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 June 30, 2000

    OR

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

    For the transition period from ______ to ______

                         Commission file number: 0-25859

                             1ST STATE BANCORP, INC.

             (Exact Name of Registrant as Specified in Its Charter)


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

445 S. MAIN STREET, BURLINGTON, NORTH CAROLINA                   27215
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)                      (Zip Code)


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 August 7,  2000,  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 June 30, 2000 (unaudited)
            and September 30, 1999............................................1

         Consolidated Statements of Income for the Three Months Ended
            June 30, 2000 and 1999 (unaudited)................................2

         Consolidated Statements of Income for the Nine Months Ended
            June 30, 2000 and 1999 (unaudited)................................3

         Consolidated Statements of Stockholders' Equity and Comprehensive
            Income for the Nine Months Ended June 30, 2000 and
            1999 (unaudited)...................................................4

         Consolidated Statements of Cash Flows for the Nine Months Ended
            June 30, 2000 and 1999 (unaudited).................................5

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

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk...........13


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

Item 1.  Legal Proceedings....................................................14

Item 2.  Changes in Securities and Use of Proceeds............................14

Item 3.  Defaults Upon Senior Securities......................................14

Item 4.  Submission of Matters to a Vote of Security Holders..................14

Item 5.  Other Information....................................................14

Item 6.  Exhibits and Reports on Form 8-K.....................................14


SIGNATURES....................................................................15



<PAGE>


                     1st State Bancorp, Inc. and Subsidiary

                           Consolidated Balance Sheets

                      June 30, 2000 and September 30, 1999

<TABLE>
<CAPTION>
                                                                                AT                 AT
                                                                              JUNE 30,        SEPTEMBER 30,
                                                                                2000               1999
                                                                          ----------------   --------------
                                                                             (Unaudited)
                                      ASSETS

<S>                                                                      <C>                 <C>
Cash and cash equivalents                                                $   32,318,574      $   15,657,202
Investment securities:
     Held to maturity (fair value of $65,422,922 and $82,541,457
         at June 30, 2000 and September 30, 1999, respectively)              68,231,508          84,228,343
     Available for sale (cost of $10,064,253 and $11,241,966
         at June 30, 2000 and September 30, 1999, respectively)               9,697,632          11,035,966
Loans held for sale, at lower of cost or fair value                           5,661,084          12,143,063
Loans receivable (net of allowance for loan losses of $3,474,480
    and $3,454,373 at June 30, 2000 and September 30, 1999,
   respectively)                                                            222,641,437         195,292,344
Federal Home Loan Bank stock, at cost                                         1,650,000           1,259,600
Premises and equipment                                                        7,733,565           7,282,361
Accrued interest receivable                                                   2,437,766           2,652,134
Other assets                                                                  3,595,585           3,374,915
                                                                         --------------      --------------
          Total assets                                                   $  353,967,151      $  332,925,928
                                                                         ==============      ==============

                LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Deposit accounts                                                       $  243,824,380      $  234,094,735
  Advances from Federal Home Loan Bank                                       30,000,000          22,000,000
  Advance payments by borrowers for property taxes and insurance                758,839             232,973
  Other liabilities                                                           4,408,422           4,983,039
                                                                         --------------      --------------
          Total liabilities                                                 278,991,641         261,310,747
                                                                         --------------      --------------

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 and 3,163,125 shares issued and outstanding
         at June 30, 2000 and September 30, 1999, respectively                   32,896              31,631
   Additional paid in capital                                                51,536,043          49,216,648
   Unearned ESOP shares                                                      (4,046,963)         (4,469,611)
   Deferred compensation                                                      2,603,381           2,373,485
   Treasury stock for deferred compensation                                  (2,603,381)         (2,373,485)
   Unearned compensation - management recognition plan                       (1,489,856)                 --
   Retained income - substantially restricted                                29,166,990          26,959,913
   Accumulated other comprehensive income (loss) - net unrealized
          loss on investment securities available for sale                     (223,600)           (123,400)
                                                                         ---------------     ---------------

          Total stockholders' equity                                         74,975,510          71,615,181
                                                                         --------------      --------------

          Total liabilities and stockholders' equity                     $  353,967,151      $  332,925,928
                                                                         ==============      ==============
</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 June 30, 2000 and 1999

                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                          FOR THE THREE MONTHS ENDED
                                                                                   JUNE 30,
                                                                           2000                 1999
                                                                       -------------      --------------
<S>                                                                    <C>                <C>
Interest income:
   Interest and fees on loans                                          $   4,721,798      $    3,990,379
   Interest and dividends on investments                                   1,380,171           1,085,944
   Overnight deposits                                                        178,419             392,250
                                                                       -------------      --------------
         Total interest income                                             6,280,388           5,468,573
                                                                       -------------      --------------

Interest expense:
    Deposit accounts                                                       2,563,811           2,283,832
    Borrowings                                                               391,276             272,495
                                                                       -------------      --------------
         Total interest expense                                            2,955,087           2,556,327
                                                                       -------------      --------------

         Net interest income                                               3,325,301           2,912,246

Provision for loan losses                                                     60,000              60,000
                                                                       -------------      --------------

         Net interest income after provision for loan losses               3,265,301           2,852,246
                                                                       -------------      --------------

Other income:
   Loan servicing fees                                                        22,594              24,808
   Customer service fees                                                     149,217             126,005
   Commissions from sales of annuities and mutual funds                      128,180              97,842
   Mortgage banking income (loss), net                                        80,282            (131,273)
   Net gain on sale of real estate owned                                     148,739                  --
   Other                                                                      50,869              66,285
                                                                       -------------      --------------
         Total other income                                                  579,881             183,667
                                                                       -------------      --------------

Operating expenses:
   Compensation and related benefits                                       2,075,326           1,242,392
   Occupancy and equipment                                                   262,878             277,719
   Deposit insurance premiums                                                 11,818              34,877
   Contribution expense                                                        2,600           3,014,205
   Other expenses                                                            405,985             265,422
                                                                       -------------      --------------
         Total operating expenses                                          2,758,607           4,834,615
                                                                       -------------      --------------

         Income (loss) before income taxes                                 1,086,575          (1,798,702)

Income taxes (benefit)                                                       380,000            (621,000)
                                                                       -------------      ---------------

         Net income (loss)                                             $     706,575      $   (1,177,702)
                                                                       =============      ===============

         Earnings (loss) per share:

         Basic                                                         $       0.24       $         (0.48)
         Diluted                                                       $       0.23       $         (0.48)

</TABLE>

See accompanying notes to the consolidated financial statements.

                                       2
<PAGE>

                     1st State Bancorp, Inc. and Subsidiary

                        Consolidated Statements of Income

                For the Nine Months Ended June 30, 2000 and 1999

                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                           For the Nine Months Ended
                                                                                   June 30,
                                                                           2000                 1999
                                                                       -------------      --------------
<S>                                                                    <C>                    <C>
Interest income:
   Interest and fees on loans                                          $  13,556,108          $11,949,089
   Interest and dividends on investments                                   4,284,506            2,724,689
   Overnight deposits                                                        383,617            1,078,730
                                                                       -------------          -----------
         Total interest income                                            18,224,231           15,752,508
                                                                       -------------          -----------

Interest expense:
    Deposit accounts                                                       7,334,399            7,288,019
    Borrowings                                                             1,112,037              822,445
                                                                       -------------          -----------
         Total interest expense                                            8,446,436            8,110,464
                                                                       -------------          -----------

         Net interest income                                               9,777,795            7,642,044

Provision for loan losses                                                    180,000              180,000
                                                                       -------------          -----------


         Net interest income after provision for loan losses               9,597,795            7,462,044
                                                                       -------------          -----------

Other income:
   Loan servicing fees                                                        67,271               76,655
   Customer service fees                                                     430,635              401,630
   Commissions from sales of annuities and mutual funds                      323,097              327,479
   Mortgage banking income, net                                               22,550              314,934
   Net gain on sale of real estate owned                                     148,739                   --
   Other                                                                     135,640              134,073
                                                                       -------------          -----------
         Total other income                                                1,127,932            1,254,771
                                                                       -------------          -----------


Operating expenses:
   Compensation and related benefits                                       4,358,499            3,383,794
   Occupancy and equipment                                                   764,062              701,404
   Deposit insurance premiums                                                 57,587              104,344
   Contribution expense                                                        8,250            3,033,196
   Other expenses                                                          1,058,140              808,539
                                                                       -------------          -----------
         Total operating expenses                                          6,246,538            8,031,277
                                                                       -------------          -----------

         Income before income taxes                                        4,479,189              685,538

Income taxes                                                               1,565,000              246,000
                                                                       -------------          -----------

         Net income                                                    $   2,914,189          $   439,538
                                                                       =============          ===========
         Earnings per share:

         Basic                                                         $       0.99         $       (0.48)
         Diluted                                                       $       0.96         $       (0.48)
</TABLE>

See accompanying notes to the consolidated financial statements.


                                       3
<PAGE>
                     1ST STATE BANCORP, INC. AND SUBSIDIARY
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
                FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                                                 TREASURY
                                                                  ADDITIONAL      UNEARNED                      STOCK FOR
                                                   COMMON          PAID-IN          ESOP       DEFERRED          DEFERRED
                                                   STOCK           CAPITAL         SHARES    COMPENSATION      COMPENSATION
                                                   ------         ----------      --------   ------------      ------------


<S>                                                <C>             <C>              <C>      <C>               <C>
Balance at September 30, 1998                      $      --            --             --             --            --

Comprehensive income:
     Net income                                           --            --             --             --            --
     Other comprehensive loss-unrealized
       loss on securities available-for-sale net
       of income taxes of $131,850                        --            --             --             --            --
Total comprehensive income

Net proceeds from issuance of common stock              31,631    49,215,725           --             --            --
Common stock acquired by ESOP                             --            --       (4,898,639)          --            --
Release of ESOP shares                                    --           2,013        331,982           --            --
Deferred compensation                                     --            --             --        2,351,365          --
Treasury stock held for deferred compensation             --            --             --             --      (2,351,365)
Cash dividends declared                                   --            --             --             --            --
Cash dividends on unallocated ESOP shares                 --            --             --             --            --
                                                   -----------   -----------    -----------    -----------   -----------
Balance at June 30, 1999                                31,631    49,217,738     (4,566,657)     2,351,365    (2,351,365)
                                                   ===========   ===========    ===========    ===========   ===========

Balance at September 30, 1999                      $    31,631    49,216,648     (4,469,611)     2,373,485    (2,373,485)

Comprehensive income:
     Net income                                           --            --             --             --            --
     Other comprehensive loss-unrealized
       loss on securities available-for-sale net
       of income taxes of $60,800                         --            --             --             --            --

Total comprehensive income
Shares issued for MRP                                    1,265     2,330,747           --             --            --
Vesting of MRP shares                                     --            --             --             --            --
Release of ESOP shares                                    --         (11,352)       422,648           --            --
Deferred compensation                                     --            --             --          229,896          --
Treasury stock held for deferred compensation             --            --             --             --        (229,896)
Cash dividend declared                                    --            --             --             --            --
Cash dividends on unallocated ESOP and
   unvested MRP shares                                    --            --             --             --            --
                                                   -----------   -----------    -----------    -----------   -----------
Balance at June 30, 2000                           $    32,896    51,536,043     (4,046,963)     2,603,381    (2,603,381)
                                                   ===========   -----------    -----------    -----------   -----------

<CAPTION>

                                               UNEARNED COMPENSATION               ACCUMULATED
                                                     MANAGEMENT                      OTHER             TOTAL
                                                    RECOGNITION      RETAINED     COMPREHENSIVE     STOCKHOLDERS'
                                                       PLAN           INCOME      INCOME (LOSS)        EQUITY
                                                -------------------  --------     -------------     -------------

<S>                                              <C>                 <C>              <C>           <C>
Balance at September 30, 1998                             --         25,872,605        93,000        25,965,605

Comprehensive income:
     Net income                                           --            439,538           --            439,538
     Other comprehensive loss-unrealized
       loss on securities available-for-sale net
       of income taxes of $131,850                        --             --          (201,400)         (201,400)
                                                                                                    -----------
Total comprehensive income                                                                              238,138

Net proceeds from issuance of common stock                --             --               --         49,247,356
Common stock acquired by ESOP                             --             --               --         (4,898,639)
Release of ESOP shares                                    --             --               --            333,995
Deferred compensation                                     --             --               --          2,351,365
Treasury stock held for deferred compensation             --             --               --         (2,351,365)
Cash dividends declared                                   --           (253,050)          --           (253,050)
Cash dividends on unallocated ESOP shares                 --             20,244           --             20,244
                                                   -----------      -----------   -----------       -----------
Balance at June 30, 1999                                  --         26,079,337      (108,400)       70,653,649
                                                   ===========      ===========   ===========       ===========
Balance at September 30, 1999                                        26,959,913      (123,400)       71,615,181

Comprehensive income:
     Net income                                                       2,914,189           --          2,914,189
     Other comprehensive loss-unrealized
       loss on securities available-for-sale net
       of income taxes of $60,800                                            --      (100,200)         (100,200)
                                                                                                    -----------
Total comprehensive income                                                                            2,813,989
Shares issued for MRP                               (2,332,012)          --               --              --
Vesting of MRP shares                                  842,156           --               --            842,156
Release of ESOP shares                                    --             --               --            411,296
Deferred compensation                                     --             --               --            229,896
Treasury stock held for deferred compensation             --             --               --           (229,896)
Cash dividend declared                                    --           (769,269)          --           (769,269)
Cash dividends on unallocated ESOP and                    --             --               --               --
   unvested MRP shares                                    --             62,157           --             62,157
                                                   -----------      -----------   -----------       -----------
Balance at June 30, 2000                            (1,489,856)      29,166,990      (223,600)       74,975,510
                                                   ===========      ===========   ===========       ===========
</TABLE>
                                       4
<PAGE>

                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                 FOR THE NINE MONTHS ENDED
                                                                                        JUNE 30,
                                                                                2000                1999
                                                                            -------------       ------------

<S>                                                                        <C>                 <C>
Cash flows from operating activities:
   Net income                                                              $   2,914,189       $     439,538
   Adjustment to reconcile net income to net cash provided by
       (used in) operating activities:
           Provision for loan losses                                             180,000             180,000
           Depreciation                                                          359,483             349,827
           Deferred tax expense                                                   84,000                  --
Amortization of premiums and discounts, net                                      (23,253)             32,664
           Gain on sale of real estate owned                                     148,739                  --
           Contribution of shares to Foundation                                       --            3,000,000
           Release of  ESOP shares                                               411,296             333,990
           Vesting of MRP shares                                                 842,156                  --
           Loan origination fees and unearned discounts
               deferred, net of current amortization                              56,287              85,925
           Net loss on sale of loans                                             424,670             427,120
           Proceeds from loans held for sale                                  14,324,397          34,604,174
           Originations of loans held for sale                               (13,363,686)        (38,252,785)
           Increase in other assets                                             (789,050)         (2,979,028)
           Decrease (increase) in accrued interest receivable                    214,368            (294,852)
           Decrease in other liabilities                                        (577,989)         (1,266,096)
                                                                           -------------       -------------
Net cash provided by (used in) operating activities                            5,205,607          (3,339,523)
                                                                           -------------       -------------

Cash flows from investing activities:
    Purchase of FHLB stock                                                      (680,800)                 --
    Redemption of FHLB stock                                                     290,400              86,900
    Purchases of investment securities held to maturity                       (3,996,250)        (63,680,540)
    Purchases of investment securities available for sale                             --          (4,000,000)
    Proceeds from maturities of investment securities available for sale       2,080,908           2,345,049
    Proceeds from maturities of investment securities
        held to maturity                                                      19,112,764          14,676,313
    Proceeds from sale of real estate owned                                     (148,740)                 --
    Net decrease (increase) in loans receivable                              (22,488,782)          7,478,838
    Purchases of premises and equipment                                         (265,506)           (199,405)
                                                                           -------------       -------------

                         Net cash used in investing activities                (6,096,006)        (43,292,845)
                                                                           -------------       -------------

                                                                                                     (Continued)
</TABLE>

                                       5
<PAGE>

                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                 FOR THE NINE MONTHS ENDED
                                                                                        JUNE 30,
                                                                                2000                1999
                                                                            -------------       ------------

<S>                                                                        <C>                 <C>
Cash flows from financing activities:
   Net increase in deposits                                                $   9,729,645       $ (10,941,891)
   Advances from the Federal Home Loan Bank                                   36,000,000                  --
   Repayments of advances from Federal Home Loan Bank                        (28,000,000)                 --
   Dividends on common stock                                                    (703,740)                 --
   Net proceeds from sale of stock                                                    --          46,247,361
   Purchase of stock for ESOP                                                         --          (4,898,639)
   Increase in advance payments by borrowers for
       property taxes and insurance                                              525,866             510,199
                                                                           -------------       -------------

Net cash provided by financing activities                                     17,551,771          30,917,030
                                                                           -------------       -------------

        Net increase (decrease) in cash and cash equivalents                  16,661,372         (15,715,338)

Cash and cash equivalents at beginning of period                              15,657,202          31,077,054
                                                                           -------------       -------------

Cash and cash equivalents at end of period                                 $  32,318,574       $  15,361,716
                                                                           =============       =============

Payments are shown below for the following:
  Interest                                                                 $   8,403,517       $   8,103,571
                                                                           =============       =============

  Income taxes                                                             $   2,112,412       $     303,000
                                                                           =============       =============

Deferred compensation to be settled in Company's stock                     $     229,896       $          --
                                                                           =============       =============

Unrealized losses on investment securities
     available for sale                                                    $    (100,200)      $   ( 201,400)
                                                                           =============       =============

Dividends declared and payable                                             $     237,951       $     232,806
                                                                           =============       =============

Supplemental noncash investing and financing activities:

Cash dividends on unallocated ESOP and unissued MRP shares                 $      62,157       $      20,244
                                                                           =============       =============

Transfer of land from other assets to premises and equipment               $     545,181       $          --
                                                                           =============       =============

Transfer from loans available for sale to loans receivable                 $   5,099,472      $           --
                                                                           =============      ==============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       6
<PAGE>

                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                JUNE 30, 2000 (UNAUDITED) AND SEPTEMBER 30, 1999


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 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, 1999,
which is derived  from the  September  30, 1999 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 nine month  periods ended
June 30, 2000 are not  necessarily  indicative of the results of operations that
may be expected  for the year ended  September  30,  2000.  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

         Earnings  per share  computations  have been made only for the  periods
subsequent to the Conversion. The Company's earnings per share for the three and
nine month  periods  ended  June 30,  2000 are based on basic  weighted  average
shares of 2,961,604 and 2,946,833,  respectively,  and diluted  weighted average
shares of 3,062,235 and 3,047,464,  respectively,  of common stock  outstanding,
excluding  ESOP and MRP  benefit  plan  shares not  committed  to be released or
granted, as follows:
<TABLE>
<CAPTION>

                                                                       Nine months               Three months
                                                                       -----------               ------------

         <S>                                                           <C>                       <C>
         Average shares issued and outstanding                         3,163,125                 3,163,125
         Add: weighted average vested MRP shares issued                    3,693                    11,120
         Less: weighted average unallocated ESOP shares                 (219,985)                 (212,641)
                                                                       ---------                 ---------
         Average basic shares for earnings per share                   2,946,833                 2,961,604

         Add: unvested MRP shares                                         84,319                    84,319
         Add: potential common stock pursuant to stock option plan        16,312                    16,312
                                                                       ---------               -----------
         Average diluted shares for earnings per share                 3,047,464                 3,062,235

</TABLE>

                                       7
<PAGE>

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
$4,898,639.  The loan is secured by the shares of stock  purchased  by the ESOP.
During the three and nine months ended June 30, 2000, 7,251 and 21,833 shares of
stock were committed to be released and  approximately  $135,000 and $411,000 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  have elected this option
concurrent with the  Conversion,  so the Company  purchased  common stock in the
Conversion on behalf of these participants to fund this obligation. Refer to the
Company's notes to consolidated financial statements,  incorporated by reference
in the  Company's  1999  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 nine  months  ended
June 30,  2000 was  $53,000 and  $161,000,  respectively,  and it 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 one-third  immediately vesting on
the date of the grant.  Compensation expense of $842,000 associated with the MRP
was recorded during the quarter ended June 30, 2000.

NOTE 7.  STOCK OPTION AND INCENTIVE PLAN

         On June 6,  2000 the  Company's  stockholders  approved  the 1 st 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 has granted  316,312  options to purchase its $0.01
par value common stock. The exercise price per share is equal to the fair market
value per share on the date of the grant of the stock.



                                       8
<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 JUNE 30, 2000 AND SEPTEMBER 30, 1999

         Total assets  increased by $21.1 million or 6.3% from $332.9 million at
September 30, 1999 to $354.0  million at June 30, 2000.  Asset growth was funded
during the period by a $9.7  million,  or 4.1%  increase in deposits  and a $8.0
million,  or 36.4%  increase  in FHLB  advances.  Deposits  at June 30, 2000 and
September 30, 1999 were $243.8  million and $234.1  million,  respectively.  The
majority  of the  deposit  increase  was in demand,  checking  and money  market
investment  accounts,  which  typically  carry a lower  interest  rate than time
deposits.  At June 30, 2000, 65.6% of the Company's  deposits are time deposits.
Advances at June 30, 2000 and  September  30, 1999 were $30.0  million and $22.0
million, respectively.

         Cash and cash  equivalents  increased  $16.6 million,  or 105.7%,  from
$15.7  million at  September  30, 1999 to $32.3  million at June 30,  2000.  The
increase  in cash  and  cash  equivalents  resulted  primarily  from  investment
maturities. Investment securities, both available for sale and held to maturity,
decreased a combined  total of $17.4  million,  or 18.3%,  from $95.3 million at
September  30, 1999 to $77.9  million at June 30,  2000.  During the nine months
ended June 30, 2000, we purchased $4.0 million of short-term  government  agency
securities and we received $21.2 million from the maturity of like securities.

         Loans receivable, net increased by $27.3 million, or 14.0%, from $195.3
million at September 30, 1999 to $222.6 million at June 30, 2000.  This increase
was offset  somewhat by a $6.4  million  decrease in loans held for sale.  Loans
held for sale  decreased  52.9% from $12.1 million at September 30, 1999 to $5.7
million at June 30, 2000.  Commercial and commercial real estate loans increased
$14.5  million,  or 21.2%,  compared to  September  30,  1999 levels  reflecting
current loan demand.  Interest rates have risen to a level that we are retaining
more of our mortgage production.  One to four family residential loans increased
$7.4 million,  or 8.2%,  compared to September  30, 1999 levels.  We continue to
emphasize consumer loans and equity lines of credit,  which increased a combined
total of $2.4 million since September 30, 1999.

         Stockholders' equity increased from $71.6 million at September 30, 1999
to $75.0 million at June 30, 2000. On June 6, 2000,  restricted  stock awards of
126,482  shares were awarded to 15 directors  and officers of the Bank under the
1st  State  Bancorp,  Inc.  Management  Recognition  Plan (the  "MRP)  which was
approved  by the  stockholders  at a Special  Meeting  on that day.  The  shares
awarded under the MRP were issued from  authorized but unissued shares of common
stock at no cost to the  recipients.  The shares  granted vest at the rate of 33
1/3% each year  beginning  with a  one-third  immediate  vest on the date of the
grant.


                                       9
<PAGE>

COMPARISON  OF  OPERATING  RESULTS FOR THE THREE  MONTHS ENDED JUNE 30, 2000 AND
1999

         Net Income.  We recorded net income of $707,000  for the quarter  ended
June 30, 2000, compared to a net loss of $1.2 million for the quarter ended June
30, 1999.  The results for the quarter  ended June 30, 1999  included a one-time
after-tax  charge of $2.0  million to fund the 1st State Bank  Foundation,  Inc.
Earnings of $802,000  would have been  reported  for the quarter  excluding  the
effect of the  one-time  charge.  For the three months ended June 30, 2000 basic
and diluted earnings per share were $0.24 and $0.23,  respectively.  The Company
reported basic and diluted loss per share for the quarter ended June 30, 1999 of
$0.48 per share.  The 1999  earnings  per share  calculation  includes  only the
Company's  results since the  conversion on April 23, 1999,  which also includes
the one-time after-tax charge of $2.0 million.

         Interest Income. Total interest income was $6.3 million for the quarter
ended June 30, 2000,  as compared to $5.5 million for the quarter ended June 30,
1999,  representing an increase of $812,000, or 14.8%. Average  interest-earning
assets increased by $19.1 million,  or 6.3%, from $304.6 million for the quarter
ended June 30, 1999 to $323.7  million for the quarter ended June 30, 2000.  The
growth in average  interest-earning  assets resulted primarily from increases in
loans and  investments  which was  partially  offset by a decrease in  overnight
funds.  We invested excess  overnight funds into higher yielding  government and
agency securities and loans.  Adding to the increase in interest income was a 58
basis point increase in the annualized average yield on interest-earning  assets
which increased from 7.18% for the three months ended June 30, 1999 to 7.76% for
the three months ended June 30, 2000. The increased  volume of  interest-earning
assets raised interest income by approximately  $343,000 and the increased yield
increased interest income by approximately $469,000.

         Interest  Expense.  Total  interest  expense  was $3.0  million for the
quarter  ended June 30, 2000,  as compared to $2.6 million for the quarter ended
June  30,  1999,  representing  an  increase  of  $399,000,  or  15.3%.  Average
interest-bearing  liabilities  increased  $3.9  million,  or 1.6%,  from  $250.8
million  for the quarter  ended June 30, 1999 to $254.7  million for the quarter
ended June 30, 2000. Average deposits  decreased $3.2 million,  which was offset
by increased average FHLB advances of $7.1 million.  Some of the deposit outflow
was used by Bank customers in 1999 to fund 1st State stock  purchases.  The cost
of funds  increased  56 basis  points from 4.08% for the three months ended June
30,  1999 to 4.64%  for the same  period in 2000.  The  Federal  Reserve  raised
interest rates six times during the year ended June 30, 2000. The Company's cost
of funds is directly  impacted by movements in short-term  interest  rates.  The
increase in the rate paid on  interest-bearing  liabilities  increased  interest
expense by  approximately  $359,000  and the  increase  in average  outstandings
raised interest expense by approximately $40,000.

         Net  Interest  Income.  Net interest  income,  the  difference  between
interest earned on loans and  investments and interest paid on  interest-bearing
liabilities,  increased  by $413,000 or 14.2% from $2.9  million for the quarter
ended June 30, 1999 to $3.3  million for the quarter  ended June 30,  2000.  Net
earning  assets  increased by $15.2  million from $53.8  million for the quarter
ended June 30, 1999 to $69.0  million for the quarter  ended June 30, 2000 while
our net  interest  rate spread  increased 2 basis points from 3.10% to 3.12% and
the  annualized  net  interest  margin  increased  29 basis points from 3.82% to
4.11%.  The increase in the net interest rate spread resulted from our increased
level of loans and investments  and higher  interest rates.  The increase in net
earning assets and net interest margin resulted  primarily from the net proceeds
from the sale of stock.

         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 June 30, 2000 and 1999.

         Other Income. Other income increased $396,000, or 215.2%, from $184,000
for the quarter  ended June 30, 1999 to $580,000 for the quarter  ended June 30,
2000.  Mortgage banking income,  net increased  $211,000 from a loss of $131,000
for the quarter  ended June 30, 1999 to income of $80,000 for the quarter  ended
June 30, 2000.  During the quarter ended June 30, 2000, we sold  fixed-rate  for
sale mortgage loans of $5.1 million and recognized  $61,000 from the origination
and sale of these loans,  and the Bank was able to record a nominal  recovery on
its lower of cost or fair  value  valuation  reserve  on loans  held for sale of
$20,000.  During the quarter  ended June 30, 1999, we sold  fixed-rate  mortgage
loans of $8.1 million and recognized  income of $95,000 from the origination and
sale of these loans; however, the increase in interest rates during this quarter
required a $226,000  charge to earnings


                                       10
<PAGE>
to record the loans held for sale to the lower of cost or fair  value.  Customer
service fees  increased  $23,000,  or 18.3% from  $126,000 for the quarter ended
June 30, 1999 to $149,000  for the quarter  ended June 30, 2000.  This  increase
results from growth in the number of transaction accounts.  In addition,  during
the quarter ended June 30, 2000,  commissions from sales of annuities and mutual
funds  increased  $30,000 or 30.6% from  $98,000 for the quarter  ended June 30,
1999 to $128,000 for the quarter ended June 30, 2000. The increase resulted from
a slightly  higher  volume of sales of annuities and mutual fund  products.  The
Company  recorded a  one-time  gain on the sale of an other  real  estate  owned
property of $149,000 during the quarter ended June 30, 2000.

         Operating Expenses.  Total operating expenses were $4.8 million for the
quarter  ended June 30, 1999 compared to $2.8 million for the quarter ended June
30, 2000. Compensation and related benefits expense increased $833,000, or 69.4%
from $1.2  million for the quarter  ended June 30, 1999 to $2.1  million for the
quarter  ended June 30, 2000.  This increase was primarily the result of the MRP
expense of $842,000 for the quarter  ended June 30, 2000,  which was not present
in 1999.  Contributions  expense  decreased  $3.0  million,  or 99.9%  from $3.0
million for the quarter ended June 30, 1999 to $3,000 for the quarter ended June
30, 2000. This decrease was the result of the $3.0 million  contribution to fund
the  Foundation  that  occurred  in  1999.  Other  operating  expense  increased
$141,000, or 53.2% from $265,000 for the quarter ended June 30, 1999 to $406,000
for the quarter  ended June 30, 2000.  This  increase  results from  expenses of
being a public  company that were not present in the prior year.  We expect that
operating  expenses will continue to remain at these higher levels in subsequent
periods as a result of increased  costs  associated  with  operating as a public
company.

         Income Tax Expense.  Income tax expense  increased  $1.0 million from a
tax  benefit of  $621,000  for the  quarter  ended  June 30,  1999 to expense of
$380,000 for the quarter ended June 30, 2000. The increase  resulted from a $2.9
million  increase in income before  income  taxes.  The effective tax rates were
35.0% and 34.5% for the quarters ended June 30, 2000 and 1999, respectively.

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999

         Net Income.  We recorded net income of $2.9 million for the nine months
ended June 30,  2000,  compared  to net income of  $440,000  for the nine months
ended June 30, 1999. The primary reasons for the increase was an increase in the
net interest  income and a decrease in operating  expenses  which were partially
offset by a decrease in other income and increased  income tax expense.  For the
nine months ended June 30, 2000, basic and diluted earnings per share were $0.99
and $0.96, respectively. For the nine months ended June 30, 1999, both basic and
diluted loss per share were $0.48. The earnings per share data includes only the
Company's results since the conversion on April 23, 1999.

         Interest  Income.  Total interest income was $18.2 million for the nine
months  ended June 30,  2000,  as compared to $15.8  million for the nine months
ended June 30, 1999, representing an increase of $2.4 million, or 15.2%. Average
interest-earning  assets  increased  by $32.6  million,  or 11.4 %, from  $286.8
million for the nine months  ended June 30, 1999 to $319.4  million for the nine
months ended June 30, 2000.  The growth in average  interest-earning  assets was
primarily  from the  investment  of the net  proceeds  from the  Conversion.  We
invested  excess  overnight  funds into higher  yielding  government  and agency
securities and loans. Interest income also increased because of a 29 basis point
increase in the annualized average yield on  interest-earning  assets from 7.32%
for the nine months  ended June 30, 1999 to 7.61% for the nine months ended June
30, 2000. The increased volume of interest-earning assets raised interest income
by approximately  $1.8 million and the increased yield increased interest income
by approximately $683,000.

         Interest Expense.  Total interest expense was $8.4 million for the nine
months  ended June 30,  2000,  as compared  to $8.1  million for the nine months
ended June 30,  1999,  representing  an increase of $336,000,  or 4.1%.  Average
interest-bearing  liabilities  decreased  $1.8  million,  or 0.7%,  from  $253.7
million for the nine months  ended June 30, 1999 to $251.9  million for the nine
months  ended June 30,  2000.  The cost of funds  increased 21 basis points from
4.26% for the nine  months  ended June 30,  1999 to 4.47% for the same period in
2000. The increase in the rate paid on  interest-bearing  liabilities  increased
interest  expense  by  approximately   $392,000  and  the  decrease  in  average
outstandings decreased interest expense by approximately $56,000.

         Net  Interest  Income.  Net interest  income,  the  difference  between
interest earned on loans and  investments and interest paid on  interest-bearing
liabilities,  increased  by $2.2 million or 28.9% from $7.6 million for the nine
months  ended June 30, 1999 to $9.8  million for the nine months  ended June 30,
2000.  Net average  earning  assets


                                       11
<PAGE>

increased by $34.3 million while our net interest rate spread  increased 8 basis
points from 3.06% to 3.14% and the annualized net interest  margin  increased 53
basis  points  from 3.55% to 4.08%.  The  increase in net  interest  rate spread
resulted from our increased  level of loans and  investments and higher interest
rates.  The  increase in net earning  assets and net  interest  margin  resulted
primarily from the net proceeds from the sale of stock.

         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  $180,000 for both the nine months
ended June 30, 2000 and 1999.

         Other  Income.  Other income  decreased  $127,000,  or 9.8%,  from $1.3
million  for the nine months  ended June 30,  1999 to $1.1  million for the nine
months ended June 30, 2000.  Interest rates on mortgage loans were higher in the
nine months  ended June 30, 2000 than in 1999 which slowed the  origination  and
sale of fixed rate mortgage loans.  As a result,  mortgage  banking income,  net
decreased  $292,000,  or 92.7%, from $315,000 for the nine months ended June 30,
1999 to $23,000 for the nine months ended June 30, 2000.  We sold $13.6  million
of loans  during the nine  months  ended  June 30,  2000,  a  decrease  of $21.0
million,  or 60.7% from the $34.6 million sold in the nine months ended June 30,
1999. In addition,  during the nine months ended June 30, 2000, customer service
fees increased  $29,000 or 7.2% from $402,000 for the nine months ended June 30,
1999 to $431,000 for the nine months ended June 30, 2000. This increase  results
from growth in the number of transaction  accounts.  Included in the nine months
ended June 30, 2000 was a $149,000  gain on sale of REO which was not present in
1999.

         Operating Expenses.  Total operating expenses were $8.0 million for the
nine  months  ended June 30, 1999  compared to $6.2  million for the nine months
ended June 30, 2000.  Compensation and related  benefits expense  increased $1.0
million,  or 29.4% from $3.4  million for the nine months ended June 30, 1999 to
$4.4  million for the nine months ended June 30,  2000.  The primary  reason for
this  increase was the $842,000 of MRP expense which was not present in 1999 and
increased  ESOP  expense of $79,000  over the prior year.  Contribution  expense
decreased by $3.0  million for the nine months  ended June 30, 2000  compared to
the nine months ended June 30, 1999.  Contribution  expense in 1999 included the
$3.0  million  donation  to fund  the 1st  State  Bank  Foundation,  Inc.  Other
operating expenses increased $250,000 or 30.9% from $809,000 for the nine months
ended June 30, 1999 to $1.1 million for the nine months ended June 30, 2000. The
primary  reason for this increase is  additional  expenses  (legal,  accounting,
printing,  postage) of being a public company which were not present in 1999. We
expect that operating  expenses will continue to increase in subsequent  periods
as a result of increased cost  associated  with  operating as a public  company.
Operating   expense  is  also   expected  to  increase  as  the  result  of  the
implementation of stock-based compensation plans.

         Income Tax  Expense.  Income tax expense  increased  $1.3  million,  or
528.5%,  from  $246,000  for the nine months ended June 30, 1999 to $1.6 million
for the nine months  ended June 30,  2000.  The  increase  resulted  from a $3.8
million  increase in income before  income  taxes.  The effective tax rates were
34.9% and 35.9% for the nine months ended June 30, 2000 and 1999, respectively.

ASSET QUALITY

         At June  30,  2000,  we had  approximately  $3.2  million  of  loans in
nonaccrual  status as compared  with $366,000 at September 30, 1999 and $480,000
at June 30,  1999.  At June 30,  2000,  impaired  loans  totaled $2.7 million as
defined by Statement of Financial  Accounting  Standards No. 114, "Accounting by
Creditors for  Impairment  of a Loan." The increase  resulted from two unrelated
loan  customers,  both of which have loans  secured by  commercial  real  estate
properties  in Alamance  County.  At June 30,  2000,  all of the $2.7 million of
impaired  loans is on  non-accrual  status,  and their related  reserve for loan
losses totaled $245,000.  There was no impact on the provision as management had
already  anticipated  the loans'  performance  in setting the allowance for loan
losses in previous  periods.  The average  carrying  value of impaired loans was
$2.8  million and $2.1  million  during the three and nine months ended June 30,
2000,  respectively.  Gross interest  income of $0 and $47,000 was recognized on
these impaired loans during the three and nine months ended June 30, 2000.  This
interest  income  represents  payments  that were made on these  impaired  loans
before they were  impaired.  If amounts  are  received  on  nonaccrual  loans or
impaired loans,  management decides whether payments received should be recorded
as a reduction of the principal  balance or as interest income  depending on our
analysis of the  collectibility of principal.  No payments have been received on
impaired  loans  since  they have been  classified  as  impaired.  There were no
impaired loans at
                                 12
<PAGE>
June 30, 1999. We had no loans  contractually past due 90 days or more and still
accruing  interest at June 30, 2000 and 1999.  The Bank's net chargeoffs for the
nine  months   ended  June  30,  2000  and  1999  were   $159,893  and  $13,009,
respectively.  These net chargeoffs  represent  0.07% and 0.01% of average loans
outstanding for the nine months ended June 30, 2000 and 1999, respectively.  The
allowance for loan losses was $3.5 million or 1.54% of outstanding loans at June
30, 2000.  This  compares to 1.74% at  September  30, 1999 and 1.76% at June 30,
1999.

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 June 30, 2000,  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 June 30, 2000, cash and cash equivalents
totaled  $32.3  million.  We have  other  sources  of  liquidity  should we need
additional  funds.  During the nine months ended June 30, 2000 and 1999, we sold
loans totaling $13.6 million and $34.6 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
$15.4 million at June 30, 2000.

         We anticipate that we will have sufficient  funds available to meet our
current  commitments.  At June 30, 2000, we had $4.7 million in  commitments  to
originate  new loans,  $53.5  million in unfunded  commitments  to extend credit
under  existing  equity  lines and  commercial  lines of credit and  $118,000 in
standby letters of credit. At June 30, 2000,  certificates of deposit, which are
scheduled to mature within one year totaled  $124.5  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 June 30, 2000
and is deemed to be "well capitalized."

ACCOUNTING ISSUES

         Accounting for Derivative  Instruments and Hedging Activities.  In June
1998, the Financial  Accounting  Standards  Board issued  Statement of Financial
Accounting  Standards No. 133 ("SFAS 133"). SFAS 133 establishes  accounting and
reporting standards for derivative instruments and for hedging activities.  This
statement,  as amended by SFAS No. 137 and No. 138 is effective  for the Company
beginning  October 1, 2000,  without  any  significant  impact  expected  on the
consolidated  financial  statements as the Company does not have any significant
derivative financial instruments and is not involved in any hedging activities.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The  Company  monitors  whether  material  changes in market  risk have
occurred  since  September  30,  1999.  The Company  does not  believe  that any
material  adverse changes in market risk exposures  occurred since September 30,
1999.

                                       13
<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 held a Special Meeting of Stockholders on June 6,
          2000. At this meeting  2,156,346  shares of the Company's common stock
          were represented in person or by proxy.

                   Stockholders  approved the 1st State Bancorp, Inc. 2000 Stock
          Option and Incentive Plan and the 1st State Bancorp,  Inc.  Management
          Recognition  Plan.  The  voting  results  for  each  proposal  were as
          follows:
<TABLE>
<CAPTION>
                                                     Votes             Votes            Votes
                                                     For               Against          Abstained

         <S>                                         <C>               <C>              <C>
         Stock Option and Incentive Plan             1,930,971         211,575          13,800

         Management Recognition Plan                 1,921,166         218,916          16,264
</TABLE>

                  There were no broker nonvotes on the matter.


         ITEM 5.  OTHER INFORMATION

         None.

         ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a.)     The following exhibits are being filed with this quarterly
                  report on Form 10-Q:

                       NO.                       DESCRIPTION
                       ---                       -----------

                       27               Financial Data Schedule (EDGAR Only)

         (b.)     Reports on Form 8-K.  During the quarter  ended June 30, 2000,
                  -------------------
                  the  registrant  did not file any current  reports on Form
                  8-K.



                                       14
<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:  August 10, 2000               -------------------------------------------
                                     James C. McGill
                                     President and Chief Executive Officer
                                     (Principal Executive Officer)


                                     /s/ A. Christine Baker
Date:  August 10, 2000               -------------------------------------------
                                     A. Christine Baker
                                     Executive Vice President
                                     Treasurer and Secretary
                                     Principal Financial and Accounting Officer)


                                       15