UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON
D.C. 20549




FORM
10-Q


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




For
the quarterly period ended June 30, 2008




OR




 ̈ TRANSITION
REPORT PURSUANT TO 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
      or other jurisdiction of incorporation)
            
            (I.R.S.
      Employer Identification No.)15473
      East Freeway Channelview,Texas
            
            77530(Address
      of Principal Executive Office)
            
            (Zip
      Code)




Registrant’s
telephone number, including area code:(281) 862-2201




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.  Yes  xNo   ̈




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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):




Large
      accelerated filer   ̈
            Accelerated
      filer   ̈Non-accelerated
      filer         ̈ (Do not
      check is smaller reporting  company)
            Smaller
      reporting company x





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




At August
14, 2008, there were 177,350,630 shares of common stock
outstanding.














IMPORTANT
INFORMATION REGARDING THIS FORM 10-Q





Unless
otherwise indicated, references to “we,” “us,” and “our” in this Quarterly
Report on Form 10-Q refer collectively to Deep Down, Inc. and its wholly-owned
subsidiaries.





Deep
Down, Inc., a Nevada corporation (“Deep Down Nevada” or “Deep Down” or the
“Company”) 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”), Mako Technologies, LLC (“Mako”), a Nevada
limited liability company and Flotation Technologies, Inc. (“Flotation”), a
Maine corporation.





Readers
should consider the following information as they review this Quarterly Report
on Form 10-Q:




Forward-Looking
Statements





The
statements contained or incorporated by reference in this Quarterly Report on
Form 10-Q that are not historical facts 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 “Exchange
Act”).  All statements other than statements of historical fact are,
or may be deemed to be, forward-looking statements.  Forward-looking
statements include any statement that may project, indicate or imply future
results, events, performance or achievements.  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,” “expect,” “may,” “will,”
“should,” “intend,” “plan,” “could,” “estimate” or “anticipate” or the negative
thereof or other variations thereon or comparable terminology, or by discussions
of strategy that involve risks and uncertainties.





Given the
risks and uncertainties relating to forward-looking statements, investors should
not place undue reliance on such statements.  Forward-looking
statements included in this Quarterly Report on Form 10-Q speak only as of the
date of this Quarterly Report on Form 10-Q and are not guarantees of future
performance.  Although we believe that the expectations reflected in
the forward-looking statements are reasonable, such expectations may prove to
have been incorrect.  All subsequent written and oral forward-looking
statements attributable to us, or persons acting on our behalf, are expressly
qualified in their entirety by these cautionary statements.





Subsequent
Events





All
statements contained in this Quarterly Report on Form 10-Q, including the
forward-looking statements discussed above, are made as of August 15, 2008,
unless those statements are expressly made as of another date.  We
disclaim any responsibility for the accuracy of any information contained in
this Quarterly Report on Form 10-Q to the extent such information is affected or
impacted by events, circumstances or developments occurring after August 15,
2008 or by the passage of time after such date.  Except to the extent
required by applicable securities laws, we expressly disclaim any obligation or
undertakings to release publicly any updates or revisions to any statement or
information contained in this Quarterly Report on Form 10-Q, including the
forward-looking statements discussed above, to reflect any change in our
expectations with regard thereto or any change in events, conditions or
circumstances on which any statement or information is based.





Document
Summaries





Descriptions
of documents and agreements contained in this Quarterly Report on Form 10-Q are
provided in summary form only, and such summaries are qualified in their
entirety by reference to the actual documents and agreements filed as exhibits
to our 2007 Annual Report on Form 10-KSB/A (Amendment No. 3), other periodic
reports we file with the Securities and Exchange Commission (“SEC”) or this Form
10-Q.





Access
to Filings





Access to
our Annual Reports on Form 10-KSB, Quarterly Reports on Forms 10-Q or Form
10-QSB and Current Reports on Form 8-K, and amendments to those reports, filed
with or furnished to the SEC pursuant to Section 13(a) of the Exchange Act, as
well as reports filed electronically pursuant to Section 16(a) of the Exchange
Act, may be obtained through our website (http://www.deepdowninc.com
).  Our website provides a hyperlink to a third-party website where
these reports may be viewed and printed at no cost as soon as reasonably
practicable after we have electronically filed such material with the
SEC.  The contents of our website are not, and shall not be deemed to
be, incorporated into this report.


2





TABLE
OF CONTENTS




PART I FINANCIAL
      INFORMATION
            Page
      No.Item
      1.
            Financial
      StatementsUnaudited
      Consolidated Balance Sheets - June 30, 2008 and December 31,
      2007
            4Unaudited
      Consolidated Statements of Operations - For the Three and Six Months
      Ended June 30, 2008 and 2007
            5Unaudited
      Consolidated Statements of Stockholders’ Equity - For the Six Months
      Ended June 30, 2008
            6Unaudited
      Consolidated Statements of Cash Flows - For the Six Months Ended June
      30, 2008 and 2007
            7Notes
      to Unaudited Consolidated Financial Statements
            9Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            21Item
      4T.
            Controls
      and Procedures
            27PART
      II OTHER INFORMATIONItem
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            27Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            28Item
      5.
            Other
      Information
            28Item
      6.
            Exhibits
            29Signatures
            
            31Exhibit
      Index
            32




3




PART
I. FINANCIAL INFORMATION


ITEM
1.  FINANCIAL STATEMENTS




DEEP
DOWN, INC.


CONSOLIDATED
BALANCE SHEETS


(Unaudited)




June
      30,
                2008
              
              
              December
      31, 2007ASSETSCash
      and equivalents
              
              $
              4,085,543
              
              
              $
              2,206,220Restricted
      cash
              
              
              -
              
              
              
              375,000Accounts
      receivable, net of allowance of $818,992 and $139,787
      respectively
              
              
              8,614,961
              
              
              
              7,190,466Prepaid
      expenses and other current assets
              
              
              710,213
              
              
              
              312,058Inventory
              
              
              179,343
              
              
              
              502,253Lease
      receivable, short-term
              
              
              414,000
              
              
              
              414,000Work
      in progress
              
              
              681,790
              
              
              
              945,612Receivable
      from Prospect, net
              
              
              -
              
              
              
              2,687,333Total
      current assets
              
              
              14,685,850
              
              
              
              14,632,942Property
      and equipment, net
              
              
              10,651,053
              
              
              
              5,172,804Other
      assets, net of accumulated amortization of $0 and $54,560
      respectively
              
              
              550,819
              
              
              
              1,109,152Lease
      receivable, long-term
              
              
              500
              
              
              
              173,000Intangibles,
      net
              
              
              18,745,713
              
              
              
              4,369,647Goodwill
              
              
              13,001,556
              
              
              
              10,594,144Total
      assets
              
              $
              57,635,491
              
              
              $
              36,051,689LIABILITIES
      AND STOCKHOLDER'S EQUITYAccounts
      payable and accrued liabilities
              
              $
              3,070,105
              
              
              $
              3,569,826Deferred
      revenue
              
              
              725,521
              
              
              
              188,030Payable
      to Mako shareholders
              
              
              -
              
              
              
              3,205,667Current
      portion of long-term debt
              
              
              47,477
              
              
              
              995,177Total
      current liabilities
              
              
              3,843,103
              
              
              
              7,958,700Long-term
      debt, net of accumulated discount of $0 and $1,703,258
      respectively
              
              
              919,381
              
              
              
              10,698,818Series
      E redeemable exchangeable preferred stock, par value $0.01, face value and
      liquidationpreference
      of $1,000 per share, no dividend preference, authorized 10,000,000
      aggregate sharesof all series of preferred stock, -0- and 500 issued
      and outstanding, respectively
              
              
              -
              
              
              
              386,411Total
      liabilities
              
              
              4,762,484
              
              
              
              19,043,929Temporary
      equity:Series
      D redeemable convertible preferred stock, $0.01 par value, face value
      andliquidation
      preference of $1,000 per share, no dividend preference, authorized
      10,000,000 aggregate sharesof all series of preferred stock, -0- and
      5,000 issued and outstanding, respectively
              
              
              -
              
              
              
              4,419,244Total
      temporary equity
              
              
              -
              
              
              
              4,419,244Stockholders'
      equity:Common
      stock, $0.001 par value, 490,000,000 shares authorized,
      174,732,501and
      85,976,526 shares issued and outstanding, respectively
              
              
              174,733
              
              
              
              85,977Paid-in
      capital
              
              
              60,000,402
              
              
              
              14,849,847Accumulated
      deficit
              
              
              (7,302,128
              )
              
              
              (2,347,308
              )Total
      stockholders' equity
              
              
              52,873,007
              
              
              
              12,588,516Total
      liabilities and stockholders' equity
              
              $
              57,635,491
              
              
              $
              36,051,689See
      accompanying notes to unaudited consolidated financial
      statements.
  4




DEEP
DOWN, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)




For
      the Three Months Ended
              
              
              For
      the Six Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007RevenuesContract
      revenue
              
              $
              5,670,385
              
              
              $
              4,508,635
              
              
              $
              11,007,914
              
              
              $
              6,110,916Rental
      revenue
              
              
              2,249,811
              
              
              
              636,153
              
              
              
              3,191,747
              
              
              
              1,132,266Total
      revenues
              
              
              7,920,196
              
              
              
              5,144,788
              
              
              
              14,199,661
              
              
              
              7,243,182Cost
      of sales
              
              
              5,496,427
              
              
              
              3,293,313
              
              
              
              9,372,798
              
              
              
              4,545,402Gross
      profit
              
              
              2,423,769
              
              
              
              1,851,475
              
              
              
              4,826,863
              
              
              
              2,697,780Operating
      expenses:Selling,
      general & administrative
              
              
              3,681,643
              
              
              
              1,103,902
              
              
              
              5,443,890
              
              
              
              1,763,622Depreciation
      and amortization
              
              
              543,128
              
              
              
              90,196
              
              
              
              841,277
              
              
              
              154,221Total
      operating expenses
              
              
              4,224,771
              
              
              
              1,194,098
              
              
              
              6,285,167
              
              
              
              1,917,843Operating
      income (loss)
              
              
              (1,801,002
              )
              
              
              657,377
              
              
              
              (1,458,304
              )
              
              
              779,937Other
      income (expense):Gain
      (loss) on debt extinguishment
              
              
              (446,412
              )
              
              
              2,000,000
              
              
              
              (446,412
              )
              
              
              2,000,000Interest
      income
              
              
              27,346
              
              
              
              16,290
              
              
              
              66,510
              
              
              
              16,290Interest
      expense
              
              
              (2,690,534
              )
              
              
              (1,276,770
              )
              
              
              (3,459,564
              )
              
              
              (1,508,657
              )Other
      expense
              
              
              (39,771
              )
              
              
              -
              
              
              
              (11,416
              )
              
              
              -Total
      other income (expense)
              
              
              (3,149,371
              )
              
              
              739,520
              
              
              
              (3,850,882
              )
              
              
              507,633Income
      (loss) before income taxes
              
              
              (4,950,373
              )
              
              
              1,396,897
              
              
              
              (5,309,186
              )
              
              
              1,287,570Benefit
      from (provision for) income taxes
              
              
              85,000
              
              
              
              (447,363
              )
              
              
              354,366
              
              
              
              (447,363
              )Net
      income (loss)
              
              $
              (4,865,373
              )
              
              $
              949,534
              
              
              $
              (4,954,820
              )
              
              $
              840,207Earnings
      per share:Basic
              
              $
              (0.04
              )
              
              $
              0.01
              
              
              $
              (0.05
              )
              
              $
              0.01Weighted-average
      common shares outstanding
              
              
              132,666,860
              
              
              
              67,870,171
              
              
              
              109,326,053
              
              
              
              74,417,132Diluted
              
              $
              (0.04
              )
              
              $
              0.01
              
              
              $
              (0.05
              )
              
              $
              0.01Weighted-average
      common shares outstanding
              
              
              132,666,860
              
              
              
              93,799,839
              
              
              
              109,326,053
              
              
              
              100,315,405See
      accompanying notes to unaudited consolidated financial
      statements.


5





DEEP
DOWN, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


(Unaudited)




For
      the Six Months Ended June 30, 2008Common
      Stock
              
              
              Paid-in
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              TotalBalance
      at December 31, 2007
              
              
              85,976,532
              
              
              $
              85,977
              
              
              $
              14,849,847
              
              
              $
              (2,347,308
              )
              
              $
              12,588,516Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (4,954,820
              )
              
              
              (4,954,820
              )Exchange
      of Series D preferred stock
              
              
              25,866,518
              
              
              
              25,867
              
              
              
              4,393,377
              
              
              
              
              
              
              
              4,419,244Stock
      issued for acquisition of Mako
              
              
              2,802,969
              
              
              
              2,803
              
              
              
              1,959,275
              
              
              
              
              
              
              
              1,962,078Stock
      issued for acquisition of Flotation
              
              
              1,714,286
              
              
              
              1,714
              
              
              
              1,421,143
              
              
              
              
              
              
              
              1,422,857Warrants
      issued for acquisition of Flotation
              
              
              
              
              
              
              -
              
              
              
              121,793
              
              
              
              
              
              
              
              121,793Restricted
      stock issued
              
              
              1,200,000
              
              
              
              1,200
              
              
              
              (1,200
              )
              
              
              
              
              
              
              -Stock
      issued in private placement
              
              
              57,142,857
              
              
              
              57,143
              
              
              
              37,002,527
              
              
              
              
              
              
              
              37,059,670Cashless
      exercise of stock options
              
              
              29,339
              
              
              
              29
              
              
              
              (29
              )
              
              
              
              
              
              
              -Stock
      based compensation
              
              
              -
              
              
              
              -
              
              
              
              253,669
              
              
              
              
              
              
              
              253,669Balance
      at June 30, 2008
              
              
              174,732,501
              
              
              $
              174,733
              
              
              $
              60,000,402
              
              
              $
              (7,302,128
              )
              
              $
              52,873,007See
      accompanying notes to unaudited consolidated financial
      statements.




6




DEEP
DOWN, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOW


(Unaudited)




Six
      Months EndedJune
      30,2008
              
              
              2007Cash
      flows from operating activities:Net
      loss
              
              $
              (4,954,820
              )
              
              $
              840,208Adjustments
      to reconcile net income to net cashused
      in operating activities:Gain
      on extinguishment of debt
              
              
              -
              
              
              
              (2,000,000
              )Interest
      income
              
              
              (30,467
              )
              
              
              (16,290
              )Amortization
      of debt discount
              
              
              1,816,847
              
              
              
              1,391,506Amortization
      of deferred financing costs
              
              
              762,700
              
              
              
              -Share-based
      compensation
              
              
              253,669
              
              
              
              39,565Bad
      debt expense
              
              
              832,328
              
              
              
              -Depreciation
      and amortization
              
              
              898,998
              
              
              
              154,221Loss
      on disposal of equipment
              
              
              9,136
              
              
              
              -Changes
      in assets and liabilities:Lease
      receivable
              
              
              -
              
              
              
              (750,000
              )Accounts
      receivable
              
              
              (254,958
              )
              
              
              (531,356
              )Prepaid
      expenses and other current assets
              
              
              (586,618
              )
              
              
              1,655Inventory
              
              
              (179,343
              )
              
              
              (472,253
              )Work
      in progress
              
              
              1,135,005
              
              
              
              (119,552
              )Accounts
      payable and accrued liabilities
              
              
              (1,601,586
              )
              
              
              1,808,987Deferred
      revenue
              
              
              537,491
              
              
              
              80,628Net
      cash provided by operating activities
              
              $
              (1,361,618
              )
              
              $
              427,319Cash
      flows from investing activities:Cash
      paid for acquisition of Flotation
              
              
              (22,116,140
              )
              
              
              -Cash
      paid for acquisition of Mako
              
              
              (1,319,967
              )
              
              
              -Cash
      paid for third party debt
              
              
              -
              
              
              
              (432,475
              )Cash
      received from sale of ElectroWave receivables
              
              
              -
              
              
              
              261,068Cash
      deficit acquired an acquisition of a business
              
              
              -
              
              
              
              (18,974
              )Purchases
      of equipment
              
              
              (687,060
              )
              
              
              (442,788
              )Restricted
      cash
              
              
              375,000
              
              
              
              -Net
      cash used in investing activities
              
              $
              (23,748,167
              )
              
              $
              (633,169
              )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
              
              
              
              960,000Proceeds
      from long term debt
              
              
              2,687,333
              
              
              
              -Proceeds
      from sales-type lease
              
              
              172,500
              
              
              
              69,000Borrowings
      on debt - related party
              
              
              -
              
              
              
              150,000Payments
      of long-term debt
              
              
              (12,930,395
              )
              
              
              (222,307
              )Net
      cash provided by (used in) financing activities
              
              $
              26,989,108
              
              
              $
              456,693Change
      in cash and equivalents
              
              
              1,879,323
              
              
              
              250,843Cash
      and equivalents, beginning of period
              
              
              2,206,220
              
              
              
              12,462Cash
      and equivalents, end of period
              
              $
              4,085,543
              
              
              $
              263,305See
      accompanying notes to unaudited consolidated financial
      statements.




7




DEEP
DOWN, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOW
 (Unaudited)




Six
      Months EndedJune
      30,2008
              
              
              2007Supplemental
      schedule of noncash investingand
      financing activities:Acquisition
      of a business
              
              $
              -
              
              
              $
              (190,381
              )Exchange
      of receivables for acquisition of a business
              
              $
              -
              
              
              $
              171,407Warrants
      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
              
              
              $
              -Fixed
      assets purchased with capital lease
              
              $
              -
              
              
              $
              525,000Fixed
      assets transferred from Inventory
              
              $
              502,253
              
              
              $
              -Exchange
      of Series D preferred stock
              
              $
              4,419,244Exchange
      of Series E preferred stock
              
              $
              -
              
              
              $
              3,366,778Redemption
      of Series E preferred stock
              
              $
              -
              
              
              $
              2,000,000Exchange
      of Series E preferred stock for subordinated debenture
              
              $
              500,000
              
              
              $
              -Common
      shares issued as restricted stock
              
              $
              1,200
              
              
              $
              -Supplemental
      Disclosures:Cash
      paid for interest
              
              $
              880,017
              
              
              $
              117,151Cash
      paid for pre-payment penalties
              
              $
              446,413
              
              
              $
              -Cash
      paid for taxes
              
              $
              275,000
              
              
              $
              -See
      accompanying notes to unaudited consolidated financial
      statements.
  8
  DEEP
DOWN, INC.


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




NOTE
1: GENERAL





Nature
of Business





Deep
Down, Inc., a Nevada corporation (“Deep Down Nevada” or “Deep Down” or the
“Company”), 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”),  Mako Technologies, LLC (“Mako”),
a Nevada limited liability company, and Flotation Technologies, Inc.
(“Flotation”), a Maine corporation. The results of Flotation are included in the
consolidated financial statements herein effective May 1, 2008, the effective
date of acquisition for accounting purposes.




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 FlotecTMsyntactic 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-LocTM cable floats, HardballTM
umbilical floats, FlotecTM cable and pipeline protection, InflexTM polymer
bend restrictors, and installation buoyancy of any size and depth
rating.




Basis
of Presentation





The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted for interim financial
information and with the instructions to Form 10-Q and Article 8 of Regulation
S-X relating to smaller reporting companies.  Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles (“GAAP”) for complete financial statements.  In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included.  Operating results for the three-month period ended June 30,
2008 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2008.  The balance sheet at December 31, 2007
has been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by GAAP for complete
financial statements.




For
further information, refer to the audited consolidated financial statements and
footnotes thereto included in our Annual Report on Form 10-KSB/A (Amendment No.
3) for the year ended December 31, 2007 filed on August 8, 2008.





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





Principles
of Consolidation





The
unaudited consolidated financial statements include the accounts of Deep Down’s
wholly-owned subsidiaries after the elimination of significant intercompany
accounts and transactions.




9




NOTE
2: ACCOUNTS RECEIVABLE





Accounts
receivable includes an allowance for uncollectible accounts of $818,992 and
$139,787 as of June 30, 2008 and December 31, 2007, respectively. Bad debt
expense totaled $832,328 and $11,555 for the six months ended June 30, 2008
and June 30, 2007, respectively.




NOTE
3: PROPERTY AND EQUIPMENT





Property
and equipment include the following:




June
      30,2008
              
              
              December
      31, 2007Land
              
              $
              2,270,439
              
              
              $
              13,148Building
              
              
              1,246,072
              
              
              
              182,156Furniture
      and fixtures
              
              
              139,044
              
              
              
              63,777Vehicles
      and trailers
              
              
              99,837
              
              
              
              112,162Leasehold
      improvements
              
              
              301,919
              
              
              
              75,149Equipment
              
              
              3,834,594
              
              
              
              2,004,167Rental
      Equipment
              
              
              3,659,714
              
              
              
              3,144,559Total
              
              
              11,551,619
              
              
              
              5,595,117Less:
      Accumulated depreciation
              
              
              (900,566
              )
              
              
              (422,314
              )Property
      and equipment, net
              
              $
              10,651,053
              
              
              $
              5,172,804





Depreciation
expense for the six months ended June 30, 2008 and June 30, 2007 was
approximately $505,063 and $154,221,respectively.




To
accommodate our growth in operations during the six months ended June 30, 2008,
we leased additional property from JUMA and incurred $98,139 in leasehold
improvements to stabilize the ground and prepare the surface for the movement
and storage of the heavy equipment we manufacture and rent at our corporate
headquarters.




In
connection with the purchase of Flotation, Deep Down acquired land along with a
building and improvements with a fair market value of $3,264,100 which
houses its 46,925 square foot light industrial manufacturing facility on a
3.61 acre site in Maine.





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




10


NOTE
4: LONG-TERM DEBT





The
following table summarizes long-term debt:




June
      30, 2008
                
                
                December
      31, 2007Secured
      credit agreement with Prospect Capital Corporationquarterly
      principal payments of $250,000 beginningSeptember
      30, 2008; monthly interest payments,interest
      fixed at 15.5%; balance due August 2011;secured
      by all assets
                
                $
                -
                
                
                $
                12,000,000Debt
      discount, net of amortization of $254,101 and $135,931
      respectively
                
                
                -
                
                
                
                (1,703,258
                )Note
      payable to a bank, payable in monthlyinstallments
      bearing interest at 8.25% per annum,maturing
      June 10, 2008, cross-collateralizedby
      Mako assets, paid January 2008.
                
                
                -
                
                
                
                289,665Note
      payable to a bank, payable in monthlyinstallments
      bearing interest at 7.85% per annum,maturing
      September 28, 2010, collateralized by Makolife
      insurance policy and equipment, paid January 2008.
                
                
                -
                
                
                
                320,027Revolving
      line-of-credit of $500,000 from a bank,matured
      October 13, 2007 or on demand, interest rate isat
      a variable rate resulting in a rate of 8.30% as ofSeptember
      30, 2007, collateralized by Mako equipment,paid
      January 2008.
                
                
                -
                
                
                
                151,705Note
      payable to a bank payable in monthlyinstallments
      bearing interest at 7.85% per annum,maturing
      January 25, 2011, collateralized by Makoequipment
      and life insurance policy, paid January 2008
                
                
                -
                
                
                
                154,647Total
      secured credit agreement and bank debt
                
                
                -
                
                
                
                11,212,7866%
      Subordinated Debenture beginning March 31, 2008; annual
                
                
                
                
                
                
                -interest
      payments, interest fixed at 6%; matures March 31, 2011
                
                
                507,479
                
                
                
                -Capital
      lease of equipment, monthly lease payments,interest
      imputed at 11.2%
                
                
                459,379
                
                
                
                481,209Total
      long-term debt
                
                
                966,858
                
                
                
                11,693,995Current
      portion of long-term debt
                
                
                (47,477
                )
                
                
                (995,177
                )Long-term
      debt, net of current portion
                
                $
                919,381
                
                
                $
                10,698,818




Secured
Credit Agreement




On August
6, 2007, Deep Down entered into a $6.5 million secured credit agreement, (the
“Credit Agreement”) with Prospect Capital Corporation, (“Prospect”) and received
an advance of $6.0 million 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. Deep Down
paid the full 15.5% and did not exercise the PIK feature for the monthly periods
through June 2008.





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 from $6.5 million to $13.0 million. Amounts borrowed were $6.0
million.  Quarterly principal payments increased to $250,000 beginning
September 30, 2008.  Cash interest paid for the three and six months
ended June 30, 2008 was $361,667 and $821,500, respectively. 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 is separately classified as “Restricted cash” on
the accompanying balance sheets.


11




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 warrant was issued to purchase up to 118,812 shares of
common stock at an exercise price of $1.01 per share.





On June
12, 2008, Deep Down paid $12,492,912 to Prospect to pay 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 approximately
$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.





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.





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
(“Series E”) 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. Upon exchange into the
Debenture, Deep Down recorded $113,589 in interest expense for the accretion up
to face value. See the additional discussion of the terms of the Series E
preferred stock at Note 6. Interest expense on the Debenture of approximately
$7,479 has been recognized for the three and six months ended June 30,
2008.





NOTE
5: ACQUISITIONS





Purchase of Mako
Technologies, Inc.





Effective
December 1, 2007, Deep Down purchased 100% of the common stock of Mako. 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, was 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, 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”
balance on the accompanying balance sheet at December 31, 2007.





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 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 from the purchase date.





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





Purchase of Flotation
Technologies, Inc.





On June
5, 2008, Deep Down completed the acquisition of 100% of the capital of
Flotation, pursuant to the Stock Purchase Agreement entered into on April 17,
2008. The equity interest was acquired from the three individual shareholder
members of the same family and related technology was acquired from an entity
affiliated with the selling stockholders. No prior material relationship existed
between the selling shareholders and Deep Down, any of our affiliates, or any of
our directors or officers, or any associate of any of our officers or
directors.  Deep Down executed the definitive agreement to purchase
Flotation on April 17, 2008 and effectively dated the acquisition for accounting
purposes as of May 1, 2008. Deep Down announced the closing on June 6,
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.


12


The
purchase price of Flotation was $23,895,830 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 $251,180. 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 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. Flotation’s selling shareholders used approximately
$1,800,000 of the $22,100,000 cash received to pay outstanding debt of
Flotation. The purchase price may be adjusted upward or downward, dependant on
certain working capital targets.





Deep Down
sold 57,142,857 shares to accredited investors on June 5, 2008, for
approximately $37,059,670 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.





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




Summary of purchase
      price:Cash
              
              $
              22,100,000Certain
      transaction costs
              
              
              251,180Fair
      market value of common stock
              
              
              1,422,857Fair
      market value of warrants issued
              
              
              121,793Total
      purchase price
              
              $
              23,895,830


The
purchase price of $23,895,830 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
              
              $
              235,040Accounts
      receivable
              
              
              2,105,519Construction
      in progress
              
              
              871,183Prepaid
      expenses
              
              
              15,904Property,
      plant and equipment, net
              
              
              4,846,190Intangibles
              
              
              14,797,000Goodwill
              
              
              2,157,307Total
      assets acquired
              
              $
              25,028,143Accounts
      payable and accrued liabilities
              
              
              1,132,313Total
      liabilities acquired
              
              $
              1,132,313Net
      assets acquired
              
              $
              23,895,830




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 $1,200,000
and will be depreciated over estimated useful lives of 3 to 40 years using the
straight-line method.


13





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




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


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 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
following unaudited pro forma combined condensed financial statements include
Flotation and Mako for the periods presented as if the acquisitions had occurred
on the first date of the respective periods and are presented for informational
purposes only. These results are not necessarily indicative of the results of
operations that actually would have been achieved had the acquisitions been
consummated as of the beginning of the period presented, or are they intended to
be a projection of future results. The unaudited pro forma results were as
follows:




Unaudited
      Pro Forma Combined Condensed Statements of OperationsFor
      the Three Months ended June 30, 2008
              
              For
      the Six Months ended June 30, 2008Historical
              
              
              
              
              
              
              
              HistoricalOne
      Month
              
              
              
              
              
              
              
              
              
              Four
      Months
              
              
              
              
              
              CombinedApril
      30,
              
              Flotation
              
              
              
              Combined
              
              
              
              April
      30,
              
              Flotation
              
              
              
              Condensed2008
              
              Pro
      Forma
              
              
              
              Pro
      Forma
              
              
              
              2008
              
              Pro
      Forma
              
              
              
              Pro
      FormaDeep
      Down
              
              Flotation
              
              Entries
              
              
              
              Results
              
              Deep
      Down
              
              Flotation
              
              Entries
              
              
              
              ResultsRevenues
              $
              7,920,196
              
              $
              1,064,364
              
              $
              -
              
              
              
              $
              8,984,560
              
              $
              14,199,661
              
              $
              5,941,472
              
              $
              -
              
              
              
              $
              20,141,133Cost
      of sales
              
              5,496,427
              
              
              627,224
              
              
              -
              
              
              
              
              6,123,651
              
              
              9,372,798
              
              
              4,005,179
              
              
              -
              
              
              
              
              13,377,977Gross
      profit
              
              2,423,769
              
              
              437,140
              
              
              -
              
              
              
              
              2,860,909
              
              
              4,826,863
              
              
              1,936,293
              
              
              -
              
              
              
              
              6,763,156Total
      operating expenses
              
              4,224,771
              
              
              305,220
              
              
              75,604
              
              (d/e
              )
              
              4,605,595
              
              
              6,285,167
              
              
              968,179
              
              
              302,416
              
              (d/e
              )
              
              7,555,762Operating
      income (loss)
              
              (1,801,002
              )
              
              131,920
              
              
              (75,604
              )
              
              
              
              (1,744,686
              )
              
              (1,458,304
              )
              
              968,114
              
              
              (302,416
              )
              
              
              
              (792,606
              )Total
      other income (expense)
              
              (3,149,371
              )
              
              (22,467
              )
              
              -
              
              
              
              
              (3,171,838
              )
              
              (3,850,882
              )
              
              (57,335
              )
              
              -
              
              
              
              
              (3,908,217
              )Income
      (loss) fromcontinuing
      operations
              
              (4,950,373
              )
              
              109,453
              
              
              (75,604
              )
              
              
              
              (4,916,524
              )
              
              (5,309,186
              )
              
              910,779
              
              
              (302,416
              )
              
              
              
              (4,700,823
              )Income
      tax benefit (expense)
              
              85,000
              
              
              -
              
              
              (12,524
              )
              (f)
              
              
              72,476
              
              
              354,366
              
              
              -
              
              
              (225,094
              )
              (f)
              
              
              129,272Net
      income (loss)
              $
              (4,865,373
              )
              $
              109,453
              
              $
              (88,128
              )
              
              
              $
              (4,844,048
              )
              $
              (4,954,820
              )
              $
              910,779
              
              $
              (527,510
              )
              
              
              $
              (4,571,551
              )Basic
      earnings (loss) per share
              $
              (0.04
              )
              
              
              
              
              
              
              
              
              $
              (0.03
              )
              $
              (0.05
              )
              
              
              
              
              
              
              
              
              $
              (0.03
              )Shares
      used in computingbasic
      per share amounts
              
              132,666,860
              
              
              
              
              
              
              
              (g)
              
              
              174,707,676
              
              
              109,326,053
              
              
              
              
              
              
              
              (g)
              
              
              161,161,117Diluted
      earnings (loss) per share
              $
              (0.04
              )
              
              
              
              
              
              
              
              
              $
              (0.03
              )
              $
              (0.05
              )
              
              
              
              
              
              
              
              
              $
              (0.03
              )Shares
      used in computingdiluted
      per share amounts
              
              132,666,860
              
              
              
              
              
              
              
              (g)
              
              
              174,707,676
              
              
              109,326,053
              
              
              
              
              
              
              
              (g)
              
              
              161,161,117





The
historical results of Deep Down for the three and six months ended June 30, 2008
contain two months of results for Flotation operations since its acquisition was
effective May 1, 2008.  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 31, 2008 and the total of 58,857,143 common shares of
Deep Down issued in June 2008; 57,142,857 in connection with the Private
Placement, and 1,714,286 to Flotation shareholders, as if all these shares were
issued January 1, 2008.




14


Unaudited
      Pro Forma Combined Condensed Statement of OperationsFor
      the Three Months ended June 30, 2007CombinedHistorical
              
              Mako
              
              
              
              Flotation
              
              
              
              CondensedPro
      Forma
              
              
              
              Pro
      Forma
              
              
              
              Pro
      FormaDeep
      Down
              
              Mako
              
              Flotation
              
              Entries
              
              
              
              Entries
              
              
              
              ResultsRevenues
              $
              5,144,788
              
              $
              1,768,876
              
              $
              1,329,446
              
              $
              -
              
              
              
              $
              -
              
              
              
              $
              8,243,110Cost
      of sales
              
              3,293,313
              
              
              561,385
              
              
              974,265
              
              
              -
              
              
              
              
              -
              
              
              
              
              4,828,963Gross
      profit
              
              1,851,475
              
              
              1,207,491
              
              
              355,181
              
              
              -
              
              
              
              
              -
              
              
              
              
              3,414,147Total
      operating expenses
              
              1,177,876
              
              
              957,572
              
              
              711,176
              
              
              122,367
              
              (a)
              
              
              226,811
              
              (d/e
              )
              
              3,195,802Operating
      income (loss)
              
              673,599
              
              
              249,919
              
              
              (355,995
              )
              
              (122,367
              )
              
              
              
              (226,811
              )
              
              
              
              218,345Total
      other income (expense)
              
              723,230
              
              
              (28,571
              )
              
              1,399,087
              
              
              (266,269
              )
              (b)
              
              
              -
              
              
              
              
              1,827,477Income
      (loss) fromcontinuing
      operations
              
              1,396,829
              
              
              221,348
              
              
              1,043,092
              
              
              (388,636
              )
              
              
              
              (226,811
              )
              
              
              
              2,045,822Income
      tax benefit (expense)
              
              (447,363
              )
              
              (17,309
              )
              
              -
              
              
              143,795
              
              
              
              
              (302,024
              )
              (f)
              
              
              (622,901
              )Net
      income (loss)
              $
              949,466
              
              $
              204,039
              
              $
              1,043,092
              
              $
              (244,841
              )
              
              
              $
              (528,835
              )
              
              
              $
              1,422,921Basic
      earnings (loss) per share
              $
              0.01
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              0.01Shares
      used in computingbasic
      per share amounts
              
              67,870,171
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (c/g
              )
              
              136,104,357Diluted
      earnings (loss) per share
              $
              0.01
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              0.01Shares
      used in computingdiluted
      per share amounts
              
              93,799,839
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (c/g
              )
              
              162,034,025


Unaudited
      Pro Forma Combined Condensed Statement of OperationFor
      the Six Months ended June 30, 2007CombinedHistorical
              
              Mako
              
              
              
              Flotation
              
              
              
              CondensedPro
      Forma
              
              
              
              Pro
      Forma
              
              
              
              Pro
      FormaDeep
      Down
              
              Mako
              
              Flotation
              
              Entries
              
              
              
              Entries
              
              
              
              ResultsRevenues
              $
              7,243,182
              
              $
              2,618,805
              
              $
              2,351,057
              
              $
              -
              
              
              
              $
              -
              
              
              
              $
              12,213,044Cost
      of sales
              
              4,545,402
              
              
              1,122,501
              
              
              1,463,530
              
              
              -
              
              
              
              
              -
              
              
              
              
              7,131,433Gross
      profit
              
              2,697,780
              
              
              1,496,304
              
              
              887,527
              
              
              -
              
              
              
              
              -
              
              
              
              
              5,081,611Total
      operating expenses
              
              1,901,552
              
              
              1,364,505
              
              
              1,376,736
              
              
              244,734
              
              (a)
              
              
              453,624
              
              (d/e
              )
              
              5,341,151Operating
      income (loss)
              
              796,228
              
              
              131,799
              
              
              (489,209
              )
              
              (244,734
              )
              
              
              
              (453,624
              )
              
              
              
              (259,540
              )Total
      other income (expense)
              
              491,343
              
              
              (46,545
              )
              
              1,390,538
              
              
              (532,391
              )
              (b)
              
              
              -
              
              
              
              
              1,302,945Income
      (loss) from
                continuing
      operations
              
              1,287,571
              
              
              85,254
              
              
              901,329
              
              
              (777,125
              )
              
              
              
              (453,624
              )
              
              
              
              1,043,405Income
      tax expense
              
              (447,363
              )
              
              (17,309
              )
              
              -
              
              
              287,536
              
              
              
              
              (165,651
              )
              (f)
              
              
              (342,787
              )Net
      income (loss)
              $
              840,208
              
              $
              67,945
              
              $
              901,329
              
              $
              (489,589
              )
              
              
              $
              (619,275
              )
              
              
              $
              700,618Basic
      earnings per share
              $
              0.01
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              -Shares
      used in computingbasic
      per share amounts
              
              74,417,132
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (c/g
              )
              
              142,651,318Diluted
      earnings per share
              $
              0.01
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              -Shares
      used in computingdiluted
      per share amounts
              
              100,315,405
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (c/g
              )
              
              168,549,591




The
unaudited pro forma combined condensed statements include the following pro
forma assumptions and entries for Mako:





a)
            Amortization
      of the intangible assets at a rate of $40,789 per month for the respective
      periods.


b)
            Represents
      cash interest plus amortization of deferred financing costs and debt
      discounts for the Credit Agreement.  Interest is payable at
      15.5% on the outstanding principal, and the related fees are 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.




15




Taxes are
calculated on the pro forma entries at Deep Down’s estimated combined effective
rate of 37%.





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 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.





The table
below reflects the assumptions used for warrant and option grants related to
Flotation during the six months ended June 30, 2008:




Risk
      free interest rate
              2.52%
      - 3.18%Expected
      life of options
              2 -
      2.5 yearsExpected
      volatility
              51.7%
      - 61.3%


NOTE
6: PREFERRED STOCK





Series
D Redeemable Convertible Preferred Stock Classified as Temporary Equity
Instruments





On March
28, 2008, the outstanding 5,000 shares of Series D redeemable convertible
preferred stock (“Series D”) were converted into 25,866,518 restricted 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.





Exchange
of Series E Redeemable Exchangeable Preferred Stock Classified as Debt
Instruments to 6% Subordinated Debenture





On March
31, 2008, 500 shares of the Series E Preferred Stock were exchanged into the 6%
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 6% Subordinated
Debenture due three years from the date of the exchange. See additional
discussion of the Debenture in Note 4.





NOTE
7: COMMON STOCK





Private
Placement




On June
5, 2008, Deep Down sold 57,142,857 shares, for $40,000,000 at a per-share price
of $0.70. After transaction costs, net proceeds were $37,059,670. Dahlman Rose
& Company, LLC acted as exclusive placement agent for the
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, with the remainder being retained
for working capital purposes.





In
connection with the private placement, Deep Down entered into a registration
rights agreement where the holder has certain demand registration rights. Deep
Down filed an S-1 Registration Statement on July 21, 2008. If the Registration
Statement is not declared effective by September 3, 2008 (the “Required
Effective Date”), then for each day following the Required Effective Date, until
but excluding the date the Commission declares the Registration Statement
effective, Deep Down shall be required to pay daily damages to the
purchasers.  Deep Down evaluated the registration rights agreement for
liability treatment under Financial Accounting Standards Board (“FASB”)
Statement No. 5,“Accounting for
Contingencies” and Financial Statement Staff Position (FSP) EITF 00-19(2)
“Accounting for Registration Payment Arrangements” and determined that the
registration rights did not meet the definition of a liability under the
authoritative guidance since management believes the liability is not estimable
at this time.




16


NOTE
8: STOCK BASED COMPENSATION AND WARRANTS





Deep Down
has a stock based compensation plan - the 2003 Directors, Officers and
Consultants Stock Option, Stock Warrant and Stock Award Plan (the “Plan”). We
account for stock-based compensation expense under Statement of Financial
Accounting (“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 six months ended June 30, 2008, Deep Down granted
4,200,000 options and 1,200,000 shares of restricted stock and cancelled 875,000
options due to forfeitures under the Plan. Based on the shares of common
stock outstanding at June 30, 2008, there are approximately 16,235,000 options
available for grant under the Plan as of that date.





Restricted
Stock





On
February 14, 2008, Deep Down issued an aggregate of 1,200,000 shares of
restricted common stock to Ronald E. Smith, CEO; Robert E. Chamberlain,
Chairman; and Eugene L. Butler, CFO under terms of the Plan. 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 six months ended June 30, 2008 Deep Down recognized a total of
$94,500 in stock based compensation related to these issued shares of restricted
stock.





The
following table summarizes Deep Down’s restricted stock activity for the six
months ended June 30, 2008:




Restricted
      Shares
              
              
              Weighted-
      Average Grant Price
              
              
              Aggregate
      Intrinsic ValueOutstanding
      at December 31, 2007
              
              
              -Grants
              
              
              1,200,000
              
              
              $
              0.42Outstanding
      at June 30,2008
              
              
              1,200,000
              
              
              $
              0.42
              
              
              $
              624,000
  Stock
Option Activity During 2008





During
the six months ended June 30, 2008, Deep Down granted 4,200,000 options under
the Plan as detailed below.  On June 17, 2008, a cashless exercise of
50,000 employee stock options for 29,339 net common shares was issued in
accordance with terms of the Plan.





During
the six months ended June 30, 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 days’ closing prices. The fair value of such options
was approximately $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 of $1.50, which was in excess of the day’s closing price of $0.42. The
fair value of such options was approximately $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.




17


Summary
of Stock Options





Deep Down
is expensing all stock options on a straight line basis over their respective
expected service periods.  The total stock based
compensation expense for the six months ended June 30, 2008 and June 30, 2007,
was $159,169 and $39,565, respectively.  The unamortized portion of the
estimated fair value of outstanding stock options is $949,885 at June 30,
2008.





The
following table summarizes Deep Down’s stock option activity for the six months
ended June 30, 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, 2007
              
              5,500,000
              
              $
              0.58Grants
              
              4,200,000
              
              
              1.35Exercises
              
              (50,000
              )
              
              0.50Forfeitures
              
              (875,000
              )
              
              0.74Outstanding
      at June 30,2008
              
              8,775,000
              
              $
              0.93
              
              
              3.0
              
              $
              1,944,750Exerciseable
      at June 30,2008
              
              1,970,834
              
              $
              0.60
              
              
              2.7
              
              $
              729,292


The
following summarizes Deep Down’s outstanding options and their respective
exercise prices at June 30, 2008:




Exercise
      Price
              
              Shares
      Underlying Options$
              0.30
      - 0.49
              
              
              175,000$
              0.50
      - 0.69
              
              
              4,125,000$
              0.70
      - 0.99
              
              
              525,000$
              1.00
      - 1.29
              
              
              950,000$
              1.30
      - 1.50
              
              
              3,000,0008,775,000


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 six
months ended June 30, 2008:




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


Summary
of Warrants





In
connection with the purchase of Flotation, warrants to purchase 200,000 common
shares at $0.70 per share were issued to an entity affiliated with the selling
stockholders 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 related to Flotation.





On August
6, 2007, as part of the Credit Agreement described above in Note 4, Deep Down
issued 4,960,585 detachable warrants to its creditor. All warrants were
issued with an exercise price of $0.507, expired in five years (or earlier in
the event of termination) and vested on the earlier of the second anniversary of
the agreement or upon payment in full of the debt. On July 3, 2008, the creditor
exercised all of its outstanding 4,960,585 warrants for a total of 2,618,129
restricted shares of Deep Down common stock in a cashless
exercise.


18


Additionally,
related to the Credit Agreement described in Note 4, Deep Down issued 320,000
detachable warrants at an exercise price of $0.75 per share to a third party
related to the financing. The warrant has a five-year term and became
exercisable in connection with the early payoff of the debt.  Also, in
connection with the Amendment to the Credit Agreement, Deep Down issued
detachable warrants to purchase up to 118,812 shares of common stock at an
exercise price of $1.01 per share to the same third party. The warrant has
a five-year term and was immediately exercisable. See the additional discussion
concerning such warrants in Note 4.





A summary
of warrant transactions follows:


Shares
      Underlying Warrants
              
              Weighted-
      Average Exercise Price
              
              Weighted-
      Average Remaining Contractual Term (in years)
              
              Aggregate
                Intrinsic
      Value
                (In-The-Money)Outstanding
      at December 31, 2007
              
              5,399,397
              
              $
              0.53Grants
              
              200,000
              
              
              0.70Outstanding
      at June 30,2008
              
              5,599,397
              
              $
              0.54
              
              
              4.4
              
              $
              2,241,852Exerciseable
      at June 30,2008
              
              5,399,397
              
              $
              0.54
              
              
              4.4
              
              $
              2,193,852


The
following summarizes Deep Down’s outstanding warrants and their respective
exercise prices at June 30, 2008:




Exercise
      Price
              
              Shares
      Underlying Warrants$
              0.51
              
              
              4,960,585$
              0.70
      - 0.99
              
              
              520,000$
              1.01
              
              
              118,8125,599,397




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 six
months ended June 30, 2008:




Dividend
      yield
              0%Risk
      free interest rate
              2.52%
      - 3.18%Expected
      life of options
              2 -
      2.5 yearsExpected
      volatility
              51.7%
      - 61.3%




NOTE9: COMMITMENTS AND
CONTINGENCIES





Litigation




We are
from time to time involved in legal proceedings arising in the normal course of
business. As of the date of this Quarterly Report on Form 10-Q, there are no
pending or threatened material legal proceedings.




Operating
Leases
 
 Deep Down
leases land under an operating lease and is responsible for related maintenance,
insurance and property taxes.  On May 1, 2008, Deep Down and JUMA,
LLC, a related party, amended the original lease that began as of September,
2006 to provide for the additional acreage leased resulting in a $4,000 per
month increase in rent.  See Note 10 below for further discussion of
the related party.




NOTE
10:  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,
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 through September 1, 2011, 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.




19




During
the six months ended June 30, 2008, Deep Down granted an aggregate of
1,200,000 restricted shares of common stock and an aggregate of 3,000,000 stock
options to Ronald E. Smith, President and Chief Executive Officer, Robert E.
Chamberlain, Jr., Chairman and Chief Acquisition Officer, and Eugene L. Butler,
Chief Financial Officer, under the terms of the Deep Down, Inc. Stock Option
Plan. Deep Down also awarded in recognition of their completion of the
acquisition of Flotation and private placement of common stock, a performance
bonus of $300,000 in the aggregate.




NOTE
11:  SUBSEQUENT EVENTS





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.


20





ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS





The
following discussion and analysis provides information that management believes
is relevant for an assessment and understanding of our results of
operations.   This information should be read in conjunction with
our audited historical consolidated financial statements which are included in
our Form 10-KSB/A (Amendment No. 3) for the fiscal year ended December 31, 2007
filed with the Securities and Exchange Commission (“SEC”) on August 8, 2008
and our unaudited condensed consolidated financial statements and notes thereto
included with this Quarterly Report on Form 10-Q in Part I, Item 1.





Corporate
History





In
December 2006, MediQuip Holdings, Inc. (“MediQuip”), a publicly traded Nevada
corporation, divested Westmeria Healthcare Limited, its wholly-owned subsidiary
representing substantially all of its preceding operations, and subsequently
acquired Deep Down, Inc. ("Deep Down"), a Delaware corporation, in a reverse
merger transaction so that Deep Down was the surviving entity for accounting
purposes.  Due to the structure of such December 2006 transactions,
the discussion and disclosure in this report relates to Deep Down and its
operations unless otherwise specified.





In June
2006, the former parent entity of Deep Down, Subsea Acquisition Corporation
(“Subsea”), a Texas corporation, was formed for the purpose of acquiring service
providers to the offshore energy industry and designers and manufacturers of
subsea equipment, surface equipment and offshore rig equipment that are used by
major integrated, large independent and foreign national oil and gas companies
in offshore areas throughout the world.





On
November 21, 2006, Subsea acquired all the outstanding capital 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 Subsea’s Series
G Preferred Stock from two of the three principal shareholders of
Subsea.  Since both Subsea and SOS were then under common control and
the operations of SOS did not constitute a business, the Company recognized
compensation expense to such principal shareholders for the fair value of both
series of preferred stock totaling $3,340,792.





On the
same day as its acquisition of SOS, Subsea also acquired Deep Down, Inc., a
Delaware corporation founded in 1997.  Under the terms of this
transaction, Subsea acquired all of Deep Down’s outstanding capital stock in
exchange for 5,000 shares of Subsea’s Series D Preferred Stock and 5,000 shares
of Subsea’s Series E Preferred Stock.  The purchase price, based on
the fair value of the Series D and E Preferred stock, was
$7,865,471.





Immediately
after the completion of the acquisitions of Deep Down and SOS on November 21,
2006, Subsea merged with and into its wholly-owned subsidiary SOS, with Subsea
continuing as the surviving company.  Immediately thereafter, Subsea
merged with and into its wholly-owned subsidiary Deep Down, with Deep Down
continuing as the surviving company.





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
financial information and the financial statements of the Company presented in
this report reflect those of Deep Down, Inc. and its subsidiaries, and do not
include the financial condition and results of operations of MediQuip or
Westmeria Healthcare Limited for periods prior to the December 2006 merger
date.





Since
December 2006, Deep Down has consummated three strategic
acquisitions.  On April 2, 2007, Deep Down acquired substantially all
of the assets of ElectroWave USA, Inc., a Texas corporation.  For
purposes of completing the acquisition, Deep Down formed a wholly-owned
subsidiary, ElectroWave USA, Inc., a Nevada corporation.  Effective
December 1, 2007, Deep Down acquired all of the outstanding common stock of Mako
Technologies, Inc., a Louisiana corporation.  For purposes of
completing the acquisition, Deep Down formed a wholly-owned subsidiary, Mako
Technologies, LLC, a Nevada limited liability company, which merged with and
into Mako Technologies, Inc., with Mako as the surviving entity. Effective May
1, 2008, Deep Down acquired all of the outstanding common stock of Flotation
Technologies, Inc., a Maine corporation.




21




Our
current operations are the result of the recent 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.





Recent
Events





Amendments
to Bylaws and Articles of Incorporation





In May
2008, the Board of Directors amended the Bylaws and approved amendments to our
Articles of Incorporation subject to shareholder approval, which was obtained on
May 16, 2008.  The amendments are designed to discourage any tender offer
or other attempt to gain control of Deep Down in a transaction that is not
approved by our Board of Directors, by making it more difficult for a person or
group to obtain control of Deep Down in a short time and then impose its will on
the remaining stockholders, including:




Classified Board of Directors and
Removal of Directors.  Our Board of Directors is divided into
three classes which shall be as nearly equal in number as
possible.  The directors in each class serve for terms of three years,
with the terms of one class expiring each year.  Each class currently
consists of approximately one-third of the number of directors.  Each
director will serve until his successor is elected and qualified.  A
director may not be removed except for cause by the affirmative vote of the
holders of 75% of the outstanding shares of capital stock entitled to vote at an
election of directors.




Advance Notice Requirements for
Nomination of Directors and Proposal of New Business at Annual Stockholder
Meetings.  Any stockholder desiring to make a nomination for
the election of directors or a proposal for new business at a stockholder
meeting must submit written notice not less than 30 or more than 60 days in
advance of the meeting.




Supermajority Voting Requirement for
Amendment of Certain Provisions of the Certificate of
Incorporation.  Specified provisions contained in the articles
of incorporation and bylaws may not be repealed or amended by action of our
stockholders except upon the affirmative vote of the holders of not less than
seventy-five percent of the outstanding stock entitled to vote.  This
requirement exceeds the majority vote that would otherwise be required by Nevada
law for the repeal or amendment of the articles or bylaws.





Private
Placement





On June
5, 2008, Deep Down entered into the Purchase Agreement to sell and issue to the
certain purchasers, purchasing in reliance on the exemption from registration in
Section 4(2) of the Securities Act of 1933, as amended, an aggregate of
57,142,857 shares, of Deep Down’s common stock at a price of $0.70 per share,
for a total purchase price of $40.0 million and net proceeds to Deep Down of
approximately $37.1 million.  Completion of the private placement was
subject to completion of the acquisition of Flotation, as described
below.  Dahlman Rose & Company, LLC acted as exclusive placement
agent for the financing.





Deep Down
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 to Prospect Capital Corporation on June 12,
2008, with the remainder being retained for working capital
purposes.





In
connection with the private placement, Deep Down entered into a registration
rights agreement where the holder has certain demand registration rights. Deep
Down filed an S-1 Registration Statement on July 21, 2008. If the Registration
Statement is not declared effective by September 3, 2008 (the “Required
Effective Date”), then for each day following the Required Effective Date, until
but excluding the date the Commission declares the Registration Statement
effective, Deep Down shall be required to pay daily damages to the
purchasers.  Deep Down evaluated the registration rights agreement for
liability treatment under FASB Statement No. 5,“Accounting for
Contingencies” and Financial Statement Staff Position (FSP) EITF 00-19(2)
“Accounting for Registration Payment Arrangements” and determined that the
registration rights did not meet the definition of a liability under the
authoritative guidance since management believes the liability is not estimable
at this time.





Purchase
of Flotation.





On June
5, 2008, Deep Down completed the acquisition on 100% of the capital stock of
Flotation, pursuant to the Stock Purchase Agreement entered into on April 17,
2008. The stock was acquired from three individual shareholder members of the
same family and related technology was acquired from an entity affiliated with
such selling shareholders. Deep Down announced the closing on June 6, 2008 and
effectively dated the acquisition for accounting purposes as of May 1,
2008.





22


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, Core TecTM
drilling riser buoyancy modules, ROVitsTM
buoyancy, Hydro-Float mooring buoys, StablemoorTM  low-drag
ADCP deployment solution, Quick-LocTM and cable floats, HardBallTM
umbilical floats , FlotectTM
 cable and pipeline protection, InFlex TM  polymer
static bend restrictors, and installation buoyancy of any size and depth
rating.





We have
accounted for the acquisition of Flotation using the purchase method of
accounting in accordance with Statement of Financial Accounting Standards (FASB)
No. 141, Business Combinations (FASB 141) since Deep Down acquired substantially
all of the assets, certain liabilities, employees, and business of
Flotation.





The
purchase price of Flotation was $23.9 million and consisted of $22.1 million
cash and 1,714,286 shares of common stock valued at $0.83 per common share plus
transaction costs of $251,180. 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 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. Flotation’s selling shareholders used $1.8 million of the
$22.1 million cash received to pay outstanding debt of Flotation. The purchase
price may be adjusted upward or downward, dependant on the amount of Flotation’s
working capital on June 6, 2008.





Deep Down
also issued 600,000 incentive common stock purchase options to employees of
Flotation for future 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.





Payment
of long term debt and exercise of Prospect warrants:





On June
12, 2008, Deep Down paid approximately $12.5 million to Prospect Capital
Corporation to pay the balance due under its Credit Agreement and related
interest and early termination fees.  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 restricted
shares of Deep Down common stock.





Results
of operations




Three
months Ended June 30, 2008 Compared to Three Months Ended June 30,
2007




Revenue.  Revenues
for the three months ended June 30, 2008 increased $2.8 million to $7.9 million,
a 54% increase. Revenues contributed by the acquisitions for the three months
ended June 30, 2008 represented $3.0 million while there was a slight decrease
in the core business of $0.2 million.  The slight decrease was a result of
certain customers delaying scheduled projects.




Gross
Profit.  Gross profit increased by $0.6
million to $2.4 million for the three months ended June 30, 2008 as
compared to the same period last year.  The acquisition of Mako and
Flotation increased gross profit by $1.0 million. ElectroWave decreased by $0.2
million versus the same period last year, and the core business declined by $0.2
million. The slight decline on the core business was due to delays in certain
projects which caused the gross profit margin to drop slightly. Gross margins
for the period were 31% for the current fiscal quarter, and are expected to
increase during the second half of the year.





Selling, General and Administrative
Expenses.SG&A
for the three months ended June 30, 2008 was $3.7 million compared to $1.1
million for the same period last year for an increase of $2.6 million. The
acquisitions of Mako and Flotation represented $0.9 million of the increase. Bad
debt increased by $0.8 million due to the write off of two accounts, one of
which filed for bankruptcy protection during the quarter ($0.2 million of the
total bad debt is included in the Mako subsidiary). Personnel and related costs
increased by $0.6 million primarily due to an 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 $0.4 million in professional, accounting and legal fees to
support our various initiatives during the quarter relating to the filing of a
registration statement and to support the related acquisitions. Stock based
compensation related to employee stock options and restricted stock was
approximately $148,500 in the current fiscal quarter compared to approximately
$40,000 for the comparable prior period.




23


Depreciation and
amortization. Depreciation expense for the three months ended June 30,
2008 was $0.3 million compared to $0.1 million for the same prior year period
due mainly to the acquisitions in fiscal year 2008. Fixed assets acquired in the
Mako and Flotation subsidiaries totaled $8.1 million. In addition, intangible
assets purchased in the Mako and Flotation acquisitions total $19.2 million in
the aggregate. Amortization for the quarter ended June 30, 2008 was $0.3
million.





Interest Expense. Interest
expense for the three months ended June 30, 2008 was $2.7 million compared to
$1.3 million for the same prior year period.  On June 12, 2008, Deep
Down paid the balance due under the Credit Agreement and related interest. In
connection with the early payoff, Deep Down accelerated the remaining deferred
financing costs totaling $0.7 million and recorded this charge to interest
expense. Additionally, $1.4 million in debt discounts were accelerated and
recorded to interest expense.  Cash interest on the Credit Agreement
totaled $0.4 million for the three months ended June 30, 2008. For the three
months ended June 30, 2007, $1.2 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 the
Credit Agreement in June 2008, early termination fees of approximately $446,412
were recognized as a loss on early extinguishment of debt. In the prior year,
Deep Down executed a Securities Redemption Agreement with the former Deep Down
CFO 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.  Deep Down accreted the remaining discount of $1.1 million
attributable to such shares on the date of redemption.




Net loss. Net loss for the
three months ended June 30, 2008 was $4.9 million, compared to a net income of
$0.9 million for the same prior year period as discussed
above.




EBITDA.EBITDA is
a non-GAAP financial measure. Deep Down defines EBITDA as net income plus
interest expense, income taxes, depreciation, amortization and other non-cash,
non-operating expense. Deep Down uses EBITDA as an unaudited supplemental
financial measure to assess (1) the financial performance of its assets without
regard to financing methods, capital structures, taxes or historical cost basis,
(2) its 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 (3) the ability of Deep Down’s assets to generate cash
sufficient for Deep Down to pay potential interest costs. Deep Down also
understands 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 Deep Down’s 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. Excluding the one-time gain and non-cash interest and stock based
compensation charges, EBITDA for the three months ended June 30, 2008 was $(1.0)
million compared to $0.8 million, a decrease of $1.8 million from the same prior
year period, due in part to the significant bad debt expense and other SG&A
expenses discussed above.





Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007





Revenue.  Revenue
generated in the six months ended June 30, 2008 was $14.2 million compared to
$7.2 million for the same period last year, an increase of 96%. Our acquisitions
accounted for $5.1 million of this increase. Mako was included for the entire
period and accounted for $2.7 million of the increase. Flotation was included
for two months and accounted for $1.5 million of the increase and ElectroWave
was included for six months, but included for only three months in the same
period last year and accounted for $0.9 million of the increase. Our existing
businesses continued to strengthen with a $1.8 million increase, for a 29%
increase over last year’s six month revenues. Contract revenues were up 25%
while rentals were up 47%.  Our offshore market continues to be strong and
we continue to expand our customer base.





Gross Profit. Gross
margin for the six months ended June 30, 2008 increased $2.1 million to $4.8
million, for a 79% increase. $1.4 million of the increase is attributable to the
inclusion of the acquisitions in this period.  The overall gross margin was
34 % for the first six months of 2008 as compared to 37% for the same period
last year. The gross margin is slightly lower due to an increase in personnel
and personnel related costs for the continued growth.




24


Selling, General and Administrative
Expenses.SG&A
for the six months ended June 30, 2008 was $5.4 million compared to $1.8
million for the same period last year for an increase of $3.6 million. The
acquisitions of Mako and Flotation represented $1.5 million of the increase. Bad
debt increased by $0.8 million due to the write off of two accounts, one of
which filed for bankruptcy protection during the quarter ($0.2 million of the
total bad debt is included in the Mako subsidiary). Personnel and related costs
increased by $1.0 million primarily due to an 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 $0.7 million to in professional accounting, and legal fees to
support our various initiatives during the six months ended June 30, 2008
relating to the filing of a registration statement and acquisitions and
reporting requirements. Stock based compensation related to employee stock
options and restricted stock was approximately $0.3 million in the current
fiscal year compared to approximately $40,000 for the comparable prior year
period.





Depreciation and
amortization. Depreciation expense for the six months ended June 30, 2008
was $0.5 million compared to $0.2 million for the same prior year period due
mainly to the acquisitions in fiscal year 2008, though Flotation has only 2
months of depreciation expense since they were acquired May 1, 2008. Fixed
assets acquired in the Mako and Flotation subsidiaries totaled $8.1 million. In
addition, intangible assets purchased in the Mako and Flotation acquisitions
total $19.2 million in the aggregate. Amortization of intangible assets for the
quarter ended June 30, 2008 was $0.4 million.





Interest Expense. Interest
expense for the six months ended June 30, 2008 was $3.9 million compared to $1.5
million for the same prior year period.  In connection with the early
payoff of the Credit Agreement, Deep Down 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 to interest expense, along with early termination fees of approximately
$446,412.  Deep Down paid cash interest related to the Credit
Agreement totaling $0.8 million for the six months ended June 30, 2008. For the
comparable period of the prior year, $1.4 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 the
Credit Agreement in June 2008, early termination fees of approximately $446,412
were recognized as a loss on early extinguishment of debt. In the prior year,
Deep Down executed a Securities Redemption Agreement with the former Deep Down
CFO 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.  Deep Down accreted the remaining discount of $1.1 million
attributable to such shares on the date of
redemption.





Netloss. Net loss for the six
months ended June 30, 2008 was $5.0 million, compared to a net income of $0.8
million for the same prior year period, as discussed above.




EBITDA.Excluding
the one-time gain and non-cash interest and stock based compensation charges,
EBITDA for the six months ended June 30, 2008 was $(0.3) million compared to
$1.0 million, a decrease of $1.3 million from the same prior year
period.





Capital
Resources and Liquidity





Financing
for our operations consists primarily of cash flows attributable to our
operations. We believe that the liquidity we derived from the private placement
of our common stock in June 2008 and cash flows attributable to our operations
is more than sufficient to fund our capital expenditures, debt maturities and
other business needs. We continue to evaluate acquisitions and joint ventures in
the ordinary course of business. When opportunities for business acquisitions
meet our standards, we believe we will have access to capital sources necessary
to take advantage of those opportunities.





As of
June 30, 2008, our cash and cash equivalents were $4.1 million.  Cash
and cash equivalents were $2.2 million plus restricted cash of $0.4 million as
of December 31, 2007.  Management believes that we have adequate
capital resources when combined with its cash position and cash flow from
operations to meet current operating requirements.





On June
5, 2008, we sold 57,142,857 shares of Deep Down’s common stock in a 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 to Prospect on June 12, 2008, with the
remainder being retained for working capital purposes.





On April
11, 2008, the shareholders of Mako received the final cash installment of $1.2
million under the terms of the securities redemption and shareholder payable
agreement.




25


Cash
Flow from Operating Activities





For the
six months ended June 30, 2008, cash used in operating activities was $1.4
million as compared to cash provided by operating activities for the same prior
year period of 2007 of $0.4 million. Our working capital balances vary due to
delivery terms and payments on key contracts, work in progress, and outstanding
receivables and payables. Additionally, we recorded the following non-cash
charges: amortization of deferred financing costs and debt discount related to
the Prospect payoff totaling $2.6 million, share based compensation of $0.3
million, and depreciation and amortization of $0.9 million.





Cash
Flow from Investing Activities





For the
six months ended June 30, 2008, cash used in investing activities was $23.7
million as compared to $0.6 million for the same prior year period. The majority
of the 2008 activity related to the cash paid to Flotation shareholders totaling
$22.1 million offset by $0.2 million cash acquired, which was funded by the net
proceeds of the private placement as discussed above. Additionally, Deep Down
made the final cash payment to the Mako shareholders in the amount of $1.2
million. The restricted cash balance of $0.4 million was released in
connection with the payoff of the Credit Agreement. Deep Down used $0.7 million
for equipment purchases compared to the same prior year period totaling
$0.4 million.





Cash
Flow from Financing Activities





For the
six months ended June 30, 2008, cash provided by financing activities
was $27.0 million compared to $0.5 million for the same prior year
period.  During the six months ended June 30, 2008, Deep Down
completed the foregoing described private placement for net proceeds of $37.1
million. In June, 2008, Deep Down 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, Deep Down paid $0.9 million of notes payable plus accrued interest of
$2,664, and received proceeds from Prospect totaling $2.7 million.





Capital
Resources and Requirements





We
generate our liquidity and capital resources primarily through operations and,
when needed, through available capital markets. At June 30, 2008, long-term debt
was $1.0 million, of which $47,477 was the current portion.




Critical
Accounting Policies





For a
discussion of our critical accounting matters, please refer to Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operation,” in our 2007 Annual Report on Form 10-KSB/A (Amendment No.3) filed on
August 8, 2008.





Inflation
and Seasonality





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




26


ITEM
4T. 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
effective to ensure that information required to be disclosed in reports filed
under the Exchange Act 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.





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.




Changes
in Internal Control Over Financial Reporting





There
were no changes in Deep Down’s internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act)
that occurred during the quarterly period covered by this Quarterly Report on
Form 10-Q that have materially affected, or are reasonably likely to materially
affect, Deep Down’s internal control over financial reporting except for the
impact of its new acquisition of Flotation. With its new acquisition, Deep
Down’s management will conduct its annual assessment for its inclusion in its
December 31, 2008 Annual Report on Form 10-K.





PART
II – OTHER INFORMATION




ITEM
2. UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS





On June
5, 2008, Deep Down entered into the Purchase Agreement to sell and issue to
certain purchasers, purchasing in reliance on the exemption from registration in
Section 4(2) of the Securities Act of 1933, an aggregate of 57,142,857 shares,
of Deep Down’s common stock at a price of $0.70 per share. The net proceeds for
Deep Down from such private placement was approximately $37.1
million. Dahlman Rose & Company, LLC acted as exclusive placement agent
for the financing. Deep Down 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 to Prospect Capital Corporation on June 12, 2008, with
the remainder being retained for working capital purposes.





In June
2008, in connection with the acquisition of Flotation, Deep Down issued an
aggregate of 1,714,286 shares of common stock to shareholders of Flotation,
valued at $0.83 per share, and 600,000 incentive common stock purchase options
to employees of Flotation with an exercise price of $1.15 per
share.  In addition, warrants to purchase 200,000 common shares at
$0.70 per share were issued to an entity affiliated with the selling
shareholders for 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.   These shares of restricted common stock are exempt
from registration requirements provided by Section 4(2) of the Securities Act
and/or Regulation D promulgated thereunder.





On June
17, 2008, Deep Down effected a cashless exercise of 50,000 employee stock
options for a non-insider employee at an exercise price of $0.50 per share for
net common shares issued totaling 29,339. These shares of common stock are
exempt from registration requirements provided by Section 4(2) of the Securities
Act and/or Regulation D promulgated thereunder.





Effective
July 3, 2008, Prospect Capital Corporation, the holders of 4,960,585 warrants
originally issued in connection with Deep Down’s secured credit agreement,
effected a cashless exercise of all of their warrants for 2,618,129 shares of
common stock of Deep Down at an exercise price of $0.507. These shares of common
stock are exempt from registration requirements provided by Section 4(2) of the
Securities Act and/or Regulation D promulgated thereunder.




27


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





On May
16, 2008 (the “Record Date”), Deep Down received written consents from
stockholders representing a majority of our outstanding voting interests on the
close of business on the Record Date, in lieu of a meeting, approving amendments
to our Articles of Incorporation and Bylaws to provide the following: i) A
division of the board of directors into three classes, approximately equal in
size and each director to serve for a three year term ; ii)
Prohibiting  action by written consent of the shareholders without
prior approval by the board of directors; iii) Limiting authority for the call
of special meetings of the shareholders to the board of directors or a committee
of the board; and iv) Requiring shareholder nominations for election of
directors or proposals for new business to be delivered or mailed to the company
not less than 30 or more sixty days prior to the meeting.





On July
21, 2008, Deep Down, Inc. filed Schedule 14C to report the results of the
actions related to these matters.





ITEM
5. OTHER INFORMATION





On May
16, 2008, the Board of Directors amended the Bylaws.  The board of
directors or a committee appointed by the board of directors shall act as
nominating committee for selecting the management nominees for election as
directors. The nominating committee shall deliver written nominations to the
secretary at least twenty days prior to the date of the annual meeting. Provided
such committee makes such nominations, no nominations for directors except those
made by the nominating committee shall be voted upon at the annual meeting
unless other nominations by stockholders are made in writing and delivered to
the secretary in accordance with the provisions of the Articles of
Incorporation.


28


ITEM
6. EXHIBITS




Exhibits
required to be attached by Item 601 of Regulation S-K are listed in the Index of
Exhibits of this Quarterly Report on Form 10-Q.  Those exhibits below
incorporated by reference herein are indicated as such by the information
supplied in the parenthetical thereafter. If no parenthetical appears after an
exhibit, such exhibit is filed herewith.





Exhibit
      Number
            Description
      of Exhibit2.1
      (1)
            Agreement
      and Plan of Reorganization among MediQuip Holdings, Inc., Deep Down, Inc.,
      and the majority shareholders of Deep Down, Inc.3.1
      (1)
            Certificate
      of Incorporation of MediQuip Holdings, Inc.3.2
      (2)
            Certificate
      of Amendment to Articles of Incorporation providing for Change of Name to
      Deep Down, Inc.3.3
      (1)
            By
      Laws of Deep Down, Inc.3.4
      (1)
            Form
      of Certificate Designation of Series D Redeemable Convertible Preferred
      Stock3.5
      (1)
            Form
      of Certificate Designation of Series E Redeemable Exchangeable Preferred
      Stock3.6
      (1)
            Form
      of Certificate Designation of Series F Redeemable Convertible Preferred
      Stock3.7
      (1)
            Form
      of Certificate Designation of Series G Redeemable Exchangeable Preferred
      Stock3.8(7)
            Amendment
      to Articles of Incorporation3.9(7)
            Amended
      and Restated Bylaws4.7
      (3)
            Securities
      Purchase Agreement4.8
      (3)
            Common
      Stock Purchase Warrant (No. 4), dated June 5, 20084.9 † (6)
            2003
      Directors, Officers and Consultants Stock Option, Stock Warrant and Stock
      Award Plan.5.1 (6)
            Opinion
      of Sonfield & Sonfield, counsel to the Company, as to the legality of
      the Common Stock being registered.10.1
      (3)
            Private
      Placement Memorandum10.2
      (6)
            Supplement
      No. 1 to Private Placement Memorandum10.4*
            Dahlman
      Rose Underwriting Agreement10.5
      (4)
            Stock
      Purchase Agreement dated April 17, 2008, among Deep down, Inc., Flotation
      Technologies, Inc. and the selling stockholders named
    therein.10.6
      † (6)
            Employment
      Agreement with David A. Capotosto10.7
      † (6)
            Employment
      Agreement with Bradley M. Parro10.8*
            Amended
      Lease Agreement dated May 1, 2008 between Deep Down, Inc., a Delaware
      corporation, as tenant, and JUMA, L.L.C. December 31, 2007 filed on March
      31, 2008).





(1) Filed
as an exhibit to our Report on Form 10-KSB/A, filed with the Commission on May
1, 2008, and incorporated herein by reference.


(2) Filed
as an exhibit to our Report on Form 10-KSB, filed with the Commission on April
1, 2008, and incorporated herein by reference.


(3) Filed
as an exhibit to our Report on Form 8-K/A, filed with the Commission on June 9,
2008, and incorporated herein by reference.


(4) Filed
as an exhibit to our Report on Form 8-K, filed with the Commission on April 21,
2008, and incorporated herein by reference.


(5) Filed
as an exhibit to our Quarterly Report on Form 10-Q, filed with the Commission on
May 16, 2008, and incorporated herein by reference.


(6) Filed
as an exhibit to our Registration Statement on Form S-1, filed with the
Commission on July 21, 2008, and incorporated herein by reference.


(7) Filed
as an exhibit to our Schedule 14C, filed with the Commission on June 19, 2008
and revised and re-filed on August 8, 2008


_________________


* Filed
or furnished herewith.


† Exhibit
constitutes a management contract or compensatory plan or
arrangement





30


SIGNATURES





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






DEEP
      DOWN, INC.(Registrant)






Signature
            
            Title
            
            Date/s/
      RONALD E. SMITH
            
            President,
      CEO and Director
            
            August
      15, 2008Ronald
      E. Smith
            
            (Principal
      Executive Officer)/s/
      EUGENE L. BUTLER
            
            Chief
      Financial Officer
            
            August
      15, 2008Eugene
      L. Butler
            
            (Principal
      Financial Officer)







31




INDEX
TO EXHIBITS
 
 Exhibit
      Number
              Description
      of Exhibit2.1
              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 Annual Report on Form 10-KSB/A
      (Amendment No. 2) for the fiscal year ended December 31, 2007 filed on May
      1, 2008).3.1
              Certificate
      of Incorporation of MediQuip Holdings, Inc. (incorporated by reference
      from Exhibit 3.1 to our Annual Report on Form 10-KSB for the fiscal year
      ended December 31, 2007 filed on March 31, 2008).3.2
              Certificate
      of Amendment to Articles of Incorporation providing for Change of Name to
      Deep Down, Inc. (incorporated by reference from Exhibit 3.2 to our Annual
      Report on Form 10-KSB for the fiscal year ended December 31, 2007 filed on
      March 31, 2008).3.3
              By
      Laws of Deep Down, Inc. (incorporated by reference from Exhibit 3.3 to our
      Annual Report on Form 10-KSB/A (Amendment No. 1) for the fiscal year ended
      December 31, 2007 filed on May 1, 2008).3.4
              Form
      of Certificate of Designation of Series D Redeemable Convertible Preferred
      Stock (incorporated by reference from Exhibit 3.4 to our Annual Report on
      Form 10-KSB/A (Amendment No. 1) for the fiscal year ended December 31,
      2007 filed on May 1, 2008).3.5
              Form
      of Certificate of Designation of Series E Redeemable Exchangeable
      Preferred Stock (incorporated by reference from Exhibit 3.5 to our Annual
      Report on Form 10-KSB/A (Amendment No. 1) for the fiscal year ended
      December 31, 2007 filed on May 1, 2008).3.6
              Form
      of Certificate of Designation of Series F Redeemable Convertible Preferred
      Stock (incorporated by reference from Exhibit 3.6 to our Annual Report on
      Form 10-KSB/A (Amendment No. 1) for the fiscal year ended December 31,
      2007 filed on May 1, 2008).3.7
              Form
      of Certificate of Designation of Series G Redeemable Exchangeable
      Preferred Stock (incorporated by reference from Exhibit 3.7 to our Annual
      Report on Form 10-KSB/A (Amendment No. 1) for the fiscal year ended
      December 31, 2007 filed on May 1, 2008).3.8
              Amendment
      to Articles of Incorporation (incorporated by reference from Exhibit A to
      our Preliminary Information Statement filed on June 19, 2008 and revised
      and re-filed on July 21, 2008).3.9
              Amended
      and Restated Bylaws (incorporated by reference from Exhibit B to our
      Preliminary Information Statement filed on June 19, 2008 and revised and
      re-filed on July 21, 2008).4.1
              Common
      Stock Purchase Warrant (No. 4) dated June 5, 2008 (incorporated by
      reference from Exhibit 4.1 to our Form 8-K/A filed on June 9,
      2008).4.2
              Stock
      Option, Stock Warrant and Stock Award Plan (incorporated by reference from
      Exhibit 4.10 to our Registration Statement on Form S-1, filed on July 21,
      2008).10.1
              Confidential
      Private Placement Memorandum dated May 16, 2008 (incorporated by reference
      from Exhibit 20.1 to our Form 8-K/A filed on June 9,
  2008).10.2
              Supplement
      No.1 to Confidential Private Placement Memorandum dated June 2, 2008
      (incorporated by reference from Exhibit 4.6 to our Registration Statement
      on Form S-1, filed on July 21, 2008).10.3
              Purchase
      Agreement dated as of June 2, 2008 (incorporated by reference from Exhibit
      10.1 to our Form 8-K/A filed on June 9, 2008).10.4
              Dahlman
      Rose Underwriting Agreement dated May 6, 200810.5
              Stock
      Purchase Agreement dated April 17, 2008, among Deep down, Inc., Flotation
      Technologies, Inc. and the selling stockholders named therein
      (incorporated by reference  to our Report on Form 8-K, filed
      with the Commission on April 21, 2008)10.6
      †
              Employment
      Agreement with David A. Capotosto (incorporated by reference from Exhibit
      4.10 to our Registration Statement on Form S-1, filed on July 21,
      2008).10.7
      †
              Employment
      Agreement with Bradley M. Parro (incorporated by reference from Exhibit
      4.10 to our Registration Statement on Form S-1, filed on July 21,
      2008).10.8*
              Amended
      Lease Agreement dated May 1, 2008 between Deep Down, Inc., a Delaware
      corporation, as tenant, and JUMA, L.L.C. December 31, 2007 filed on March
      31, 2008).31.1†
              Certification
      of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of
      the Securities Exchange Act of 1934.31.2†
              Certification
      of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the
      Securities Exchange Act of 1934.32.1†
              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 Down,
      Inc.
 
 * Filed
or furnished herewith
 † Exhibit
constitutes a management contract or compensatory plan or
arrangement