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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 September 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  x    No ̈



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).    Yes ̈No  x



As of November 10, 2005, 2,999,594 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 ConditionSeptember 30, 2005 and December 31, 2004          |  | 3
|         |  |                                                                                       | 
|         |  |                                                                                       |  | Consolidated Statements of IncomeThree Months and Nine Months Ended September 30, 2005 and 2004 |  | 4
|         |  |                                                                                       | 
|         |  |                                                                                       |  | Consolidated Statements of Cash FlowsNine Months Ended September 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 6 - |  | Exhibits                                                                              |  | 12                                                                                             



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##### Table of Contents

Part 1. FINANCIAL INFORMATION



Item 1 - Financial Statements



South Street Financial Corp. and Subsidiary

Consolidated Statements of Financial Condition



|                                                                                                                                                      |  |                              |         |   |                   |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                      |  | September 30,2005(Unaudited) |         |   | December 31,2004* |  
|                                                                                                                                                      |  | (In thousands)               |        
|ASSETS                                                                                                                                                |  |                              |         |   |                   |   |         |  
|                                                                                                                                                      |  |                             
|Cash and cash equivalents:                                                                                                                            |  |                              |         |   |                   |   |         |  
|Non-interest-earning deposits                                                                                                                         |  | $                            | 4,922   |   |                   | $ | 7,032   |  
|Interest-earning deposits                                                                                                                             |  |                              | 7,703   |   |                   |   | 16,144  |  
|Federal funds sold                                                                                                                                    |  |                              | 1,982   |   |                   |   | 2,370   |  
|Securities held to maturity, fair market value June 30, 2005, $5,866; December 31, 2004, $6,440                                                       |  |                              | 5,554   |   |                   |   | 6,479   |  
|Securities available for sale                                                                                                                         |  |                              | 24,210  |   |                   |   | 18,691  |  
|Federal Home Loan Bank stock                                                                                                                          |  |                              | 1,010   |   |                   |   | 434     |  
|Loans                                                                                                                                                 |  |                              | 176,839 |   |                   |   | 153,006 |  
|Allowance for loan losses                                                                                                                             |  |                              | (665    | ) |                   |   | (575    | )
|                                                                                                                                                      |  |                              |         |   |                   |   |         |  
|NET LOANS                                                                                                                                             |  |                              | 176,174 |   |                   |   | 152,431 |  
|                                                                                                                                                      |  |                             
|Real estate held for investment                                                                                                                       |  |                              | 653     |   |                   |   | 653     |  
|Foreclosed real estate                                                                                                                                |  |                              | 105     |   |                   |   | 57      |  
|Property and equipment, net                                                                                                                           |  |                              | 4,296   |   |                   |   | 2,602   |  
|Bank-owned life insurance                                                                                                                             |  |                              | 7,513   |   |                   |   | 7,245   |  
|Prepaid expenses and other assets                                                                                                                     |  |                              | 2,012   |   |                   |   | 1,413   |  
|                                                                                                                                                      |  |                              |         |   |                   |   |         |  
|TOTAL ASSETS                                                                                                                                          |  | $                            | 236,134 |   |                   | $ | 215,551 |  
|                                                                                                                                                      |  |                              |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                  |  |                              |         |   |                   |   |         |  
|                                                                                                                                                      |  |                             
|LIABILITIES                                                                                                                                           |  |                              |         |   |                   |   |         |  
|Deposits                                                                                                                                              |  | $                            | 193,443 |   |                   | $ | 186,905 |  
|Borrowings                                                                                                                                            |  |                              | 13,000  |   |                   |   |        |  
|Accrued expenses and other liabilities                                                                                                                |  |                              | 4,162   |   |                   |   | 2,915   |  
|                                                                                                                                                      |  |                              |         |   |                   |   |         |  
|TOTAL LIABILITIES                                                                                                                                     |  |                              | 210,605 |   |                   |   | 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 2,999,594 shares at September 30, 2005 and
3,047,886 December 31, 2004, respectively |  |                              | 6,453   |   |                   |   | 6,993   |  
|Unearned compensation                                                                                                                                 |  |                              | (212    | ) |                   |   | (287    | )
|Unearned ESOP                                                                                                                                         |  |                              | (794    | ) |                   |   | (933    | )
|Retained earnings, substantially restricted                                                                                                           |  |                              | 20,314  |   |                   |   | 20,076  |  
|Accumulated other comprehensive loss                                                                                                                  |  |                              | (232    | ) |                   |   | (118    | )
|                                                                                                                                                      |  |                              |         |   |                   |   |         |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                                            |  |                              | 25,529  |   |                   |   | 25,731  |  
|                                                                                                                                                      |  |                              |         |   |                   |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                            |  | $                            | 236,134 |   |                   | $ | 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 EndedSeptember 30,                 |           | Nine Months EndedSeptember 30,
|                                                              |  | 2005                                            |           | 2004                           |   | 2005      |  | 2004
|                                                              |  | (In thousands, except share and per share data)
|INTEREST INCOME                                               |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|Loans, including fees                                         |  | $                                               | 2,944     |                                | $ | 2,350     |  | $    | 8,251     |  | $ | 7,004    
|Investment securities                                         |  |                                                 | 282       |                                |   | 198       |  |      | 788       |  |   | 521      
|Other interest-earnings deposits                              |  |                                                 | 30        |                                |   | 93        |  |      | 194       |  |   | 256      
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|TOTAL INTEREST INCOME                                         |  |                                                 | 3,256     |                                |   | 2,641     |  |      | 9,233     |  |   | 7,781    
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|INTEREST EXPENSE                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|Deposits                                                      |  |                                                 | 1,283     |                                |   | 1,094     |  |      | 3,604     |  |   | 3,281    
|Borrowings                                                    |  |                                                 | 92        |                                |   |          |  |      | 112       |  |   | 20       
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|TOTAL INTEREST EXPENSE                                        |  |                                                 | 1,375     |                                |   | 1,094     |  |      | 3,716     |  |   | 3,301    
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|NET INTEREST INCOME                                           |  |                                                 | 1,881     |                                |   | 1,547     |  |      | 5,517     |  |   | 4,480    
|                                                              |  |                                                 |           |                               
|PROVISION FOR LOAN LOSSES                                     |  |                                                 | 30        |                                |   |          |  |      | 90        |  |   | 60       
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES           |  |                                                 | 1,851     |                                |   | 1,547     |  |      | 5,427     |  |   | 4,420    
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|NON-INTEREST INCOME                                           |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|Service charges and fees                                      |  |                                                 | 114       |                                |   | 106       |  |      | 311       |  |   | 285      
|Income from bank-owned life insurance                         |  |                                                 | 55        |                                |   | 50        |  |      | 268       |  |   | 189      
|Other                                                         |  |                                                 | 99        |                                |   | 18        |  |      | 56        |  |   | 62       
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|TOTAL NON-INTEREST INCOME                                     |  |                                                 | 268       |                                |   | 174       |  |      | 635       |  |   | 536      
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|NON-INTEREST EXPENSE                                          |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|Compensation and benefits                                     |  |                                                 | 1,003     |                                |   | 877       |  |      | 2,882     |  |   | 2,714    
|Net occupancy and equipment                                   |  |                                                 | 127       |                                |   | 102       |  |      | 347       |  |   | 298      
|Data processing                                               |  |                                                 | 92        |                                |   | 105       |  |      | 272       |  |   | 267      
|Other                                                         |  |                                                 | 214       |                                |   | 209       |  |      | 748       |  |   | 687      
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|TOTAL NON-INTEREST EXPENSE                                    |  |                                                 | 1,436     |                                |   | 1,293     |  |      | 4,249     |  |   | 3,966    
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|INCOME BEFORE INCOME TAXES                                    |  |                                                 | 683       |                                |   | 428       |  |      | 1,813     |  |   | 990      
|                                                              |  |                                                 |           |                               
|INCOME TAXES                                                  |  |                                                 | 264       |                                |   | 171       |  |      | 697       |  |   | 349      
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|NET INCOME                                                    |  | $                                               | 419       |                                | $ | 257       |  | $    | 1,116     |  | $ | 641      
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|PER SHARE DATA:                                               |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|Basic and diluted net income per common share                 |  | $                                               | .14       |                                | $ | .09       |  | $    | .38       |  | $ | .22      
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|Dividends                                                     |  | $                                               | .10       |                                | $ | .10       |  | $    | .30       |  | $ | .30      
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|Weighted average common shares outstanding, basic and diluted |  |                                                 | 2,938,579 |                                |   | 2,976,520 |  |      | 2,945,091 |  |   | 2,966,044
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          



See accompanying notes.



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##### Table of Contents

South Street Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)



|                                                                                          |  |                                |         |   |      |   |         |  
|----------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                          |  | Nine Months EndedSeptember 30, |        
|                                                                                          |  | 2005                           |         |   | 2004 |  
|                                                                                          |  | (In thousands)                 |        
|CASH FLOWS FROM OPERATING ACTIVITIES                                                      |  |                                |         |   |      |   |         |  
|Net income                                                                                |  | $                              | 1,116   |   |      | $ | 641     |  
|Adjustments to reconcile net income to net cash provided by operating activities:         |  |                                |         |   |      |   |         |  
|Net accretion of premiums and discounts on securities                                     |  |                                | 44      |   |      |   | 106     |  
|Amortization of deferred loan fees                                                        |  |                                | (323    | ) |      |   | (278    | )
|Depreciation                                                                              |  |                                | 132     |   |      |   | 153     |  
|Provision for loan losses                                                                 |  |                                | 90      |   |      |   | 60      |  
|Loss on disposal of fixed assets                                                          |  |                                | 4       |   |      |   |        |  
|Amortization of unearned compensation                                                     |  |                                | 75      |   |      |   | 315     |  
|Income from Bank Owned Life Insurance                                                     |  |                                | (268    | ) |      |   | (189    | )
|ESOP contribution                                                                         |  |                                | (72     | ) |      |   | (125    | )
|Change in assets and liabilities:                                                         |  |                                |         |   |      |   |         |  
|(Increase) decrease in other assets                                                       |  |                                | (526    | ) |      |   | 251     |  
|Increase in accrued expenses and other liabilities                                        |  |                                | 1,247   |   |      |   | 250     |  
|                                                                                          |  |                                |         |   |      |   |         |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                 |  |                                | 1,519   |   |      |   | 1,184   |  
|                                                                                          |  |                                |         |   |      |   |         |  
|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 |  |                                | 314     |   |      |   | 7,228   |  
|Proceeds from maturities, calls and principal repayments of securities held to maturity   |  |                                | 879     |   |      |   | 973     |  
|Loan originations and principal payments on loans, net                                    |  |                                | (23,558 | ) |      |   | (5,564  | )
|Purchase of property and equipment                                                        |  |                                | (1,830  | ) |      |   | (126    | )
|Proceeds from sale of foreclosed assets                                                   |  |                                |        |   |      |   | 350     |  
|Purchase of FHLB stock                                                                    |  |                                | (576    | ) |      |   |        |  
|Proceeds from redemption of FHLB stock                                                    |  |                                |        |   |      |   | 307     |  
|                                                                                          |  |                                |         |   |      |   |         |  
|NET CASH USED BY INVESTING ACTIVITIES                                                     |  |                                | (30,789 | ) |      |   | (13,832 | )
|                                                                                          |  |                                |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                      |  |                                |         |   |      |   |         |  
|Net increase in deposits                                                                  |  |                                | 6,538   |   |      |   | 4,564   |  
|Payment of dividends                                                                      |  |                                | (878    | ) |      |   | (875    | )
|Purchases and retirement of common stock                                                  |  |                                | (468    | ) |      |   | (209    | )
|Borrowings from FHLB, net                                                                 |  |                                | 13,000  |   |      |   |        |  
|Repayments on borrowings, net                                                             |  |                                |        |   |      |   | (10,000 | )
|Principal payment received on ESOP note                                                   |  |                                | 139     |   |      |   | 563     |  
|                                                                                          |  |                                |         |   |      |   |         |  
|NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES                                          |  |                                | 18,331  |   |      |   | (5,957  | )
|                                                                                          |  |                                |         |   |      |   |         |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                                 |  |                                | (10,939 | ) |      |   | (18,605 | )
|                                                                                          |  |                               
|CASH AND CASH EQUIVALENTS, BEGINNING                                                      |  |                                | 25,546  |   |      |   | 42,502  |  
|                                                                                          |  |                                |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS, ENDING                                                         |  | $                              | 14,607  |   |      | $ | 23,897  |  
|                                                                                          |  |                                |         |   |      |   |         |  



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 September 30, 2005 and for the three and nine month periods ended September 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 nine month periods ended September 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 September 30, 2005 and 2004, there were 449,650
exercisable options outstanding, all of which were antidilutive.



NOTE C -
COMPREHENSIVE INCOME



For the quarters ended September 30, 2005 and
2004, total comprehensive income, consisting of net income and unrealized securities gains and losses, net of taxes, was $507,000 and $301,000, respectively.



For the nine months ended September 30, 2005 and 2004, total comprehensive income, consisting of net income and unrealized securities gains and losses, net of taxes,
was $1,002,000 and $555,000, 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 EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                   |  | 2005                            |         |   | 2004                           |   |         | 2005 |  |   | 2004    |  
|                                   |  | (Dollars in thousands)          |        
|Service cost                       |  | $                               | 31,020  |   |                                | $ | 29,044  |      |  | $ | 93,060  |   |  | $ | 87,134  |  
|Interest cost                      |  |                                 | 44,045  |   |                                |   | 39,876  |      |  |   | 132,135 |   |  |   | 119,627 |  
|Expected return on plan assets     |  |                                 | (31,511 | ) |                                |   | (26,901 | )    |  |   | (94,532 | ) |  |   | (80,702 | )
|Amortization of prior service cost |  |                                 | 15,766  |   |                                |   | 16,715  |      |  |   | 47,298  |   |  |   | 50,144  |  
|                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net periodic pension cost          |  | $                               | 59,320  |   |                                | $ | 58,734  |      |  | $ | 177,961 |   |  | $ | 176,203 |  
|                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  



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

September 30, 2005 and December 31, 2004



The Companys total consolidated assets increased $20.5 million
during the nine months ended September 30, 2005 from $215.6 million at December 31, 2004 to $236.1 million. This increase in our assets resulted primarily from an increase in net loans receivable. Cash and cash equivalents decreased by
$10.9 million, from $25.5 million at December 31, 2004 to $14.6 million at September 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 $23.7 million, from $152.4 million at December 31,
2004 to $176.1 million at September 30, 2005. The Company has utilized the liquidity provided by the increase in deposits from our customers of $6.5 million and the increase in borrowings of $13.0 million to fund the increase in the loan
portfolio.



Comparison of Operating Results for the

Three Months Ended September 30, 2005 and 2004



General.Net income for the three-month period ended September 30, 2005 was $419,000 or $164,000 more than the $255,000 earned
during the same period in 2004. This increase in our earnings resulted principally from the increase in interest income of $614,000 during the quarter, which is explained below.



Interest income. Interest income increased by $614,000 from $2.6 million for the three months ended September 30, 2004 to $3.2
million for the three months ended September 30, 2005. The level of our average interest-earning assets increased from approximately $197.7 million during the third quarter of 2004 to approximately $214.6 million during the third quarter of
2005, which is the result of loan growth for the period. The yield on our average interest-earning assets increased approximately 97 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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Interest expense.Interest expense on deposits and borrowed funds increased by $281,000 from $1.094 million for
the three months ended September 30, 2004 to $1.375 million for the three months ended September 30, 2005. As with our interest-earning assets, the volume of our interest-bearing liabilities increased from approximately $185.7 million in
the third quarter of 2004, to $206.4 million in the third quarter of 2005. The average rates for our interest-bearing liabilities increased approximately 42 basis points in comparison to the first quarter of 2004.



Net interest income. Net interest income increased by $334,000 from $1.547 million for
the three months ended September 30, 2004 to $1.881 million for the three months ended September 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 September 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 September 30, 2005 the Banks allowance for loan losses amounted to $665,000, which management believes is adequate to absorb losses inherent in its loan
portfolio.



Non-interest income. The Company earned non-interest income
of $268,000 during the three months ended September 30, 2005 compared to the $174,000 that was earned during the same period in 2004. This increase in non-interest income of $94,000 was primarily attributable to an increase in income from
bank-owned life insurance along with an increase in service charges on deposit accounts during the quarter.



Non-interest expense. Non-interest expense increased by $143,000 for the three months ended September 30, 2005 compared to the three months ended September 30, 2004. This increase resulted partially
from an increase in compensation 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 September 30, 2005 as compared to 40.0% for the period ending September 30, 2004.



Comparison of Operating Results for the

Nine Months Ended September 30, 2005 and 2004



General.Net income for the nine-month period ended September 30, 2005 was $1.1 million or $475,000 more than the $641,000 earned during the same period in
2004. This increase in our earnings resulted principally from the increase in interest income of $1.5 million during the current nine month period, which is explained below.



Interest income. Interest income increased by $1.5 million from $7.8 million for the nine months ended September 30, 2004 to
$9.2 million for the nine months ended September 30, 2005. The level of our average interest-earning assets increased from approximately $198.6 million during the first nine months of 2004 to approximately $211 million during the first nine
months of 2005, and the yield on our average interest-earning assets increased approximately 74 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 $415,000 from $3.3 million for the
nine months ended September 30, 2004 to $3.7 million for the nine months ended September 30, 2005. As with our interest-earning assets, the volume of our interest-bearing liabilities increased from approximately $187 million in the first
nine months of 2004, to $206.4 million in the first nine months of 2005. The average rates for our interest-bearing liabilities increased approximately 45 basis points in comparison to the first quarter of 2004.



Net interest income. Net interest income increased by $1.0 million from $4.5 million
for the nine months ended September 30, 2004 to $5.5 million for the nine months ended September 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
nine months ended September 30, 2005 and 2004 was $90,000. 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 September 30, 2005 the Banks allowance for loan losses amounted to $665,000, which management believes is adequate to absorb losses inherent in its loan
portfolio.



Non-interest income. The Company earned non-interest income
of $635,000 during the nine months ended September 30, 2005 compared to the $536,000 that was earned during the same period in 2004. Non-interest income has remained constant over the nine months ended September 30, 2005.



Non-interest expense. Non-interest expense increased by $283,000 for the nine months
ended September 30, 2005 compared to the nine months ended September 30, 2004. This increase resulted partially from an increase in compensation 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 $30,000 increase in loan expenses associated with
the bank paying all fees on equity loans and $15,000 increase in NOW expenses associated with the opening of our Oakboro Branch, net of a $28,000 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 38.4% for the period ending September 30, 2005 as compared to 35.3% for the period ending September 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 September 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 September 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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Part II. OTHER INFORMATION



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



The following
table provides information with respect to purchases made by or on behalf of the Company or any affiliated purchases (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Companys common stock
during the three months ended September 30, 2005.



|                                        |  |                                |  |                            |      |                                                                  |        |                                                                  |       
|--------------------------------------- |  | ------------------------------ |  | -------------------------- | ---- | ---------------------------------------------------------------- | ------ | ---------------------------------------------------------------- | ------
|Period                                  |  | Total Numberof SharesPurchased |  | Average PricePaid perShare |      | Total Numberof SharesPurchased asPart ofPubliclyAnnouncedProgram |        | Maximum Numberof Shares ThatMay Yet BePurchased Underthe Program
|July 1, 2005 to July 30, 2005           |  | 12,048                         |  | $                          | 9.71 |                                                                  | 12,048 |                                                                  | 99,379
|August 1, 2005 to August 31, 2005       |  | 19,044                         |  | $                          | 9.76 |                                                                  | 19,044 |                                                                  | 80,335
|September 1, 2005 to September 30, 2005 |  | 7,200                          |  | $                          | 9.63 |                                                                  | 7,200  |                                                                  | 73,135
|                                        |  |                                |  |                            |      |                                                                  |        |                                                                  |       
|                                        |  | 38,292                         |  |                            |      |                                                                  | 38,292 |                                                                  |       
|                                        |  |                                |  |                            |      |                                                                  |        |                                                                  |       



Note: On June 8, 2004, the
Company publicly announced a share repurchase program. Under the program, the Company may repurchase up to 153,408 outstanding shares. The program has no termination date.



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         
|        |          
|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



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|        |           |  |                                                                                                                                                                                                                                                                                                                         
|------- | --------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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: November 10, 2005 |  | By:                          |  | /s/ R. Ronald Swanner                
|                        |  |                              |  | R. Ronald Swanner                    
|                        |  |                              |  | President and Chief Executive Officer
|                        |  |                             
|Date: November 10, 2005 |  | By:                          |  | /s/ Christopher F. Cranford          
|                        |  |                              |  | Christopher F. Cranford              
|                        |  |                              |  | Treasurer and Chief Financial Officer



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