U.S. SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C.

                                    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 March 31, 2008

                                       OR

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

               For the Transition Period from _________to_________

                               Commission File No.
                                     0-25933

                        SOUTHCOAST FINANCIAL CORPORATION
             (Exact name of registrant as specified in its charter)

                  South Carolina                          57-1079460
           (State or other jurisdiction                (I.R.S. Employer
        of incorporation or organization)            Identification No.)

                           530 Johnnie Dodds Boulevard
                       Mt. Pleasant, South Carolina 29464
                    (Address of principal executive offices)

                                  843-884-0504
              (Registrant's telephone number, including area code)
                ------------------------------------------------

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 (or for such  shorter  period that the  registrant  was
required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
requirements for the past 90 days.

                                 YES [X] NO [ ]

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.

Large accelerated filer  [ ]                     Accelerated filer  [X]

Non-accelerated filer  [ ]                       Smaller reporting company  [ ]
(Do not check if a smaller reporting company)


Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

                                 YES [ ] NO [X]

 State the  number of shares  outstanding  of each of the  issuer's  classes  of
common stock as of the latest practicable date.

      4,679,859 shares of common stock, no par value, as of April 30, 2008




<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                                      INDEX


<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION                                                                                     Page No.
------------------------------                                                                                     --------

Item 1.  Financial Statements (Unaudited)

<S>      <C>                                                                                                        <C>
         Condensed Consolidated Balance Sheets - March 31, 2008 and December 31, 2007...................................2

         Condensed Consolidated Statements of Income - Three months ended March 31, 2008 and 2007.......................3

         Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
           Three months ended March 31, 2008 and 2007...................................................................4

         Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2008 and 2007...................5

         Notes to Condensed Consolidated Financial Statements.........................................................6-9

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations......................10-17

Item 3.  Quantitative and Qualitative Disclosure about Market Risk.....................................................17

Item 4.   Controls and Procedures......................................................................................17

PART II - OTHER INFORMATION

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds ..................................................17

Item 6.  Exhibits .....................................................................................................17

Signatures ............................................................................................................18

Exhibit Index .........................................................................................................19
</TABLE>


            See notes to condensed consolidated financial statements.

<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION
                      Condensed Consolidated Balance Sheets


PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
<TABLE>
<CAPTION>
                                                                                                     March 31,        December 31,
                                                                                                       2008               2007
                                                                                                       ----               ----
                                                                                                    (Unaudited)         (Audited)
Assets
   Cash and cash equivalents:
<S>                                                                                               <C>                 <C>
     Cash and due from banks ..............................................................       $  22,327,321       $   7,033,156
     Federal funds sold ...................................................................           1,176,000           3,774,000
                                                                                                  -------------       -------------
         Total cash and cash equivalents ..................................................          23,503,321          10,807,156
   Investment securities
     Available for sale ...................................................................          63,173,205          58,467,574
     Federal Home Loan Bank Stock, at cost ................................................           4,734,500           4,141,700
                                                                                                  -------------       -------------
         Total investment securities ......................................................          67,907,705          62,609,274
   Loans held for sale ....................................................................                   -             384,000
   Loans, net of allowance of $4,239,647 and $4,297,337 ...................................         381,076,191         374,116,734
   Property and equipment, net ............................................................          26,687,352          26,735,228
   Company owned life insurance ...........................................................          20,673,106          20,467,919
   Other assets ...........................................................................           6,049,678           5,731,776
                                                                                                  -------------       -------------

       Total assets .......................................................................       $ 525,897,353       $ 500,852,087
                                                                                                  =============       =============

Liabilities
   Deposits
     Noninterest-bearing ..................................................................       $  30,821,218       $  32,607,181
     Interest bearing .....................................................................         324,243,023         310,147,640
                                                                                                  -------------       -------------

       Total deposits .....................................................................         355,064,241         342,754,821

   Securities sold under agreements to repurchase .........................................          10,880,459           7,730,401
   Advances from Federal Home Loan Bank ...................................................          86,000,000          73,500,000
   Junior subordinated debentures .........................................................          10,310,000          10,310,000
   Other liabilities ......................................................................           4,137,852           3,815,558
                                                                                                  -------------       -------------

       Total liabilities ..................................................................         466,392,552         438,110,780
                                                                                                  -------------       -------------

Shareholders' Equity
   Common stock (no par value;  20,000,000 shares  authorized;  4,717,500 shares
     outstanding at March 31, 2008 and 5,009,903 at December 31, 2007) ....................          56,098,927          60,157,384
   Retained earnings ......................................................................           3,342,060           2,597,714
   Accumulated other comprehensive income (loss) ..........................................              63,814             (13,791)
                                                                                                  -------------       -------------

       Total shareholders' equity .........................................................          59,504,801          62,741,307
                                                                                                  -------------       -------------
       Total liabilities and shareholders' equity .........................................       $ 525,897,353       $ 500,852,087
                                                                                                  =============       =============
</TABLE>

            See notes to condensed consolidated financial statements.

                                      -2-
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                   Condensed Consolidated Statements of Income
                                   (Unaudited)


                                                      For the Three months ended
                                                                March 31,
                                                                ---------
                                                          2008             2007
                                                          ----             ----
Interest income
   Loans, including fees ...........................    $6,834,242    $6,973,916
   Investment securities ...........................       818,167       602,434
   Federal funds sold ..............................        11,677       216,687
                                                        ----------    ----------
       Total interest income .......................     7,664,086     7,793,037
                                                        ----------    ----------
Interest expense
   Deposits and borrowings .........................     4,210,892     4,151,600
                                                        ----------    ----------
Net interest income ................................     3,453,194     3,641,437
    Provision for loan losses ......................       381,047             -
                                                        ----------    ----------
Net interest income after provision
   for loan losses .................................     3,072,147     3,641,437
                                                        ----------    ----------
Noninterest income
   Service fees on deposit accounts ................       268,667       218,587
   Fees on loans sold ..............................        75,242        98,360
   Gain on sale of available for sale securities ...       153,465        91,951
   Gain on sale of property and equipment ..........             -        13,000
   Company owned life insurance earnings ...........       205,187        24,473
   Other ...........................................        91,984       156,114
                                                        ----------    ----------
       Total noninterest income ....................       794,545       602,485
                                                        ----------    ----------
Noninterest expenses
   Salaries and employment benefits ................     1,723,443     1,728,354
   Occupancy .......................................       282,386       266,931
   Furniture and equipment .........................       292,403       277,802
   Advertising and public relations ................        10,476        59,970
   Professional fees ...............................        95,388       176,255
   Travel and entertainment ........................        53,627        73,281
   Telephone, postage and supplies .................       104,282       113,605
   Other operating expenses ........................       360,832       272,690
                                                        ----------    ----------
       Total noninterest expenses ..................     2,922,837     2,968,888
                                                        ----------    ----------
Income before income taxes .........................       943,855     1,275,034
    Income tax .....................................       199,509       444,122
                                                        ----------    ----------
Net income .........................................    $  744,346    $  830,912
                                                        ==========    ==========
Basic net income per common share ..................    $     0.16    $     0.14
Diluted net income per common share ................    $     0.16    $     0.14
Weighted average shares outstanding
   Basic ...........................................     4,792,108     5,849,085
   Diluted .........................................     4,792,108     5,854,599

            See notes to condensed consolidated financial statements.



                                      -3-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION
       Condensed Consolidated Statement of Changes in Shareholders' Equity
                            and Comprehensive Income
               For the three months ending March 31, 2008 and 2007
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                          Accumulated
                                                                                                             other
                                                                  Common Stock                           comprehensive
                                                                 ------------             Retained          income
                                                             Shares         Amount        earnings          (loss)        Total
                                                             ------         ------        --------          ------        -----
<S>                                                        <C>          <C>             <C>             <C>             <C>
Balance, December 31, 2006 ..........................      5,470,316    $ 75,315,774    $  3,503,162    $    (16,324)   $78,802,612

   Net income for the period ........................                                        830,912                        830,912

   Other comprehensive income
     net of taxes of $42,976:
       Unrealized holding gains
       on securities available for sale .............                                                         76,401         76,401

   Less reclassification adjustment for
      gains included in net income, net of
      taxes of $33,103 ..............................                                                        (58,849)       (58,849)
                                                                                                                        -----------

   Comprehensive income .............................                                                                       848,464

   Stock dividend ...................................        518,440       4,334,074      (4,334,074)                             -

    Shares repurchased and retired ..................       (287,542)     (6,407,901)                                    (6,407,901)

   Employee stock purchase plan .....................          1,622          28,548                                         28,548
                                                           ---------    ------------    ------------    ------------    -----------

Balance, March 31, 2007 .............................      5,702,836    $ 73,270,495    $          -    $      1,228    $73,271,723
                                                           =========    ============    ============    ============    ===========


Balance, December 31, 2007 ..........................      5,009,903    $ 60,157,384    $  2,597,714    $    (13,791)   $62,741,307

   Net income for the period ........................                                        744,346                        744,346

   Other comprehensive income
       net of taxes of $98,900:
         Unrealized holding gains
         on securities available for sale ...........                                                        175,823        175,823

    Less reclassification adjustment for
       gains included in net income, net of
       taxes of $55,247 .............................                                                        (98,218)       (98,218)
                                                                                                                        -----------

   Comprehensive income .............................                                                                       821,951

   Shares repurchased and retired ...................       (295,152)     (4,097,630)                                    (4,097,630)

   Employee stock purchase plan .....................          2,749          39,173                                         39,173
                                                           ---------    ------------    ------------    ------------    -----------


Balance, March 31, 2008 .............................      4,717,500    $ 56,098,927    $  3,342,060    $     63,814    $59,504,801
                                                           =========    ============    ============    ============    ===========
</TABLE>

            See notes to condensed consolidated financial statements.

                                      -4-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION
                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                      For the three months ended
                                                                                                               March 31,
                                                                                                               ---------
                                                                                                         2008                2007
                                                                                                         ----                ----
Operating activities
<S>                                                                                               <C>                  <C>
   Net income ............................................................................        $    744,346         $    830,912
   Adjustments to reconcile net income to net
   cash provided (used) by operating activities
       Deferred income taxes .............................................................              45,767              403,119
       Provision for loan losses .........................................................             381,047                    -
       Depreciation and amortization .....................................................             257,667              374,511
       Discount accretion and premium amortization .......................................              (8,910)              (4,301)
       Gain on sale of securities ........................................................            (153,465)             (91,951)
       Gain on sale of property and equipment ............................................                   -              (13,000)
       Originations of loans held for sale ...............................................         (14,972,238)         (20,506,677)
       Proceeds from sales of loans held for sale ........................................          15,356,238           20,315,256
       Increase in value of Company Owned Life Insurance .................................            (205,187)             (24,473)
       Increase in other assets ..........................................................            (376,868)            (536,243)
       Increase in other liabilities .....................................................             322,295              338,637
                                                                                                  ------------         ------------

         Net cash provided by operating activities .......................................           1,390,692            1,085,790
                                                                                                  ------------         ------------

Investing activities
    Purchases of Federal Home Loan Bank stock ............................................            (592,800)            (596,400)
    Purchases of investment securities available-for-sale ................................         (12,134,327)          (3,371,123)
    Sales, calls, and maturities of investment securities available-for-sale .............           8,028,805            3,147,890
    Proceeds from sales of premises and equipment ........................................                   -               13,000
    Purchases of  premises and equipment .................................................            (209,791)            (853,790)
    Net (increase) decrease in loans .....................................................          (7,687,435)           3,621,350
                                                                                                  ------------         ------------

         Net cash provided by (used for) investing activities ............................         (12,595,548)           1,960,927
                                                                                                  ------------         ------------

Financing activities
   Increase in borrowings ................................................................          15,650,058           19,084,580
   Proceeds from issuance of stock .......................................................              39,173               28,548
   Funds used to repurchase stock ........................................................          (4,097,630)          (6,407,901)
   Net increase(decrease) in deposits ....................................................          12,309,420          (31,744,590)
                                                                                                  ------------         ------------

         Net cash provided (used) by financing activities ................................          23,901,021          (19,039,363)
                                                                                                  ------------         ------------

         Increase (decrease) in cash and cash equivalents ................................          12,696,165          (15,992,646)

Cash and cash equivalents, beginning of period ...........................................          10,807,156           38,212,202
                                                                                                  ------------         ------------

Cash and cash equivalents, end of period .................................................        $ 23,503,321         $ 22,219,556
                                                                                                  ============         ============

Cash paid during the year for:
    Income taxes .........................................................................        $    623,345         $    413,681
    Interest .............................................................................        $  4,146,568         $  4,264,954
</TABLE>

            See notes to condensed consolidated financial statements.


                                      -5-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 1 - Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance
with accounting  principles  generally  accepted in the United States of America
for interim  financial  information  and with the  instructions to Form 10-Q and
Regulation S-X of the Securities and Exchange  Commission.  Accordingly  they do
not include all information and notes required by generally accepted  accounting
principles  for  complete  financial  statements.  However,  in the  opinion  of
management,   all  adjustments  (consisting  of  normal  recurring  adjustments)
considered necessary for a fair presentation have been included.

Note 2 - Organization

Southcoast Financial Corporation (the "Company") is a South Carolina corporation
organized  in 1999 for the  purpose of being a holding  company  for  Southcoast
Community Bank (the "Bank").  On April 29, 1999,  pursuant to a Plan of Exchange
approved by the shareholders,  all of the outstanding shares of capital stock of
the Bank were  exchanged for shares of common stock of the Company.  The Company
presently  engages in no business other than that of owning the Bank and another
subsidiary, Southcoast Investment Corporation, and has no employees.

Note 3 - Net Income Per Share

Net income per share is computed on the basis of the weighted  average number of
common shares  outstanding in accordance with Statement of Financial  Accounting
Standards No. 128,  "Earnings per Share".  The treasury  stock method is used to
compute the effect of stock  options on the  weighted  average  number of shares
outstanding for diluted earnings per share.

Note 4 - Stock Repurchase

On January 18, 2008,  the Company  announced  plans to  repurchase up to 484,527
shares of its  outstanding  common  stock.  Repurchased  shares are retired into
authorized  unissued  shares.  During  the first  quarter of 2008,  the  Company
repurchased  295,152  shares and in April,  2008,  the  Company  repurchased  an
additional  40,000 shares.  As a result of the  repurchase,  together with 2,359
shares issued  through the Company's  Employee  Stock Purchase Plan, the Company
had 4,679,859  common  shares  outstanding  at April 30, 2008.  During the first
quarter of 2007,  the  Company  repurchased  287,542  shares of common  stock in
conjunction with a plan to repurchase up to 547,194 shares.

Note 5 - Recently Issued Accounting Standards

The  following  is a summary  of recent  authoritative  pronouncements  that may
affect  accounting,  reporting,  and disclosure of financial  information by the
Company:

In December  2007,  the FASB issued SFAS No.  141(R),  "Business  Combinations,"
("SFAS 141(R)") which replaces SFAS 141. SFAS 141(R) establishes  principles and
requirements  for how an  acquirer  in a  business  combination  recognizes  and
measures in its financial  statements  the  identifiable  assets  acquired,  the
liabilities  assumed,  and any  controlling  interest;  recognizes  and measures
goodwill acquired in the business combination or a gain from a bargain purchase;
and  determines  what  information  to disclose to enable users of the financial
statements  to  evaluate  the  nature  and  financial  effects  of the  business
combination.  FAS 141(R) is effective  for  acquisitions  by the Company  taking
place on or after January 1, 2009. Early adoption is prohibited.  Accordingly, a
calendar   year-end  company  is  required  to  record  and  disclose   business
combinations  following existing  accounting guidance until January 1, 2009. The
Company  will assess the impact of SFAS 141(R) if and when a future  acquisition
occurs.

In December  2007,  the FASB issued SFAS No. 160,  "Noncontrolling  Interests in
Consolidated  Financial  Statements - an amendment of ARB No. 51" ("SFAS  160").
SFAS  160   establishes   new  accounting   and  reporting   standards  for  the
noncontrolling  interest  in a  subsidiary  and  for  the  deconsolidation  of a
subsidiary.  Before this  statement,  limited  guidance  existed  for  reporting
noncontrolling interests (minority interest). As a result, diversity in practice
exists. In some cases minority interest is reported as a liability and in others
it is  reported  in  the  mezzanine  section  between  liabilities  and  equity.
Specifically,  SFAS 160 requires the  recognition of a  noncontrolling  interest
(minority  interest) as equity in the  consolidated  financials  statements  and
separate from the parent's equity. The amount of net income  attributable to the
noncontrolling  interest will be included in consolidated net income on the face
of the income statement. SFAS 160 clarifies that changes in a parent's ownership


                                      -6-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 5 - Recently Issued Accounting Standards (continued)

interest  in a  subsidiary  that do not  result in  deconsolidation  are  equity
transactions  if the parent  retains  its  controlling  financial  interest.  In
addition,  this statement  requires that a parent  recognize gain or loss in net
income when a subsidiary is  deconsolidated.  Such gain or loss will be measured
using  the  fair  value  of  the   noncontrolling   equity   investment  on  the
deconsolidation  date. SFAS 160 also includes expanded  disclosure  requirements
regarding the interests of the parent and its noncontrolling interests. SFAS 160
is effective for the Company on January 1, 2009. Earlier adoption is prohibited.
The  Company  does not  believe  the  adoption  of SFAS 160 will have a material
impact on its financial position, results of operations or cash flows.

In March  2008,  the FASB issued SFAS No.  161,  "Disclosures  about  Derivative
Instruments and Hedging  Activities"  ("SFAS 161").  SFAS 161 requires  enhanced
disclosures  about an entity's  derivative  and hedging  activities  and thereby
improves the transparency of financial reporting.  It is intended to enhance the
current disclosure  framework in SFAS 133 by requiring that objectives for using
derivative  instruments be disclosed in terms of underlying  risk and accounting
designation.  This  disclosure  better  conveys the purpose of derivative use in
terms of the risks that the entity is intending to manage. SFAS 161 is effective
for the  Company  on  January  1,  2009.  This  pronouncement  does  not  impact
accounting measurements but will result in additional disclosures if the Company
is involved in material derivative and hedging activities at that time.

In February 2008, the FASB issued FASB Staff Position No. 140-3, "Accounting for
Transfers of  Financial  Assets and  Repurchase  Financing  Transactions"  ("FSP
140-3").  This FSP provides guidance on accounting for a transfer of a financial
asset and the transferor's  repurchase financing of the asset. This FSP presumes
that an initial  transfer of a financial  asset and a repurchase  financing  are
considered part of the same arrangement (linked transaction) under SFAS No. 140.
However,  if certain  criteria  are met,  the initial  transfer  and  repurchase
financing are not evaluated as a linked transaction and are evaluated separately
under Statement 140. FSP 140-3 will be effective for financial statements issued
for fiscal years  beginning  after November 15, 2008, and interim periods within
those fiscal years and earlier application is not permitted.  Accordingly,  this
FSP is  effective  for the Company on January 1, 2009.  The Company is currently
evaluating  the  impact,  if any,  the  adoption  of FSP 140-3  will have on its
financial position, results of operations and cash flows.

In April 2008, the FASB issued FASB Staff Position No. 142-3,  "Determination of
the Useful Life of Intangible Assets" ("FSP 142-3"). This FSP amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized  intangible  asset under SFAS No. 142,
"Goodwill and Other Intangible Assets". The intent of this FSP is to improve the
consistency between the useful life of a recognized  intangible asset under SFAS
No. 142 and the period of expected  cash flows used to measure the fair value of
the asset  under  SFAS No.  141(R),  "Business  Combinations,"  and  other  U.S.
generally accepted  accounting  principles.  This FSP is effective for financial
statements  issued for fiscal years  beginning  after  December  15,  2008,  and
interim  periods  within those fiscal  years and early  adoption is  prohibited.
Accordingly,  this FSP is  effective  for the  Company on  January 1, 2009.  The
Company does not believe the  adoption of FSP 142-3 will have a material  impact
on its financial position, results of operations or cash flows.

Effective  January 1, 2008,  the  Company  adopted  SFAS No.  157,  "Fair  Value
Measurements"  ("SFAS  157")  which  provides  a  framework  for  measuring  and
disclosing fair value under generally accepted accounting  principles.  SFAS 157
requires  disclosures about the fair value of assets and liabilities  recognized
in the balance sheet in periods subsequent to initial  recognition,  whether the
measurements  are made on a  recurring  basis (for  example,  available-for-sale
investment securities) or on a nonrecurring basis (for example, impaired loans).



                                      -7-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Note 5 - Recently Issued Accounting Standards (continued)

SFAS 157 defines fair value as the exchange  price that would be received for an
asset or paid to transfer a liability  (an exit price) in the  principal or most
advantageous market for the asset or liability in an orderly transaction between
market  participants on the measurement  date. SFAS 157 also  establishes a fair
value  hierarchy  which  requires  an entity to maximize  the use of  observable
inputs and minimize the use of  unobservable  inputs when  measuring fair value.
The standard  describes  three levels of inputs that may be used to measure fair
value:

Level 1        Quoted  prices  in  active   markets  for  identical   assets  or
               liabilities.  Level 1 assets  and  liabilities  include  debt and
               equity securities and derivative  contracts that are traded in an
               active  exchange  market,  as well as U.S.  Treasury,  other U.S.
               Government and agency  mortgage-backed  debt  securities that are
               highly  liquid  and  are  actively  traded  in   over-the-counter
               markets.

Level 2        Observable inputs other than Level 1 prices such as quoted prices
               for similar assets or liabilities;  quoted prices in markets that
               are not active;  or other  inputs that are  observable  or can be
               corroborated by observable market data for substantially the full
               term of the assets or liabilities. Level 2 assets and liabilities
               include debt  securities  with quoted prices that are traded less
               frequently  than   exchange-traded   instruments  and  derivative
               contracts  whose value is  determined  using a pricing model with
               inputs  that  are  observable  in the  market  or can be  derived
               principally from or corroborated by observable  market data. This
               category  generally  includes  certain  derivative  contracts and
               impaired loans.

Level 3        Unobservable  inputs  that are  supported  by little or no market
               activity and that are significant to the fair value of the assets
               or liabilities.  Level 3 assets and liabilities include financial
               instruments  whose  value is  determined  using  pricing  models,
               discounted cash flow  methodologies,  or similar  techniques,  as
               well as  instruments  for which the  determination  of fair value
               requires  significant  management  judgment  or  estimation.  For
               example,  this category generally includes certain private equity
               investments,  retained  residual  interests  in  securitizations,
               residential  mortgage servicing rights, and  highly-structured or
               long-term derivative contracts.

Assets  and  liabilities  measured  at fair  value on a  recurring  basis are as
follows as of March 31, 2008:

<TABLE>
<CAPTION>
                                                     Quoted market price        Significant other         Significant unobservable
                                                      in active markets         observable inputs                  inputs
                                                          (Level 1)                (Level 2)                      (Level 3)
                                                          ---------                ---------                      ---------

<S>                                                     <C>                       <C>                              <C>
Available-for-sale
 investment securities ..........................       $63,173,205               $         -                      $       -

Interest rate swap
 derivative instrument ..........................       $         -               $  (563,071)                     $       -
</TABLE>

The Company has no  liabilities  carried at fair value or measured at fair value
on a nonrecurring basis.

The Company is  predominantly  an asset based lender with real estate serving as
collateral  on a  substantial  majority  of loans.  Loans which are deemed to be
impaired are primarily valued on a nonrecurring  basis at the fair values of the
underlying  real  estate  collateral.   Such  fair  values  are  obtained  using
independent  appraisals,  which the Company considers to be level 2 inputs.  The
aggregate carrying amount of impaired loans at March 31, 2008 was $ 5,276,876.

FASB Staff  Position No. FAS 157-2 delays the  implementation  of SFAS 157 until
the first  quarter of 2009 with respect to goodwill,  other  intangible  assets,
real  estate  and  other  assets   acquired   through   foreclosure   and  other
non-financial assets measured at fair value on a nonrecurring basis.

                                      -8-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Note 5 - Recently Issued Accounting Standards (continued)

Other  accounting  standards  that have been  issued or  proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Company's financial position, results of operations or cash flows.

Note 6- Commitments and Contingencies

In May 2006 the  Company  entered  into a sales  contract on two parcels of land
contiguous to its branch location on John's Island. The land has a cost basis of
$2,837,178.  Under the agreement the Company agreed to sell the land, comprising
approximately  13.21 acres,  to the purchaser for the sum of $5,735,000.  At the
time of the contract the purchaser paid the Company a nonrefundable presales fee
of $1,390,000 that was not applicable to the purchase price of the property. The
Company  recognized  this as an item of  noninterest  income  during  2006.  The
agreement  specified a closing date on or before December 31, 2007, and provided
for an extension period of one year through December 31, 2008, contingent on the
payment  of $30,000  monthly  extension  payments  to the  Company.  Half of the
monthly  extension  payments  would be applicable to the purchase price and half
would be  nonapplicable.  In December 2007 the purchaser  exercised its right to
extend the closing date of the  transaction  and has paid the monthly  extension
payments to date in accordance  with the contract.  Half of the payments made to
date have been recognized into noninterest  income as extension fee payments and
half have been recorded as an escrow liability.


























                                      -9-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. -  Management's  Discussion  and  Analysis of  Financial  Condition  and
           Results of Operations

The following  discussion and analysis  should be read in  conjunction  with the
financial  statements  and related notes  appearing  herein and in the Company's
Annual  Report on Form 10-K for the year ended  December  31,  2007.  Results of
operations for the period ending March 31, 2008 are not  necessarily  indicative
of the results to be attained for any other period. All share and per share data
in this discussion has been adjusted to reflect the 10% stock dividend  declared
in May 2007.

This Report on Form 10-Q may contain forward-looking statements relating to such
matters as anticipated financial performance, business prospects,  technological
developments,  new products and similar  matters.  All  statements  that are not
historical  facts  are  "forward-looking  statements."  The  Private  Securities
Litigation  Reform  Act of  1995  provides  a safe  harbor  for  forward-looking
statements.  In order to comply with terms of the safe harbor, the Company notes
that a  variety  of  factors  could  cause  the  Company's  actual  results  and
experience  to  differ   materially  from  the  anticipated   results  or  other
expectations   expressed   in   the   Company's   forward-looking    statements.
Forward-looking  statements  include  statements  with  respect to  management's
beliefs, plans, objectives,  goals,  expectations,  anticipations,  assumptions,
estimates,  intentions,  and future  performance,  and involve known and unknown
risks,  uncertainties  and other  factors,  which may be  beyond  the  Company's
control,  and which may cause actual results,  performance or achievements to be
materially different from future results,  performance or achievements expressed
or  implied  by such  forward-looking  statements.  All  statements  other  than
statements  of  historical  fact are  statements  that could be  forward-looking
statements.  These  forward-looking  statements can be identified through use of
words  such as "may,"  "will,"  "anticipate,"  "assume,"  "should,"  "indicate,"
"would," "believe,"  "contemplate,"  "expect," "seek,"  "estimate,"  "continue,"
"plan,"  "point  to,"  "project,"   "predict,"   "could,"  "intend,"   "target,"
"potential,"  and other  similar  words and  expressions  of the  future.  These
forward-looking  statements  may not be  realized  due to a variety of  factors,
including, without limitation:

     o    future economic and business conditions;
     o    lack of  sustained  growth in the  economy of the  Greater  Charleston
          area;
     o    government monetary and fiscal policies;
     o    the  effects of changes in interest  rates on the levels,  composition
          and costs of deposits, loan demand, and the values of loan collateral,
          securities, and interest sensitive assets and liabilities;
     o    the effects of  competition  from a wide  variety of local,  regional,
          national and other providers of financial,  investment,  and insurance
          services;
     o    credit risks;
     o    the  failure  of  assumptions  underlying  the  establishment  of  the
          allowance for loan losses and other estimates;
     o    the risks of opening new offices,  including,  without limitation, the
          related  costs  and  time  of  building  customer   relationships  and
          integrating  operations as part of these  endeavors and the failure to
          achieve  expected  gains,  revenue growth and/or expense  savings from
          such endeavors;
     o    changes in laws and regulations, including tax, banking and securities
          laws and regulations;
     o    changes in accounting policies, rules and practices;
     o    changes in technology or products may be more difficult or costly,  or
          less effective than anticipated;
     o    the  effects of war or other  conflicts,  acts of  terrorism  or other
          catastrophic  events that may affect general  economic  conditions and
          economic confidence; and
     o    other factors and information  described in any of the reports that we
          file with the Securities and Exchange  Commission under the Securities
          Exchange Act of 1934.

All forward-looking statements are expressly qualified in their entirety by this
cautionary  notice.  The Company has no obligation,  and does not undertake,  to
update,  revise or correct any of the forward-looking  statements after the date
of this  report.  The  Company  has  expressed  its  expectations,  beliefs  and
projections  in good faith and believes they have a reasonable  basis.  However,
there is no  assurance  that these  expectations,  beliefs or  projections  will
result or be achieved or accomplished.


                                      -10-
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. -  Management's  Discussion  and  Analysis of  Financial  Condition  and
           Results of Operations - continued

Results of Operations

The Company's net income for the three months ended March 31, 2008 was $744,346,
or $0.16 per basic share, compared to $830,912, or $.14 per basic share, for the
three months ended March 31,  2007.  The basic  earnings per share for March 31,
2008 was based on 4,792,108  shares  outstanding  compared to  5,849,085  shares
outstanding for the quarter ended March 31, 2007.

Net Interest Income

Net interest  income,  the principal  source of the Company's  earnings,  is the
difference  between  the  interest  earned on  interest  earning  assets and the
interest paid for funds  acquired to support those assets.  Net interest  income
was $3,453,194 for the three months ended March 31, 2008, compared to $3,641,437
for the three months ended March 31, 2007.

Changes  that affect net  interest  income  include  changes in the average rate
earned on interest earning assets,  changes in the average rate paid on interest
bearing  liabilities,  and changes in the volumes of interest earning assets and
interest bearing liabilities.

Average  earning assets for the three months ending March 31, 2008 increased 2.7
percent to $444.0 million from the $432.2 million  reported for the three months
ending March 31, 2007. The increase was primarily attributable to an increase of
$13.2  million in average  loans.  The increase in average  loans was due to the
continued  growth of the Charleston  market area, the expansion of the Company's
branches, and the Company's marketing efforts.

Average interest bearing  liabilities for the three months ending March 31, 2008
increased 13.0 percent to $406.4  million from the $359.7  million  reported for
the  three  months  ending  March  31,  2007.  The $46.7  million  increase  was
attributable to increases in average  savings and transaction  accounts of $28.0
million, average time deposits of $18.0 million, and average other borrowings of
$12.1 million,  offset by an $11.4 million decrease in average subordinated debt
outstanding.  The increase in total average  interest  bearing  liabilities  was
necessitated by the need to fund an $11.8 million  increase in average  interest
earning assets,  the funding of the Company's stock  repurchase over the last 12
months,  which  resulted in a $14.9  million  decrease in average  shareholders'
equity,  and the funding of $17.3  million in  purchases  of Company  Owned Life
Insurance during the final nine months of 2007.

The  following  table  compares the average  balances,  yields and rates for the
interest sensitive segments of the Company's balance sheets for the three months
ended March 31, 2008 and 2007.







                                      -11-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. -  Management's  Discussion  and  Analysis of  Financial  Condition  and
           Results of Operations - continued

Net Interest Income - continued

<TABLE>
<CAPTION>
                                                        For the three months ended                 For the three months ended
                                                              March 31, 2008                              March 31, 2007
                                                              --------------                              --------------
                                                  Average        Income/     Yield/          Average        Income/       Yield/
                                                  Balance        Expense     Rate(1)         Balance        Expense       Rate(1)
                                                  -------        -------     -------         -------        -------       -------
Assets
<S>                                           <C>             <C>              <C>        <C>            <C>               <C>
   Federal funds sold ...................     $  1,660,451    $     11,677     2.85%      $ 16,483,600   $    216,687      5.33%
   Investments - taxable ................       44,516,499         593,458     5.41         42,476,641        541,538      5.17
   Investments- non taxable (2) .........       17,459,355         339,110     7.88          6,033,196         95,149      6.40
                                              ------------    ------------                ------------   ------------
     Total investments and
       Federal funds sold ...............       63,636,305         944,245     6.02         64,993,437        853,374      5.33
   Loans (3)(4) .........................      380,397,091       6,834,242     7.25        367,206,411      6,973,916      7.66
                                              ------------    ------------                ------------   ------------
     Total earning assets ...............      444,033,396       7,778,487     7.08        432,199,848      7,827,290      7.31
                                              ------------    ------------                ------------   ------------
     Other assets .......................       62,803,255                                  40,249,336
                                              ------------                                ------------
     Total assets .......................     $506,836,650                                $472,449,184
                                              ============                                ============
Liabilities
   Savings and
     transaction accounts ...............     $ 85,093,163         504,726     2.41%      $ 57,044,553        362,444      2.58%
   Time deposits ........................      219,100,830       2,613,501     4.84        201,113,926      2,473,534      4.99
   Other borrowings .....................       91,931,060         935,692     4.13         79,863,801        900,436      4.57
   Subordinated debt ....................       10,310,000         156,973     6.17         21,655,000        415,186      7.78
                                              ------------    ------------                ------------   ------------
     Total interest bearing
       liabilities ......................      406,435,053       4,210,892     4.20        359,677,280      4,151,600      4.68
                                                              ------------                               ------------
   Non-interest bearing
     liabilities ........................       39,278,543                                  36,734,736
                                              ------------                                ------------
     Total liabilities ..................      445,713,596       4,210,892     3.83        396,412,016      4,151,600      4.25
                                              ------------    ------------                ------------   ------------
   Shareholders' equity .................       61,123,054                                  76,037,168
                                              ------------                                ------------
     Total liabilities and
       shareholders' equity .............     $506,836,650                                $472,449,184
                                              ============                                ============
     Net interest
       income/margin (5) ................                     $  3,567,595     3.13%                     $  3,675,690      3.42%
                                                              ============                               ============
     Net interest spread (6) ............                                      2.88%                                       2.63%
</TABLE>
(1)  Annualized
(2)  Tax equivalent yield for nontaxable investments assuming a 36% tax rate.
(3)  Does not include non-accruing loans.
(4)  Includes loan fees of $254,658 in 2008 and $245,138 in 2007.
(5)  Net interest income divided by total earning assets.
(6)  Total interest earning assets yield less total interest bearing liabilities
     rate.

As reflected  above, for the three months ended March 31, 2008 the average yield
on earning assets was 7.08 percent,  while the average cost of interest  bearing
liabilities  was 4.20  percent.  For the three  months  ended March 31, 2007 the
average  yield on  earning  assets  was 7.31  percent  and the  average  cost of
interest-bearing  liabilities  was 4.68  percent.  The  decrease in the yield on
earning  assets is  attributable  to decreases in market rates of interest.  The
decrease  in the  cost  of  interest  bearing  liabilities  is due to the  early
retirement  of $11.3 million in higher rate  subordinated  debt and lower market
rates on savings and transaction accounts,  time deposits, and other borrowings.
The net interest  margin for the three  months  ended March 31,  2008,  was 3.13
percent  compared to 3.42 percent for the three months ended March 31, 2007. The
decline in the net interest  margin is primarily  attributable  to a decrease of
$14.9 million in average shareholders' equity due to the Company's ongoing stock
repurchase efforts. The Company replaced these interest free funds with interest
bearing  liabilities,  thereby  shrinking its net interest  margin.  The cost of
total  liabilities  was 3.83  percent for the three  months ended March 31, 2008
compared  to 4.25  percent  for the  three  months  ended  March 31,  2007.  The
following table presents  changes in the Company's net interest income which are


                                      -12-

<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. -  Management's  Discussion  and  Analysis of  Financial  Condition  and
           Results of Operations - continued

Net Interest Income - continued

primarily a result of changes in the  volumes and rates of its  interest-earning
assets and interest-bearing liabilities.

<TABLE>
<CAPTION>
                                                                                   Analysis of Changes in Net Interest Income
                                                                                    For the three months ended March 31, 2008
                                                                                  Versus three months ended March 31, 2007(1)
                                                                                  -------------------------------------------
                                                                                Volume                 Rate               Net Change
                                                                                ------                 ----               ----------
Interest income:
<S>                                                                           <C>                   <C>                   <C>
   Federal funds sold ............................................            $(194,859)            $ (10,151)            $(205,010)
   Investments - taxable .........................................               26,006                25,914                51,920
   Investments - non taxable(2) ..................................              180,201                63,760               243,961
                                                                              ---------             ---------             ---------
     Total investments and federal funds sold ....................               11,348                79,523                90,871
     Net loans (3) ...............................................              249,141              (388,815)             (139,674)
                                                                              ---------             ---------             ---------
     Total interest income .......................................              260,489              (309,292)              (48,803)
                                                                              ---------             ---------             ---------
Interest expense:
   Savings and transaction accounts ..............................              178,212               (35,930)              142,282
   Time deposits .................................................              221,224               (81,257)              139,967
   Other borrowings ..............................................              136,054              (100,798)               35,256
   Subordinated debt .............................................             (217,515)              (40,698)             (258,213)
                                                                              ---------             ---------             ---------
     Total interest expense ......................................              317,975              (258,683)               59,292
                                                                              ---------             ---------             ---------
     Net interest income .........................................            $ (57,486)            $ (50,609)            $(108,095)
                                                                              =========             =========             =========
</TABLE>
(1)  Changes in rate/volume have been allocated on a consistent basis to rate.
(2)  Tax equivalent yield for nontaxable investments assuming a 36% tax rate.
(3)  Includes  loan fees of $ 254,658 and  $245,138  for the three  months ended
     March 31, 2008 and 2007.

Noninterest Income and Expenses

Noninterest  income for the three  months  ended  March 31,  2008 was  $794,545,
compared to $602,485 for the three months ended March 31, 2007.  The increase is
primarily  attributable  to an  increase  of  $181,000  in  Company  Owned  Life
Insurance  earnings.  The Company purchased $17.3 million of additional  Company
Owned  Life  Insurance  during the final  nine  months of 2007,  leading to this
increase.

Noninterest  expenses for the three months ended March 31, 2008 were $2,922,837,
compared to  $2,968,888  for the three months  ended March 31, 2007.  The slight
decrease is due to decreases  in  advertising  and  professional  fees  totaling
$130,000 and travel and  entertainment  totaling  $20,000,  partially  offset by
increases  in  occupancy  and  equipment  expenses  totaling  $30,000  and other
expenses totaling $88,000. Of the increase in other expenses, $47,000 was due to
increased  insurance  expense,  primarily due to the increase in FDIC  insurance
premiums that became  effective  during the second quarter of 2007. The decrease
in  advertising  and  professional  fees was due to a reduction  in  television,
outdoor,  and print ads, as well as a decrease in consulting  fees. The increase
in  occupancy  and  equipment  expenses  was due to the opening of the Park West
branch in May 2007.


                                      -13-
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. -  Management's  Discussion  and  Analysis of  Financial  Condition  and
           Results of Operations - continued

Liquidity

Liquidity  is the  ability  to  meet  current  and  future  obligations  through
liquidation  or maturity of existing  assets or the  acquisition  of  additional
liabilities.  Adequate  liquidity  is  necessary  to meet  the  requirements  of
customers for loans and deposit  withdrawals  in the most timely and  economical
manner. Some liquidity is ensured by maintaining assets which may be immediately
converted  into cash at minimal cost  (amounts due from banks and federal  funds
sold).  However,  the most  manageable  sources of  liquidity  are  composed  of
liabilities, with the primary focus of liquidity management being on the ability
to obtain deposits within our Bank's service area. Core deposits (total deposits
less certificates for $100,000 or more, wholesale and brokered deposits) provide
a relatively stable funding base, and were equal to $175.2 million,  or 49.3% of
total  deposits as of March 31, 2008.  Asset  liquidity is provided from several
sources,  including amounts due from banks and federal funds sold and funds from
maturing  loans.  Our Bank is a member of the Federal  Home Loan Bank of Atlanta
("FHLBA")  and,  as such has the  ability to borrow  against a pledge of its 1-4
family  residential  mortgage  loans.  We also have federal funds  accommodation
lines totaling $17 million with Nexity Bank,  $15.4 million with Silverton Bank,
and $10 million with First Tennessee Bank.

Loans
Nonfarm,  nonresidential  real estate loans totaling $92.6 million made up 24.0%
of total  loans at March  31,  2008.  Construction  and land  development  loans
totaled $77.4  million,  or 20.1% of the loan  portfolio.  All other real estate
loans (primarily 1-4 family  residential  loans)  comprised  $171.2 million,  or
44.4% of the portfolio.  Commercial and industrial  loans totaled $40.3 million,
or 10.5% of total loans. Finally, installment, consumer, and other loans totaled
$3.9  million,  or 1.0% of total  loans.  Total loans  increased by $6.9 million
during the first  quarter,  due to increases of $6.0 million and $3.0 million in
commercial and industrial and 1-4 family residential loans, respectively, offset
by a $3.3 million decline in nonfarm, nonresidential real estate loans.

At March 31, 2008,  the Company had no loans 90 days past due and still accruing
interest,  $347,000 in other real estate owned, and $5.3 million of non-accruing
loans.  The majority of non-accruing  loans are secured by real estate,  and the
overall  value  of  real  estate  in the  Company's  market  area  has  remained
relatively  stable.  There were no other loans that management had determined to
be potential  problem loans at March 31, 2008. At December 31, 2007, the Company
had $3.5 million of loans 90 days past due and still accruing interest, $194,000
in other real estate owned,  and $893,000 of  non-accruing  loans.  At March 31,
2007,  the Company had $1.1 million in loans 90 days past due and still accruing
interest,  no other real estate owned,  and $420,000 of non-accruing  loans. The
allowance  for  loan  losses  was  1.10% of total  loans as of March  31,  2008,
compared to 1.14% as of December  31, 2007 and 1.20% as of March 31,  2007.  For
the quarter ended March 31, 2008 the Company  recorded a loan loss  provision of
$381,000 compared to no loan loss provision during 2007. The current year's loan
loss  provision  is the result of an  increase  of $6.9  million in total  loans
during the first quarter,  as well as an increase in total  nonperforming  loans
and loan chargeoffs totaling $439,000.  During 2007, the Company's average loans
outstanding  decreased  by $12.0  million  compared  with 2006 due  primarily to
payoffs of brokered and wholesale  loans.  Due to this  contraction  in its loan
portfolio the Company did not make a provision for loan losses during 2007.

In  management's  opinion,  the  allowance for loan losses is adequate to absorb
estimated  losses  inherent in our Company's  loan  portfolio.  In reviewing the
adequacy of the allowance for loan losses at each quarter end,  management takes
into  consideration the historical loan losses we experienced,  current economic
conditions  affecting the ability of our borrowers to repay, the volume of loans
and the trends in delinquent,  nonaccruing, and potential problem loans, and the
quality of collateral  securing  nonperforming and problem loans. After charging
off all  known  losses,  management  considers  the  allowance  for loan  losses
adequate to cover its  estimate of inherent  losses in the loan  portfolio as of
March 31, 2008.

The  following  table  provides a year to date  analysis of activity  within the
allowance for loan losses:

Balance at December 31, 2007 ................................       $ 4,297,337
Current Year Loan Loss Provision ............................           381,047
Charge- offs:
     Domestic:
       Commercial, financial, and agricultural ..............          (438,737)
       Installment loans to individuals .....................                 -
     Foreign: ...............................................                 -
Recoveries:
       Installment loans to individuals .....................                 -
                                                                    -----------
Balance at March 31, 2008 ...................................       $ 4,239,647
                                                                    ===========

                                      -14-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. -  Management's  Discussion  and  Analysis of  Financial  Condition  and
           Results of Operations - continued

Deposits

Deposits increased $12.3 million during the first three months of 2008 to $355.1
million  at March 31,  2008.  The  increase  was  primarily  attributable  to an
increase of $16.6 million in brokered and  wholesale  time  deposits,  partially
offset by a $4.7 million decrease in retail time deposit  accounts.  The current
market rate  environment  and  aggressive  rate  offerings  by  competitors  are
attributed for the decline in retail time deposits.

Other Borrowings

Other   borrowings   include  FHLBA   advances   (below).   FHLBA  Advances  are
collateralized  by pledged FHLBA stock and certain  residential  mortgage loans.
FHLBA advances are summarized as follows:

              Maturity                     Rate                 Balance
           -----------------          --------------       ---------------
           May 2008                        4.67%           $     5,000,000
           June 2008                       2.40%                 5,500,000
           July 2008                       3.00%                 7,500,000
           November 2008                   2.50%                 2,000,000
           September 2010                  5.55%                 7,000,000
           February 2011                   3.09%                 4,500,000
           March 2011                      2.96%                 7,500,000
           September 2013                  2.46%                10,000,000
           June 2014                       3.92%                 2,000,000
           October 2016                    4.25%                 5,000,000
           November 2016                   4.08%                 5,000,000
           January 2017                    4.35%                 5,000,000
           January 2017                    4.40%                 5,000,000
           January 2017                    4.46%                 5,000,000
           January 2017                    4.60%                 5,000,000
           March 2018                      2.33%                 5,000,000
                                                           ---------------

           Balance                                         $    86,000,000
                                                           ===============

Junior Subordinated Debentures

On May 3,  2002,  December  16,  2002,  and August 5,  2005,  in three  separate
transactions,  Southcoast  Capital Trust I, II, and III (the "Capital  Trusts"),
non-consolidated  subsidiaries of the Company, issued and sold a total of 21,655
floating rate  securities,  with a $1,000  liquidation  amount per security (the
"Capital  Securities").  Institutional  buyers  bought  21,000  of  the  Capital
Securities  denominated as preferred securities and the Company bought the other
655 Capital Securities which are denominated as common securities.  The proceeds
of those  sales,  $21.7  million,  were used by the Capital  Trusts to buy $21.7
million of junior subordinated debentures from the Company which are reported on
its  consolidated   balance  sheets.   The  Capital  Securities  mature  or  are
mandatorily  redeemable  upon maturity on June 30, 2032,  December 16, 2032, and
September  30,  2035,  respectively,  or upon  earlier  optional  redemption  as
provided  in the  indenture.  The  Company  has the right to redeem the  Capital
Securities  in whole or in part,  on or after June 30, 2007,  December 30, 2007,
and September 30, 2010. The Company may also redeem the capital securities prior
to such dates upon  occurrence  of  specified  conditions  and the  payment of a
redemption  premium.  During 2007 the Company  exercised its right to redeem the
Capital  Securities issued by Southcoast  Capital Trust I and Southcoast Capital
Trust II. As a result the Company retired total debt related to these securities
of $11,345,000.  See Note 11 to the  consolidated  financial  statements and the
information set forth in Exhibit 13 under the caption  "Management's  Discussion
and  Analysis  of  Financial   Condition  and  Results  of  Operations-   Junior
Subordinated  Debentures"  filed with our Form 10-K for the year ended  December
31,  2007,  for more  information  about  the terms of the  junior  subordinated
debentures.

The securities issued by Southcoast Capital Trust III were effectively converted
from a floating  rate to a fixed rate  through the use of an interest  rate swap
agreement.  The  agreement  provides for the Company to make payments at a fixed
rate of 6.32% in exchange for receiving payments at a variable rate (three month
LIBOR  plus  150  basis  points).  See  Note  12 to the  consolidated  financial
statements  filed with our Form 10-K for the year ended  December 31, 2007,  for
more information about the terms of the rate swap agreement.

                                      -15-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. -  Management's  Discussion  and  Analysis of  Financial  Condition  and
           Results of Operations - continued

Capital Resources

The capital  base for the Company  decreased by $3.2 million for the first three
months of 2008,  due to our  repurchase of 295,152 shares of common stock for an
aggregate  purchase  price of $4.1  million,  partially  offset by net income of
$744,346,  other  comprehensive  income of  $77,605,  and  proceeds  from  stock
issuances of $39,173  through our Employee  Stock  Purchase  Plan. The Company's
tier one capital to average  assets ratio was 13.75 percent as of March 31, 2008
compared to 15.16 percent as of December 31, 2007.

The  Federal  Reserve  Board and other bank  regulatory  agencies  require  bank
holding  companies and financial  institutions  to maintain  capital at adequate
levels based on a percentage of assets and off-balance sheet exposures, adjusted
for risk weights ranging from 0% to 100%. Under the risk-based standard, capital
is  classified  into  two  tiers.   Our  Tier  1  capital   consists  of  common
shareholders'  equity minus certain  intangible assets plus junior  subordinated
debt  subject  to  certain  limitations.  Our  Tier 2  capital  consists  of the
allowance  for  loan  losses  subject  to  certain  limitations  and our  junior
subordinated debt in excess of 25% of our Tier 1 capital for the Company. A bank
holding company's qualifying capital base for purposes of its risk-based capital
ratio  consists  of the sum of its Tier 1 and  Tier 2  capital.  The  regulatory
minimum  requirements are 4% for Tier 1 and 8% for total risk-based capital. The
Company and our Bank are also  required to maintain  capital at a minimum  level
based on quarterly  average assets,  which is known as the leverage ratio.  Only
the strongest bank holding  companies and banks are allowed to maintain  capital
at the minimum requirement.  All others are subject to maintaining ratios 100 to
200 basis points above the  minimum.  As of March 31, 2008,  the Company and the
Bank exceeded our capital requirements levels as shown in the following table.

<TABLE>
<CAPTION>
                                                                                           Capital Ratios
                                                                                           --------------
                                                                                          Well Capitalized    Adequately Capitalized
(Dollars in thousands)                                                 Actual               Requirement             Requirement
                                                                       ------               -----------             -----------
                                                                 Amount      Ratio        Amount      Ratio      Amount       Ratio
                                                                 ------      -----        ------      -----      ------       -----
The Bank
<S>                                                             <C>          <C>         <C>         <C>         <C>         <C>
  Total capital (to risk-weighted assets) ................      $54,821      14.26%      $38,452     10.00%      $30,762     8.00%
  Tier 1 capital (to risk-weighted assets) ...............       50,770      13.20%       23,071      6.00%       15,381     4.00%
  Tier 1 capital (to average assets) .....................       50,770      10.42%       24,354      5.00%       19,483     4.00%
The Company
  Total capital (to risk-weighted assets) ................      $69,704      18.43%          N/A       N/A       $32,098     8.00%
  Tier 1 capital (to risk-weighted assets) ...............       73,944      17.37%          N/A       N/A        16,049     4.00%
  Tier 1 capital (to average assets) .....................       73,944      13.75%          N/A       N/A        20,272     4.00%
</TABLE>

Off Balance Sheet Risk

We make  contractual  commitments to extend credit and issue standby  letters of
credit in the ordinary course of our business activities.  These commitments are
legally binding agreements to lend money to customers at predetermined  interest
rates for a  specified  period of time.  In addition  to  commitments  to extend
credit,  we also issue standby letters of credit which are assurances to a third
party  that  they  will  not  suffer  a loss  if our  customer  fails  to meet a
contractual  obligation  to the third party.  At March 31,  2008,  we had issued
commitments  to extend credit of $33.1 million and standby  letters of credit of
$1.4  million  through  various  types  of  commercial   lending   arrangements.
Approximately  $29.6 million of these  commitments to extend credit had variable
rates.

The  following  table sets forth the  length of time until  maturity  for unused
commitments to extend credit and standby letters of credit at March 31, 2008.

<TABLE>
<CAPTION>
                                                                  After One     After Three
                                                                   Through        Through                    Greater
                                                    Within One       Three         Twelve     Within One       Than
                                                       Month        Months         Months        Year        One Year       Total
                                                       -----        ------         ------        ----        --------       -----
<S>                                                <C>           <C>           <C>           <C>           <C>           <C>
Unused commitments to extend credit ............   $ 1,887,847   $ 1,953,883   $14,758,596   $18,600,326   $14,459,433   $33,059,759
Standby letters of credit ......................       104,601       107,970     1,083,868     1,296,439        53,831     1,350,270
                                                   -----------   -----------   -----------   -----------   -----------   -----------

    Totals .....................................   $ 1,992,448   $ 2,061,853   $15,842,464   $19,896,765   $14,513,264   $34,410,029
                                                   ===========   ===========   ===========   ===========   ===========   ===========
</TABLE>


                                      -16-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. -  Management's  Discussion  and  Analysis of  Financial  Condition  and
           Results of Operations - continued

Off Balance Sheet Risk - continued

Based on historical  experience,  many of the  commitments and letters of credit
will expire unfunded.  Accordingly,  the amounts shown in the table above do not
necessarily reflect the Company's need for funds in the periods shown.  Further,
through our various  sources of  liquidity,  we believe  that we will be able to
fund these obligations as they arise.

The Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary upon extension of credit,
is based on the company's credit  evaluation of the borrower.  Collateral varies
but may include accounts receivable,  inventory,  property, plant and equipment,
commercial and residential real estate.

Item 3. - Quantitative and Qualitative Disclosures About Market Risk.

Information  about the  Company's  exposure to market risk was  disclosed in its
Annual Report on Form 10-K for the year ended December 31, 2007, which was filed
with the Securities and Exchange Commission on March 7, 2008. There have been no
material  quantitative or qualitative  changes in market risk exposure since the
date of that filing.

Item 4. - Controls and Procedures.

Based  on  the  evaluation  required  by 17  C.F.R.  Sections  240.13a-15(b)  or
240.15d-15(b) of the Company's disclosure controls and procedures (as defined in
17 C.F.R. Section 240.13a-15(e) and 240.15d-15(e), the Company's chief executive
officer and chief financial officer concluded that such controls and procedures,
as of the end of the period covered by this quarterly report, were effective.

There  has been no change  in the  Company's  internal  control  over  financial
reporting during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially  affect,  the Company's internal control over
financial reporting.

PART II - OTHER INFORMATION

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

        (c) Issuer Purchases of Equity Securities

<TABLE>
<CAPTION>
                                        (a) Total Number         (b) Average       (c) Total Number of         Maximum Number
                                           of Shares              Price Paid       Shares Purchased as    of Shares that May yet be
                Period                     Purchased              Per Share    Part of Publicly Announced   Purchased Under the
                                                                                 Plans or Programs (1)        Plans or Programs

<C>                                         <C>                   <C>                     <C>                      <C>
1/1/08-1/31/08 .....................        175,418               $   14.03               175,418                  477,773
2/1/08-2/28/08 .....................        117,934                   13.66               117,934                  359,839
3/1/08-3/31/08 .....................          1,800                   14.06                 1,800                  358,039
</TABLE>

(1)  On July 24, 2007, the Board of Directors authorized the repurchase of up to
     547,556 shares of the Company's  outstanding  stock. The Company  announced
     the repurchase plan on July 25, 2007. The Company  completed the repurchase
     authorized  under this  announcement  during  January  2008. On January 14,
     2008,  the  Board  of  Directors  authorized  the  repurchase  of  up to an
     additional  484,527  shares,  or 10%, of the Company's  common  stock.  The
     Company  announced the repurchase plan on January 18, 2008. Stock dividends
     occurring   subsequent   to  the   authorizations   are   included  in  the
     authorizations.  Purchases will be made in the open market and block trades
     will be permitted,  all in accordance with Rule 10b-18 under the Securities
     Exchange Act of 1934. The plan does not have a termination date.


Item 6.  Exhibits

     31-1  Rule 13a-14(a) Certifications of CEO


                                      -17-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

     31-2  Rule 13a-14(a) Certifications of CFO
     32Section 1350 Certification

                                   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.





Date:    May 8, 2008                        By: s/L. Wayne Pearson
                                               ----------------------------
                                                L. Wayne Pearson
                                                Chief Executive Officer



Date:    May 8, 2008                        By: s/William C. Heslop
                                               ----------------------------
                                                William C. Heslop
                                                Senior Vice President and
                                                 Chief Financial Officer



                                      -18-
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

Exhibit Index

31.1      Certification  of Chief Executive  Officer  pursuant to Section 302 of
          the Sarbanes-Oxley Act of 2002.

31.2      Certification  of Chief Financial  Officer  pursuant to Section 302 of
          the Sarbanes-Oxley Act of 2002.

32        Certification of Chief Executive  Officer and Chief Financial  Officer
          pursuant  to  Section  906 of the  Sarbanes-Oxley  Act of  2002.  This
          exhibit is not  "filed" for  purposes of Section 18 of the  Securities
          Exchange  Act  of  1934  but  is  instead  furnished  as  provided  by
          applicable rules of the Securities and Exchange Commission.



                                      -19-