##### Table of Contents

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U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549



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FORM 10-QSB



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|x | Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------



For the quarterly period ended June 30, 2005



| ̈ | Transition Report Under Section 13 or 15(d) of the Exchange Act
|- | ---------------------------------------------------------------



For the transition period ended



Commission File Number 0-21083



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SOUTH STREET FINANCIAL CORP.

(Exact name of small business issuer as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|NORTH CAROLINA                                                 |  | 56-1973261                          
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification Number)



155 WEST SOUTH
STREET, ALBEMARLE, NC 28001

(Address of principal executive office)



(704) 982-9184

(Issuers telephone number)



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Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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  xNo ̈



As of July 28, 2005, 3,037,886 shares of the issuers common stock, no par value, were
outstanding.



This report contains 14 pages.



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##### Table of Contents

|                              |  |                                                                                           |  |         
|----------------------------- |  | ----------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                           |  | Page No.
|Part I. FINANCIAL INFORMATION |  |                                                                                          
|                              |  |                                                                                          
|Item 1 -                      |  | Financial Statements (Unaudited)                                                          |  |         
|                              |  |                                                                                          
|                              |  | Consolidated Statements of Financial ConditionJune 30, 2005 and December 31, 2004         |  | 3       
|                              |  |                                                                                          
|                              |  | Consolidated Statements of IncomeThree Months and Six Months Ended June 30, 2005 and 2004 |  | 4       
|                              |  |                                                                                          
|                              |  | Consolidated Statements of Cash FlowsSix Months Ended June 30, 2005 and 2004              |  | 5       
|                              |  |                                                                                          
|                              |  | Notes to Consolidated Financial Statements                                                |  | 6       
|                              |  |                                                                                          
|Item 2 -                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations     |  | 8       
|                              |  |                                                                                          
|Item 3 -                      |  | Controls and Procedures                                                                   |  | 11      
|                              | 
|Part II. OTHER INFORMATION    |  |                                                                                          
|                              |  |                                                                                          
|Item 4 -                      |  | Submission of Matters to a Vote of Security Holders                                       |  | 12      
|                              |  |                                                                                          
|Item 6 -                      |  | Exhibits                                                                                  |  | 12      



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##### Table of Contents

Part I. FINANCIAL INFORMATION



Item 1 - Financial Statements



South Street Financial Corp. and Subsidiary

Consolidated Statements of Financial Condition



|                                                                                                                                                 |  |                         |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                 |  | June 30,2005(Unaudited) |         |   | December 31,2004* |  
|                                                                                                                                                 |  | (In thousands)          |        
|ASSETS                                                                                                                                           |  |                         |         |   |                   |   |         |  
|                                                                                                                                                 |  |                        
|Cash and cash equivalents:                                                                                                                       |  |                         |         |   |                   |   |         |  
|Non-interest-earning deposits                                                                                                                    |  | $                       | 5,369   |   |                   | $ | 7,032   |  
|Interest-earning deposits                                                                                                                        |  |                         | 5,269   |   |                   |   | 16,144  |  
|Federal funds sold                                                                                                                               |  |                         | 2,308   |   |                   |   | 2,370   |  
|Securities held to maturity, fair market value June 30, 2005, $5,866; December 31, 2004, $6,440                                                  |  |                         | 5,895   |   |                   |   | 6,479   |  
|Securities available for sale                                                                                                                    |  |                         | 24,398  |   |                   |   | 18,691  |  
|Federal Home Loan Bank stock                                                                                                                     |  |                         | 650     |   |                   |   | 434     |  
|Loans                                                                                                                                            |  |                         | 172,003 |   |                   |   | 153,006 |  
|Allowance for loan losses                                                                                                                        |  |                         | (635    | ) |                   |   | (575    | )
|                                                                                                                                                 |  |                         |         |   |                   |   |         |  
|NET LOANS                                                                                                                                        |  |                         | 171,368 |   |                   |   | 152,431 |  
|                                                                                                                                                 |  |                        
|Real estate held for investment                                                                                                                  |  |                         | 653     |   |                   |   | 653     |  
|Foreclosed real estate                                                                                                                           |  |                         | 57      |   |                   |   | 57      |  
|Property and equipment, net                                                                                                                      |  |                         | 2,997   |   |                   |   | 2,602   |  
|Bank-owned life insurance                                                                                                                        |  |                         | 7,379   |   |                   |   | 7,245   |  
|Prepaid expenses and other assets                                                                                                                |  |                         | 2,096   |   |                   |   | 1,413   |  
|                                                                                                                                                 |  |                         |         |   |                   |   |         |  
|TOTAL ASSETS                                                                                                                                     |  | $                       | 228,439 |   |                   | $ | 215,551 |  
|                                                                                                                                                 |  |                         |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                             |  |                         |         |   |                   |   |         |  
|                                                                                                                                                 |  |                        
|LIABILITIES                                                                                                                                      |  |                         |         |   |                   |   |         |  
|Deposits                                                                                                                                         |  | $                       | 193,329 |   |                   | $ | 186,905 |  
|Borrowings                                                                                                                                       |  |                         | 5,000   |   |                   |   |        |  
|Accrued expenses and other liabilities                                                                                                           |  |                         | 4,324   |   |                   |   | 2,915   |  
|                                                                                                                                                 |  |                         |         |   |                   |   |         |  
|TOTAL LIABILITIES                                                                                                                                |  |                         | 202,653 |   |                   |   | 189,820 |  
|                                                                                                                                                 |  |                         |         |   |                   |   |         |  
|STOCKHOLDERS EQUITY                                                                                                                             |  |                         |         |   |                   |   |         |  
|Preferred stock, no par value: authorized 5,000,000 shares; none issued                                                                          |  |                         |        |   |                   |   |        |  
|Common stock, no par value: authorized 20,000,000 shares; issued 3,037,886 shares at June 30, 2005 and 3,047,886 December 31, 2004,
respectively |  |                         | 6,848   |   |                   |   | 6,993   |  
|Unearned compensation                                                                                                                            |  |                         | (237    | ) |                   |   | (287    | )
|Unearned ESOP                                                                                                                                    |  |                         | (840    | ) |                   |   | (933    | )
|Retained earnings, substantially restricted                                                                                                      |  |                         | 20,185  |   |                   |   | 20,076  |  
|Accumulated other comprehensive loss                                                                                                             |  |                         | (170    | ) |                   |   | (118    | )
|                                                                                                                                                 |  |                         |         |   |                   |   |         |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                                       |  |                         | 25,786  |   |                   |   | 25,731  |  
|                                                                                                                                                 |  |                         |         |   |                   |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                       |  | $                       | 228,439 |   |                   | $ | 215,551 |  
|                                                                                                                                                 |  |                         |         |   |                   |   |         |  

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|* | Derived from audited consolidated financial statements.
|- | -------------------------------------------------------



See accompanying notes.



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##### Table of Contents

South Street Financial Corp. and Subsidiary

Consolidated Statements of Income (Unaudited)



|                                                              |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|------------------------------------------------------------- |  | ----------------------------------------------- | --------- | ------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                                              |  | Three Months Ended June 30,                     |           | Six Months Ended June 30,
|                                                              |  | 2005                                            |           | 2004                      |   | 2005      |  | 2004
|                                                              |  | (In thousands, except share and per share data)
|INTEREST INCOME                                               |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|Loans, including fees                                         |  | $                                               | 2,761     |                           | $ | 2,314     |  | $    | 5,307     |  | $ | 4,654    
|Investment securities                                         |  |                                                 | 298       |                           |   | 159       |  |      | 506       |  |   | 323      
|Other interest-bearing deposits                               |  |                                                 | 33        |                           |   | 80        |  |      | 164       |  |   | 163      
|                                                              |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|TOTAL INTEREST INCOME                                         |  |                                                 | 3,092     |                           |   | 2,553     |  |      | 5,977     |  |   | 5,140    
|                                                              |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|INTEREST EXPENSE                                              |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|Deposits                                                      |  |                                                 | 1,198     |                           |   | 1,079     |  |      | 2,321     |  |   | 2,187    
|Borrowings                                                    |  |                                                 | 20        |                           |   |          |  |      | 20        |  |   | 20       
|                                                              |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|TOTAL INTEREST EXPENSE                                        |  |                                                 | 1,218     |                           |   | 1,079     |  |      | 2,341     |  |   | 2,207    
|                                                              |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|NET INTEREST INCOME                                           |  |                                                 | 1,874     |                           |   | 1,474     |  |      | 3,636     |  |   | 2,933    
|                                                              |  |                                                 |           |                          
|PROVISION FOR LOAN LOSSES                                     |  |                                                 | 30        |                           |   | 30        |  |      | 60        |  |   | 60       
|                                                              |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES           |  |                                                 | 1,844     |                           |   | 1,444     |  |      | 3,576     |  |   | 2,873    
|                                                              |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|NON-INTEREST INCOME                                           |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|Service charges and fees                                      |  |                                                 | 105       |                           |   | 95        |  |      | 197       |  |   | 179      
|Income from bank-owned life insurance                         |  |                                                 | 55        |                           |   | 70        |  |      | 134       |  |   | 139      
|Other                                                         |  |                                                 | 43        |                           |   | 12        |  |      | 36        |  |   | 44       
|                                                              |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|TOTAL NON-INTEREST INCOME                                     |  |                                                 | 203       |                           |   | 177       |  |      | 367       |  |   | 362      
|                                                              |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|NON-INTEREST EXPENSE                                          |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|Compensation and benefits                                     |  |                                                 | 984       |                           |   | 922       |  |      | 1,879     |  |   | 1,837    
|Net occupancy and equipment                                   |  |                                                 | 118       |                           |   | 94        |  |      | 220       |  |   | 196      
|Data processing                                               |  |                                                 | 86        |                           |   | 81        |  |      | 180       |  |   | 162      
|Other                                                         |  |                                                 | 291       |                           |   | 253       |  |      | 534       |  |   | 478      
|                                                              |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|TOTAL NON-INTEREST EXPENSE                                    |  |                                                 | 1,479     |                           |   | 1,350     |  |      | 2,813     |  |   | 2,673    
|                                                              |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|INCOME BEFORE INCOME TAXES                                    |  |                                                 | 568       |                           |   | 271       |  |      | 1,130     |  |   | 562      
|                                                              |  |                                                 |           |                          
|INCOME TAXES                                                  |  |                                                 | 220       |                           |   | 88        |  |      | 433       |  |   | 178      
|                                                              |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|NET INCOME                                                    |  | $                                               | 348       |                           | $ | 183       |  | $    | 697       |  | $ | 384      
|                                                              |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|PER SHARE DATA:                                               |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|Basic and diluted net income per common share                 |  | $                                               | .12       |                           | $ | .06       |  | $    | .12       |  | $ | .13      
|                                                              |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|Dividends                                                     |  | $                                               | .10       |                           | $ | .10       |  | $    | .10       |  | $ | .20      
|                                                              |  |                                                 |           |                           |   |           |  |      |           |  |   |          
|Weighted average common shares outstanding, basic and diluted |  |                                                 | 2,950,649 |                           |   | 2,968,442 |  |      | 2,950,495 |  |   | 2,961,219
|                                                              |  |                                                 |           |                           |   |           |  |      |           |  |   |          



See accompanying notes.



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##### Table of Contents

South Street Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)



|                                                                                          |  |                           |         |   |      |   |         |  
|----------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                          |  | Six Months Ended June 30, |        
|                                                                                          |  | 2005                      |         |   | 2004 |  
|                                                                                          |  | (In thousands)            |        
|CASH FLOWS FROM OPERATING ACTIVITIES                                                      |  |                           |         |   |      |   |         |  
|Net income                                                                                |  | $                         | 697     |   |      | $ | 384     |  
|Adjustments to reconcile net income to net cash provided by operating activities:         |  |                           |         |   |      |   |         |  
|Net accretion of premiums and discounts on securities                                     |  |                           | 32      |   |      |   | 70      |  
|Amortization of deferred loan fees                                                        |  |                           | (216    | ) |      |   | (171    | )
|Depreciation                                                                              |  |                           | 66      |   |      |   | 102     |  
|Provision for loan losses                                                                 |  |                           | 60      |   |      |   | 60      |  
|Loss on disposal of fixed assets                                                          |  |                           | 4       |   |      |   |        |  
|Amortization of unearned compensation                                                     |  |                           | 50      |   |      |   | 210     |  
|Income from Bank Owned Life Insurance                                                     |  |                           | (134    | ) |      |   | (139    | )
|ESOP contribution                                                                         |  |                           | (50     | ) |      |   | (79     | )
|(Increase) decrease in other assets                                                       |  |                           | (650    | ) |      |   | 172     |  
|Increase in accrued expenses and other liabilities                                        |  |                           | 1,409   |   |      |   | 606     |  
|                                                                                          |  |                           |         |   |      |   |         |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                 |  |                           | 1,268   |   |      |   | 1,215   |  
|                                                                                          |  |                           |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                      |  |                           |         |   |      |   |         |  
|Purchase of securities available for sale                                                 |  |                           | (6,018  | ) |      |   | (17,000 | )
|Proceeds from maturities, calls and principal repayments of securities available for sale |  |                           | 227     |   |      |   | 7,059   |  
|Proceeds from maturities, calls and principal repayments of securities held to maturity   |  |                           | 552     |   |      |   | 691     |  
|Loan originations and principal payments on loans, net                                    |  |                           | (18,781 | ) |      |   | 1,872   |  
|Purchase of property and equipment                                                        |  |                           | (465    | ) |      |   | (104    | )
|Purchase of FHLB stock                                                                    |  |                           | (216    | ) |      |   |        |  
|Proceeds from redemption of FHLB stock                                                    |  |                           |        |   |      |   | 307     |  
|                                                                                          |  |                           |         |   |      |   |         |  
|NET CASH USED BY INVESTING ACTIVITIES                                                     |  |                           | (24,701 | ) |      |   | (7,175  | )
|                                                                                          |  |                           |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                      |  |                           |         |   |      |   |         |  
|Net increase in deposits                                                                  |  |                           | 6,424   |   |      |   | 1,139   |  
|Payment of dividends                                                                      |  |                           | (587    | ) |      |   | (587    | )
|Purchases and retirement of common stock                                                  |  |                           | (96     | ) |      |   | (117    | )
|Borrowings from FHLB, net                                                                 |  |                           | 5,000   |   |      |   | (10,000 | )
|Principal payment received on ESOP note                                                   |  |                           | 92      |   |      |   | 92      |  
|                                                                                          |  |                           |         |   |      |   |         |  
|NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES                                          |  |                           | 10,833  |   |      |   | (9,473  | )
|                                                                                          |  |                           |         |   |      |   |         |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                                 |  |                           | (12,600 | ) |      |   | (15,433 | )
|CASH AND CASH EQUIVALENTS, BEGINNING                                                      |  |                           | 25,546  |   |      |   | 42,502  |  
|                                                                                          |  |                           |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS, ENDING                                                         |  | $                         | 12,946  |   |      | $ | 27,069  |  
|                                                                                          |  |                           |         |   |      |   |         |  



See accompanying notes.



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##### Table of Contents

South Street Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements



NOTE A - BASIS OF PRESENTATION



In managements opinion, the financial information, which is unaudited, reflects all
adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of June 30, 2005 and for the three and six month periods ended June 30, 2005 and 2004, in conformity with accounting
principles generally accepted in the United States of America. The consolidated financial statements include the accounts of South Street Financial Corp. (the Company) and its wholly-owned subsidiary, Home Savings Bank of Albemarle,
S.S.B., (Home Savings or the Bank), the Banks wholly-owned subsidiary, South Street Development Corporation (SSDC), and SSDCs wholly-owned subsidiary, Park Ridge Associates, LLC (Park
Ridge). All significant intercompany transactions and balances have been eliminated in consolidation. Operating results for the three and six month periods ended June 30, 2005 are not necessarily indicative of the results that may be expected
for the fiscal year ending December 31, 2005.



The organization and business of
the Company, accounting policies followed by the Company and other information are contained in the notes to the consolidated financial statements filed as part of the Companys 2004 annual report on Form 10-KSB. This quarterly report should be
read in conjunction with such annual report.



NOTE B - EARNINGS PER SHARE



The Companys basic earnings per share is based on net income
divided by the weighted average number of shares outstanding from the beginning of the period to the end of the period. Diluted earnings per share is adjusted for all potential common stock instruments having a dilutive effect. For purposes of this
computation, the number of shares of common stock purchased by the ESOP that have not been allocated to participant accounts are not assumed to be outstanding.



At June 30, 2005 and 2004, there were 449,650 exercisable options outstanding, all of which were antidilutive.



NOTE C - COMPREHENSIVE INCOME



For the quarters ended June 30, 2005 and 2004, total comprehensive income, consisting of net
income and unrealized securities gains and losses, net of taxes, was $449,000 and $50,000, respectively.



For the six months ended June 30, 2005 and 2004, total comprehensive income, consisting of net income and unrealized securities gains and losses, net of taxes, was $645,000 and $253,000, respectively.



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##### Table of Contents

South Street Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements



NOTE D - EMPLOYEE BENEFIT PLANS



The accompanying table details the components of pension expense recognized in the Companys Consolidated Statements of Income and Comprehensive Income:



|                                   |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------- |  | -------------------------- | ------- | - | ------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                   |  | Three Months EndedJune 30, |         |   | Six Months Ended June 30, |  
|                                   |  | 2005                       |         |   | 2004                      |   |         | 2005 |  |   | 2004    |  
|                                   |  | (Dollars in thousands)     |        
|Service cost                       |  | $                          | 31,020  |   |                           | $ | 29,045  |      |  | $ | 62,040  |   |  | $ | 58,090  |  
|Interest cost                      |  |                            | 44,045  |   |                           |   | 39,875  |      |  |   | 88,090  |   |  |   | 79,751  |  
|Expected return on plan assets     |  |                            | (31,510 | ) |                           |   | (26,900 | )    |  |   | (63,021 | ) |  |   | (53,801 | )
|Amortization of prior service cost |  |                            | 15,766  |   |                           |   | 16,714  |      |  |   | 31,532  |   |  |   | 33,429  |  
|                                   |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Net periodic pension cost          |  | $                          | 59,321  |   |                           | $ | 58,734  |      |  | $ | 118,641 |   |  | $ | 117,469 |  
|                                   |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  



For the 2005 Plan Year, no
tax-deductible contributions are required or allowed.



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##### Table of Contents

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



This Quarterly Report on Form 10-QSB contains certain forward-looking statements with respect to the financial condition, results of operations and business of the
Company and the Bank. These forward-looking statements involve risks and uncertainties, and are based on the beliefs and assumptions of management of the Company and the Bank and on the information available to management at the time that these
disclosures were prepared. These statements can be identified by the use of words like expect, anticipate, estimate and believe, variations of these words, and other similar expressions. Readers should
not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially
include, but are not limited to, (1) competition in the Banks markets, (2) changes in the interest rate environment, (3) general national, regional or local economic conditions that are less favorable than expected, resulting in, among other
things, a deterioration in credit quality and the possible impairment of collectibility of loans, (4) legislative or regulatory changes, including changes in accounting standards, (5) significant changes in the federal and state legal and regulatory
environment and tax laws, (6) the impact of changes in monetary and fiscal policies, laws, rules and regulations, and (7) other risks and factors identified in the Companys other filings with the SEC. The Company undertakes no obligation to
update any forward-looking statements.



Comparison of Financial Condition at

June 30, 2005 and December 31, 2004



The Companys total consolidated assets increased $12.9 million during the six months
ended June 30, 2005 from $215.5 million at December 31, 2004 to $228.4 million. This increase in our assets resulted primarily from an increase in net loans receivable. Cash and cash equivalents decreased by $12.6 million, from $25.5 million at
December 31, 2004 to $12.9 million at June 30, 2005. This decrease in liquid assets occurred principally due to managements decision to purchase $6.0 million in available for sale securities from the Federal Home Loan Bank. In comparison to
prior years, loan rates have been adjusted aggressively to grow the portfolio. As a consequence, the Banks loan portfolio increased by $18.9 million, from $152.4 million at December 31, 2004 to $171.3 million at June 30, 2005. The Company has
utilized the liquidity provided by the increase in deposits from our customers of $6.4 million and the increase in borrowings of $5.0 million to fund the increase in the loan portfolio.



Comparison of Operating Results for the

Three Months Ended June 30, 2005 and 2004



General.Net income for the three-month period ended June 30, 2005 was $348,000, or $164,000 more than the $183,000 earned during the same period in 2004. This increase in our earnings resulted principally from
the increase in interest income of $539,000 during the quarter, which is explained below.



Interest income. Interest income increased by $539,000 from $2.5 million for the three months ended June 30, 2004 to $3.0 million for the three months ended June 30, 2005. The level of our average
interest-earning assets increased from approximately $196.2 million during the second quarter of 2004 to approximately $203.8 million during the second quarter of 2005, which is the result of loan growth for the period. The yield on our average
interest-earning assets increased approximately 86 basis points. This increase in our yield resulted primarily from the shift in our earning assets from interest earning deposits to loans and investment securities, which have significantly higher
rates than do our interest earning deposits.



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##### Table of Contents

Interest expense.Interest expense on deposits and borrowed funds increased by $139,000 from $1.079 million for
the three months ended June 30, 2004 to $1.218 million for the three months ended June 30, 2005. As with our interest-earning assets, the volume of our interest-bearing liabilities increased from approximately $182.3 million in the second quarter of
2004, to $198.3 million in the second quarter of 2005. The average rates for our interest-bearing liabilities increased approximately 10 basis points in comparison to the first quarter of 2004.



Net interest income. Net interest income increased by $400,000 from $1.5 million for
the three months ended June 30, 2004 to $1.9 million for the three months ended June 30, 2005. This increase resulted primarily from the increase in our interest income discussed above.



Provision for loan losses. The provision for loan losses charged to income during the three months ended June 30, 2005 and 2004 was
$30,000. Provisions, which are charged to operations, and the resulting loan loss allowance are amounts the Banks management believes will be adequate to absorb losses inherent in our loan portfolio. Loans are charged off against the allowance
when management believes that collectibility is unlikely.



At June 30, 2005 the
Banks allowance for loan losses amounted to $635,000, which management believes is adequate to absorb losses inherent in its loan portfolio.



Non-interest income. The Company earned non-interest income of $203,000 during the three months ended June 30, 2005 compared to the $177,000 that was earned during
the same period in 2004. This increase in non-interest income of $26,000 was primarily attributable to a decrease in income from bank-owned life insurance along with an increase in origination fees on loans sold to FNMA and an increase in service
charges on deposit accounts during the quarter.



Non-interest expense.
Non-interest expense increased by $129,000 for the three months ended June 30, 2005 compared to the three months ended June 30, 2004. This increase resulted partially from an increase in internal audit fees of approximately $15,000. The increase in
compensation expense was due largely to expense associated with normal and expected compensation adjustments, additional personnel, and increases in the cost of employee benefits such as health insurance net of a decrease in expenses associated with
the ESOP.



Provision for income taxes. The Companys effective tax
rate (income taxes as a percentage of income before income taxes) was 38.7% for the period ending June 30, 2005 as compared to 32.6% for the period ending June 30, 2004.



Comparison of Operating Results for the

Six Months Ended June 30, 2005 and 2004



General.Net income for the six-month period ended June 30, 2005 was $697,000, or $313,000 more than the $384,000 earned during the same period in 2004. This increase in our earnings resulted principally from
the increase in interest income of $837,000 during the current six month period, which is explained below.



Interest income. Interest income increased by $837,000 from $5.1 million for the six months ended June 30, 2004 to $5.9 million for the six months ended June 30, 2005. The level of our average interest-earning
assets increased from approximately $196.2 million during the first half of 2004 to approximately $203.8 million during the first half of 2005, and the yield on our average interest-earning assets increased approximately 63 basis points. This
increase in our yield resulted primarily from the shift in our earning assets from interest earning deposits to loans and investment securities, which have significantly higher rates than do our interest earning deposits combined with the increase
in yields.



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Interest expense.Interest expense on deposits and borrowed funds increased by $134,000 from $2.207 million for
the six months ended June 30, 2004 to $2.341 million for the six months ended June 30, 2005. As with our interest-earning assets, the volume of our interest-bearing liabilities increased from approximately $182.3 million in the first half of 2004,
to $198.3 million in the first half of 2005. The average rates for our interest-bearing liabilities increased approximately 10 basis points in comparison to the first quarter of 2004.



Net interest income. Net interest income increased by $704,000 from $2.9 million for the six months ended June 30, 2004 to $3.6
million for the six months ended June 30, 2005. This increase resulted primarily from the increase in our interest income discussed above.



Provision for loan losses. The provision for loan losses charged to income during the six months ended June 30, 2005 and 2004 was $60,000. Provisions, which are
charged to operations, and the resulting loan loss allowance are amounts the Banks management believes will be adequate to absorb losses inherent in our loan portfolio. Loans are charged off against the allowance when management believes that
collectibility is unlikely.



At June 30, 2005 the Banks allowance for
loan losses amounted to $635,000, which management believes is adequate to absorb losses inherent in its loan portfolio.



Non-interest income. The Company earned non-interest income of $367,000 during the six months ended June 30, 2005 compared to the $362,000 that was earned during
the same period in 2004. Non-interest income has remained constant over the six months ended June 30, 2005.



Non-interest expense. Non-interest expense increased by $140,000 for the six months ended June 30, 2005 compared to the six months ended June 30, 2004. This increase resulted partially from an increase in
internal audit fees due to Section 404 of Sarbanes-Oxley of approximately $31,000. The increase in compensation expense was due largely to expense associated with normal and expected compensation adjustments, additional personnel, and increases in
the cost of employee benefits such as health insurance net of a decrease in expenses associated with the ESOP. The increase in other non-interest expense resulted primarily from a $17,000 increase in loan expenses associated with the bank paying all
fees on equity loans and $12,000 increase in NOW expenses associated with the opening of our Oakboro Branch, net of a $19,000 decrease in expenses related to the maintenance and repair of foreclosed real estate.



Provision for income taxes. The Companys effective tax rate (income taxes as a
percentage of income before income taxes) was 38.3% for the period ending June 30, 2005 as compared to 31.7% for the period ending June 30, 2004.



Liquidity and Capital Resources



The term liquidity generally refers to an organizations ability to generate adequate amounts of funds to meet its needs for cash. More specifically for
financial institutions, liquidity ensures that adequate funds are available to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses, and provide funds for debt service,
dividends to stockholders, and other institutional commitments. Funds are primarily provided through financial resources from operating activities, expansion of the deposit base, borrowings, through the sale or maturity of investments, the ability
to raise equity capital, or maintenance of shorter-term interest bearing deposits.



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As a state chartered stock savings bank, the Bank must meet certain liquidity requirements that are established by the
North Carolina Commissioner of Banks. The Banks liquidity ratio at June 30, 2005, as computed under such regulations, was considerably in excess of such requirements. Given its excess liquidity and its ability to borrow from the FHLB of
Atlanta, the Bank believes that it will have sufficient funds available to meet anticipated future loan commitments, unexpected deposit withdrawals, or other cash requirements.



The FDIC requires the Bank to have a minimum leverage ratio of Tier I Capital (principally consisting of retained earnings and any common
stockholders equity, less any intangible assets) to all assets of at least 3%, provided that it receives the highest rating during the examination process. For institutions that receive less than the highest rating, the Tier I capital
requirement is 1% to 2% above the stated minimum. The FDIC also requires the Bank to have a ratio of total capital to risk-weighted assets of 8%, of which at least 4% must be in the form of Tier I capital. The Commissioner requires a net worth equal
to at least 5% of total assets. The Bank complied with all of the capital requirements of both the FDIC and the Commissioner at June 30, 2005.



Item 3. Controls and Procedures



As of the end of
the period covered by this Report, the Companys management carried out an evaluation, under the supervision and with the participation of the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Companys disclosure controls and procedures pursuant to Rule 13a-15 of the Securities and Exchange Act of 1934 (the Exchange Act). Based upon that evaluation, the Companys management, including its
Chief Executive Officer and Chief Financial Officer, concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries)
required to be included in the Companys Exchange Act filings.



There have
been no significant changes in internal control over financial reporting during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial
reporting.



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##### Table of Contents

Part II. OTHER INFORMATION



Item 4. Submission of Matters to a Vote of Security Holders



The Annual Meeting of Stockholders was held on May 23, 2005. Of 3,047,886 shares entitled to vote at the meeting, 2,709,592 were voted. The following matters were voted on at the meeting:



|            |  |                                                                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|Proposal 1: |  | To elect six members of the Board of Directors for a one-year term until the Annual Meeting of Shareholders in 2005. Votes for each nominee were as follows:



|                         |  |           |  |         
|------------------------ |  | --------- |  | --------
|Name                     |  | For       |  | Withheld
|J. Banks Garrison, Jr.   |  | 2,289,517 |  | 20,075  
|Caldwell A Holbrook, Jr. |  | 2,689,667 |  | 19,925  
|Joel A Huneycutt         |  | 2,689,592 |  | 20,000  
|Douglas D Stokes         |  | 2,689,667 |  | 19,925  
|R. Ronald Swanner        |  | 2,690,067 |  | 19,525  
|Greg E Underwood         |  | 2,684,689 |  | 24,903  



|            |  |                                                                                                                  
|----------- |  | -----------------------------------------------------------------------------------------------------------------
|Proposal 2: |  | To ratify the appointment of Dixon Hughes PLLC as our independent auditors for the year ending December 31, 2005.



|          |  |         |  |        
|--------- |  | ------- |  | -------
|For       |  | Against |  | Abstain
|2,702,916 |  | 600     |  | 0      



Item 6. Exhibits



|                  |  |                                                                                                                                                                                                                                                                          
|----------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit (3)(i)    |  | Certificate of Incorporation, incorporated herein by reference to Exhibit (3)(i) to the Registration Statement on Form S-1, Registration No. 333-04509, dated May 24, 1996, and amended on July
25, 1996                                                                 
|                  | 
|Exhibit (3)(ii)   |  | Bylaws, incorporated herein by reference to Exhibit (3)(ii) to the Registration Statement on Form S-1, Registration No. 333-04509, dated May 24, 1996, and amended on July 25,
1996                                                                                      
|                  | 
|Exhibit (4)       |  | Specimen Stock Certificate, incorporated herein by reference to Exhibit (4) to the Registration Statement on Form S-1, Registration No. 333-04509, dated May 24, 1996, and amended on July 25,
1996                                                                      
|                  | 
|Exhibit (10)(i)   |  | Employment Agreement between R. Ronald Swanner and Home Savings Bank of Albemarle, Inc., S.S.B., incorporated herein by reference to the Form 10-K dated September 30, 1996                                                                                              
|                  | 
|Exhibit (10)(ii)  |  | South Street Financial Corp. Stock Option Plan, incorporated herein by reference to the Form 10-K dated September 30, 1997                                                                                                                                               
|                  | 
|Exhibit (10)(iii) |  | 2003 Supplemental Executive Retirement Plan Agreements with R. Ronald Swanner, Christopher F. Cranford, David L. Smith and Cris D. Turner, dated June 27, 2003, incorporated herein by
reference to the Form 10-KSB dated December 31, 2003                              
|                  | 
|Exhibit (10)(iv)  |  | 2003 Executive Life Insurance Endorsement Method Split Dollar Plan Agreements with R. Ronald Swanner, Christopher F. Cranford, David L. Smith and Cris D. Turner, dated June 27, 2003,
incorporated herein by reference to the Form 10-KSB dated December 31, 2003       
|                  | 
|Exhibit (10)(v)   |  | 2003 Director Supplemental Retirement Plan Agreements with Caldwell A. Holbrook, Jr., Joel A. Huneycutt, Douglas Dwight Stokes, R. Ronald Swanner and Greg E. Underwood, dated June 27, 2003,
incorporated herein by reference to the Form 10-KSB dated December 31, 2003



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|                  |  |                                                                                                                                                                                                                                                                                                                         
|----------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit (10)(vi)  |  | 2003 Director Deferral Plan Agreements with Caldwell A. Holbrook, Jr., Joel A. Huneycutt, J. Banks Garrison, Jr., Douglas Dwight Stokes, R. Ronald Swanner and Greg E. Underwood, dated June
27, 2003, incorporated herein by reference to the Form 10-KSB dated December 31, 2003                                      
|                  | 
|Exhibit (10)(vii) |  | 2003 Director Life Insurance Endorsement Method Split Dollar Plan Agreements with Caldwell A. Holbrook, Jr., Joel A. Huneycutt, J. Banks Garrison, Jr., Douglas Dwight Stokes, R. Ronald
Swanner and Greg E. Underwood, dated June 27, 2003, incorporated herein by reference to the Form 10-KSB dated December 31, 2003
|                  | 
|Exhibit (11)      |  | Statement Regarding Computation of Per Share Earnings                                                                                                                                                                                                                                                                   
|                  | 
|Exhibit (31.1)    |  | Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                      
|                  | 
|Exhibit (31.2)    |  | Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                      
|                  | 
|Exhibit (32)      |  | Certification of Periodic Financial Report Pursuant to Section 906 of Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                        



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SIGNATURES



In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                      |  |                              |  |                                      
|--------------------- |  | ---------------------------- |  | -------------------------------------
|                      |  | SOUTH STREET FINANCIAL CORP.
|                      |  |                             
|Date: August 12, 2005 |  | By:                          |  | /s/ R. Ronald Swanner                
|                      |  |                              |  | R. Ronald Swanner                    
|                      |  |                              |  | President and Chief Executive Officer
|                      |  |                             
|Date: August 12, 2005 |  | By:                          |  | /s/ Christopher F. Cranford          
|                      |  |                              |  | Christopher F. Cranford              
|                      |  |                              |  | Treasurer and Chief Financial Officer



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