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. 1) for the fiscal year ended December 31, 2007 filed with the Securities and Exchange Commission ("SEC") on May 1, 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.

Results of operations

Three months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007

Revenue. Revenue generated in the three months ended March 31, 2008 was $6,279,465 compared to $2,098,394 for the three months ended March 31, 2007, an increase of $4,181,071 or 199%. Increased activity from Deep Down's offshore subsea business, including service activity related to installation of recoveries of subsea equipment, the delivery of launch and recovery systems, loose tube steel flying leads, winch system refurbishments, and an active heave compensated in-line winch system accounted for $4,293,820 of this revenue, an increase of $2,195,426, or 105% over the same prior year period. The Mako and ElectroWave acquisitions accounted for $1,985,645 of this revenue, an increase of 94% over the same prior year period.

Gross Profit. Gross margin for the three months ended March 31, 2008 was $2,403,094 compared to $846,305 in the same prior year period, an increase of $1,556,789 or 184%. Gross margin as a percentage of revenue was 38% in the current period as compared to 40% in the prior period.

Selling, General and Administrative Expenses. SG&A for the three months ended March 31, 2008 was $1,762,247 compared to $659,651 for the same prior-year period. The increase was primarily due to costs related to our acquisitions of Mako and Electrowave. However, SG&A as a percent of net revenue was lower for the three months ended March 31, 2008 at approximately 28% compared to 31% for the same prior period.

Interest Expense. Interest expense for the three months ended March 31, 2008 was $769,030 compared to $231,887 for the same prior year period. This increase is the result of the interest of debt related to the Credit Agreement in the three months ended March 31, 2008 which did not exist for the same prior period (See below "Capital Resources and Liquidity").

Net loss. Net loss for the three months ended March 31, 2008 was $89,447, compared to a net loss of $109,258 for the same prior year period.

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 the Company believes calculate EBITDA in a similar manner; and (3) the ability of Deep Down 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 the Company's 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 and others 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, earnings before depreciation, interest, amortization, taxes and other non-cash charges ("EBITDA") for the three months ended March 31, 2008 was $749,958 compared to $186,654, an increase of $563,304, or 302% over 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 derive from our leasing arrangements, our Credit Agreement 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.

Cash Flow from Operations

As of March 31, 2008, our cash and cash equivalents were $3,115,818 plus restricted cash of $562,500. Cash and cash equivalents were $2,206,220 plus restricted cash of $375,000 as of December 31, 2007. Management believes that the Company has adequate capital resources when combined with its cash position and cash flow from operations to meet current operating requirements.

On April 11, 2008, the shareholders of Mako received the final cash installment of $1,243,571 under the terms of the securities redemption and shareholder payable agreement.

For the three months ended March 31, 2008, cash used in operating activities was $543,444 as compared to cash provided by operating activities for the same prior year period of 2007 of $144,083. Our working capital balances vary due to delivery terms and payments on key contracts, work in progress, and outstanding receivables and payables.

---

For the three months ended March 31, 2008, cash used in investing activities was $410,983 as compared to $395,439 for the same prior year period. Investing outflows were due to equipment purchases of $156,958, acquisition costs of $66,525 and restricted cash of $187,500.

For the three months ended March 31, 2008, cash provided by financing activities was $1,864,025 compared to cash provided by financing activities for the same prior year period of $336,871. Increased financing outflows were primarily due to long-term debt payments of $926,808 related to the Mako acquisition.

Capital Resources and Requirements

We generate our liquidity and capital resources primarily through operations and, when needed, through available capital markets. At March 31, 2008, long-term debt was $11,385,358, of which $330,399 was the current portion. Long-term debt, net of current portion, included bank loans of $10,834,513 (includes $750,000 restricted cash), capital leases of $470,446 and the Debenture of $500,000 (See Note 6 "Preferred Stock").

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.1) filed on May 1, 2008.

Inflation and Seasonality

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