<PAGE>

                    U. S. Securities and Exchange Commission
                             Washington, DC  20549

                                  Form 10-QSB

(Mark One)

[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934


     For the quarterly period ended: December 31, 2000
                                     -----------------


[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT
       For the transition period from  __________  to ___________


                        Commission file number 000-25179
                                               ---------


                       INNES STREET FINANCIAL CORPORATION
                       ----------------------------------
                    (Exact name of small business issuer as
                           specified in its charter)

         NORTH CAROLINA                                    56-2101799
         --------------                                    ----------
   (State or other jurisdiction                (IRS Employer Identification No.)
of  incorporation or organization)



                             401 WEST INNES STREET
                              SALISBURY, NC 28144
                              -------------------
                    (Address of principal executive office)

                                 (704) 633-2341
                                 --------------
                          (Issuer's telephone number)



   As of January 31, 2001, there were 1,974,325 shares of the Registrant's
                           common stock outstanding.
<PAGE>

               Innes Street Financial Corporation and Subsidiary

                               Table of Contents

                                                                            Page
                                                                            ----
Part I.   Financial Information                                                3
------    ---------------------

Item 1.   Financial Statements
          Consolidated Balance Sheets at December 31, 2000 (unaudited)
          and September 30, 2000                                               4

          Consolidated Statements of Income for the Three Months
          Ended December 31, 2000 and 1999 (unaudited)                         5

          Consolidated Statements of Shareholders' Equity for the Three
          Months Ended December 31, 2000 and 1999 (unaudited)                  6

          Consolidated Statements of Cash Flows for the Three Months
          Ended December 31, 2000 and 1999 (unaudited)                         7

          Notes to Unaudited Consolidated Financial Statements                 8

Item 2.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations                                  9


Part II.  Other Information                                                   12
--------  -----------------

Item 1.  Legal Proceedings                                                    13

Item 6.  Exhibits and Reports on Form 8-K                                     13

         Signature Page                                                       14

                                       2
<PAGE>

               Innes Street Financial Corporation and Subsidiary

                         Part I.  Financial Information


                                       3
<PAGE>

Item 1.  Financial Statements
---- --  --------- ----------

               Innes Street Financial Corporation and Subsidiary
                          Consolidated Balance Sheets




<TABLE>
<CAPTION>

                                                                               December 31,        September 30,
                                                                                  2000                 2000
                                                                               ------------        -------------
                                                                                (unaudited)
<S>                                                                            <C>                 <C>
Assets

Cash and due from banks                                                        $  4,560,410         $  2,987,315
Federal funds sold-overnight                                                      3,865,000            6,686,000
                                                                               ------------         ------------
Cash and cash equivalents                                                         8,425,410            9,673,315
                                                                               ------------         ------------

Mortgage-backed securities available-for-sale                                     3,060,246            3,099,380
Mortgage-backed securities held-to-maturity (fair value of $624,805 and
  $635,344 at December 31, 2000 and September 30, 2000, respectively)               610,746              630,476
Loans receivable, net                                                           188,983,267          186,915,054
Premises and equipment, net                                                       2,317,127            2,375,478
Other                                                                             5,349,075            5,354,619
                                                                               ------------         ------------
Total assets                                                                   $208,745,871         $208,048,322
                                                                               ============         ============
Liabilities and shareholders' equity

Deposit accounts                                                               $165,116,371         $166,406,701
Borrowings                                                                       15,000,000           13,600,000
Other                                                                             2,466,972            2,240,173
                                                                               ------------        -------------
Total liabilities                                                               182,583,343          182,246,874
                                                                               ------------        -------------
Preferred stock, no par value:
  Authorized - 5,000,000 shares; none issued and outstanding                             -                    -

Common stock, no par value:
  Authorized - 20,000,000 shares; issued and outstanding: 1,974,325
  shares at December 31, 2000 and September 30, 2000                                     -                    -
Paid in capital                                                                  10,533,013           10,522,958
Retained earnings (substantially restricted)                                     18,403,895           18,208,565
Unallocated ESOP stock                                                           (2,096,749)          (2,188,339)
Unearned compensation MRP                                                          (720,889)            (779,339)
Accumulated other comprehensive income                                               43,258               37,603
                                                                               ------------         ------------
Total shareholders' equity                                                       26,162,528           25,801,448
                                                                               ------------         ------------
Total liabilities and shareholders' equity                                     $208,745,871         $208,048,322
                                                                               ============         ============
</TABLE>

                                       4
<PAGE>

               Innes Street Financial Corporation and Subsidiary
                       Consolidated Statements of Income
                                  (Unaudited)

<TABLE>
<CAPTION>

                                                                                                        Three Months Ended
                                                                                                -----------------------------------
                                                                                                            December 31,
                                                                                                -----------------------------------
                                                                                                   2000                     1999
                                                                                                ----------               ----------
<S>                                                                                             <C>                      <C>
Interest and fee income:
Loans receivable                                                                                $3,782,050               $3,227,715
Investments                                                                                              -                  154,423
Mortgage-backed securities                                                                          70,507                   75,742
Other interest-earning assets                                                                      180,934                  106,213
                                                                                                ----------               ----------
Total interest income                                                                            4,033,491                3,564,093
                                                                                                ----------               ----------

Interest expense:
Deposits                                                                                         2,347,541                1,919,527
Borrowings                                                                                         229,809                   29,513
                                                                                                ----------               ----------
Total interest expense                                                                           2,577,350                1,949,040
                                                                                                ----------               ----------
Net interest income                                                                              1,456,141                1,615,053
Provision for loan losses                                                                                -                        -
                                                                                                ----------               ----------
Net interest income after provision for loan losses                                              1,456,141                1,615,053
                                                                                                ----------               ----------

Non-interest income:
Loan servicing fees                                                                                 16,571                   24,099
Gain on sales of loans, net                                                                         10,245                    8,544
Other                                                                                               37,963                   46,284
                                                                                                ----------               ----------
Total non-interest income                                                                           64,779                   78,927
                                                                                                ----------               ----------
Non-interest expense:
Compensation and benefits                                                                          610,849                  515,278
Occupancy and equipment                                                                            140,048                  130,341
Advertising and promotion                                                                           30,768                   35,523
Data processing                                                                                     56,684                   56,507
Deposit insurance premium                                                                            8,214                   23,724
Other                                                                                              214,388                  218,165
                                                                                                ----------               ----------
Total non-interest expense                                                                       1,060,951                  979,538
                                                                                                ----------               ----------
Income before income taxes                                                                         459,969                  714,442
Provision for income taxes                                                                         177,102                  270,237
                                                                                                ----------               ----------
Net income                                                                                      $  282,867               $  444,205
                                                                                                ==========               ==========
Net income per common share:
Basic (Note 2)                                                                                  $     0.17               $     0.23
Diluted (Note 2)                                                                                $     0.16               $     0.23

Average shares outstanding:
Basic (Note 2)                                                                                   1,691,471                1,966,042
Diluted (Note 2)                                                                                 1,725,874                1,966,042


</TABLE>

                                       5
<PAGE>

<TABLE>
<CAPTION>

                                         Innes Street Financial Corporation and Subsidiary
                                          Consolidated Statements of Shareholders' Equity
                                       For the Three Months Ended December 31, 2000 and 1999
                                                            (Unaudited)

                                                                            Unearned                       Accumulated
                     Shares of                            Deferred        Compensation      Unearned         Other
                      Common     Paid in     Retained    Compensation     Relating to     Compensation   Comprehensive    Total
                      Stock      Capital     Earnings       Plans           the ESOP          MRP            Income       Equity
                    ---------  -----------  -----------  ------------     ------------    ------------   -------------  -----------
<S>                 <C>        <C>          <C>          <C>              <C>             <C>            <C>            <C>
Balance at
 September 30,
 1999               2,135,838  $20,106,106  $17,251,509   $     -        $(1,708,670)     $       -         $32,837     $35,681,782

Net income                                      444,205                                                                     444,205

Change in
 unrealized
 appreciation on
 securities
 available-for-
 sale, net of
 taxes of ($2,918)                                                                                           (4,605)         (4,605)
                                                                                                                        -----------
Comprehensive
 income                                                                                                                     439,600

Dividends paid
($0.05 per share)                               (97,800)                                                                    (97,800)

Shares purchased
 and held in rabbi
 trusts                                                     6,149                                                             6,149

Deferred
 compensation
 obligation                                                (6,149)                                                           (6,149)

Commencement of
 ESOP shares
 (6,595 shares)                      8,907                                    65,948                                         74,855
                    ---------  -----------  -----------   -------        -----------      ---------         -------     -----------
Balance at
 December 31,
 1999               2,135,838  $20,115,013  $17,597,914   $     -        $(1,642,722)     $       -         $28,232     $36,098,437
                    =========  ===========  ===========   =======        ===========      =========         =======     ===========
Balance at
 September 30,
 2000               1,974,325  $10,522,958  $18,208,565   $     -        $(2,188,339)     $(779,339)        $37,603     $25,801,448

Net income                                      282,867                                                                     282,867

Change in
 unrealized
 appreciation
 on securities
 available-for-
 sale, net of
 taxes $3,557                                                                                                 5,655           5,655
                                                                                                                        -----------
Comprehensive
 income                                                                                                                     288,522

Dividends paid
 ($0.05 a share)                                (87,537)                                                                    (87,537)

Shares purchased
 and held in
 rabbi trusts                                               7,048                                                             7,048

Deferred
 compensation
 obligation                                                (7,048)                                                           (7,048)

Commencement of
 ESOP shares
 (7,980 shares)                     10,055                                    91,590                                        101,645

Prorata vesting of
 MRP stock                                                                                   58,450                          58,450
                    ---------  -----------  -----------   -------        -----------      ---------         -------     -----------
Balance at
 December 31,
 2000               1,974,325  $10,533,013  $18,403,895   $     -        $(2,096,749)     $(720,889)        $43,258     $26,162,528
                    =========  ===========  ===========   =======        ===========      =========         =======     ===========

</TABLE>

                                       6
<PAGE>

               Innes Street Financial Corporation and Subsidiary
                     Consolidated Statements of Cash Flows
                                  (Unaudited)



<TABLE>
<CAPTION>

                                                                                                    Three months ended December 31,
                                                                                                    -------------------------------
                                                                                                        2000               1999
                                                                                                    ------------       ------------
<S>                                                                                                 <C>                <C>
Operating activities
Net income                                                                                          $   282,867        $   444,205
Adjustments to reconcile net income to net cash provided by operating activities:
 Depreciation                                                                                            75,386             68,202
 Amortization of premium (discount) on investments                                                          983             (1,524)
 Amortization of deferred loan fees                                                                     (36,789)             9,999
 Commitment of ESOP shares                                                                              101,645             74,855
 Prorata vesting of MRP stock                                                                            58,450                  -
 Deferred income taxes                                                                                   (6,693)           (18,427)
 Gain on sales of loans, net                                                                            (10,245)            (8,544)
 Other, net                                                                                             208,404            104,101
                                                                                                    -----------         ----------
Net cash provided by operating activities                                                               673,978            672,867

Investment activities
 Principal repayment of mortgage-backed securities                                                       67,123            435,319
 Net increase in loans                                                                               (2,189,375)        (4,087,725)
 Purchases of loans                                                                                    (426,114)                 -
 Proceeds from sales of loans                                                                           594,310          1,119,683
 Purchases of premises and equipment                                                                    (17,035)          (389,533)
 Proceeds from sales of foreclosed real estate                                                          116,310                  -
                                                                                                    -----------        -----------
Net cash used in investing activities                                                                (1,854,781)        (2,922,256)

Financing activities
 Net decrease in deposit accounts                                                                    (1,290,330)        (3,974,314)
 Proceeds from borrowings                                                                            11,000,000          7,000,000
 Repayment of borrowings                                                                             (9,600,000)                 -
 Net decrease in mortgage escrow funds                                                                  (89,235)          (143,390)
 Dividends paid                                                                                         (87,537)           (97,800)
                                                                                                    -----------        -----------
Net cash (used in) provided by financing activities                                                     (67,102)         2,784,496

Net (decrease) increase in cash and cash equivalents                                                 (1,247,905)           535,107
Cash and cash equivalents at beginning of period                                                      9,673,315          6,789,346
                                                                                                    -----------        -----------
Cash and cash equivalents at end of period                                                          $ 8,425,410        $ 7,324,453
                                                                                                    ===========        ===========

</TABLE>

                                       7
<PAGE>

               Innes Street Financial Corporation and Subsidiary
              Notes to Unaudited Consolidated Financial Statements


1.  Organization

Innes Street Financial Corporation was incorporated on July 6, 1998 to serve as
the holding company for Citizens Bank, FSB (the "Bank") upon the Bank's
conversion from a federally chartered mutual savings bank to a federally
chartered stock savings bank ("Conversion").  Innes Street Financial Corporation
completed the Conversion on December 28, 1998 through the sale and issuance of
2,248,250 shares of common stock.  Information set forth in this report relating
to periods prior to the Conversion, including financial statements and related
data relates to the Bank.

The accompanying unaudited consolidated financial statements of the Company
(Innes Street Financial Corporation and the Bank) have been prepared in
accordance with instructions to Form 10-QSB.  Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.  However, such information
reflects all adjustments (consisting solely of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair statement of
results for the interim period.

The results of operations for the three months ended December 31, 2000 are not
necessarily indicative of the results to be expected for the year ending
September 30, 2001.  The consolidated financial statements and notes thereto
should be read in conjunction with the audited financial statements and notes
thereto for the year ended September 30, 2000.

2.  Earnings Per Share

The following table sets forth the computation of basic and diluted Earnings Per
Share ("EPS") for the periods indicated.

<TABLE>
<CAPTION>
                                                                                             Three Months Ended
                                                                                                December 31,
                                                                                   -------------------------------------
                                                                                      2000                       1999
                                                                                   ----------                 ----------
<S>                                                                                <C>                        <C>
BASIC
Net Income                                                                         $  282,867                 $  444,205

Weighted average shares outstanding                                                 1,902,386                  2,135,838
Less weighted average unallocated ESOP shares                                        (210,915)                  (169,796)
                                                                                   ----------                 ----------
Total weighted average shares outstanding                                           1,691,471                  1,966,042
                                                                                   ==========                 ==========

Basic earnings per share                                                           $     0.17                 $     0.23

DILUTED
Net Income                                                                         $  282,867                 $  444,205

Weighted average shares outstanding                                                 1,902,386                  2,135,838
Less weighted average unallocated ESOP shares                                        (210,915)                  (169,796)
                                                                                   ----------                 ----------
Total weighted average shares outstanding                                           1,691,471                  1,966,042
Dilutive common stock options at market price                                          34,403                         --
                                                                                   ----------                 ----------
Average dilutive shares outstanding                                                 1,725,874                  1,966,042
                                                                                   ==========                 ==========

Diluted earnings per share                                                         $     0.16                 $     0.23
</TABLE>

                                       8
<PAGE>

3.  New Accounting Standards

In September 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" (FASB 140) that replaces
FASB Statement No. 125.  FASB 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain additional disclosures regarding these activities. The
statement is effective for transfers and servicing of financial assets or
extinguishments of liabilities that occur after March 31, 2001. The statement is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. The Company is in the process of assessing the impact
and plans to adopt the standard in accordance with the effective dates. Adoption
is not expected to result in a material financial impact.


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



Comparison of Financial Condition at December 31, 2000 and September 30, 2000

Total assets were $208.7 million at December 31, 2000 and $208.0 million at
September 30, 2000, an increase of  $0.7 million or 0.34%.

Loans receivable, increased from $187.0 million at September 30, 2000 to $189.0
million at December 31, 2000, an increase of $2.0 million, or 1.1%.  This
increase was primarily due to an increase in loan production.

Deposit accounts decreased from $166.4 million at September 30, 2000 to $165.1
million at December 31, 2000, a decrease of $1.31 million.  This decrease was
due primarily to a decrease in certificates of deposits, offset by an increase
in money market accounts.

Advances from the Federal Home Loan Bank ("FHLB") increased $1.4 million from
September 30, 2000.  This increase in debt, along with a decline in cash, was
used to finance an increase in loan production.

Retained earnings increased by the net income earned during the three months
ended December 31, 2000 of  $0.3 million.  During the three months ended
December 31, 2000 the Company paid dividends totaling $0.05 a share to
stockholders.  This dividend resulted in a $0.1 million decrease in retained
earnings.

Unallocated Employee Stock Ownership Plan ("ESOP") stock decreased by $91,590.
This decrease was a result of the ESOP trust using dividends that it had
received in the calendar year 2000 to make an additional loan repayment of
$38,788, which resulted in a release of an additional 2,927 shares to be
allocated to eligible employees.  Also 5,053 shares were allocated to eligible
employees as part of the normal repayment of the ESOP loan, which resulted in a
decline of $52,802.  Unallocated ESOP stock decreases every month due to the
Bank's recording of the shares earned for that month that will be allocated in
the future to eligible employees.

Unearned compensation Management Recognition Plan ("MRP") decreased by $58,450.
Each month the Company records compensation and benefits expense and reduces the
unearned compensation MRP by $19,483.  This entry will continue until the
remaining MRP stock is fully vested on February 1, 2004.


Results of Operations

The earnings of the Company depend primarily on its level of net interest income
which is the difference between interest earned on the Company's interest-
earning assets and the interest paid on its interest-bearing liabilities.  Net

                                       9
<PAGE>

interest income is a function of the Company's spread, which is the difference
between yield earned on interest-earning assets and the rate paid on interest-
bearing liabilities, as well as a function of the average balance of interest-
earning assets as compared to the average balance of interest-bearing
liabilities.


Comparison of Operating Results for the Three Months ended December 31, 2000 and
1999

Net Income.  Net income for the three months ended December 31, 2000 was
$282,867 compared to $444,205 for the three months ended December 31, 1999, a
decrease of 36.3%.  This decrease was primarily a result of a decrease in net
interest income coupled with an increase in non-interest expense.

Net Interest Income.  Net interest income decreased from $1,615,053 for the
three months ended December 31, 1999 to $1,456,141 for the three months ended
December 31, 2000.  An increase in interest expense on deposits and borrowings
accounted for $628,310 of the decrease in net interest income.  This was offset
by a $469,398 increase in interest income.  The increase in interest income is
attributable to a $8.5 million increase in average earning assets from the
quarter ended December 31, 1999.  The Company's average borrowings outstanding
and deposits increased from $161.0 million during the quarter ended December 31,
1999 to $179.7 million during the quarter ended December 31, 2000, an increase
of $18.7 million or 11.6%.   This increase in average costing liabilities was
due to the Company's payment of a $4.00 per share distribution to shareholders
in June, 2000 as well as the share repurchase program during calendar year 2000
and the growth of interest earning assets.

Provision for Loan Losses.  No provision for loan losses was made in either the
three months ended December 31, 2000 or the three months ended December 31,
1999.  In the opinion of management, based on its review of specific loans and
historical loss experience, the allowance for loan losses is adequate to cover
probable credit losses that were incurred as of December 31, 2000 and 1999.
Accordingly, no provision for loan losses was recorded during the three months
ended December 31, 2000 and 1999.

Non-interest income.  Non-interest income decreased from $78,927 for the three
month period ended December 31, 1999 to $64,779 for the three month period ended
December 31, 2000.  The Company experienced a decrease in loan servicing fees
due to a decrease in loans serviced for others.

Non-interest expense.  Non-interest expense increased from $979,538 during the
three month period ended December 31, 1999 to $1,060,951 for the three month
period ended December 31, 2000.  An increase in compensation and benefits during
the three month period ended December 31, 2000 accounts for the majority of this
increase.  The increase in compensation and benefits was a result of increases
in ESOP expense, MRP expense, and medical and dental insurance expense.  ESOP
expense increased $26,790 due to an increase in the number of shares released.
Because the MRP was not implemented until February 1, 2000, there was no MRP
expense recorded during the quarter ended December 31, 1999 as opposed to
$58,450 charged during the quarter ended December 31, 2000.

Provision for Income Taxes.  The provision for income taxes decreased from
$270,237 for the three month period ended December 31, 1999 to $177,102 for the
three month period ended December 31, 2000 as a result of lower pre-tax income.

Liquidity and Capital Resources.  The Company's primary sources of funds are
customer deposits, proceeds from loan principal and interest payments, sales of
loans, maturing investments, and FHLB of Atlanta advances.  While maturities and
scheduled amortization of loans are a predictable source of funds, deposit flows
and mortgage prepayments are influenced greatly by general interest rates, other
economic conditions, and competition.

The Bank is required by the Office of Thrift Supervision ("OTS") to maintain an
average daily balance of specified liquid assets equal to a monthly average of
not less than a specified percentage (currently 4%) of its net withdrawable
deposit accounts plus short-term borrowings.  Monetary penalties may be imposed
for failure to meet these liquidity requirements.  The Bank's average liquidity
ratio for the quarter ended December 31, 2000 was

                                       10
<PAGE>

6.57%, which exceeded the applicable 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, and other cash requirements.

As of December 31, 2000, the Bank's regulatory capital was in excess of all
applicable regulatory requirements.  At December 31, 2000, under applicable
regulations, the Bank's actual tangible, core and risk-based capital ratios were
11.63%, 11.63% and 19.41%, respectively, compared to requirements of 1.5%, 3.0%,
and 8.0%, respectively.

Due to the Company's excess capital position, the Board of Directors continues
to consider opportunities to enhance shareholder value, including stock
repurchases, special cash dividends and a return of capital.  A decision by the
Board of Directors to undertake any of these activities will depend upon a
number of factors, including investment opportunities available to the Company
and the Bank, capital requirements, regulatory limitations, the Company's and
the Bank's results of operations and financial condition, tax considerations and
general economic conditions.  Upon review of such considerations, the Board of
Directors may authorize such activities if it deems them appropriate and in
compliance with applicable law and regulation.  However, no assurances can be
given that any of these activities will in fact be authorized by the Board of
Directors in the future.

                                       11
<PAGE>

               Innes Street Financial Corporation and Subsidiary

                          Part II.  Other Information

                                       12
<PAGE>

               Innes Street Financial Corporation and Subsidiary

Item 1.   Legal Proceedings
---- --   -----------------

From time to time the Company is a party to various legal proceedings incident
to its business.  At December 31, 2000, there were no legal proceedings to which
the Company was a party, or to which any of its property was subject, which were
expected by management to result in a material loss.


Item 6.  Exhibits and Reports on Form 8-K
---- --  --------------------------------

         (a) None.
         (b) No reports on Form 8-K were filed during the quarter ended December
             31, 2000.

                                       13
<PAGE>

               Innes Street Financial Corporation and Subsidiary

                                   Signatures


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


                                         Innes Street Financial Corporation
                                         ----------------------------------
                                                (Registrant)


     February 13, 2001                   /s/ Ronald E. Bostian
     -----------------                   ------------------------------------
         (Date)                              Ronald E. Bostian
                                             President and CEO
                                             (Duly Authorized Representative)





     February 13, 2001                   /s/ Dianne E. Hawkins
     -----------------                   ------------------------------------
         (Date)                              Dianne E. Hawkins
                                             Treasurer and Controller
                                             (Principal Financial Officer)

                                       14