UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                    FORM 10-Q

(Mark One)

/X/  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     For the quarterly period ended March 31, 2004

     OR

/ /  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from ______ to ______

                         Commission file number: 0-25859

                             1st STATE BANCORP, INC.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)


         Virginia                                         56-2130744
-------------------------------                      --------------------
(State or Other Jurisdiction of                        (I.R.S. Employer
 Incorporation or Organization)                       Identification No.)

445 S. Main Street, Burlington, North Carolina              27215
-----------------------------------------------        --------------
(Address of Principal Executive Offices)                  (Zip Code)


                                 (336) 227-8861
               ---------------------------------------------------
               Registrant' s Telephone Number, Including Area Code

                                       N/A
-------------------------------------------------------------------------------
         (Former Name, Former Address and Former Fiscal Year, if Changed
                               Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements  for the past 90 days. Yes X  No
                                        --   --
Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

     As of May 7, 2004,  the issuer had 2,962,323  shares of common stock issued
and outstanding.


<PAGE>

                                    CONTENTS

                                                                            PAGE

PART I. FINANCIAL INFORMATION
        =====================

Item 1. Financial Statements

          Consolidated  Balance  Sheets as of March  31, 2004
          (unaudited) and September 30, 2003..................................2

          Consolidated Statements of Income for the Three
          Months Ended March 31, 2004  and  2003 (unaudited)..................3

          Consolidated  Statements  of Income for the Six Months
          Ended March 31, 2004  and  2003 (unaudited).........................4

          Consolidated  Statements  of  Stockholders'  Equity
          and  Comprehensive Income   for  the  Six   Months
          Ended   March  31,   2004  and  2003 (unaudited)....................5

          Consolidated  Statements  of Cash Flows for the
          Six Months Ended March 31, 2004 and 2003 (unaudited)................6

          Notes to  Consolidated Financial Statements.........................8

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

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

Item 4. Controls and Procedures...............................................20


PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings....................................................21

Item 2.  Changes in  Securities,  Use of Proceeds and Issuer
         Purchases of Equity Securities.......................................21

Item 3.  Defaults Upon Senior Securities......................................22

Item 4.  Submission of Matters to a Vote of Security Holders..................22

Item 5.  Other Information....................................................22

Item 6.  Exhibits and Reports on Form 8-K.....................................22


SIGNATURES....................................................................24


<PAGE>


                     1st STATE BANCORP, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                      MARCH 31, 2004 AND SEPTEMBER 30, 2003
                        (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>

                                                                                   At                   At
                                                                                March 31,         September 30,
                                                                                  2004                2003
                                                                           ------------------    ---------------
<S>                                                                               <C>                   <C>
                                                                             (Unaudited)
                                      ASSETS

Cash and cash equivalents                                                   $     8,385          $    9,359
Investment securities:
     Held to maturity (fair value of $22,088 and $19,397
         at March 31, 2004 and September 30, 2003, respectively)                 21,824              19,462
     Available for sale (cost of $85,767 and $92,971
         at March 31, 2004 and September 30, 2003, respectively)                 85,368              91,709
Loans held for sale, at lower of cost or fair value                               1,244                 645
Loans receivable (net of allowance for loan losses of $3,892
    and $3,856 at March 31, 2004 and September 30, 2003,
    respectively)                                                               230,584             225,725
Real estate owned                                                                   513                  95
Federal Home Loan Bank stock, at cost                                             1,425               1,675
Premises and equipment                                                            8,253               8,413
Accrued interest receivable                                                       1,886               1,967
Other assets                                                                      3,387               3,590
                                                                            -----------          ----------
             Total assets                                                   $   362,869          $  362,640
                                                                            ===========          ==========

                LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Deposit accounts                                                              264,413             262,712
  Advances from Federal Home Loan Bank                                           28,500              31,500
  Advance payments by borrowers for property taxes and insurance                    215                  57
  Dividend payable                                                                  296                 297
  Other liabilities                                                               5,131               5,373
                                                                            -----------          ----------
          Total liabilities                                                     298,555             299,939
                                                                            -----------          ----------

Stockholders' Equity:
   Preferred stock, $0.01 par value, 1,000,000 shares authorized;
         none issued                                                                 --                  --
   Common stock, $0.01 par value, 7,000,000 shares authorized;
         2,962,323 and 2,971,977 shares issued and outstanding
         at  March 31, 2004 and September 30, 2003, respectively                     33                  33
   Additional paid-in capital                                                    35,930              35,778
   Unallocated ESOP shares                                                       (2,854)             (3,141)
   Deferred compensation payable in treasury stock                                5,802               5,466
   Treasury stock                                                               (13,448)            (12,785)
   Retained income - substantially restricted                                    39,094              38,118
   Accumulated other comprehensive income (loss) - net unrealized
        loss on investment securities available for sale                           (243)               (768)
                                                                            -----------          ----------
Total stockholders' equity                                                       64,314              62,701
                                                                            -----------          ----------
        Total liabilities and stockholders' equity                          $   362,869          $  362,640
                                                                            ===========          ==========
</TABLE>


See accompanying notes to the consolidated financial statements.

                                       2
<PAGE>

                     1st STATE BANCORP, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
               FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                       For the Three Months Ended
                                                                                March 31,
                                                                       ------------------------------
                                                                          2004                2003
                                                                       ----------         -----------
<S>                                                                       <C>                 <C>
Interest income:
   Interest and fees on loans                                          $   2,830          $   3,295
   Interest and dividends on investments                                   1,116              1,060
   Overnight deposits                                                          8                 42
                                                                       ---------          ---------
         Total interest income                                             3,954              4,397
                                                                       ---------          ---------

Interest expense:
    Deposit accounts                                                         886              1,169
    Borrowings                                                               303                276
                                                                       ---------          ---------
         Total interest expense                                            1,189              1,445
                                                                       ---------          ---------

         Net interest income                                               2,765              2,952

Provision for loan losses                                                     60                 60
                                                                       ---------          ---------
         Net interest income after provision for loan losses               2,705              2,892
                                                                       ---------          ---------

Other income:
   Customer service fees                                                     240                214
   Commissions from sales of annuities and mutual funds                       93                159
   Mortgage banking income, net                                              113                436
   Securities gains, net                                                      88                 --
   Other                                                                      56                 62
                                                                       ---------          ---------
         Total other income                                                  590                871
                                                                       ---------          ---------

Operating expenses:
   Compensation and related benefits                                       1,316              1,400
   Occupancy and equipment                                                   340                384
   Real estate operations, net                                                (1)                 4
   Other expenses                                                            401                393
                                                                       ---------          ---------
         Total operating expenses                                          2,056              2,181
                                                                       ---------          ---------

         Income before income taxes                                        1,239              1,582

Income taxes                                                                 460                585
                                                                       ---------          ---------

         Net income                                                    $     779           $    997
                                                                       =========          =========

         Earnings per share:

         Basic                                                         $    0.28          $    0.35
         Diluted                                                       $    0.26          $    0.34
</TABLE>

See accompanying notes to the consolidated financial statements.


                                       3
<PAGE>

                     1st STATE BANCORP, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
                FOR THE SIX MONTHS ENDED MARCH 31, 2004 AND 2003
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                       For the Six Months Ended
                                                                                March 31,
                                                                       ----------------------------
                                                                          2004               2003
                                                                       ----------         ---------
<S>                                                                        <C>                <C>
Interest income:
   Interest and fees on loans                                          $   5,684          $   6,667
   Interest and dividends on investments                                   2,300              2,212
   Overnight deposits                                                         17                 85
                                                                       ---------          ---------
         Total interest income                                             8,001              8,964
                                                                       ---------          ---------

Interest expense:
    Deposit accounts                                                       1,805              2,460
    Borrowings                                                               619                552
                                                                       ---------          ---------
         Total interest expense                                            2,424              3,012
                                                                       ---------          ---------
         Net interest income                                               5,577              5,952

Provision for loan losses                                                    120                120
                                                                       ---------          ---------
         Net interest income after provision for loan losses               5,457              5,832
                                                                       ---------          ---------

Other income:
   Customer service fees                                                     446                431
   Commissions from sales of annuities and mutual funds                      165                246
   Mortgage banking income, net                                              211                837
   Securities gains, net                                                     185                 --
   Other                                                                     109                118
                                                                       ---------          ---------
         Total other income                                                1,116              1,632
                                                                        --------          ---------
Operating expenses:
   Compensation and related benefits                                       2,648              2,745
   Occupancy and equipment                                                   683                735
   Real estate operations, net                                                (5)                 9
   Other expenses                                                            833                839
                                                                       ---------          ---------
         Total operating expenses                                          4,159              4,328
                                                                       ---------          ---------

         Income before income taxes                                        2,414              3,136

Income taxes                                                                 877              1,156
                                                                       ---------          ---------

Net income                                                             $   1,537          $   1,980
                                                                       =========          =========

Earnings per share:
         Basic                                                         $    0.55          $    0.70
         Diluted                                                       $    0.52          $    0.67
</TABLE>

See accompanying notes to the consolidated financial statements

                                       4
<PAGE>

                     1st STATE BANCORP, INC. AND SUBSIDIARY
                    CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
                         EQUITY AND COMPREHENSIVE INCOME
          FOR THE SIX MONTHS ENDED MARCH 31, 2004 AND 2003 (UNAUDITED)
                                 (In Thousands)
<TABLE>
<CAPTION>


                                                                             Deferred
                                                                           compensation                   Accumulated
                                                    Additional Unallocated  payable in                        other        Total
                                              Common  paid-in     ESOP      treasury   Treasury Retained comprehensive stockholders'
                                              stock   capital    shares       stock     stock    Income   income (loss)   equity
                                              ----- ---------- ----------- ------------ ------   ------  ------------- -------------
<S>                                             <C>      <C>      <C>          <C>        <C>     <C>          <C>            <C>
Balance at September 30, 2002                 $33      35,623       (3,739)    5,466    (11,899)  35,258      827        61,569

Comprehensive income:
     Net income                                --          --           --        --         --    1,980       --         1,980
     Other comprehensive loss-unrealized
       loss on securities available-for-sale
       net of income taxes of $169             --          --           --        --         --       --     (262)         (262)
                                                                                                                          -----
     Total comprehensive income                                                                                           1,718
Allocation of ESOP shares                      --          72          298        --         --       --       --           370
Acquisition of treasury stock                  --          --           --        --       (743)      --       --          (743)
Cash dividends declared ($0.18 per share)      --          --           --        --         --     (538)      --          (538)
Cash dividends on unallocated ESOP shares      --          --           --        --         --       35       --            35
                                              ---      ------       ------     -----    -------   ------      ---        ------
Balance at March 31, 2003                     $33      35,695       (3,441)    5,466    (12,642)  36,735      565        62,411
                                              ===      ======       =======    =====    ========  ======      ===        ======

Balance at September 30, 2003                 $33      35,778       (3,141)    5,466    (12,785)  38,118     (768)       62,701

Comprehensive income:
     Net income                                --         --            --        --         --    1,537       --         1,537
     Other comprehensive income-unrealized
       gain on securities available-for-sale
       net of income taxes of $338             --         --            --        --         --       --      525           525
                                                                                                                         ------
     Total comprehensive income                                                                                           2,062
Allocation of ESOP shares                      --         133          287        --         --       --       --           420
Acquisition of treasury stock                  --          --           --        --       (663)      --       --          (663)
Deferred compensation                          --          --           --       336         --       --       --           336
Exercise of stock options                      --          19           --        --         --       --       --            19
Cash dividends declared ($0.20 per share)      --          --           --        --         --     (593)      --          (593)
Cash dividends on unallocated ESOP shares      --          --           --        --         --       32       --            32
                                              ---      ------       ------     -----    -------   ------      ---        ------
Balance at March 31, 2004                     $33      35,930       (2,854)    5,802    (13,448)  39,094     (243)       64,314
                                              ===      ======       ======     =====    =======   ======     ====        ======
</TABLE>

See accompanying notes to the consolidated financial statements.

                                       5
<PAGE>

                     1st STATE BANCORP, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE SIX MONTHS ENDED MARCH 31, 2004 AND 2003
                                   (UNAUDITED)
                                 (In Thousands)


<TABLE>
<CAPTION>
                                                                                     For the Six Months Ended
                                                                                             March 31,
                                                                                      2004                2003
                                                                                   ---------          -----------
<S>                                                                                   <C>                  <C>

Cash flows from operating activities:
   Net income                                                                   $    1,537           $   1,980
   Adjustment to reconcile net income to net cash provided by
       operating activities:
           Provision for loan losses                                                   120                 120
           Depreciation                                                                342                 394
           Deferred tax expense (benefit)                                              (51)                 91
           Amortization of premiums and discounts, net                                   6                 (31)
           Deferred compensation                                                       120                 120
           Release of ESOP shares                                                      420                 370
           Loan origination fees and unearned discounts
               deferred, net of current amortization                                   (26)                (41)
           Loss (gain) on sale of other real estate                                    (12)                  6
           Gain on sale of investment securities available for sale                   (185)                 --
           Net (gain) loss on sale of loans                                             27                (164)
           Proceeds from loans held for sale                                        13,544              48,579
           Originations of loans held for sale                                     (14,170)            (45,768)
           Decrease (increase) in other assets                                         (72)                203
           Decrease in accrued interest receivable                                      81                 449
           Decrease in other liabilities                                               (26)             (2,809)
                                                                                ----------            --------
                      Net cash provided by operating activities                      1,655               3,499
                                                                                ----------            --------

Cash flows provided by (used in) investing activities:
           Proceeds from sale of FHLB stock                                          1,975                 368
           Purchases of FHLB stock                                                  (1,725)                 --
           Purchases of investment securities held to maturity                      (6,368)             (2,000)
           Purchases of investment securities available for sale                   (30,575)            (48,229)
           Proceeds from sales of investment securities available for sale          10,993                  --
           Proceeds from maturities and issuer calls of investment securities
               available for sale                                                   26,969              66,485
           Proceeds from maturities and issuer calls of investment securities
               held to maturity                                                      4,002                   2
           Net increase in loans receivable                                         (5,121)             (3,935)
           Purchase of real estate acquired in settlement of loans                    (250)                 --
           Purchases of premises and equipment                                        (182)               (768)
                                                                                ----------           ---------

                   Net cash provided by (used in) investing activities                (282)             11,923
                                                                                ----------           ---------
</TABLE>

                                                                 (Continued)


                                       6
<PAGE>

                     1st STATE BANCORP, INC. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
                FOR THE SIX MONTHS ENDED MARCH 31, 2004 AND 2003
                                   (UNAUDITED)
                                 (In Thousands)
<TABLE>
<CAPTION>

                                                                                  FOR THE SIX MONTHS ENDED
                                                                                           MARCH 31,
                                                                                     2004               2003
                                                                                -----------        -------------
<S>                                                                                   <C>                  <C>
Cash flows from financing activities:
   Net increase (decrease) in deposits                                          $    1,701           $  (1,861)
   Advances from the Federal Home Loan Bank                                         54,000              13,000
   Repayments of advances from the Federal Home Loan Bank                          (57,000)            (13,000)
   Purchase of treasury stock                                                         (663)               (743)
   Exercise of stock options                                                            19                  --
   Dividends paid on common stock                                                     (562)               (446)
   Increase in advance payments by borrowers for
     property taxes and insurance                                                      158                 188
                                                                                ----------           ---------

   Net cash used in financing activities                                            (2,347)             (2,862)
                                                                                ----------           ---------

        Net increase (decrease) in cash and cash equivalents                          (974)             12,560

Cash and cash equivalents at beginning of period                                     9,359              18,865
                                                                                ----------           ---------

Cash and cash equivalents at end of period                                      $    8,385           $  31,425
                                                                                ==========           =========

Payments are shown below for the following:
       Interest                                                                 $    2,420           $   3,021
                                                                                ==========           =========

       Income taxes                                                             $    1,276           $   1,133
                                                                                ==========           =========

Noncash investing and financing activities:

     Unrealized gains (losses) on investment securities
          available for sale                                                    $      863           $    (431)
                                                                                ==========           =========

     Cash dividends declared but not paid                                       $      280           $     279
                                                                                ==========           =========

     Cash dividends on unallocated ESOP shares                                  $       32           $      35
                                                                                ==========           =========
</TABLE>


See accompanying notes to the consolidated financial statements.

                                       7
<PAGE>


                     1st STATE BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                MARCH 31, 2004 (UNAUDITED) AND SEPTEMBER 30, 2003


NOTE 1.  NATURE OF BUSINESS

     1st State Bancorp,  Inc. (the "Company") was incorporated under the laws of
the Commonwealth of Virginia for the purpose of becoming the holding company for
1st State Bank (the  "Bank") in  connection  with the Bank's  conversion  from a
North Carolina-chartered mutual savings bank to a North Carolina-chartered stock
savings bank (the  "Converted  Bank")  pursuant to its Plan of  Conversion  (the
"Stock Conversion"). Upon completion of the Stock Conversion, the Converted Bank
converted from a North Carolina-chartered stock savings bank to a North Carolina
commercial bank (the "Bank Conversion"),  retaining the name 1st State Bank (the
"Commercial  Bank"),  and the Commercial Bank succeeded to all of the assets and
liabilities of the Converted Bank. The Stock  Conversion and the Bank Conversion
were  consummated  on April 23,  1999.  The common  stock of the  Company  began
trading on the Nasdaq  National  Market  System under the symbol "FSBC" on April
26, 1999.

NOTE 2.  BASIS OF PRESENTATION

     The accompanying  consolidated  financial  statements (which are unaudited,
except for the  consolidated  balance  sheet at  September  30,  2003,  which is
derived from the September 30, 2003 audited consolidated  financial  statements)
have been prepared in accordance with accounting  principles  generally accepted
in the United States of America for interim  financial  information and with the
rules and  regulations of the Securities and Exchange  Commission.  Accordingly,
they do not include all of the information and footnotes  required by accounting
principles  generally  accepted  in the United  States of America  for  complete
financial  statements.  In the opinion of management,  all adjustments  (none of
which  were  other  than  normal  recurring   accruals)  necessary  for  a  fair
presentation of the financial position and results of operations for the periods
presented have been included.

     The results of  operations  for the three and six month periods ended March
31, 2004 are not necessarily indicative of the results of operations that may be
expected for the year ending September 30, 2004. The preparation of consolidated
financial statements in accordance with accounting principles generally accepted
in the United States of America requires  management to make certain  estimates.
These amounts may be revised in future  periods  because of changes in the facts
and circumstances underlying their estimation.

NOTE 3.  EARNINGS PER SHARE

     For purposes of computing  basic and diluted  earnings per share,  weighted
average shares outstanding  excludes  unallocated ESOP shares that have not been
committed to be released. The deferred compensation obligation discussed in Note
5 that is funded with shares of the Company's  common stock has no net impact on
the  Company's  earnings  per share  computations.  Diluted  earnings  per share
include the potentially  dilutive effects of the Company's  stock-based  benefit
plans.  There were no  anti-dilutive  stock options for the three and six months
ended March 31, 2004 and 2003. A reconciliation of the denominators of the basic
and diluted earnings per share computations is as follows:
<TABLE>
<CAPTION>

                                                                             THREE MONTHS ENDED
                                                                                  MARCH 31,
                                                                       ------------------------------
                                                                          2004                2003
                                                                       ----------         -----------
<S>                                                                       <C>                  <C>
Average shares issued and outstanding                                    2,963,492          2,995,606
Less: Unallocated ESOP shares                                             (149,487)          (179,585)
                                                                       -----------         ----------
Average basic shares for earnings per share                              2,814,005          2,816,021
Add: Potential common stock pursuant to stock option plan                  157,118            122,277
                                                                       -----------         ----------
Average dilutive shares for earnings per share                           2,971,123          2,938,298
                                                                       ===========         ==========
</TABLE>


                                       8
<PAGE>
<TABLE>
<CAPTION>

                                                                              SIX MONTHS ENDED
                                                                                   MARCH 31,
                                                                          2004                2003
                                                                       ----------         -----------
<S>                                                                        <C>                  <C>
Average shares issued and outstanding                                    2,966,391          2,999,280
Less: Unallocated ESOP shares                                             (153,167)          (183,449)
                                                                        ----------         ----------
Average basic shares for earnings per share                              2,813,224          2,815,831
Add: Potential common stock pursuant to stock option plan                  152,782            124,438
                                                                        ----------         ----------
Average dilutive shares for earnings per share                           2,966,006          2,940,269
                                                                        ==========         ==========
</TABLE>

NOTE 4.  EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")

     The Company  sponsors an employee stock ownership plan (the "ESOP") whereby
an aggregate  number of shares amounting to 253,050 or 8% of the stock issued in
the  conversion was purchased for future  allocation to employees.  The ESOP was
funded by an 11-year term loan from the Company in the amount of $4,899,000. The
loan is secured by the shares of stock  purchased by the ESOP.  During the three
and six months  ended  March 31,  2004 and 2003,  7,280 and 7,360 and 14,640 and
15,288 shares of stock were committed to be released and approximately  $215,000
and $181,000 and $420,000 and $371,000, respectively of compensation expense was
recognized.

NOTE 5.  DEFERRED COMPENSATION

     Directors  and  certain  executive  officers   participate  in  a  deferred
compensation plan, which was approved by the Board of Directors on September 24,
1997.  This plan  generally  provides  for fixed  payments  beginning  after the
participant  retires.  Each  participant is fully vested in his account  balance
under the plan. Directors may elect to defer their directors' fees and executive
officers may elect to defer 25% of their salary and 100% of bonus compensation.

     Prior  to the  Stock  Conversion,  amounts  deferred  by  each  participant
accumulated interest at a rate equal to the highest rate of interest paid on the
Bank's  one-year   certificates  of  deposit.   In  connection  with  the  Stock
Conversion, participants in the plan were given the opportunity to prospectively
elect to have their deferred compensation balance earn a rate of return equal to
the total return of the Company's stock.  All  participants  elected this option
concurrent with the Stock Conversion,  so the Company purchases its common stock
to fund this obligation.  Refer to the Company's notes to consolidated financial
statements,  incorporated  by reference in the  Company's  2003 Annual Report on
Form 10-K for a discussion  of the Company's  accounting  policy with respect to
this deferred  compensation plan and the related treasury stock purchased by the
Company to fund this obligation.

     The expense related to this plan for each of the three and six months ended
March 31,  2004 and 2003 was $60,000 and  $60,000  and  $120,000  and  $120,000,
respectively. This expense is included in compensation expense.

NOTE 6.  STOCK OPTION AND INCENTIVE PLAN

     On June 6, 2000, the Company's stockholders approved the 1st State Bancorp,
Inc. 2000 Stock Option and Incentive Plan (the "Plan"). The purpose of this plan
is to  advance  the  interests  of the  Company  through  providing  select  key
employees and directors of the Bank with the opportunity to acquire  shares.  By
encouraging  such stock  ownership,  the Company  seeks to  attract,  retain and
motivate  the  best   available   personnel   for   positions   of   substantial
responsibility  and to provide  incentives to the key  employees and  directors.
Under the Plan, the Company  granted  316,312  options to purchase its $0.01 par
value common  stock.  The  exercise  price per share is equal to the fair market
value per share on the date of the grant. Options granted under the Stock Option
Plan are 100% vested on the date of the grant,  and all options  expire 10 years
from the date of the grant.  As a result of the one-time  cash dividend of $5.17
paid on October 2, 2000, the exercise price for the options repriced from $18.44
to $14.71.  There were 2,077  options  exercised  during the three  months ended
March 31, 2004.  No options  were granted  during the three and six months ended
March 31, 2004 and 2003. At March 31, 2004, 314,235 options are outstanding, all
of which are exercisable.



                                       9
<PAGE>

NOTE 7. MORTGAGE SERVICING RIGHTS

     The rights to service  mortgage  loans for  others  are  included  in other
assets on the consolidated balance sheet. Mortgage servicing rights ("MSRs") are
capitalized  based on the allocated cost that is determined  when the underlying
loans are sold. MSRs are amortized over a period that  approximates  the life of
the underlying loan as an adjustment of servicing income.  Impairment reviews of
MSRs are performed on a quarterly  basis. As of March 31, 2004 and September 30,
2003,  MSRs  totaled  $520,000  and  $547,000,  respectively,  and no  valuation
allowance was required.

     Amortization  expense  totaled $57,000 and $71,000 for the six months ended
March 31, 2004 and 2003, respectively.

NOTE 8.  STANDBY LETTERS OF CREDIT

     In  November  2002,  the  FASB  issued  Interpretation  No.  45  (FIN  45),
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect  Guarantees of Indebtedness of Others",  which addressed the disclosure
to be made by a guarantor in its interim and annual  financial  statements about
its obligations under  guarantees.  FIN 45 requires the guarantor to recognize a
liability  for  the  non-contingent  component  of the  guarantee,  such  as the
obligation  to stand  ready to perform in the event  that  specified  triggering
events or conditions  occur.  The initial  measurement  of this liability is the
fair value of the guarantee at inception.  The  recognition  of the liability is
required even if it is not probable  that  payments  will be required  under the
guarantee or if the guarantee was issued with a premium  payment or as part of a
transaction  with  multiple  events.  The initial  recognition  and  measurement
provisions are effective for all guarantees within the scope of FIN 45 issued or
modified  after March 31, 2003.  The Company  issues  standby  letters of credit
whereby the Company  guarantees  performance if a specified  triggering event or
condition occurs (primarily  nonperformance under construction contracts entered
into by construction customers). The guarantees generally expire within one year
and may be automatically  renewed  depending on the terms of the guarantee.  The
maximum  potential  amount of undiscounted  future  payments  related to standby
letters of credit at March 31,  2004 is $1.7  million.  At March 31,  2004,  the
Company  has  recorded  no  liability  for the  current  carrying  amount of the
obligation to perform as a guarantor  and no contingent  liability is considered
necessary  as such  amounts  are deemed  immaterial.  Substantially  all standby
letters of credit are secured by real estate and/or  guaranteed by third parties
in the event the Company had to advance funds to fulfill the guarantee.

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD-LOOKING STATEMENTS

     When used in this Form 10-Q,  the words or phrases  "will  likely  result,"
"are expected to," "will continue," "is anticipated,"  "estimate,"  "project" or
similar expressions are intended to identify "forward-looking statements" within
the  meaning of the  Private  Securities  Litigation  Reform  Act of 1995.  Such
statements are subject to certain risks and  uncertainties  including changes in
economic  conditions  in our market  area,  changes in  policies  by  regulatory
agencies,  fluctuations in interest rates,  demand for loans in our market area,
and  competition  that could  cause  actual  results to differ  materially  from
historical  earnings and those  presently  anticipated or projected.  We wish to
caution you not to place undue reliance on any such forward-looking  statements,
which  speak  only as of the date made.  We wish to advise you that the  factors
listed above could affect our financial  performance  and could cause our actual
results for future periods to differ  materially from any opinions or statements
expressed with respect to future periods in any current statements.

     We do not undertake, and specifically disclaim any obligation,  to publicly
release  the result of any  revisions  which may be made to any  forward-looking
statements to reflect events or circumstances  after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.

GENERAL

     1st State Bancorp,  Inc. was formed in November 1998 and became the holding
company for 1st State Bank on April 23, 1999.

     Our business consists  principally of attracting  deposits from the general
public and investing these funds in loans secured by  single-family  residential
and commercial real estate,  secured and unsecured commercial loans and consumer

                                       10
<PAGE>

loans. Our profitability  depends primarily on our net interest income, which is
the  difference  between  the  income  we  receive  on our loan  and  investment
securities  portfolios and our cost of funds, which consists of interest paid on
deposits  and  borrowed  funds.  Net  interest  income  also is  affected by the
relative amounts of interest-earning  assets and  interest-bearing  liabilities.
When interest-earning assets approximate or exceed interest-bearing liabilities,
any  positive  interest  rate spread will  generate  net  interest  income.  Our
profitability  is also  affected  by the  level of other  income  and  operating
expenses.  Other income consists of miscellaneous  fees related to our loans and
deposits,  mortgage  banking income and commissions  from sales of annuities and
mutual funds. Operating expenses consist of compensation and benefits, occupancy
related  expenses,   federal  deposit  insurance   premiums,   data  processing,
advertising and other expenses.

     Our operations are influenced  significantly  by local economic  conditions
and by policies of financial  institution  regulatory  authorities.  Our cost of
funds is  influenced  by interest  rates on competing  investments  and by rates
offered on similar investments by competing financial institutions in our market
area,  as well as  general  market  interest  rates.  These  factors  can  cause
fluctuations in our net interest income and other income. Lending activities are
affected  by the demand for  financing  of real estate and other types of loans,
which in turn is affected by the interest  rates at which such  financing may be
offered.  In addition,  local economic  conditions can impact the credit risk of
our loan  portfolio,  in that  local  employers  may be  required  to  eliminate
employment  positions of many of our borrowers,  and small  businesses and other
commercial  borrowers may experience a downturn in their  operating  performance
and become unable to make timely payments on their loans.  Management  evaluates
these factors in estimating its allowance for loan losses,  and changes in these
economic  conditions could result in increases or decreases to the provision for
loan losses.

     Our business emphasis has been to operate as a well capitalized, profitable
and independent  community-oriented financial institution dedicated to providing
quality customer service. We are committed to meeting the financial needs of the
communities  in which we operate.  We believe  that we can be more  effective in
servicing our  customers  than many of our nonlocal  competitors  because of our
ability to quickly  and  effectively  provide  senior  management  responses  to
customer needs and inquiries.  Our ability to provide these services is enhanced
by the stability of our senior management team.

     Over the years, we have sought to gradually  increase the percentage of our
assets invested in commercial real estate loans,  commercial  loans and consumer
loans,  which  have  shorter  terms and  adjust  more  frequently  to changes in
interest  rates than  single-family  residential  mortgage  loans.  These  loans
generally carry added risk when compared to a single-family residential mortgage
loan, so we have concurrently increased our allowance for loan losses as we have
originated these loans.

     Due to a general  slowdown in the economy  beginning  in 2000,  the Federal
Reserve acted to provide a stimulus through a series of interest rate reductions
that  lowered  the prime rate from 9.50% in January  2001 to 4.00% in June 2003.
These reductions in prime tended to negatively impact the Company's net interest
margin and net interest  spread which resulted in lower net interest  income for
the  Company.  The  Company's  asset growth has been slower as a result of heavy
refinancing  as  customers  have taken  advantage of these  attractive  interest
rates. The fee income associated with the heavy refinancing  volume has replaced
some of the  lost net  interest  income.  Now as the  refinancing  activity  has
slowed, the Company is looking to replace lost net interest income possibly with
leverage  strategies.  During periods of slow loan demand, the Company purchases
more investments,  and the Company uses short-term  borrowings as an alternative
to deposits for funding certain assets. The Company's balance sheet is currently
asset   sensitive,   that  is,  rate  sensitive  assets  exceed  rate  sensitive
liabilities.  We expect an increase in net  interest  income  during  periods of
rising  interest  rates and  decreased  net interest  income  during  periods of
falling interest rates.

CRITICAL ACCOUNTING POLICIES

     The Company's  significant  accounting  policies are set forth in Note 1 of
the consolidated  financial statements as of September 30, 2003, which was filed
on the Company's  Annual Report on Form 10-K for the fiscal year ended September
30, 2003. Of these significant  accounting  policies,  the Company considers its
policy  regarding  the  allowance  for  loan  losses  to be  its  most  critical
accounting policy,  because it requires management's most subjective and complex
judgments.  In addition,  changes in economic  conditions can have a significant
impact on the  allowance  for loan losses and  therefore  the provision for loan
losses and results of operations. The Company has developed appropriate policies
and  procedures  for  assessing  the adequacy of the  allowance for loan losses,
recognizing  that this process  requires a number of  assumptions  and estimates
with respect to its loan portfolio. The Company's assessments may be impacted in
future  periods by  changes in  economic  conditions,  the impact of  regulatory
examinations, and the discovery of

                                       11
<PAGE>

information  with respect to borrowers  that is not known to  management  at the
time of the issuance of the consolidated financial statements.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2004 AND SEPTEMBER 30, 2003

     Total  assets were  relatively  flat from  September  30, 2003 to March 31,
2004.  Assets  increased to $362.9 million at March 31, 2004 from $362.6 million
at September  30, 2003.  Increases in loans  receivable,  net and loans held for
sale were offset by decreases in investment  securities.  Deposits  increased by
$1.7 million  from $262.7  million at  September  30, 2003 to $264.4  million at
March 31, 2004.  These  increases  were offset by decreases in advances from the
Federal  home loan Bank.  Borrowings  from the Federal Home Loan Bank of Atlanta
decreased $3.0 million from $31.5 million at September 30, 2003 to $28.5 million
at March 31, 2004.

     Investment  securities available for sale decreased $5.7 million from $91.1
million at September 30, 2003 to $85.4 million at March 31, 2004. During the six
months  ended March 31, 2004,  we  purchased  $30.6  million of  securities  and
received  $38.0 million in proceeds from sales,  maturities  and issuer calls of
investment securities available for sale. Investment securities held to maturity
increased $2.4 million from $19.5 million at September 30, 2003 to $21.8 million
at March 31, 2004. During the six months ended March 31, 2004, we purchased $6.4
million of securities and received $4.0 million in proceeds from  maturities and
issuer calls of investment securities held to maturity.

     Loans  held for sale  increased  to $1.2  million  at March  31,  2004 from
$645,000 at September 30, 2003.  Loans  receivable,  net  increased  from $225.7
million at September 30, 2003 to $230.6  million at March 31, 2004. The increase
in loans held for sale resulted from timing  differences  in the funding of loan
sales.  During the six months ended March 31, 2004,  mortgage  originations were
considerably  slower than in previous quarters as refinance activity slowed down
in response to higher  mortgage  interest  rates.  During this same period,  the
Company saw growth in commercial loans and equity lines.

     Stockholders'  equity  increased  by $1.6  million  from  $62.7  million at
September  30, 2003 to $64.3 million at March 31, 2004 as a result of net income
of $1.5 million, release of ESOP shares of $420,000 and a decrease in unrealized
loss on  available  for  sale  securities  of  $525,000.  These  increases  were
partially  offset by cash  dividends  to  stockholders  declared of $561,000 and
purchases of treasury stock of $663,000.

COMPARISON  OF  OPERATING  RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND
2003

     NET INCOME.  We recorded net income of $779,000 for the quarter ended March
31,  2004,  as  compared  to $997,000  for the  quarter  ended  March 31,  2003,
representing a decrease of $218,000,  or 21.9%. For the three months ended March
31,  2004,   basic  and  diluted  earnings  per  share  were  $0.28  and  $0.26,
respectively,  compared  to the basic  and  diluted  earnings  per share for the
quarter ended March 31, 2003 of $0.35 and $0.34,  respectively.  The decrease in
net income  resulted  primarily from decreased net interest income and decreased
other  income that were offset  partially by  decreased  operating  expenses and
decreased income tax expense.  The decrease in net interest income resulted from
lower net interest  margins.  The average  prime  interest  rate for the quarter
ended March 31, 2004 was 4.00%, a decrease of 25 basis points from 4.25%,  which
was the average  prime for the quarter  ended March 31, 2003.  The  repricing of
loans and  investments  decreased the Company's  average asset yield by 75 basis
points  whereas the average cost of funds  decreased only 47 basis points during
the quarter ended March 31, 2003.

     NET INTEREST INCOME.  Net interest income,  the difference between interest
earned  on  loans  and  investments   and  interest  paid  on   interest-bearing
liabilities,  decreased by $187,000 or 6.8% for the three months ended March 31,
2004, compared to the same quarter in the prior year. This decrease results from
a $443,000 decrease in interest income that was partially offset by the $256,000
decrease  in total  interest  expense.  The  average  net  interest  rate spread
decreased  28 basis  points from 3.21% for the three months ended March 31, 2003
to 2.93% for the quarter ended March 31, 2004.

     INTEREST INCOME. The decrease in interest income for the three months ended
March 31, 2004 was the result of a decrease in yield on interest-earning  assets
of 75 basis points from 5.39% for the three months ended March 31, 2003 to 4.64%
for the three months ended March 31, 2004. This decrease was partially offset by
an increase of $14.7 million in average  interest-earning assets compared to the
same quarter in the prior year.  Average investment  securities  increased $24.9
million,  average  interest-bearing  overnight funds decreased $11.1 million and
average loans receivable increased

                                       12
<PAGE>

$918,000.  The increase in average  interest-earning  assets increased  interest
income by  approximately  $299,000 and the  decrease in the average  asset yield
decreased interest income by approximately $742,000.

     INTEREST  EXPENSE.  Interest  expense  decreased  in the three months ended
March 31, 2004 due to a decrease in the cost of interest-bearing  liabilities of
47 basis  points from 2.18% for the three  months  ended March 31, 2003 to 1.71%
for the three months ended March 31, 2004. This decrease was partially offset by
an increase in average  interest-bearing  liabilities of $12.9 million.  Average
interest-bearing  deposits increased by $4.5 million while average FHLB advances
increased $8.4 million for the three months ended March 31, 2004 compared to the
same  quarter  in the prior  year.  The  increase  in  average  interest-bearing
liabilities  increased  interest  expense  by  approximately  $127,000  and  the
decrease in the average cost of interest-bearing  liabilities decreased interest
expense by approximately $383,000.

The following table presents average  balances and average rates  earned/paid by
the Company for the quarter  ended March 31, 2004  compared to the quarter ended
March 31, 2003.
<TABLE>
<CAPTION>

                                                          Three Months Ended                           Three Months Ended
                                                              March 31, 2004                              March 31, 2003
                                                     --------------------------------          ----------------------------------
                                                                             (Dollars in Thousands)

                                                     Average                     Average     Average                    Average
                                                     Balance        Interest   Yield/Cost    Balance      Interest    Yield/Cost
                                                     -------        --------   ----------    -------      --------    ----------
<S>                                                     <C>           <C>        <C>          <C>           <C>            <C>
Assets:
Loans receivable (1).........................     $    229,683    $   2,830       4.93%   $   228,764  $   3,295           5.76%
Investment securities (2)....................          107,811        1,116       4.14         82,921      1,060           5.11
Interest-bearing overnight deposits .........            3,556            8       0.91         14,669         42           1.15
                                                  ------------    ---------      -----    -----------  ---------         ------
  Total interest-earning assets (3)..........          341,050        3,954       4.64        326,354      4,397           5.39
Non interest-earning assets..................           20,970                                 21,001
                                                  ------------                            -----------
  Total assets...............................     $    362,020                            $   347,355
                                                  ============                            ===========

Liabilities and stockholders' equity:
Interest bearing checking....................           35,538           18       0.21         33,018         36           0.44
Money market investment accounts.............           19,212           32       0.66         22,485         54           0.96
Passbook and statement savings...............           29,834           45       0.60         29,321         80           1.09
Certificates of deposit......................          163,530          791       1.93        158,776        999           2.52
FHLB advances................................           30,280          303       4.01         21,900        276           5.05
                                                  ------------    ---------      -----    -----------  ---------         ------
  Total interest-bearing liabilities.........          278,394        1,189       1.71        265,500      1,445           2.18
Non interest-bearing liabilities.............           19,822                                 19,356
                                                  ------------                            -----------
  Total liabilities..........................          298,216                                284,856
Stockholders' equity.........................           63,804                                 62,499
                                                  ------------                            -----------
  Total liabilities and stockholders' equity      $    362,020                            $   347,355
                                                  ============                            ===========

Net interest income..........................                     $   2,765                            $   2,952
                                                                  =========                            =========
Interest rate spread.........................                                     2.93%                                    3.21%
                                                                                  ====                                     ====
Net interest margin (4)......................                                     3.24%                                    3.62%
                                                                                  ====                                     ====
Ratio of average interest-earning assets to
 average interest-bearing liabilities........                                   122.51%                                  122.92%
                                                                                ======                                   ======
</TABLE>

 --------
(1)  Includes  nonaccrual  loans and loans held for sale,  net of discounts  and
     allowance for loan losses.
(2)  Includes FHLB of Atlanta stock.
(3)  Due to immateriality, the interest income and yields related to certain tax
     exempt assets have not been adjusted to reflect a fully taxable  equivalent
     yield.
(4)  Represents  net  interest   income  divided  by  the  average   balance  of
     interest-earning assets.

                                       13
<PAGE>

     PROVISION FOR LOAN LOSSES. We charge provisions for loan losses to earnings
to maintain the total allowance for loan losses at a level we consider  adequate
to provide for probable loan losses,  based on existing loan levels and types of
loans outstanding,  nonperforming loans, prior loss experience, general economic
conditions and other factors.  We estimate the allowance  using an allowance for
loan losses  model which takes into  considerations  all of these  factors.  Our
policies  require  the review of assets on a regular  basis,  and we assign risk
grades to loans  based on the  relative  risk of the  credit,  considering  such
factors as  repayment  experience,  value of  collateral,  guarantors,  etc. Our
credit management systems have resulted in low loss experience;  however,  there
can be no assurances that such  experience will continue.  We believe we use the
best information available to make a determination with respect to the allowance
for loan losses,  recognizing that future adjustments may be necessary depending
upon a change in economic conditions.

     The provision for loan losses was $60,000 and net charge-offs  were $36,000
for the three months ended March 31, 2004  compared with a provision of $60,000,
and  net  charge-offs  of  $0  for  the  three  months  ended  March  31,  2003.
Nonperforming  loans at March 31, 2004 and  September 30, 2003 were $4.0 million
and  $4.2  million,  respectively.  The  majority  of the  non-performing  loans
resulted  from  two  unrelated,  distinct  credits  which  are  not  necessarily
indicative  of  the  credit  quality  of  the  entire  portfolio.  There  was no
significant  impact on the provision as these loans are well secured by property
and equipment.

     OTHER INCOME.  Other income decreased  $281,000 from $871,000 for the three
months  ended March 31, 2003 to $590,000  for the three  months  ended March 31,
2004.  Mortgage  banking  income,  net decreased  $323,000 from $436,000 for the
three  months  ended March 31, 2003 to $113,000 for the three months ended March
31,  2004.  This  decrease  results  from a decrease in volume of mortgage  loan
originations  and sales. We sold loans totaling $6.7 million in the three months
ended March 31, 2004  compared  with sales of $23.8 million in the previous year
for the comparable  period.  The increase in mortgage  interest rates slowed the
volume of mortgage  originations and sales.  Given the current level of mortgage
interest rates,  the Company believes that mortgage banking income will continue
to decrease in future quarters due to lower  refinancing  activity.  Commissions
from sales of annuities and mutual funds decreased $66,000 from $159,000 for the
quarter  ended March 31, 2003 to $93,000 for the quarter  ended March 31,  2004.
This  decrease  results  from lower sales of  annuities  and mutual  funds.  The
Company  recorded  gains on sales of  investments of $88,000 in the three months
ended March 31, 2004 which were not present in the prior year.

     OPERATING  EXPENSES.  Total  operating  expenses were $2.1 million and $2.2
million  for the  three  months  ended  March 31,  2004 and 2003,  respectively.
Expenses  incurred  in  operating  real  estate  owned were $4,000 for the three
months  ended March 31, 2003  compared to income of $1,000 for the three  months
ended March 31, 2004. The Company has been able to control  expenses during this
period of slower asset growth.

     INCOME TAX EXPENSE.  Income tax expense decreased $125,000 from tax expense
of $585,000  for the three months ended March 31, 2003 to $460,000 for the three
months ended March 31, 2004.  The  effective  tax rates were 37.1% and 37.0% for
the three months ended March 31, 2004 and 2003, respectively.

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 2004 AND 2003

     NET INCOME. We recorded net income of $1.5 million for the six months ended
March 31, 2004, a decrease of $500,000,  or 25.0% over the $2.0 million reported
in the six months ended March 31, 2003. For the six months ended March 31, 2004,
basic and diluted  earnings  per share were $0.55 and $0.52,  respectively.  The
Company  reported basic and diluted  earnings per share for the six months ended
March 31,  2003 of $0.70 and $0.67,  respectively.  The  decrease  in net income
resulted  primarily  from  decreased  net interest  income and  decreased  other
income.  These decreases in income were partially offset by decreased  operating
expenses and  decreased  income taxes.  The decrease in the net interest  income
resulted from lower net interest  margins.  The average prime  interest rate for
the six months  ended  March 31, 2004 was 4.00%,  a decrease of 35 basis  points
from 4.35% which was the average  prime for the six months ended March 31, 2003.
The rate  decrease  caused a greater  reduction in the average  yield on earning
assets than the average rate paid on interest-bearing liabilities.

     NET INTEREST INCOME.  Net interest income,  the difference between interest
earned  on  loans  and  investments   and  interest  paid  on   interest-bearing
liabilities,  decreased  by $376,000 or 6.7% for the six months  ended March 31,
2004,  compared to the same six months in the prior year. This decrease reflects
a $963,000 decrease in interest income that was partially offset by the $588,000
decrease  in total  interest  expense.  The  average  net  interest  rate spread
decreased  27 basis points from 3.22% for the six months ended March 31, 2003 to
2.95% for the six months ended March 31, 2004.

                                       14
<PAGE>

     INTEREST  INCOME.  The decrease in interest income for the six months ended
March 31, 2004 was due to a decrease in yield on  interest-earning  assets of 81
basis points from 5.51% for the six months ended March 31, 2003 to 4.70% for the
six months  ended  March 31,  2004 that was  partially  offset by an increase of
$14.2 million in average  interest-earning assets compared to the same period in
the  prior  year.  The  increased  volume  of  average  interest-earning  assets
increased  interest  income by  approximately  $592,000 and the decreased  yield
decreased  interest income by  approximately  $1.6 million.  Average  investment
securities  increased $25.0 million  compared with the prior year. This increase
was offset in part by a decrease in average  loans  receivable of $165,000 and a
decrease of $10.0 million in average interest bearing overnight funds.

     INTEREST EXPENSE.  Interest expense decreased in the six months ended March
31, 2004 due to a decrease  in the cost of  interest-bearing  liabilities  of 54
basis points from 2.29% for the six months ended March 31, 2003 to 1.75% for the
six months  ended  March 31,  2004 that was  partially  offset by an increase of
$14.2  million  in  average  interest-bearing   liabilities.   Average  deposits
increased by $3.4 million, and average FHLB advances increased $10.8 million for
the six months ended March 31, 2004 compared to the same six months in the prior
year. The increase in average  interest-bearing  liabilities  increased interest
expense by  approximately  $317,000  and the  decrease  in the  average  cost of
interest-bearing   liabilities   decreased  interest  expense  by  approximately
$905,000.


     The following table presents average balances and average rates earned/paid
by the  Company  for the six months  ended  March 31,  2004  compared to the six
months ended March 31, 2003.
<TABLE>
<CAPTION>

                                                            Six Months Ended                           Six Months Ended
                                                             March 31, 2004                              March 31, 2003
                                                     --------------------------------        -------------------------------------
                                                                              (Dollars in Thousands)

                                                     Average                     Average     Average                    Average
                                                     Balance        Interest   Yield/Cost    Balance      Interest    Yield/Cost
                                                     --------       --------   ----------    -------      --------    ----------
<S>                                                     <C>           <C>         <C>         <C>           <C>           <C>
Assets:
Loans receivable (1).........................     $    227,691    $   5,684       4.99%   $  227,857   $   6,667          5.85%
Investment securities (2)....................          108,883        2,300       4.22        83,906       2,212          5.27
Interest-bearing overnight deposits .........            3,786           17       0.91        13,789          85          1.24
                                                  ------------    ---------     ------    ----------   ---------         -----
  Total interest-earning assets (3)..........          340,360        8,001       4.70       325,552       8,964          5.51
Non interest-earning assets..................           20,879                                19,996
                                                  ------------                            ----------
  Total assets...............................     $    361,239                            $  345,548
                                                  ============                            ==========
Liabilities and stockholders' equity:
Interest bearing checking....................           35,822           38       0.21        33,369          74          0.45
Money market investment accounts.............           19,406           65       0.67        21,945         112          1.02
Passbook and statement savings...............           30,095           92       0.61        29,264         161          1.10
Certificates of deposit......................          160,301        1,610       2.01       157,639       2,113          2.68
FHLB advances................................           31,863          619       3.89        21,077         552          5.25
                                                  ------------    ---------     ------    ----------   ---------         -----
  Total interest-bearing liabilities.........          277,487        2,424       1.75       263,294       3,012          2.29
Non interest-bearing liabilities.............           20,401                                20,055
                                                  ------------                            ----------
  Total liabilities..........................          297,888                               283,349
Stockholders' equity.........................           63,351                                62,199
                                                  ------------                            ----------
  Total liabilities and stockholders' equity      $    361,239                            $  345,548
                                                  ============                            ==========

Net interest income..........................                     $   5,577                            $   5,952
                                                                  =========                            =========
Interest rate spread.........................                                     2.95%                                   3.22%
                                                                                ======                                   =====
Net interest margin (4)......................                                     3.28%                                   3.66%
                                                                                ======                                   =====
Ratio of average interest-earning assets to
 average interest-bearing liabilities........                                   122.66%                                 123.65%
                                                                                ======                                  ======
</TABLE>

---------
(1)  Includes  nonaccrual  loans and loans held for sale,  net of discounts  and
     allowance for loan losses.
(2)  Includes FHLB of Atlanta stock.
(3)  Due to immateriality, the interest income and yields related to certain tax
     exempt assets have not been adjusted to reflect a fully taxable  equivalent
     yield.
(4)  Represents  net  interest   income  divided  by  the  average   balance  of
     interest-earning assets.


     PROVISION  FOR LOAN  LOSSES.  The  provision  for loan losses is charged to
earnings to maintain the total  allowance for loan losses at a level  considered
adequate to absorb  estimated  probable  losses  inherent in the loan  portfolio
based on  existing  loan  levels and types of loans  outstanding,  nonperforming
loans,  prior  loan  loss  experience,  general  economic  conditions  and other
factors.  Provisions  for loan losses  totaled  $120,000 for both the six months
ended March 31, 2004 and 2003. The provision for loan losses was impacted by the
continued  shift in the  portfolio to  commercial  loans which  require a larger
allocation of allowance for loan losses.  The effects of this continued shift in
the  portfolio  were  offset  to a  certain  degree  in  2004 by a  decrease  in
nonperforming  loans.  The Company has completed the  foreclosure on some of the
nonperforming loans and shifted those assets into real estate owned. Most of the
real estate  owned is under  contract.  The sale of these  properties  should be
completed during the next quarter.

     OTHER INCOME. Other income decreased $500,000 from $1.6 million for the six
months  ended March 31, 2003 to $1.1  million for the six months ended March 31,
2004.  Mortgage banking income, net decreased $626,000 from $837,000 for the six
months ended March 31, 2003 to $211,000 for the six months ended March 31, 2004.
This decrease  results from a decrease in volume of mortgage  loan  originations
and sales.  We sold loans  totaling  $13.6 million in the six months ended March
31,  2004  compared  with sales of $45.8  million in the  previous  year for the
comparable  period. The increase in mortgage interest rates slowed the volume of
mortgage  originations and sales.  Given the current level of mortgage  interest
rates,  the Company  believes  that  mortgage  banking  income will  continue to
decrease in future quarters due to lower refinancing activity.  Commissions from
sales of annuities and mutual funds decreased  $81,000 from $246,000 for the six
months ended March 31, 2003 to $165,000 for the six months ended March 31, 2004.
This  decrease  results  from lower sales of  annuities  and mutual  funds.  The
Company  recorded  gains on sales of  investments  of $185,000 in the six months
ended March 31, 2004 which were not present in the prior year.

     OPERATING  EXPENSES.  Total  operating  expenses were $4.2 million and $4.3
million for the six months ended March 31, 2004 and 2003, respectively. Expenses
incurred in  operating  real estate  owned were $9,000 for the six months  ended
March 31, 2003  compared to income of $5,000 for the six months  ended March 31,
2004. The Company has been able to control expenses during this period of slower
asset growth.

     INCOME TAX EXPENSE.  Income tax expense decreased $300,000 from tax expense
of $1.2  million for the six months ended March 31, 2003 to $877,000 for the six
months ended March 31, 2004.  The  effective  tax rates were 36.3% and 36.9% for
the six months ended March 31, 2004 and 2003, respectively.  The decrease in the
effective  rate  was  primarily  due  to an  increase  in  the  ratio  of  state
non-taxable income as a percentage of net income before taxes.

COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK

     The Company is a party to financial instruments with off-balance sheet risk
including  commitments  to extend  credit  under  existing  lines of credit  and
commitments  to sell  loans.  These  instruments  involve,  to varying  degrees,
elements of credit and interest rate risk in excess of the amount  recognized in
the consolidated balance sheets.

     Off-balance  sheet financial  instruments  whose contract amounts represent
credit and interest rate risk are summarized as follows:
<TABLE>
<CAPTION>

                                                                 March 31, 2004            September 30, 2003
                                                                 --------------            ------------------
            <S>                                                   <C>                        <C>
                                                                        (Dollars in thousands)

         Commitments to originate new loans                            $ 1,196               $  1,552
         Commitments to originate new loans held for sale                  326                    278
         Unfunded commitments to extend credit under existing
              equity line and commercial lines of credit                56,537                 57,237
         Commercial letters of credit                                    1,692                    326
         Commitments to sell loans held for sale                         1,755                  1,630
</TABLE>

                                       16
<PAGE>

     The Company  does not have any special  purpose  entities or other  similar
forms of off-balance sheet financing arrangements.

     Commitments  to originate new loans or to extend  credit are  agreements to
lend to a customer as long as there is no violation of any condition established
in the contract.  Loan  commitments  generally expire within 30 to 45 days. Most
equity line  commitments  are for a term of 15 years,  and  commercial  lines of
credit are generally  renewable on an annual basis.  Commitments  generally have
fixed expiration dates or other termination clauses and may require payment of a
fee.  Since many of the  commitments  are expected to expire without being drawn
upon, the total  commitment  amounts do not  necessarily  represent  future cash
requirements.  The  Company  evaluates  each  customer's  creditworthiness  on a
case-by-case basis. The amounts of collateral  obtained,  if deemed necessary by
the Company upon extension of credit, is based on management's credit evaluation
of the borrower.

     Commitments  to sell loans held for sale are  agreements to sell loans to a
third party at an agreed upon price. At March 31, 2004, the aggregate fair value
of these commitments exceeded the book value of the loans to be sold.

CONTRACTUAL OBLIGATIONS

As of March 31, 2004
<TABLE>
<CAPTION>
                                                     PAYMENTS DUE BY PERIOD
                                                     (DOLLARS IN THOUSANDS)

                                    LESS THAN
                                      1 YEAR       1-3 YEARS    4-5 YEARS    OVER 5 YEARS    TOTAL
                                    ---------      ---------    ---------    ------------    -----
<S>                                     <C>          <C>          <C>            <C>          <C>
Deposits                            $229,567        23,343        11,503         --        264,413
Advances from FHLB                     8,500            --        20,000         --         28,500
Lease obligations                         18            41            42         26            127
                                    --------       -------      --------       ----        -------
Total contractual cash
    obligations                     $238,085        23,384        31,545         26        293,040
                                    ========       =======      ========       ====        =======
</TABLE>

ASSET QUALITY

     At  March  31,  2004,  the  Company  had  approximately   $4.5  million  in
nonperforming  assets (nonaccrual loans and real estate owned) or 1.23% of total
assets. At September 30, 2003,  nonperforming  assets were $4.2 million or 1.17%
of total  assets.  At March 31, 2004 and  September  30,  2003,  impaired  loans
totaled $3.7 million and $3.8 million,  respectively, as defined by Statement of
Financial  Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan." The impaired  loans at March 31, 2004 and  September 30, 2003 result
from two and three,  respectively,  unrelated commercial loan customers, each of
which have loans  secured  by  commercial  real  estate and  business  assets in
Alamance  County.  At March 31,  2004,  the entire $3.7  million of the impaired
loans are on  non-accrual  status,  and their  related  reserve  for loan losses
totaled $160,000.  The average carrying value of impaired loans was $3.7 million
during the six months ended March 31, 2004.  Interest income of $98,000 has been
recorded on impaired  loans in the six months ended March 31,  2004.  The Bank's
net chargeoffs for the six months ended March 31, 2004 were $84,000.  The Bank's
allowance  for loan losses was $3.9 million at March 31, 2004 and  September 30,
2003,  and the ratio of the  allowance  for loan losses to total  loans,  net of
loans in process  and  deferred  loan fees was 1.66% and 1.68% at March 31, 2004
and September 30, 2003, respectively.

     The following table presents an analysis of our nonperforming assets:
<TABLE>
<CAPTION>

                                                      At                           At                      At
                                                   March 31,                 September 30,             March 31,
                                                     2004                         2003                    2003
                                                     ----                         ----                    ----
<S>                                                   <C>                         <C>                     <C>
Nonperforming loans:
Nonaccrual loans                              $       3,951                $        4,153             $     4,414
Loans 90 days past due and accruing                      --                            --                      --
Restructured loans                                       --                            --                      --
                                              -------------                --------------             -----------
Total nonperforming loans                             3,951                         4,153                   4,414
Other real estate                                       513                            95                     177
                                              -------------                --------------             -----------
Total nonperforming assets                    $       4,464                $        4,248             $     4,591
                                              =============                ==============             ===========

Nonperforming loans to loans receivable, net           1.71%                         1.84%                   1.97%
Nonperforming assets as a percentage
 of loans and other real estate owned                  1.93%                         1.88%                   2.05%
Nonperforming assets to total assets                   1.23%                         1.17%                   1.32%
</TABLE>

                                       17
<PAGE>

     Regulations  require that we classify our assets on a regular basis.  There
are three classifications for problem assets: substandard, doubtful and loss. We
regularly   review  our  assets  to   determine   whether  any  assets   require
classification or  re-classification.  At March 31, 2004, we had $5.0 million in
classified  assets consisting of $4.5 million in substandard  loans,  $24,000 in
loss loans and $513,000 in real estate owned. At September 30, 2003, we had $4.9
million in substandard assets consisting of $4.8 million in loans and $95,000 in
real estate  owned.  At March 31, 2003, we had $5.0 million in  substandard  and
loss loans and $177,000 in real estate owned.

     In addition to  regulatory  classifications,  we also  classify as "special
mention" and "watch"  assets that are currently  performing  in accordance  with
their contractual terms but may become classified or nonperforming assets in the
future.  At March 31, 2004,  we have  identified  approximately  $5.3 million in
assets  classified as special  mention and $29.3 million as watch.  At March 31,
2003,  we had  identified  approximately  $1.1 million in assets  classified  as
special mention and $30.7 million as watch.

     Included  in the total of  special  mention  assets  are five loans with an
aggregate  outstanding  balance of $4.4  million at March 31,  2004 to a company
affiliated with one of our directors. At December 31, 2003, these loans had been
classified  as watch.  In  addition,  the  director has the ability to borrow an
additional  $35,956 from us under a line of credit.  At September 30, 2003,  the
aggregate  outstanding balance was $4.5 million with additional  availability of
$172,000.  All the loans are  secured by a first lien on all  assets,  including
accounts receivable,  inventory, equipment, furniture and real property occupied
by the  borrower.  In  addition,  the  director  and his spouse have  personally
guaranteed  repayment of the loans.  At March 31, 2004,  such loans were current
with respect to their payment  terms and,  except for the waiver of certain debt
covenants  by the Bank,  were  performing  in  accordance  with the related loan
agreements.  Based on an analysis of the borrower's current financial statements
received in April 2004,  management  has  concerns  that the  borrower  may have
difficulty  in  complying  with the present loan  repayment  terms on an ongoing
basis.  Accordingly,  this loan may become an impaired  loan in future  periods.
Management  will continue to closely  monitor the  performance of these loans in
future periods.

LIQUIDITY AND CAPITAL RESOURCES

     The Bank must meet certain liquidity requirements  established by the State
of North Carolina Office of the Commissioner of Banks (the  "Commissioner").  At
March 31, 2004, the Bank's liquidity ratio exceeded such requirements. Liquidity
generally refers to the Bank's ability to generate  adequate amounts of funds to
meet its cash needs.  Adequate  liquidity  guarantees that sufficient  funds are
available to meet deposit withdrawals, fund loan commitments,  maintain adequate
reserve  requirements,  pay operating expenses,  provide funds for debt service,
pay dividends to stockholders and meet other general commitments.

     Our primary sources of funds are deposits,  principal and interest payments
on loans, proceeds from the sale of loans, and to a lesser extent, advances from
the FHLB of Atlanta.  While  maturities and scheduled  amortization of loans are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and local competition.

     Our most liquid assets are cash and cash  equivalents.  The levels of these
assets  are  dependent  on  our  operating,  financing,  lending  and  investing
activities during any given period. At March 31, 2004, cash and cash equivalents
totaled  $8.4  million.  We have  other  sources  of  liquidity  should  we need
additional funds.  During the three and six months ended March 31, 2004, we sold
loans totaling $6.7 million and $12.9 million, respectively.  Additional sources
of funds include FHLB of Atlanta  advances.  Other sources of liquidity  include
loans and investment  securities designated as available for sale, which totaled
$86.6 million at March 31, 2004.

                                       18
<PAGE>

     We  anticipate  that we will have  sufficient  funds  available to meet our
current  commitments.  At March 31, 2004, we had $1.2 million in  commitments to
originate  new loans,  $56.5  million in unfunded  commitments  to extend credit
under existing  equity lines and commercial  lines of credit and $1.7 million in
standby letters of credit. At March 31, 2004, certificates of deposit, which are
scheduled to mature within one year,  totaled $126.8 million.  We believe that a
significant portion of such deposits will remain with us.

     The Federal Deposit  Insurance  Corporation  ("FDIC")  requires the Bank to
meet a minimum leverage capital requirement of Tier I capital to assets ratio of
4%.  The  FDIC  also  requires  the Bank to meet a ratio  of  total  capital  to
risk-weighted  assets of 8%, of which 4% must be in the form of Tier I  capital.
The  Commissioner  requires  the Bank at all times to maintain  certain  minimum
capital levels. The Bank was in compliance with all capital  requirements of the
FDIC  and  the  Commissioner  at  March  31,  2004  and is  deemed  to be  "well
capitalized."

     The Federal Reserve also mandates capital  requirements on all bank holding
companies,  including 1st State  Bancorp,  Inc. These capital  requirements  are
similar to those imposed by the FDIC on the Bank. At March 31, 2004, the Company
was in compliance with the capital requirements of the Federal Reserve.

     On October 2, 2000, the Company paid a one-time  special cash  distribution
of $5.17 per share to its stockholders.  The distribution was made to manage the
Company's  capital  and  enhance  shareholder  value.  Returning  capital to the
stockholders  reduced the  Company's  equity to asset ratio from 21.2% to 17.2%.
The Company's  equity to asset ratio at March 31, 2004 was 17.7%.  The Company's
capital level is sufficient to support future growth.

     The Company has declared cash  dividends per common share of $0.10 for each
of the three months ended March 31, 2004, September 30, 2003 and March 31, 2003.
The Company's ability to pay dividends is dependent upon earnings. The Company's
dividend  payout ratio for the three months ended March 31, 2004,  September 30,
2003 and March 31, 2003 was 38.5%, 31.2% and 29.4%, respectively.

ACCOUNTING MATTERS

     In March  2004,  the SEC  released  Staff  Accounting  Bulletin  No.  105 -
Application of Accounting Principles to Loan Commitments. This bulletin requires
all registrants to begin accounting for their issued loan commitments (including
interest rate lock  commitments)  subject to Statement  133 as written  options.
Treatment  as a written  option  would  require  those  loan  commitments  to be
reported as liabilities  until either they are exercised (and a loan is made) or
they expire  unexercised.  Staff Accounting  Bulletin No. 105 must be applied to
loan  commitments  that are issued after March 31,  2004.  The adoption of Staff
Accounting  Bulletin  No. 105 is not  expected to have a material  impact on the
consolidated financial statements.

     In January 2003, FASB  Interpretation  No. 46,  "Consolidation  of Variable
Interest  Entities,  an interpretation of ARB No. 51",  (Interpretation  46) was
issued. Interpretation 46 addresses the consolidation by business enterprises of
variable interest entities as defined in the  Interpretation.  Interpretation 46
applies  immediately to variable interests in variable interest entities created
after January 31, 2003, and to variable  interests in variable interest entities
obtained  after  January  31,  2003.  In  December  2003,  the FASB  issued FASB
Interpretation  No. 46  (revised  December  2003),  "Consolidation  of  Variable
Interest  Entities",  which addresses how a business  enterprise should evaluate
whether it has a controlling financial interest in an entity through means other
than voting  rights and  accordingly  should  consolidate  the  entity.  FIN 46R
replaces  FASB  Interpretation  No.  46,  "Consolidation  of  Variable  Interest
Entities",  which was issued in January  2003.  The Company  will be required to
apply FIN 46R to variable interests in VIEs created after December 31, 2003. The
application  of this revised  interpretation  is not expected to have a material
effect on the consolidated financial statements.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Market  risk is the  possible  chance of loss from  unfavorable  changes in
market prices and rates.  These changes may result in a reduction of current and
future period net interest income, which is the favorable spread earned from the
excess of interest income on  interest-earning  assets over interest  expense on
interest-bearing liabilities.

     The Company considers  interest rate risk to be its most significant market
risk, which could  potentially  have the greatest impact on operating  earnings.
The  structure  of the  Company's  loan and  deposit  portfolios  is such that a
significant decline in interest rates may adversely impact net market values and
net interest income.

                                       19
<PAGE>

     The Company  monitors whether material changes in market risk have occurred
since September 30, 2003. The Company does not believe that any material adverse
changes in market risk exposures have occurred since September 30, 2003.

ITEM 4.  CONTROLS AND PROCEDURES

     As of the end of the  period  covered  by this  report,  management  of the
Company  carried  out  an  evaluation,   under  the  supervision  and  with  the
participation  of  the  Company's  principal  executive  officer  and  principal
financial officer, of the effectiveness of the Company's disclosure controls and
procedures.  Based on this evaluation, the Company's principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and  procedures  are  effective  in  ensuring  that  information  required to be
disclosed  by the  Company  in  reports  that it  files  or  submits  under  the
Securities Exchange Act of 1934, as amended, is recorded, processed,  summarized
and reported,  within the time periods  specified in the Securities and Exchange
Commission's  rules  and  forms.  It  should  be noted  that the  design  of the
Company's  disclosure  controls  and  procedures  is based in part upon  certain
reasonable  assumptions about the likelihood of future events,  and there can be
no reasonable  assurance  that any design of disclosure  controls and procedures
will  succeed  in  achieving  its  stated  goals  under  all  potential   future
conditions,  regardless of how remote, but the Company's principal executive and
financial  officers have  concluded that the Company's  disclosure  controls and
procedures are, in fact, effective at a reasonable assurance level.

     In addition,  there have been no changes in the Company's  internal control
over financial reporting  identified in connection with the evaluation described
in the above  paragraph that occurred  during the Company's last fiscal quarter,
that has materially affected,  or is reasonably likely to materially affect, the
Company's internal control over financial reporting.


                                       20
<PAGE>
                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     From time to time, we are a party to various legal proceedings  incident to
our business.  There currently are no legal proceedings to which we are a party,
or to  which  any of our  property  was  subject,  except  as  described  in the
following  paragraph,  and none which are expected to result in a material loss.
There are no pending regulatory  proceedings to which we are a party or to which
any of our  properties  is subject  which are  expected  to result in a material
loss.

     A civil action was filed  against 1st State Bank and Brokers,  Incorporated
by Michael  Locklar in Davidson  County  Superior  Court,  in the State of North
Carolina on May 16, 2003.  Mr.  Locklar has alleged in the action that 1st State
Bank granted him an option to purchase certain real property located in Davidson
County,  North  Carolina,  which  1st State  Bank  wrongfully  sold to  Brokers,
Incorporated  for $150,000 in breach of the option granted to Mr.  Locklar.  Mr.
Locklar  is  seeking  to set  aside  the  conveyance  of  property  to  Brokers,
Incorporated  and to purchase  the  property  from 1st State Bank for the option
price.  Brokers,  Incorporated  has filed a  cross-claim  against 1st State Bank
seeking  indemnification  in the form of return of the purchase  price they paid
for the  property,  damages and attorneys  fees should  Locklar be successful in
setting aside the real estate  conveyance.  1st State Bank intends to vigorously
contest Mr. Locklar's allegations.

ITEM  2.  CHANGES  IN  SECURITIES,  USE OF  PROCEEDS  AND  ISSUER  PURCHASES  OF
SECURITIES

     (a)  Not applicable

     (b)  Not applicable

     (c)  Not applicable

     (d)  Not applicable

     (e)  The  following  table sets forth  information  regarding the Company's
          repurchases  of its Common  Stock  during the quarter  ended March 31,
          2004.

<PAGE>
<TABLE>
<CAPTION>
                                                                            (c)
                                                                       TOTAL NUMBER
                                                                         OF SHARES                (d)
                                                                         PURCHASED              MAXIMUM
                                        (a)                              AS PART OF        NUMBER OF SHARES
                                       TOTAL               (b)            PUBLICLY         THAT MAY YET BE
                                     NUMBER OF           AVERAGE       ANNOUNCED PLANS     PURCHASED UNDER
                                       SHARES           PRICE PAID            OR             THE PLANS OR
              PERIOD                 PURCHASED          PER SHARE          PROGRAMS             PROGRAMS
              ------                 ---------          ----------    ----------------     ----------------
          <S>                          <C>                 <C>             <C>                    <C>
   January 2004                          688              $29.38              688                (1)
   Beginning date: January 29
   Ending date:  January 30

   February 2004                       4,950              $29.41            4,950                (1)
   Beginning date: February 3
   Ending date:  February 23

                                       5,638              $29.40            5,638                (1)
   Total
</TABLE>

     (1) On August  20,  2002,  the  Company  announced  a 10% stock  repurchase
program to acquire up to 328,961  shares of the  Company's  common  stock over a
period of 18 months. These share purchases complete this repurchase program.

         ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None

         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         The Company's  Annual Meeting of Stockholders  was held on February 3,
         2004. At this meeting,  2,971,285 shares of the Company's common stock
         were represented in person or by proxy.

         Stockholders voted in favor of the election of three nominees for
         director. The voting results for each nominee were as follows:
<TABLE>
<CAPTION>

                                                  VOTES IN FAVOR                VOTES
                  NOMINEE                          OF ELECTION                WITHHELD
                  -------                         --------------              --------
                   <S>                                 <C>                      <C>
                  James A. Barnwell, Jr.             2,595,101                  2,405
                  James G. McClure                   2,596,201                  1,305
                  T. Scott Quakenbush                2,595,019                  2,379

</TABLE>
                  There were no broker nonvotes on the matter.

         ITEM 5.  OTHER INFORMATION

         None.

         ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      EXHIBITS.
                  ---------
                  3.2    Bylaws, as amended of 1st State Bancorp, Inc.

                  31.1   Rule 13a-14(a) Certification of Chief Executive Officer

                                       22
<PAGE>

                  31.2   Rule 13a-14(a) Certification of Chief Financial Officer

                  32     Section 1350 Certification

         (b)      REPORTS ON FORM 8-K.
                  --------------------

                  The Registrant  filed the following  Current Reports on Form
                  8-K during the quarter ended March 31, 2004:

                  DATE OF REPORT    ITEM(S) REPORTED  FINANCIAL STATEMENTS FILED
                  --------------    ----------------  --------------------------
                  January 28, 2004       7, 12                N/A
                  February 25, 2004         5                 N/A


                                       23
<PAGE>

                                   SIGNATURES


     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                 1st STATE BANCORP, INC.


Date:  May 13, 2004              /s/ James C. McGill
                                 --------------------------------------------
                                 James C. McGill
                                 President and Chief Executive Officer
                                 (Principal Executive Officer)

Date:  May 13, 2004              /s/ A. Christine Baker
                                 --------------------------------------------
                                 A. Christine Baker
                                 Executive Vice President
                                 Treasurer and Secretary
                                 (Principal Financial and Accounting Officer)