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 September 30, 2007

                                       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                          28-2384011
       (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, or a  non-accelerated  filer.  See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]   Accelerated filer [X]    Non-accelerated filer [ ]

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.

     5,020,505 shares of common stock, no par value, as of October 31, 2007





<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                                      INDEX


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

Item 1.  Financial Statements (Unaudited)

<S>                                                                                                                    <C>
         Condensed Consolidated Balance Sheets - September 30, 2007 and December 31, 2006...............................2

         Condensed  Consolidated  Statements  of  Income  -  Nine  months  ended
           September 30, 2007 and 2006 and three months ended September 30, 2007 and 2006...............................3

         Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
           Nine months ended September 30, 2007 and 2006................................................................4

         Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2007 and 2006................5

Notes to Condensed Consolidated Financial Statements..................................................................6-8

Forward Looking Statements..............................................................................................9

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations......................10-18

Item 3.  Quantitative and Qualitative Disclosures About Market Risk....................................................19

Item 4. Controls and Procedures........................................................................................19

PART II - OTHER INFORMATION

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds...................................................20

Item 6.  Exhibits .....................................................................................................20

Signatures ............................................................................................................21
</TABLE>


<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                      Condensed Consolidated Balance Sheets


PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
<TABLE>
<CAPTION>
                                                                                                 September 30,         December 31,
                                                                                                     2007                  2006
                                                                                                     ----                  ----
                                                                                                  (Unaudited)
Assets
   Cash and cash equivalents:
<S>                                                                                              <C>                  <C>
     Cash and due from banks .............................................................       $   7,034,992        $   7,008,202
     Federal funds sold ..................................................................                   -           31,204,000
                                                                                                 -------------        -------------
       Total cash and cash equivalents ...................................................           7,034,992           38,212,202
   Investment securities
     Available for sale ..................................................................          50,701,853           42,577,683
     Federal Home Loan Bank Stock, at cost ...............................................           4,366,700            3,882,800
                                                                                                 -------------        -------------
       Total investment securities .......................................................          55,068,553           46,460,483
   Loans held for sale ...................................................................             242,586              139,516
   Loans, net of allowance of $4,315,078 and $4,364,127 ..................................         365,703,093          363,246,406
   Property and equipment, net ...........................................................          25,779,844           25,125,834
   Bank owned life insurance .............................................................          17,703,954            2,631,881
   Other assets ..........................................................................           6,272,345            6,039,218
                                                                                                 -------------        -------------
       Total assets ......................................................................       $ 477,805,367        $ 481,855,540
                                                                                                 =============        =============

Liabilities
   Deposits
     Noninterest-bearing .................................................................       $  35,004,698        $  34,693,747
     Interest bearing ....................................................................         268,020,367          276,198,958
                                                                                                 -------------        -------------
       Total deposits ....................................................................         303,025,065          310,892,705
   Federal funds purchased ...............................................................           6,565,900                    -
   Securities sold under agreements to repurchase ........................................           7,744,237            1,840,719
   Other borrowings ......................................................................          78,500,000           66,000,000
   Junior subordinated debentures ........................................................          17,530,000           21,655,000
   Other liabilities .....................................................................           2,431,364            2,664,504
                                                                                                 -------------        -------------
       Total liabilities .................................................................         415,796,566          403,052,928
                                                                                                 -------------        -------------
Shareholders' Equity
   Common stock (no par value;  20,000,000 shares  authorized;  5,020,505 shares
     outstanding at September 30, 2007 and 5,470,316 at December 31, 2006) ...............          60,309,135           75,315,774
   Retained earnings .....................................................................           1,874,730            3,503,162
   Accumulated other comprehensive loss ..................................................            (175,064)             (16,324)
                                                                                                 -------------        -------------
       Total shareholders' equity ........................................................          62,008,801           78,802,612
                                                                                                 -------------        -------------
       Total liabilities and shareholders' equity ........................................       $ 477,805,367        $ 481,855,540
                                                                                                 =============        =============
</TABLE>


            See notes to condensed consolidated financial statements.


                                      -2-

<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                   Condensed Consolidated Statements of Income
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                     For the Nine months ended          For the Three months ended
                                                                            September 30,                       September 30,
                                                                            -------------                       -------------
                                                                       2007              2006               2007             2006
                                                                       ----              ----               ----             ----
Interest income
<S>                                                                <C>               <C>               <C>               <C>
   Loans, including fees ...................................       $21,470,899       $20,952,717       $ 7,248,499       $ 7,201,123
   Investment securities ...................................         1,969,230         2,113,996           762,912           918,674
   Federal funds sold ......................................           358,259           322,324            61,358            59,460
                                                                   -----------       -----------       -----------       -----------
       Total interest income ...............................        23,798,388        23,389,037         8,072,769         8,179,257
                                                                   -----------       -----------       -----------       -----------
Interest expense
   Deposits and borrowings .................................        12,960,254        11,106,217         4,599,063         4,141,990
                                                                   -----------       -----------       -----------       -----------
Net interest income ........................................        10,838,134        12,282,820         3,473,706         4,037,267
   Provision for loan losses ...............................                 -           722,465                 -            97,582
                                                                   -----------       -----------       -----------       -----------
Net interest income after provision
   for loan losses .........................................        10,838,134        11,560,355         3,473,706         3,939,685
                                                                   -----------       -----------       -----------       -----------
Noninterest income
   Service fees on deposit accounts ........................           780,816           721,323           291,432           229,493
   Fees on loans sold ......................................           263,243           257,633            60,493           102,417
   Gain on sale of available for sale securities ...........           255,954            88,128           164,003            49,033
   Gain on sale of premises and equipment ..................            25,016           377,714                 -                 -
   Presales fee on property under sales contract ...........                 -         1,390,000                 -                 -
   Bank owned life insurance earnings ......................           355,085            72,260           196,553            22,248
   Other ...................................................           240,710           221,766            44,223           149,211
                                                                   -----------       -----------       -----------       -----------
       Total noninterest income ............................         1,920,824         3,128,824           756,704           552,402
                                                                   -----------       -----------       -----------       -----------
Noninterest expenses
   Salaries and employment benefits ........................         4,935,028         4,941,890         1,511,610         1,482,859
   Occupancy ...............................................           834,648           641,927           297,021           250,884
   Furniture and equipment .................................           869,362           774,543           302,112           272,262
   Advertising and public relations ........................           121,432           257,712            28,508            92,408
   Professional fees .......................................           414,051           350,134            92,354           169,433
   Travel and entertainment ................................           219,832           277,448            76,275           155,464
   Telephone, postage and supplies .........................           331,846           324,984           108,473           125,736
   Other operating expenses ................................         1,022,457           891,066           368,724           273,478
                                                                   -----------       -----------       -----------       -----------
       Total noninterest expenses ..........................         8,748,656         8,459,704         2,785,077         2,822,524
                                                                   -----------       -----------       -----------       -----------
Income before income taxes .................................         4,010,302         6,229,475         1,445,333         1,669,563
   Income tax ..............................................         1,304,660         2,356,784           434,635           612,527
                                                                   -----------       -----------       -----------       -----------
Net income .................................................       $ 2,705,642       $ 3,872,691       $ 1,010,698       $ 1,057,036
                                                                   ===========       ===========       ===========       ===========
Basic net income per common share ..........................       $      0.49       $      0.65       $      0.19       $      0.18
Diluted net income per common share ........................       $      0.49       $      0.64       $      0.19       $      0.18
Weighted average shares outstanding
   Basic ...................................................         5,554,195         6,003,734         5,217,249         6,015,596
   Diluted .................................................         5,559,507         6,009,280         5,221,717         6,020,576
</TABLE>

*Share and per share  amounts  have been  adjusted  to give  effect to 10% stock
dividends issued in 2007 and 2006.

            See notes to condensed consolidated financial statements.

                                      -3-

<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
    Condensed Consolidated Statements of Changes in Shareholders' Equity and
  Comprehensive Income For the nine months ending September 30, 2007 and 2006
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                    Accumulated
                                                                                                       other
                                                              Common Stock                          comprehensive
                                                              ------------             Retained         income
                                                         Shares          Amount        earnings         (loss)              Total
                                                         ------          ------        --------         ------              -----
<S>                                                    <C>          <C>             <C>                <C>             <C>
Balance, December 31, 2005 ......................      4,954,210    $ 70,267,702    $  3,300,753       $    (253,910)  $ 73,314,545

   Net income for the period ....................                                      3,872,691                          3,872,691

   Other comprehensive income
     net of tax,
   Unrealized holding gains
     on securities available for sale ...........                                                           284,844         284,844
                                                                                                                       ------------

   Comprehensive income .........................                                                                         4,157,535

   Stock dividend ...............................        495,843       4,637,165      (4,637,165)                                 -

   Employee stock purchase plan .................          5,845         108,317                                            108,317

   Issuance of common stock .....................         12,826         273,835                                            273,835
                                                       ---------    ------------    ------------       -------------   ------------

Balance, September 30, 2006 .....................      5,468,724    $ 75,287,019    $  2,536,279       $      30,934   $ 77,854,232
                                                       =========    ============    ============       =============   ============

Balance, December 31, 2006 ......................      5,470,316    $ 75,315,774    $  3,503,162       $     (16,324)  $ 78,802,612

   Net income for the period ....................                                      2,705,642                          2,705,642

   Other comprehensive loss,
     net of tax
   Unrealized holding losses
     on securities available for sale ...........                                                          (158,740)       (158,740)
                                                                                                                       ------------

   Comprehensive income .........................                                                                         2,546,902

   Stock dividend ...............................        502,609       4,334,074      (4,334,074)                                 -

   Shares repurchased and retired ...............       (957,497)    (19,443,547)                                       (19,443,547)

   Employee stock purchase plan .................          5,077         102,834                                            102,834
                                                       ---------    ------------    ------------       -------------   ------------

Balance, September 30, 2007 .....................      5,020,505    $ 60,309,135    $  1,874,730       $    (175,064)  $ 62,008,801
                                                       =========    ============    ============       =============   ============
</TABLE>





            See notes to condensed consolidated financial statements.

                                      -4-

<PAGE>


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


<TABLE>
<CAPTION>
                                                                                                       For the nine months ended
                                                                                                             September 30,
                                                                                                             -------------
                                                                                                       2007                  2006
                                                                                                       ----                  ----
Operating activities
<S>                                                                                               <C>                  <C>
   Net income ............................................................................        $  2,705,642         $  3,872,691
   Adjustments to reconcile net income to net
   cash provided (used) by operating activities
     Decrease in deferred income taxes ...................................................             371,008              835,629
     Provision for loan losses ...........................................................                   -              722,465
     Depreciation and amortization .......................................................           1,014,086              640,375
     Discount accretion and premium amortization .........................................              (9,654)            (100,988)
     Gain on sale of securities ..........................................................            (255,954)             (88,128)
     Gain on sale of property and equipment ..............................................             (25,016)            (377,714)
     Originations of loans held for sale .................................................         (40,816,193)         (77,159,768)
     Proceeds from sales of loans held for sale ..........................................          40,713,123           85,853,260
     Increase in value of Bank owned life insurance ......................................            (355,085)             (10,445)
     Increase in other assets ............................................................            (592,225)          (1,104,475)
     Increase(decrease) in other liabilities .............................................            (233,140)             267,692
                                                                                                  ------------         ------------

         Net cash provided by operating activities .......................................           2,516,592           13,350,594
                                                                                                  ------------         ------------

Investing activities
   (Purchases) sales of Federal Home Loan Bank stock .....................................            (483,900)             197,300
   Purchases of investment securities available-for-sale .................................         (26,551,342)         (53,203,846)
   Sales, calls, and maturities of investment securities available-for-sale ..............          18,522,130           25,586,794
   Purchases of Bank Owned Life Insurance ................................................         (14,716,988)                   -
   Proceeds from sales of premises and equipment .........................................              34,000            1,001,298
   Purchases of premises and equipment ...................................................          (1,677,080)          (4,617,582)
   Net (increase) decrease in loans ......................................................          (2,456,687)             289,435
                                                                                                  ------------         ------------

         Net cash used for investing activities ..........................................         (27,329,867)         (30,746,601)
                                                                                                  ------------         ------------

Financing activities
   Increase(decrease) in borrowings ......................................................          24,969,418           (7,424,908)
   Decrease in junior subordinated debentures ............................................          (4,125,000)                   -
   Proceeds from issuances of stock ......................................................             102,834              382,152
   Funds used to repurchase stock ........................................................         (19,443,547)                   -
   Net increase(decrease) in deposits ....................................................          (7,867,640)           9,945,677
                                                                                                  ------------         ------------

         Net cash provided(used) by financing activities .................................          (6,363,935)           2,902,921
                                                                                                  ------------         ------------

         Increase(decrease) in cash and cash equivalents .................................         (31,177,210)         (14,493,086)

Cash and cash equivalents, beginning of period ...........................................          38,212,202           31,341,737
                                                                                                  ------------         ------------

Cash and cash equivalents, end of period .................................................        $  7,034,992         $ 16,848,651
                                                                                                  ============         ============

Cash paid during the year for:
   Income taxes ..........................................................................        $  1,314,715         $  2,919,325
   Interest ..............................................................................        $ 12,721,667         $ 10,308,453
</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 management's opinion,
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 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.

In May 2007 and April 2006, the Company  declared ten percent stock dividends on
the Company's  common stock. The weighted average number of shares and all other
share data has been  restated for all periods  presented to reflect  these stock
dividends.

Note 4 - 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 February  2006, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  ("SFAS")  No. 155,  "Accounting  for Certain
Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140."
This Statement amends SFAS No. 133,  "Accounting for Derivative  Instruments and
Hedging  Activities," and SFAS No. 140,  "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." This Statement resolves
issues addressed in SFAS No. 133  Implementation  Issue No. D1,  "Application of
Statement 133 to Beneficial Interests in Securitized  Financial Assets." FAS 155
permits  fair value  re-measurement  for any hybrid  financial  instrument  that
contains  an embedded  derivative  that  otherwise  would  require  bifurcation,
clarifies which interest  only-strips and principal-only  strips are not subject
to the  requirements  of Statement  133,  establishes a requirement  to evaluate
interests  in  securitized  financial  assets  to  identify  interests  that are
freestanding  derivatives or that are hybrid financial  instruments that contain
an embedded derivative requiring  bifurcation,  clarifies that concentrations of
credit  risk in the form of  subordination  are not  embedded  derivatives,  and
amends  Statement  140 to eliminate  the  prohibition  on a  qualifying  special
purpose entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. SFAS No.
155 is effective for all financial  instruments acquired or issued after January
1, 2007.  The Company  does not believe  that the  adoption of SFAS No. 155 will
have a material impact on its financial position,  results of operations or cash
flows.

                                      -6-
<PAGE>
                        SOUTHCOAST FINANCIAL CORPORATION

              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 4 - Recently Issued Accounting Standards- (continued)

In March  2006,  the FASB  issued SFAS No. 156,  "Accounting  for  Servicing  of
Financial Assets--an amendment of FASB Statement No. 140." This Statement amends
FASB No. 140,  "Accounting  for Transfers and Servicing of Financial  Assets and
Extinguishments  of Liabilities,"  with respect to the accounting for separately
recognized servicing assets and servicing liabilities.  SFAS No. 156 requires an
entity to  recognize  a  servicing  asset or  servicing  liability  each time it
undertakes  an  obligation  to  service a  financial  asset by  entering  into a
servicing  contract;  requires all separately  recognized  servicing  assets and
servicing  liabilities to be initially  measured at fair value,  if practicable;
permits an entity to choose its subsequent measurement methods for each class of
separately recognized servicing assets and servicing liabilities; at its initial
adoption,  permits a one-time reclassification of available-for-sale  securities
to trading  securities by entities with  recognized  servicing  rights,  without
calling into question the treatment of other available-for-sale securities under
Statement 115, provided that the available-for-sale securities are identified in
some  manner as  offsetting  the  entity's  exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value;  and requires  separate  presentation of servicing assets
and servicing  liabilities  subsequently measured at fair value in the statement
of financial position and additional  disclosures for all separately  recognized
servicing assets and servicing liabilities.  The required adoption date for SFAS
No. 156 is January 1, 2007.  The Company  does not believe the  adoption of SFAS
No.  156 will have a  material  impact on its  financial  position,  results  of
operations or cash flows.

In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for   Uncertainty  in  Income  Taxes."  FIN  48  clarifies  the  accounting  for
uncertainty in income taxes recognized in enterprises'  financial  statements in
accordance  with FASB Statement No. 109,  "Accounting  for Income Taxes." FIN 48
prescribes  a  recognition  threshold  and  measurement   attributable  for  the
financial  statement  recognition  and  measurement  of a tax position  taken or
expected  to be  taken  in a tax  return.  FIN  48  also  provides  guidance  on
derecognition,  classification,  interest and  penalties,  accounting in interim
periods,  disclosures  and  transitions.  FIN 48 is  effective  for fiscal years
beginning after December 15, 2006. The Company does not believe that FIN 48 will
have a material impact on its financial position,  results of operations or cash
flows.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
157 defines fair value,  establishes  a framework  for  measuring  fair value in
generally accepted  accounting  principles,  and expands  disclosures about fair
value  measurements.   This  standard  does  not  require  any  new  fair  value
measurements,  but rather  eliminates  inconsistencies  found in  various  prior
pronouncements.  SFAS 157 is  effective  for the  Company on January 1, 2008 and
will not impact the  Company's  accounting  measurements  but it is  expected to
result in some additional disclosures.

In September  2006,  the FASB issued SFAS No. 158,  "Employers'  Accounting  for
Defined  Benefit  Pension and Other  Postretirement  Plans" ("SFAS 158"),  which
amends  SFAS  87 and  SFAS  106 to  require  recognition  of the  overfunded  or
underfunded  status of pension  and other  postretirement  benefit  plans on the
balance  sheet.  Under  SFAS 158,  gains and  losses,  prior  service  costs and
credits,  and any remaining  transition  amounts under SFAS 87 and SFAS 106 that
have  not  yet  been  recognized  through  net  periodic  benefit  cost  will be
recognized in accumulated other comprehensive income, net of tax effects,  until
they are amortized as a component of net periodic cost. The  measurement  date -
the date at which the  benefit  obligation  and plan  assets  are  measured - is
required  to be the  company's  fiscal  year  end.  SFAS  158 is  effective  for
publicly-held  companies for fiscal years ending after December 15, 2006, except
for the measurement date provisions, which are effective for fiscal years ending
after  December 15, 2008.  The Company does not have a defined  benefit  pension
plan.  Therefore,  SFAS 158 will not impact the Company's financial condition or
results of operations.

In  September,  2006,  The FASB ratified the  consensuses  reached by the FASB's
Emerging  Issues Task Force ("EITF")  relating to EITF 06-4  "Accounting for the
Deferred   Compensation  and  Postretirement   Benefit  Aspects  of  Endorsement
Split-Dollar  Life  Insurance   Arrangements."   EITF  06-4  addresses  employer
accounting for endorsement split-dollar life insurance arrangements that provide
a benefit to an employee that extends to postretirement periods should recognize
a liability  for future  benefits in accordance  with SFAS No. 106,  "Employers'
Accounting  for  Postretirement  Benefits  Other Than  Pensions",  or Accounting
Principles Board ("APB") Opinion No. 12, "Omnibus  Opinion--1967."  EITF 06-4 is
effective for fiscal years  beginning  after December 15, 2006.  Entities should
recognize  the effects of  applying  this Issue  through  either (a) a change in
accounting principle through a cumulative-effect adjustment to retained earnings
or to other  components  of equity or net assets in the  statement  of financial
position  as of the  beginning  of the  year  of  adoption  or (b) a  change  in
accounting principle through retrospective application to all prior periods. The
Company does not believe the  adoption of EITF 06-4 will have a material  impact
on its financial position, results of operations and cash flows.

                                      -7-
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 4 - Recently Issued Accounting Standards (continued)

In September 2006, the FASB ratified the consensus reached related to EITF 06-5,
"Accounting for Purchases of Life  Insurance--Determining  the Amount That Could
Be Realized in Accordance with FASB Technical Bulletin No. 85-4,  Accounting for
Purchases  of Life  Insurance."  EITF 06-5  states  that a  policyholder  should
consider  any  additional  amounts  included  in the  contractual  terms  of the
insurance  policy other than the cash surrender  value in determining the amount
that could be realized under the insurance contract.  EITF 06-5 also states that
a policyholder should determine the amount that could be realized under the life
insurance   contract   assuming   the   surrender  of  an   individual-life   by
individual-life  policy (or certificate by certificate in a group policy).  EITF
06-5 is  effective  for fiscal years  beginning  after  December  15, 2006.  The
Company does not believe the  adoption of EITF 06-5 will have a material  impact
on its financial position, results of operations and cash flows.

In December  2006,  the FASB issued a Staff  Position  ("FSP") on EITF  00-19-2,
"Accounting for Registration  Payment  Arrangements" ("FSP EITF 00-19-2").  This
FSP  specifies  that  the  contingent  obligation  to make  future  payments  or
otherwise  transfer  consideration  under a  registration  payment  arrangement,
whether issued as a separate agreement or included as a provision of a financial
instrument or other agreement,  should be separately  recognized and measured in
accordance with SFAS No. 5, "Accounting for  Contingencies."  If the transfer of
consideration  under a registration  payment  arrangement is probable and can be
reasonably   estimated  at  inception,   the  contingent   liability  under  the
registration  payment arrangement is included in the allocation of proceeds from
the related financing  transaction (or recorded subsequent to the inception of a
prior financing  transaction) using the measurement guidance in SFAS No. 5. This
FSP is effective  immediately  for  registration  payment  arrangements  and the
financial  instruments  subject to those  arrangements  that are entered into or
modified subsequent to the issuance of the FSP. For prior arrangements,  the FSP
is effective for financial  statements  issued for fiscal years  beginning after
December 15, 2006 and interim  periods within those years.  The Company does not
believe the  adoption of this FSP will have a material  impact on its  financial
position, results of operations and cash flows.

In February  2007,  the FASB issued  SFAS No.  159,  "The Fair Value  Option for
Financial  Assets and  Financial  Liabilities  - Including  an amendment of FASB
Statement No. 115." This statement  permits,  but does not require,  entities to
measure many financial  instruments  at fair value.  The objective is to provide
entities with an opportunity to mitigate  volatility in reported earnings caused
by measuring related assets and liabilities  differently without having to apply
complex hedge accounting provisions. Entities electing this option will apply it
when the  entity  first  recognizes  an  eligible  instrument  and  will  report
unrealized  gains and  losses on such  instruments  in  current  earnings.  This
statement 1) applies to all entities,  2) specifies  certain  election dates, 3)
can be applied on an instrument-by-instrument  basis with some exceptions, 4) is
irrevocable and 5) applies only to entire  instruments.  One exception is demand
deposit  liabilities which are explicitly excluded as qualifying for fair value.
With respect to SFAS 115,  available-for-sale and held-to-maturity securities at
the  effective  date are eligible for the fair value option at that date. If the
fair  value  option is  elected  for those  securities  at the  effective  date,
cumulative  unrealized  gains and losses at that date shall be  included  in the
cumulative-effect  adjustment and thereafter,  such securities will be accounted
for as trading  securities.  SFAS 159 is effective for the Company on January 1,
2008.  The  Company  is  currently  analyzing  the  fair  value  option  that is
permitted, but not required, under SFAS 159.

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 and cash flows.

Note 5 - 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.  The
agreement specifies a closing date on or before September 30, 2007, which can be
extended  for a cost of $15,000  per month  through  December  31,  2007.  These
monthly  payments are  nonrefundable  and not applicable to the purchase  price.
After  December  31,  2007,  the buyer may further  extend the  closing  through
December 31, 2008, by making  monthly  payments of $30,000.  Half of the monthly
extension  cost would be applicable to the purchase  price and half would not be
applicable.  The purchaser also paid the Company a nonrefundable presales fee of
$1,390,000 that is not applicable to the purchase price. The Company  recognized
the presales fee as an item of noninterest  income during 2006. At September 30,
2007, the sale had not yet closed.


                                      -8-
<PAGE>



                        SOUTHCOAST FINANCIAL CORPORATION

                           FORWARD LOOKING STATEMENTS

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  economies of the  Company's  market
          areas;
     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 this report and in any
          other reports that we file with the Securities and Exchange Commission
          under the Securities 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.


                                      -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,  2006.  Results of
operations  for the  period  ending  September  30,  2007  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
dividends declared in May 2007 and April 2006.

Results of Operations

The  Company's  net income for the nine  months  ended  September  30,  2007 was
$2,705,642  or $0.49 per basic share,  compared to $3,872,691 or $0.65 per basic
share, for the nine months ended September 30, 2006. The average number of basic
shares  outstanding for the nine months ending September 30, 2007 was 5,554,195,
compared to 6,003,734 for the nine months ending September 30, 2006.

The  Company's  net income for the three  months  ended  September  30, 2007 was
$1,010,698  or $0.19 per basic share,  compared to $1,057,036 or $0.18 per basic
share,  for the three months ended  September  30, 2006.  The average  number of
basic  shares  outstanding  for  the  quarter  ending  September  30,  2007  was
5,217,249, compared to 6,015,596 for the quarter ending September 30, 2007.

Net Interest Income

Net interest  income 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,  the  principal  source of the  Company's  earnings,  was
$10,838,134  for  the  nine  months  ended  September  30,  2007,   compared  to
$12,282,820 for the nine months ended September 30, 2006.

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 nine months ending  September 30, 2007 decreased
$21.5  million,  or 4.8  percent,  to $424.4  million  from the  $445.9  million
reported  for the nine months  ending  September  30,  2006.  The  decrease  was
primarily  attributable  to a $14.7  million  decrease  in average  loans.  This
decrease  in average  loans was driven by a $33.4  million  decrease  in average
purchased  loans,  the result of  management's  decision to focus on  internally
generated lending. Average internally generated loans increased by $18.7 million
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 nine months ending September 30,
2007 increased $3.0 million,  or 0.8 percent,  to $367.9 million from the $364.9
million reported for the nine months ending September 30, 2006. The increase was
due to increases in average interest bearing checking, savings, and money market
accounts and other borrowings of $15.7 million and $21.9 million,  respectively,
offset by  decreases in average time  deposits  and  subordinated  debt of $32.6
million and $2.1  million,  respectively.  The decrease in average time deposits
was  primarily  attributable  to a decrease in brokered and  wholesale  deposits
totaling  $27.2  million,  the result of  management's  decision to rely less on
wholesale  deposit  funding.  The remaining  decrease of $5.4 million in average
time deposits was due to a competitive  rate market for time deposits  resulting
from economic  conditions and increased  competition for time deposits driven by
several new competitors in our market area. The decrease in average subordinated
debt was attributable to the early retirement of $4.1 million in trust preferred
securities on July 2, 2007.

The  following  table  compares the average  balances,  yields and rates for the
interest  sensitive segments of the Company's balance sheets for the nine months
ended September 30, 2007 and 2006. The decrease in net interest income is due to
the  decrease  in the volume of  average  earning  assets  having  exceeded  the
decrease in the volume of average interest bearing liabilities,  and an increase
in average rates on interest  bearing  liabilities  in excess of the increase in
average rates on interest earning assets.  A primary  contributor to the average
volume  and rate on  interest  bearing  liabilities  for the nine  months  ended
September 30, 2007 was the Company's  repurchase of stock during 2007. The stock
repurchase  contributed to a reduction in average  shareholders'  equity of $5.2
million,   which  was  replaced   primarily  by  higher  cost  interest  bearing
liabilities.

                                      -10-

<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 nine months ended                       For the nine months ended
                                                        September 30, 2007                               September 30, 2006
                                                        ------------------                               ------------------
                                           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 ..............   $   9,136,582      $     358,259       5.24%          9,105,608      $     322,324      4.73%
   Investments- taxable ............      41,114,024          1,704,878       5.54          52,629,941          1,993,485      5.06
   Investments- non taxable(2) .....       8,668,969            413,050       6.37           3,995,623            163,895      5.48
                                       -------------      -------------                  -------------      -------------
     Total investments and
       Federal funds sold ..........      58,919,575          2,476,187       5.62          65,731,172          2,479,704      5.04
   Loans(3) (4) ....................     365,518,948         21,470,899       7.85         380,182,844         20,952,717      7.37
                                       -------------      -------------                  -------------      -------------
     Total earning assets ..........     424,438,523         23,947,086       7.54         445,914,016         23,432,421      7.03
                                                          -------------                                     -------------
     Other assets ..................      51,656,955                                        37,409,471
                                       -------------                                     -------------
     Total assets ..................   $ 476,095,478                                     $ 483,323,487
                                       =============                                     =============
Liabilities
   Savings and
       transaction accounts ........   $  68,528,696      $   1,505,648       2.94       $  52,837,210      $     665,889      1.68
   Time deposits ...................     195,862,210          7,432,786       5.07         228,435,634          7,332,370      4.29
   Other borrowings ................      83,894,536          2,853,164       4.55          61,972,791          1,905,364      4.11
   Subordinated debt ...............      19,592,500          1,168,656       7.97          21,655,000          1,202,594      7.42
                                       -------------      -------------                  -------------      -------------
     Total interest bearing
       liabilities .................     367,877,942         12,960,254       4.71         364,900,635         11,106,217      4.07
                                                          -------------                                     -------------
   Non-interest bearing
     liabilities ...................      37,811,829                                        42,837,851
                                       -------------                                     -------------
     Total liabilities .............     405,689,771         12,960,254       4.27         407,738,486         11,106,217      3.64
                                                          -------------                                     -------------
   Shareholders' equity ............      70,405,707                                        75,585,001
                                       -------------                                     -------------
     Total liabilities and
       shareholders' equity ........   $ 476,095,478                                     $ 483,323,487
                                       =============                                     =============
     Net interest
       income/margin (5) ...........                      $  10,986,832       3.45%                         $  12,326,204      3.70%
                                                          =============                                     =============
     Net interest spread (6) .......                                          2.83%                                            2.96%
</TABLE>
(1)  Annualized
(2)  Tax equivalent yield for nont axable  investments  assuming a 36% tax rate.
(3)  Does not include non-accruing loans
(4)  Includes loan fees of $851,171 in 2007 and $1,002,602 in 2006.
(5)  Net interest income divided by total interest earning assets.
(6)  Total interest earning assets yield less total interest bearing liabilities
     rate.

As reflected  above,  for the nine months ended  September  30, 2007 the average
yield on earning  assets was 7.54  percent,  while the average  cost of interest
bearing  liabilities  was 4.71 percent.  For the nine months ended September 30,
2006 the average  yield on earning  assets was 7.03 percent and the average cost
of interest-bearing  liabilities was 4.07 percent.  The increase in the yield on
earning assets is  attributable to the rise in market rates of interest over the
last year. The increase in the cost of interest bearing  liabilities is a result
of maturing  lower yield  certificates  and other  borrowings  being replaced by
higher  yield  certificates  and other  borrowings  and the  increases in market
interest  rates over the last  year.  The net  interest  margin is  computed  by
subtracting year to date interest expense from interest income,  annualizing the
result,  and dividing the resulting  figure by average  interest earning assets.
The net interest  margin for the nine months ended  September  30, 2007 was 3.45
percent  compared to 3.70 percent for the nine months ended  September 30, 2006.
The decrease in the net interest margin is primarily  attributable to a decrease
in average earning assets of $21.5 million between the two periods, coupled with
a 64 basis point increase in rates paid on average interest bearing liabilities,
compared  to a 51 basis  point  increase  in rates on average  interest  earning
assets.  The cost of average total  liabilities  was 4.27 percent for the period
ending  September  30,  2007  compared  to 3.64  percent  for the period  ending
September 30, 2006.

                                      -11-

<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest Income - continued

Average  earning assets for the quarter ended September 30, 2007 decreased $36.8
million,  or 8.1 percent, to $418.5 million from the $455.3 million reported for
the three months ending  September 30, 2006.  The decrease was  attributable  to
decreases  of  $19.7  million  and  $17.4  million,   respectively,  in  average
investments  and average  loans.  The decrease in average  loans was driven by a
$31.2  million  decrease  in average  purchased  loans,  partially  offset by an
increase of $13.8 million in internally generated loans.

Average  interest  bearing  liabilities for the quarter ended September 30, 2007
increased  $3.1  million,  or 0.8  percent,  to $381.0  million  from the $377.9
million  reported for the quarter ended September 30, 2006. The increase was due
to increases in average interest  bearing  checking,  savings,  and money market
accounts and other borrowings of $25.3 million and $15.3 million,  respectively,
offset by  decreases in average time  deposits  and  subordinated  debt of $33.4
million and $4.1  million,  respectively.  The decrease in average time deposits
was solely attributable to a decrease in average brokered and wholesale deposits
totaling  $33.6  million,  and the  decrease  in average  subordinated  debt was
attributable  to the  early  retirement  of  $4.1  million  in  trust  preferred
securities on July 2, 2007.







































                                      -12-
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest Income - continued


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 September 30, 2007 and 2006. The decrease in net interest income is due to
a $36.8 million  reduction in average earning assets,  partially  offset by a 20
basis point improvement in the Company's net interest spread.


<TABLE>
<CAPTION>
                                                    For the quarter ended                                For the quarter ended
                                                      September 30, 2007                                   September 30, 2006
                                                      ------------------                                   ------------------
                                                   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                       $      4,779,016  $      61,358       5.09%   $      4,407,830  $      59,460      5.35%
   Investments - taxable                          38,341,399        633,048       6.55          65,068,941        859,099      5.24
   Investments- non taxable(2)                    12,923,453        202,912       6.23           5,918,879        102,959      6.90
                                            ----------------  -------------               ----------------  -------------
     Total investments and
       federal funds sold                         56,043,868        897,318       6.35          75,395,650      1,021,518      5.38
   Loans (3)(4)                                  362,500,322      7,248,499       7.93         379,944,220      7,106,293      7.42
                                            ----------------  -------------               ----------------  -------------
     Total earning assets                        418,544,190      8,145,817       7.72         455,339,870      8,127,811      7.08
                                                              -------------                                 -------------
     Other assets                                 63,067,583                                    40,352,137
                                            ----------------                              ----------------
     Total assets                           $    481,611,773                              $    495,692,007
                                            ================                              ================
Liabilities
   Savings and
       transaction accounts                 $     77,653,982  $     652,027       3.33%   $     52,370,989  $     236,176      1.79%
   Time deposits                                 203,191,002      2,656,356       5.19         236,561,240      2,730,763      4.58
   Other borrowings                               82,642,120        952,580       4.57          67,337,893        743,193      4.38
   Subordinated debt                              17,530,000        338,100       7.65          21,655,000        431,858      7.91
                                            ----------------  -------------               ----------------  -------------
     Total interest bearing
       liabilities                               381,017,104      4,599,063       4.79         377,925,122      4,141,990      4.35
                                                              -------------                                 -------------
   Non-interest bearing
     liabilities                                  39,187,603                                    40,210,658
                                            ----------------                              ----------------
     Total liabilities                           420,204,707      4,599,063       4.34         418,135,780      4,141,990      3.93
                                                              -------------                                 -------------
   Shareholders' equity                           61,407,066                                    77,556,227
                                            ----------------                              ----------------
     Total liabilities and
       shareholders' equity                 $    481,611,773                              $    495,692,007
                                            ================                              ================
     Net interest
       income/margin (5)                                      $   3,546,754       3.36%                     $   3,985,821      3.47%
                                                              =============                                 =============
     Net interest spread (6)                                                      2.93%                                        2.73%

</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 $272,127 in 2007 and $282,792 in 2006.
(5)  Net interest income divided by total interest earning assets.
(6)  Total interest earning assets yield less total interest bearing liabilities
     rate.

                                      -13-

<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Net Interest Income - continued

As reflected  above,  for the quarter ended September 30, 2007 the average yield
on earning assets was 7.72 percent,  while the average cost of interest  bearing
liabilities  was 4.79  percent.  For the quarter  ended  September  30, 2006 the
average  yield on  earning  assets  was 7.08  percent  and the  average  cost of
interest-bearing  liabilities  was 4.35  percent.  The  increase in the yield on
earning assets is attributable to the increases in market rates of interest over
the last 12 months. The increase in the cost of interest bearing  liabilities is
a result of maturing lower yield  certificates of deposits and other  borrowings
being replaced with higher yield certificates and other borrowings and increases
in market rates of interest.  The net interest margin for the three months ended
September  30,  2007,  was 3.36  percent  compared to 3.47 percent for the three
months  ended  September  30, 2006.  The decrease in the net interest  margin is
primarily  attributable  to the  decrease  in  average  earning  assets of $36.8
million,  coupled  with a $3.1  million  increase  in average  interest  bearing
liabilities.   The  increase  in  average  interest   bearing   liabilities  was
necessitated  by the current  year's  stock  repurchase  plan,  reflected in the
decrease in average  shareholders'  equity of $16.1 million  between the quarter
ended  September 30, 2007 and the quarter ended  September 30, 2006. The Company
retired stock totaling $19.4 million through the nine months ended September 30,
2007 as a result of the  repurchase.  Additionally,  the company  has  purchased
$14.7  million of  additional  Bank owned life  insurance  during the first nine
months  of the  year.  Though  these  policies  generate  income,  they  are not
classified as interest earning assets.  The income they produce is classified as
noninterest  income.  While yields on average  interest  earning  assets for the
quarter ended  September 30, 2007  increased by 64 basis points over the quarter
ended September 30, 2006, rates paid on average interest bearing liabilities for
the quarter ended  September 30, 2007 increased by only 44 basis points over the
quarter ended September 30, 2006, leading to a 20 basis point improvement in the
net  interest  spread to 2.93% for the quarter  ended  September  30,  2007,  as
compared to 2.73% for the quarter ended September 30, 2006. This  improvement in
net interest spread  mitigated the drop in margin caused by changes in volume of
average interest earning assets and average  interest bearing  liabilities.  The
cost of total  liabilities  was 4.34 percent for the quarter ended September 30,
2007, compared to 3.93 percent for the quarter ended September 30, 2006.

The following  tables present changes in the Company's net interest income which
are   primarily   a  result  of   changes   in  the  volume  and  rates  of  its
interest-earning assets and interest-bearing liabilities.

<TABLE>
<CAPTION>
                                                                                   Analysis of Changes in Net Interest Income
                                                                                  For the nine months ended September 30, 2007
                                                                                  Versus nine months ended September 30, 2006(1)
                                                                                  ----------------------------------------------
                                                                                Volume                Rate               Net Change
                                                                                ------                ----               ----------
Interest income:
<S>                                                                         <C>                   <C>                   <C>
   Federal funds sold ............................................          $     1,096           $    34,839           $    35,935
   Investments - taxable .........................................             (436,193)              147,586              (288,607)
   Investments - non taxable .....................................              191,694                57,461               249,155
                                                                            -----------           -----------           -----------
     Total investments and federal funds sold ....................             (243,403)              239,886                (3,517)
     Net loans (2) ...............................................             (808,160)            1,326,342               518,182
                                                                            -----------           -----------           -----------
     Total interest income .......................................           (1,051,563)            1,566,228               514,665
                                                                            -----------           -----------           -----------
Interest expense:
   Savings and transaction accounts ..............................              197,754               642,005               839,759
   Time deposits .................................................           (1,045,548)            1,145,964               100,416
   Other borrowings ..............................................              673,988               273,812               947,800
   Subordinated debt .............................................             (114,539)               80,601               (33,938)
                                                                            -----------           -----------           -----------
     Total interest expense ......................................             (288,345)            2,142,382             1,854,037
                                                                            -----------           -----------           -----------
     Net interest income .........................................          $  (763,218)          $  (576,154)          $(1,339,372)
                                                                            ===========           ===========           ===========
</TABLE>

(1)  Changes in rate/volume have been allocated on a consistent basis to rate.
(2)  Includes  loan fees of $851,171  and  $1,002,602  for the nine months ended
     September 30, 2007 and 2006


                                      -14-

<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>
                                                                                     Analysis of Changes in Net Interest Income
                                                                                      For the quarter ended September 30, 2007
                                                                                    Versus quarter ended September 30, 2006 (1)
                                                                                    -------------------------------------------
                                                                                Volume                 Rate              Net Change
                                                                                ------                 ----              ----------
Interest income:
<S>                                                                           <C>                   <C>                   <C>
   Federal funds sold ............................................            $   5,007             $  (3,109)            $   1,898
   Investments - taxable .........................................             (352,881)              126,830              (226,051)
   Investments - non taxable .....................................              121,845               (21,892)               99,953
                                                                              ---------             ---------             ---------
     Total investments and federal funds sold ....................             (226,029)              101,829              (124,200)
     Net loans (2) ...............................................             (326,262)              468,468               142,206
                                                                              ---------             ---------             ---------
     Total interest income .......................................             (552,291)              570,297                18,006
                                                                              ---------             ---------             ---------

Interest Expense:

   Savings and transaction accounts ..............................              114,018               301,833               415,851
   Time deposits .................................................             (385,212)              310,805               (74,407)
   Other borrowings ..............................................              168,909                40,478               209,387
   Subordinated debt .............................................              (82,263)              (11,495)              (93,758)
                                                                              ---------             ---------             ---------

     Total interest expense ......................................             (184,548)              641,621               457,073
                                                                              ---------             ---------             ---------
     Net interest income .........................................            $(367,743)            $ (71,324)            $(439,067)
                                                                              =========             =========             =========
</TABLE>
(1)  Changes in rate/volume have been allocated on a consistent basis to rate.
(2)  Includes  loan  fees  of  $272,127  and  $282,792  for the  quarters  ended
     September 30, 2007 and 2006.

Noninterest Income and Expenses

Noninterest  income for the nine months ended  September 30, 2007 was $1,920,824
compared to  $3,128,824  for the nine  months  ended  September  30,  2006.  The
decrease  of  $1,208,000  is   attributable  to  two   non-regularly   recurring
transactions  that occurred during the nine months ended September 30, 2006. The
first is  receipt  of a  $1,390,000  presales  fee on a parcel  of our  property
currently  under  contract to be sold in the fourth  quarter of 2007. The fee is
not applicable to the purchase price of the property and is nonrefundable in the
event the sale does not occur. The second non-regularly recurring transaction is
a $377,714 gain on the sale of premises and equipment  related to a sale of real
estate.  Gains on sales of premises  and  equipment  for the nine  months  ended
September  30, 2007 were  $25,016.  During the nine months ended  September  30,
2007,  earnings on Bank Owned Life Insurance  totaled  $355,085,  an increase of
$282,825 over the $72,260 in earnings on Bank Owned Life  Insurance for the nine
months ended September 30, 2006. This was due to the $14.7 million of Bank Owned
Life Insurance  purchased  during the first nine months of 2007.  Also partially
offsetting  the decline in  noninterest  income was $255,954 in gains on sale of
available for sale  securities for the nine months ended  September 30, 2007, an
increase of $167,826 over the year ago period. Finally, fees on deposit accounts
totaled  $780,816 and $721,323 for the nine months ended  September 30, 2007 and
September 30, 2006, respectively, an increase of $59,493.

Noninterest  expenses  for  the  nine  months  ended  September  30,  2007  were
$8,748,656, compared to $8,459,704 for the nine months ended September 30, 2006.
The increase of $288,952, or 3.4 percent, is mainly attributable to increases in
occupancy  and  furniture  and fixture  expenses of $287,540.  The  increases in
occupancy and furniture and fixture  expenses  primarily  relate to expenditures
associated  with the  Operations  Center placed into service in March 2006,  the
Charlestowne  Mortgage  operation,  acquired June 30, 2006,  the Sam  Rittenberg
branch  location,  opened in January  2007,  and the Park West branch  location,
opened in April 2007.

Noninterest  income for the  quarter  ended  September  30,  2007 was  $756,704,
compared to $552,402 for the quarter  ended  September  30, 2006, an increase of
$204,302.  This  increase  is the  result  of an  increase  in Bank  Owned  Life
Insurance earnings of $174,305, as well as increased gains on sales of available
for sale securities of $114,970. Other noninterest income decreased $104,988 due
primarily  to a decrease in dividend  income  received on a mezzanine  financing

                                      -15-

<PAGE>
                        SOUTHCOAST FINANCIAL CORPORATION

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

Noninterest Income and Expenses - continued

investment  fund.  The  dividend  income  on this  fund for the  quarters  ended
September  30,  2007  and  September  30,  2006  totaled   $5,000  and  $117,647
respectively, a decrease of $112,647.

Noninterest  expenses for the quarter ended September 30, 2007 were  $2,785,077,
compared to $2,822,524 for the quarter ended September 30, 2006. The decrease of
$37,447 is  attributable  to several  factors.  Professional  fees  decreased by
$77,079  between  the  two  periods  due  to  loan  review  and  Sarbanes  Oxley
implementation  costs  incurred  during the third  quarter of 2006.  Advertising
expense  decreased  by $63,900  between  the two  periods  due to  decreases  in
television and billboard advertising.  Offsetting these decreases were increases
in  occupancy  and  furniture  and  equipment  expenses  of  $75,987  due to two
additional  branch  locations in service during the quarter ended  September 30,
2007.

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 totaled $167.8 million,  or 55.4% of total
deposits as of September  30,  2007.  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 a $15.4 million line of credit
with the Bankers Bank of Atlanta, a $17 million line of credit with Nexity Bank,
a $10 million line of credit with First Tennessee Bank, and a $5 million line of
credit with First American Bank.  Management believes that our liquidity sources
are adequate to meet our normal operating needs.

Loans

Nonfarm,  nonresidential loans totaling $85.5 million made up 23% of total loans
at September 30, 2007.  Construction  and land  development  loans totaled $76.5
million,  or 21% of the loan portfolio.  All other real estate loans  (primarily
residential  mortgage loans) comprised $168.7 million,  or 45% of the portfolio.
Commercial  and industrial  loans totaled $35.6 million,  or 10% of total loans.
Finally,  installment  and consumer  loans totaled $3.7 million,  or 1% of total
loans.  The  allowance  for loan losses was 1.17% of total loans as of September
30, 2007,  compared to 1.19% as of December 31, 2006. In  management's  opinion,
the allowance for loan losses is adequate to absorb estimated losses inherent in
our bank's loan  portfolio.  At September 30, 2007, the Company had $1.9 million
in loans 90 days  delinquent and still  accruing  interest and $122,731 in other
real  estate  owned and had $2.6  million  of  non-accruing  loans.  Of the $1.9
million  in loans 90 days  delinquent  and  still  accruing  interest,  one loan
totaling $1,049,927 in principal was paid off in full subsequent to quarter end.
The majority of  non-accruing  loans are secured by real  estate.  There were no
other loans that  management  had  determined  to be potential  problem loans at
September  30, 2007.  The  following  table  provides a year to date analysis of
activity within the allowance for loan losses:

Balance at December 31, 2006 .................................        $4,364,127
Current Year Loan Loss Provision .............................                 -
Charge- offs:
   Domestic:
     Commercial, financial, and agricultural .................            60,899
     Installment loans to individuals ........................               399
     Foreign:
Recoveries:
     Commercial, financial, and agricultural .................            12,171
     Installment loans to individuals ........................                78
                                                                      ----------
Balance at September 30, 2007 ................................        $4,315,078
                                                                      ==========

                                      -16-

<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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

Deposits

Deposits  decreased  $7.9 million during the first nine months of 2007 to $303.0
million at September 30, 2007. The decrease was attributable to several factors.
Noninterest  bearing deposits  increased  $310,951 and interest bearing deposits
decreased  $8.2 million  during the first nine months of 2007.  Certificates  of
deposit  from retail  customers  increased  $2.2  million  during the first nine
months,  largely as a result of several  certificate  of deposit  rate  specials
offered throughout the year. Savings and interest bearing  transaction  accounts
increased  $26.1  million due to  municipal  deposits  rolled into money  market
accounts from certificates of deposit,  competitive  rates, and the expansion of
our branch  network.  Brokered  deposits  decreased  $36.5  million for the nine
months ended September 30, 2007 as the Company followed its strategy of reducing
its reliance on wholesale funding.

Other Borrowings

Other   borrowings  are  comprised  of  FHLBA   advances.   FHLBA  Advances  are
collateralized  by pledged FHLBA stock and certain  residential  mortgage loans.
FHLBA advances are summarized as follows:

             Maturity                     Rate                     Balance
    -----------------------      ---------------------        ---------------
      June 2008                          4.90%                $     5,500,000
      July 2008                          5.44%                      8,000,000
      November 2008                      5.00%                      2,000,000
      September 2010                     5.55%                      7,000,000
      February 2011                      5.51%                      4,500,000
      November 2011                      4.86%                      2,000,000
      March 2013                         2.91%                      7,500,000
      September 2013                     5.06%                     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
                                                              ---------------

      Balance                                                 $    78,500,000
                                                              ===============

Junior Subordinated Debentures

In two  separate  transactions  in 2002 and  another  transaction  in  2005,  we
established  Southcoast Capital Trusts I, II and III (the "Capital Trusts"),  as
non-consolidated  subsidiaries.  The Capital  Trusts  issued and sold a total of
21,655 floating rate securities,  with $1,000  liquidation  amount per security.
Institutional  buyers bought 21,000 of the floating rate securities  denominated
as preferred  securities  and we bought the other 655 floating  rate  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 us which are reported on our consolidated  balance
sheets. On July 2, 2007, the Company retired the securities issued by Southcoast
Capital  Trust I. The  securities  totaled  $4,125,000  and paid  interest  at a
floating  rate of 3 month Libor + 375 basis points.  Our $530,000  investment in
the common  securities  of the  remaining  Capital  Trusts is included in "Other
assets" on our  consolidated  balance  sheets.  The preferred  securities of the
Capital Trusts  totaling  $17.5 million  qualify as Tier 1 capital under Federal
Reserve  Board  guidelines,   subject  to  limitations.   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, 2006, for more information  about the terms
of the junior subordinated debentures.

Capital Resources

Our Company's  capital base decreased by $16.8 million for the first nine months
of 2007,  due to our  repurchase  of  957,497  shares  of  common  stock  for an
aggregate  purchase  price of $19.4  million,  and other  comprehensive  loss of
$158,740,  offset by net income of $2,705,642  and proceeds from stock  issuance
through our Employee  Stock  Purchase Plan of $102,834.  The Company's  tier one

                                      -17-

<PAGE>
                        SOUTHCOAST FINANCIAL CORPORATION

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

Capital  Resources - continued

capital to average  assets  ratio was 16.72  percent as of  September  30,  2007
compared to 20.87 percent as of December 31, 2006.

The Federal  Reserve Board and FDIC require bank holding  companies and banks 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. 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.  We 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 September 30, 2007, we 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) ............  $  57,376       16.30%    $  35,200       10.00%    $   28,160     8.00%
  Tier 1 capital (to risk-weighted assets) ...........     53,367       15.16        21,120        6.00         14,080     4.00
  Tier 1 capital (to average assets) .................     53,367       11.60        23,010        5.00         18,408     4.00
The Company
  Total capital (to risk-weighted assets) ............  $  83,982       22.35%          N/A         N/A     $   30,063     8.00%
  Tier 1 capital (to risk-weighted assets) ...........     79,667       21.20           N/A         N/A         15,032     4.00
  Tier 1 capital (to average assets) .................     79,667       16.72           N/A         N/A         19,054     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 it will not suffer a loss if our customer fails to meet a contractual
obligation to the third party. At September 30, 2007, we had issued  commitments
to extend  credit of $38.6  million  and  standby  letters of credit of $990,460
through various types of commercial lending  arrangements.  Approximately  $35.5
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  September  30,
2007.
<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 ........   $ 6,238,741  $ 2,872,101  $  13,920,080  $  23,030,922   $  15,551,051  $  38,581,973
Standby letters of credit ..................        91,070      111,451        773,909        976,430          14,030        990,460
                                               -----------  -----------  -------------  -------------   -------------  -------------
    Totals .................................   $ 6,329,811  $ 2,983,552  $  14,693,989  $  24,007,352   $  15,565,081  $  39,572,433
                                               ===========  ===========  =============  =============   =============  =============
</TABLE>
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 its various sources of liquidity,  the Company  believes it 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.

                                      -18-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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, 2006, which was filed
with the Securities and Exchange  Commission on March 16, 2007.  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.


                                      -19-
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

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             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>
7/1/07-7/31/07 ..........................        2,729             20.21              2,729                     602,378
8/1/07-8/31/07 ..........................      455,050             18.26            455,050                     147,328

Total ...................................      457,779             18.27            457,779                     147,328
</TABLE>
(1)  On January 19, 2007, the Board of Directors authorized the repurchase of up
     to 547,194  shares,  or 10%, of the  Company's  common  stock.  The Company
     announced the  repurchase  plan on January 23, 2007. On July 24, 2007,  the
     Board of Directors  authorized  the  repurchase of an additional 10% of its
     outstanding stock. The Company announced the additional  repurchase plan on
     July 25, 2007. 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.

Item 6.  Exhibits

3-2  Bylaws, as amended September 13, 2007(incorporated by reference to Form 8-K
     filed September 14, 2007)
31-1 Rule 13a-14(a) Certifications of CEO
31-2 Rule 13a-14(a) Certifications of CFO
32   Section 1350 Certification


                                      -20-

<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

                                   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:    November 9, 2007                        By:  s/L. Wayne Pearson
                                                      --------------------------
                                                      L. Wayne Pearson
                                                      Chief Executive Officer



Date:    November 9, 2007                        By:  s/William C. Heslop
                                                      --------------------------
                                                      William C. Heslop
                                                      Chief Financial Officer

                                      -21-

<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION


Exhibit Index

3.2  Bylaws, as amended September 13, 2007(incorporated by reference to Form 8-K
     filed September 14, 2007)

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.
























                                      -22-