1. BASIS OF PRESENTATION (Policies)

9 Months Ended

Sep. 30, 2012

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Deep Down, Inc. and its wholly-owned subsidiaries (“Deep Down,” “we,” “us” or the “Company”) were prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC” or the “Commission”) pertaining to interim financial information and instructions to Form 10-Q.  As permitted under those rules, certain footnotes or other financial information that are normally required by United States generally accepted accounting principles (“US GAAP”) can be condensed or omitted.  Therefore, these statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 29, 2012 with the Commission.

Preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosed amounts of contingent assets and liabilities and the reported amounts of revenues and expenses. If the underlying estimates and assumptions upon which the financial statements are based change in future periods, then the actual amounts realized may differ from those included in the accompanying condensed consolidated financial statements.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Certain prior period amounts have been reclassified to conform to current period presentation.

Principles of Consolidation

The unaudited condensed consolidated financial statements presented herein include the accounts of Deep Down, Inc. and its wholly-owned subsidiaries. Our investment in a joint venture is accounted for using the equity method. All material intercompany accounts and transactions have been eliminated in consolidation.

Segments

Our operations are located in the United States, although we occasionally generate sales to international customers.

On August 27, 2012, we announced that we had consolidated the operations of our Mako operating segment in Morgan City, Louisiana into the operations of our Deep Down Delaware operating segment in Channelview, Texas. This consolidation did not affect our financial reporting because these two operating segments were previously aggregated into a single reporting segment.

While the operating segments had different product lines, they were similar, and we aggregated their results for internal analysis purposes. They were both service-based operations revolving around our personnel’s expertise in the deepwater and ultra-deepwater industry, and equipment was produced to a customer’s specified design and engineered using Deep Down personnel’s expertise, with installation and project management as part of our service revenue to the customer. Additionally, the operating segments had similar customers and distribution methods, and their economic characteristics were similar with regard to their gross margin percentages.