<PAGE>
 
               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington D.C. 25049

                                   FORM 10-Q

 [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
 
     For the quarterly period ended March 31, 1999
                                    --------------
 
 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
 
     For the transition period from _____________ to _______________

                        Commission File Number 0-21083
                                               -------

                          South Street Financial Corp.
                          ----------------------------
             (Exact name of registrant as specified in its charter)

     North Carolina                                56-1973261
     --------------                                ----------
     (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

                             155 West South Street
                        Albemarle, North Carolina 28001
                        -------------------------------
              (Address of principal executive office) (Zip code)

                                (704) 982-9184
                                 --------------
                         (Issuer's telephone  number)

                                      N/A
                                      ---
   (Former name, former address and former fiscal year, if changed since last
                                    report)

Indicate by check [X] whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the 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 _____
                

As of May 14, 1999 there were issued and outstanding 4,001,824 shares of the
Registrant's common stock, no par value.
<PAGE>
 
                  SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

<TABLE> 
<CAPTION> 
                                     INDEX

PART I.    FINANCIAL INFORMATION                                                            Page
                                                                                          --------
<S>                                                                                       <C>       
  Item 1.    Financial Statements
 
  Consolidated Statements of Financial Condition at March 31, 1999 (Unaudited)
    and September 30, 1998                                                                      1
 
  Consolidated Statements of Income and Comprehensive Income for the Three
    Months Ended March 31, 1999 and 1998 (Unaudited)                                            2
 
  Consolidated Statements of Income and Comprehensive Income for the Six
    Months Ended March 31, 1999 and 1998 (Unaudited)                                            3
 
  Consolidated Statements of Cash Flows for the Six Months Ended
    March 31, 1999 and 1998 (Unaudited)                                                     4 - 5
 
  Notes to Consolidated Financial Statements (Unaudited)                                    6 - 8
 
  Item 2.    Management's Discussion and Analysis of Financial Condition and
             Results of Operations                                                         9 - 14
 
  Item 3.    Quantitative and Qualitative Disclosures about Market Risk                        15
 
PART II.     OTHER INFORMATION
 
  Item 1.    Legal Proceedings                                                                 16
 
  Item 2.    Changes in Securities and Use of Proceeds                                         16
 
  Item 3.    Defaults upon Senior Securities                                                   16
 
  Item 4.    Submission of Matters to a Vote of Security Holders                               16
 
  Item 5.    Other Information                                                                 16
 
  Item 6.     Exhibits and Reports on Form 8-K                                                 16
 
  Signatures                                                                              17 - 18
</TABLE>
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
 
 
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1999 AND SEPTEMBER 30, 1998

<TABLE> 
<CAPTION> 
                                                                                   March 31,                  September 30,
ASSETS                                                                              1999                         1998
-----------------------------------------------------------------------------------------------------------------------------
                                                                                 (Unaudited)                    (Note)
<S>                                                                              <C>                        <C>    
Cash and cash equivalents:
  Noninterest-bearing deposits                                                    $    2,025,000            $    2,891,000
  Interest-bearing deposits                                                           21,342,000                26,895,000
  Federal Funds sold                                                                   2,250,000                 3,010,000
Securities held to maturity                                                           10,680,000                13,340,000
Securities available for sale                                                         25,957,000                39,158,000
Federal Home Loan Bank stock                                                           1,653,000                 1,707,000
Loans receivable, net                                                                111,679,000               110,550,000
Real estate acquired in settlement of loans                                               18,000                    68,000
Real estate held for investment                                                          976,000                   960,000
Accrued interest receivable                                                            1,014,000                 1,302,000
Office properties and equipment, net                                                   1,251,000                 1,106,000
Prepaid expenses and other assets                                                      1,271,000                   958,000
                                                                                  ------------------------------------------
       Total assets                                                               $  180,116,000            $  201,945,000
                                                                                  ==========================================
                                                                      
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------------------------
Liabilities:
  Deposits                                                                        $  147,737,000          $    148,444,000
  Note payable                                                                                                  18,000,000
  Advance payments by borrowers for taxes and insurance                                  323,000                   125,000
  Accounts payable and other liabilities                                               2,402,000                 3,250,000
  Minority interest in Park Ridge Associates, LLC                                         10,000                    10,000
  Checks outstanding on disbursement account                                             246,000                   561,000
                                                                                  ------------------------------------------   
       Total liabilities                                                             150,718,000               170,390,000
                                                                                  ------------------------------------------
Stockholders' equity:
  Preferred stock, no par value, authorized 5,000,000 shares;
    no shares issued                                                                          -                         -
  Common stock, no par value, authorized 20,000,000 shares;
    issued 4,076,924 shares March 31, 1999 and 4,351,0060
    shares at September 30, 1998                                                              -                         -
  Additional paid-in capital                                                          15,746,000                17,930,000
  Deferred management recognition plan                                                (1,197,000)               (1,596,000)
   Accumulated other comprehensive income, unrealized gain
    (loss) on securities available for sale, net of tax                                 (194,000)                   26,000
  Unearned compensation                                                               (1,918,000)               (1,990,000)
  Unearned ESOP                                                                       (3,789,000)               (4,080,000)
  Retained earnings, substantially restricted                                         20,750,000                21,265,000
                                                                                  -------------------------------------------   
       Total stockholders' equity                                                     29,398,000                31,555,000
                                                                                  ------------------------------------------
       Total liabilities and stockholders' equity                                 $  180,116,000          $    201,945,000
                                                                                  ==========================================
</TABLE>

NOTE: The Consolidated Statement of Financial Condition as of September 30, 1998
      has been taken from the audited financial statements of South Street
      Financial Corp. and Subsidiary at that date.

See Notes to Consolidated Financial Statements.

                                       1
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
 
 
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 1999 AND 1998

<TABLE> 
<CAPTION> 
                                                                                       1999                 1998
-------------------------------------------------------------------------------------------------------------------
                                                                                             (Unaudited)
<S>                                                                            <C>                    <C>         
Interest income:
  Loans                                                                        $     2,238,000        $  2,383,000
  Mortgage-backed securities                                                           335,000             457,000
  Investment securities                                                                310,000             875,000
  Other interest-bearing deposits                                                      253,000             330,000
                                                                               ------------------------------------
     Total interest income                                                           3,136,000           4,045,000
Interest expense on deposits and borrowed funds                                      1,743,000           2,459,000
                                                                               ------------------------------------      
        Net interest income                                                          1,393,000           1,586,000
Provision for loan losses                                                                   -                   -
                                                                               ------------------------------------
        Net interest income after provision for loan losses                          1,393,000           1,586,000
                                                                               ------------------------------------
Noninterest income, net                                                                 32,000              67,000
                                                                               ------------------------------------

Noninterest expenses:
  Compensation and benefits                                                          1,038,000             875,000
  Net occupancy                                                                         72,000              63,000
  Federal insurance premium expenses                                                    23,000              22,000
  Data processing                                                                       61,000              56,000
  Other                                                                                181,000             198,000
                                                                               ------------------------------------
                                                                                     1,375,000           1,214,000
                                                                               ------------------------------------
        Income before income taxes                                                      50,000             439,000
Provision for income taxes                                                              17,000             179,000
                                                                               ------------------------------------ 
        Net income                                                                      33,000             260,000
 
Other comprehensive income (loss), net of tax:
  Unrealized holding gains (losses) arising during period, net of tax                 (103,000)             49,000
  Less reclassification adjustment for gains (losses) included in
    net income, net of tax                                                                  -                   -
                                                                               ------------------------------------         
     Other comprehensive income (loss)                                                (103,000)             49,000
                                                                               ------------------------------------      
 
        Comprehensive income (loss)                                            $       (70,000)       $    309,000
                                                                               ====================================
Basic earnings per share                                                       $          0.01        $       0.06
                                                                               ====================================           
Diluted earning per share                                                      $          0.01        $       0.06
                                                                               ==================================== 
 
Dividends declared per share                                                   $          0.10        $       0.10
                                                                               ====================================
Average number of basic shares outstanding                                           3,702,291           4,170,349
 
Average number of diluted shares outstanding                                         3,702,291           4,170,349
</TABLE>

See Notes to Consolidated Financial Statements.

                                       2
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
 
 
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Six Months Ended March 31, 1999 and 1998

<TABLE> 
<CAPTION> 


                                                                              1999               1998
-----------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                 <C>            
Interest income:
  Loans                                                                    $ 4,518,000         $  4,779,000
  Mortgage-backed certificates                                                 663,000              983,000
  Investment securities                                                        732,000            1,981,000
  Other interest-bearing deposits                                              483,000              593,000
                                                                         -------------         ------------     
    Total interest income                                                    6,396,000            8,336,000
Interest expense on deposits and borrowed funds                              3,541,000            4,746,000
                                                                         -------------         ------------  
           Net interest income                                               2,855,000           3,590,0000
Provision for loan losses                                                            -                    -                      
                                                                         -------------         ------------   
           Net interest income after provision for loan losses               2,855,000            3,590,000
                                                                         -------------         ------------  
Noninterest income, net                                                         61,000               84,000
                                                                         -------------         ------------   
Noninterest expenses:
  Compensation and benefits                                                  1,860,000            2,568,000
  Net occupancy                                                                157,000              123,000
  Federal insurance premium expenses                                            45,000               44,000
  Data processing                                                              112,000              107,000
  Other                                                                        407,000              394,000
                                                                         -------------         ------------  
                                                                             2,581,000            3,236,000
                                                                         -------------         ------------  
           Income before income taxes                                          335,000              438,000
Provision for income taxes                                                     109,000              179,000
                                                                         -------------         ------------  
           Net income                                                          226,000              259,000
 
Other comprehensive loss, net of tax:
  Unrealized holding losses arising during the period, net of tax             (218,000)             (54,000)
  Less reclassification adjustment for gains included in net
    income, net of tax                                                          (2,000)                  - 
                                                                         -------------         ------------   
        Other comprehensive loss                                              (220,000)            (54,000)
                                                                         -------------         ------------  
       Comprehensive income                                                $     6,000         $   205,000
                                                                         =============         ============ 
Basic earnings per share                                                   $      0.06         $      0.06
                                                                         =============         ============ 
Diluted earning per share                                                  $      0.06         $      0.06
                                                                         =============         ============ 
Dividends declared per share                                               $      0.20         $      0.10
                                                                          =============         ============  
Average number of basic shares outstanding                                   3,748,051           4,157,224
 
Average number of diluted shares outstanding                                 3,748,051           4,157,224

See Notes to Consolidated Financial Statements.
</TABLE>

                                       3
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED Statements of CASH FLOWS
Six Months Ended March 31, 1999 and 1998
 

<TABLE> 
<CAPTION> 
                                                                           1999                 1998
-----------------------------------------------------------------------------------------------------------------------
                                                                                  (Unaudited)
<S>                                                                     <C>                <C> 
Cash Flows From Operating Activities
  Net income                                                                 $ 226,000        $  259,000
  Adjustments to reconcile net income to cash used in
    operating activities:
    Net accretion of premiums and discounts on securities                       18,000          (125,000)
    Amortization of deferred loan fees                                        (168,000)          (78,000)
    Provision for depreciation                                                  66,000            56,000
    ESOP contribution                                                            3,000           219,000
    Vesting of deferred management recognition plan                            399,000         1,198,000
    Deferred income taxes                                                      (35,000)          125,000
    Amortization of unearned compensation                                       72,000                 -
    Gain on sale of investments                                                 (2,000)                -
    (Increase) decrease in assets:
       Accrued interest receivable                                             288,000           530,000
       Prepaid expenses and other assets                                      (313,000)          175,000
    Increase (decrease) in liabilities:
       Accounts payable and other liabilities                                 (658,000)           17,000
       Interest payable                                                         (2,000)            6,000
                                                                         
Checks outstanding on disbursement accounts                                    315,000)         (181,000)
                                                                          ------------        ---------- 
         Net cash provided by (used in) operating activities                  (421,000)        2,201,000
                                                                          ------------        ---------- 
Cash Flows From Investing Activities
  Purchases of securities available for sale                               (11,037,000)       (8,072,000)
  Redemption of FHLB stock                                                      54,000           543,000
  Proceeds from maturities and recalls of securities available
    for sale                                                                23,891,000        37,854,000
  Principal collected on securities held to maturity                         2,630,000         3,500,000
  Loan originations and principal payments on loans, net                      (961,000)        1,738,000
  Purchase of office properties and equipment                                 (211,000)           (2,O00)
  Purchase of real estate held for investment                                 ( 16,000)
  Proceeds from sale of foreclosed real estate                                  50,000
                                                                          ------------       ----------- 
           Net cash provided by investing activities                        14,400,000        35,561,000
                                                                          ------------       -----------
</TABLE> 
                                       4
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six Months Ended March 31, 1999 and 1998

<TABLE> 
<CAPTION> 
                                                                                     1999                 1998
--------------------------------------------------------------------------------------------------------------------------
                                                                                           (Unaudited)
<S>                                                                               <C>                       <C>      
Cash Flows from Financing Activities
   Net decrease in deposits                                                       $      (705,000)          $   5,121,000
   Net increase in advance payments by borrowers for taxes
     and insurance                                                                        198,000                 207,000
   Principal payment received on ESOP note                                                291,000                  72,000
   Proceeds from borrowings on note payable                                                    -               18,000,000
   Repayment of note payable                                                          (18,000,000)                     -
   Dividends paid to stockholders                                                        (755,000)            (28,993,000)
   Retirement of stock purchased                                                       (2,187,000)                     -
   Proceeds from Federal Home Loan Bank borrowings                                             -                       -
   Repayment of Federal Home Loan Bank borrowings                                              -              (20,000,000)
                                                                                  ----------------------------------------
           Net cash used in financing activities                                      (21,158,000)            (25,593,000)
                                                                                  ----------------------------------------
           Net increase (decrease) in cash and cash equivalents                        (7,179,000)             12,169,000
Cash and cash equivalents:
  Beginning                                                                            32,796,000              27,644,000
                                                                                  ----------------------------------------   
  Ending                                                                          $    25,617,000           $  39,813,000
                                                                                  ========================================
 
Supplemental Disclosures of Cash Flow Information
  Cash and cash equivalents:
    Cash and short-term investments:
      Noninterest-bearing                                                         $     2,025,000           $   2,454,000
      Interest-bearing                                                                 21,342,000              31,929,000
      Federal funds sold                                                                2,250,000               5,430,000
                                                                                  ----------------------------------------        
                                                                                  $    25,617,000           $  39,813,000
                                                                                  ========================================
 
  Cash payments for:
    Interest                                                                      $     2,113,000           $   2,029,000
    Taxes                                                                                (576,000)                136,000
 
Supplemental Disclosures of Noncash Transactions
  Net change in unrealized (gain) loss on securities available for
    sale, net of deferred taxes                                                   $       220,000           $      54,000
  Change in dividends accrued                                                             (14,000)                 18,000
</TABLE>

See Notes to Consolidated Financial Statements.

                                       5
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
--------------------------------------------------------------------------------

Note 1.    Nature of Business

Prior to October 2, 1996, Home Savings Bank of Albemarle, Inc., S.S.B. (the
"Bank") operated as a mutual North Carolina-chartered savings bank. On October
2, 1996, the Bank converted from a North Carolina-chartered mutual savings bank
to a North Carolina-chartered savings bank (the "Conversion"). In connection
with the Conversion, all of the issued and outstanding capital stock of the Bank
was acquired by South Street Financial Corp., a North Carolina corporation (the
"Company") which was organized to become the holding company for the Bank.  At
that time, the Company had an initial public offering of its common stock, no
par value (the "Common Stock").

The Company is a bank holding company registered with the Board of Governors of
the Federal Reserve System (the "Federal Reserve") under the Bank Holding
Company Act of 1956, as amended (the "BHCA") and the 0savings bank holding
company laws of North Carolina. The Company's office is located at 155 West
South Street, Albemarle, North Carolina. The Company's activities consist of
investing the proceeds of its initial public offering which half of proceeds
were retained at the holding company level, holding the indebtedness outstanding
from the Home Savings Bank of Albemarle, Inc., SSB Employee Stock Ownership Plan
(the "ESOP") and owning the Bank. The Company's principal sources of income are
earnings on its investments and interest payments received from the ESOP with
respect to the ESOP loan. In addition, the Company will receive any dividends,
which are declared and paid by the Bank on its capital stock.

The Bank was originally chartered in 1911. It has been a member of the Federal
Home Loan Bank ("FHLB") system since 1954 and its deposits are federally insured
up to allowable limits. The Bank is engaged primarily in the business of
attracting retail deposits from the general public and using such deposits to
make mortgage loans secured by real estate. The Bank makes mortgage loans
secured by residential real property, including one-to-four family residential
real estate loans, home equity line of credit loans and other subordinate lien
loans, loans secured by improved nonresidential real property, loans secured by
undeveloped real property and construction loans. The Bank also makes a limited
number of loans, which are not secured by real property, such as loans secured
by savings accounts. The Bank's primary source of revenue is interest income
from its lending activities. The Bank's other major sources of revenue are
interest and dividend income from investments and mortgage-backed securities,
interest income from its interest-bearing deposit balances in other depository
institutions and fee income from its lending and deposit activities. The major
expenses of the Bank are interest on deposits and noninterest expenses such as
compensation and fringe benefits, federal deposit insurance premiums, data
processing expenses and branch occupancy and related expenses.

                                       6
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
--------------------------------------------------------------------------------

Note 2.    Basis of Presentation

The accompanying unaudited consolidated financial statements (except for the
statement of financial condition at September 30, 1998, which is audited) have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Regulation S-X.  Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (none of
which were other than normal recurring accruals) necessary for a fair
presentation of the financial position and results of operations for the periods
presented have been included.  The financial sta0tements of the Company are
presented on a consolidated basis with those of Home Savings Bank.  The results
of operations for the three and six month periods ended March 31, 1999 are not
necessarily indicative of the results of operations that may be expected for the
year ended September 30, 1999.

The accounting policies of the Company followed are as set forth in Note 1 of
the Notes to Consolidated Financial Statements in the 1998 annual report of the
Company.

Note 3.    Earnings Per Share

The Company's basic earnings per share for the six and three month periods ended
March 31, 1999 and 1998 are based on net income earned 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 the conversion,
exercise or issuance of all potential common stock instruments, if they have a
dilutive effect. For purposes of this computation, the number of shares of
common stock purchased by the ESOP which have not been allocated to participant
accounts are not assumed to be outstanding.

Note 4.    Dividends Declared

On March 8, 1999, the Company's Board of Directors declared a dividend of $ .10
a share for shareholders of record as of March 24, 1999 and payable on April 7,
1999. In addition, on March 8, 1999, the Board of Directors of Home Savings
declared an upstream dividend of $324,000 to the Company.

Note 5     Notes Payable and Advances from Federal Home Loan Bank

The note payable to Bankers' Bank in the amount of $18,000,000 was repaid on
October 1, 1998 and as of March 31, 1999 there are no outstanding notes or
advances from the FHLB.

                                       7
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
--------------------------------------------------------------------------------

Note 6.    Stock Option Plan and the Bank's Management Recognition Plan

The Company's stockholders approved the Company's Stock Option Plan and the
Bank's Management Recognition Plan and the Trust (the "MRP") on October 15,
1997. The Stock Option Plan reserves for issuance up to 449,650 stock options
to all officers, directors, and employees at the time of the adoption either in
the form of incentive stock options or non-incentive stock options. The
exercise price of the stock options may not be less than the fair value of the
Company's common stock at date of grant. The options awarded to employees vest
at the rate of 25% annually beginning at the date of grant. Options granted to
non-employee directors vested immediately on the date of grant. All options
were granted in 1998 and expire in 2008. As permitted under the generally
accepted accounting principles, grants under the plan will0 be accounted for
following the provisions of APB Opinion No. 25 and its related interpretations.
Accordingly, no compensation cost will be recognized on the grant date of any
options.

On December 4, 1998 the FASB issued an exposure draft during the first quarter
of 1999 which will include interpretations of APB Opinion No. 25 which are
anticipated to be effective in September, 1999 and if adopted will cover events
that occur after December 15, 1998. Under the interpretations certain
transactions should they occur would cause an entity to adopt fair value
accounting for stock.

The MRP reserved for issuance 179,860 shares of common stock to all officers,
directors, and employees at the time of adoption. The Bank issued shares to
fund the MRP in October of 1997. The restricted common stock under the MRP
vests at the rate of 25% annually beginning at the date of grant.

                                       8
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS
--------------------------------------------------------------------------------

This Form 10-Q contains certain forward-looking statements consisting of
estimates with respect to the financial condition, results of operations and
other business of the Company that are subject to various factors which could
cause actual results to differ materially from those estimates.  Factors, which
could influence the estimates, include changes in general and local market
conditions, legislative and regulatory conditions and an adverse interest rate
environment.

Comparison of Financial Condition at March 31, 1999 and September 30, 1998:

Total assets decreased by $21.8 million or 10.8%, to $180.1 million at March 31,
1999 from $201.9 million at September 30, 1998. The decrease in assets was
primarily attributable to a decrease in liquidity and investment securities,
which were used for repayment of the note payable to Bankers' Bank in the amount
of $18.0 million. The Company also repurchased 274,136 shares of the outstanding
common stock of the Company in the amount of $2.2 million.

Net loans receivable increased by $1.1 million or 1.0% to $111.7 million at
March 31, 1999 from $110.6 million at September 30, 1998. Investment securities
held to maturity decreased $2.7 million or 19.9%, to $10.7 million at March 31,
1999 from $13.3 million at September 30, 1998. Likewise, investment securities
classified as available for sale decreased $13.2 million or 33.7%, to $26.0
million at March 31, 1999 from $39.2 million at September 30, 1998. The
decrease was primarily due to the repayment of $18.0 million in borrowings from
Bankers' Bank. The Bank had borrowings of $18.0 million outstanding at the end
of September 30, 1998. The Bank has guaranteed the repayment of the ESOP's note
payable to the Company, which it incurred on October 2, 1996 in order to
purchase 359,720 shares of stock in the Company. The Company's note receivable
from the ESOP totaling $3.8 million, net of $291,000 principal repayment made
during the six months ended March 31, 1999, is reported as a reduction of
stockholders' equity. Retained earnings decreased by $515,000 to $20.8 million
at March 31, 1999, which is attributable to the Company's dividends accrued for
the six months ended March 31, 1999 in the amount of $741,000, net of $226,000
of net income. Additional paid-in capital, deferred MRP and unearned
compensation decreased by $1.7 million to $12.6 million at March 31, 1999 from
$14.3 million at September 30, 1998. The decrease was primarily attributable to
the repurchase of 274,136 shares of outstanding common stock in the amount of
$2.2 million.

As a North Carolina chartered stock savings bank, the Bank is required to meet
various capital standards established by federal and state banking agencies. At
March 31, 1999 the Company's stockholders' equity amounted to $29.4 million, or
16.3% of total assets and exceeds all regulatory capital requirements.

The Bank's level of nonperforming loans, defined as loans past due 90 days or
more was $249,000 and $248,000 at March 31, 1999 and September 30, 1998,
respectively. During the six month periods ended March 31, 1999 and 1998, the
Bank's level of nonperforming loans remained consistently low in relation to
prior periods and to total loans outstanding, and the Bank's charge-offs of
loans was minimal. Management determined based on their analysis that no loan
loss provisions were necessary during the six months ended March 31, 1999.

                                       9
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AMD RESULTS OF
OPERATIONS
-------------------------------------------------------------------------------

Comparison of Operating Results for the Three and Six Months Ended March 31,
1999 and 1998:

General.  Net income for the three month and six month periods ended March 31,
1999 was $33,000 and $226,000 respectively or $227,000 and $33,000 less than the
$260,000 and $259,000 earned during the same period in 1998. As discussed
below, the decrease in net income was primarily attributable to a decrease in
net interest income caused by a lower level of interest-earning assets.

Interest income.  Interest income decreased by $909,000 from $4.0 million for
the three months ended March 31, 1998 to $3.1 million for the three months ended
March 31, 1999. Interest income decreased by $1.9 million from $8.3 million for
the six months ended March 31, 1998 to $6.4 million for the six months en0ded
March 31, 1999. These decreases were attributable to the decrease in the volume
of interest-earning assets outstanding.

Interest Expense.  Interest expense on deposits decreased by $716,000 from $2.5
million for the three months ended March 31, 1998 to $1.7 million for the three
months ended March 31, 1999. Interest expense on deposits and borrowed funds
decreased by $1.2 million from $4.7 million for the six months ended March 31,
1998 to $3.5 million for the six months ended March 31, 1999. The decrease was
primarily due to the repayment of $18.0 million in outside borrowings.

Net interest income. Net interest income decreased by $193,000 from $1.6 million
for the three months ended March 31, 1998 to $1.4 million for the three months
ended March 31, 1999.  Net interest income decreased by $735,000 from $3.6
million for the six months ended March 31, 1998 to $2.9 million for the six
months ended March 31, 1999. This decrease resulted from the decrease in the
volume of interest-earning assets outstanding offset somewhat by lower
outstanding average debt. The Bank's interest rate spread decreased primarily
because its deposits were more rate sensitive than its interest-earning assets.

Provision for loan losses.  There were no provisions for loan losses charged to
income during the six months ended March 31, 1999. Provisions, which are
charged to operations, and the resulting loan loss allowances are amounts the
Bank's management believes will be adequate to absorb losses on existing loans
that may become uncollectible.

Loans are charged off against the allowance when management believes that
collectibility is unlikely. The decision to increase or decrease the provision
and resulting allowances is based upon an evaluation of both prior loan loss
experience and other factors, such as changes in the nature and volume of the
loan portfolio, overall portfolio quality, and current economic conditions. The
Bank's level of nonperforming loans has remained consistently low in relation to
prior periods and total loans outstanding, and the Bank's charge-offs of loans
during the six month periods ended March 31, 1999 and 1998 was minimal.

At March 31, 1999, the Bank's level of general valuation allowances for loan
losses amounted to $429,000, which management believes is adequate to absorb
potential losses in its loan portfolio.

                                       10
<PAGE>
 
SOUTH STREET FINANCIAL CORP.AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
------------------------------------------------------------------------------

Noninterest income.  Noninterest income decreased by $35,000 from $67,000 for
the three month period ended March 31, 1998 to $32,000 for the three month
period ended March 31, 1999. This decrease was attributable to a decrease in
miscellaneous immaterial items during0 the six months ended March 31, 1999 as
compared to the same period in 1998. Noninterest income decreased by $23,000
from $84,000 for the six month period ended March 31, 1998 to $61,000 for the
six month period ended March 31, 1999.

Noninterest expense.  Noninterest expense increased by $161,000 from $1.2
million for the three month period ended March 31, 1998 to $1.4 million for the
three month period ended March 31, 1999. The increase in noninterest expense is
primarily due to the amortization of the unearned compensation, which was
recorded for the amount of the special return of capital dividend that was paid
to unallocated ESOP shares. The original amount of $2.0 million is being
amortized as compensation expense as ESOP shares are allocated to participants.
Noninterest expense decreased by $655,000 from $3.2 million for the six month
period ended March 31, 1998 to $2.6 million for the six month period ended March
31, 1999.  The decrease in noninterest expense is principally due to the
immediate vestiture of MRP expense, discussed below, in the first quarter of
fiscal year 1998 in the amount of $798,000.

As a part of the conversion, the Company established an ESOP that acquired a
total of 359,720 shares of the stock offered in the conversion with funds
provided in the form of a loan from the Company.  The loan is expected to be
repaid over a fifteen-year period with funds provided by the Bank sufficient to
amortize the debt.  The expense associated with the ESOP is reported in
accordance with SOP 93-6 Employers' Accounting for Employee Stock Ownership
Plans.

The MRP reserved for issuance 179,860 shares of common stock to all officers,
directors and employees on the adoption date of October 15, 1997. The Bank
issued shares to fund the MRP in October of 1997. The restricted common stock
under the MRP vests at the rate of 25% annually. The expense recorded in the
six months ended March 31, 1999 represents six months accrual of the yearly 25%
vesting amount, while the expense for the six months ended March 31, 1998
represents immediate vesting of 25% of the MRP shares and six months accrual of
the next 25% amount.

Capital Resources and Liquidity:

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-earning deposits.

                                       11
<PAGE>
 
SOUTH STREET FINANCIAL CORP.AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
------------------------------------------------------------------------------

During the six month period ended March 31, 1999, cash and cash equivalents, a
significant source of liquidity, decreased by approximately $7.2 million. This
decrease is a direct result of the Company's repayment of $18.0 million in
borrowings and the repurchase of the Company's common stock as mentioned
previously.  Cash flow resulting from internal operating activities provided for
a decrease of $421,000 in cash during the six month period ended March 31, 1999.
Financing activities, principally the repayment of short-term debt in the amount
of $18.0 million provided for a decrease of $21.2 million in cash. Investing
activities, principally proceeds from maturities and sales of securities of
$26.5 million, netted by the purchase of securities totaling $11.0 million
provided an additional $14.4 million.

As a state chartered stock savings bank, Home Savings must meet certain
liquidity requirements that are established by the Administrator. Home's
liquidity ratio at March 31, 1999, 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, Home Savings believes that it will
have sufficient funds available to meet anticipated future loan commitments,
unexpected deposit withdrawals, or other cash requirements.

The FDIC requires Home Savings 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 Administrator requires a
net worth equal to at least 5% of total assets. Home Savings complied with all
of the capital requirements of both the FDIC and the Administrator at March 31,
1999.

The consolidated financial statements and accompanying footnotes have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without consideration for changes in the relative purchasing
power of money over time due to inflation.  The assets and liabilities of the
Company are primarily monetary in nature and changes in interest rates have a
greater impact on the Company's performance than do the effect of inflation.

Inflation and Changing Prices:

The financial statements and accompanying footnotes have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time due to inflation.  The assets and liabilities of the Company are
primarily monetary in nature and changes in market interest rates have a greater
impact on the Company's performance than do the effects of inflation.

                                       12
<PAGE>
 
SOUTH STREET FINANCIAL CORP.AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
----------------------------------------------------------------------------

Year 2000:

A lot of attention has been given to the impact that the year 2000 date change
will have on businesses, utilities and other organizations that rely on
computerized systems to help run their operations. The year 2000 date change
can affect any system that uses computer software or computer chips including
automated equipment and machinery.  For example, many computer programs and
computer chips store the calendar year portion of the date as two digits rather
than four digits. These software programs and chips record the year 1999 as
"99". This approach works until the year 2000 when the "00" may be interpreted
as the year 1900 instead of the year 2000.

Banks use computer systems to perform financial calculations, transfer funds,
record deposits and loan payments, run financial security systems and vaults and
a myriad of other functions.  Because banks rely heavily on their computer
systems, the Federal Financial Institutions Examination Council ("FFIEC") has
placed significant emphasis on the problems surrounding the year 2000 issues and
has required financial institutions to document the assessment, testing and
corrections made to ready their computer systems and programs for the year 2000
date change. The FFIEC has strict regulations, guidelines, and milestones in
place that each FDIC insured financial institution must follow in order to
remain operational. The Company's board of directors has remained informed of
the Company's position and progress in its year 2000 project.

The Company's year 2000 project remains on schedule according to the guidelines
set forth by the FFIEC. The Company's most critical external exposure to year
2000 system problems is with its data processing provider, Fiserv. Fiserv
renovated its systems in June 1998 and is currently testing its remediation
efforts. Fiserv has responded to the Company that renovation of its program is
virtually complete. In the event that Fiserv is unable to make the necessary
corrections to its programs to accommodate the year 2000, the Company will
convert its data to one of the other Fiserv programs that is able to operate in
the 2000 environment.

In addition, the Company has contacted its major customers and vendors to
inquire about their progress in addressing the year 2000 problem and does not
believe that the problems of such customers and vendors will have a material
adverse effect on the Company or its operations.  The Company will continue to
monitor the progress of these parties in addressing the year 2000 problem as the
new millennium approaches. Management replaced the computer hardware and
software with year 2000 compliant equipment during the second quarter of fiscal
1999 at a total cost of approximately $260,000.

The year 2000 problems can affect the Company's operation in a number of ways
but the mission critical issue is maintaining customers' account information
including tracking deposits, interest accruals and loan payments. The Company
is dependent upon electricity, telephone lines, computer hardware and Fiserv's
date processing capability.

                                       13
<PAGE>
 
SOUTH STREET FINANCIAL CORP.AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
-----------------------------------------------------------------------------

The Company is in contact with its electric utility and phone company, and
assurances have been given that no major problems exist and that both companies
will have all year 2000 problems addressed well before December 31, 1999. A new
telephone system was also installed in the second quarter of fiscal 1999. If
the electric utility is unable to certify that its renovation is completed by
June 30, 1999, the Company will acquire portable generators with sufficient
capacity to run the system servers and at least one work station in each branch
office.

To prevent difficulties in the event there is an unforeseen interruption in
either telephone or electrical service when the year changes, the Company will
print hard copies of all account information. In addition, the Company will
download all account information into programs on the Company's hardware that
will allow bank personnel to extract customer information without regard to
outside sources.

The Company's loan portfolio consists primarily of residential mortgage loans to
individuals. These individuals generally are not affected by Year 2000
failures. A limited number of the Company's commercial borrowers are being
contacted to assure that timely payments will be made in January 2000. The
Company intends to amend its underwriting policies to address loan payment
problems associated with a borrower as a result of a disruption in income or a
commercial borrower's inability to make a timely payment.

                                       14
<PAGE>
 
SOUTH STREET FINANCIAL CORP.AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
------------------------------------------------------------------------------

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk. One of the principal risks for the bank is interest rate
risk. One of the Bank's principal financial objectives is to achieve long-term
profitability while reducing its exposure to fluctuations in interest rates.
Historically, the Bank has been a mortgage lender so the loan portfolio
continues to have a large number of mortgage loans with maturities that are
considerably longer than for the deposits that fund those loans. Thus, an
upward movement in the market rate of interest would result in the cost of
deposits increasing at a faster rate than the rate on loans. The principal
strategy of the Bank over the past several years has been to emphasize the
investment of excess cash in short or intermediate term interest-earning assets
and the solicitation of transaction deposits accounts which are less sensitive
to changes in interest rates and can be repriced rapidly. The Company has not
experienced any substantial changes in its portfolio risk during the six month
period ended March 31, 1999.  See disclosures in the September 30, 1998 Form 10-
K.  However, the Bank's interest rate spread has decreased slightly during the
six months ended March 31, 1999 due to a general economic decline in the Bank's
market area.

During 1998, the Bank formed a wholly owned subsidiary, South Street Development
Corporation ("SSDC") with a $1.8 million cash investment, SSDC then invested
$10,000 for a 50% interest in Park Ridge Associates, LLC ("Park Ridge").  An
outside individual owns the other 50% interest in Park Ridge.  In June, 1998,
Park Ridge Associates acquired 25.6 acres of prime real estate located within
the city limits of Albemarle, North Carolina.  The joint venture was created to
acquire and develop the property into a premier residential subdivision. The
upscale subdivision consists of 30 building lots of which nine have been
presold.  As of March 31, 1999, the development of the infrastructure was two-
thirds completed with an expected completion date of June 30, 1999. The
property will be marketed at that time. There can be no assurances that the
development will be completed by the expected completion date, or that the Bank
will be successful in recovering its investment in the joint venture.

                                       15
<PAGE>
 
Part II. OTHER INFORMATION

        Item 1.  Legal Proceedings

                 The Company is not engaged in any legal proceedings at the
                 present time. From time to time, the Bank is a party to legal
                 proceedings within the normal course of business wherein it
                 enforces its security interest in loans made by it, and other
                 matters of a similar nature.

        Item 2.  Changes in Securities and Use of Proceeds
                 
                 Not applicable

        Item 3.  Defaults Upon Senior Securities
        
                 Not applicable

        Item 4.  Submission of Matters to a Vote of Security Holders
          
                 Not applicable

        Item 5.  Other Information
                 
                 Not applicable

        Item 6.  Exhibits and Reports on Form 8-K
                 
                 (a)  Exhibits

                      Exhibit (27) Financial Data Schedule

                 (b)  Reports on Form 8-K

                 On January 12, 1999, the Company filed a Form 8-K with the
                 Securities and Exchange Commission announcing that the Board of
                 Directors had authorized the repurchase of up to 10% of the
                 Company's outstanding common stock.

                                       16
<PAGE>
 
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.

                                       South Street Financial Corp.


     Dated ________________            By:__________________________
                                           Carl M. Hill
                                           President and Chief Executive Officer



     Dated _________________           By:__________________________
                                           Christopher F. Cranford
                                           Treasurer and Controller

                                       17
<PAGE>
 
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.

    
                                           South Street Financial Corp.


     Dated ________________            By: /s/ Carl M. Hill
                                           ---------------------------
                                           Carl M. Hill
                                           President and Chief Executive Officer


     Dated ________________            By: /s/ Christopher F. Cranford
                                           ---------------------------
                                           Christopher F. Cranford
                                           Treasurer and Controller

                                       18