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, 2001


[ ]  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
                                              ---    ---

     As of April 30,  2001,  the issuer  had  3,289,607  shares of common  stock
issued and outstanding.


<PAGE>



                                    CONTENTS

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

Item 1.  Financial Statements

         Consolidated Balance Sheets as of March 31, 2001 (unaudited)
            and September 30, 2000............................................1

         Consolidated Statements of Income for the Three Months Ended
            March 31, 2001 and 2000 (unaudited)...............................2

         Consolidated Statements of Income for the Six Months Ended
            March 31, 2001 and 2000 (unaudited)...............................3

         Consolidated Statements of Stockholders' Equity and Comprehensive
            Income for the Six Months Ended March 31, 2001 and 2000
            (unaudited).......................................................4

         Consolidated Statements of Cash Flows for the Six Months Ended
            March 31, 2001 and 2000 (unaudited)...............................5

         Notes to Consolidated Financial Statements...........................7

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk..........16

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

Item 1.  Legal Proceedings...................................................17

Item 2.  Changes in Securities and Use of Proceeds...........................17

Item 3.  Defaults Upon Senior Securities.....................................17

Item 4.  Submission of Matters to a Vote of Security Holders.................17

Item 5.  Other Information...................................................17

Item 6.  Exhibits and Reports on Form 8-K....................................17


SIGNATURES...................................................................18


<PAGE>

                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

                      MARCH 31, 2001 AND SEPTEMBER 30, 2000

                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                AT                  AT
                                                                            MARCH  31,          SEPTEMBER 30,
                                                                               2001                 2000
                                                                            -----------         ------------
                                                                            (UNAUDITED)
                                      ASSETS
<S>                                                                         <C>                      <C>
Cash and cash equivalents                                                   $ 34,356                 33,107
  Investment securities:
     Held to maturity (fair value of $49,970 and $65,173
         at March 31, 2001 and September 30, 2000, respectively)              49,708                 67,232
     Available for sale (cost of $13,914 and $10,019
         at March 31, 2001 and September 30, 2000, respectively)              13,933                  9,752
Loans held for sale, at lower of cost or fair value                            6,544                  5,533
Loans receivable (net of allowance for loan losses of $3,619
   and $3,536 at March 31, 2001 and September 30, 2000,
   respectively)                                                             227,192                223,595
Real estate owned                                                              2,106                     --
Federal Home Loan Bank stock, at cost                                          1,650                  1,650
Premises and equipment                                                         8,692                  8,453
Accrued interest receivable                                                    2,441                  2,653
Other assets                                                                   3,742                  3,552
                                                                            --------               --------
          Total assets                                                      $350,364                355,527
                                                                            ========               ========

                LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Deposit accounts                                                           262,711                254,405
  Advances from Federal Home Loan Bank                                        20,000                 20,000
  Advance payments by borrowers for property taxes and insurance                 541                    151
  Dividend payable                                                               263                 17,270
  Other liabilities                                                            5,619                  4,492
                                                                            --------               --------
          Total liabilities                                                  289,134                296,318
                                                                            --------               --------

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;
       3,289,607 shares issued and outstanding                                    33                     33
   Additional paid-in capital                                                 35,575                 35,587
   Unearned ESOP shares                                                       (4,678)                (4,950)
   Unearned compensation - management recognition plan                          (907)                (1,296)
   Deferred compensation                                                       3,815                  2,679
   Treasury stock for deferred compensation                                   (3,815)                (2,679)
   Retained income - substantially restricted                                 31,195                 29,999
   Accumulated other comprehensive income (loss) - net unrealized
        gain (loss) on investment securities available for sale                   12                   (164)
                                                                            --------               --------

        Total stockholders' equity                                            61,230                 59,209
                                                                            --------               --------

        Total liabilities and stockholders' equity                          $350,364                355,527
                                                                            ========               ========
</TABLE>

See accompanying notes to the consolidated financial statements.


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

                        CONSOLIDATED STATEMENTS OF INCOME

               FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000

                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                          FOR THE THREE MONTHS ENDED
                                                                                   MARCH 31,
                                                                          --------------------------
                                                                           2001                2000
                                                                          --------          --------
<S>                                                                       <C>                 <C>
Interest income:
   Interest and fees on loans                                             $  4,927             4,442
   Interest and dividends on investments                                     1,119             1,433
   Overnight deposits                                                          195               113
                                                                          --------          --------
         Total interest income                                               6,241             5,988
                                                                          --------          --------

Interest expense:
    Deposit accounts                                                         3,013             2,437
    Borrowings                                                                 277               365
                                                                          --------          --------
         Total interest expense                                              3,290             2,802
                                                                          --------          --------

         Net interest income                                                 2,951             3,186

Provision for loan losses                                                       60                60
                                                                          --------          --------
         Net interest income after provision for loan losses                 2,891             3,126
                                                                          --------          --------

Other income:
   Service fees on loans sold                                                   22                22
   Customer service fees                                                       162               140
   Commissions from sales of annuities and mutual funds                        108               115
   Real estate operations, net                                                  (6)               --
   Mortgage banking income, net                                                193                25
   Other                                                                        41                39
                                                                          --------          --------
         Total other income                                                    520               341
                                                                          --------          --------
Operating expenses:
   Compensation and related benefits                                         1,431             1,108
   Occupancy and equipment                                                     331               255
   Deposit insurance premiums                                                   13                12
   Other expenses                                                              425               369
                                                                          --------          --------
         Total operating expenses                                            2,200             1,744
                                                                          --------          --------
         Income before income taxes                                          1,211             1,723

Income taxes                                                                   436               608
                                                                          --------          --------

         Net income                                                       $    775             1,115
                                                                          ========          ========

         Earnings per share:

         Basic                                                            $   0.26          $   0.38
         Diluted                                                          $   0.24          $   0.38

</TABLE>

See accompanying notes to the consolidated financial statements.


                                       2
<PAGE>

                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME

                FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND 2000

                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                          FOR THE SIX MONTHS ENDED
                                                                                   MARCH 31,
                                                                          --------------------------
                                                                           2001                2000
                                                                          --------          --------
<S>                                                                       <C>                 <C>
Interest income:
   Interest and fees on loans                                             $ 10,017             8,834
   Interest and dividends on investments                                     2,336             2,905
   Overnight deposits                                                          398               205
                                                                          --------          --------
         Total interest income                                              12,751            11,944
                                                                          --------          --------

Interest expense:
    Deposit accounts                                                         5,990             4,770
    Borrowings                                                                 580               721
                                                                          --------          --------
         Total interest expense                                              6,570             5,491
                                                                          --------          --------

         Net interest income                                                 6,181             6,453

Provision for loan losses                                                      120               120
                                                                          --------          --------
         Net interest income after provision for loan losses                 6,061             6,333
                                                                          --------          --------
Other income:
   Service fees on loans sold                                                   42                45
   Customer service fees                                                       318               281
   Commissions from sales of annuities and mutual funds                        219               195
   Real estate operations, net                                                  (6)               --
   Mortgage banking income (loss), net                                         321               (58)
   Other                                                                        83                85
                                                                          --------          --------
         Total other income                                                    977               548
                                                                          --------          --------
Operating expenses:
   Compensation and related benefits                                         2,974             2,283
   Occupancy and equipment                                                     608               501
   Deposit insurance premiums                                                   25                46
   Other expenses                                                              836               658
                                                                          --------          --------
         Total operating expenses                                            4,443             3,488
                                                                          --------          --------
         Income before income taxes                                          2,595             3,393

Income taxes                                                                   919             1,185
                                                                          --------          --------

         Net income                                                       $  1,676             2,208
                                                                          ========          ========

         Earnings per share:

         Basic                                                            $   0.56          $   0.75
         Diluted                                                          $   0.53          $   0.75
</TABLE>

See accompanying notes to the consolidated financial statements

                                       3
<PAGE>

                             1ST STATE BANCORP, INC.
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
          FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                                                     TREASURY
                                                              ADDITIONAL    UNEARNED       UNEARNED                 STOCK FOR
                                                   COMMON      PAID-IN        ESOP       COMPENSATION   DEFERRED     DEFERRED
                                                   STOCK       CAPITAL       SHARES           MRP     COMPENSATION COMPENSATION
                                                   -----       -------       ------           ---     ------------ -----------

<S>                                              <C>            <C>           <C>                          <C>       <C>
Balance at September 30, 1999                    $    32        49,216        (4,470)            --        2,373     (2,373)

Comprehensive income:
     Net income                                       --            --            --             --           --         --
     Other comprehensive income-unrealized
       loss on securities available-for-sale
net
       of income taxes of $52                         --            --            --             --           --         --


Total comprehensive income
Release of ESOP shares                                --           (5)           282             --           --         --
Deferred compensation                                 --            --            --             --          230         --
Treasury stock held for deferred
    compensation                                      --            --            --             --           --       (230)
Cash dividend declared                                --            --            --             --           --         --
Cash dividend on unallocated ESOP shares              --            --            --             --           --         --
                                                --------    ----------   -----------   ------------   ----------   --------
Balance at March 31, 2000                       $     32        49,211        (4,188)            --        2,603     (2,603)
                                                ========    ==========   ===========   ============   ==========   ========


Balance at September 30, 2000                   $     33        35,587        (4,950)        (1,296)       2,679     (2,679)

Comprehensive income:
     Net income                                       --            --            --             --           --         --
     Other comprehensive income-unrealized
       gain on securities available-for-sale
       net of income taxes of $110                    --            --            --             --           --         --


Total comprehensive income
Release of ESOP shares                                --           (12)          272             --           --         --
Deferred compensation                                 --            --            --             --        1,136         --
Treasury stock held for deferred
compensation                                          --            --            --             --           --     (1,136)
MRP share amortization                                --            --            --            389           --         --
Cash dividend declared                                --            --            --             --           --         --
Cash dividend on unallocated ESOP shares              --            --            --             --           --         --
                                                --------    ----------   -----------   ------------   ----------   --------
Balance at March 31, 2001                       $     33        35,575        (4,678)          (907)       3,815     (3,815)
                                                ========    ==========   ===========   ============   ==========   ========


<CAPTION>
                                                                    ACCUMULATED
                                                                       OTHER           TOTAL
                                                    RETAINED       COMPREHENSIVE   STOCKHOLDERS'
                                                     INCOME        INCOME (LOSS)      EQUITY
                                                     ------        -------------      ------

<S>                                                    <C>                <C>         <C>
Balance at September 30, 1999                          26,960             (123)       71,615

Comprehensive income:
     Net income                                         2,208               --         2,208
     Other comprehensive income-unrealized
       loss on securities available-for-sale
       net of income taxes of $52                          --              (91)          (91)
                                                                                  ----------

Total comprehensive income                                                             2,117
Release of ESOP shares                                     --               --           277
Deferred compensation                                      --               --           230
Treasury stock held for deferred
    compensation                                           --               --          (230)
Cash dividend declared                                   (506)              --          (506)
Cash dividend on unallocated ESOP shares                   36               --            36
                                                -------------    -------------   -----------
Balance at March 31, 2000                              28,698             (214)       73,539
                                                =============    =============   ===========

Balance at September 30, 2000                          29,999             (164)       59,209

Comprehensive income:
     Net income                                         1,676               --         1,676
     Other comprehensive income-unrealized
       gain on securities available-for-sale
       net of income taxes of $110                         --              176           176
                                                                                  ----------

Total comprehensive income                                                             1,852
Release of ESOP shares                                     --               --           260
Deferred compensation                                      --               --         1,136
Treasury stock held for deferred
  compensation                                             --               --        (1,136)
MRP share amortization                                     --               --           389
Cash dividend declared                                   (526)              --          (526)
Cash dividend on unallocated ESOP shares                   46               --            46
                                                -------------    -------------   -----------
Balance at March 31, 2001                              31,195               12        61,230
                                                =============    =============   ===========
</TABLE>



See accompanying notes to the consolidated financial statements.
                                       4
<PAGE>

                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND 2000

                                   (UNAUDITED)

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                  FOR THE SIX MONTHS ENDED
                                                                                         MARCH 31,
                                                                                  2001                2000
                                                                                --------            --------
<S>                                                                             <C>                 <C>
Cash flows from operating activities:
   Net income                                                                   $  1,676               2,208
   Adjustment to reconcile net income to net cash provided by
       operating activities:
           Provision for loan losses                                                 120                 120
           Depreciation                                                              305                 239
           Deferred tax benefit                                                     (325)               (115)
           Amortization of premiums and discounts, net                               (12)                (17)
           Release of  ESOP shares                                                   260                 276
           Vesting of MRP shares                                                     389                  --
           Loan origination fees and unearned discounts
               deferred, net of current amortization                                 (11)                 33
           Net loss on sale of loans                                                  50                 361
           Proceeds from loans held for sale                                      17,646               9,209
           Originations of loans held for sale                                   (18,707)             (6,278)
           Decrease (increase) in other assets                                        25                (574)
           Decrease (increase) in accrued interest receivable                        212                 (87)
           Increase/(decrease) in other liabilities                                1,127              (1,523)
                                                                                --------            --------
                   Net cash provided by operating activ                            2,755               3,852
                                                                                --------            --------

Cash flows provided by (used in) investing activities:
    Purchase of FHLB stock                                                            --                (431)
    Redemption of FHLB stock                                                          --                 290
    Purchases of investment securities held to maturity                               --              (3,996)
    Purchase of investment securities available for sale                          (6,999)                 --
    Proceeds from maturities of investment securities available for sale           3,108               2,040
    Proceeds from maturities of investment securities held to maturity            17,532               4,300
    Net increase in loans receivable                                              (5,812)            (12,043)
    Purchases of premises and equipment                                             (544)                (76)
                                                                                --------            --------

                   Net cash provided by (used in) investing activities             7,285              (9,916)
                                                                                --------            --------
</TABLE>


                                                    (Continued)


                                       5
<PAGE>
                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND 2000

                                   (UNAUDITED)

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                  FOR THE SIX MONTHS ENDED
                                                                                         MARCH 31,
                                                                                  2001                2000
                                                                                --------            --------
<S>                                                                             <C>                 <C>
Cash flows from financing activities:
   Net increase in deposits                                                     $  8,306            $  5,901
   Advances from the Federal Home Loan Bank                                        5,000              16,000
   Repayments of advances from Federal Home Loan Bank                             (5,000)            (10,000)
   Return of capital dividend payment                                            (17,007)                 --
   Dividends paid on common stock                                                   (480)               (469)
   Increase in advance payments by borrowers for
     property taxes and insurance                                                    390                 347
                                                                                --------            --------
   Net cash (used in)  provided by  financing activities                          (8,791)             11,779
                                                                                --------            --------

        Net increase in cash and cash equivalents                                  1,249               5,715

Cash and cash equivalents at beginning of period                                  33,107              15,657
                                                                                --------            --------

Cash and cash equivalents at end of period                                      $ 34,356            $ 21,372
                                                                                ========            ========

Payments are shown below for the following:
       Interest                                                                 $  6,598            $  5,429
                                                                                ========            ========

       Income taxes                                                             $    937            $  1,317
                                                                                ========            ========

Noncash investing and financing activities:
     Deferred compensation to be settled in Company's stock                     $  1,136            $    230
                                                                                ========            ========

     Unrealized gains (losses) on investment securities
          available for sale                                                    $    286            $   (143)
                                                                                ========            ========

     Cash dividends declared but not paid                                       $    241            $    235
                                                                                ========            ========

     Cash dividends on unallocated ESOP shares, used to repay the
          Company's loan to ESOP, and on unallocated MRP shares                 $     46            $     36
                                                                                ========            ========

     Transfer from loans held for sale to loans receivable                      $    686            $  5,099
                                                                                ========            ========

     Transfer of land from other assets to premises and equipment               $     --            $    545
                                                                                ========            ========

     Transfer from loans to real estate acquired in settlement of loans         $  2,106            $     --
                                                                                ========            ========
</TABLE>

See accompanying notes to consolidated financial statements.


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                MARCH 31, 2001 (UNAUDITED) AND SEPTEMBER 30, 2000

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, 2000,
which is derived  from the  September  30, 2000 audited  consolidated  financial
statements) have been prepared in accordance with generally accepted  accounting
principles 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 generally  accepted  accounting
principles for complete financial statements. In the opinion of management,  all
adjustments (none of which were other than normal recurring  accruals) necessary
for a fair presentation of the financial  position and results of operations for
the periods presented have been included.

          The results of  operations  for the three and six month  periods ended
March 31, 2001 are not necessarily  indicative of the results of operations that
may be expected  for the year ended  September  30,  2001.  The  preparation  of
consolidated   financial   statements  in  accordance  with  generally  accepted
accounting  principles  requires  management  to make certain  estimates.  These
amounts  may be  revised in future  periods  because of changes in the facts and
circumstances underlying their estimation.

NOTE 3.  EARNINGS PER SHARE

          The Company's  basic  earnings per share were computed by dividing net
income  by the  weighted  average  shares  outstanding,  excluding  ESOP and MRP
benefit plan shares not  committed to be released or granted.  Diluted  earnings
per share includes the  potentially  dilutive  effects of the Company's  benefit
plans.  A  reconciliation  of the  denominators  of the  basic and  diluted  EPS
computations is as follows:
<TABLE>
<CAPTION>
                                                                                   Three Months Ended
                                                                                       March 31,
                                                                                   2001            2000
                                                                                   ----            ----
         <S>                                                                    <C>             <C>
         Shares outstanding, excluding MRP shares granted                       3,163,125       3,163,125
         Add: vested MRP shares issued                                             42,163              --
         Less: unallocated ESOP shares                                           (191,213)       (219,932)
                                                                                ---------       ---------
         Basic shares for earnings per share                                    3,014,075       2,943,193

         Add: unvested MRP shares                                                  84,319              --

         Add: potential common stock pursuant to stock
               option plan  (See Note 7)                                           67,269              --
                                                                                ---------       ---------
         Diluted shares for earnings per share                                  3,165,663       2,943,193
                                                                                =========       =========
</TABLE>

                                       7
<PAGE>
<TABLE>
<CAPTION>
                                                                                     Six Months Ended
                                                                                       March 31,
                                                                                   2001            2000
                                                                                   ----            ----
         <S>                                                                    <C>             <C>
         Shares outstanding, excluding MRP shares granted                       3,163,125        3,163,125
         Add: vested MRP shares issued                                             42,163               --
         Less: unallocated ESOP shares                                           (194,774)        (223,597)
                                                                                ---------       ---------
         Basic shares for earnings per share                                    3,010,514        2,939,528

         Add: unvested MRP shares                                                  84,319               --

         Add: potential common stock pursuant to stock
               option plan  (See Note 7)                                           64,165              --
                                                                                ---------       ---------
         Diluted shares for earnings per share                                  3,158,998       2,939,528
                                                                                =========       =========
</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, 2001, 6,992 and 14,089 shares of
stock were committed to be released and  approximately  $131,000 and $260,000 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.  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 as additional amounts are deferred.  Refer to the Company's
notes to  consolidated  financial  statements,  incorporated by reference in the
Company's  2000 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, 2001 was $68,000 and $135,000,  respectively. This expense is included
in compensation expense.

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. Compensation expense of $263,000 and $527,000 associated with
the MRP was recorded during the three and six months ended March 31, 2001.

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.

                                       8
<PAGE>


NOTE 8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

          In June 1998 the Financial  Accounting  Standards  Board (FASB) issued
Statement of Financial  Accounting  Standards  (SFAS) No. 133,  "Accounting  for
Derivative  Instruments and Certain  Hedging  Activities." In June 1999 the FASB
issued SFAS No. 138, "Accounting for Certain Derivative  Instruments and Certain
Hedging  Activities,  an  Amendment  of SFAS 133." SFAS No. 133 and SFAS No. 138
require  that all  derivative  instruments  be recorded on the balance  sheet at
their  respective fair values.  Changes in the fair values of those  derivatives
will be reported in earnings or other comprehensive  income depending on the use
of the  derivative and whether the  derivative  qualifies for hedge  accounting.
SFAS No.  133 and SFAS No. 138 are  effective  for all  fiscal  quarters  of all
fiscal years beginning after June 30, 2000; the Company adopted SFAS No. 133, as
amended by SFAS No. 138, on October 1, 2000.

          On October 1, 2000, the Company had no embedded derivative instruments
requiring separate accounting treatment and had identified fixed rate conforming
loan commitments as its only  freestanding  derivative  instrument.  The Company
does not currently  engage in hedging  activities.  The commitments to originate
fixed rate conforming loans totaled $2,410,000 and $ 1,114,000 at March 31, 2001
and  October 1, 2000,  respectively.  The fair  value of these  commitments  was
immaterial  on these dates and  therefore the adoption of SFAS 133 on October 1,
2000 as well as the  impact  of  applying  SFAS  133 at March  31,  2001 was not
material to the Company's consolidated financial statements.



                                       9
<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.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2001 AND SEPTEMBER 30, 2000

          Total assets  decreased by $5.1 million or 1.5% from $355.5 million at
September  30, 2000 to $350.4  million at March 31,  2001.  Assets grew by $11.8
million  during the six months  ended March 31, 2001 but this growth was largely
offset  by the  $17.0  million  return  of  capital  dividend  which was paid to
stockholders on October 2, 2000.

          Investment  securities  available for sale increased $4.1 million from
$9.8  million  at  September  30,  2000 to  $13.9  million  at March  31,  2001.
Investment  securities  held to  maturity  decreased  $17.5  million  from $68.9
million at  September  30, 2000 to $51.4  million at March 31,  2001.  As market
interest  rates fell  during the six months  ended March 31,  2001,  many of the
Company's callable investment securities were called by the issuers.

          Loans receivable,  net increased by $3.6 million, or 1.6%, from $223.6
million at September  30, 2000 to $227.2  million at March 31, 2001.  Loans held
for sale also  increased $1.0 million from $5.5 million at September 30, 2000 to
$6.5 million at March 31, 2001.  With the lower  interest rate  environment,  we
have  continued to sell most of the long term fixed rate mortgage  loans that we
originate.  We sold $17.7  million in fixed rate  mortgage  loans during the six
months  ended March 31, 2001  compared to $9.2  million for the six months ended
March 31, 2000.  We continue to emphasize  commercial,  commercial  real estate,
consumer loans and equity lines of credit that carry variable rates and/or short
term maturities.  At March 31, 2001,  commercial loans totaled $52.6 million and
account  for  22.8% of  gross  loans  compared  to $42.9  million  and  18.9% at
September  30,  2000.  One to four  family  residential  loans at March 31, 2001
totaled $91.8 million or 39.8% of gross loans compared to $97.6 million or 43.0%
at September 30, 2000.

          Deposits  increased  $8.3 million from $254.4 million at September 30,
2000 to $262.7 million at March 31, 2001.  Certificates  of deposit at March 31,
2001 totaled $170.8 million or 65.0% of total  deposits.  At September 30, 2000,
certificates of deposit  totaled $168.3 million or 66.2% of total  deposits.  We
continue to emphasize  transaction  accounts,  which carry lower  interest rates
than  certificates  of deposit.  Transaction  accounts  account for 61.3% of the
deposit growth during the six months ended March 31, 2001.

          Stockholders'  equity  increased by $2.0 million from $59.2 million at
September  30, 2000 to $61.2 million at March 31, 2001 as a result of net income
of $1.7  million,  release of ESOP shares of $260,000,  vesting of MRP shares of
$389,000,  and an increase in unrealized  gains on available for sale securities
of $176,000. These increases were offset by dividends declared of $480,000.

COMPARISON  OF  OPERATING  RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND
2000

          Net Income.  We recorded net income of $775,000 for the quarter  ended
March 31, 2001, as compared to $1,115,000  for the quarter ended March 31, 2000,
representing a decrease of $340,000,  or 30.5%. For the three months ended March
31,  2001  basic  and  diluted   earnings   per  share  were  $0.26  and  $0.24,
respectively.  The Company reported basic and diluted earnings per share for the
quarter  ended  March 31,  2000 of $0.38 per share.  The  decrease in net income
resulted  primarily from decreased net interest  income and increased  operating
expenses  that were offset  partially  by increased  other income and  decreased
income taxes.  The decline in net interest  income resulted from the decrease in
average earning assets that resulted from the special return of capital dividend
of $17.0  million,  which was paid on October 2, 2000 and decreased net interest
margins.  The  return  of  capital  dividend  decreased  the  ratio  of  average
interest-earning assets to average interest-bearing  liabilities from 126.5% for
the three months ended March 31, 2000 to 119.0% for the three months ended March
31, 2001.

                                       10
<PAGE>

          Net Interest  Income.  Net interest  income,  the  difference  between
interest earned on loans and  investments and interest paid on  interest-bearing
liabilities,  decreased by $235,000 or 7.4% for the three months ended March 31,
2001,  compared to the same quarter in the prior year. This decrease  reflects a
$253,000  increase in interest  income that was more than offset by the $488,000
increase in total interest expense. The average net interest margin decreased 32
basis  points from 3.99% for the three  months ended March 31, 2000 to 3.67% for
the quarter ended March 31, 2001.

          Interest Income.  The increase in interest income for the three months
ended  March  31,  2001  was due to an  increase  of  $2.4  million  in  average
interest-earning  assets  compared to the same  quarter in the prior year and an
increase in yield on  interest-earning  assets of 0.26% from 7.50% for the three
months  ended March 31, 2000 to 7.76% for the three months ended March 31, 2001.
The  increased  volume of average  interest-earning  assets  increased  interest
income by  approximately  $44,000 and the  increased  yield  increased  interest
income by approximately  $209,000.  An increase in average loans  outstanding of
$15.1  million  coupled with an increase in average  interest-bearing  overnight
funds of $6.2 million increased interest-earning assets for the quarter compared
to the prior year.  These increases were offset in part by a decrease in average
investments of $18.9 million.  Average investments  decreased to provide cash to
pay the special return of capital  dividend and as a result of the $20.0 million
of bonds that were called.

          Interest Expense. Interest expense increased in the three months ended
March 31,  2001 due to an increase in average  interest-bearing  liabilities  of
$18.0 million and an increase in the cost of interest-bearing  liabilities of 43
basis  points from 4.44% for the three  months ended March 31, 2000 to 4.87% for
the three  months  ended March 31,  2001.  Average  deposits  increased by $23.9
million while average FHLB advances  decreased $5.9 million for the three months
ended  March 31,  2001  compared  to the same  quarter  in the prior  year.  The
increase in average  interest-bearing  liabilities increased interest expense by
approximately   $200,000   while   the   increase   in  the   average   cost  of
interest-bearing   liabilities   increased  interest  expense  by  approximately
$289,000.

          The  following  table  presents  average  balances  and average  rates
earned/paid  by the Company for the quarter ended March 31, 2001 compared to the
quarter ended March 31, 2000.
<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED                          THREE  MONTHS ENDED
                                                        MARCH 31, 2001                               MARCH 31, 2000
                                                                             DOLLARS IN THOUSANDS

                                                 AVERAGE                   YIELD/              AVERAGE              YIELD/
                                                 BALANCE       INTEREST    COST                BALANCE    INTEREST   COST
                                                 -------       --------    ------              -------    --------  ------
<S>                                              <C>              <C>      <C>                 <C>          <C>      <C>
Assets:
Loans receivable (1)                             232,084          4,927    8.49%               216,993      4,442    8.19%
Investment securities (2)                         75,511          1,119    5.93                 94,449      1,433    6.07
Interest-bearing overnight deposits               14,129            195    5.53                  7,930        113    5.69
                                                 -------          -----                        -------      -----
  Total interest-earning assets                  321,724          6,241    7.76                319,372      5,988    7.50
Non interest-earning assets                       26,125                                        19,509
                                                 -------                                       -------
  Total assets                                   347,849                                       338,881

Liabilities and stockholders' equity:
Deposits                                         249,938          3,013    4.82%               226,086      2,437    4.31%
FHLB advances                                     20,444            277    5.41                 26,297        365    5.56
                                                 -------          -----                        -------      -----
  Total interest-earning liabilities             270,382          3,290    4.87                252,383      2,802    4.44
Non interest-earning liabilities                  16,641                                        13,469
                                                 -------                                       -------
  Total liabilities                              287,023                                       265,852
Stockholders' equity                              60,826                                        73,029
                                                 -------                                       -------
  Total liabilities and stockholders' equity     347,849                                       338,881

Net interest income                                               2,951                                     3,186
Interest rate spread                                                       2.89%                                     3.06%
Net interest margin (3)                                                    3.67%                                     3.99%
Ratio of average interest-earning assets
  to average interest-bearing liabilities                                 118.99%                                   126.54%
<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.
</FN>
</TABLE>


                                       11
<PAGE>
          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  $60,000 for both the three months
ended  March 31,  2001 and 2000.  During  the  quarter we  foreclosed  on a $2.1
million loan  resulting in an increase to real estate  owned.  The fair value of
the  collateral  for the loan,  less costs to sell,  is  estimated to exceed the
balance  of the loan.  Accordingly,  upon  foreclosure  there was no charge  off
against the allowance for loan losses.  See further  discussion of nonperforming
assets at "Asset Quality".

          Other Income. Other income increased $179,000, or 52.5%, from $341,000
for the quarter ended March 31, 2000 to $520,000 for the quarter ended March 31,
2001.  Mortgage  banking  income,  net  increased  $168,000 from $25,000 for the
quarter  ended March 31, 2000 to $193,000 for the quarter  ended March 31, 2001.
During the quarter ended March 31, 2001, we sold fixed-rate  mortgage loans held
for sale of $11.4 million and recognized a $193,000 gain on the sale. During the
quarter ended March 31, 2000, we sold fixed-rate mortgage loans held for sale of
$6.7  million and  recognized  a gain of $25,000  from the sale of these  loans.
Customer service fees increased $22,000,  or 15.7% from $140,000 for the quarter
ended March 31, 2000 to $162,000  for the  quarter  ended March 31,  2001.  This
increase  results  primarily from growth in the number of transaction  accounts.
During the quarter  ended March 31, 2001,  the Company  incurred net losses from
real estate operations of $6,000, which were not present in the prior year.

          Operating Expenses. Total operating expenses were $2.2 million for the
quarter  ended March 31, 2001,  an increase of $456,000,  or 26.2% over the $1.7
million  recorded for the three months  ended March 31, 2000.  Compensation  and
related benefits expense increased $323,000,  or 29.2% from $1.1 million for the
quarter  ended  March 31, 2000 to $1.4  million for the quarter  ended March 31,
2001.  This increase was primarily the result of the MRP expense of $263,000 for
the quarter ended March 31, 2001,  which was not present in 2000.  Occupancy and
equipment expense increased $76,000 or 29.8% from $255,000 for the quarter ended
March 31, 2000 to $331,000 for the quarter  ended March 31,  2001.  Most of this
increase  was  depreciation  expense  from the new branch and the check  imaging
hardware and  software,  which were not present in the same quarter in the prior
year.  The  increases in other  categories of operating  expenses  generally are
attributable  to the growth of the  Company  including  the  operating  expenses
associated with the Bank's seventh  branch,  which opened on September 27, 2000.
We expect that other operating  expenses will continue to increase in subsequent
periods  as a result  of  increased  cost  associated  with  operating  a public
company.

          Income Tax Expense.  Income tax expense  decreased  $172,000  from tax
expense of  $608,000  for the quarter  ended March 31, 2000 to $436,000  for the
quarter ended March 31, 2001. The decrease  resulted from a $512,000 decrease in
income before income taxes. The effective tax rates were 36.0% and 35.3% for the
quarters ended March 31, 2001 and 2000, respectively.

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND 2000

          Net Income.  We recorded net income of $1.7 million for the six months
ended March 31, 2001, as compared to $2.2 million for the six months ended March
31,  2000,  representing  a decrease of $532,000,  or 24.1%.  For the six months
ended March 31, 2001 basic and diluted  earnings per share were $0.56 and $0.53,
respectively.  The Company reported basic and diluted earnings per share for the
six months  ended March 31, 2000 of $0.75 per share.  The decrease in net income
resulted  primarily from decreased net interest  income and increased  operating
expenses  that were offset  partially  by increased  other income and  decreased
income taxes.  The decline in net interest  income resulted from the decrease in
average earning assets that resulted from the special return on capital dividend
of $17.0  million,  which was paid on October 2, 2000 and decreased net interest
margins.  The  return  of  capital  dividend  decreased  the  ratio  of  average
interest-earning assets to average interest-bearing  liabilities from 126.7% for
the six months ended March 31, 2000 to 120.0% for the six months ended March 31,
2001.

          Net Interest  Income.  Net interest  income,  the  difference  between
interest earned on loans and  investments and interest paid on  interest-bearing
liabilities,  decreased  by $272,000 or 4.2% for the six months  ended March 31,
2001,  compared to the same six months in the prior year. This decrease reflects
a $807,000  increase  in  interest  income that was more than offset by the $1.1
million  increase in total  interest  expense.  The average net interest  margin
decreased  23 basis points from 4.07% for the six months ended March 31, 2000 to
3.84% for the six months ended March 31, 2001.

          Interest  Income.  The increase in interest  income for the six months
ended  March  31,  2001  was due to an  increase  of  $4.8  million  in  average
interest-earning assets compared to the same six months in the prior year and an
increase  in yield on  interest-earning  assets of 0.39%  from 7.53% for the six
months  ended March 31, 2000 to 7.92% for the six months  ended March 31,  2001.
The  increased  volume of average  interest-earning  assets  increased  interest
income by  approximately  $180,000 and the increased  yield  increased  interest
income by approximately  $628,000.  An increase in average loans  outstanding of
$17.8  million  coupled with an increase in average  interest-bearing  overnight
funds of $5.7  million  increased  interest-earning  assets  for the six  months
compared to the prior year. These increases were offset in part by a decrease in
average investments of $18.7 million.  Average investments  decreased to provide
cash to pay the special return of capital


                                       12
<PAGE>

dividend and as a result of the $20.0 million of bonds that were called.

          Interest  Expense.  Interest expense increased in the six months ended
March 31,  2001 due to an increase in average  interest-bearing  liabilities  of
$18.0 million and an increase in the cost of interest-bearing  liabilities of 51
basis points from 4.39% for the six months ended March 31, 2000 to 4.90% for the
six months ended March 31, 2001.  Average  deposits  increased by $22.8  million
while  average  FHLB  advances  decreased  $4.9 million for the six months ended
March 31, 2001  compared to the same six months in the prior year.  The increase
in  average   interest-bearing   liabilities   increased   interest  expense  by
approximately   $394,000   while   the   increase   in  the   average   cost  of
interest-bearing   liabilities   increased  interest  expense  by  approximately
$685,000.

          The  following  table  presents  average  balances  and average  rates
earned/paid  by the Company for the six months ended March 31, 2001  compared to
the six months ended March 31, 2000.
<TABLE>
<CAPTION>
                                                       SIX MONTHS ENDED                            SIX  MONTHS ENDED
                                                        MARCH 31, 2001                               MARCH 31, 2000
                                                                             DOLLARS IN THOUSANDS

                                                 AVERAGE                   YIELD/              AVERAGE              YIELD/
                                                 BALANCE       INTEREST    COST                BALANCE    INTEREST   COST
                                                 -------       --------    ------              -------    --------  ------
<S>                                              <C>              <C>      <C>                 <C>          <C>      <C>
Assets:
Loans receivable (1)                             231,747         10,017    8.64%               213,994      8,834    8.26%
Investment securities (2)                         77,118          2,336    6.06                 95,838      2,905    6.06
Interest-bearing overnight deposits               13,143            398    6.07                  7,399        205    5.55
                                                 -------         ------                        -------     ------
  Total interest-earning assets                  322,008         12,751    7.92                317,231     11,944    7.53
Non interest-earning assets                       23,977                                        19,656
                                                 -------                                       -------
  Total assets                                   345,985                                       336,887

Liabilities and stockholders' equity:
Deposits                                         247,303          5,990    4.84%               224,454      4,770    4.25%
FHLB advances                                     21,050            580    5.51                 25,929        721    5.56
                                                 -------         ------                        -------     ------
  Total interest-earning liabilities             268,353          6,570    4.90                250,383      5,491    4.39
Non interest-earning liabilities                  17,311                                        13,912
                                                 -------                                       -------
  Total liabilities                              285,664                                       264,295
Stockholders' equity                              60,321                                        72,592
                                                 -------                                       -------
  Total liabilities and stockholders' equity     345,985                                       336,887

Net interest income                                               6,181                                     6,453
Interest rate spread                                                       3.02%                                     3.14%
Net interest margin (3)                                                    3.84%                                     4.07%
Ratio of average interest-earning assets
  to average interest-bearing liabilities                                 119.99%                                   126.70%
<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.
</FN>
</TABLE>

                                       13
<PAGE>


          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,  2001 and 2000.  During  the  quarter we  foreclosed  on a $2.1
million loan  resulting in an increase to real estate  owned.  The fair value of
the  collateral  for the loan,  less costs to sell,  is  estimated to exceed the
balance  of the loan.  Accordingly,  upon  foreclosure  there was no charge  off
against the allowance for loan losses.  See further  discussion of nonperforming
assets at "Asset Quality".

          Other Income. Other income increased $429,000, or 78.3%, from $548,000
for the six months  ended March 31, 2000 to  $977,000  for the six months  ended
March 31, 2001.  Mortgage banking income,  net increased $379,000 from a loss of
$58,000 for the six months  ended  March 31, 2000 to income of $321,000  for the
six months ended March 31, 2001.  During the six months ended March 31, 2001, we
sold  fixed-rate  mortgage loans held for sale of $17.7 million and recognized a
$301,000  gain on the  sale  as well as a  recovery  of  $20,000  from  previous
writedowns  on loans held for sale.  During the six months ended March 31, 2000,
we sold fixed-rate mortgage loans held for sale of $9.2 million and recognized a
gain of $122,000 from the sale of these loans; however, the increase in interest
rates  during this six months  required a $180,000  charge to earnings to record
the loans  held for sale at the lower of cost or fair  value.  Customer  service
fees  increased  $37,000,  or 13.2% from $281,000 for the six months ended March
31, 2000 to $318,000  for the six months  ended March 31,  2001.  This  increase
results  primarily  from  growth  in the  number  of  transaction  accounts.  In
addition,  during the six months ended March 31, 2001, commissions from sales of
annuities and mutual funds increased  $24,000 or 12.3% from $195,000 for the six
months ended March 31, 2000 to $219,000 for the six months ended March 31, 2001.
This increase  resulted from a shift in the mix of products sold that earned the
Company  higher  commissions.  During the six months ended March 31,  2001,  the
Company  incurred net losses from real estate  operations of $6,000,  which were
not present in the prior year.

          Operating Expenses. Total operating expenses were $4.4 million for the
six months ended March 31, 2001, an increase of $955,000, or 27.4% over the $3.5
million  recorded  for the six months  ended March 31,  2000.  Compensation  and
related benefits expense increased $691,000,  or 30.3% from $2.3 million for the
six months  ended March 31, 2000 to $3.0  million for the six months ended March
31, 2001.  This increase was primarily the result of the MRP expense of $527,000
for the six  months  ended  March  31,  2001,  which  was not  present  in 2000.
Occupancy and equipment  expense  increased  $107,000 or 21.4% from $501,000 for
the six months  ended March 31, 2000 to $608,000  for the six months ended March
31, 2001. Most of this increase was depreciation expense from the new branch and
the check imaging hardware and software, which were not present in the same, six
months in the  prior  year.  The  increases  in other  categories  of  operating
expenses  generally are attributable to the growth of the Company  including the
operating  expenses  associated with the Bank's seventh branch,  which opened on
September  27, 2000.  We expect that other  operating  expenses will continue to
increase in subsequent  periods as a result of increased  cost  associated  with
operating a public company.

          Income Tax Expense.  Income tax expense  decreased  $266,000  from tax
expense of $1.2  million for the six months ended March 31, 2000 to $919,000 for
the six months  ended March 31,  2001.  The  decrease  resulted  from a $798,000
decrease in income before  income taxes.  The effective tax rates were 35.4% and
34.9% for the six months ended March 31, 2001 and 2000, respectively. The higher
effective  tax rate  results  from the losses at the holding  company  level for
which no state tax benefit is received.

ASSET QUALITY

          At March 31, 2001,  the Company's  non-performing  assets  (nonaccrual
loans and real estate  owned)  were $2.9  million or 0.83% of total  assets.  At
September 30, 2000,  non-performing  assets consisted  entirely of loans,  which
were  approximately  $2.9 million or 0.82% of total  assets.  At March 31, 2001,
impaired loans totaled $493,000 as defined by Statement of Financial  Accounting
Standards No. 114,  "Accounting by Creditors for Impairment of a Loan," compared
to $2.6 million at September 30, 2000. The decrease is  attributable to a single
$2.1 million loan that was foreclosed during the quarter. See further discussion
below.  The  impaired  loans at March 31, 2001 result from one  borrower and are
secured  by  several  one to four  family  dwellings  that  are  used as  income
properties  in  Alamance  County.  At March 31,  2001,  all of the  $493,000  of
impaired loans are on  non-accrual  status,  and their related  reserve for loan
losses totaled  $45,000.  The average  carrying value of impaired loans was $1.8
million  during the six months  ended March 31,  2001.  No  interest  income was
recognized on these  impaired  loans during the six months ended March 31, 2001.
All amounts  received on these  impaired loans have been recorded as a reduction
of the  principal  balance  of the loan.  At March 31,  2001 real  estate  owned
totaled $2.1 million,  compared to zero one at September 30, 2000.  The increase
is  attributable  to  foreclosing on two loans secured by real estate during the
quarter  ended March 31, 2001.  Within real estate owned is a 53 unit  apartment
complex in  Burlington,  N. C. with a carrying  value of $2.0  million.  We have
engaged a  management  company to rent and operate the complex  while we own it.
The Company is undertaking  steps to liquidate the real


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<PAGE>

estate  owned  properties.  The Bank's net  chargeoffs  for the six months ended
March 31, 2001 and 2000 were $36,000 and $1,000, respectively. The allowance for
loan losses was $3.6  million or 1.57% of  outstanding  loans at March 31, 2001.
This compares to 1.56 % at September 30, 2000 and 1.66% at March 31, 2000.

          Regulations  require that we classify  our assets on a regular  basis.
There are three  classifications for problem assets:  substandard,  doubtful and
loss.  We regularly  review our assets to determine  whether any assets  require
classification or re-classification.  At March 31, 2001, we had $ 3.3 million in
classified assets consisting entirely of $3.3 million in substandard assets.

          In  addition  to  regulatory  classifications,  we  also  classify  as
"special mention" assets that are currently  performing in accordance with their
contractual  terms but may  become  classified  or  nonperforming  assets in the
future.  At March 31, 2001, we have  identified  approximately  $37.8 million in
assets classified as special mention or watch.  Included in this amount are five
loans with an aggregate outstanding balance of $4.3 million at March 31, 2001 to
a company  affiliated with one of our directors.  In addition,  the director has
the ability to borrow an additional $174,000 from us under a line of credit. All
the loans are secured by a first lien on all company assets,  including accounts
receivable,  inventory,  equipment,  furniture and real property occupied by the
borrower.  In addition,  the director has personally guaranteed repayment of the
loans.  At March 31, 2001, such loans were current with respect to their payment
terms and were performing in accordance with the related loan agreements.  Based
on an analysis of the borrower's  current financial  statements  received in May
2001, management has concerns that the borrower may have difficulty in complying
with the present loan  repayment  terms on an ongoing basis.  Accordingly,  this
loan may  become  a  nonperforming  asset in  future  periods.  Management  will
continue to closely monitor the performance of these loans in future periods.

LIQUIDITY AND CAPITAL RESOURCES

          The Bank must meet certain liquidity  requirements  established by the
State  of  North   Carolina   Office   of  the   Commissioner   of  Banks   (the
"Commissioner").  At March 31, 2001,  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, 2001, cash and cash equivalents
totaled  $34.4  million.  We have  other  sources  of  liquidity  should we need
additional  funds.  During the six months ended March 31, 2001 and 2000, we sold
loans totaling $17.7 million and $9.2 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
$13.9 million at March 31, 2001.

          We anticipate that we will have sufficient funds available to meet our
current  commitments.  At March 31, 2001, we had $7.2 million in  commitments to
originate  new loans,  $55.2  million in unfunded  commitments  to extend credit
under  existing  equity  lines and  commercial  lines of credit and  $266,000 in
standby letters of credit. At March 31, 2001, certificates of deposit, which are
scheduled to mature within one year,  totaled $140.2 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, 2001
and is deemed to be "well capitalized."


                                       15
<PAGE>

          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,  2001,  the
Company was in compliance with the capital requirements of the Federal Reserve.

ACCOUNTING ISSUES

          In June 1998 the Financial  Accounting  Standards  Board (FASB) issued
Statement of Financial  Accounting  Standards  (SFAS) No. 133,  "Accounting  for
Derivative  Instruments and Certain  Hedging  Activities." In June 2000 the FASB
issued SFAS No. 138, "Accounting for Certain Derivative  Instruments and Certain
Hedging  Activities,  an  Amendment  of SFAS 133." SFAS No. 133 and SFAS No. 138
require  that all  derivative  instruments  be recorded on the balance  sheet at
their  respective fair values.  Changes in the fair values of those  derivatives
will be reported in earnings or other comprehensive  income depending on the use
of the  derivative and whether the  derivative  qualifies for hedge  accounting.
SFAS No.  133 and SFAS No. 138 are  effective  for all  fiscal  quarters  of all
fiscal years beginning after June 30, 2000; the Company adopted SFAS No. 133, as
amended by SFAS No. 138, on October 1, 2000.

          On October 1, 2000, the Company had no embedded derivative instruments
requiring separate accounting treatment and had identified fixed rate conforming
loan commitments as its only  freestanding  derivative  instrument.  The Company
does not currently  engage in hedging  activities.  The commitments to originate
fixed rate conforming loans totaled  $2,410,000 and $1,114,000 at March 31, 2001
and October 1, 2000, respectively.  The fair value of these commitments was less
than $ 12,000 on these dates and  therefore  the adoption of SFAS 133 on October
1, 2000 as well as the  impact of  applying  SFAS 133 at March 31,  2001 was not
material to the Company's consolidated financial statements.

          The FASB has issued  Statement of Financial  Accounting  Standards No.
140,   "Accounting   for  Transfers  and  Servicing  of  Financial   Assets  and
Extinguishments  of Liabilities"  ("SFAS 140"). This statement replaces SFAS No.
125   ("Accounting   for  Transfers  and  Servicing  of  Financial   Assets  and
Extinguishments  of  Liabilities")  and revises the standards for accounting for
securitizations  and other  transfers of  financial  assets and  collateral  and
requires certain disclosures, but it carries over most of the provisions of SFAS
No. 125 without  consideration.  SFAS No. 140 provides  accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities,  based on  application  of a  financial  components  approach  that
focuses on control.  SFAS No. 140 is effective  for  transfers  and servicing of
financial assets and extinguishments of liabilities  occurring after March 2001.
Adoption  of SFAS No.  140 is not  expected  to have a  material  impact  on the
Company's consolidated financial statements.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

          The  Company  monitors  whether  material  changes in market risk have
occurred  since  September  30,  2000.  The Company  does not  believe  that any
material  adverse changes in market risk exposures  occurred since September 30,
2000.



                                       16
<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 30,
         2001. At this meeting 2,859,452 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

           James A. Barnwell, Jr.            2,854,864            4,588
           James G. McClure, Jr.             2,854,864            4,588
           T. Scott Quakenbush               2,854,864            4,588
           Ernest A. Koury, Jr.              2,854,837            4,615

         There were no broker nonvotes on the matter.

         ITEM 5.  OTHER INFORMATION

         None.

         ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a.)     Exhibits.  None.
                  --------

         (b.)     Reports on Form 8-K.  During the quarter ended March 31, 2001,
                  -------------------
                  the  registrant  did not file any current reports on Form 8-K.


                                       17
<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 11, 2001                ----------------------------------------
                                   James C. McGill
                                   President and Chief Executive Officer
                                   (Principal Executive Officer)


                                   /s/ A. Christine Baker
Date:  May 11, 2001                ----------------------------------------
                                   A. Christine Baker
                                   Executive Vice President
                                   Treasurer and Secretary
                                   (Principal Financial and Accounting Officer)



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