for damages or entitle Tenant to be relieved from any of its obligations hereunder (including the obligation to pay Rent) or grant Tenant any right of setoff or recoupment. In the event of any such interruption, however, Landlord shall use reasonable diligence to restore such service in any circumstances in which such restoration is within the reasonable control of Landlord and the interruption was not caused by Tenant's fault or the fault of Tenant's employees, agents, contractors, invitees, or licensees. Notwithstanding anything contained herein, Landlord shall use reasonable efforts to restore any service required of it that becomes unavailable: however, such unavailability shall not render Landlord liable for any damages caused thereby, be a constructive eviction of Tenant, constitute a breach of any implied warranty, or, except as provided in the next sentence, entitle Tenant to any abatement of Tenant's obligations hereunder. If, however, Tenant is prevented from using the Premises for more than live (5) consecutive business days because of the unavailability of any such service and such service is within Landlord's control, then Tenant shall, as its exclusive remedy be entitled to a reasonable abatement of Base Rent and Additional Rent for each consecutive day (after such 5-day period) that Tenant is so prevented from using the Premises.

(c) Should Tenant desire any additional services beyond those described in Subparagraph (a) of this Paragraph 7 or rendition of any such services outside the normal times of Landlord for providing such services. Landlord may (at Landlord's option), upon reasonable advance notice from Tenant to Landlord, furnish such services, and Tenant agrees to pay Landlord such charges as may be agreed on between Landlord and Tenant, but in no event at a charge less than Landlord's actual cost plus reasonable overhead for the additional services provided. By way of illustration and not limitation, special equipment requiring abnormal use of water or electricity used as a power source for data processing machines, including, air conditioning costs therefor, large business machines and similar equipment of high electrical consumption characteristics shall not constitute standard water consumption or electrical service, as the case may be, and the costs thereat' shall he paid by Tenant. Tenant hereby agrees to cause, at its sole expense, separate meters for measuring units of' consumption to be installed within the Leased Premises, if the services consumed by Tenant are reasonably determined by Landlord to be beyond or more than those services described in Subparagraph (a) of this Paragraph 7 to be provided by Landlord.

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(d)          Tenant shall pay to the Landlord the amount provided for in this Paragraph 7(c) for additional services within five (5) business days after receipt of an invoice therefor from Landlord.

(e)          Tenant shall also pay for, before delinquencies, all telephone charges and the cost or charge for all other materials and services not expressly the obligation of Landlord that are Furnished to or used on, in or about the Leased Premises by other parties during the Term of this Lease.

8. REPAIR AND MAINTENANCE.

(a)          Landlord shall, subject to the casualty provisions of Paragraph 9, maintain the (i) Common Area and service areas of the Project, ( ii) roof, foundation, exterior windows and load-bearing items of the Building; (iii) exterior (located outside the Leased Premises) surfaces of walls; (iv) plumbing, pipes and conduits located in the Common Area or service areas of the Project; and (v) the Buildings central heating, ventilation and air conditioning, electrical, mechanical and plumbing systems, landlord is not required to make any repair in connection with or resulting from (1) any alteration or modification to the Leased Premises or to Building equipment performed by, for or because of Tenant or to special equipment or systems, installed by, for or because of Tenant, (2) the installation, use or operation of Tenant's property, fixtures, and equipment, (3) the moving of Tenant's property in or out of the Building, or in and about the Leased Premises, (4) Tenant's use or occupancy of the Leased Premises in violation of Paragraph 6 or in a manner set out in this Lease (e.g. subsequent installation of special use rooms), (5) the acts or omissions of Tenant and Tenant's employees, agents, invitees, subtenants, licensees or contractors, or (6) fire or other casualty, except as provided in Paragraph 9. Depending on the nature of repairs undertaken by Landlord, the cost of the repairs will be borne solely by Landlord (if required to be under the terms of the Lease) or will be reimbursed to Landlord either by a particular tenant or tenants or by all tenants as part of the Operating Expenses.

(b)          Except for janitorial services provided by Landlord and landlord's obligations under Paragraph I(b) and 8(a), and subject to the terms of Paragraph 15. Tenant shall maintain the Leased Premises, including all fixtures installed by Tenant, in good and tenantable condition and repair and shall promptly make all reasonably necessary non­structural repairs and replacements thereto except those caused by fire or other casualty covered by insurance on the Building under policies naming Landlord as the insured. all at Tenant's sole expense, under the supervision and with the reasonable approval of Landlord. Such repairs and replacements shall be in quality and class equal to the original work. Without diminishing such obligations of Tenant, if Tenant fails to make such repairs or replacements within fifteen (15) days after the occurrence of the damage or injury, Landlord may at its option (after prior written notice to Tenant) make such repair and Tenant shall pay Landlord for the reasonable cost thereof upon demand, plus interest thereon, as provided in this Lease, from demand until payment. In addition, Tenant shall pay the cost of repair and replacement due to damage or injury done to the Building or any part thereof or any part of the Project, by Tenant or Tenant's agents, employees, contractors, licensees or invitees. Such amount shall be paid by Tenant to Landlord within five (5) business days, after written demand, plus interest thereon, as provided in this Lease, from demand until payment. Upon termination of this Lease, Tenant will surrender the Leased Premises to Landlord in the same condition in which they existed at the commencement of the Lease or as subsequently Unproved by Landlord or Tenant, excepting only ordinary wear and tear and damage arising from any cause required hereunder to be repaired at Landlord's expense.

(c)          If there now is or shall be installed in the Building a "sprinkler system" and such systems or any of its appliances shall be damaged or injured or not in perfect working order by reason of any act or omission of Tenant, Tenant's agents, servants, employees, contractors, licensees or invitees, Tenant shall forthwith restore same to good working condition at its own expense under the supervision and with the approval of Landlord; and if any bureau, department or official oldie state or city government require or recommend that any changes, modifications or alterations be made or that sprinkler heads and equipment be supplied by reason of Tenant's business, or the location of partitions, trade Fixtures or other contents of the Leased Premises. Tenant shall, at Tenant's expense, promptly make and supply such changes, or modifications, alterations, additional sprinkler heads or other equipment.

(d)          Tenant acknowledges that after it has inspected the Leased Premises and Tenant's taking possession of the Leased Premises shall be conclusive evidence as against the Tenant that the Leased Premises were in good order and satisfactory condition when the Tenant took possession. No promise of the Landlord to alter, remodel, repair or improve the Leased Premises or the Building and no representation respecting the condition of the Leased Premises or the Building have been made by Landlord to Tenant, other than as may be contained herein or in a separate Work Letter agreement signed by Landlord and, Tenant.

9. LANDLORD'S INSURANCE; FIRE AND CASUALTY.

(a) Landlord will maintain fire and extended coverage insurance on the Building in an amount not less than 80% (or such greater percentage as necessary to comply with co-insurance requirements of the policy) of the "replacement cost" thereof, as defined in a Replacement Cost Endorsement to be attached thereto. Said insurance is for Landlord's sole benefit and is under its sole control.

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(b)            If at any time during the Term, the Leased Premises or any portion of the Building or Common Area shall be damaged or destroyed by tire or other casualty, then Landlord shall have the election either to terminate this Lease or to repair and reconstruct the Common Area, the Leased Premises and/or the Building to substantially the same condition in which they existed immediately prior to such damage or destruction, except that Landlord shall not be required to repair, replace or reconstruct any personal property, furniture, trade fixtures, tenants improvements, alterations or additions made by or for Tenant, or office equipment which is located in the Leased Premises and removable or insurable by Tenant under the provisions of this Lease, and except that Landlord is not required in any event to expend more than the amount of insurance proceeds actually received by Landlord as a result of fire or other casualty.

(c)            In any of the aforesaid circumstances, Rent shall abate proportionately during the period and to the extent that the Leased Premises or portion thereof are untenantable or unfit for use by Tenant in the ordinary conduct of its business, if Landlord has elected to repair and restore the Leased Premises to the extent staled above, this Lease shall continue in full force and effect and such repairs will be made within a reasonable time thereafter, subject to delays arising from shortages of labor or materials, acts of God, war or other conditions beyond Landlord's reasonable control. Within sixty (60) days following any casualty hereunder, Landlord notify Tenant in writing of the time required to repairs such casualty, as estimated by Landlord. Should (i) Landlord, in Landlord's reasonable judgment, estimate that reasonable repairs cannot be completed within six (6) months after the casualty, or (ii) Landlord estimate that the reasonable repairs will be completed within six (6) months after the casualty, but Landlord does not in fact complete such repairs within such six (6) month period, then Tenant may terminate this Lease by written notice within (x) thirty (30) days after receipt of Landlord's notice with respect to clause (i) of this sentence, or (y) thirty (30) days following the expiration of such six (6) month period with respect to clause (ii) of this sentence. In the event that this Lease is terminated as herein permitted, Landlord shall refund to Tenant any prepaid Rent (unaccrued as of the date of damage or destruction) less any sum then owing Landlord by Tenant. If Landlord has elected to repair and reconstruct the Leased Premises to the extent stated above, then, at Landlord's election, the Term may be extended by a period of time equal to the period of such repair and reconstruction.

(d)           Notwithstanding the provisions of Subparagraphs (b) and (c) of this Paragraph 9, if the Leased Premises or any other portion of the Building is damaged by fire or other casualty resulting from the fault or negligence of Tenant or any of Tenant's agents, employees, contractors, licensees or invitees, the Rent hereunder shall not be diminished during repair of such damage, and Tenant shall be liable to Landlord for the reasonable cost and expense of the repair and restoration of the Leased Premises or the Building caused thereby to the extent such reasonable cost and expenses are not covered by insurance proceeds.

(e)            Notwithstanding anything herein to the contrary, if Landlords Mortgagee requires that the insurance proceeds be applied to indebtedness owed to such mortgagee. Landlord may terminate this Lease by delivering written notice of termination to Tenant within three (3) days after the requirement is made by Landlord's Mortgagee, whereupon all further rights and obligations of each party hereunder shall cease and terminate.

(f)             If the Leased Premises, or any part thereof, are damaged or destroyed by a casualty other than a peril covered by the insurance to be provided by landlord under Subparagraph 9(a), or if any other improvements situated on the Leased Premises are damaged or destroyed, then Tenant shall at its sole cost and expense proceed with reasonable diligence to rebuild and repair the damaged improvements to substantially the condition in which they existed before the damage or destruction, subject to Landlord's approval of The plans and specifications for the rebuilding and repairing.

10. COMPLIANCE WITH LAWS AND USAGE. Tenant, at its own expense, will (i) promptly comply with all federal, state, municipal and other laws, ordinances, rules and regulations applicable to the Leased Premises and the business conducted therein by Tenant: (ii) not engage in any activity which would cause Landlords fire and extended coverage insurance to be canceled or the rate therefor to be increased (or, at Landlord's option, will pay any such increase); (iii) not commit any act which is a nuisance, disturbance or annoyance to Landlord or to other tenants, or which might, in the exclusive reasonable judgment of Landlord, waste in the Leased Premises or Building; and (v) not paint, erect or display any sign, advertisement, placard or lettering which is visible on the corridors or lobby of the Building or from the exterior of the Building without Landlords prior written approval. The parties acknowledge that the Americans With Disabilities Act of 1990 (42 U.S.C. ss. 12101 et seq.) and regulations and guidelines promulgated thereunder, as all of the same may be amended and supplemented from time to time (collectively referred to herein as the "ADA") establish requirements for business operations, accessibility and barrier removal, and that such requirements may or may not apply to the Leased Premises and the Building depending on, among other things; (1) whether Tenant's business is deemed a "public accommodation" or "commercial facility", (2) whether such requirements are "readily achievable", and (3) whether a given alteration affects a "primary function area" or triggers "path of travel" requirements. The parties hereby agree that; (a) Landlord shall be responsible for ADA Title III compliance in the Common Areas of the Building, except as provided below, (b) Tenant shall be responsible for ADA Title III compliance in the Leased Premises, including any leasehold improvements or other work to be performed in the Leased Premises under or in connection with this Lease, and (c) Landlord may perform, or require that Tenant perform, and Tenant shall be responsible for the cost of, ADA Title III "path of travel" requirements triggered by alterations in the Leased Premises. Tenant shall be solely responsible for requirements under Title I of the ADA relating to Tenant's employees. The parties hereto specifically agree that no provision ofthis Lease or any exhibit attached hereto shall be construed in any manner as to violate the ADA, and neither party has any intent, and disclaims any intent, to violate the ADA, and no activities of the Landlord or Tenant otherwise prohibited by this Lease or any exhibit hereto shall be prohibited to the extent such prohibition is construed as a violation of the ADA.

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11.          INDEMNITY. Landlord shall not be liable for and Tenant agrees to indemnify and save harmless Landlord and its affiliates and their agents, servants, directors, officers and employees (collectively "Indemnitees") from and against any and all liabilities, damages, claims, suits, costs (including reasonable costs of suit, reasonable attorneys' fees and reasonable costs of investigation) and actions of any kind arising or alleged by the injured party or arise by reason of injury to or death of any person or damage to or loss of property occurring on, in or about the Leased Premises or by reason of any other claim whatsoever of any person or party occasioned or alleged to be occasioned by any act or omission on the part of Tenant or any invitee, patron, licensee, employee, director, officer, agent, servant, owner, contractor, subcontractor, or tenant of Tenant, or on the part of any person entering the Building or Leased Premises under the expressed or implied invitation of Tenant, or by any breach, violation or nonperformance of any covenant of Tenant, or by any breach, violation or nonperformance of any covenant of Tenant under this Lease, whether such liability, claims, suits, costs, injuries, deaths, or damages arise from or are attributed to the concurrent negligence of any Indemnitee, if any action or proceeding shall be brought by or against any Indemnitee in connection with any such liability or claim, Tenant, on notice from the Indemnitee shall defend such action or proceeding, at Tenant's expense, by or through attorneys reasonably satisfactory to the Indemnitee. The provisions of this Paragraph shall apply to all activities of Tenant with respect to Leased Premises or the Project, occurring after execution of this Lease, Tenant's obligations under this Paragraph shall not be limited to the limits or coverage of insurance maintained or required to be maintained by Tenant under this Lease.

12.          WAIVER OF LIABILITY. No Indemnitee shall be liable in any manner to Tenant or any other person or party for any injury to or death of persons or for any loss of or damage to property of Tenant, its employees, agents, customers, invitees or to others, regardless of whether such property is entrusted to employees of the Building or such loss or damage is occasioned by casualty, theft or any other cause of whatsoever nature, unless caused by the willful misconduct or gross negligence of the particular Indemnitee. In no event shall any Indemnitee be liable in any manner to Tenant or any other person or party as a result of the acts or omissions of Tenant, its agents, employees, contractors, invitees, patrons, licensees, directors, officers, tenants, or any other person or party entering the Project or the Leased Premises under the expressed or implied invitation of Tenant, or any other tenant of the Building. All personal property upon the Leased Premises shall be at the risk of Tenant only, and no Indemnitee shall be liable for any damage thereto or theft thereof, whether or not due in whole or in part to the negligence of any Indemnitee.

13.          WAIVER OF SUBROGATION. Regardless of fault or negligence, Landlord and Tenant hereby waive any claim arising in favor of one against the other, or anyone claiming through either, by way of subrogation or otherwise, for any loss of or damage to any property of either which loss or damage is covered under their respective casualty insurance policies (including extended coverage). Said waiver shall be in addition to any other waiver or release contained in this Lease with regard to loss or damage to property of either. Landlord and Tenant each shall request its insurer to consent to such waiver and agree to waive all rights of subrogation against the other party, and Landlord and Tenant shall provide the other party with all endorsements necessary to evidence the consent of its insurer.

14.          TENANT'S INSURANCE. Tenant shall maintain at all times during the term of this Lease, at Tenant's expense:

(a)          CASUALTY INSURANCE; including extended coverage, vandalism, and malicious mischief, and demolition and debris removal, insuring for an amount not less than 80% of the current replacement cost of all Tenant improvements, alterations or additions made to the Leased Premises by Tenant, and Tenant's trade fixtures, inventory, furniture and equipment owned, controlled or in use by Tenant and situated in the Leased Premises. Landlord shall have no interest in the insurance upon Tenant's equipment and trade fixtures other than as a lien holder pursuant to Paragraph 21 with respect to such equipment and trade fixtures. Landlord will not carry insurance insuring Tenant's property unless it elects to do so pursuant to Paragraph 14(1) below.

(b)          COMMERCIAL GENERAL LIABILITY INSURANCE including Bodily Injury and Property Damage Liability and Person & Advertising Injury Liability on an occurrence basis with respect to Tenant's business and occupancy of the Leased Premises for any one occurrence or claim of not less than $2,000,000. with N/A Products Aggregate and $5,000,000 General Aggregate, or such greater amount as Landlord may reasonably require in writing from time to time. Such insurance shall contain a provision including coverage for all liabilities assumed by Tenant under this Lease and shall name Landlord as an additional insured.

(c)          WORKER'S COMPENSATION INSURANCE for all Tenant employees working in the Leased Premises in an amount sufficient to comply with applicable laws or regulations. The policy shall include Employer's Liability with minimum limits of Sl00.000 per accident, $100,000 per employee, $500.000 policy limit.

(d)          INSURANCE against such other perils and in such amounts as Landlord may from time to time reasonably require in writing. Such request shall be made on the basis that the insurance coverage requested is customary at the time for prudent tenants.

All policies of insurance required to be maintained by Tenant hereunder shall (i) be in a form acceptable to Landlord: (ii) be issued by an insurer licensed to do business in the state in which the Building is situated and which insurer shall otherwise be reasonably acceptable to Landlord: (iii) require at least thirty (30) days written notice to Landlord before termination or material alteration: and (iv) with respect to insurance, required under Subparagraphs (a), (h), and (e), name Landlord and Landlord's Mortgagee as an "additional insured". Tenant shall, upon the commencement of the Term of this Lease and thereafter within thirty (30) days prior to the expiration of each such policy, promptly deliver to Landlord certified copies or other evidence of such policies and evidence satisfactory to Landlord that all premiums have been paid and the policies are in effect.

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(f) Tenant shall provide Landlord with an original certificate of insurance upon execution of this Lease. If Tenant fails to comply with the insurance requirements set forth in Paragraph 14, then Landlord may (in addition to having available to it all other remedies provided herein upon an occurrence of an Event of Default), obtain such insurance and Tenant shall pay to Landlord on demand, the premium cost thereof, plus interest provided under Paragraph 40.

I5. ADDITIONS AND FIXTURES.

(a)          Tenant shall not make any alteration, change, improvement, repair, replacement or addition to the Leased Premises ("Alteration") without prior written consent of Landlord which consent shall not be unreasonably withheld. Unless Landlord has waived the requirement in writing, together with Tenant's request for approval of an Alteration, Tenant must also submit reasonable detail with respect so design concept, plans and specifications. certificates of insurance to be maintained by Tenant's contractors, hours of construction, proposed construction methods, details with respect to the quality of the proposed work, and reasonable evidence of security (such as payment and performance bonds) to assure timely completion and payment of the costs of the work by the contractor. With respect to an Alteration that is visible from outside the Leased Premises, the Alteration must, in the opinion of the Landlord, also be architecturally and aesthetically harmonious with the remainder of the Building. If Landlord consents to the Alteration, the work in such connection shall be at Tenant's expense, but be performed by workers of Landlord or workers and contractors approved by the Landlord in advance and in writing, and shall he performed in a manner and upon terms and conditions and at times reasonably satisfactory to and approved in advance and in writing by Landlord. In any instance in which Landlord grants such consent, Landlord may grant such consent contingent and conditioned upon Tenant's working in harmony and not interfering with any labor utilized by Landlord. Landlord's contractors or mechanics, or by any other tenant or such other tenant's contractors or mechanics: and if at any time such entry by one or more persons furnishing labor or materials for Tenant's work shall cause interference in the Project or with respect to other tenants and their employees, agents, contractors, invitees or licensees, the consent granted by Landlord to Tenant may be withdrawn upon forty-eight (48) hours written notice to Tenant. All work performed by or for Tenant will be performed diligently and in a first class, workmanlike manner, and in compliance with all applicable laws, ordinances, regulations and rules of any public authority having jurisdiction over the Building  and/or Tenant and, so long as communicated in writing to Tenant, Landlord's insurance carriers. Landlord has the right, but not the obligation,. to inspect periodically the work on the Leased Premises and may require or make changes in the method or quality of the work.

Except for the cost that Landlord agrees with Tenant in writing to pay, Tenant shall pay for all costs incurred or arising out of any Alterations and shall not permit a mechanic's or materialman's lien to be asserted against the Leased Premises. On Landlord's request, Tenant shall deliver to Landlord proof of payment and lien waivers and releases satisfactory to Landlord of all costs incurred or arising out of Alterations. If for any reason Tenant fails to discharge any such obligation, and a mechanics or materialman's lien is tiled against any portion of the Project, other than liens that are being contested by Tenant in good faith, in addition to any other right or remedy of Landlord for an occurrence of an Event of Default under this Lease. Landlord may (but is not obligated to) discharge the lien, either by paying the amount due or by procuring a bond, or by any other means. Any amount paid by Landlord to obtain the discharge of the lien, with interest as provided in Paragraph 40, shall be paid by Tenant to Landlord on demand.

(b)          Tenant may remove its trade fixtures, office supplies and movable office furniture and equipment not attached to the Building provided: (i) such removal is made prior to the termination of the term: (ii) Tenant is not in default of any obligation or covenant under this Lease at the time of such removal: and (iii) Tenant promptly repairs all damage cause by such removal. All other property at the Leased Premises and any Alteration of the Leased Premises (including wall-to-wall carpeting, paneling or other wall covering) and any other article attached or affixed to the Leased Premises (any of which as stated above shall require Landlord's prior written consent) shall become the property of Landlord upon construction or installation and shall remain upon and he surrendered with the Leased Premises as part thereof at the termination of this Lease, (however, Landlord shall not have any obligation to insure or rebuild or replace any such alterations) and Tenant hereby waives all rights to any payment or compensation therefor. If, however, Landlord notifies Tenant in writing upon approval of the "Final Plans" (as defined in Exhibit C attached hereto). Tenant will, prior to termination of this Lease, remove any and/or all Alterations, fixtures, equipment and property placed or installed by it or at its request in the Lease Premises and will repair any damage caused by such removal.

16. ASSIGNMENT AND SUBLETTING.

(a) Neither Tenant, nor Tenant's legal representatives or successors in interest by operation of law or otherwise, shall assign this Lease or sublease of the Leased Premises or any part thereof or mortgage, pledge or hypothecate its leasehold interest in this Lease or grant any concession or license within the Leased Premises without the prior express written permission of Landlord (which permission may not be unreasonably withheld, conditioned or delayed), and any attempt to do any of the foregoing without the prior express written permission of Landlord shall be an Event of Default hereunder and such attempted act shall be void and of no effect. In the event Tenant requests Landlords permission as to any such assignment, sublease or other transaction, in the event of any such attempted assignment or attempted sublease or should Tenant, in any other transaction, permit or attempt to permit anyone to occupy the Leased Premises (or any other portion thereof) without the prior written permission of the Landlord. Landlord shall thereupon have the right and option, but not the obligation, to cancel and terminate this Lease effective upon fifteen (15) days notice to Tenant given by Landlord at any time thereafter either as to the entire Leased Premises or as to only the portion thereof which Tenant shall have attempted to assign or sublease or otherwise permitted some other party's occupancy without Landlord's prior express written permission, and if Landlord elects to cancel and terminate this Lease as to the aforesaid portion of the  Leased Premises, then the Rent and other charges payable hereunder shall thereafter be proportionately reduced. This prohibition against assigning or subletting shall be construed to include a prohibition against any assignment or subletting by operation of the law, Tenant shall pay Landlord, on demand, as additional Rent hereunder all reasonable costs(including reasonable attorneys' fees) incurred by Landlord in connection with any request by Tenant hereunder, whether or not such request is approved.

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(b) Notwithstanding that the prior express written permission of Landlord to any of the aforesaid transactions may have been obtained, the following shall apply:

(i)          In the event of an assignment, contemporaneously with the granting of Landlord's aforesaid consent, Tenant shall cause the assignee to expressly assume in writing and agree to perform all of the covenants, duties and obligations of Tenant hereunder and such assignee shall be jointly and severally liable therefor along with Tenant;

(ii)          A signed counterpart or all instruments relative thereto (executed by all parties to such transaction with the exception of Landlord) shall be submitted by Tenant to Landlord prior to or contemporaneously with the request for Landlord's written consent thereto (it being understood that no such instrument shall be effective without the written consent of Landlord);

(iii)          Tenant shall subordinate to Landlords statutory lien and Landlord's contractual lien and security interest any liens or other rights which Tenant may claim with respect to any fixtures, leased to tire proposed assignee or sublessee or other party intending to occupy the Leased Premises;

(iv)          No usage of the Leased Premises different from the usage herein provided to be made by Tenant shall be permitted and all other terms and provisions of this Lease shall continue to apply after any such assignment or subleasing; and

(v)In any case where Landlord consents to an assignment, sublease, grant or concession or license or mortgage, pledge or hypothecation of the leasehold, the Tenant (and any guarantor of this Lease) will nevertheless remain directly and primarily liable for the performance of all the covenants, duties and obligations of Tenant hereunder (including, without limitation, the obligation to pay all Rent and other sums herein provided to be paid), and Landlord shall be permitted to enforce the provisions of this instrument against the undersigned Tenant (and such guarantor) and/or any assignee without demand upon or proceeding in any way against any other person; and

(vi)         In the event that the Rent and any other consideration due and payable on a monthly basis or otherwise by a sublessee under any sublease permitted by Landlord pursuant to the terms of this Lease, exceed the Rent payable under this Lease, or if with respect to a permitted assignment. permitted license or other transfer by Tenant permitted by Landlord, the consideration payable to Tenant by the assignee, licensee or other transferee exceeds the Rent payable tinder this Lease, then Tenant shall he bound and obligated to pay Landlord. in addition to Rent due under this Lease, as additional Rent under this Lease, Fifty percent (50%) of all such excess Rent (after deducting the costs paid by Tenant to complete such sublease, assignment or transfer) other excess consideration within ten (10) days following receipt thereof by Tenant from such sublessee, assignee, licensee or other transferee, as the case might be.

(c) If Tenant or any guarantor of Tenant's obligations hereunder is a corporation, then any merger or consolidation of the corporation with another corporation or dissolution of the corporation or any change in ownership or power to vote a majority of the voting stock outstanding at the time of execution of this instrument of Tenant or such guarantor shall constitute an assignment of this Lease for the purpose of this Lease, if the outstanding voting shares of capital stock of Tenant or any guarantor of Tenant's obligations hereunder is stock which is registered pursuant to the Securities Exchange Act of 1941, and listed on a recognized security exchange or over-the-counter market, the provision or the Paragraph I 6(c) shall not apply. For purposes of this Paragraph 16(c), the term "voting stock" shall refer to shares of stock regularly entitled to vote for the election of directors of the corporation involved.

If Tenant or such guarantor is a general partnership having one or more corporations as partner, or if Tenant is a limited partnership having one or more corporations as a general partner, the provisions of the  preceding paragraph shall apply to each of such corporations as if such corporation alone had been the Tenant or such guarantor hereunder.

If Tenant or such guarantor is a general partnership (whether or not having any corporations as partners or if Tenant or such guarantor is a limited partnership (whether or not having any corporation as general partners) the transfer of the partnership interest or interests constituting a majority of the general partnership interests on the date of full execution of this Lease shall constitute an assignment for the purpose of this Lease.

(d) Consent by Landlord to a particular assignment or sublease or other transaction shall not be deemed consent to any other or subsequent transaction, if this Lease be assigned or if the Leased Premises be subleased (whether in whole or in part) or in the event of the mortgage, pledge or hypothecation of the leasehold interest or grant of any concession or license within the Leased Premises without the prior express written permission of the Landlord, or  of the Leased Premises be occupied in whole or in part by anyone other than Tenant without prior express written permission of Landlord, Landlord may nevertheless collect Rent from the assignee, sublessee, mortgagee, pledgee, party to whom the leasehold interest was hypothecated, concessionee or licensee or other occupant and apply the net amount collected to the Rent payable hereunder, but no such transaction or collection of Rent or application thereof by Landlord shall be deemed a waiver of the provisions of this Lease relating to assignment and subletting of this Lease, or a release of Tenant from further performance by Tenant of its covenants, duties and obligations hereunder.

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17. SUBORDINATION AND ATTORNMENT.

(a)          Tenant accepts this Lease subject and subordinate to any mortgage, deed of trust or other lien presently existing or hereafter placed upon the Building and to any renewals and extensions thereof; but Tenant agrees that any mortgagee and/or beneficiary of any such deed of trust or other lien ("Landlord's Mortgagee") and/or Landlord shall have the right (but shall not be obligated) at any time to subordinate such mortgage, deed of trust or other lien to this Lease on such terms and subject to such conditions as Landlords Mortgagee may deem appropriate in its discretion. Within thirty (30) days following Tenant's execution of this Lease, Tenant agrees to promptly execute and deliver a subordination, non-disturbance and attornment agreement ("SNDA"), substantially in the forms attached hereto as Exhibit "D", subordinating this Lease, as Landlords Mortgagee shall request, Landlord shall deliver to Tenant the fully-executed SNDA within sixty (60) days after Landlord receives Tenant's executed counterpart copy of the SNDA.

(b)          If a mortgagee or other lienholder or any other purchaser acquires the Building or Project as a purchaser at a foreclosure sale (any such mortgagee or other lienholder or purchaser at a foreclosure sale being each hereinafter referred to as the "Purchaser at Foreclosure"), then Tenant shall (at the sole and absolute election of the Purchaser at Foreclosure) thereafter remain bound to the terms of this Lease to the same effect as if a new and identical lease between the Purchaser at Foreclosure, as Landlord and Tenant, as Tenant, had been entered into for the remainder of the Term of the Lease in effect at the time of the foreclosure. Tenant shall, on request, execute any certificate or instrument necessary or desirable further to confirm a Purchaser at Foreclosures election to continue (or discontinue) of the Lease in effect alter foreclosure, as above provided. If the Purchaser at Foreclosure elects to continue this Lease within ninety (90) days after such foreclosure, Tenant shall attorn and pay vent to the Purchaser at Foreclosure as if that party were a signatory to this Agreement as "Landlord".

(c) In the event that Tenant shall fail to execute any instrument described in (a) or (b) above within seven (7) days as requested. Tenant hereby irrevocably constitutes Landlord as Tenant's attorney-in-fact to execute such instrument in Tenant's name, place and stead, it being stipulated by Landlord and Tenant That such agency is coupled with an interest in Landlord and is, accordingly, irrevocable.

18. RULES AND REGULATIONS.

(a)          Tenant shall not exhibit, sell or offer for sale on the Leased Premises or on the Project any article or thing (except those articles or things essentially connected with the stated use of the Leased Premises by Tenant) without the prior written consent of Landlord.

(b)          Tenant shall not display, inscribe, print, paint, maintain, or affix in or about the Project any sign, notice, legend, direction, figure or advertisement, except on the doors of the Leased Premises and on the Building directory and then only such names) and matter and in such color, size, style, place and materials as shall first have been approved by the Landlord. The listing of any name other than that of Tenant, whether on the doors of the Leased Premises, on the Building directory or otherwise, shall not operate to vest in any additionally named party any right or interest in this Lease or in the Leased Premises or be deemed to be written consent of Landlord to any act of Tenant, it being expressly understood that any such listing is a privilege extended by Landlord revocable at will by written notice to Tenant.

(c)          Tenant shall not advertise the business, profession or activities of the Tenant conducted in the Leased Premises in any manner that violates the letter or spirit of any code of ethics adopted by a recognized association or organization pertaining to such business, profession or activities and shall not use the name of the Building for any purposes other than that of the business address of the Tenant and shall never use any picture or likeness of the Building in any circular, notices, advertisements or correspondence without Landlord's consent.

(d)          No additional locks or similar devices shall be attached to any door or window without Landlord's prior written consent. No keys for any door other than those provided by the Landlord shall be trade. If more than two (2) keys for one lock are desired, Landlord will provide the same upon payment by Tenant of the cost of making such additional keys. All keys must be returned to Landlord at the expiration or termination of this Lease.

(e) All persons entering or leaving the Building alter hours on Monday through Friday, or at any time on Saturdays, Sundays or holidays, may be required to do so under such regulations as Landlord may impose. The Landlord may exclude or expel any peddler, and Landlord shall not be required to accept any deliveries or packages on behalf of Tenant.

(f) Tenant shall not overload, in accordance with commercially reasonable standards, any floor. Landlord may direct the time and manner of delivery, routing and removal and the location of safes and other heavy articles.

(g) Unless Landlord gives advance written consent, Tenant shall not install or operate any steam or internal combustion engine, boiler, machinery, refrigerating or heating device or air conditioning apparatus in or about the Leased Premises or carry on any mechanical business therein or use the Leased Premises for housing accommodations or lodging or sleeping purposes, or do any cooking with the exception of microwave ovens therein or use or permit to be brought into the Building any inflammable fluids such as gasoline, kerosene, naphtha and benzine or any explosive, radioactive materials or other articles deemed extra hazardous to life, limb or property. Tenant shall not use the Leased Premises of any illegal or immoral purposes.

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(h)         Tenant shall reasonably cooperate fully with Landlord to assure the commercially effective  operation of the Buildings air-conditioning system, including the closing of venetian blinds and drapes.

(i)          The sidewalks, halls, passages, exits, entrances, elevators and stairways shall not be obstructed by Tenant or used for any purpose other than for ingress to or egress from the Leased Premises. The halls, passages, exits, entrances. elevators, stairways and roof, not for the uses of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence, in the judgment of Landlord, shall be prejudicial to the safety, character, reputation and interests of the Building and its tenants. Neither Tenant nor the agents. Contractors, employees, or invitees of Tenant shall go upon the roof or mechanical floor of the Building. Tenant shall keep closed at all times, except for ordinary use, all corridor entrance/exit doors in the Leased Premises.

(j) Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the Leased Premises or permit or suffer the Leased Premises to be occupied or used in a manner offensive or objectionable to landlord or other occupants of the Building by reason of noise, odors and/or vibrations, or interfere in any way with other tenants or those having business there, nor shall any animals or birds be brought in or kept about the Leased Premises or the Building.

(k) Tenant shall see that the doors and windows, if operable, of the Leased Premises are closed and securely locked before leaving the Building and shall observe strict care and caution that all water faucets or water apparatus are entirely shut off before Tenant or Tenant's employees leave the Building and that all electricity shall likewise be shut off so as to reasonably prevent waste or damage. For any default of or under this Lease by Tenant or carelessness of Tenant, Tenant shall reimburse, indemnify and hold harmless Landlord and all other tenants and occupants of the Project for or front all injuries or losses sustained by Landlord or other tenants or occupants of the Building.

In addition to all other liabilities for any failure by Tenant to observe the rules and regulations, Tenant shall pay to Landlord an amount equal to any increase in insurance premiums payable by the Landlord or any other tenant in the Building caused solely by such failure. The inability of Landlord to cause another occupant of the Building to comply with the rules and regulations will neither excuse Tenant's obligation to comply with the rules or any other provisions of this Lease, nor cause Landlord to he liable to Tenant for any damages resulting to Tenant. Tenant shall cause its employees, agents, invitees, licensees and contractors to comply with all rules and regulations for the Project.

19.          EMINENT DOMAIN. If there shall be taken by exercise of the power of eminent domain during the Term of this Lease any of the Leased Premises. Landlord or Tenant may elect to terminate this Lease. If more than ten percent (10%) of the Building shall be taken by exercise of the power of eminent domain during the Term of this Lease, Landlord may elect to terminate this Lease. If neither party terminates this Lease, then this Lease shall continue in full force and effect, except that Rent shall be reduced in proportion to the area of the Leased Premises to be taken and Landlord shall repair any damage to the Leased Premises or Building resulting from such taking. All sums awarded or agreed upon between Landlord and the condemning authority for the raking of the interest of Landlord or Tenant, whether as damages or as compensation, will be the property of Landlord without prejudice, and are hereby assigned from Tenant (to the extent of Tenant's interest) to Landlord. However, as to claims of Tenant against the condemning authority on account of the unamortized cost of leasehold improvements paid For by Tenant taken by the condemning authority. If this Lease should he terminated tinder any provision of this Paragraph 19. Rent shall be payable up to the date that possession is taken by the condemning authority and Landlord will refund to Tenant any prepaid unaccrued Rent less any sum then owing by Tenant to Landlord.

20.          ACCESS BY LANDLORD. Landlord, its agents and employees shall have access to and the right to enter upon the Leased Premises at any reasonable time and upon reasonable notice during regular business hours except for an emergency to examine the condition thereof, to make any repair's or alterations required to be made by Landlord hereunder, to show the Leased Premises to prospective purchasers, mortgagees or tenants and for any other purpose deemed reasonable by Landlord. In addition, Landlord may post "For Rent” signs on or about the Project advertising the Building and Leased Premises for lease.

21.          INTENTIONALLY DELETED.

22.          DEFAULT AND REMEDIES.

(a) Each of the following acts or omissions of Tenant or occurrences shall constitute and "Event of Default":

(i)          Failure or refusal by Tenant to timely pay Rent or other payments hereunder within two (2) business days following written notice to Tenant of such failure.

(ii)        Failure to perform or observe any other covenant or condition of this Lease by Tenant to be performed or observed prior to the expiration of a period of thirty (30) days following written notice to Tenant specifying with particularity such failure (plus an additional reasonable period as may be required by Tenant to cure such default if Tenant shall diligently pursue the cure of such default until the same shall be cured).

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(iii)          The filing or execution or occurrence of any of the following with respect to either Tenant or any guarantor of this Lease: a petition in bankruptcy or other solvency proceeding by or against them; or any petition or answer seeking relief under any provision of the Bankruptcy Code or an assignment for the benefit of creditors or composition: or a petition or other proceeding by or against them for the appointment of a trustee, receiver or liquidator of them or any of their property; or a proceeding by any governmental authority for the dissolution or liquidation of them.

(b) This Lease and the Term and estate hereby granted and the demise hereby made are subject to the limitation that if and whenever any Event of Default shall occur, Landlord may, at its option, in addition to till other rights and remedies given hereunder or by law or equity, do any one or more of the following:

(i)          Terminate this Lease, in which event Tenant shall immediately surrender possession of the Leased Premises to Landlord.

(ii)          Enter upon and take possession of the Leased Premises and expel or remove Tenant and any other occupant therefrom, with or without terminating the Lease.

(iii)        Change or alter locks and other security devices at the Leased Premises prohibiting entry into the Leased Premises and deny Tenants access thereto. In connection with such change or alteration, of locks. Landlord shall have no obligation to advise Tenant of the change of locks other than to provide written notice at the Demised Premises of the person Tenant may contact, during normal business hours for the Leased Premises, to acquire additional information. Furthermore, Tenant waives all rights under Section 91 of the Texas Property Code, to which it is otherwise entitled.

(iv)       Perform any action required to be performed by Tenant hereunder.

(c) Exercise by Landlord of any one or more remedies hereunder granted or otherwise available shall not be deemed to be an acceptance or surrender of the Leased Premises by Tenant, whether by agreement or by operation of the law, it being understood that such surrender can he affected only by the written agreement of Landlord and Tenant. No such alteration of security devices and no removal or other exercise of dominion by Landlord over the property of Tenant or others at the Leased Premises shall be deemed unauthorized or constitute a conversion. Tenant hereby consenting, after an Event of Default, to the aforesaid exercise of dominion over Tenant's property within the Building. All claims for damages by reason of such re-entry and/or repossession and/or alteration of locks or other security devices are hereby waived, as are all claims for damages by reason of Landlord's compliance with distress warrant, forcible detainer proceeding, sequestration proceedings, or other legal process. Tenant agrees that any re-entry by Landlord may be pursuant to judgment obtained in forcible detainer proceedings or other legal proceedings or without the necessity for any legal proceedings, as Landlord may elect, and Landlord shall not be liable in trespass or otherwise.

(d) In the event Landlord elects to terminate the Lease by reason of an Event of Default. Then, notwithstanding such termination, Tenant shall be liable, as damages to Landlord and not as a penalty, for the breach of this Lease, and shall pay to Landlord the total of (i) the reasonable costs of recovering the Leased Premises and the sum of all Rent and other indebtedness accrued to the date of such termination, (ii) the Rent due hereunder which was suspended or waived because of any "free rent period", (iii) out of pocket expenses of Landlord in constructing the Tenant finish required under this Lease, (iv) all commissions paid by Landlord in connection with this Lease, (v) the amount of the excess of (a) the total Rent and other benefits which Landlord would have received under this Lease for the remainder of the Term (at rates then in effect) together with all other expenses incurred by Landlord in connection with Tenant's default, over (b) the Fair Market Value of the Balance of the Lease Term (as hereinafter defined) as of the time of such breach: and (vi) all other sums of money and damages then owing by Tenant to Landlord. As used herein, the term "Fair Market Value of the Balance of the Lease Term shall mean the difference between art amount equal to all Rent and other benefits payable over the remainder of the Lease Term, minus reasonable rental value of the Leased Premises for the same period. by comparison to other tenants of the Building (or, if thereare no comparable tenants in the Building, in comparable buildings) and to other leasing space of comparable size, similarly situated, for a lease term comparable to the remainder of the Term, with such difference discounted to a present value based upon a rare of seven percent (7%) per annum.

(e) In the event that Landlord elects to repossess the Leased Premises without terminating the Lease, then Tenant shall be liable for and shall pay to Landlord all Rent and other indebtedness accrued to the date of such repossession, plus rent required to be paid by Tenant to Landlord during the remainder of the Term until the date of expiration of the Term as stated in Paragraph 2, diminished by any net sums thereafter received by Landlord through reletting the Leased Premises during said period (after deducting reasonable expenses incurred by Landlord as provided in Subparagraph 22(1) hereof). Actions to collect amounts due by Tenant provided for in this Paragraph may be brought front time to time by Land lord during the aforesaid period, on one or more occasions, without the necessity of Landlord's waiting until expiration of such period; and in no event shall Tenant he entitled to any excess of Rent (or Rent plus other sums) obtained by reletting over and above the Rent provided for in this Lease.

(f) In the case of an Event of Default, Tenant shall also be liable for and shall pay to Landlord in addition to any sum provided to be paid above, (i) reasonable broker's fees incurred by Landlord in connection with reletting the whole or any part of the Leased Premises, (ii) the reasonable cost of removing and storing Tenants or other occupants property; (iii) reasonable cost of repairing, altering, remodeling or otherwise purring the Leased Premises into condition acceptable to a new tenant or tenants, and (iv) all reasonable expenses incurred by Landlord in enforcing Landlord's remedies, including reasonable attorneys' fees. Past due Rent and other past due payments shall bear interest from maturity until paid by Landlord to Tenant at the rate described in Paragraph 40 hereof.

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(g)          In the event of repossession of the Leased Premises after an Event of Default. Landlord shall not have any obligation to reset or attempt to reset the Leased Premises, or any port ion thereof, or to collect Rent after reletting: but Landlord shall have the option to relet or attempt to relett and in the event of reletting. Landlord may reset the whole or any portion of the Leased Premises for any period, to any tenant, and for any use and purpose.

(h)          If Tenant should fail to make any payment or cure any Event of Default hereunder within the time herein permitted, Landlord, without being under any obligation to do so and without thereby waiving such default, may make such payment and/or remedy such other Event of Default for the account of Tenant (and enter the Leased Premises for study purposes) and thereupon Tenant shall be obligated to, and hereby agrees to pay Landlord upon demand, as additional Rent hereunder, all reasonable costs, expenses and disbursements (including reasonable attorneys' fees) incurred by Landlord in taking such remedial action.

(i) In the event of any default by Landlord, Tenant's exclusive remedy shall be an action for damages (Tenant hereby waiving the benefit of any laws granting the right to terminate this Lease, to a lien upon the property of Landlord and/or upon Rent due Landlord), but prior to any such action Tenant will give landlord written notice specifying such default with particularity and Landlord shall have thirty (30) days (plus an additional reasonable period as may be required by Landlord to cure such default, if Landlord shall diligently pursue the cure of such default until same shall be cured) in which to cure any such default. Unless and until Landlord bills to so cure any default after such notice, Tenant shall also have any remedy or causes of action by reason thereof. All obligations of Landlord hereunder will be construed as covenants, not conditions, and all such obligations will be binding upon Landlord only during period of its ownership of the Building and not thereafter. Landlord shall have no personal liability for the performance of any obligations hereunder, recourse by any party for default against Landlord being limited to Landlord's interest in the Building. The term "Landlord" shall mean only the owner of the Building at the date a commencement of the Term, and in the event of the transfer by such owner (or subsequent owner) of its interest in the Building, such previous owner shall thereupon be released and discharged from all covenants and obligations of the Landlord under this Lease thereafter accruing, and Tenant agree to look only to the new owner for the performance of the obligations of Landlord hereunder.

(j) In any circumstances set out in this Lease where Landlord is permitted to enter upon Leased Premises during  the Term, whether for the purposes of curing any default of Tenant or repairing damage resulting from fire or other casualty or an eminent domain taking or where Landlord is otherwise permitted hereunder or by law to go upon the Leased Premises, no such entry in accordance therewith will constitute an eviction or disturbance of Tenant's use and possession of the Leased Premises or a breach by Landlord of any of its obligations hereunder or render Landlord liable for damages for loss of business or for any other reason to entitle tenant to be relieved from any of its obligations hereunder or grant Tenant any right of setoff or recoupment or other remedy; and in connection with any such entry incident to performance of repairs, replacements, maintenance or construction, all of the aforesaid provisions shall be applicable notwithstanding that Landlord may elect to take building materials in, to or upon the Leased Premises that may be required or utilized in connection with such entry by Landlord.

(k) In the event Landlord commences any proceedings against Tenant for nonpayment of Rent or any other sum due and payable by Tenant hereunder. Tenant will not interpose any non-compulsory counterclaim against Landlord of whatever nature or description in any such proceedings, and in the event Tenant interposes any such non-compulsory counterclaim or other claim against Landlord in such proceedings. Landlord and Tenant stipulate and agree that in addition to any other lawful remedy of Landlord, upon motion of Landlord, such non-compulsory counterclaim or other claim instituted by Tenant shall be severed from the proceeding institutes by Landlord and the proceedings instituted by landlord may proceed to final judgment separately and apart from and without consolidation with or reference to the status of such non-compulsory counterclaim or any other claim asserted by Tenant: provided, however, the provisions of this sentence do not apply to counterclaims or claims by Tenant which may only be asserted in the aforesaid proceedings brought by Landlord or forever be barred if not asserted in said proceedings.

(l) Landlord may seek to restrain or enjoin any breach or threatened breach of any covenant, duty or obligation of Tenant herein. The remedies of Landlord hereunder,  at law or in equity shall be deemed cumulative, and no remedy of landlord, whether exercised by Landlord or not, shall be deemed to be in exclusion of any other. Except as may be otherwise herein expressly provided, in all circumstances under this Lease where prior consent or permission of one party ("first party") is required before the other party ("second party") is authorized to take any particular type of action. the matter of whether to grant such consent or permission shall be within the sole and exclusive judgment and discretion of thefirst party; and it shall not constitute any nature of breach by the first party hereunder or any defense to the performance of any covenant, duty or obligation of the second party hereunder that the first party delayed or withheld the granting of such consent or permission, whether or not the delay or withholding of such consent or permission was prudent or reasonable or based on good cause.

(m) The obligation of Tenant to pay all Rent and other sums hereunder provided to be paid by Tenant and the obligation of Tenant to perform Tenant's other covenants and duties hereunder constitute independent, unconditional obligations to be performed at all times provided for hereunder, save and except only when an abatement thereof or reduction therein is herein expressly provided for and not otherwise. Tenant waives and relinquishes all rights which Tenant might have to claim any nature of lien against or withhold, deduct from or offset against any Rent and other sums provided hereunder to be paid Landlord by Tenant. Tenant waives and relinquishes any right to assert, either as a claim or as a defense, which Landlord is bound to perform or is liable for time nonperformance of any implied covenant or implied duty of Landlord not expressly herein set forth.

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(n)          In the event of foreclosure by any 1ienholder of the Building or Project, Tenant shall not have a right to terminate this Lease, although Tenant hereby understands and agrees that such lienholder who or which forecloses its lien on the Building or Project -shall have the option to terminate this Lease (as such rights are further described in Paragraph 17(b)), unless such lienholder has agreed in writing to the contrary.

(o)          Under no circumstances whatsoever shall Landlord or Tenant ever by liable hereunder for consequential damages or special damages.

(p)          This Lease is acontract under which applicable law excuses Landlord from accepting performance from (or rendering performance to) any person or entity other than Tenant within the meaning of Sections 365(e) and 365(e)(2) of the Bankruptcy Code. 11 U.S.C. §5101 et seq. ("Bankruptcy Code")

(q)          If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code. Any and all monies or other consideration payable or otherwise to be delivered in connection with such assignment shall be paid or delivered to Landlord, shall be and remain the exclusive property of Landlord, and shall not constitute property of Tenant or of the Estate of Tenant within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting Landlord's property under the preceding sentence not paid or delivered to Landlord shall be held in trust for the benefit of Landlord and he promptly paid or delivered to Landlord.

(r)          Notwithstanding anything to the contrary, in any bankruptcy filed by or against Tenant, all Rent or other amounts payable by Tenant or on behalf of Tenant to Landlord tinder this Lease, whether or not expressly denominated as rent, shall constitute credit provided to the Bankruptcy Estate which shall have the priority set forth in Section 264(c)(1) of the Bankruptcy Code, and such designation as credit shall be binding on any trustee, assignee, or receiver of Tenant. Notwithstanding the foregoing, should Landlord's Section 364(c)(1) priority not be allowed, then any rents or other amounts due to Landlord under this Lease shall constitute administrative priority allowed pursuant to, inter alia, Section 503(b) of the Bankruptcy Code. Furthermore, Tenant agrees not to seek any extension under Section 365(d) of the Bankruptcy Code.

(s)          Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed, without further act or deed, to have assumed all of the obligations arising under this Lease on or after the date of such assignment. Any such assignee shall upon demand execute and deliver to Landlord any instrument confirming such assumption.

23.          NONWAIVER. Neither acceptance of Rent by Landlord nor failure by Landlord to complain of any action, non action or default of Tenant shall constitute a waiver of any of Landlords rights hereunder. Waiver by Landlord of any right for any default of Tenant shall not constitute a waiver of any right for either a subsequent default of the same obligation or any other default. Receipt by Landlord of Tenant's keys to the Leased Premises shall not constitute any acceptance or surrender of the Leased Premises.

24.          HOLDING OVER. If Tenant should remain in possession of the Leased Premises after the expiration of the Term without execution by Landlord and Tenant of a new lease, then Tenant shall be deemed to be occupying the Leased Premises as a tenant-at-sufferance, subject to all the covenants and obligations of this Lease and at a daily rental of 1.50 times the per day Rent provided hereunder, computed on the basis of a thirty (30) day month. Additionally, Tenant shall pay Landlord for all direct damages sustained by Landlord by reason of Tenant's retention of possession. If any property not belonging to Landlord remains at the Leased Premises after the expiration of the Term of this Lease, Tenant hereby authorizes Landlord to make such disposition of such property as Landlord may desire without liability for compensation or damages to Tenant. Tenant agrees to indemnify and hold Landlord harmless from all suits, actions, liability. loss, damages, and expenses in connection with or incident to any removal, exercise or dominion over, and/or disposition of such property by Landlord. The provisions of this Paragraph do not exclude Landlord's right of re-entry or any other right of Landlord hereunder.

25. NOTICE. Any notice or request which may or shall be given tinder the terms of this Lease shall be in writing and shall be either delivered by hand to the Building management office (for Landlord) or the Leased Premises (by Tenant) or sent by United States Registered or Certified Mail, post prepaid, addressed to the parties hereto at the respective addressed set out opposite their names below. Such address may be changed from time to time by either party giving notice as provided above. Notice shall be deemed given when delivered (if delivered by hand) or when postmarked (if sent by mail).

Tenant:   Deep Down. Inc. 8827 W. Sam Houston Pkwy., N. Suite 100 Houston, Texas 77040 Landlord:   A-K-S-L 49 BELTWAY 8, L.P 8827 W. Sam Houston Pkwy N. Suite 200 Houston, TX 77040

26. LANDLORD'S MORTGAGEE.

(a) If the Project. Building and/or Leased Premises are at any time subject to a mortgage or deed of trust lien, then in any instance in which Tenant gives notice to Landlord alleging default by' Landlord hereunder. Tenant will also simultaneously give a copy of such notice to each Landlord's Mortgagee (provided Landlord or Landlord's Mortgagee shall have provided written notice to Tenant of the name and address of Landlord's Mortgagee), and each Landlord's Mortgagee shall have the right (but not the obligation) to cure or remedy such default during the period that is permitted to Landlord hereunder, plus and additional period or thirty (30) days, and Tenant will accept such curative or remedial action (if any) taken by Landlord's Mortgagee with the same effect as if such action had been taken by Landlord.

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(b) Tenant agrees that from time to time Tenant will deliver to Landlord a statement in writing certifying (i) that this Lease is unmodified and in full force and effect (or if there have been modifications that the same is in full force and effect as modified and identifying the modifications), (ii) the dates to which the Rent and other charges have been paid and (iii) that the Landlord is not in default or specifying each such default of which the person making the certificate may have knowledge, it being understood that any such statement so delivered may be relied upon by any landlord under any ground or underlying lease, or any prospective purchaser, mortgagee or any assignee of any mortgage on the Project or any part thereof.

27.          QUIET ENJOYMENT. Provided Tenant complies with its covenants, duties and obligations hereunder, Tenant shall quietly have, hold and enjoy the Leased Premises during the Term as against Landlord, subject to the terms and provisions of this Lease.

28.          TIME OF ESSENCE. In all instances where Landlord or Tenant is required hereunder to pay any sum or do any act at a particular indicated time or within an indicated period. it is understood that time is of the essence: and all performance due dates, time schedules and conditions precedent to exercising a right by Landlord or Tenant shall he strictly adhered to without delay except where otherwise expressly provided.

29. MECHANIC'S LIEN. It because of any act or omission of Tenant, its employees, agents, contractors or subcontractors, any mechanic's lien or other lien, charge or order for the payment of money shall be filed against Landlord or against all or any portion of the Leased Premises or the Building. Tenant shall, at its own cost and expense, cause the same to be discharged of record within thirty (30) days after filing thereat and Tenant shall indemnify and save harmless Landlord against and from all reasonable costs and expenses, liabilities, suits, penalties, claims and demands, including, without limitation, reasonable attorneys fees, resulting therefrom.

30. MEMORANDUM OF LEASE. Tenant agrees that, upon written request from Landlord, Tenant will within ten (10) days of such request deliver a copy of this Lease, or, if the Landlord so requests, a Memorandum of this Lease in recordable form to Landlord. Tenant shall not record this Lease or a memorandum thereof without the prior written consent of the Landlord. Any such recording without Landlords prior written consent shall be an Event of Default hereunder.

31.          INVALIDITY OF PARTICULAR PROVISIONS. If any clause or provision of this Lease is or becomes illegal, invalid or unenforceable because of present or future laws or any rule or regulation of any governmental or quasi- governmental body or any court holding effective during the Term, the intention of the parties hereto is that the remaining parts of this Lease shall not be affected thereby unless such invalidity is. in the sole determination of the Landlord, essential to the rights of both parties, in which event Landlord has the right, but not tine obligation, to terminate this Lease on written notice to Tenant.

32.          WAIVER OF BENEFITS. To the extent permitted by law, tenant waives the benefits of all existing and future rent control legislation and statutes and similar governmental rules and regulations, whether in time of war or not.

33.          WAIVER OF TRIAL BY JURY. It is mutually agreed by and between Landlord and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant,  Tenant's use or occupancy of the Leased Premised and any emergency statute or any other statutory remedy.

34.          MISCELLANEOUS TAXES. Tenant shall pay prior to delinquency all taxes assessed against or levied upon its occupancy of tine Leased Premises, or upon the fixtures, furnishings, equipment and all other personal property owned by Tenant located on the Leased Premises, if nonpayment thereof shall give rise to a lien on the real estate, and when possible Tenant shall use its best efforts to cause said fixtures, furnishings, equipment and other personal property to be assessed and billed separately from the property of the Landlord. In the event any or all of Tenant's fixtures, Furnishings, equipment and other personal property upon, or Tenant's occupancy of, the Leased Premises shall be assessed and taxed with the property of Landlord. Tenant shall pay to Landlord Tenant's share of such taxes within ten (10) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant's fixtures, furnishings, equipment or personal property along with a copy of the assessment and tax invoice.

35.  INTENTIONALLY DELETED.

36. BROKERAGE. Tenant represents and warrants that, except for Mary Caldwell or Caldwell Companies, it has dealt with no broker, agent or other person in connection with this transaction and that no broker, agent or other person brought about this transaction, and Tenant agrees to indemnify and hold Landlord harmless from and against any claims by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with Tenant with regard to this leasing transaction. The provisions of this Paragraph, in addition to all of Tenant's indemnities and covenants expressly set forth in this Lease, shall survive the termination of this Lease.

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37.          NO REINSTATEMENT. No receipt of money by Landlord from Tenant after the termination of this Lease, after the service of any notice of any Event of Default or of termination of this Lease, or after the commencement of any suit or after final judgment for possession of the Leased Premises shall reinstate, continue to extend the term of this Lease or affect any such notice, demand or suit or imply consent for any action for which Landlord's consent is required.

38.          LIMITATION OF IMPLIED WARRANTY. Landlord's duties and warranties are limited to those expressly stated in this Lease and shall not include any implied duties or implied warranty now or in the future. LANDLORD HAS NOT MADE, AND TENANT MAY NOT RELY ON, ANY REPRESENTATIONS OR WARRANTIES WITH REGARD TO THE BUILDING, LEASED PREMISES OR OTHERWISE, EXPRESSED OR IMPLIED, EXCEPT AS STATED IN THIS LEASE. IN PARTICULAR, LANDLORD HAS NOT AUTHORIZED ANY AGENT OR BROKER TO MAKE A REPRESENTATION OR WARRANTY INCONSISTENT WITH THE TERMS OF THIS LEASE AND TENANT MAY NOT RELY ON ANY SUCH INCONSISTENT REPRESENTATION OR WARRANTY.

39.          CAPTIONS AND BINDING EFFECT. Paragraph captions are for convenience only and neither limit nor amplify the provisions of this Lease. The provisions of this Lease shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and assigns of the parties, but this provision shall in no way alter the restriction herein in connection with assignment and subletting by Tenant. In the event of variation or discrepancy between copies of this Lease, Landlord's original copy shall control.

40.          INTEREST. Notwithstanding any provision of the Lease to the contrary, whenever this Lease provides for the payment of interest to Landlord, the rate of interest shall be the maximum rate allowed by applicable law, and if there is no maximum rate, then twelve percent (12%) per annum, however, regardless of any provision contained herein. or in any other document executed in connection herewith, no Landlord or holder of this Lease shall ever be entitled to receive, collect or apply, as interest on any amount owing hereunder, any amount in excess of the maximum non-usurious contract rate of interest allowed front time to time by applicable law ("Highest Lawful Rate"), and in the event any Landlord or holder of this Lease ever receives, collects, or applies, as interest. any such excess, such amount as would be excessive same shall be ipso facto reduced to the amount permitted by law; and if all amounts of this Lease shall be paid in full. any excess shall forthwith be paid to Tenant. In determining whether or not the interest paid or payable, tinder any specific contingency, exceeds the Highest Lawful Rate, the Landlord and any holder of this Lease shall, to the maximum extent permitted by law (a) characterize any non-principal payment as an expense, fee or premium rather than as interest: (b) exclude voluntary prepayment and the effects thereof; and (c) compare the total amount of interest collected, contracted for. charged or received throughout the entire contemplated term of this Lease at the Highest Lawful Rate; provided that if all Tenant's obligations under this Lease are paid and performed prior to the end of the full contemplated terms thereof, and if the interest received for the actual period of existence hereof exceeds the Highest Lawful Rate, the Landlord and holder of this Lease shall refund to the Tenant the amount of such excess, and in such event, no Landlord or holder of this Lease shall be subject to any penalties provided by any laws for collecting, contracting for, charging or receiving interest in excess of the Highest Lawful Rate.

41.          INTENTIONALLY DELETED.

42.          ATTORNEYS' FEES. If, as a result of any breach or default by Tenant of its respective obligations under this Lease, Landlord employs an attorney to enforce or defend any of its rights or remedies hereunder, and if Landlord prevails, then Tenant shall pay to Landlord the reasonable attorneys' fees incurred by Landlord. If Tenant prevails, Landlord shall pay to Tenant the reasonable attorney's Fees incurred by Tenant.

43.          FORCE MAJURE. If the performance by Landlord or Tenant of any provision of this Lease is delayed or prevented by an Act of God, strike, lockout, shortage of material or labor, restriction by any governmental authority, civil riot, flood and any other cause not within the control of Landlord or Tenant, then the period for landlord's or Tenant's performance of the provision shall be automatically extended for the same amount of time that Landlord or Tenant in so delayed or hindered.

44.          USE OF LANGUAGE. Words of any gender used in this Lease include any other gender, and words in the singular include the plural, unless the context otherwise requires.

45.          DAMAGE FROM CERTAIN CAUSES. Landlord or Tenant are not liable or responsible to the other party for any loss or damage to any property or person occasioned by theft, fire, act of God, public enemy, injunction, riot, strike, insurrection, war, court order, requisition, or order of governmental body or authority, or for any damages or inconvenience that may arise through repair or alteration of any part of the Project, the Building or the Leased Premises, or failure to make any such repairs.

46.          GOVERNING LAW. This Lease and the rights and obligations of the parties hereto shall be interpreted, construed and enforced in accordance with the local laws of the State of Texas.

47.         ASBESTOS OR OTHER HAZARDOUS SUBSTANCES. Tenant shall not cause or permit any hazardous substance or solid waste to be brought upon, kept or used in or about the Leased Premises by Tenant or its agents, employees, contractors or invitees (the "Tenant Group'). If Tenant breaches the obligations stated in the preceding sentence (which shall be an Event of Default under this Lease), or if the presence of a hazardous substance or solid waste otherwise occurs, in or about the Leased Premises caused by the Tenant Group, then Tenant shall indemnify, defend and hold harmless Landlord and Landlords' parents, subsidiaries, affiliates, officers, directors, employees, agents, attorneys and representatives front any and all claims, judgments, damages, penalties, fines, reasonable costs, liabilities or losses which arise during or after the Lease Term as a result of such contamination, and Tenant shall, at its sole cost and expense, cause the removal or containment of any such contamination in accordance with all laws, rules and/or regulations of any governmental authority having jurisdiction. Furthermore, if Landlord discovers any hazardous substance or solid waste on or about the Project, including, but not limited to asbestos in the Building of a material amount, Landlord shall have the option to terminate this Lease upon fifteen (15) days written notice to Tenant. The term "hazardous substances" and "solid waste" shall have the meanings specified in the Comprehensive Environmental Response. Compensation and Liability Act of  1980, as amended, the Resource Conservation and Recovery Act of 1976. as amended, the Texas Water Code and The Texas Solid Waste Disposal Act.

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48.          AMENDMENT.  Except where (a) otherwise authorized, permitted or required by express terms of this lease, and (b) notice to consent or approval of, or joinder by any party has been expressly waived by the provisions hereof, no amendment, moderation, deletion, release, termination or extension of; alteration, variance or change in; or supplement to, the provisions of this Lease shall be valid or effective or otherwise binding on the parties hereto, unless and until such amendment, etc., shall have been reduced to writing and executed by the parties hereto with the same formality as this Lease.

49.          ENTIRE AGREEMENT. THE PARTIES HERETO ACKNOWLEDGE AND AGREE THAT, WITH REGARD TO THE SUBJECT MATTER OF THIS LEASE AND THE TRANSACTIONS CONTEMPLATED HEREIN (a) THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES HERETO AND (b) THIS LEASE, INCLUDING THE DEFINED TERMS AND ALL EXHIBITS AND ADDENDUMS, IF ANY, ATTACHED HERETO, (i) EMBODIES THE FINAL AND COMPLETE AGREEMENT BETWEEN THE PARTIES; (ii) SUPERSEDES ALL PRIOR AND CONTEMPORANEOUS NEGOTIATIONS, OFFERS, PROPOSALS, AGREEMENTS, COMMITMENTS, ASSURANCES AND UNDERSTANDINGS, WHETHER VERBAL OR WRITTEN, AND (iii) MAY NOT BE VARIED OR CONTRADICTED BY EVIDENCE OF ANY SUCH PRIOR OR CONTEMPORANEOUS MATTER OR BY EVIDENCE OF ANY SUBSEQUENT ORAL AGREEMENT OF THE PARTIES HERETO.

Executed on this the Day of November. 2008.

LANDLORD:

A-K-S-L 49 BELTWAY 8, LP., a Texas limited partnership

By:A-K-S-L 49, L.C.,

a Texas limited liability company, its General Partner

By:  /s/ Jay K. Sears

Name Jay Sears

Title:  Member-Manager

TENANT:

DEEPDOWN, INC.,

a Nevada Corporation

By:  /s/ Bradley Parro

Name:  Bradley Parro

Title:  Vice President

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EX-10.22

Exhibit 10.22

LOAN AGREEMENT

THIS LOAN AGREEMENT is dated this 13th day of February, 2009, by and among Flotation Technologies, Inc., a Maine corporation having its principal place of business at Biddeford, Maine, and a mailing address of 20 Morin Street, Biddeford, Maine 04005, (hereinafter called "Borrower" or "Debtor"); Deep Down Inc., (hereinafter called "Parent Company"), and TD BANK, N.A. a corporation organized under the laws of the United States of America with a place of business at One Portland Square, Portland, Maine, and a mailing address of P.O. Box 9540, Portland, Maine 04112-9540 (hereinafter called "Lender" or the "Bank").

WHEREAS, the Borrower has requested that the Bank make available to Borrower, in accordance with the terms hereof, a loan in the principal amount of $2,160,000.00 (the “Loan”); and

WHEREAS, Bank has agreed, subject to the terms and conditions hereof, to make the Loan available to Borrower; and

WHEREAS, as a condition of making the Loan the Bank has required that the Borrower’s debt to Parent Company, other than accounts arising in the ordinary course of business, be subordinated to the Loan, with no payments of principal or interest allowed; and

WHEREAS, as a condition of making the Loan the Bank has required that the Bank receive and accept confirmation of approval from Whitney National Bank; and

WHEREAS, as a condition of making the Loan the Bank has required that a default in any obligation of Parent Company to Whitney National Bank shall constitute a default under the Loan; and

WHEREAS, the Loan will be secured by a first priority Mortgage and Security Agreement and a first priority Collateral Assignment of Leases and Rents on the Borrower’s premises at 20 Morin Street, Biddeford, Maine, (the “Project”), and

WHEREAS, as a condition of making the Loan the Bank has required a pledge from the Borrower that it will not grant or permit any security interest or other encumbrance of Borrower’s assets, except the existing security interest granted to Whitney National Bank and the security granted to the Bank as provided herein;

NOW, THEREFORE, in consideration of the mutual covenants and promises hereinafter set forth, Borrower and Lender agree as follows:

SECTION 1. DEFINITIONS

As used herein, unless otherwise specifically defined, the following capitalized words and phrases shall have the following meanings:

1.1           "Loan" shall mean all advances made by Lender to Borrower from time to time pursuant to the Loan referenced above.

1.2           "Loan Documents" means this Agreement, the Note issued to evidence the Loan, and any and all instruments, documents and agreements evidencing, governing or otherwise relating to the Obligations, whether executed contemporaneously herewith or executed at any time in the future, including without limitation the documents listed in the Closing Agenda attached hereto, as the same may be amended, extended, renewed, restated or otherwise modified from time to time.

1.3           "Note" means the Commercial Note of even date herewith executed by the Borrower to the Bank to evidence the loan in the amount of $2,160,000.00, together with any and all amendments and modifications thereto, substitutions therefor and renewals and extensions thereof.

1.4           "Obligations” means any and all notes (including without limitation the Note, together with any amendments thereto, extensions or renewals thereof or substitutions therefor), liabilities, advances, loans, sums due or to become due under any letters of credit and indebtedness of Borrower to Bank of every kind, nature and description (whether or not evidenced by any note or other instrument, and whether or not for the payment of money), direct or indirect, absolute or contingent, primary or secondary, joint or several, secured or unsecured, due or to become due, now existing or hereafter arising, regardless of how they arise or were acquired, any liability of Borrower to Bank as a guarantor or surety of the indebtedness or liabilities of others, obligations to perform acts and refrain from taking action as well as obligations to pay money, and all interest, fees, charges and expenses (including reasonable attorneys' fees) paid or incurred by Bank at any time in connection with the commitment for, preparation, execution, delivery, amendment, review, perfection, administration and/or enforcement of this Agreement and any other of the Loan Documents and any and all obligations of Borrower to Bank pursuant to the Loan Documents.

1.5           “Project” means and includes the real estate and all appurtenances, equipment, fixtures and other personal property of the Borrower located at or near 20 Morin Street, Biddeford, Maine.

1.6           The singular form of any word used herein, including any of the terms defined above, shall include the plural, and vice versa.  The use herein of a word of any gender shall include both genders.

1.7           The headings or titles of several sections to this Agreement shall be solely for convenience of reference and shall not affect the meaning, construction or effect of the provisions hereof.

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SECTION 2.  ESTABLISHMENT OF CREDIT FACILITIES

2.1           Establishment of Credit.  Lender agrees to loan to Borrower an amount not to exceed in the aggregate Two Million One Hundred Sixty Thousand Dollars ($2,160,000.00), subject to the terms of this Agreement and a certain $2,160,000.00 Commercial Note of even date herewith.

2.2           Loan Advances.  The Loan shall be used for working capital, to support increased inventory, purchase of new equipment and completion of building renovations.  At closing the Bank will advance the sum of $1,840,000.00.  Upon completion of construction of the building renovations and issuance of a certificate of occupancy by the City of Biddeford, the Bank will advance the balance of the Loan in the amount of $320,000.00.  Upon disbursement of the second advance, the Bank will recalculate the monthly payment amount on the Note to an amount that will fully amortize the then outstanding principal balance over a term ending 20 years from the date of the Note.

SECTION 3.  REPRESENTATIONS AND WARRANTIES

3.1           General.  Borrower represents, warrants and covenants that the execution, delivery and performance of this Agreement, and any other documents required by Lender relating to this loan transaction are not a violation of, or contrary to, any covenants, warranties or agreements of Borrower with any other persons or parties.  This Agreement evidences a loan for business and commercial purposes, and not for personal, family or household purposes.

3.2           Organization, Standing, Authority, etc.  The Borrower is a corporation duly organized and validly existing under the laws of the State of Maine, and has all requisite power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted, to enter into this Agreement, and all other documents to be executed by it in connection with the transactions contemplated hereby, to issue the Note and to carry out the terms hereof and thereof.  Parent Company is a corporation duly organized and validly existing under the laws of the State of Texas, and has all requisite power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted, to enter into this Agreement, and all other documents to be executed by it in connection with the transactions contemplated hereby, to issue the Debt Subordination and Standby Agreement and to carry out the terms hereof and thereof.

3.3           Litigation, etc.  There is no action, proceeding or investigation of any sort pending or, to the knowledge of the Borrower and Parent Company, threatened (or any basis therefor known to the Borrower and Parent Company) which questions the validity of this Agreement, the Note, the Debt Subordination and Standby Agreement, or the other documents executed in connection herewith, or an action taken or to be taken pursuant hereto, or which might result, either in any case or in the aggregate, in any material adverse change in the business operations, affairs or condition of the Borrower or Parent Company or of their respective properties or in any material liability on the part of the Borrower or Parent Company.

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3.4           Authorization; Compliance with Other Instruments.  The execution, delivery and performance of this Agreement and the Note, the Security Instruments and the Debt Subordination and Standby Agreement have been duly authorized by all necessary action on the part of the Borrower and Parent Company, will not result in any violation of or be in conflict with any term of the Borrower’s and Parent Company’s Organizational Documents, including their respective Articles of Organization, Bylaws, or of any material agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to the Borrower or Parent Company, or result in the creation of any mortgage, lien, charge or encumbrance upon any of the properties or assets of the Borrower or Parent Company pursuant to any such term.  Neither the Borrower nor Parent Company is in violation of any term of its Organizational Documents, or of any term of any material agreement or instrument to which it is a party, or, of any judgment, decree, order, statute, rule or governmental regulation applicable to it, the non-compliance with which would have a material adverse effect on the Borrower or Parent Company or their respective properties.

SECTION 4. AFFIRMATIVE COVENANTS

Borrower covenants that from and after the date hereof and so long as this Agreement is in effect or any amounts remain unpaid on account of the Loan,

4.1           Financial Reporting.

(a)           Borrower will provide the following to Lender within 120 days after the end of each fiscal year:

(i) balance sheets and operating statements with respect to the Project and any other property that serves as collateral for the Loan;

(ii) complete federal income tax returns of Borrower, including complete tax returns on any partnerships, corporations or other entities in which Borrower has an interest;

(iii) audited financial statements of Parent Company, including consolidated financial statements of Borrower prepared in accordance with generally accepted accounting principles by a certified public accountant acceptable to Bank, accompanied by any Management Letter;

(b)           Borrower will provide the following to Lender within 45 days after the end of each fiscal quarter:

(i) management prepared financial statements prepared in accordance with generally accepted accounting principles including a detailed balance sheet and profit and loss statement;

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(ii) Company prepared aging of accounts receivable and accounts payable; and

(iii) Company prepared list of inventory.

(c)           Borrower will provide to Lender such other information regarding its business affairs and condition as the Lender may, from time to time, reasonably request.

A failure to provide the information required hereunder shall be a default under the Loan, and Borrower shall thereupon be obligated to pay interest at the Default Interest Rate as stated in the Note.

4.2             Legal Existence; Licenses; Compliance with Laws, etc.  The Borrower will maintain its existence and business; maintain all properties which are reasonably necessary for the conduct of its business, now or hereafter owned, in good repair, working order and condition; take all actions necessary to maintain and keep in full force and effect its rights, including any licenses; and, except as otherwise provided herein, comply with all applicable statutes, rules, regulations and orders of, and all applicable restrictions imposed by, all governmental authorities in respect of the conduct of its business and the ownership of its properties, including without limitation all zoning, land-use, equal access to public accommodations and environmental laws and regulations to the extent that the non-compliance with the foregoing would or could have a material adverse effect on the Borrower or its properties.  At closing, Borrower’s counsel shall provide written opinions regarding these issues satisfactory to Bank.

4.3             Insurance.  The Borrower will maintain or cause to be maintained with respect to the Project and any other property which is to serve as collateral for the Loan or any Guaranty insurance in form and substance reasonably satisfactory to Lender, including:

(a)             “all risks” property insurance on the Property written on a non-reporting form and in compliance with any co-insurance clause;

(b)             flood insurance, if the Property is located in any federally designated “special flood hazard area”;

(c)             general liability insurance and owner’s contingent or protective liability insurance in an amount not less than $2,000,000.00;

(d)             worker’s compensation insurance; and

(e)             adequate hazard insurance on all business assets securing the Loan naming the Bank as loss payee.

The property and flood insurance policies shall name the Bank as mortgagee and loss payee and shall be first payable in case of loss to the Bank pursuant to standard non-contributory mortgage clauses and lender’s loss payable endorsements.  The liability insurance shall name the Bank as an additional insured.  For the purpose of insurance, the Bank shall be named as TD Bank, N.A., its successors and assigns, ATIMA, P. O. Box 9540, Portland, Maine 04112.

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All insurance referred to in this commitment shall be in such amounts and form, shall include such coverage, endorsements and deductibles, and shall be issued by such insurers as shall be approved by Bank, and shall provide for written notice to Bank at least thirty (30) days prior to notice of cancellation, nonrenewal, modification or expiration.  Duplicate originals or certified copies of the insurance required above, together with proof of payment of premiums, shall be delivered to the Bank prior to the closing of the Loan.

4.4           Payment of Taxes.  The Borrower will pay and discharge promptly as they become due and payable all taxes, assessments and other governmental charges or levies imposed upon it or its income or upon any of its property or assets, or upon any part thereof, as well as all lawful claims of any kind (including claims for labor, materials and supplies, franchise, unemployment and withholding) which, if unpaid, might by law become a lien or a charge upon the Property or any other property to serve as collateral for the Loan; provided that the Borrower shall not be required to pay any such tax, assessment, charge, levy or claim if the amount, applicability or validity thereof shall currently be contested in good faith by appropriate proceedings or other appropriate actions promptly initiated and diligently conducted and if the Borrower shall have set aside on its books such reserves, if any, with respect thereto as are required by GAAP and deemed appropriate by the Borrower and its independent public accountants, provided, further, however, that the Borrower will pay all such taxes, or assessments, charges, levies or claims in such a manner as to prevent, as to a municipality or other political subdivision, the sale, forfeiture or loss of each property, and in all other cases forthwith upon commencement of proceedings to foreclose any lien which may attach as security therefor.

4.5             Advice of Default, etc.  The Borrower will promptly advise Lender of any notice in respect of any material order, claim or proceeding received by the Borrower as to violations or alleged violations of any statutes, orders, rules or regulations relating to the foregoing or requiring any material work, repair or capital expenditures.  The Borrower also will promptly notify the Lender of any material adverse change in the Borrower’s financial condition or any condition or event which constitutes, or over the passage of time or upon notice or both would constitute an Event of Default under the Note or any other agreement with the Lender, or of any obligation of the Borrower to others, or of any threat or pending claim, litigation, arbitration or governmental proceeding material to the Borrower or their respective business interests.

4.6             Liability for and Reimbursement of Costs and Expenses.  The Borrower will pay or reimburse the Lender, on demand, for all reasonable expenses (including, without limitation, counsel fees and expenses) incurred or paid by the Lender in connection with the preparation, review, interpretation and amendment or restatement of the Loan Documents and any instrument, agreement or document executed and delivered pursuant thereto or in connection therewith, or with the enforcement by the Lender of its rights as against the Borrower or any other person primarily or secondarily liable to the Lender in respect of any Obligations of the Borrower to the Lender.

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4.7             Deposit Account.  The Borrower shall open and maintain a comprehensive deposit relationship with Lender so long as any portion of the Loan remains outstanding.

SECTION 5.  FINANCIAL COVENANTS

5.1           These Financial Covenants will be tested annually beginning with the period ending December 31, 2009:

Tangible Net Worth:

Borrower will maintain a Tangible Net Worth of at least $9,500,000.00.  Tangible Net Worth Net of Subordinated Debt: Defined As: The Book Value of Net Worth (Total Assets - Total Liabilities) As Set Forth In The Statement of Financial Position of The Borrower Determined In Accordance With Generally Accepted Accounting Principals, Minus The Net Book Value Of The Following Items (But Only To The Extent That Such Items Are Included In Any Determination Of The Total Assets Of The Borrower): (I) Good Will, Patents, Trademarks, Copyrights, Trade Names, Customer Lists, And Other Like Intangible Assets; (Ii) Receivables Due From Affiliates, Subsidiaries Or Other Related Parties, Include Officers, Employees Or Stockholders Of The Borrower; And (Iv) Any Capitalized Start-Up Or Development Expenses, And (V) Any Write-Up Or Reappraisal Of The Borrower's Existing Assets.

Debt Service Coverage - Post Distributions:

Borrower will maintain a Debt Service Coverage Ratio of at least 1.50 To 1.0:  Defined As: (Net Income after Tax + Depreciation/Depletion/Amortization + Interest - Dividends/Distributions +/- Non-Recurring Items) Divided By (Required Annual Principal & Interest Payments). Non-Recurring Items Will Include Other Income/Expenses That Are Not Part Of The Normal Ongoing Operations Of The Company, As Determined By The Bank.  .

Debt Service Coverage - Pre Distributions:

Borrower will maintain a debt service coverage ratio of at least 2.0 to 1.0: defined as: (net income after tax + depreciation/depletion/amortization + interest +/- non-recurring items) divided by (required annual principal & interest payments). Non-recurring items will include other income/expenses that are not part of the normal ongoing operations of the company, as determined by the bank.

SECTION 6.  NEGATIVE COVENANTS

6.1           So long as any part of the Loan remains outstanding, the Borrower shall not grant or permit any security interest or other encumbrance of Borrower’s assets, except the existing security interest granted to Whitney National Bank and the security granted to the Bank as provided herein.  The existence of any security interest or other encumbrance in violation of the terms of this section, if not terminated within twenty (20) days following written notice of such security interest or other encumbrance given by the Bank to the Borrower, shall constitute a default under the Loan Documents.

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6.2           Borrower shall not incur debt in excess of $100,000.00 without approval from the Bank. Approval of additional debt exceeding $100,000.00 will not be unreasonably withheld by the Bank.

SECTION 7.  MISCELLANEOUS

7.1           Notices.  All notices and other communications hereunder shall be in writing and shall be personally delivered or mailed by first class mail, postage prepaid, as follows:

(a)           If to the Lender:

TD Bank, N.A.

One Portland Square

P.O. Box 9540

Portland, Maine  04112-9540

Attention:  Commercial Loan Department

(b)           If to the Borrower:

Flotation Technologies, Inc.

20 Morin Street

Biddeford, Maine 04005

(b)           If to Parent Company:

Deep Down, Inc.

or to such other address or addresses as the party to whom such notice is directed may have designated in writing to the other party hereto.  A notice shall be deemed to have been given upon the earlier to occur of (i) three (3) days after the date on which it is deposited in the U.S. mails properly addressed, first class postage prepaid, by certified or registered mail, return receipt requested, or (ii) receipt by the party to whom such notice is directed.

7.2           No Waiver; Cumulative Remedies.  No failure to exercise and no delay in exercising, on the part of Lender, any right, power or privilege hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege.  The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law.

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7.3           Successor.  This Agreement shall be binding upon and inure to the benefit of Borrower, Guarantors, Lender, and their respective successors and assigns.

7.4           Governing Law.  This Agreement and the rights and obligations of the parties hereunder shall be governed by and construed and interpreted in accordance with the laws of the State of Maine.

7.5           Waiver.  Borrower and all other parties liable for the Obligations, whether principal, guarantor, endorser or otherwise, hereby severally waive demand, notice and protest, and waive all recourse to suretyship and guarantorship defenses generally, including but not limited to any extension of time for payment or performance which may be granted to Borrower or to any other liable party, any modifications or amendments to this Agreement or any documents securing payment and performance hereof, any act or omission to act by or on behalf of Lender, any invalidity or unenforceability of security given herefor, any release, whether intentional, unintentional, or by operation of law, or security, any release, whether intentional, unintentional or by operation of law, of a liable party or parties, and all other indulgences of any type which may be granted by Lender to the Borrower or any party liable for the Obligations, and do also agree to pay all costs of collection of the Obligations, including reasonable attorneys' fees which may be incurred in connection therewith.

7.6           Survival of Representations.  All representations and warranties of the Borrower and all terms and provisions, covenants and conditions and agreements to be performed by the Borrower in any of the other Loan Documents shall be true and satisfied at the time of the delivery of this Agreement and shall survive the execution and delivery of this Agreement.

7.7           Entire Agreement.  This Agreement and the other Loan Documents contain the entire agreement of the parties hereto and thereto with respect to the matters discussed herein and therein.  This Agreement may not be altered or amended except by agreement in writing signed by the parties.

7.8           Counterparts.  This Agreement may be executed in two or more counterparts each of which shall be an original and all of which shall constitute one agreement.

7.9           JURY WAIVER.  LENDER BORROWER AND EACH GUARANTOR, FOR THEMSELVES AND THEIR RESPECTIVE HEIRS, SUCCESSORS AND ASSIGNS, KNOWINGLY, VOLUNTARILY AND MUTUALLY WAIVE ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING RELATING TO THE TRANSACTIONS UNDER THIS AGREEMENT, ANY ALLEGED ORAL OR WRITTEN COMMITMENT BY THE LENDER, OR ANY COLLECTION PROCEEDINGS WITH RESPECT TO THIS AGREEMENT.

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BORROWER AND EACH GUARANTOR AGREES THAT ANY AND ALL DISPUTES OR CLAIMS AGAINST THE BANK OR ITS AGENTS ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE LOANS, THE LOAN DOCUMENTS, ANY COLLATERAL SECURING THE LOANS OR THE CONDUCT OF THE BANK OR ITS AGENTS SHALL BE RESOLVED SOLELY BY MEANS OF BINDING ARBITRATION CONDUCTED IN PORTLAND, MAINE IN ACCORDANCE WITH THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION GOVERNING COMMERCIAL ARBITRATION.

7.10           Writing Required.  Borrower and each Guarantor acknowledges that under Maine law, no promise, contract, or agreement to lend money, extend credit, forbear from collection of a debt or make any other accommodations for the repayment of a debt for more than $250,000 may be enforced against Bank unless the promise, contract, or agreement is in writing and signed by Bank, nor can any change, forbearance or other accommodation relating to the Loan be enforced against Bank unless it is in writing and signed by Bank.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above.

BORROWER:	Flotation Technologies, Inc.
	By: ________________________________
PARENT COMPANY:	Deep Down, Inc.
	By:  ______________________________
LENDER:	TD Bank, N.A.
	By: /s/ William Sipperly
	William Sipperly,  its Vice President

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EX-10.23

Exhibit 10.23

MORTGAGE AND SECURITY AGREEMENT

KNOW ALL MEN BY THESE PRESENTS, that FLOTATION TECHNOLOGIES, INC., a Maine corporation having a mailing address of 20 Morin Street, Biddeford, Maine 04005, (the "Grantor"), in consideration of One Dollar ($1.00) and other valuable consideration paid by TD BANK, N.A. a corporation organized under the laws of the United States of America with a place of business at One Portland Square, Portland, Maine, and a mailing address of P.O. Box 9540, Portland, Maine 04112-9540 (the "Grantee"), the receipt whereof is hereby acknowledged, does hereby give, grant, bargain, sell and convey unto TD BANK, N.A., its successors and assigns, forever, to secure the Obligations as defined below, the following described Premises:

Premises situated at or near 20 Morin Street, in the City of Biddeford, County of York and State of Maine, more particularly described in Schedule A attached hereto with all buildings and improvements now or hereafter situated thereon and all easements and rights appurtenant thereto, together with all building materials and supplies and all other tangible personal property intended for use in construction of buildings and other improvements on the Premises, now and hereafter owned by the Grantor and now affixed and to be affixed, or now and hereafter located upon the Premises, together with all of Grantor's right, title and interest under any contracts or agreements relating in any way to the construction of any improvements on the Premises or the marketing and/or sale of any portion of the Premises, including without limitation all construction contracts and subcontracts, design contracts, brokerage listing contracts, and all other contracts and agreements between Grantor and any of Grantor's general contractors, subcontractors, architects, engineers, brokers, consultants, material providers or other parties providing any goods or services in any connection with construction upon all or any portion of the Premises, together with all plans, specifications, drawings, surveys, engineering and all other site reports, studies, assessments and marketing materials related to the Premises, or to any portion thereof, and all governmental permits, licenses, orders and approvals of whatever nature, related in any way to all or any portion of the Premises, whether received by Grantor or applied for and not yet received or not yet applied for, together with all profits, proceeds, payments, sums of money and accounts, including without limitation, earnest money deposits, accounts receivable, contract rights, intangibles, notes, drafts, acceptances, and all other evidences of receivables, and all rights of Grantor now or hereafter acquired or earned by Grantor under contracts for the sale of any interests in any real estate forming all or any portion of the Premises, together with all contracts, agreements, contract rights and general intangibles related thereto now or hereafter acquired by Grantor as aforesaid provided that nothing contained herein shall obligate Grantee to perform any obligations of Grantor under such contracts, agreements, permits, licenses, orders or approvals, all of which the Grantor hereby agrees to perform well and punctually.

The Grantor also conveys and grants hereby to the Grantee the following articles of personal property now or hereafter situated on or within the Premises, buildings and improvements, or used in connection therewith: All plumbing, heating, lighting, refrigerating, ventilating and air conditioning apparatus and equipment, garbage incinerators and receptacles, elevators and elevator machinery, boilers, tanks, motors, sprinkler and fire extinguishing systems, door bell and alarm systems, screens, awnings, screen doors, storm and other detachable windows and doors, mantels, built-in cases, counters, and all other equipment, machinery, furniture and furnishings, fixtures and articles of personal property now or hereafter owned by Grantor and now or hereafter affixed to, placed upon or used in connection with the operation of said real estate, buildings and improvements, for business and commercial purposes generally, and all other purposes, together with cash proceeds and non-cash proceeds of all of the foregoing, all of which are covered by this mortgage, whether or not such property is subject to prior conditional sales agreements, leases, chattel mortgages or other liens.

The said real estate, buildings, improvements and the foregoing equipment, machinery, furniture, furnishings, fixtures and personal property are hereinafter referred to collectively as the "Premises".  This Mortgage and Security Agreement as it may be affected by any amendments, subordinations, partial releases or supplemental mortgages hereafter executed by or accepted by Grantee is hereinafter referred to as the "Mortgage".

As further security for payment of the Obligations, Grantor hereby grants, transfers, sets over, conveys and assigns to Grantee:

a. All conditional sales agreements, leases and use agreements of machinery, equipment and other personal property of Grantor in the categories hereinabove set forth under which Grantor is the purchaser or lessee of, or entitled to use, such items, and Grantor agrees to execute and deliver to Grantee specific separate assignments thereof to Grantee upon terms satisfactory to Grantee, when requested by Grantee; and nothing herein shall obligate Grantee to perform any obligations of Grantor under such leases or agreements, unless it so chooses, which obligations Grantor hereby covenants and agrees to perform well and punctually.  If the lien of this Mortgage on any fixtures or personal property be subject to a conditional sales agreement or chattel mortgage or lease covering such property, then all the right, title and interest of the Grantor in and to any and all deposits made thereon or therefor are hereby assigned to Grantee, together with the benefit of any payments now or hereafter made thereon.

b. All leases and tenancies of the Premises and all Grantor's rights and interests as the lessor or landlord under any and all written or oral such leases and tenancies, whether such leases or tenancies now exist or are hereafter created, including rents, profits, revenues, royalties, bonuses, rights and benefits under any and all leases or tenancies now existing or hereafter created of the Premises or any part thereof, with the right to receive and apply the same to said indebtedness, and Grantee may demand, sue for and recover such payments, but shall not be required to do so; provided, however, that so long as Grantor is not in default hereunder, the right to receive and retain such rents, issues and profits is reserved to Grantor.  To carry out the foregoing, Grantor agrees (1) to execute and deliver to Grantee such conditional assignments of leases and rents applicable to the mortgaged Premises as the Grantee may from time to time request, while this mortgage and the debt secured hereby are outstanding, which assignments shall be upon terms satisfactory to Grantee, and further (2) not to anticipate or collect any of the rentals or income under any such leases or tenancies more than thirty (30) days in advance of the time the same shall become due, and not to cancel, accept a surrender of, reduce any rentals under, or modify any such leases or tenancies, or consent to an assignment or subletting thereof, in whole or in part, without Grantee's prior written consent.  Nothing herein shall obligate the Grantee to perform the duties of the Grantor as landlord or lessor under any such leases or tenancies, which duties Grantor hereby covenants and agrees to perform well and punctually.

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c. All judgments, awards of damages and settlements hereafter made as a result or in lieu of any taking of the Premises or any interest thereon or part thereof under the power of eminent domain, or for any damage (whether caused by such taking, any casualty or otherwise) to the Premises or the improvements thereon or any part thereof, including any award for change of grade of streets.  Grantee may apply all such sums or any part thereof so received on the indebtedness secured hereby in such manner as it elects or, at its option, the entire amount or any part thereof so received may be released.  Grantor hereby irrevocably authorizes and appoints Grantee its attorney-in-fact to collect and receive any such judgments, awards and settlements from the authorities or entities making the same, to appear in any proceeding therefor, to give receipts and acquittances therefor, and to apply the same to payment on account of the Obligations secured hereby, whether then matured or not; and the Grantor will execute and deliver to the Grantee on demand such assignments and other instruments as the Grantee may require for said purposes and will reimburse the Grantee for its cost (including reasonable counsel fees) in the collection of such judgments and settlements.

d. All fees, charges, accounts or other payment for the use or occupancy of rooms and other public facilities in hotels, motels or other lodging facilities.

Receipt of rents, awards, and any other moneys or evidences thereof, pursuant to the provisions of the foregoing paragraphs a., b., c., or d., or pursuant to any other terms or provisions of this Mortgage, and any disposition of the same by Grantee shall not constitute a waiver of the right of foreclosure by Grantee in the event of default or failure of performance by Grantor hereunder, whether such receipt or disposition shall occur before or after the commencement of such foreclosure.

TO HAVE AND TO HOLD all the aforegranted and bargained Premises, property, leases, tenancies, rents and property income, contract rights, other rights, awards, intangibles, and other personal property, with all the privileges and rights appurtenant thereto (hereinafter referred to collectively as the "Security"), to Grantee, its successors and assigns, to its and their use and behoof forever; PROVIDED NEVERTHELESS, that if Grantor pays to Grantee and fully performs all of the Obligations, in accordance with all the terms and conditions of this Mortgage and the Loan Documents, then this Mortgage, shall be void, but otherwise shall remain in full force.

The term "Obligations" shall mean any and all liabilities, obligations, and indebtedness of Grantor to Grantee presently existing or hereafter arising, and whether evidenced by a writing or not and including, without limitation, obligations to pay principal, interest, costs, fees, or other charges, all obligations of Grantor to Grantee, if any, as guarantor, endorser, accommodation party or surety for the obligations of any Principal Debtor (described below), to Grantee, and any and all other obligations of performance or forbearance, all as required or regulated by applicable Loan Documents.  The term "Loan Documents" shall mean this Mortgage and any other instrument, document or agreement evidencing, securing, or governing the Obligations, whether now existing or hereafter arising, including without limitation, the documents listed below, as each such document may be amended, extended, renewed or replaced by a written instrument executed by the applicable parties:

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A. Commercial Note from Grantor to Grantee dated February 13, 2009, in the original principal amount of $2,160,000.00.

The term Loan Documents shall also include, without limitation, any promissory note, line of credit agreement, guaranty, letter of credit reimbursement agreement or other document, executed by Grantor either on or about the date hereof or in the future which states that it is or is intended to be secured by this Mortgage, including those to be secured as a future obligation pursuant to paragraph 8 below.

Grantor covenants and agrees with Grantee as follows:

1.           Estate of Grantor; Warranty Covenant.  Grantor is lawfully seized of an indefeasible estate in fee simple in the Premises, free from encumbrances, except as may specifically be noted herein, or in Schedule A attached hereto, and Grantor has good right and power, and is duly authorized, to convey the Security to Grantee to hold as aforesaid.  Grantor shall and will Warrant and Defend the Security to Grantee forever against the claims and demands of all persons, except as aforesaid.

2.           Payment of Secured Amounts.  Grantor shall pay all sums secured hereby when due and shall perform all Obligations as required by the applicable Loan Documents.

3.           Payment of Encumbrances on the Security.  Grantor shall pay, when due, all taxes and assessments of every type or nature, and any claim, lien or encumbrance which may be or may become prior to this Mortgage, made, placed, levied or assessed against the Security, or any portion thereof.

4.           Insurance.  Grantor shall keep the Premises insured against loss or damage by fire, the perils against which insurance is afforded by the Extended Coverage Endorsement, and such other risks and perils as Grantee in its discretion may require from time to time, including, without limitation, insurance against flood damage and business interruption.  The policy or policies of such insurance shall be in such form, shall contain such terms and provisions, and shall be in such amounts as Grantee may require, shall be issued by a company or companies approved by Grantee, and shall name Grantee as mortgagee with loss payable to Grantee, and shall, at the request of Grantee, provide for payment of the full replacement value of the Premises in lieu of a specified sum, which replacement value insurance shall be in an amount at all times sufficient to keep Grantor from becoming a co-insurer, which may be evidenced by any agreed amount or similar affirmative statement from any insurer.  Such policy or policies of insurance shall be delivered to Grantee by Grantor.  Grantor shall also maintain comprehensive general public liability insurance for personal injury and property damage, with contractual liability endorsement, in such amounts as Grantee may reasonably require from time to time; Grantor shall deliver the policies providing such public liability insurance for personal injury and property damage to the Grantee to be held by the Grantee, except that certificates of insurance, addressed to the Grantee, satisfactory in form and content to Grantee, evidencing such public liability insurance for personal injury and property damage may be delivered to the Grantee in lieu of the policies therefor, provided that a copy of the underlying policy is also delivered to the Grantee; the policies for such public liability, personal injury and property damage insurance shall name Grantee as an additional insured and shall be carried with such companies and shall contain such other terms and conditions as shall be satisfactory to Grantee, including an obligation upon any such insurer to notify Grantee of any cancellation of any such insurance coverage in advance thereof.  Any and all amounts received by Grantee as payee under any of such policies may be applied by Grantee to the indebtedness secured hereby in such manner as Grantee may, in its sole discretion, elect, or, at the option of Grantee, the entire amount so received or any part thereof may be released to Grantor.  Upon foreclosure of this Mortgage or other acquisition of the Premises or any part thereof by Grantee, such policies naming Grantee as payee shall become the absolute property of Grantee, but receipt of any insurance proceeds and any disposition of the same by Grantee shall not constitute a waiver of any rights of Grantee, statutory or otherwise, and specifically shall not constitute a waiver of the right of foreclosure by Grantee in the event of default or failure of performance by Grantor of any covenant or agreement contained herein or in any note secured hereby.

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5.           Condition and Use of Premises.  Grantor (i) shall neither remove, demolish nor alter the design or structural character of any building or structure now or hereafter erected upon the Premises, other than such construction approved by Grantee, unless the Grantee shall first consent thereto in writing; (ii) shall maintain the Premises in good condition and repair; (iii) shall not commit or suffer waste of any Security; (iv) shall comply with all laws, ordinances, regulations, covenants, conditions and restrictions affecting the ownership, use and operation of the Security and shall not commit, suffer, or permit any violation thereof.

6.           Grantee's Right to Pay Certain Expenses.  If Grantor fails to defend diligently against, or pay, any claim, lien or encumbrance which is alleged to be prior to this Mortgage, or to defend diligently against, or pay, any tax or assessment or insurance premium when due, to keep the Premises in repair, or if the Grantor commits or permits waste of any Security, or if there be commenced any action or proceeding affecting this Mortgage or the debt secured hereby, the Security or the title thereto, or pertaining to any other mortgage or lien on the Security mortgaged hereby or any indebtedness secured thereby, then Grantee, at its option, may pay said claim, lien, encumbrance, tax, assessment or premium, with right of subrogation thereunder, may make such repairs and take such steps as it deems advisable to prevent or cure such waste, and with respect to any such action or proceeding, Grantee may appear in the action or proceeding, retain counsel therein at the expense of Grantor, and take such action therein as Grantee deems reasonably advisable, and for any one or more of the above purposes Grantee may advance such sums of money as it deems necessary.  Grantee shall have no responsibility with respect to the legality, validity or priority of any such claim, lien, encumbrance, tax, assessment, premium, action or proceeding, or with respect to the amount it deems necessary to be paid in satisfaction thereof, so long as it acts reasonably.  Grantor shall pay to Grantee, immediately upon demand therefor, all sums of money advanced or expended by Grantee pursuant to this paragraph, and all fees and charges (including reasonable attorney's fees) incurred by the Grantee incident to the loan(s) secured by this Mortgage, incident to the continued assurance of the security represented by this Mortgage, or incident to the enforcement of the obligations of the Grantor under this Mortgage, including without limitation all costs and expenses incurred by Grantee in foreclosure proceedings hereunder in the event that the Grantor obtains redemption after such proceedings have been initiated, together with interest on all such advancements, fees and charges, at the highest rate of interest per annum (including any default interest rate) required by any of the Loan Documents secured hereby; and all such sums advanced, and the interest thereon, shall be secured hereby.

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7.           Default, Possession, Appointment of a Receiver, and Certain Other Default Remedies.  The occurrence of any one or more of the following events shall constitute a default hereunder: (a) the insolvency of the Grantor or any Principal Debtor, or (b) the making of any assignment for the benefit of creditors of the Grantor or any Principal Debtor, or (c) the issuance or filing of any attachment, levy, or other judicial process on or against any of the Grantor's or any Principal Debtor's assets; or (d) the appointment of a receiver, trustee or custodian for all or any portion of the property of the Grantor or any Principal Debtor; or (e) the commencement of any proceedings under any state or federal bankruptcy or insolvency law or under laws for relief of debtors, by or against the Grantor or any Principal Debtor; or (f) the occurrence of such a change in the condition or affairs (financial or otherwise) of the Grantor or any Principal Debtor as, the opinion of the Grantee, materially impairs the Security (if any) or the prospect of repayment of any amounts outstanding hereunder; or (g) the death, incompetence, dissolution, business failure (which term includes, without limitation, the cessation of normal business operations) or termination of existence of the Grantor or any Principal Debtor; or (h) the failure of the Grantor or any Principal Debtor to pay their respective debts as they mature; or (i) any representation or statement made or furnished to Grantee by or on behalf of Grantor or any Principal Debtor is false or misleading in any material respect; or (j) any default in the payment of any sums due under said Obligations when due, or default by the Grantor or any Principal Debtor in performance of any other Obligations under this Mortgage; or (k) default beyond any applicable cure period in the payment, satisfaction or performance by the Grantor or any Principal Debtor of any condition or obligation under any of the Loan Documents or under any documents executed in connection with any other obligations or liabilities of Grantor or any Principal Debtor to Grantee.  At any time after a default has occurred:

a. Grantee is authorized at any time, without notice, in its sole discretion, to enter upon and take possession of the Premises or any part thereof, and to perform any acts Grantee deems necessary or proper to conserve the Security, and whether or not entry is made and possession is taken as aforesaid, to demand, collect and receive all rents, issues and profits thereof, including past due amounts as well as those presently or thereafter accruing.  Grantee shall (after payment of all costs and expenses incurred in connection therewith) have the right, to the fullest extent permitted by law, but shall not be obliged, to apply such rents, issues and profits received by it to any amounts secured hereby, in such order as Grantee determines.  Grantee shall be liable to account only for such rents, issues and profits actually received by Grantee; and

b. Grantee shall be entitled to have a receiver appointed to enter and take possession of the Premises, collect the rents and profits therefrom and apply the same as the court may direct; and

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c. Grantee or the receiver may also take possession of, and for these purposes use, any and all personal property contained in the Premises and used by Grantor in the rental or leasing thereof or any part thereof.

d. Grantee may cure any default for the account of Grantor, and, to the fullest extent permissible under law, Grantee may apply any funds credited by or due from Grantee to Grantor against the same (without any obligation first to enforce any other rights of the Grantee, including, without limitation, any rights under said Obligations or Loan Documents secured hereby or this Mortgage, or any guarantee thereof, and without prejudice to any such rights).  Without limiting the generality of the foregoing, Grantor hereby authorizes Grantee to pay all taxes, sewer use fees, water rates and assessments, with interest, costs and charges accrued thereon, which may at any time be a lien upon the Security, or any part thereof; to pay the premiums for any insurance required hereunder; to incur and pay reasonable expenses in protecting its rights hereunder and the security hereby granted; to pay any balance due under any security agreement on any fixtures and equipment included as a part of the collateral; and the payment of all amounts so incurred shall be secured hereby as fully and effectually as any other Obligation secured hereby and shall bear interest until paid at the highest applicable rate of interest then payable under the terms of any of the Loan Documents secured hereby.  To the fullest extent permissible under law, Grantee may apply to any of these purposes or to the repayment of any amounts so paid by Grantee any sums paid on any of the Obligations or this Mortgage by Grantor as interest or otherwise.

e. Grantee shall also have such rights and remedies as may be given to Grantee in said Loan Documents, including but not limited to, the right to enter the mortgaged premises before and after any default by Grantor, make inspections, complete or cause to be completed construction thereon and to make the same tenantable or habitable for human occupancy under requirements of all laws and ordinances and the right to expend the balance of loan proceeds and additional sums, necessary in the judgment of Grantee, in order to complete such construction and make the same tenantable or habitable as aforesaid; all such additional sums so expended, with interest thereon at the highest rate of interest per annum that is required by any of the Loan Documents, shall be fully secured hereby as necessary to protect the security of this Mortgage.

All expenses (including receiver's fees, counsel fees, costs and agent's compensation) incurred pursuant to the powers contained in this paragraph 7 shall be secured hereby.  Grantor agrees that exercise of such powers and disposition of funds pursuant to this paragraph 7 shall not constitute a waiver of any foreclosure once commenced nor preclude the later commencement of foreclosure for breach hereof.  The right to enter and take possession of said property, to manage and operate the same, and to collect the rents, issues and profits thereof, whether by a receiver or otherwise, shall be cumulative to any other right or remedy hereunder or afforded by law, and may be exercised concurrently therewith or independent thereof.  Grantor agrees that any proceeds of the Security received by Grantee, including but not limited to foreclosure sale proceeds, insurance proceeds and condemnation proceeds may be applied by Grantee, whether or not there is a default hereunder, to any one or more of the Obligations secured hereby, regardless of whether any of such Obligations are matured or unmatured, as the Grantee may, in its sole discretion, determine.

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8.           Further Advances by Grantee and Future Obligations of Grantor.  Upon request of Grantor, Grantee may from time to time, at its sole option, make further advances to Grantor to be secured hereby and Grantor and Grantee may, at their option, enter into additional Loan Documents to be secured hereby with respect to existing or future Obligations of Grantor to Grantee, provided, however, that the total principal of the Obligations secured hereby and remaining unpaid, including any such advances and future Obligations but excluding protective advances, shall not at any time exceed the sum of Two Million Five Hundred Thousand Dollars ($2,500,000.00).  Grantor shall execute and deliver to Grantee a note or other agreement evidencing each and every such further advance or future Obligations, which Loan Documents shall contain such terms and conditions as Grantee may require.  Grantor shall pay when due all such further advances and future Obligations with interest and other charges thereon, as applicable, and the same, and each of the Loan Documents evidencing the same, shall be secured hereby.  All provisions of this Mortgage shall apply to each further advance as well as to all other indebtedness secured hereby.  Nothing herein contained, however, shall limit the amount secured by this Mortgage if such amount is increased by advances made by Grantee to protect or preserve the Security, as herein elsewhere provided.  If this Mortgage secures a Guaranty from Grantor to Grantee with respect to the obligations or liabilities of the Principal Debtor to Grantee which include future obligations or liabilities in an unlimited amount (an "Unlimited Guaranty"), nothing contained in this paragraph shall be deemed to limit the amount of the Principal Debtor's obligations guaranteed by the Unlimited Guaranty and this Mortgage shall secure all Grantor's obligations pursuant to said Unlimited Guaranty up to the limit of $2,500,000.00.  The word "Grantor" as used in this paragraph includes any successor to the Grantor in ownership of the Premises.

9.           Delay in Exercise of Rights.  No delay of Grantee in exercising any right or remedy hereunder, or otherwise afforded by law, shall operate as a waiver thereof or preclude the exercise thereof during the continuance of any default hereunder.

10.         Grantee's Rights.  Without affecting the liability of Grantor or any other person (except any person expressly released in writing by Grantee) for payment of any indebtedness secured hereby or for performance of any obligation contained herein, and without affecting the rights of Grantee with respect to any security not expressly released in writing.  Grantee may at any time and from time to time, either before or after the maturity of said note and without notice or consent:

a. Release any person liable for payment of all or any part of the indebtedness or for performance of any obligation.

b. Make any agreement extending the time or otherwise altering the terms of payment of all or any part of the indebtedness, or modifying or waiving any obligation, or subordinating, modifying or otherwise dealing with the lien or charge hereof.

c. Exercise or refrain from exercising or waive any right Grantee may have.

d. Accept additional security of any kind.

e. Release or otherwise deal with any property, real or personal, securing the indebtedness, including all or any part of the Security mortgaged hereby.

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11.           Primacy of Mortgage Lien.  All rights of the Grantee under any agreement hereafter made by Grantor and Grantee pursuant to this Mortgage shall be superior to the rights of the holder of any intervening lien or encumbrance on any Security, to the extent allowed by law.

12.           Maintenance; Construction on the Premises.  Grantor shall maintain and preserve in good order and repair the parking areas, common areas, passageways and drives, now or hereafter existing on the mortgaged Premises.  No building or other structure shall be erected upon the Premises, nor shall any new building or any addition to an existing building be erected thereon, without the prior written consent of Grantee.

13.           Bankruptcy and Related Matters.  Grantee, at its option, may accelerate the maturity of the indebtedness secured by this Mortgage, and may exercise any one or more default remedies, including foreclosure of this Mortgage (a) in the event any owner of the mortgaged Premises during the period of such ownership shall make an assignment for the benefit of creditors, file a petition in bankruptcy, petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for itself or for any substantial part of its assets, or shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or (b) if there shall have been filed any such petition or application, or any such proceeding shall have been commenced against such owner, in which an order for relief is entered or which remains undismissed for a period of thirty days or more; or (c) if such owner by any act or omission shall indicate its consent to, approval of or acquiescence in any such petition, application or proceeding or order for relief or the appointment of a custodian, receiver or trustee for itself or for any substantial part of any of its properties, or shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of thirty days or more.

14.           Security Interest; Notice; Remedies.  The Grantor further covenants and agrees that this Mortgage shall constitute a security agreement with respect to any and all machinery, equipment, chattels, articles of personal property, receivables, contract rights, awards, and fixtures described and included in this Mortgage, including all leases and tenancies assigned hereby, and all rental and other income therefrom, and all additions, accessions, substitutions and replacements thereto and therefor, and all proceeds thereof, all of which are included in the Security, but are sometimes hereinafter referred to separately as the "Collateral", and Grantor hereby grants and conveys to Grantee, its successors and assigns, a security interest therein.  This Mortgage shall be effective as a financing statement filed as a fixture filing with respect to all Collateral.  Grantor agrees to execute, deliver and bear the expenses of such financing and continuation statements and such other instruments as Grantee may reasonably require to maintain its priority of security in the Collateral from time to time.  Should Grantor default in any term, condition or covenant of this Mortgage, then, upon acceleration of the indebtedness secured hereby, the Grantee may, at its discretion, require the Grantor to assemble the Collateral and make it available to the Grantee at a place reasonably convenient to both parties to be designated by the Grantee.  The Grantee shall give the Grantor notice, by registered mail, postage prepaid, of the time and place of any public sale of any of the collateral or of the time of any private sale or other intended disposition thereof; which notice is to be sent to the Grantor at least five (5) days before the time of the sale or other disposition, which provisions for notice the Grantor and Grantee agree are reasonable; provided, however, that nothing herein shall preclude the Grantee from proceeding as to both real and personal property in accordance with Grantee's rights and remedies in respect of the Security.  Grantee shall have all of the remedies of a secured party under the Uniform Commercial Code as now in effect in the State of Maine, and such further remedies as may from time to time hereafter be provided in Maine for a secured party.  Grantor agrees that all rights of Grantee as to said Security, and as to all appurtenances thereto, may be exercised together or separately, and further agrees that in exercising its power of sale as to said Security, and rights and interests appurtenant thereto, the Grantee may sell the Collateral or any part thereof, either separately from or together with the said Premises, all appurtenances thereto, or any part thereof, all as the Grantee may in its discretion elect.  This Mortgage is a construction mortgage within the meaning of the Maine Uniform Commercial Code, particularly Section 9-313 of Article 9 thereof, and shall have the priority and all other benefits given to a construction mortgage by said Code as it may now exist and as it may hereafter be amended.

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15.           Certain Terms of Foreclosure Sale.  At any foreclosure sale, any combination, or all, of the Security given to secure the indebtedness secured hereby, may be offered for sale for a single price, and the proceeds of such sale may be accounted for in one account without distinction between the items of security and without assigning to them any proportion of such proceeds, Grantor hereby waiving the application of any doctrine of marshalling; and, in case the Grantee, in the exercise of the power of sale herein given, elects to sell in parts or parcels, such sales may be held from time to time, and the power shall not be fully executed until all of the Security not previously sold shall have been sold.

16.           Financial Records of the Premises.  Grantor shall maintain full and correct books and records showing in detail the earnings and expenses of the Security; will permit the Grantee and its representatives to examine said books and records and all supporting vouchers and data at reasonable times upon request by the Grantee at the principal office of Grantor or at the mortgaged Premises, and Grantor hereby agrees to furnish to Grantee within one hundred twenty (120) days after the close of each fiscal year an annual financial statement of the operation of the Security reflecting income (including sources thereof) and expenses, such statement to be prepared by a certified accountant or other competent party satisfactory to Grantee.

17.           Statement of Balances and Defenses.  Within seven (7) days after a request made in person, or within ten (10) days after a request made by mail, Grantor shall furnish a duly acknowledged written statement to Grantee, setting forth the amount of the debt secured by this Mortgage, and stating either that no offsets or defenses exist against the mortgage debt, or, if such offsets or defenses are alleged to exist, the nature thereof.

18.           Grandfathered Uses.  If at any time the then existing use or occupancy of the mortgaged Premises shall, pursuant to any zoning or other law, ordinance or regulation, be permitted only so long as such use or occupancy shall continue, that Grantor shall not cause or permit such use or occupancy to be discontinued without the prior written consent of the Grantee.

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19.           Loan Agreement.  Grantor shall well and truly perform, or cause to be performed, in a punctual manner, all the terms, conditions and agreements that are the obligation of Grantor contained in the Loan Agreement of even date herewith between Grantor and Grantee.

20.           Escrow for Taxes and Insurance.  Grantor shall, upon written request therefor by Grantee to Grantor, which request may be withdrawn and remade from time to time at the discretion of Grantee, pay to Grantee on a monthly basis as hereafter set forth a sum equal to the municipal and other governmental real estate taxes, other assessments next due on the real property described in this Mortgage and all premiums next due for fire and other casualty insurance required of Grantor hereunder, less all sums already paid therefor, divided by the number of months to elapse not less than one (1) month prior to the date when said taxes and assessments will become delinquent and when such premiums will become due.  Such sums as estimated by Grantee shall be paid with monthly payments of interest due pursuant to the terms of the indebtedness secured by this Mortgage and such sums shall be held at no interest by Grantee to pay said taxes, assessments and premiums before the same become delinquent.  Grantor agrees that should there be insufficient funds so deposited with Grantee for said taxes, assessments and premiums when due, it will upon demand by Grantee promptly pay to Grantee amounts necessary to make such payments in full; any surplus funds may be applied toward the payment of the indebtedness secured by this mortgage or credited toward future such taxes, assessments and premiums; if Grantee shall have commenced foreclosure proceedings, the Grantee may apply such funds toward the payment of the mortgage indebtedness without causing thereby a waiver of any rights, statutory or otherwise, and specifically such application shall not constitute a waiver of the right of foreclosure hereunder.  Grantor hereby assigns to Grantee all the foregoing sums so held hereunder for such purposes.

21.           Financial Statements.  In addition to the financial statements required of Grantor under paragraph 16 hereof, Grantor hereby covenants and agrees to deliver or cause to be delivered to Grantee, the financial statements and tax returns required under the terms of the Loan Agreement of even date herewith.

22.           Leases and Tenancies.  Grantor shall submit to the Grantee for Grantee's examination and approval in writing prior to the execution, delivery and commencement thereof, all leases, tenancies and occupancies of the Premises mortgaged hereby and any part thereof; any such leases, tenancies and occupancies, not so approved, shall not be valid; and Grantor at its cost and expense, upon request of Grantee, shall cause any parties in possession of the premises under any such leases, tenancies and occupancies, not so approved, to vacate the premises immediately; and Grantor acknowledges that Grantee may from time to time at its option enter upon the mortgaged Premises and take any other action in court or otherwise to cause such parties to vacate the Premises; the costs and expenses of Grantee in so doing shall be paid by Grantor to Grantee on demand thereof and shall be part of the Obligations secured by this Mortgage as costs and expenses incurred to preserve and protect the security; such rights of Grantee shall be in addition to all its other rights as Mortgagee, including the right of foreclosure, for breach by Grantor in the requirements of this paragraph.

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23.           Sale or Encumbrance of the Premises  It is an additional condition of this Mortgage, for breach of which foreclosure may be claimed, and for breach of which all indebtedness secured hereby may be declared due and payable at once, that, without Grantee's prior written consent, neither the Grantor nor any subsequent owner of the Premises mortgaged hereby shall convey, mortgage, sell, contract to sell or otherwise transfer or encumber the title, ownership, right of possession, or any other interest in the mortgaged Premises, or in any part thereof, nor shall any interest in said Premises pass from Grantor or from any subsequent owner, either voluntarily, involuntarily, by operation of law or otherwise.  The conditions of this paragraph shall continue until all indebtedness and obligations secured hereby are satisfied.  Permission given or election not to foreclose or accelerate said indebtedness made by Grantee, its successors or assigns, as to any one such event, shall not constitute a waiver of any rights of Grantee, its successors or assigns, as to any subsequent such event, as to which this condition shall remain in full force and effect.  The title as used herein shall mean the estate of the Grantor subject to the lien of this Mortgage.  Any change in the legal or equitable title of the Premises or in the beneficial ownership of the Premises, whether or not of record, and whether or not for consideration or sale or other disposition of the stock of, or general partnership interest in, Grantor, if Grantor is a corporation or a partnership, shall be deemed a sale of the Premises and without the prior written consent of Grantee shall constitute a default herein by Grantor.

24.           Hazardous Substances.

a. Grantor covenants that it has not discharged, dumped, installed, stored, used, treated, transported, disposed or maintained, and shall neither discharge, dump, install, store, use, treat, transport, dispose or maintain, nor allow, suffer or permit others to discard, dump, install, store, use, treat, transport, dispose or maintain toxic, hazardous, or radioactive substances, materials or wastes, including, without limitation, all of the following: (a) asbestos in any form; (b) urea formaldehyde foam insulation; (c) transformers or other equipment which contain dielectric fluid containing any level of polychlorinated biphenyls or (d) any other chemical, material or substance which is prohibited, limited, or regulated by any federal, state, county, regional, local, or other governmental authority or which, even if not so regulated, may or could pose a hazard to the health and safety of the occupants of the Premises or the owners of property adjacent to the Premises (all of which are referred to collectively herein as "Hazardous Substances"), in or on the mortgaged Premises; Grantor further covenants that the Premises do not contain, and Grantor shall not permit the Premises to contain, any Hazardous Substances, and that the Premises are not now being used and never have been used for any activities directly or indirectly involving the use, generation, treatment, storage, transportation or disposal of any Hazardous Substances, and that neither the Premises nor the Grantor is the subject of any existing, pending or threatened investigation or inquiry by, or of any remedial order or obligation issued by or at the behest of, any governmental authority under any law, rule or regulation pertaining to health or the environment.  Grantor shall at all times keep the Premises free from any Hazardous Substances.  If Grantor fails to take with diligence any action required by Grantee or by any governmental entity with respect to the clean-up of any Hazardous Substances, materials or wastes on the Premises, Grantee, at its option, may enter upon the Premises, retain such experts and consultants at the expense of Grantor and take such action as Grantee deems advisable, and Grantee may advance such sums of money as it deems necessary with respect to the clean-up of any such substances, materials or wastes on the Premises;  Grantor shall pay to Grantee immediately and upon demand, all sums of money advanced or expended by Grantee pursuant to this paragraph, together with interest on each such advancement at the highest rate of interest per annum (including any default interest rate) required by any of the Loan Documents secured hereby, and all such sums, and the interest thereon, shall be secured hereby, as sums spent to preserve and protect the Security.

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b. The Grantor shall indemnify the Grantee and hold the Grantee harmless from and against all loss, damage, and expense (including, without limitation, attorney fees and costs incurred in the investigation, defense, and settlement of claims) that the Grantee may incur as a result of or in connection with the assertion against the Grantee of any claim relating directly or indirectly, in whole or in part, to the presence of or removal of any Hazardous Substances, or relating to any activity on or off the Premises, whether prior to or during the term of this loan, and whether such activity was carried on by the Grantor or any predecessor in title or any employees, agents, contractors, or third parties, if such activity involved Hazardous Substances, in whole or in part, directly or indirectly, or noncompliance with any federal, state or local laws, regulations, or orders relating thereto.

c. The Grantor shall promptly notify the Grantee in writing of any order or pending or threatened action by any regulatory agency or other governmental body, or any claims made by any third party, relating to Hazardous Substances on or emanating from the Premises, and shall promptly furnish the Grantee with copies of any correspondence and legal pleadings in connection therewith.

d. The Grantee shall have the right, but shall not be obligated, to notify any state, federal or local governmental authority of information which may come to its attention with respect to Hazardous Substances on or emanating from the Premises and Grantor irrevocably releases Grantee from any claims of loss, damage, liability, expense or injury relating to or arising from, directly or indirectly, any such disclosure, but Grantee does not hereby release Grantor from any claims, loss, damage, expense, injury, or any other matter in connection therewith, all of which claims, loss, damage, expense, injury and other matters of Grantee are hereby expressly reserved and preserved.

e. At any time during the term of this loan the Grantee may require the Grantor to provide the Grantee, at the expense of the Grantor, written reports of inspections or audits of the Premises, prepared by a qualified consultant approved by Grantee, certifying as to the presence or absence of Hazardous Substances, or to permit the Grantee to so inspect or audit the Premises at the Grantor's expense, and Grantor hereby grants Grantee, its employees, agents and independent contractors, the right to enter upon the Premises for the purpose of conducting tests, soil borings, the installation of monitoring wells and such other tests as Grantee deems necessary or desirable.

f. The liability of the Grantor to the Grantee under the covenants of this section is not limited by any exculpatory provision in any Loan Document and shall survive any assignment, transfer, discharge or foreclosure of this Mortgage or any transfer of the Premises by deed in lieu of foreclosure, and any one or more transfers of the Premises by deed or otherwise, by whomsoever made, it being the intent hereof that Grantee may seek recourse against Grantor hereunder after any number of such transfers or other events.

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25.           Condominium or Development of Premises.  Grantor further covenants and agrees that, without the prior written consent of Grantee herein, no part of the Premises herein mortgaged shall be declared, or become the subject of, a condominium under the Maine Condominium Act, as it may be amended or supplemented, or become the subject of any covenants or restrictions, or any planned unit development, or any other type of development that would control or restrict the uses to which the Premises may be put or the scheme or arrangement of its development or the design, location or character of its buildings or improvements, or which would impose obligations or assessments of any type upon any owners or tenants of the Premises, or upon any other parties who may use or enjoy the Premises.

26.           Effect of Consents and Waivers.  No express or implied consent to, or waiver of, any default of Grantor by Grantee shall be construed as a consent to, or waiver of, any other default.  No consent to, or waiver of, any default, or any other indulgence, shall be effective unless expressed in writing by Grantee.  Grantor agrees for itself, its successors and assigns, that the acceptance, before the expiration of the right of redemption and after the commencement of foreclosure proceedings of this Mortgage, of insurance proceeds, eminent domain awards, rents or anything else of value to be applied on or to the mortgage indebtedness by Grantee or any person or party holding under it shall not constitute a waiver of such foreclosure, and this agreement by Grantor shall be that agreement referred to in Section 6204 of Title 14 of the Maine Revised Statutes of 1964 as necessary to prevent such waiver of foreclosure.  This agreement by Grantor is intended to apply to the acceptance and such application of any such proceeds, awards, rents and other sums or anything else of value whether the same shall be accepted from, or for the account of, Grantor or from any other source whatsoever by Grantee or by any person or party holding under Grantee at any time or times in the future while any of the Obligations secured hereby shall remain outstanding.

27.           Indemnification.  The Grantor shall indemnify, defend, and hold the Grantee harmless of and from any claim brought or threatened against the Grantee by the Grantor, by any guarantor or endorser of the indebtedness secured hereby, or by any other person (as well as from attorneys' reasonable fees and expenses in connection therewith) on account of the Security or any Loan Document, including, without limitation, on account of the Grantee's relationship with the Grantor or any other such guarantor or endorser (each of which claims may be defended, compromised, settled, or pursued by the Grantee with counsel of the Grantee's selection, but at the expense of the Grantor.  The within indemnification shall survive payment and performance of this Mortgage and any termination, release, or discharge executed by the Grantee in favor of the Grantor.

28.           Prior and Junior Liens.  If any portion of the Premises or the Security shall at any time be subject to any mortgage, security interest, lien or encumbrance whether prior to this Mortgage ( a "Prior Lien") or junior in priority to this Mortgage (a "Junior Lien") the provisions of this paragraph shall apply.  The existence of this paragraph shall not be deemed to imply any consent or approval or agreement by Grantee to allow any Prior Lien or Junior Lien upon any part of the Premises or the Security, or an exception to the Grantor's covenants under paragraph 1 above or of the condition described in paragraph 23 above.

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a. Grantor shall perform, or cause to be performed, when due, all obligations of the Grantor in any document relating to or secured by any Prior Lien or any Junior Lien, to perform all statutory or other conditions of said documents, and shall pay or cause to be paid, when due, all indebtedness secured thereby.  Grantor hereby agrees that a default in the terms of any document relating to or secured by any Prior Lien or any Junior Lien, shall constitute a default under this Mortgage.

b. If an event of default shall have occurred under any document relating to or secured by a Prior Lien, then in addition to any other rights and remedies available to Grantee, Grantee may, but need not, make any payment or perform any act required under any document relating to or secured by a Prior Lien, in any form and manner deemed expedient by Grantee, and may, but need not, make full or partial payments of principal or interest secured by any Prior Lien, and purchase, discharge, compromise or settle the Prior Lien and/or the other documents secured thereby, and in the event Grantee shall make any such payments to the holder of the Prior Lien, Grantee shall be subrogated to all of the right, title, interest and privilege which before said payment were vested in the holder of such Prior Lien, as the case may be, and that upon such payment, this Mortgage shall be, to the extent of payment so made, a valid lien subrogated as aforesaid upon the Premises and/or the Security.

c. Notwithstanding any other provisions in this Mortgage, if pursuant to any document relating to a Prior Lien, insurance proceeds in respect of any damage or destruction or any award or payment applicable to a taking by eminent domain is applied against any obligation secured by any Prior Lien, as the case may be, Grantee may forthwith demand payment in full of the Obligations secured hereby due and payable at any time thereafter unless the Premises remaining after such taking or damage or destruction is sufficient in Grantee's sole judgement to adequately secure the payment of the Obligations secured hereby.

d. Grantor shall not enter into any agreement by which the terms or conditions of any document relating to any Prior Lien or any Junior Lien are waived, modified, varied, extended or renewed without the prior written consent of Grantee and, further, Grantor shall not enter into any agreement by which the terms of payment of any indebtedness secured by Prior Lien or Junior Lien are waived, modified, or deferred or delayed or increased or reduced in rate or amount without the prior written consent of Grantee, and if any such action be taken by written agreement or oral understanding, without the prior written consent of Grantee, Grantee, at its option, may consider such event a default under this Mortgage, entitling Grantee to exercise any and all default remedies hereunder or otherwise available to it.

29.           Further Documentation.  Grantor shall at all times do and perform all acts and things necessary or appropriate (or which Grantee may reasonably deem necessary or appropriate) to effectuate more fully the purposes of this Mortgage and the agreements set forth herein or in any other documents associated with any indebtedness secured hereby, upon request therefor by Grantee.  Grantor shall promptly execute and deliver to Grantee on demand any further instruments or documentation which Grantee may reasonably deem necessary or appropriate in order to create, maintain, perfect, ensure the first priority of or otherwise effectuate any of Grantee's security interests, mortgage interests, liens, rights or interests created or to be created in connection with the debt secured hereby, including without limitation such specific assignments of security, mortgages, UCC financing statements, assignments, pledges, and other documents as Grantee shall request.  Grantor shall perform any and all steps requested by Grantee to perfect Grantee's security interest in the Collateral, such as placing and maintaining signs, appointing custodians, executing and filing financing or continuation statements in form and substance satisfactory to Grantee, and delivering to Grantee any documents, chattel paper, instruments, drafts, notes, and other forms of obligations owing to Grantor and in which Grantee has a security interest, endorsed to the order of Grantee at Grantee's request.

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30.           Captions.  The use of paragraph headings in this document is for purposes of convenience only, and no caption or paragraph heading shall affect in any way the interpretation, meaning or construction of this document.

Under the terms and provisions of one or more of the Loan Documents which this Mortgage secures and under the terms and provisions of any future or further advances secured hereby, the interest rate payable thereunder may be variable.  THE PURPOSE OF THIS PARAGRAPH IS TO PROVIDE RECORD NOTICE OF THE RIGHT OF GRANTEE, ITS SUCCESSORS AND ASSIGNS, TO INCREASE OR DECREASE THE INTEREST RATE ON ANY INDEBTEDNESS SECURED HEREBY WHERE THE TERMS AND PROVISIONS OF SUCH INDEBTEDNESS PROVIDE FOR A VARIABLE INTEREST RATE.

NOTWITHSTANDING any provision hereinabove to the contrary, the Grantor acknowledges that one or more of the Loan Documents which this Mortgage secures may be a demand obligation which entitles the holder thereof after such date to make demand of the unpaid principal balance thereof with interest thereon and any other charges described hereinabove at any time and for any reason at the sole discretion of the holder thereof.

The covenants and agreements herein contained shall bind, and the benefits and advantages thereof shall inure to, the respective heirs, executors, administrators, successors and assigns of the Grantor and Grantee.  Wherever used, the singular number shall include the plural, the plural the singular, the use of any gender shall be applicable to all genders.  If more than one party executes this Mortgage as a Grantor, then the promises, obligations and liabilities of each such party to Grantee hereunder shall be joint and several promises, obligations and liabilities to Grantee, its successors and assigns.  This Mortgage shall be governed in all respects in accordance with the laws of the State of Maine.

No determination that any obligation or portion of this Mortgage and Security Agreement is invalid or unenforceable under law shall affect in any way the validity or enforceability of any other obligations or portions hereof.

THIS MORTGAGE is on the STATUTORY CONDITION and upon the further condition of full and seasonable compliance of the Grantor with all of the preceding terms, conditions, covenants and agreements, for any breach of which: (a) the Grantor shall be in default hereunder, (b) the Grantee shall have the right of foreclosure and any and all other rights and remedies given to a Mortgagee and Secured Party under the law of Maine, this Mortgage and Security Agreement and any document it secures; and (c) the Grantee and Grantee's successors and assigns shall also have THE STATUTORY POWER OF SALE  pursuant to the applicable provisions of Titles 14 and 33 of the Maine Revised Statutes of 1964, as said Statutes have been and shall be amended, and in connection therewith, Grantor acknowledges that this Mortgage is given primarily for a business, commercial or agricultural purpose.  The parties herein agree that any sale conducted pursuant to the Statutory Power of Sale may, at Grantee’s option, be conducted at or near the premises, at Grantee’s principal place of business in the State of Maine, or at any branch office of Grantee in York County, Maine.  The word "Grantee" as used in this paragraph includes any successor to the Grantee in ownership of this Mortgage.  No remedy herein conferred on the Grantee is intended to be exclusive of any other remedy and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing.  The failure to exercise any right or remedy shall in no event be construed as a waiver or release thereof.  Any failure by the Grantee to insist upon strict performance by Grantor of any of the terms or provisions of this Mortgage shall not be deemed to be a waiver of any terms or provisions of this Mortgage and the Grantee shall have the right thereafter to insist upon strict performance by Grantor of any and all of such terms and provisions.

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IN WITNESS WHEREOF, the Grantor has duly executed this instrument, under seal, this 13th day of February 2009.

WITNESS:	FLOTATION TECHNOLOGIES, INC.
	By: /s/ David Capotosto
	David Capotosto Its President

STATE OF MAINE

York, ss.

Upon this 13th day of February, 2009, then before me personally appeared the above-named David Capotosto, President of FLOTATION TECHNOLOGIES, INC., and acknowledged the foregoing instrument to be his free act and deed and in his capacity of said corporation.

/s/ David J. Jones                                         

Attorney at Law

David J. Jones

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Schedule A

Two certain lots or parcels of land, together with improvements thereon, situated in Biddeford on the westerly side of Morin Street, Biddeford, York County, Maine being more particularly bounded and described as follows:

Parcel I

BEGINNING at a found iron rod located on the westerly sideline of Morin Street, said iron rod marking the southeasterly corner of lot 9 and the northeasterly corner of Lot 8 as shown on a "Plan of the Biddeford Industrial Park, Biddeford, Maine by Wells Engineering, Inc.,” dated July 1, 1977, approved by the Biddeford Planning Board on July 1, 1977 and recorded with the York County Registry of Deeds in Plan Book 87, Page 37 (“1977 Plan”) and as shown on a plan entitled “Subdivision Amendment of Lots 8 & 9” prepared by Paul P. Gadbois Engineering and Surveying Company, approved by the City of Biddeford Planning Department on July 2, 2008, and recorded with the York County Registry of Deeds in Plan Book 330, Page 32 (“2008 Plan”);

THENCE running N 85° 44' 00’’ W a distance of 442.63 feet to an iron rod at land now or formerly of the Boston & Maine Railroad;

THENCE turning and running in a general northeast direction along a curve to the right, by said land of the Boston & Maine Railroad, a distance of 345.77 feet to an iron rod and land now or formerly of Correct Holdings, LLC, as shown on the 2008 Plan;

THENCE turning and running S 84° 49' 00” E a distance of 473.54 feet to an iron rod at the northwesterly sideline of said Morin Street;

THENCE S 5° 11' 00” W, along said Morin Street, a distance of 337.07 feet to found iron rod and the point of BEGINNING.

Meaning and intending to describe Lot 9 as shown on a "Plan of the Biddeford Industrial Park, Biddeford, Maine by Wells Engineering, Inc., dated July 1, 1977, approved by the Biddeford Planning Board on July 1, 1977 and recorded in the York County Registry of Deeds in Plan Book 87, Page 37.

Parcel I is subject to:

Such state of facts disclosed on the Plan of Biddeford Industrial Park, Biddeford, Maine prepared by Wells Engineering, Inc. dated July 1, 1977, and recorded in the York County Registry of Deeds in Plan Book 87, Page 37.

Terms, conditions and restrictions set forth in the deed from the City of Biddeford to V. P. Winter Distributing Co. dated February 15, 1984, and recorded in said Registry of Deeds in Book 3245, Page 194, as said terms were amended by an Amendment to Covenants to Biddeford Industrial Park dated June 14, 1999, and recorded in the York County Registry of Deeds in Book 9535, Page 24 and dated October 26, 2001, and recorded in said Registry in Book 11083, Page 45.

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Rights and easements granted to Central Maine Power Company and New England Telephone and Telegraph Company by instrument dated June 4, 1984, and recorded in said Registry of Deeds in Book 3351, Page 57.

Title reference for Parcel I is made by a Deed from The Lynch Realty Group, LLC to Flotation Technologies, Inc. dated August 21, 2007, and recorded in the York County Registry of Deeds in Book 15242, Page 311.

Parcel II

BEGINNING at a found iron rod located on the westerly sideline of Morin Street, said iron rod marking the southeasterly corner of land conveyed to Flotation Technologies, Inc., by deed recorded in the York County Registry of Deeds in Book 15242, Page 311;

THENCE running S 05°-11’ 00” W along the westerly sideline of said Street a distance of 5.29 feet to an iron rod to be set;

THENCE turning and running S 76° 08’ 34” W along remaining land now or formerly of Morin Maine, LLC a distance of 448.41 feet to an iron rod to be set on the easterly sideline of land of Boston and Maine Rail Road;

THENCE turning and running N 03° 16’ 00” W along the easterly sideline of said Rail Road land a distance of 23.13 feet to a point;

THENCE turning and running N 01° 59’ 00” W continuing along the easterly sideline of said Rail Road land a distance of 122.58 feet to a point located on the southerly sideline of land now or formerly of Flotation Technologies;

THENCE turning and running S 85° 44’ 00” E along the southerly sideline of said Flotation Technologies land a distance of 89.88 feet to a found iron rod;

THENCE turning and running S 85° 44’ 00” E continuing along the southerly sideline of said Flotation Technologies land a distance of 352.75 feet to the found iron rod and the point of BEGINNING.

The above described parcel containing 33,450 square feet, more or less. The bearings were derived from the 1977 Plan.

SUBJECT TO a drainage easement for the benefit of remaining land now or formerly of Morin Maine, LLC and being more particularly described as follows:

BEGINNING at a point located on the easterly sideline of said Rail Road land, said point marking the southwesterly corner of Lot # 9 as shown on said Plan;

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THENCE turning and running S 85° 44’ 00” E along the southerly sideline of Flotation Technologies land a distance of 16.88 feet to a point,

THENCE turning and running S 33° 04’ 44” E a distance of 145.55 feet to a point;

THENCE turning and running S 76° 08’ 34” W a distance of 93.43 feet to an iron rod to be set on the easterly sideline of said Rail Road land;

THENCE turning and running N 03° 16’ 00” W along the easterly sideline of said Rail Road land a distance of 23.13 feet to a point;

THENCE turning and running N 01° 59’ 00”W continuing along the easterly sideline of said Rail Road land a distance of 122.58 feet to the point of BEGINNING.

Title reference for Parcel II is made to a parcel of land conveyed to Flotation Technologies, Inc, from Morin Maine, LLC dated July 31, 2008 and recorded in the York County Registry of Deeds in Book 15478, Page 749.

The above described Parcels I and II are depicted as Lot 9 on a plan entitled “Subdivision Amendment of Lots 8 & 9” prepared by Paul P. Gadbois Engineering and Surveying Company, approved by the City of Biddeford Planning Department on July 2, 2008, and recorded with the York County Registry of Deeds in Plan Book 330, Page 32.

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EX-10.24

Exhibit 10.24

COLLATERAL ASSIGNMENT OF LEASES AND RENTS

THIS ASSIGNMENT made the 13th day of February, 2009, by FLOTATION TECHNOLOGIES, INC., a Maine corporation, having a mailing address of 20 Morin Street, Biddeford, Maine 04005, (hereinafter referred to as the "Assignor") to TD BANK, N.A., a corporation organized under the laws of the United States of America and having an address of One Portland Square, P.O. Box 9540, Portland, Maine 04112-9540 (hereinafter referred to as the "Assignee").

W I T N E S S E T H:

That the Assignor for One Dollar and other good and valuable consideration, receipt of which is hereby acknowledged, hereby grants, transfers and assigns to the Assignee the entire lessor's interest in and to any and all leases and tenancy at will agreements now in existence or subsequently entered into by the Assignor with reference to improvements on the real property covered by the Mortgage referred to herein (collectively the "Leases", which term as here and hereinafter used shall be construed to include the singular and plural thereof if the context so requires);

TOGETHER with all rents, income, profits and security deposits, if any, arising from said Leases, renewals and extensions thereof and together with all rents, income, profits and security deposits, if any, for the use and occupation of the premises described in said Leases or in the Mortgage hereinafter referred to and, all rents, income, profits, and security deposits, if any, arising from all Leases upon said premises which may be executed in the future during the term of this Assignment.  For purposes of this Assignment, rents, income and profits shall include, without limitation, (i) the right to receive and collect all rents, income, revenues, issues, profits, insurance proceeds, condemnation awards, moneys and security payable or receivable under said Leases or pursuant to any provisions thereof, (ii) the right to make all waivers and agreements, (iii) the right to give all notices, consents and releases, (iv) the right to take action upon the happening of a default under any Lease or by law or in equity, and (v) the right to do any and all other things whatsoever which Assignor or any lessor is or may be entitled to do under any Lease.

Assignor covenants and agrees that any and all future Leases, including amendments, extensions and renewals of existing and future Leases, of all or any part of the said premises shall require the approval of the Assignee to be effective, which approval shall not be unreasonably withheld, and provided that this paragraph shall not affect the rights or obligations of any third parties except at the option of Assignee.

THIS ASSIGNMENT shall constitute a second priority assignment, made for the purposes of securing the payment and performance of a certain Commercial Note dated February 13, 2009, given by Assignor to Assignee, in the original principal amount of $2,160,000.00 in accordance with all the terms and conditions of the Loan Documents as such term is defined in the Mortgage and Security Agreement from Assignor to Assignee, of even date and securing the above amount, to be recorded in the York County Registry of Deeds herewith (the "Mortgage"), on real property situated at 20 Morin Street, Biddeford, York County, Maine, and more particularly described in Schedule A attached hereto, which may include further advances or future obligations of Assignor to Assignee pursuant to Loan Documents hereafter executed by Assignor as described in paragraph 8 of the Mortgage.  Any such future obligations which are secured by the Mortgage shall also automatically be secured hereby.

THE ASSIGNOR WARRANTS that the Assignor is and shall be the sole owner of the entire lessor's interest in said Leases; that said Leases are and shall be valid and enforceable and have not been and will not be altered, modified or amended in any manner whatsoever except as herein set forth; that the lessees named therein are not and shall not be in default under any of the terms, covenants or conditions thereof; that no rent reserved in said Leases has been or shall be assigned or anticipated except as contemplated herein and that no rent for any period subsequent to the date of this Assignment has been or will be collected more than one month in advance of the time when the same became or becomes due under the terms of said Lease.

THE ASSIGNOR COVENANTS with the Assignee to observe and perform all the obligations imposed upon the lessor under said Leases and not to do or permit to be done anything to impair the security thereof; not to collect any of the rent, income and profits arising or accruing under said Leases or from the premises described in said Mortgage more than one month in advance of the time when the same shall become due; not to execute any other assignment of lessor's interest in said Leases or assignment of rent arising or accruing from said Leases or from the premises described in said Mortgage; not to subordinate any Lease to any mortgage or other encumbrance or permit, consent or agree to such subordination without the Assignee's prior written consent; not to alter, modify or change the terms of any Lease or give any consent or approval or exercise any option required or permitted by such terms without the prior written consent of the Assignee, or cancel or terminate any Lease or accept a surrender thereof or convey or transfer or suffer or permit a conveyance or transfer of the premises demised thereby or of any interest therein so as to effect directly or indirectly, proximately or remotely a merger of the estates and rights of, or a termination or diminution of the obligations of, lessee thereunder; not to waive or release any rights of lessor under any Lease; not to accept abandonment or vacation of any premises demised by any Lease; not to enter into any future lease of the real property which is the subject of the Mortgage without the prior written consent of the Assignee; not to alter, modify or change the terms of any guaranty of any Lease or cancel or terminate any such guaranty without the prior written consent of the Assignee; not to consent to any assignment of or subletting under any Lease, unless in accordance with its terms, without the prior written consent of the Assignee.  The Assignor further covenants and agrees that any of the foregoing acts referred to in this paragraph, if done without the prior written consent of the Assignee, shall be null and void.

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The Assignor further covenants with the Assignee: to enforce all of the obligations of each lessee under the Leases; to exercise, in a manner satisfactory to the Assignee, any rights and remedies available to the Assignor or lessor under the Leases upon default by any lessee thereunder; to exercise any option available to the Assignor as lessor under the Leases at the request of the Assignee; and to execute such further and additional assignments and other instruments as the Assignee shall from time to time require to confirm or perfect its rights and remedies hereunder, including, without limitation, further confirmations of the assignment of any Lease to Assignee.

In the event the Assignor shall default in any of the obligations imposed upon lessor under any Lease, the Assignee shall have the right, but not the obligation to cure the same, and all expenses incurred by the Assignee in connection therewith shall become a debt of the Assignor secured hereby and by said Mortgage.

THIS ASSIGNMENT is made on the following terms, covenants and conditions:

1.           So long as there shall exist no default by the Assignor in the payment or performance of any of the Obligations (a "Default" hereunder), the Assignor shall have the right to collect not more than one month before the date provided for the payment thereof, all rents, income and profits arising under the Leases or from the premises described therein and to retain, use and enjoy the same.

2.           Upon or at any time after a Default, the Assignee without in any way waiving such Default may at its option without notice and without regard to the adequacy of the security for the principal sum, interest and indebtedness secured hereby and by said Note and Mortgage, either in person or by agent, with or without bringing any action or proceeding, or by a receiver appointed by a court, take possession of the premises described in the Leases and the Mortgage and have, hold, manage, lease and operate the same on such terms and for such period of time as the Assignee may deem proper, and either with or without taking possession of said premises or holding, managing, leasing and operating in its own name, demand, sue for or otherwise collect and receive all rents, income and profits of said premises, including those past due and unpaid with full power to make from time to time all alterations, renovations, repairs or replacements thereto or thereof as may seem proper to the Assignee and to apply such rents, income and profits to the payment of:  (a) all expenses of managing the premises, including, without being limited thereto, the salaries, fees and wages of a managing agent and such other employees of the Assignee may deem necessary or desirable and all expenses of operating and maintaining the premises, including, without being limited thereto, all taxes, charges, claims, assessments, water rents, sewer rents and any other liens, and premiums for all insurance which the Assignee may deem necessary or desirable, and the cost of all alterations, renovations, repairs or replacements, and all expenses incident to taking and retaining possession of the premises; and (b) the payment or performance of any of the Obligations, together with all costs and attorneys' fees, in such order of priority as to any of the items mentioned in this paragraph as the Assignee in its sole discretion may determine, any statute, law, custom or use to the contrary notwithstanding.  The exercise by the Assignee of the option granted it in this paragraph and the collection of the rents, income and profits and the application thereof as herein provided shall not be considered a waiver of any Default or of any default by the Assignor arising hereunder or under the Note or Mortgage or other Loan Documents.  Exercise of any rights of the Assignee under this paragraph shall not be considered to be a waiver of any other rights of the Assignee hereunder; in particular, but without limitation, the Assignee's exercise of its rights to collect and receive rents, income and profits shall not preclude the Assignee from later electing to take possession of the premises hereunder, nor shall the Assignee's exercise of its rights with respect to any particular Lease or portion of the said premises (which exercise shall be expressly permitted, at the Assignee's option) preclude the Assignee from later electing to exercise its rights with respect to other Leases or portions of the premises subject hereto.

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3.           The Assignee shall not be liable for any loss sustained by the Assignor resulting from the Assignee's failure to let the premises after Default or from any other act or omission of the Assignee in managing the premises after Default unless such loss is caused by the willful misconduct and bad faith of the Assignee.  The Assignee shall not be obligated to perform or discharge nor does the Assignee hereby undertake to perform or discharge any obligation, duty or liability under the Leases or under or by reason of this Assignment and the Assignor shall, and does hereby agree, to indemnify the Assignee for, and to hold the Assignee harmless from, any and all liability, loss or damage, including attorneys' fees, which may or might be incurred under the Leases or under or by reason of this Assignment and from any and all claims and demands whatsoever which may be asserted against the Assignee by reason of any alleged obligations or undertakings on its part to perform or discharge any of the terms, covenants or agreements contained in any Lease.  Should the Assignee incur any such liability under any Lease or under or by reason of this Assignment or in defense of any such claims or demands, the amount thereof, including costs, expenses and attorneys' fees shall be secured hereby and the Assignor shall reimburse the Assignee therefor immediately upon demand and upon the failure of the Assignor so to do the Assignee may, at its option, declare all sums secured hereby and by said Note and Mortgage immediately due and payable.  And it is further understood that this Assignment shall not operate to place responsibility for the control, care, management or repair of said premises upon the Assignee, nor for the carrying out of any of the terms and conditions of any Lease; nor shall it operate to make the Assignee responsible or liable for any waste committed on the property by the tenants or any other parties, or for any dangerous or defective condition of the premises, or for any negligence in the management, upkeep, repair or control of said premises resulting in loss or injury or death to any tenant, licensee, employee or stranger.

4.           Upon payment in full of the principal sum, interest and indebtedness secured hereby and by said Note and Mortgage this Assignment shall become and be void and of no effect but the affidavit, certificate, letter or statement of any officer, agent or attorney of the Assignee showing any part of said principal, interest or indebtedness to remain unpaid shall be and constitute conclusive evidence of the validity, effectiveness and continuing force of this Assignment and any person may, and is hereby authorized to, rely thereon.  The Assignor hereby authorizes and directs the lessees named in the Leases or any other or future lessee or occupant of the premises described therein or in said Mortgage upon receipt from the Assignee of written notice to the effect that the Assignee is then the holder of said Note and that a Default exists hereunder to pay over to the Assignee all rents, income and profits arising or accruing under said Lease or from the premises described therein or in said Mortgage and to continue so to do until otherwise notified by the Assignee.

5.           The Assignee may take or release other security for the payment of said principal sum, interest and indebtedness, may release any party primarily or secondarily liable therefor and may apply any other security held by it to the satisfaction of such principal sum, interest or indebtedness without prejudice to any of its rights under this Assignment.

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6.           The term "lease" or "said lease" as used herein means the lease(s) and rental agreement(s) hereby assigned or, at the option of the Assignee, any extension or renewal thereof and any Lease(s) subsequently executed during the term of this assignment covering the premises described in any lease or in the Mortgage or any part thereof.

7.           Nothing contained in this Assignment and no act done or omitted by the Assignee pursuant to the powers and rights granted it hereunder shall be deemed to be a waiver by the Assignee of its rights and remedies under the Note, Mortgage or any other Instrument, and this Assignment is made and accepted without prejudice to any of the rights and remedies possessed by the Assignee under the terms of the Note and Mortgage and any other Instrument.  The right of the Assignee to collect said principal sum, interest and indebtedness and to enforce any other security therefor held by it may be exercised by the Assignee either prior to, simultaneously with, or subsequent to any action taken by it hereunder.

8.           Notwithstanding any provision hereof to the contrary, the Assignor agrees that the Assignee, and not the Assignor, shall be and is deemed to be the creditor of each lessee under each Lease in respect of any sums of money which may be payable by a lessee under the Lease on account of a default by the lessee under such Lease, including, without limitation, any damages or further rentals payable by such lessee on account of or after such default, and in respect of all assignments for the benefit of creditors and bankruptcy, reorganization, insolvency, dissolution or receivership proceedings affecting any lessee under such Lease (without obligation on the part of the Assignee, however, to file or make timely filings of claims in such proceedings or otherwise to pursue creditor's rights thereon), with an option to the Assignee to apply any money received or receivable by the Assignee as such creditor, whether or not a default under said Note, Mortgage, other Instrument, or other security instrument now or hereafter securing payment of said Note, the order of application of such money to such indebtedness being in the sole and uncontrolled discretion of the Assignee.

9.           In case of any conflict between the terms of this Assignment and the terms of the Mortgage described above, the terms of the Mortgage shall prevail.

THIS ASSIGNMENT, together with the covenants and warranties therein contained, shall inure to and be binding upon the Assignee and any subsequent holder of the Note and Mortgage and the Assignor, their heirs, executors, administrators, successors and assigns and any subsequent owner of the mortgaged premises.

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IN WITNESS WHEREOF, the Assignor have duly executed this instrument, under seal, as of the day and year first above.

WITNESS:	FLOTATION TECHNOLOGIES, INC.
	By: /s/ David Capotosto
	David Capotosto Its President

STATE OF MAINE

York, ss.

Upon this 13th day of February, 2009, then before me personally appeared the above-named David Capotosto, President of Flotation Technologies, Inc., and acknowledged the foregoing instrument to be their free act and deed in his said capacity and the free act and deed of said corporation.

/s/ David J. Jones                                       

Attorney at Law

David J. Jones, Maine Bar No. 710

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Schedule A

Two certain lots or parcels of land, together with improvements thereon, situated in Biddeford on the westerly side of Morin Street, Biddeford, York County, Maine being more particularly bounded and described as follows:

Parcel I

BEGINNING at a found iron rod located on the westerly sideline of Morin Street, said iron rod marking the southeasterly corner of lot 9 and the northeasterly corner of Lot 8 as shown on a "Plan of the Biddeford Industrial Park, Biddeford, Maine by Wells Engineering, Inc.,” dated July 1, 1977, approved by the Biddeford Planning Board on July 1, 1977 and recorded with the York County Registry of Deeds in Plan Book 87, Page 37 (“1977 Plan”) and as shown on a plan entitled “Subdivision Amendment of Lots 8 & 9” prepared by Paul P. Gadbois Engineering and Surveying Company, approved by the City of Biddeford Planning Department on July 2, 2008, and recorded with the York County Registry of Deeds in Plan Book 330, Page 32 (“2008 Plan”);

THENCE running N 85° 44' 00’’ W a distance of 442.63 feet to an iron rod at land now or formerly of the Boston & Maine Railroad;

THENCE turning and running in a general northeast direction along a curve to the right, by said land of the Boston & Maine Railroad, a distance of 345.77 feet to an iron rod and land now or formerly of Correct Holdings, LLC, as shown on the 2008 Plan;

THENCE turning and running S 84° 49' 00” E a distance of 473.54 feet to an iron rod at the northwesterly sideline of said Morin Street;

THENCE S 5° 11' 00” W, along said Morin Street, a distance of 337.07 feet to found iron rod and the point of BEGINNING.

Meaning and intending to describe Lot 9 as shown on a "Plan of the Biddeford Industrial Park, Biddeford, Maine by Wells Engineering, Inc., dated July 1, 1977, approved by the Biddeford Planning Board on July 1, 1977 and recorded in the York County Registry of Deeds in Plan Book 87, Page 37.

Parcel I is subject to:

Such state of facts disclosed on the Plan of Biddeford Industrial Park, Biddeford, Maine prepared by Wells Engineering, Inc. dated July 1, 1977, and recorded in the York County Registry of Deeds in Plan Book 87, Page 37.

Terms, conditions and restrictions set forth in the deed from the City of Biddeford to V. P. Winter Distributing Co. dated February 15, 1984, and recorded in said Registry of Deeds in Book 3245, Page 194, as said terms were amended by an Amendment to Covenants to Biddeford Industrial Park dated June 14, 1999, and recorded in the York County Registry of Deeds in Book 9535, Page 24 and dated October 26, 2001, and recorded in said Registry in Book 11083, Page 45.

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Rights and easements granted to Central Maine Power Company and New England Telephone and Telegraph Company by instrument dated June 4, 1984, and recorded in said Registry of Deeds in Book 3351, Page 57.

Title reference for Parcel I is made by a Deed from The Lynch Realty Group, LLC to Flotation Technologies, Inc. dated August 21, 2007, and recorded in the York County Registry of Deeds in Book 15242, Page 311.

Parcel II

BEGINNING at a found iron rod located on the westerly sideline of Morin Street, said iron rod marking the southeasterly corner of land conveyed to Flotation Technologies, Inc., by deed recorded in the York County Registry of Deeds in Book 15242, Page 311;

THENCE running S 05°-11’ 00” W along the westerly sideline of said Street a distance of 5.29 feet to an iron rod to be set;

THENCE turning and running S 76° 08’ 34” W along remaining land now or formerly of Morin Maine, LLC a distance of 448.41 feet to an iron rod to be set on the easterly sideline of land of Boston and Maine Rail Road;

THENCE turning and running N 03° 16’ 00” W along the easterly sideline of said Rail Road land a distance of 23.13 feet to a point;

THENCE turning and running N 01° 59’ 00” W continuing along the easterly sideline of said Rail Road land a distance of 122.58 feet to a point located on the southerly sideline of land now or formerly of Flotation Technologies;

THENCE turning and running S 85° 44’ 00” E along the southerly sideline of said Flotation Technologies land a distance of 89.88 feet to a found iron rod;

THENCE turning and running S 85° 44’ 00” E continuing along the southerly sideline of said Flotation Technologies land a distance of 352.75 feet to the found iron rod and the point of BEGINNING.

The above described parcel containing 33,450 square feet, more or less. The bearings were derived from the 1977 Plan.

SUBJECT TO a drainage easement for the benefit of remaining land now or formerly of Morin Maine, LLC and being more particularly described as follows:

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BEGINNING at a point located on the easterly sideline of said Rail Road land, said point marking the southwesterly corner of Lot # 9 as shown on said Plan;

THENCE turning and running S 85° 44’ 00” E along the southerly sideline of Flotation Technologies land a distance of 16.88 feet to a point,

THENCE turning and running S 33° 04’ 44” E a distance of 145.55 feet to a point;

THENCE turning and running S 76° 08’ 34” W a distance of 93.43 feet to an iron rod to be set on the easterly sideline of said Rail Road land;

THENCE turning and running N 03° 16’ 00” W along the easterly sideline of said Rail Road land a distance of 23.13 feet to a point;

THENCE turning and running N 01° 59’ 00”W continuing along the easterly sideline of said Rail Road land a distance of 122.58 feet to the point of BEGINNING.

Title reference for Parcel II is made to a parcel of land conveyed to Flotation Technologies, Inc, from Morin Maine, LLC dated July 31, 2008 and recorded in the York County Registry of Deeds in Book 15478, Page 749.

The above described Parcels I and II are depicted as Lot 9 on a plan entitled “Subdivision Amendment of Lots 8 & 9” prepared by Paul P. Gadbois Engineering and Surveying Company, approved by the City of Biddeford Planning Department on July 2, 2008, and recorded with the York County Registry of Deeds in Plan Book 330, Page 32.

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EX-10.25

Exhibit 10.25

COMMERCIAL NOTE

$2,160,000.00 Kennebunk, Maine February 13, 2009

FOR VALUE RECEIVED, the undersigned (hereinafter called the "Borrower") promises to pay to the order of TD BANK, N.A. (hereinafter called the "Lender"), at any of its banking offices or at such other place as may be designated in writing by the Lender, the principal sum of Two Million One Hundred Sixty Thousand Dollars ($2,160,000.00), together with interest on the principal sum from time to time advanced at the following rate:

INTEREST RATE:

The loan will bear interest at the fixed rate of five and three-quarters percent (5.75%) per annum.

Interest will continue to accrue until all principal is paid in full in accordance with the following payment schedule, which Borrower agrees to follow:

PAYMENT SCHEDULE:

(A)           The loan will be repaid in monthly installments of Thirteen Thousand Six and 58/100 Dollars ($13,006.58) each, including principal and interest (which payments are based upon an initial advance of $1,840,000.00 and an amortization schedule of 20 years), commencing on March 13, 2009, and monthly thereafter until February 13, 2016, when all principal and interest remaining unpaid shall be due and payable in a single balloon payment, notwithstanding the foregoing amortization schedule.  Upon disbursement of the final advance of $320,000.00 the Lender will recalculate the monthly payment to an amount that will fully amortize the then outstanding principal balance over the remainder of the original 20 year amortization schedule.

All payments shall be applied first to unpaid interest and then to outstanding principal, until paid in full.  All interest hereunder shall be computed on the basis of the actual number of days elapsed over a 360 day year.  If any payment is not received within fifteen (15) days of when due, then Borrower shall pay to Lender a late payment fee of six percent (6.0%) of the amount of such delinquent payment.

DEFAULT INTEREST RATE:  Lender shall have the right to charge interest on the unpaid principal balance hereof at an interest rate of five percent (5.0%) per annum in excess of the rate of interest otherwise payable as provided herein, for any period after an event of default (as defined below) shall have occurred and until the same shall have been cured or expressly waived by Lender in writing.

PREPAYMENT: The Borrower may prepay this Note at any time, provided, however, that at the time of any full or partial prepayment, the Borrower shall pay the Lender a fee equal to the greater of one percent (1.0%) of the principal balance being prepaid or a `Yield Maintenance Fee' in an amount computed as follows:

The Federal Home Loan Bank rate with a maturity date closest to the remaining term of the Note shall be subtracted from the above stated interest rate, or default rate if applicable. If the result is zero or a negative number, there shall be no Yield Maintenance Fee due and payable. If the result is a positive number, then the resulting percentage shall be multiplied by the amount of the principal balance being prepaid. The resulting amount shall be divided by three hundred sixty (360) and multiplied by the number of days remaining in the term of this Note. Said amount shall be reduced to present value calculated by using the above referenced Federal Home Loan Bank rate and the number of days remaining in the term of this Note. The resulting amount shall be the yield maintenance fee due to the Lender upon prepayment of the principal of this Note.

SECURITY:

1.  This Note is secured and/or guaranteed pursuant to the terms and conditions of the following documents which, unless otherwise noted below, are dated on or about the date of this Note:

A. a Mortgage and Security Agreement on property located at 20 Morin Street, Biddeford, Maine.

B. a Collateral Assignment of Leases and Rents relating to the property described in said Mortgage and Security Agreement.

DEFAULT:

2.           The entire principal balance hereof, together with all interest and other charges, as applicable, shall become due and payable at the option of the Lender, upon the occurrence of any one or more of the following events, each of which shall constitute an event of default hereunder:  (a) the insolvency of the Borrower, or (b) the making of any assignment for the benefit of creditors of the Borrower, or (c) the issuance of filing of any attachment, levy, or other judicial process on or against any of the Borrower's assets; or (d) the appointment of a receiver, trustee or custodian for all or any portion of the property of the Borrower; or (e) the commencement of any proceedings under any state or federal bankruptcy or insolvency law or under laws for relief of debtors, by or against the Borrower; or (f) the occurrence of such a change in the condition or affairs (financial or otherwise) of the Borrower as, in the opinion of the Lender, materially impairs the Collateral (if any) or the prospect of repayment of any amounts outstanding hereunder; or (g) the death, incompetency, dissolution, business failure (which term includes, without limitation, the cessation of normal business operations) or termination of existence of the Borrower; (h) the failure of the Borrower to pay its debts as they mature; (i) any representation or statement made or furnished to Lender by or on behalf of any Borrower is false or misleading in any material respect; (j) any default in the payment of any sums due under this Note when due, or default by the Borrower in performance of any other obligation under this Note; (k) any default by Borrower in the performance of any obligation under the Loan Agreement of even date herewith; or (l) default beyond any applicable cure period in the payment, satisfaction or performance by the Borrower of any condition or obligation under any of the Security Documents or under any documents executed in connection with any other Liabilities of the Borrower to the Lender; or (m) any default by Deep Down Inc. (parent company of Borrower) under its obligations to Whitney National Bank that are subject to any guaranty given by Borrower; or (n) any default by Borrower on its guaranty to Whitney National Bank of the obligations of Deep Down Inc.

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REMEDIES:

3.           Upon the occurrence of any event of default under this Note the Lender may declare due and payable at once all amounts outstanding hereunder.  The Lender shall not be required to pursue or to exhaust its remedies against the Borrower, or its successors, or against any other party liable for payment hereof, whether maker, Guarantor, or otherwise, or against any property or assets mortgaged or pledged as security herefor, but upon nonpayment or nonperformance hereof may immediately demand and enforce payment and performance from any one or more of Borrower(s) or Guarantor(s), or may seek to realize upon the value of any collateral, without the necessity of joining any other Borrower(s) or Guarantor(s), and in each case without any requirement of first seeking to collect the debt evidenced by this Note from any other source.  Each Borrower hereby irrevocably agrees that any legal action or proceeding arising out of or relating to this Note may be brought in any state or federal court in the State of Maine, at the election of Lender.  By the execution and delivery hereof, each Borrower hereby irrevocably submits to the nonexclusive jurisdiction of any such court in any such action or proceeding.  Borrower irrevocably agrees that in addition to any methods of service provided for under applicable law, all service of process in any such legal action or proceeding may be made by certified mail, return receipt requested to the Borrower's address pursuant to paragraph 7 below.  Each Borrower and each Guarantor shall be liable for, and hereby agrees to pay, upon demand, any and all costs or expenses of any nature whatsoever incurred by the Lender in endeavoring to collect or enforce this Note against any party including, without limiting the generality of the foregoing, reasonable attorneys' fees and expenses.  The Lender shall not be deemed to have waived any of its rights or remedies under this Note or under any of the Security Documents by any act, delay, omission or failure or refusal to exercise any of such rights or remedies.  No waiver by Lender of any kind shall be valid unless it is in writing and signed by an officer of the Lender, and then only to the extent specifically stated.  All of the rights and remedies of the Lender shall be cumulative and not exclusive, and may be exercised on any one or more occasions either singularly or concurrently.

4.           Borrower hereby grants to Lender, as security for the payment and performance of this Note, a continuing lien on and security interest in any and all deposit accounts and funds on deposit therein (general or specific, time or demand, regardless of maturity or the Bank branch where the deposit accounts are held) now or hereafter held by Lender and other sums credited by or due from Lender to Borrower or subject to withdrawal by Borrower, whether or not any other person or persons could also withdraw money therefrom (collectively hereinafter called the "Deposits").  After any event of default Lender may "freeze" or place a "hold" on any Deposits by suspending Borrower's right to withdraw the Deposits and may set off any Deposits (including those previously frozen or placed on hold) against any amounts payable by Borrower under this Note or any other Liabilities.  Failure of the Lender to take necessary steps to preserve rights against any parties with respect to any property in its possession shall not be deemed a failure to exercise due care.

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WAIVERS:

5.           The Borrower and each Guarantor hereby (1) waive presentment, notice of dishonor, protest, notice of protest, and any and all other notices of any nature whatsoever in connection with the delivery, acceptance, performance, default or enforcement of this Note and (2) consent and agree that the Lender may at any time and from time to time without affecting the liability of Borrower or any Guarantor or of any other person (excepting any person expressly released in writing) for payment of the debt evidenced by this Note or for performance of any obligation contained herein, and without affecting Lender's rights with respect to any security not expressly released in writing:  (a) release any person liable for all or any part of the indebtedness or for performance of any obligation; (b) extend the time for payment of any amounts due under this Note (c) grant any releases, compromises or indulgences with respect to this Note or any extensions, renewals, or acceleration hereof or substitutions herefor or with respect to any Collateral securing the payment of sums outstanding under this Note to any party primarily or secondarily liable hereunder, or (d) modify the provisions of this Note all without notice to or consent of any Borrower or any Guarantor; (3) waive all recourse to suretyship and guarantorship defenses generally; and (4) waive the right to direct the application of any payment hereunder.  BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY AND ALL RIGHTS, WHETHER ARISING UNDER THE CONSTITUTIONS OF THE UNITED STATES OR OF ANY STATE, AND RULES OF CIVIL PROCEDURE, COMMON OR STATUTORY LAW, OR OTHERWISE, TO DEMAND A TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM INVOLVING LENDER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS NOTE OR ANY OF THE SECURITY DOCUMENTS.

MISCELLANEOUS:

6.           If, for any reason, any payment to Lender applied to amounts outstanding hereunder is required to be refunded by Lender to Borrower or to any Guarantor or turned over by Lender to any other person or entity, Borrower and each Guarantor agree to pay to Lender on demand an amount equal to the payment so refunded or turned over by Lender and the liability of Borrower and each Guarantor shall not be treated as having been discharged by the original payment to Lender giving rise to such refunded or turned over payment.

7.           All notices, demands or requests provided for or permitted to be given pursuant to this Note must be in writing and shall be given by personal delivery or by depositing the same in the United States mail, post paid and certified, return receipt requested at the addresses set forth below, as such addresses may be changed by notice given to the other party.

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Lender's Address:	Borrower's Address
TD Bank, N.A.	Flotation Technologies, Inc.
One Portland Square	20 Morin Street
P.O. Box 9540	Biddeford, Maine 04005
Portland, Maine  04112-9540
Attn:  Commercial Loan Dept.

8.           Each Borrower and each Guarantor shall be jointly and severally liable to the Lender under this Note and each Borrower has subscribed his/her/its name hereto without condition that any other person or entity shall sign or become bound hereunder and without any other conditions whatever.  Any Borrower that is a corporation hereby warrants that it is validly formed, in existence and in good standing at the present time, with all necessary authority to enter into, execute and deliver this Note.  No invalidity or unenforceability of any portion or obligation of this Note shall affect the validity or enforceability of the remaining portions or obligations hereof.  This Note and all actions taken pursuant hereto shall be governed by, and interpreted and construed in accordance with, the laws of the State of Maine.  This Note evidences a loan for business and commercial purposes and not for personal, household, or family purposes.  The use of captions in this Note is for purposes of convenience only, and no caption shall affect the meaning of this Note.  As used herein, the word:  (1) Liabilities means any and all liabilities, indebtedness, and obligations of each Borrower and Guarantor to Lender of any nature whatsoever, now existing or hereafter arising, due or to become due, absolute or contingent, direct or indirect and whether joint, several, or joint and several; (2) Guarantor shall mean and include each endorser, surety, guarantor or other party primarily or secondarily liable to the Lender with respect to this Note other than the Borrower; (3) Borrower shall mean each undersigned party; and (4) Lender shall mean TD Bank, N.A. and each future holder of this Note.  This Note and the provisions hereof shall be binding upon the heirs, executors, administrators, successors, legal representatives and assigns of the Borrower and each Guarantor and shall inure to the benefit of the Lender, its successors, legal representatives and assigns.  This Note is intended to take effect as a sealed instrument.

WITNESS:	Flotation Technologies, Inc.
________________________	By: /s/ David Capotosto
	David Capotosto, its President

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EX-10.26

Exhibit 10.26

DEBT SUBORDINATION AGREEMENT

For valuable consideration, receipt whereof is hereby acknowledged, and in consideration of all loans, advances, discounts, renewals or extensions now or hereafter made, given or continued by TD BANK, N.A., a banking corporation organized under the laws of the United States of America, with a place of business at One Portland Square, Portland, Maine, and a mailing address of P.O. Box 9540, Portland, Maine 04112-9540 (hereinafter called the "Bank") to or for the account of FLOTATION TECHNOLOGIES, INC. (hereinafter called the "Borrower"), the Borrower and DEEP DOWN, INC. (hereinafter the “Parent Company”) agree with the Bank as follows:

1.  The Borrower and the Parent Company represent to the Bank that the Borrower now owes the Parent Company no indebtedness, with the exception of accounts payable and similar obligations generated in the ordinary course of business between the Borrower and Parent Company (“Accounts”) and the sum of $23,928,648.98 to be shown on the balance sheet of the Borrower as a long term liability (“Long Term Debt”).  The Long Term Debt is not represented by any notes or other negotiable instruments.  At no time hereafter will any part of the Long Term Debt be represented by any notes or other negotiable instruments.  The Parent Company does not expect and will not demand or accept repayment of the Long Term Debt until all indebtedness of the Borrower to the Bank is paid in full and is no longer committed (i.e. paid and canceled).

2.  The term “Junior Debt” shall include the Long Term Debt and all other indebtedness of the Borrower to the Parent Company now existing or hereafter arising, except for Accounts.  The Parent Company hereby postpones and subordinates the Junior Debt, and any and all security given for the Junior Debt, to all indebtedness of the Borrower to the Bank, whether direct or indirect, absolute or contingent, howsoever created or evidenced, all whether now existing or hereafter arising, and any extensions, renewals or modifications thereof, the interest thereon, costs and expenses of administration enforcement and collection thereof and of enforcement of this Agreement, including, without limitation, reasonable attorneys' fees, and all other sums payable with respect thereto (the "Senior Debt"), and all security given for the Senior Debt.  The Parent Company agrees that, without the prior written consent of Bank, no payment of or on account of the Junior Debt shall be made, or any security given for the Junior Debt, unless and until all Senior Debt has been paid in full and is no longer committed (i.e. paid and canceled), and further agrees not to demand, receive or accept any such payment or security, either from the Borrower or any endorsers or guarantors of any note or obligation of Borrower to the Parent Company.

3.   The Parent Company shall not assign, transfer, hypothecate or dispose of all or any part of the Junior Debt, without the prior consent of Bank.  The Bank shall not be prejudiced in its right to enforce this subordination by any act or failure to act on the part of the Borrower.

4.  Bank may from time to time enter into such agreements with Borrower as Bank may deem proper regarding the Senior Debt without notice to the Parent Company, and no action which the Bank, or the Borrower with the consent of the Bank, may take or refrain from taking with respect to the Senior Debt, or any collateral held for the Senior Debt, or any agreement or agreements (including guarantees) in connection therewith, shall affect or impair this agreement or the obligations of the Parent Company hereunder.

5.  The Bank's delay in or failure to exercise any right or remedy shall not be deemed a waiver of any obligation of the undersigned or right of the Bank, and all of the Bank's rights and remedies shall be cumulative. This Agreement may be modified, and any of the Bank's rights hereunder waived, only by agreement in writing signed by the Bank. Upon default in the performance or observance of any of the covenants, warranties or other terms and conditions of this Agreement by the Parent Company, the Bank may, at its option, declare all or any part of the Senior Debt to be immediately due and payable, or pursue any other remedies it may have against the Parent Company.

6.  This Agreement shall inure to the benefit of the Bank's successors and assigns and bind the successors and assigns of the Borrower and the Parent Company.

7.  Notice of acceptance by Bank of this agreement is hereby waived by the Parent Company, and this Agreement and all of the terms and provisions hereof shall immediately be binding upon the Parent Company from the date of execution hereof.

8.  This agreement shall be construed and governed by the laws of the State of Maine.

IN WITNESS WHEREOF, the parties have caused this instrument to be executed by their respective duly authorized officers as of the 13th day of February, 2009.

WITNESS:	DEEP DOWN, INC.
____________________________	By:________________________
	Its
WITNESS:	FLOTATION TECHNOLOGIES, INC.
____________________________	By:________________________
	Its
WITNESS:	TD BANK, N.A.
____________________________	By:________________________
	Its

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EX-10.27

Exhibit 10.27

ENVIRONMENTAL INDEMNITY AGREEMENT

FOR VALUE RECEIVED, namely the loans, lines of credit, letters of credit or other financing arrangements provided by TD BANK, N.A., a banking corporation organized under the laws of the United States of America, with a place of business at One Portland Square, Portland, Maine, and a mailing address of P.O. Box 9540, Portland, Maine 04112-9540, (the "Bank") to FLOTATION TECHNOLOGIES, INC., a Maine corporation, whose address is 20 Morin Street, Biddeford, Maine 04005, under the terms and provisions of the Loan Documents, as described in and secured by a Mortgage and Security Agreement, of even date, given to the Bank on certain premises located at and near 20 Morin Street, Biddeford, Maine, (the "Premises"), the undersigned hereby unconditionally and irrevocably agrees to pay on demand to the Bank, and to reimburse defend, hold harmless and indemnify the Bank for, any and all liabilities, executions, awards, judgments, claims, damages, demands, penalties, actions, debts, suits, expenditures, indemnities, losses, charges or other amounts that are or may become due from the Bank in connection with, or arising directly or indirectly out of, any hazardous, toxic, dangerous, radioactive, noxious or unhealthful materials, substances, objects, gases, and/or wastes, including without limitation all of the following:  (a) asbestos in any form; (b) urea formaldehyde foam insulation; (c) transformers or other equipment which contain dielectric fluid containing any level of polychllorinated biphenyls; (d) underground or above ground storage tanks for oil or other potentially harmful substances or (e) any other chemical, material, gas or substance which is prohibited, limited, or regulated by any federal, state, county, regional, local, or other governmental authority or which, even if not so regulated, may or could pose a hazard to or be injurious to the health or safety of the occupants of the Premises or the owners of property adjacent to the Premises or which, even though not posing a danger to hinder health or safety, may or could constitute a pollutant that could be required to be cleaned up by any governmental authority, (all of which are hereinafter referred to collectively as "Hazardous Materials") situated in, over, upon, or under said Premises mortgaged to the Bank under the terms of the aforementioned Mortgage and Security Agreement; meaning and intending hereby to assume the obligation to pay, and to indemnify and hold harmless the Bank for, without limitation, (1) all costs incurred or expended by the Bank in connection with the removal of all Hazardous Materials from said Premises, including without limitation all costs of investigation, monitoring, remedial response, removal, restoration, feasibility studies, remedial work, cleanup, engineering reports, and permit acquisitions incurred in connection therewith; (2) all costs incurred and sums expended by the Bank in determining the compliance of such removal with all applicable regulations and standards; (3) all liability of, or expense to, the Bank incurred as a result of the improper removal or disposal of Hazardous Materials from said Premises, by whomever performed, or arising out of exposure to Hazardous Materials of any individual while in or on said Premises, or otherwise in connection with the existence or removal of, or failure to remove, any and all Hazardous Materials, on or from said Premises, together with (4) all of the Bank's costs of defending against any proceedings brought by or on behalf of any individual or entity allegedly injured as a result of the presence of Hazardous Materials on said Premises, or emanating therefrom in any manner, whether such claim is decided adversely to or in favor of the Bank, and (5) any reasonable attorney's fees incurred in connection with any of the foregoing matters; and the undersigned do hereby further unconditionally assume and agree to indemnify

and make the Bank whole if the Bank should incur any liability whatsoever under the Uncontrolled Hazardous Substance Sites Act, 38 M.R.S.A. § 1361 et seq. (1989), or the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. § 9601 et seq. (1983) ("CERCLA"), or the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), or the Federal Waste Pollution Control Act (the "Clean Water Act"), 33 U.S.C. § 1251 et seq. and 33 U.S.C. § 1342 et seq., or the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. 6901 et seq., or the Safe Drinking Water Act, 14 U.S.C. §§ 1401-1450, or the Toxic Substances Control Act, 15 U.S.C.§§  2601-2629, or the Hazardous Materials Transportation Act, 49 U.S.C. § 1801 et seq., or the Resource Conservation Recovery Act, as amended by the Hazardous and Solid Waste Amendments of 1984, 42 U.S.C.  § 6902 et seq., or the Clean Air Act, 42 U.S.C. § 7401 et seq., or the State of Maine statutory provisions relating to underground Storage Facilities and Ground Water Protection, 38 M.R.S.A. § 561 et seq., or any regulation promulgated under any of the foregoing, or any other local, state or federal regulation, law or ordinance relating in any way to any Hazardous Materials, or any successor provision, because of or in connection with the Bank's connection with said Premises.  The Bank shall not be required to pursue or exhaust its remedies against the maker of said note, or against any other party liable for the payment of any amounts or for any performance for which the undersigned herein agrees to indemnify the Bank, or for which the undersigned herein assumes liability or which the undersigned hereby guaranties, or against the property mortgaged or pledged as security for the payment of said note, but upon the incurring of any obligation, damage, penalty, loss, charge, expense, execution, penalty, debt, claim, suit, expenditure, cost or liability, may immediately demand and enforce payment or performance from the undersigned pursuant to this indemnity agreement.  The obligations of the undersigned hereunder shall survive the repayment in full of the above mentioned loan, and shall remain in full force and effect for all time.  The obligations of the undersigned hereunder shall bind the undersigned's estate and administrators, executors and personal representatives and, to the maximum extent permitted by law, the heirs and successors of the undersigned.  The undersigned hereby waives demand, notice and protest, and waives all recourse to suretyship and guarantorship defenses generally, including, but not limited to, any extensions of time for payment or performance which may be granted to any other liable party, any modifications or amendments to any of the documents executed in connection with said loan, any act or omission to act by or on behalf of the Bank, its successors and assigns, any release of security, any release of a liable party or parties, and all other indulgences of any type which may be granted by the Bank, its successors and assigns, to any other party liable for the obligations assumed by the undersigned herein, and does also agree to pay all costs of enforcement hereof, and all costs of collection of amounts due hereunder, including reasonable attorneys' fees incurred in connection therewith hereby meaning to waive any and all matters whatsoever whereby the undersigned would or might be released, in whole or in part, from the obligations hereof.  All amounts due hereunder from the undersigned shall bear interest from the date demanded by the Bank until paid, at the highest rate per annum (including any default interest rate).  This shall be a continuing indemnity agreement, which shall not be terminated or otherwise affected by payment in full of said promissory note, or by any other matter, unless and until this agreement is waived or released, in writing, by the Bank.

If more than one person or entity executes this Agreement in favor of the Bank, all obligations shall be joint and several with respect to each.  This Agreement shall be construed in accordance with and governed by the laws of the State of Maine.  If any other provision of this Agreement shall be prohibited by, unenforceable or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition, unenforceability or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.  This Agreement may be modified or amended only by a writing signed by Bank and the undersigned.

2

The undersigned hereby irrevocably agrees that any legal action or proceeding arising out of or relating to this Indemnity Agreement may be brought in any state or federal court in the State of Maine, at the election of the Bank, its successors and assigns. By the execution and delivery hereof, each of the undersigned hereby irrevocably submits to the nonexclusive jurisdiction of any such court in any such action or proceeding, and hereby waives the benefit of jurisdiction derived from present or future domicile, and further waives personal service of any and all process upon the undersigned in connection herewith, and consents that any or all such service of process be made by registered or certified mail, return receipt requested, postage prepaid, directed to the undersigned at the address given below (or such other address as the undersigned may from time to time provide to the Bank in writing), and any service so made shall be deemed to have been completed five (5) days after the same shall have been so mailed. Final judgment against the undersigned in any such action, suit or proceeding shall be conclusive and may be enforced in any other jurisdiction by suit on the judgment, a certified or exemplified copy of which shall be conclusive evidence of the fact.

Dated: February 13, 2009	FLOTATION TECHNOLOGIES, INC.
_________________________	By: /s/ David Capotosto
Witness	David Capotosto
	Its President

3

EX-21.1

  
    deepdown_ex2101.htm




    
    

EX-31.1

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, 2008;

(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.

March 16, 2009

By: /s/ RONALD E. SMITH

Ronald E. Smith

President and Chief Executive Officer

EX-31.2

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, 2008;

(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.

March 16, 2009

By: /s/ EUGENE L. BUTLER

Eugene L. Butler

Chief Financial Officer

EX-32.1

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, 2008, 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

March 16, 2009

EX-32.2

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, 2008, 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

March 16, 2009