U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 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, 2003


[ ]  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)


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

                                       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 April 30,  2003,  the issuer  had  2,977,789  shares of common  stock
issued and outstanding.

                                       1
<PAGE>

                                    CONTENTS

                                                                            PAGE
                                                                            ----

PART I.  FINANCIAL INFORMATION
         ---------------------

Item 1.  Financial Statements

         Consolidated Balance Sheets as of March 31, 2003 (unaudited)
             and September 30, 2002...........................................3

         Consolidated Statements of Income for the Three Months Ended
             March 31, 2003 and 2002 (unaudited)..............................4

         Consolidated Statements of Income for the Six Months Ended
               March 31, 2003 and 2002 (unaudited)............................5

         Consolidated Statements of Stockholders' Equity and Comprehensive
               Income for the Six Months Ended March 31, 2003 and 2002
               (unaudited)....................................................6

         Consolidated Statements of Cash Flows for the Six Months Ended
               March 31, 2003 and 2002 (unaudited)............................7

         Notes to Consolidated Financial Statements...........................9

Item 2.  Management's Discussion and Analysis of Financial Condition
               and Results of Operations.....................................13

Item 3.  Quantitative and Qualitative Disclosures About Market Risk..........24

Item 4.  Controls and Procedures.............................................24


PART II.  OTHER INFORMATION
          -----------------

Item 1.  Legal Proceedings...................................................25

Item 2.  Changes in Securities and Use of Proceeds...........................25

Item 3.  Defaults Upon Senior Securities.....................................25

Item 4.  Submission of Matters to a Vote of Security Holders.................25

Item 5.  Other Information...................................................25

Item 6.  Exhibits and Reports on Form 8-K....................................25


SIGNATURES...................................................................26

                                       2
<PAGE>
                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS
                      MARCH 31, 2003 AND SEPTEMBER 30, 2002
                        (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                                                  AT                 AT
                                                                              MARCH  31,       SEPTEMBER 30,
                                                                                  2003              2002
                                                                            ------------       -------------
                                                                             (Unaudited)
                       ASSETS
<S>                                                                         <C>                      <C>
Cash and cash equivalents                                                   $    31,425              18,865
Investment securities:
     Held to maturity (fair value of $13,468 and $11,558
         at March 31, 2003 and September 30, 2002, respectively)                 13,105              11,114
     Available for sale (cost of $58,995 and $77,213
         at March 31, 2003 and September 30, 2002, respectively)                 59,924              78,572
Loans held for sale, at lower of cost or fair value                               4,151               6,798
Loans receivable (net of allowance for loan losses of $3,850
    and $3,732 at March 31, 2003 and September 30, 2002,
    respectively)                                                               223,903             220,047
Real estate owned                                                                   177                 183
Federal Home Loan Bank stock, at cost                                             1,382               1,750
Premises and equipment                                                            8,346               7,972
Accrued interest receivable                                                       1,823               2,272
Other assets                                                                      2,771               2,896
                                                                            -----------           ---------
             Total assets                                                   $   347,007             350,469
                                                                            ===========           =========
                LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Deposit accounts                                                              258,806             260,667
  Advances from Federal Home Loan Bank                                           20,000              20,000
  Advance payments by borrowers for property taxes and insurance                    242                  54
  Dividend payable                                                                  298                 241
  Other liabilities                                                               5,250               7,938
                                                                            -----------           ---------
          Total liabilities                                                     284,596             288,900
                                                                            -----------           ---------
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;
          2,977,789 and 3,008,682 shares issued and outstanding
           at March 31, 2003 and September 30, 2002, respectively                    33                  33
   Additional paid-in capital                                                    35,695              35,623
   Unallocated ESOP shares                                                       (3,441)             (3,739)
   Deferred compensation payable in treasury stock                                5,466               5,466
   Treasury stock                                                               (12,642)            (11,899)

   Retained income - substantially restricted                                    36,735              35,258
   Accumulated other comprehensive income - net unrealized
        gain on investment securities available for sale                            565                 827
                                                                            -----------           ---------

        Total stockholders' equity                                               62,411              61,569
                                                                            -----------           ---------
        Total liabilities and stockholders' equity                          $   347,007             350,469
                                                                            ===========           =========
</TABLE>

See accompanying notes to the consolidated financial statements.

                                       3
<PAGE>
                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME
               FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                       FOR THE THREE MONTHS ENDED
                                                                                 MARCH 31,
                                                                       -----------------------------
                                                                          2003                2002
                                                                       ---------           --------
<S>                                                                    <C>                    <C>
Interest income:
   Interest and fees on loans                                          $   3,295              3,527

   Interest and dividends on investments                                   1,060              1,357
   Overnight deposits                                                         42                 52
                                                                       ---------           --------
         Total interest income                                             4,397              4,936
                                                                       ---------           --------
Interest expense:
    Deposit accounts                                                       1,169              1,678
    Borrowings                                                               276                286
                                                                       ---------           --------
         Total interest expense                                            1,445              1,964
                                                                       ---------           --------

         Net interest income                                               2,952              2,972

Provision for loan losses                                                     60                 60
                                                                       ---------           --------
         Net interest income after provision for loan losses               2,892              2,912
                                                                       ---------           --------
Other income:
   Customer service fees                                                     214                217
   Commissions from sales of annuities and mutual funds                      159                 98
   Mortgage banking income, net                                              459                357
   Securities gains, net                                                      --                 47
   Other                                                                      62                 56
                                                                       ---------           --------
         Total other income                                                  894                775
                                                                       ---------           --------
Operating expenses:
   Compensation and related benefits                                       1,423              1,584
   Occupancy and equipment                                                   384                311
   Real estate operations, net                                                 4                (50)
   Other expenses                                                            393                404
                                                                       ---------           --------
         Total operating expenses                                          2,204              2,249
                                                                       ---------           --------

         Income before income taxes                                        1,582              1,438

Income taxes                                                                 585                513
                                                                       ---------           --------
         Net income                                                    $     997                925
                                                                       =========           ========
         Earnings per share:

         Basic                                                         $    0.35          $    0.31
         Diluted                                                       $    0.34          $    0.29
</TABLE>

See accompanying notes to the consolidated financial statements.

                                       4
<PAGE>
                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME
                FOR THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                        FOR THE SIX MONTHS ENDED
                                                                                MARCH 31,
                                                                       ----------------------------
                                                                          2003               2002
                                                                       ---------           --------
<S>                                                                    <C>                    <C>
Interest income:
   Interest and fees on loans                                          $   6,667              7,432
   Interest and dividends on investments                                   2,212              2,579
   Overnight deposits                                                         85                142
                                                                       ---------           --------
         Total interest income                                             8,964             10,153
                                                                       ---------           --------
Interest expense:
    Deposit accounts                                                       2,460              3,773
    Borrowings                                                               552                562
                                                                       ---------           --------
         Total interest expense                                            3,012              4,335
                                                                       ---------           --------

         Net interest income                                               5,952              5,818

Provision for loan losses                                                    120                120
                                                                       ---------           --------
         Net interest income after provision for loan losses               5,832              5,698
                                                                       ---------           --------
Other income:
   Customer service fees                                                     431                466
   Commissions from sales of annuities and mutual funds                      246                220
   Mortgage banking income, net                                              893                779
   Securities gains, net                                                      --                 47
   Other                                                                     118                106
                                                                       ---------           --------
         Total other income                                                1,688              1,618
                                                                       ---------           --------
Operating expenses:
   Compensation and related benefits                                       2,801              3,148
   Occupancy and equipment                                                   735                614
   Real estate operations, net                                                 9                (32)
   Other expenses                                                            839                776
                                                                       ---------           --------
         Total operating expenses                                          4,384              4,506
                                                                       ---------           --------

         Income before income taxes                                        3,136              2,810

Income taxes                                                               1,156              1,040
                                                                       ---------           --------

Net income                                                             $   1,980              1,770
                                                                       =========           ========
Earnings per share:
         Basic                                                         $    0.70          $    0.59
         Diluted                                                       $    0.67          $    0.56
</TABLE>

See accompanying notes to the consolidated financial statements

                                       5
<PAGE>
                     1ST STATE BANCORP, INC. AND SUBSIDIARY
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
          FOR THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED)
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                                           DEFERRED
                                                                                                         COMPENSATION
                                                              ADDITIONAL  UNALLOCATED      UNEARNED       PAYABLE IN
                                                 COMMON        PAID-IN        ESOP       COMPENSATION      TREASURY
                                                 STOCK         CAPITAL       SHARES          MRP            STOCK
                                                --------       -------       -------     ------------    -----------
<S>                                             <C>             <C>           <C>              <C>            <C>
Balance at September 30, 2001                   $     33        35,588        (4,373)          (518)          4,173

Comprehensive income:
     Net income                                       --            --            --             --              --
     Other comprehensive loss-unrealized
       loss on securities available-for-sale
       net of income taxes of $801                    --            --            --             --              --

     Total comprehensive income
Allocation of ESOP shares                             --            13           338             --              --
Deferred compensation                                 --            --            --             --             270
Acquisition of treasury stock                         --            --            --             --              --
Vesting of MRP shares                                 --            --            --            388              --
Cash dividends declared ($0.16 per share)             --            --            --             --              --
Cash dividends on unallocated ESOP shares
     and unvested MRP shares                          --            --            --             --              --
                                                --------       -------       -------          -----          ------
Balance at March 31, 2002                       $     33        35,601        (4,035)          (130)          4,443
                                                ========       =======       =======          =====          ======
Balance at September 30, 2002                   $     33        35,623        (3,739)            --           5,466

Comprehensive income:
     Net income                                       --            --            --             --              --
     Other comprehensive loss-unrealized
       loss on securities available-for-sale
       net of income taxes of $169                    --            --            --             --              --

     Total comprehensive income
Allocation of ESOP shares                             --            72           298             --              --
Acquisition of treasury shares                        --            --            --             --              --
Cash dividends declared ($0.18 per share)             --            --            --             --              --
Cash dividends on unallocated ESOP shares             --            --            --             --              --
                                                --------       -------       -------          -----          ------
Balance at March 31, 2003                       $     33        35,695        (3,441)            --           5,466
                                                ========       =======       =======          =====          ======

<CAPTION>

                                                                                  ACCUMULATED
                                                                                     OTHER           TOTAL
                                                  TREASURY        RETAINED       COMPREHENSIVE   STOCKHOLDERS'
                                                   STOCK           INCOME        INCOME (LOSS)      EQUITY
                                                  --------        --------       -------------   -------------

<S>                                                 <C>              <C>                 <C>        <C>
Balance at September 30, 2001                       (4,173)          32,404              510        63,644

Comprehensive income:
     Net income                                         --            1,770               --         1,770
     Other comprehensive loss-unrealized
       loss on securities available-for-sale
       net of income taxes of $801                      --               --           (1,245)       (1,245)
                                                                                                    ------
     Total comprehensive income                                                                        525
Allocation of ESOP shares                               --               --              --            351
Deferred compensation                                   --               --              --            270
Acquisition of treasury stock                        (270)               --              --           (270)
Vesting of MRP shares                                   --               --              --            388
Cash dividends declared ($0.16 per share)               --             (526)             --           (526)
Cash dividends on unallocated ESOP shares
     and unvested MRP shares                            --               49              --             49
                                                  --------          -------          ------         -------
Balance at March 31, 2002                           (4,443)          33,697            (735)         64,431
                                                  ========          =======          ======         =======
Balance at September 30, 2002                      (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                               --               --              --             370
Acquisition of treasury shares                        (743)              --              --            (743)
Cash dividends declared ($0.18 per share)               --             (538)             --            (538)
Cash dividends on unallocated ESOP shares               --               35              --              35
                                                  --------          -------          ------         -------
Balance at March 31, 2003                          (12,642)          36,735             565          62,411
                                                  ========          =======          ======         =======
</TABLE>

See accompanying notes to the consolidated financial statements.

                                       6
<PAGE>
                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002
                                   (UNAUDITED)

                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                  FOR THE SIX MONTHS ENDED
                                                                                            MARCH 31,
                                                                                 -----------------------------
                                                                                   2003                 2002
                                                                                 ---------            --------
<S>                                                                              <C>                     <C>
Cash flows from operating activities:
   Net income                                                                    $   1,980               1,770
   Adjustment to reconcile net income to net cash provided by
       operating activities:
           Provision for loan losses                                                   120                 120
           Depreciation                                                                394                 313
           Deferred tax expense                                                         91                 305
           Amortization of premiums and discounts, net                                 (31)                (21)
           Deferred compensation                                                       120                 164
           Release of ESOP shares                                                      370                 351
           Vesting of MRP shares and dividends on unvested MRP shares                   --                 520
           Loan origination fees and unearned discounts
               deferred, net of current amortization                                   (41)                (75)
           Loss (gain) on sale of other real estate                                      6                  (5)
           Securities gains, net                                                        --                  47
           Net (gain) loss on sale of loans                                           (164)                230
           Proceeds from loans held for sale                                        48,579              41,951
           Originations of loans held for sale                                     (45,768)            (41,334)
           Decrease in other assets                                                    203                  27
           Decrease (increase) in accrued interest receivable                          449                (249)
           Decrease in other liabilities                                            (2,809)             (1,455)
                                                                                 ---------            --------
                      Net cash provided by operating activities                      3,499               2,565
                                                                                 ---------            --------

Cash flows provided by (used in) investing activities:
           Proceeds from sale of FHLB stock                                            368                  --
           Purchases of investment securities held to maturity                      (2,000)             (2,454)
           Purchases of investment securities available for sale                   (48,229)            (62,108)
           Proceeds from sales of investment securities available for sale              --               1,811
           Proceeds from maturities and issuer calls of investment securities
               available for sale                                                   66,485              24,208
           Proceeds from maturities and issuer calls of investment securities
               held to maturity                                                          2               3,003
           Net decrease (increase) in loans receivable                              (3,935)             10,894
           Proceeds from disposal of real estate acquired in
               settlement of loans                                                      --                  81
           Purchases of premises and equipment                                        (768)               (101)
                                                                                 ---------            --------
                   Net cash provided by (used in) investing activities              11,923             (24,666)
                                                                                 ---------            --------

                                                                                                     (Continued)
</TABLE>

                                       7
<PAGE>
                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                FOR THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002

                                   (UNAUDITED)

                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                  FOR THE SIX MONTHS ENDED
                                                                                            MARCH 31,
                                                                                 -----------------------------
                                                                                   2003                 2002
                                                                                 ---------            --------
<S>                                                                              <C>                     <C>
Cash flows from financing activities:
   Net decrease in deposits                                                     $   (1,861)          $  (1,271)
   Advances from the Federal Home Loan Bank                                         13,000              21,000
   Repayments of advances from the Federal Home Loan Bank                          (13,000)            (11,000)
   Purchase of treasury stock                                                         (743)               (270)
   Dividends paid on common stock                                                     (446)               (477)
   Increase in advance payments by borrowers for
     property taxes and insurance                                                      188                 398
                                                                                ----------           ---------

   Net cash used in financing activities                                            (2,862)             (8,380)
                                                                                ----------           ---------
        Net increase (decrease) in cash and cash equivalents                        12,560             (13,721)

Cash and cash equivalents at beginning of period                                    18,865              25,981
                                                                                ----------           ---------

Cash and cash equivalents at end of period                                      $   31,425           $  12,260
                                                                                ==========           =========
Payments are shown below for the following:
       Interest                                                                 $    3,021           $   4,348
                                                                                ==========           =========
       Income taxes                                                             $    1,133           $     269
                                                                                ==========           =========
Noncash investing and financing activities:

     Unrealized losses on investment securities
          available for sale                                                    $     (431)          $  (2,046)
                                                                                ==========           =========

     Cash dividends declared but not paid                                       $      279           $     241
                                                                                ==========           =========

     Cash dividends on unallocated ESOP shares                                  $       35           $      49
                                                                                ==========           =========

     Transfer from loans to real estate acquired in settlement of loans         $       --           $     347
                                                                                ==========           =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       8
<PAGE>
                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                MARCH 31, 2003 (UNAUDITED) AND SEPTEMBER 30, 2002

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,  2002,  which is
derived from the September 30, 2002 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, 2003 are not necessarily indicative of the results of operations that may be
expected for the year ended  September 30, 2003. 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.

     Certain  amounts in the March 31, 2002  consolidated  financial  statements
have been  reclassified to conform with the  presentation  adopted in 2003. Such
reclassifications   did  not  change  net  income  or  stockholders'  equity  as
previously reported.

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 fully  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 includes the  potentially  dilutive  effects of the Company's  stock-based
benefit plans.  There were no  antidilutive  stock options for the three and six
months ended March 31, 2003 and 2002. A  reconciliation  of the  denominators of
the basic and diluted earnings per share computations is as follows:

                                       9
<PAGE>
<TABLE>
<CAPTION>
                                                                             THREE MONTHS ENDED
                                                                                  MARCH 31,
                                                                        -----------------------------
                                                                          2003                2002
                                                                        ----------          ---------
<S>                                                                      <C>                <C>
Average shares issued and outstanding                                    2,995,606          3,289,607
Less: Unvested MRP shares                                                       --            (42,156)
Less: Unallocated ESOP shares                                             (179,585)          (223,522)
                                                                        ----------          ---------
Average basic shares for earnings per share                              2,816,021          3,023,929
Add: Unvested MRP shares                                                        --             42,156
Add: Potential common stock pursuant to stock option plan                  122,277             86,763
                                                                        ----------          ---------
Average dilutive shares for earnings per share                           2,938,298          3,152,848
                                                                        ==========          =========
<CAPTION>
                                                                              SIX MONTHS ENDED
                                                                                  MARCH 31,
                                                                        -----------------------------
                                                                          2003                2002
                                                                        ----------          ---------
<S>                                                                      <C>                <C>
Average shares issued and outstanding                                    2,999,280          3,289,607
Less: Unvested MRP shares issued                                                --            (42,156)
Less: Unallocated ESOP shares                                             (183,449)          (227,870)
                                                                        ----------          ---------
Average basic shares for earnings per share                              2,815,831          3,019,581
Add: Unvested MRP shares                                                        --             42,156
Add: Potential common stock pursuant to stock option plan                  124,438             87,666
                                                                        ----------          ---------
Average dilutive shares for earnings per share                           2,940,269          3,149,403
                                                                        ==========          =========
</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,  2003 and 2002,  7,560 and 8,507 and 15,288 and
17,203 shares of stock were committed to be released and approximately  $181,000
and $172,000 and $371,000 and $350,000 of  compensation  expense was recognized,
respectively.

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 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  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  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  2002 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 the three and six months  ended March
31,  2003  and  2002  was  $60,000  and  $72,000  and  $120,000  and   $164,000,
respectively. This expense is included in compensation expense.

                                       10
<PAGE>

NOTE 6.  MANAGEMENT RECOGNITION PLAN

     The Company has a Management  Recognition  Plan  ("MRP")  which serves as a
means of providing existing directors and officers of the Bank with an ownership
interest in the  Company.  On June 6, 2000,  restricted  stock awards of 126,482
shares  were  granted.  The  shares  awarded  under  the MRP  were  issued  from
authorized but unissued shares of common stock at no cost to the recipients. The
shares vest at a rate of 33 1/3% per year with a one-third immediate vest on the
date of the grant and annually thereafter.  The Company recorded no compensation
expense  associated with the MRP during the three and six months ended March 31,
2003 as all shares  became  fully vested in June 2002.  Compensation  expense of
$260,000 and $520,000  associated with the MRP was recorded during the three and
six months ended March 31, 2002, respectively.

NOTE 7.  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 in fiscal year 2000. The exercise price per share is equal to
the fair market  value per share on the date of the grant of the stock.  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. No options were exercised or granted
during  the three and six months  ended  March 31,  2003 and 2002.  At March 31,
2003, 316,312 options are outstanding, all of which are exercisable.

     In December 2002, the Financial Accounting Standards Board issued Statement
of  Financial   Accounting   Standards  No.  148   "Accounting  for  Stock-Based
Compensation  -  Transition  and  Disclosure"  (SFAS 148) an  amendment  of FASB
Statement No. 123,  "Accounting for Stock-Based  Compensation" (SFAS 123), which
provides  alternative  methods of transition for a voluntary  change to the fair
value based method of  accounting  for  stock-based  employee  compensation.  In
addition,  SFAS 148 amends the  disclosure  requirements  of SFAS 123 to require
prominent  disclosure in both annual and interim financial  statements about the
method of accounting for stock-based  compensation  and the effect of the method
on reported results. The Company does not have any plans to change its method of
accounting for stock-based employee  compensation.  There is no pro forma impact
for any of the periods presented or for either of the two prior fiscal years.

NOTE 8. 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 which is determined when the underlying
loans are sold. MSRs are amortized over a period which  approximates the life of
the underlying loans as an adjustment of income.  Impairment reviews of MSRs are
performed on a quarterly basis. As of March 31, 2003 and September 30, 2002 MSRs
totaled  $484,000 and  $370,000,  respectively,  and no valuation  allowance was
required.

     Amortization  expense  totaled $71,000 and $30,000 for the six months ended
March 31, 2003 and 2002, respectively.


                                       11
<PAGE>
     The estimated  amortization  expense for the mortgage  servicing rights for
the years ended September 30, 2003,  2004, 2005, 2006 and 2007 and thereafter is
as follows:

                               ESTIMATED AMORTIZATION EXPENSE
                                    (In Thousands)

                      2003                             40,000
                      2004                             40,000
                      2005                             40,000
                      2006                             40,000
                      2007                             40,000
                      2008 and thereafter             170,000
                                                     --------
                                                     $370,000
                                                     ========

The  estimation  of  future  amortization  expense  presented  above is based on
assumptions  (such as  estimate  of  prepayment  of loans)  subject to change in
future periods.  Accordingly,  the amortization expense in future periods may be
different  from the  amounts  disclosed  above to the  extent  that any of these
assumptions are modified due to a change in the underlying estimations.

NOTE 9. 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  December 31, 2002. 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, 2003 is  $265,000.  At March 31, 2003 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.

                                       12
<PAGE>

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.  As a result,  portions  of this
discussion  (as of dates and for periods  prior to April 23, 1999) relate to the
financial condition and results of operations of 1st State Bank.

     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
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.

                                       13
<PAGE>

     Beginning  in the late  1980's,  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.

CRITICAL ACCOUNTING POLICIES

The  Company's  significant  accounting  policies are set forth in note 1 of the
consolidated  financial  statements  as of September 30, 2002 which was filed on
Form 10-K. 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 information  with respect to borrowers which
is not  known to  management  at the time of the  issuance  of the  consolidated
financial statements.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2003 AND SEPTEMBER 30, 2002

     Total  assets  decreased  by $3.5  million or 1.0% from  $350.5  million at
September 30, 2002 to $347.0 million at March 31, 2003. As market rates remained
low during the six months ended March 31, 2003,  many of the Company's  callable
investments were called by the issuers. The proceeds from investment  maturities
and calls totaled $66.5 million for the six months ended March 31, 2003 compared
with  investment  purchases  of  $50.2  million;   therefore,  total  investment
securities  decreased  from  September  30,  2002.  Cash  and  cash  equivalents
increased  $12.6  million or 66.6% from $18.9  million at September  30, 2002 to
$31.4  million  at March 31,  2003 as a result  of the  decrease  in  investment
securities. Loans receivable, net increased while loans held for sale decreased.
Deposits  decreased by $1.9 million or 0.7% from $260.7 million at September 30,
2002 to $258.8 million at March 31, 2003. This decrease resulted from the runoff
of $4.7 million of  certificates of deposits held by  municipalities  as part of
the Company's asset liability strategy. This decrease in certificates of deposit
was offset partially by growth in transaction accounts.

     Investment securities available for sale decreased $18.6 million from $78.6
million at September 30, 2002 to $59.9 million at March 31, 2003. During the six
months ended March 31, 2003, we purchased $48.2 million of securities  available
for sale and received $66.5 million in proceeds from maturities and issuer calls
of investment  securities  available  for sale.  Investment  securities  held to
maturity  increased from $11.1 million at September 30, 2002 to $13.1 million at
March 31, 2003 as $2.0 million of  investment  securities  held to maturity were
purchased during this period.

     Loans  held for  sale  decreased  by $2.6  million  from  $6.8  million  at
September  30, 2002 to $4.2 million at March 31,  2003.  Loans  receivable,  net
increased  $3.9  million  from $220.0  million at  September  30, 2002 to $223.9
million at March 31,  2003.  The decrease in loans held for sale  resulted  from
timing  differences  in the funding of loan sales.  During the six months  ended
March 31, 2003 our mortgage  originations  and  prepayments  continued at record
levels.  Mortgage  rates  declined to record low levels during this period,  and
many borrowers took  advantage of this  opportunity to refinance  their existing
mortgage loans.  Mortgage loans secured by single family dwellings  decreased by
$10.1  million  during  this  period as a result of the  tremendous  refinancing
activity.  During this same period, increases in commercial and home equity line
loans more than offset this single family mortgage loan decrease.

     Stockholders'  equity increased by $842,000 from $61.6 million at September
30,  2002 to $62.4  million  at March  31,  2003 as a result  of net  income  of
$1,980,000 and release of ESOP shares of $370,000.  These  increases were offset
by cash dividends to  stockholders  declared of $503,000,  purchases of treasury
stock of  $743,000  and a decrease  in  unrealized  gain on  available  for sale
securities of $262,000.

                                       14
<PAGE>
COMPARISON  OF  OPERATING  RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND
2002

     Net Income.  We recorded net income of $997,000 for the quarter ended March
31,  2003,  as  compared  to $925,000  for the  quarter  ended  March 31,  2002,
representing  an increase of $72,000,  or 7.8%. For the three months ended March
31,  2003,   basic  and  diluted  earnings  per  share  were  $0.35  and  $0.34,
respectively,  compared  to the basic  and  diluted  earnings  per share for the
quarter ended March 31, 2002 of $0.31 and $0.29,  respectively.  The increase in
net  income  resulted  primarily  from  increased  other  income  and  decreased
operating  expenses that were offset  partially by decreased net interest income
and increased  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, 2003 was 4.25%,  a decrease of 50 basis  points from 4.75% which
was the average  prime for the quarter  ended March 31, 2002.  The  repricing of
certificates of deposits, savings and money market investment accounts decreased
the  Company's  cost of funds to  partially  offset the  decrease in asset yield
which resulted from the lower prevailing interest rates 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 $20,000 or 0.7% for the three months ended March 31,
2003, compared to the same quarter in the prior year. This decrease results from
a $539,000  decrease in interest  income that was offset in part by the $519,000
decrease  in total  interest  expense.  The  average  net  interest  income as a
percentage of average earning assets decreased 5 basis points from 3.67% for the
three months ended March 31, 2002 to 3.62% for the quarter ended March 31, 2003.

     Interest Income. The decrease in interest income for the three months ended
March 31, 2003 was the result of a decrease in yield on interest-earning  assets
of 71 basis points from 6.10% for the three months ended March 31, 2002 to 5.39%
for the three months ended March 31, 2003 which was  partially  offset by a $2.7
million increase in interest earning assets.  Average loans receivable increased
$13.7 million from $215.1 million for the quarter ended March 31, 2002 to $228.8
million for the quarter  ended March 31,  2003.  Average  investment  securities
decreased  $13.9  million  for the quarter  compared to the prior year.  Average
interest-bearing overnight funds increased $2.9 million for the quarter compared
to the prior year.  The  decrease in asset yield  resulted  from the lower rates
prevailing in the  marketplace.  The increase in average interest earning assets
increased  interest  income by  approximately  $43,000  and the  decrease in the
average  yield  on  interest  earning  assets   decreased   interest  income  by
approximately $582,000.

     Interest  Expense.  Interest  expense  decreased  in the three months ended
March 31, 2003 due to a decrease in the cost of interest-bearing  liabilities of
79 basis  points from 2.97% for the three  months  ended March 31, 2002 to 2.18%
for the three  months ended March 31, 2003.  Average  interest-bearing  deposits
increased by $2.8 million while average FHLB advances decreased $1.5 million for
the three months ended March 31, 2003  compared to the same quarter in the prior
year. The decrease in the average cost of interest-bearing liabilities accounted
for the decrease in interest expense.

                                       15
<PAGE>
     The following table presents average balances and average rates earned/paid
by the  Company for the  quarter  ended  March 31, 2003  compared to the quarter
ended March 31, 2002.
<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED                 THREE MONTHS ENDED
                                                          MARCH 31, 2003                       MARCH 31, 2002
                                                                        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)                               $228,764    $3,295       5.76%      $215,058    $3,527       6.56%
Investment securities (2)                            82,921     1,060       5.11         96,821     1,357       5.61
Interest-bearing overnight deposits                  14,669        42       1.15         11,762        52       1.77
                                                   --------    ------     ------       --------    ------     ------
  Total interest-earning assets (4)                 326,354     4,397       5.39        323,641     4,936       6.10
Non interest-earning assets                          21,001                              22,414
                                                   --------                            --------
  Total assets                                     $347,355                            $346,055
                                                   ========                            ========
Liabilities and stockholders' equity
Interest-bearing checking                            33,018        36       0.44         31,320        36       0.46
Money market investment accounts                     22,485        54       0.96         27,465        86       1.25
Passbook and statement savings                       29,321        80       1.09         27,060       102       1.51
Certificates of deposit                             158,776       999       2.52        154,984     1,454       3.75
FHLB advances                                        21,900       276       5.05         23,444       286       4.88
                                                   --------    ------     ------       --------    ------     ------
  Total interest-bearing liabilities                265,500     1,445       2.18        264,273     1,964       2.97
Non interest-bearing liabilities                     19,356                              17,321
                                                   --------                            --------
  Total liabilities                                 284,856                             281,594
Stockholders' equity                                 62,499                              64,461
                                                   --------                            --------
  Total liabilities and stockholders' equity       $347,355                            $346,055
                                                   ========                            ========

Net interest income                                            $2,952                              $2,972
                                                               ======                              ======
Interest rate spread                                                        3.21%                               3.13%
Net interest margin (3)                                                     3.62%                               3.67%
Ratio of average interest-earning assets to
  average interest-bearing liabilities                                    122.92%                             122.46%
<FN>
 ________
(1)  Includes  nonaccrual  loans and loans held for sale,  net of discounts  and
     allowance for loan losses.
(2)  Includes FHLB of Atlanta stock.
(3)  Represents  net  interest   income  divided  by  the  average   balance  of
     interest-earning assets.
(4)  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.
</FN>
</TABLE>
     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  consideration  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 $0 for the quarter ended March 31, 2003 compared with a
provision of $60,000,  and net charge-offs of $7,000 for the quarter ended March
31,  2002.  Nonperforming  loans were $4.4  million  at both March 31,  2003 and
September 30, 2002. The majority of the  non-performing  loans resulted from two
unrelated,  unique  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.  The
provision  for the quarter ended March 31, 2003 was  positively

                                       16
<PAGE>
impacted  by the  decrease in  charge-offs  which was offset by the shift in the
loan  portfolio to commercial  loans which  receive  higher  allocations  in the
allowance for loan losses model. The Company made no significant  changes to the
allowance  for loan losses  methodology  during the period  which  impacted  the
provision for loan losses.

     During the quarter  ended March 31, 2003  commercial  and home equity loans
continued  to  increase as well as the  percentages  of these loans to the total
portfolio.  Although  these loans  normally  have a  relatively  short  maturity
management  believes that there is greater risk inherent in these loans than the
typical  one-to-four family  residential  mortgage loan.  Therefore,  management
assigns these types of loans a higher risk weighting in the analysis of the loan
loss reserve.  The commercial  loans that have been originated are loans made to
businesses  to either  produce a  product,  sell a product or provide a service.
Many of these loans are  asset-based  loans which are loans where  repayment  is
based  primarily  on the cash flow  from  operations  and  secondarily  on,  the
liquidation of assets such as inventory and accounts receivable.

     Other Income. Other income increased $119,000,  or 15.4%, from $775,000 for
the quarter  ended March 31,  2002 to $894,000  for the quarter  ended March 31,
2003. Commissions from sales of annuities and mutual funds increased $61,000, or
62.2% from  $98,000  for the quarter  ended  March 31, 2002 to $159,000  for the
quarter  ended March 31,  2003.  This  increase  results  from  higher  sales of
annuities and mutual funds. Mortgage banking income, net increased $102,000 from
$357,000 for the quarter  ended March 31, 2002 to $459,000 for the quarter ended
March 31,  2003 as a result  of higher  loan  sales.  Proceeds  from the sale of
mortgage  loans  totaled  $23.7  million for the quarter ended March 31, 2003 as
compared to $16.7  million for the quarter  ended March 31, 2002.  The increased
loan activity  resulted  from heavy  mortgage loan  refinancing  activity  which
resulted from the attractive  mortgage loan rates available in the  marketplace.
The Company recorded gains on the sale of investments of $47,000 for the quarter
ended March 31, 2002 which were not present in the current quarter.

     Operating Expenses. Total operating expenses were $2.2 million for both the
quarters  ended  March 31,  2003 and 2002.  Compensation  and  related  benefits
expense  decreased  $161,000  from $1.6 million for the quarter  ended March 31,
2002 to $1.4  million for the quarter  ended March 31,  2003.  Compensation  and
related benefits expense for the quarter ended March 31, 2002 included  $260,000
of MRP expense  which was not present in 2003 as the final  vesting date for the
MRPs  was  June 6,  2002.  Partially  offsetting  this  decrease  was  increased
personnel  expense related to increased number of employees and increased salary
and benefit costs.  Occupancy and equipment expense increased $73,000,  or 23.4%
from  $311,000 for the quarter  ended March 31, 2002 to $384,000 for the quarter
ended March 31,  2003.  This  increase  was  primarily  the result of  increased
depreciation on new equipment.  Expenses incurred in operating real estate owned
were $4,000 for the three  months  ended  March 31,  2003  compared to income of
$50,000 for the quarter ended March 31, 2002. During the quarter ended March 31,
2002,  the rent  receipts on real estate  owned  properties  exceeded  operating
expenses by $50,000.

     Income Tax Expense.  Income tax expense  increased $72,000 from tax expense
of  $513,000  for the quarter  ended March 31, 2002 to $585,000  for the quarter
ended  March 31,  2003.  The  effective  tax rates  were 37.0% and 35.7% for the
quarters  ended  March 31,  2003 and 2002,  respectively.  The  increase  in the
effective rate was primarily due to an increase in non-deductible  expenses over
the prior period.

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002

     Net Income. We recorded net income of $2.0 million for the six months ended
March 31, 2003, an increase of $210,000, or 11.9% over the $1.8 million reported
in the six months ended March 31, 2002. For the six months ended March 31, 2003,
basic and diluted  earnings  per share were $0.70 and $0.67,  respectively.  The
Company  reported basic and diluted  earnings per share for the six months ended
March 31,  2002 of $0.59 and $0.56,  respectively.  The  increase  in net income
resulted  primarily from increased net interest  income,  increased other income
and  decreased  operating  expenses.  These  increases in income were  partially
offset by  increased  income  taxes.  The  increase in the net  interest  income
resulted from higher net interest  margins.  The average prime interest rate for
the six months  ended  March 31, 2003 was 4.35%,  a decrease of 61 basis  points
from 4.96% which was the average  prime for the six months ended March 31, 2002.
The rate  decrease  caused a  greater  reduction  in the  average  rate  paid on
interest-bearing liabilities than the average yield on earning assets.

     Net Interest Income.  Net interest income,  the difference between interest
earned  on  loans  and  investments   and  interest  paid  on   interest-bearing
liabilities,  increased  by $134,000 or 2.3% for the six months  ended March 31,
2003,

                                       17
<PAGE>

compared to the same six months in the prior year. This increase reflects a $1.2
million  decrease  in  interest  income  that was more  than  offset by the $1.3
million  decrease in total  interest  expense.  The average net interest  margin
increased 8 basis  points from 3.58% for the six months  ended March 31, 2002 to
3.66% for the six months ended March 31, 2003.

     Interest  Income.  The decrease in interest income for the six months ended
March 31,  2003 was due a  decrease  in yield on  interest-earning  assets of 73
basis points from 6.24% for the six months ended March 31, 2002 to 5.51% for the
six months  ended  March 31,  2003 that was  partially  offset by an increase of
$225,000 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  $66,000 and the  decreased  yield  decreased
interest  income  by  approximately  $1.3  million.   Average  loans  receivable
increased $8.1 million for the six months ended March 31, 2003 compared with the
prior year. This increase was offset in part by a decrease in average investment
securities  of $7.0  million  and a decrease  of  $845,000  in average  interest
bearing overnight funds.

     Interest Expense.  Interest expense decreased in the six months ended March
31,  2003 due to a decrease  in  average  interest-bearing  liabilities  of $1.2
million and a decrease in the cost of  interest-bearing  liabilities of 99 basis
points  from 3.28% for the six months  ended March 31, 2002 to 2.29% for the six
months  ended March 31,  2003.  Average  deposits  decreased  by $628,000  while
average FHLB advances decreased $562,000 for the six months ended March 31, 2003
compared  to the same six  months in the prior  year.  The  decrease  in average
interest-bearing liabilities decreased interest expense by approximately $24,000
and the decrease in the average cost of interest-bearing  liabilities  decreased
interest expense by approximately $1.3 million.

                                       18
<PAGE>

     The following table presents average balances and average rates earned/paid
by the  Company  for the six months  ended  March 31,  2003  compared to the six
months ended March 31, 2002.
<TABLE>
<CAPTION>
                                                           SIX MONTHS ENDED                 SIX MONTHS ENDED
                                                             MARCH 31, 2003                  MARCH 31, 2002

                                                                       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 (5)                               $227,857    $6,667       5.85%        $219,783    $7,432      6.76%
Investment securities (6)                            83,906     2,212       5.27           90,909     2,579      5.67
Interest-bearing overnight deposits                  13,789        85       1.24           14,634       142      1.94
                                                   --------    ------     ------         --------    ------    ------
  Total interest-earning assets (8)                 325,552     8,964       5.51          325,326    10,153      6.24
Non interest-earning assets                          19,996                                22,119
                                                   --------                              --------
  Total assets                                     $345,548                              $347,445
                                                   ========                              ========
Liabilities and stockholders' equity
Interest-bearing checking                            33,369        74       0.45           31,060        77      0.49
Money market investment accounts                     21,945       112       1.02           28,167       205      1.45
Passbook and statement savings                       29,264       161       1.10           26,619       213      1.60
Certificates of deposit                             157,639     2,112       2.68          156,999     3,278      4.18
FHLB advances                                        21,077       553       5.25           21,639       562      5.19
                                                   --------    ------     ------         --------    ------    ------
  Total interest-earning liabilities                263,294     3,012       2.29          264,484     4,335      3.28
Non interest-earning liabilities                     20,055                                18,736
                                                   --------                              --------
  Total liabilities                                 283,349                               283,220
Stockholders' equity                                 62,199                                64,225
                                                   --------                              --------
  Total liabilities and stockholders' equity       $345,548                              $347,445
                                                   ========                              ========
Net interest income                                            $5,952                                $5,818
                                                               ======                                ======
Interest rate spread                                                        3.22%                                2.96%
Net interest margin (7)                                                     3.66%                                3.58%
Ratio of average interest-earning assets                                  123.65%                              123.00%
<FN>
_________
(5)  Includes  nonaccrual  loans and loans held for sale,  net of discounts  and
     allowance for loan losses.
(6)  Includes FHLB of Atlanta stock.
(7)  Represents  net  interest   income  divided  by  the  average   balance  of
     interest-earning assets.
(8)  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.
</FN>
</TABLE>

     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, 2003 and 2002. 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 2003 by a decrease in net loan
charge-offs.

     Other Income.  Other income increased  $70,000,  or 4.3%, from $1.6 million
for the six months ended March 31, 2002 to $1.7 million for the six months ended
March 31, 2003.  Mortgage banking income,  net increased  $114,000 from $779,000
for the six months  ended March 31, 2002 to  $893,000  for the six months  ended
March 31, 2003.  During the six months ended March 31, 2003, we sold  fixed-rate
mortgage  loans held for sale of $48.6 compared with loan sales of $42.0 million
for the six months ended March 31, 2002. Gains on sales of investment securities
of $47,000 were recognized during

                                       19
<PAGE>

the six months ended March 31, 2002 that were not present in the current year.

     Operating Expenses.  Total operating expenses were $4.4 million for the six
months  ended  March 31,  2003,  a decrease of  $122,000,  or 2.7% over the $4.5
million  recorded  for the six months  ended March 31,  2002.  Compensation  and
related benefits expense decreased $347,000,  or 11.0% from $3.1 million for the
six months  ended March 31, 2002 to $2.8  million for the six months ended March
31, 2003.  Compensation  and benefits expense for the six months ended March 31,
2002 included $520,000 of MRP expense which was not present in 2003 as the final
vesting date for the MRPs was June 6, 2002.  Partially  offsetting this decrease
was increased personnel expense related to the increased number of employees and
increased  salary and benefit  costs.  The Company  recognized  income from real
estate operations of $32,000 during the six months ended March 31, 2002 compared
to expenses of $9,000 in the six months ended March 31, 2003.

     Income Tax Expense.  Income tax expense increased $116,000 from tax expense
of $1.0  million for the six months ended March 31, 2002 to $1.2 million for the
six months ended March 31, 2003. The increase  resulted from a $326,000 increase
in income before income taxes.  The effective tax rates were 36.9% and 37.0% for
the six months ended March 31, 2003 and 2002, respectively.

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 amount represents credit
and interest rate risk are summarized as follows:
<TABLE>
<CAPTION>
                                                                       March 31, 2003            September 30, 2002
                                                                       --------------            ------------------
                                                                                 (dollars in thousands)
<S>                                                                         <C>                        <C>
         Commitments to originate new loans                                 $1,787                     $1,435
         Commitments to originate new loans held for sale                       --                         --
         Unfunded commitments to extend credit under existing
              equity line and commercial lines of credit                    64,409                     56,200
         Commercial letters of credit                                          265                        266
         Commitments to sell loans held for sale                             4,710                     16,371
</TABLE>

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, 2003, the agreed-upon price of these
commitments exceeded the book value of the loans to be sold.

                                       20
<PAGE>
CONTRACTUAL OBLIGATIONS

As of March 31, 2003
<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>
Deposits                            $230,882           19,920             8,004              --               258,806
Long-term borrowings                      --               --            20,000              --                20,000
Lease obligations                         19               56                42              38                   155
                                    --------           ------            ------             ---               -------
Total contractual cash
    obligations                     $230,901           19,976            28,046              38               278,961
                                    ========           ======            ======             ===               =======
</TABLE>

ASSET QUALITY

     At March 31, 2003,  we had  approximately  $4.6  million in  non-performing
assets  (nonaccrual  loans and real estate owned) or 1.32% of total  assets.  At
September  30, 2002,  non-performing  assets were $4.4 million or 1.25% of total
assets.  At March 31, 2003 and September 30, 2002,  impaired  loans totaled $3.8
million and $3.7  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,  2003  result  from  three  unrelated
commercial  loan  customers,  all of which have loans secured by commercial real
estate and business  assets in Alamance  County.  At March 31, 2003,  the entire
$3.8 million of the impaired loans were on non-accrual status, and their related
reserve for loan losses totaled $210,000. The average carrying value of impaired
loans was $3.7  million  during the three and six months  ended March 31,  2003,
respectively.  Interest  income of $75,000  and  $117,000  has been  recorded on
impaired loans on a cash basis in the three and six months ended March 31, 2003,
respectively.  The Bank's  net  charge-offs  for the three and six months  ended
March 31, 2003 were $0 and $2,000,  respectively.  The Bank's allowance for loan
losses  was $3.8  million  at March  31,  2003  compared  with $3.7  million  at
September  30,  2002 and $3.6  million  at March  31,  2002.  As a result of our
continued , gradual  shift toward  commercial,  construction,  consumer and home
equity loans,  the recent  decrease in residential  mortgage  loans,  the modest
increase in  non-performing  loans as a percentage of total loans as well as the
continued decline in the local and regional economy,  the ratio of the allowance
for loan losses to total loans,  net of loans in process and deferred  loan fees
increased to 1.69% at March 31, 2003 compared to 1.67% at September 30, 2002.

     The following table presents an analysis of our nonperforming assets:
<TABLE>
<CAPTION>
                                                              At                    At                       At
                                                            March 31,           September 30,              March 31,
                                                              2003                  2002                     2002
                                                              ----                  ----                     ----
<S>                                                          <C>                  <C>                     <C>
Nonperforming loans:
Nonaccrual loans                                             $  4,414             $  4,204                $ 1,747
Loans 90 days past due and accruing                                --                   --                     --
Restructured loans                                                 --                   --                     --
                                                             --------              -------                -------
Total nonperforming loans                                       4,414                4,204                  1,747
Other real estate                                                 177                  183                  2,252
                                                             --------              -------                -------
Total nonperforming assets                                   $  4,591              $ 4,387                $ 3,999
                                                             ========              =======                =======
Nonperforming loans to loans receivable, net                     1.97%                1.91%                  0.83%
Nonperforming assets as a percentage
 of loans and other real estate owned                            2.05%                1.99%                  1.88%
Nonperforming assets to total assets                             1.32%                1.25%                  1.16%
</TABLE>

Regulations  require that we classify our assets on a regular  basis.  There are
three  classifications  for problem assets:

                                       21
<PAGE>
substandard,  doubtful  and loss.  We  regularly  review our assets to determine
whether any assets require  classification  or  re-classification.  At March 31,
2003,  we had $5.1 million in  classified  assets  consisting of $5.0 million in
substandard  and loss loans and $177,000 in real estate owned.  At September 30,
2002, we had $5.1 million in  substandard  assets  consisting of $4.9 million in
loans and $183,000 million 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, 2003,  we have  identified  approximately  $1.1 million in
assets classified as special mention and $30.7 million as watch.

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, 2003, 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, 2003, cash and cash equivalents
totaled  $31.4  million.  We have  other  sources  of  liquidity  should we need
additional funds.  During the three and six months ended March 31, 2003, we sold
loans totaling $23.7 million and $48.6 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
$64.1 million at March 31, 2003.

     We  anticipate  that we will have  sufficient  funds  available to meet our
current  commitments.  At March 31, 2003, we had $1.8 million in  commitments to
originate  new loans,  $64.4  million in unfunded  commitments  to extend credit
under  existing  equity  lines and  commercial  lines of credit and  $265,000 in
standby letters of credit. At March 31, 2003, certificates of deposit, which are
scheduled to mature within one year,  totaled $127.4 million.  We believe that a
significant portion of such deposits will remain with us.

     The 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, 2003 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, 2003, 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, 2003 was 18.0%.  The Company's
capital level is sufficient to support future growth.

     The Company has declared cash  dividends  per common share of $0.10,  $0.08
and $0.08 for each of the three months ended March 31, 2003,  September 30, 2002
and March 31, 2002,  respectively.  The  Company's  ability to pay

                                       22
<PAGE>
dividends is dependent upon earnings.  The Company's  dividend  payout ratio for
the three months ended March 31, 2003, September 30, 2002 and March 31, 2002 was
29.4%, 26.4% and 27.6%, respectively.

ACCOUNTING MATTERS

On October 3, 2001, the FASB issued Statement of Financial  Accounting Standards
No. 144,  "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
No. 144), which addresses financial  accounting and reporting for the impairment
or disposal of long-lived  assets.  While SFAS No. 144  supercedes  SFAS No. 121
(Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of), it retains many of the fundamental  provisions of SFAS No. 121.
SFAS No.  144  also  supersedes  the  accounting  and  reporting  provisions  of
Accounting  Principles Board Opinion No. 30 (Reporting the Results of Operations
-  Reporting  the  Effects  of  Disposal  of  a  Segment  of  a  Business,   and
Extraordinary,  Unusual and Infrequently  Occurring Events and Transactions) for
the disposal of a segment of a business.  However, it retains the requirement in
Opinion  No. 30 to report  separately  discontinued  operations  and extends the
reporting to a component of an entity that either has been disposed of (by sale,
abandonment,  or in a distribution to owners) or is classified as held for sale.
By  broadening  the  presentation  of  discontinued  operations  to include more
disposal  transactions,  the FASB has enhanced  management's  ability to provide
information  that  helps  financial  statement  users to assess  the  effects of
disposal  transactions on the ongoing operations of an entity. The provisions of
SFAS No. 144 are  effective  for  financial  statements  issued for fiscal years
beginning  after  December 15,  2001,  and interim  periods  within those fiscal
years.  Adoption  of SFAS No.  144 on  October  1, 2002 did not have a  material
impact on the Company's consolidated financial statements.


In June 2002, the FASB issued  Statement of Financial  Accounting  Standards No.
146 (SFAS No.  146),  "Accounting  for Costs  Associated  with Exit or  Disposal
Activities,"  which  addresses  financial  accounting  and  reporting  for costs
associated with exit or disposal  activities and nullifies  Emerging Issues Task
Force  (EITF)  Issue No.  94-3,  "Liability  Recognition  for  Certain  Employee
Termination  Benefits  and Other  Costs to Exit an Activity  (including  Certain
Costs Incurred in a Restructuring)."  This Statement applies to costs associated
with an exit  activity  that does not  involve  an entity  newly  acquired  in a
business  combination  or with a  disposal  activity  covered  by SFAS No.  144,
"Accounting  for the  Impairment or Disposal of Long-Lived  Assets." Those costs
include, but are not limited to, the following: a) termination benefits provided
to current  employees  that are  involuntarily  terminated  under the terms of a
benefit arrangement that, in substance, is not an ongoing benefit arrangement or
an  individual  deferred  compensation  contract  (hereinafter  referred  to  as
one-time termination  benefits),  b) costs to terminate a contract that is not a
capital lease and c) costs to consolidate facilities or relocate employees. This
Statement does not apply to costs associated with the retirement of a long-lived
asset  covered by FASB  Statement  No.  143,  "Accounting  for Asset  Retirement
Obligations."  A  liability  for a cost  associated  with an  exit  or  disposal
activity  shall be  recognized  and measured  initially at its fair value in the
period in which the  liability is incurred.  A liability  for a cost  associated
with an exit or disposal activity is incurred when the definition of a liability
is met. The  provisions  of this  Statement  are  effective for exit or disposal
activities that are initiated  after December 31, 2002,  with early  application
encouraged.  This  statement will impact the Company to the extent it engages in
exit or disposal activities in future periods.


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 addresses 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 disclosure  requirements are effective for
interim and annual  financial  statements  ending after  December 15, 2002.  The
initial recognition and measurement  provisions are effective for all guarantees
within the scope of FIN 45 issued or  modified  after  December  31,  2002.  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,  2003 is  $265,000.  At March 31,  2003,  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

                                       23
<PAGE>

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.


In December 2002, the Financial  Accounting  Standards Board issued Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based  Compensation
- Transition and Disclosure'  (SFAS 148) an amendment of FASB Statement No. 123,
Accounting for Stock-Based  Compensation (SFAS 123), which provides  alternative
methods of transition  for a voluntary  change to the fair value based method of
accounting for stock-based employee compensation.  In addition,  SFAS 148 amends
the disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and  interim  financial  statements  about the method of  accounting  for
stock-based employee  compensation and the effect of the method used on reported
results. The transition  provisions of the statement are effective for financial
statements  for fiscal years ending after December 15, 2002 while the disclosure
requirements  are effective for interim  periods  beginning  after  December 15,
2002, with early application encouraged.  The adoption of SFAS 148 have resulted
in enhanced disclosures for the Company's stock-based employee compensation plan
effective January 1, 2003.


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.

     The Company  monitors whether material changes in market risk have occurred
since September 30, 2002. The Company does not believe that any material adverse
changes in market risk exposures occurred since September 30, 2002.

ITEM 4.  CONTROLS AND PROCEDURES

     (a) Within 90 days  prior to the date of this  report,  we  carried  out an
evaluation,  under the supervision and with the  participation  of our principal
executive officer and principal  financial officer,  of the effectiveness of the
design and operation of our disclosure  controls and  procedures.  Based on this
evaluation,  our principal  executive  officer and principal  financial  officer
concluded  that our  disclosure  controls and procedures are effective in timely
alerting  them to material  information  required to be included in our periodic
SEC reports.

     (b) In  addition,  there have been no  significant  changes in our internal
controls or in other  factors that could  significantly  affect  those  controls
subsequent to the date of their last evaluation.

                                       24
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

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 January 28, 2003. At
this meeting  2,574,001 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:

                                     Votes in Favor               Votes
   Nominee                           of Election                 Withheld

   Bernie C. Bean                     2,571,002                    2,999
   James C. McGill                    2,561,735                   12,226
   Virgil L. Stadler                  2,570,478                    3,523

There were no broker nonvotes on the matter.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a.) Exhibits.
     --------

     99   Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
          to Section 906 of the Sarbanes-Oxley Act of 2002

(b.) Reports on Form 8-K.
     -------------------

     On March 20, 2003,  the Company  filed a report on Form 8-K  regarding  its
     March 19, 2003 news  release in which it  announced an increase in its cash
     dividend  to $0.10 per share.  The full text news  release  dated March 19,
     2003 was attached as Exhibit 99(a) to this Form 8-K filing.


                                       25
<PAGE>

                                   SIGNATURES


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

                                    1ST STATE BANCORP, INC.


                                    /s/ James C. McGill
Date:  May 14, 2003                 --------------------------------------------
                                    James C. McGill
                                    President and Chief Executive Officer
                                    (Principal Executive Officer)


                                    /s/ A. Christine Baker
Date:  May 14, 2003                 --------------------------------------------
                                    A. Christine Baker
                                    Executive Vice President
                                    Treasurer and Secretary
                                    (Principal Financial and Accounting Officer)

                                       26
<PAGE>

                                  CERTIFICATION

I, James C. McGill,  President and Chief Executive Officer of 1st State Bancorp,
Inc., certify that:


1. I have  reviewed  this  quarterly  report on Form 10-Q of 1st State  Bancorp,
Inc.;

2. Based on my  knowledge,  this  quarterly  report  does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made, not  misleading  with respect to the period covered by this quarterly
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included in this quarterly  report,  fairly present in all material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed  such  disclosure  controls and  procedures  to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others  within those  entities,  particularly  during the
period in which this quarterly report is being prepared;

b) Evaluated  the  effectiveness  of the  registrant's  disclosure  controls and
procedures  as of a date  within  90  days  prior  to the  filing  date  of this
quarterly report (the "Evaluation Date"); and

c) Presented in this quarterly report our conclusions about the effectiveness of
the  disclosure  controls  and  procedures  based  on our  evaluation  as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) All significant  deficiencies in the design or operation of internal controls
which  could  adversely  affect the  registrant's  ability  to record,  process,
summarize and report  financial data and have  identified  for the  registrant's
auditors any material weaknesses in internal controls; and

b) Any  fraud,  whether  or not  material,  that  involves  management  or other
employees who have a significant role in the registrant's internal controls; and


6. The  registrant's  other  certifying  officers  and I have  indicated in this
quarterly  report  whether or not there  were  significant  changes in  internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.


Date: May 14, 2003

                                By: /s/ James C. McGill
                                    --------------------------------------------
                                    Name:  James C. McGill
                                    Title: President and Chief Executive Officer

                                       27
<PAGE>

                                  CERTIFICATION

I, A. Christine Baker,  Secretary,  Treasurer and Chief Financial Officer of 1st
State Bancorp, Inc,, certify that:

1. I have  reviewed  this  quarterly  report on Form 10-Q of 1st State  Bancorp,
Inc.;

2. Based on my  knowledge,  this  quarterly  report  does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made, not  misleading  with respect to the period covered by this quarterly
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included in this quarterly  report,  fairly present in all material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed  such  disclosure  controls and  procedures  to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others  within those  entities,  particularly  during the
period in which this quarterly report is being prepared;

b) Evaluated  the  effectiveness  of the  registrant's  disclosure  controls and
procedures  as of a date  within  90  days  prior  to the  filing  date  of this
quarterly report (the "Evaluation Date"); and

c) Presented in this quarterly report our conclusions about the effectiveness of
the  disclosure  controls  and  procedures  based  on our  evaluation  as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) All significant  deficiencies in the design or operation of internal controls
which  could  adversely  affect the  registrant's  ability  to record,  process,
summarize and report  financial data and have  identified  for the  registrant's
auditors any material weaknesses in internal controls; and

b) Any  fraud,  whether  or not  material,  that  involves  management  or other
employees who have a significant role in the registrant's internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
quarterly  report  whether or not there  were  significant  changes in  internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 14, 2003


                                By: /s/ A. Christine Baker
                                    ------------------------------------
                                    Name:  A. Christine Baker
                                    Title: Secretary, Treasurer and
                                            Chief Financial Officer

                                       28