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, 2002

[ ]  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 6,  2002,  the  issuer had  3,289,607  shares of common  stock
issued and outstanding.


                                       1
<PAGE>

                                    CONTENTS

                                                                            PAGE
                                                                            ----

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

Item 1.  Financial Statements

         Consolidated Balance Sheets as of June 30, 2002
            (unaudited) and September 30, 2001...............................3

         Consolidated Statements of Income for the Three Months Ended
            June 30, 2002 and 2001 (unaudited)...............................4

         Consolidated Statements of Income for the Nine Months Ended
            June 30, 2002 and 2001 (unaudited)...............................5

         Consolidated Statements of Stockholders' Equity and
            Comprehensive Income for the Nine Months Ended June
            30, 2002 and 2001 (unaudited)....................................6

         Consolidated Statements of Cash Flows for the Nine Months
            Ended June 30, 2002 and 2001 (unaudited).........................7

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

Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations...............................12

Item 3.  Quantitative and Qualitative Disclosures About Market Risk..........23


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

Item 1.  Legal Proceedings...................................................24

Item 2.  Changes in Securities and Use of Proceeds...........................24

Item 3.  Defaults Upon Senior Securities.....................................24

Item 4.  Submission of Matters to a Vote of Security Holders.................24

Item 5.  Other Information...................................................24

Item 6.  Exhibits and Reports on Form 8-K....................................24


SIGNATURES...................................................................25


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

                           CONSOLIDATED BALANCE SHEETS

                      JUNE 30, 2002 AND SEPTEMBER 30, 2001

                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                       AT                  AT
                                                                     JUNE 30,          SEPTEMBER 30,
                                                                       2002                2001
                                                                   -----------         -------------
                                                                   (Unaudited)
                                      ASSETS
<S>                                                                 <C>                  <C>
Cash and cash equivalents                                           $ 19,939             25,981
  Investment securities:
     Held to maturity (fair value of $10,356 and $12,495
         at June 30, 2002 and September 30, 2001, respectively)       10,118             12,169
     Available for sale (cost of $88,157 and $54,689
         at June 30, 2002 and September 30, 2001, respectively)       88,941             55,527
Loans held for sale, at lower of cost or fair value                    1,194              3,291
Loans receivable (net of allowance for loan losses of $3,700
    and $3,612 at June 30, 2002 and September 30, 2001,
    respectively)                                                    215,175            222,285
Real estate owned                                                      2,226              1,981
Federal Home Loan Bank stock, at cost                                  1,750              1,650
Premises and equipment                                                 8,074              8,414
Accrued interest receivable                                            2,171              2,542
Other assets                                                           2,519              2,952
                                                                    --------           --------
             Total assets                                           $352,107            336,792
                                                                    ========           ========

                LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Deposit accounts                                                   259,247            248,370
  Advances from Federal Home Loan Bank                                20,000             20,000
  Advance payments by borrowers for property taxes and insurance         655                 82
  Dividend payable                                                       263                263
  Other liabilities                                                    5,278              4,433
                                                                    --------           --------
          Total liabilities                                          285,443            273,148
                                                                    --------           --------

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                                         35,610             35,588
   Unallocated ESOP shares                                            (3,895)            (4,373)
   Unearned compensation - management recognition plan                    --               (518)
   Deferred compensation                                               4,471              4,173
   Treasury stock for deferred compensation                           (4,471)            (4,173)
   Retained income - substantially restricted                         34,438             32,404
   Accumulated other comprehensive income - net unrealized
        gain on investment securities available for sale                 478                510
                                                                    --------           --------

        Total stockholders' equity                                    66,664             63,644
                                                                    --------           --------
        Total liabilities and stockholders' equity                  $352,107            336,792
                                                                    ========           ========
</TABLE>

See accompanying notes to the consolidated financial statements.

                                      (3)
<PAGE>

                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME

                FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001

                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                         FOR THE THREE MONTHS ENDED
                                                                                 JUNE 30,
                                                                       -----------------------------
                                                                           2002              2001
                                                                       -----------        ----------
<S>                                                                    <C>                    <C>
Interest income:
   Interest and fees on loans                                          $     3,492            4,625
   Interest and dividends on investments                                     1,413            1,182
   Overnight deposits                                                           50              230
                                                                       -----------        ---------
         Total interest income                                               4,955            6,037
                                                                       -----------        ---------

Interest expense:
    Deposit accounts                                                         1,475            2,725
    Borrowings                                                                 281              273
                                                                       -----------        ---------
         Total interest expense                                              1,756            2,998
                                                                       -----------        ---------

         Net interest income                                                 3,199            3,039

Provision for loan losses                                                       60               60
                                                                       -----------        ---------
         Net interest income after provision for loan losses                 3,139            2,979
                                                                       -----------        ---------

Other income:
   Service fees on loans sold                                                   26               21
   Customer service fees                                                       209              204
   Commissions from sales of annuities and mutual funds                        131              240
   Mortgage banking income, net                                                155              338
   Other                                                                        47               57
                                                                       -----------        ---------
Total other income                                                             568              860
                                                                       -----------        ---------

Operating expenses:
   Compensation and related benefits                                         1,512            1,616
   Occupancy and equipment                                                     315              336
   Deposit insurance premiums                                                   11               12
   Real estate operations, net                                                 (24)              30
   Other expenses                                                              365              455
                                                                       -----------        ---------
         Total operating expenses                                            2,179            2,449
                                                                       -----------        ---------

         Income before income taxes                                          1,528            1,390

Income taxes                                                                   542              497
                                                                       -----------        ---------

         Net income                                                    $       986              893
                                                                       ===========        =========
         Earnings per share:

         Basic                                                         $      0.32        $    0.29
         Diluted                                                       $      0.31        $    0.28
</TABLE>

See accompanying notes to the consolidated financial statements.


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

                        CONSOLIDATED STATEMENTS OF INCOME

                FOR THE NINE MONTHS ENDED JUNE 30, 2002 AND 2001

                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                         FOR THE NINE MONTHS ENDED
                                                                                  JUNE 30,
                                                                       -------------------------------
                                                                           2002               2001
                                                                       -----------          ----------
<S>                                                                    <C>                     <C>
Interest income:
   Interest and fees on loans                                          $    10,891             14,642
   Interest and dividends on investments                                     3,993              3,517
   Overnight deposits                                                          191                629
                                                                       -----------        -----------
Total interest income                                                       15,075             18,788
                                                                       -----------        -----------
Interest expense:
    Deposit accounts                                                         5,248              8,715
    Borrowings                                                                 843                853
                                                                       -----------        -----------
         Total interest expense                                              6,091              9,568
                                                                       -----------        -----------
         Net interest income                                                 8,984              9,220

Provision for loan losses                                                      180                180
                                                                       -----------        -----------
         Net interest income after provision for loan losses                 8,804              9,040
                                                                       -----------        -----------
Other income:
   Service fees on loans sold                                                   72                 63
   Customer service fees                                                       675                522
   Commissions from sales of annuities and mutual funds                        351                459
    Mortgage banking income, net                                               921                658
    Securities gains, net                                                       47                 --
    Other                                                                      153                141
                                                                       -----------         ----------
         Total other income                                                  2,219              1,843
                                                                       -----------         ----------
Operating expenses:
   Compensation and related benefits                                         4,660              4,589
   Occupancy and equipment                                                     929                944
   Deposit insurance premiums                                                   34                 37
   Real estate operations, net                                                 (56)                36
   Other expenses                                                            1,119              1,292
                                                                       -----------        -----------
         Total operating expenses                                            6,686              6,898
                                                                       -----------        -----------

         Income before income taxes                                          4,337              3,985

Income taxes                                                                 1,582              1,416
                                                                       -----------        -----------
         Net income                                                    $     2,755              2,569
                                                                       ===========        ===========
         Earnings per share:

         Basic                                                         $      0.91        $     0.85
         Diluted                                                       $      0.87        $     0.81
</TABLE>

See accompanying notes to the consolidated financial statements

                                       5
<PAGE>
                             1ST STATE BANCORP, INC.
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
          FOR THE NINE MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                              ADDITIONAL    UNEARNED       UNEARNED
                                                   COMMON      PAID-IN        ESOP       COMPENSATION      DEFERRED
                                                   STOCK       CAPITAL       SHARES           MRP        COMPENSATION
                                                   -----       -------       ------           ---        ------------

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

Comprehensive income:
     Net income                                       --            --            --             --              --
     Other comprehensive income-unrealized
       gain on securities available-for-sale
       net of income taxes of $76                     --            --            --             --              --


     Total comprehensive income
Allocation of ESOP shares                             --            (6)          409             --              --
Deferred compensation                                 --            --            --             --           1,346
Treasury stock held for deferred
     Compensation                                     --            --            --             --              --
Vesting of MRP shares                                 --            --            --            583              --
Cash dividends declared                               --            --            --             --              --
Cash dividends on unallocated ESOP shares
     and unvested MRP shares                          --            --            --             --              --
                                                --------     ---------    ----------    -----------     -----------
Balance at June 30, 2001                        $     33        35,581        (4,541)          (713)          4,025
                                                ========     =========    ==========    ===========     ===========

Balance at September 30, 2001                   $     33        35,588        (4,373)          (518)          4,173

Comprehensive income:
     Net income                                       --            --            --             --              --
     Other comprehensive loss-unrealized
       loss on securities available-for-sale
       net of income taxes of $22                     --            --            --             --              --
     Total comprehensive income
Allocation of ESOP shares                             --            22           478             --              --
Deferred compensation                                 --            --            --             --             298
Treasury stock held for deferred
     Compensation                                     --            --            --             --              --
Vesting of MRP shares                                 --            --            --            518              --
Cash dividends declared                               --            --            --             --              --
Cash dividends on unallocated ESOP shares
     and unvested MRP shares                          --            --            --             --              --
                                                --------     ---------    ----------    -----------     -----------
Balance at June 30, 2002                        $     33        35,610        (3,895)            --           4,471
                                                ========     =========    ==========    ===========     ===========

<CAPTION>

                                                     TREASURY
                                                     STOCK FOR                           OTHER           TOTAL
                                                      DEFERRED        RETAINED       COMPREHENSIVE   STOCKHOLDERS'
                                                    COMPENSATION       INCOME        INCOME (LOSS)      EQUITY
                                                    ------------       ------        -------------      ------
<S>                                                   <C>              <C>                <C>           <C>
Balance at September 30, 2000                           (2,679)          29,999             (164)         59,209

Comprehensive income:
     Net income                                             --            2,569               --           2,569
     Other comprehensive income-unrealized
       gain on securities available-for-sale
       net of income taxes of $76                           --               --              122             122
                                                                                                      ----------
     Total comprehensive income                                                                            2,691
Allocation of ESOP shares                                   --               --               --             403
Deferred compensation                                       --               --               --           1,346
Treasury stock held for deferred
     Compensation                                       (1,346)              --               --          (1,346)
Vesting of MRP shares                                       --               --               --             583
Cash dividends declared                                     --             (789)              --            (789)
Cash dividends on unallocated ESOP shares
     and unvested MRP shares                                --               64               --              64
                                                   -----------    -------------     ------------      ----------
Balance at June 30, 2001                                (4,025)          31,843              (42)         62,161
                                                   ===========    =============     ============      ==========

Balance at September 30, 2001                           (4,173)          32,404              510          63,644

Comprehensive income:
     Net income                                             --            2,755               --           2,755
     Other comprehensive loss-unrealized
       loss on securities available-for-sale
       net of income taxes of $22                           --               --              (32)            (32)
                                                                                                      ----------

     Total comprehensive income                                                                            2,723
Allocation of ESOP shares                                   --               --               --             500
Deferred compensation                                       --               --               --             298
Treasury stock held for deferred
     Compensation                                         (298)              --               --            (298)
Vesting of MRP shares                                       --               --               --             518
Cash dividends declared                                     --             (790)              --            (790)
Cash dividends on unallocated ESOP shares
     and unvested MRP shares                                --               69               --              69
                                                   -----------    -------------     ------------      ----------
Balance at June 30, 2002                                (4,471)          34,438              478          66,664
                                                   ===========    =============     ============      ==========

</TABLE>

See accompanying notes to the consolidated financial statements.


                                       6
<PAGE>

                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                FOR THE NINE MONTHS ENDED JUNE 30, 2002 AND 2001

                                   (UNAUDITED)

                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                              FOR THE NINE MONTHS ENDED
                                                                                      JUNE 30,
                                                                            -----------------------------
                                                                               2002                2001
                                                                            ----------           --------
<S>                                                                        <C>                      <C>
Cash flows from operating activities:
   Net income                                                               $    2,755              2,569
   Adjustment to reconcile net income to net cash provided by
       operating activities:
           Provision for loan losses                                               180                180
           Depreciation                                                            474                469
           Deferred tax expense (benefit)                                          495               (101)
           Amortization of premiums and discounts, net                             (23)               (18)
           Deferred compensation                                                   236                203
           Release of ESOP shares                                                  500                403
           Vesting of MRP shares and dividends on unvested MRP shares              712                787
           Loan origination fees and unearned discounts
               deferred, net of current amortization                               (63)                 6
           Gain on sale of other real estate                                        (4)                --
           Securities gains, net                                                   (47)                --
           Net loss on sale of loans                                               227                205
           Proceeds from loans held for sale                                    49,134             37,260
           Originations of loans held for sale                                 (47,264)           (35,183)
           Decrease (increase) in other assets                                     (41)               356
           Decrease in accrued interest receivable                                 371                422
           Increase (decrease) in other liabilities                                117             (1,456)
                                                                            ----------         ----------
           Net cash provided by operating activities                             7,759              6,102
                                                                            ----------         ----------

Cash flows used in investing activities:
           Purchase of FHLB stock                                                 (100)                --
           Purchase of investment securities held to maturity                   (3,958)              (661)
           Purchase of investment securities available for sale                (78,127)           (50,528)
           Proceeds from sales of investment securities available for sale       1,811                 --
           Proceeds from maturities of investment securities available
             for sale                                                           42,923              6,148
           Proceeds from maturities of investment securities
               held to maturity                                                  6,004             42,251
           Net decrease (increase) in loans receivable                           6,646             (1,065)
           Proceeds from disposal of real estate acquired in
               settlement of loans                                                 107                 --
           Purchases of premises and equipment                                    (134)              (568)
                                                                            ----------         ----------

                   Net cash used in investing activities                       (24,828)            (4,423)
                                                                            ----------         ----------

                                                                                                (Continued)
</TABLE>


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

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                FOR THE NINE MONTHS ENDED JUNE 30, 2002 AND 2001

                                   (UNAUDITED)

                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                           FOR THE NINE MONTHS ENDED
                                                                                     JUNE 30,
                                                                           --------------------------
                                                                              2002            2001
                                                                           ----------       --------
<S>                                                                        <C>              <C>
Cash flows from financing activities:
   Net increase in deposits                                                $  10,877       $  4,438
   Advances from the Federal Home Loan Bank                                   29,000          5,000
   Repayments of advances from Federal Home Loan Bank                        (29,000)        (5,000)
   Return of capital dividend payment                                             --        (17,007)
   Purchase of treasury stock for deferred compensation                          298          1,346
   Dividends paid on common stock                                               (721)          (725)
   Increase in advance payments by borrowers for
     property taxes and insurance                                                573            533
                                                                           ---------       --------

   Net cash provided by (used in) financing activities                        11,027        (11,415)
                                                                           ---------       ---------

        Net decrease in cash and cash equivalents                             (6,042)        (9,736)

Cash and cash equivalents at beginning of period                              25,981         33,107
                                                                           ---------       --------

Cash and cash equivalents at end of period                                 $  19,939       $ 23,371
                                                                           =========       ========

Payments are shown below for the following:
       Interest                                                            $   6,085       $  9,446
                                                                           =========       ========

       Income taxes                                                        $   1,534       $  1,100
                                                                           =========       ========

Noncash investing and financing activities:
     Deferred compensation to be settled in Company's stock                $     298       $  1,346
                                                                           =========       ========

     Unrealized gains (losses) on investment securities
          available for sale                                               $     (54)      $    198
                                                                           =========       ========

     Cash dividends declared but not paid                                  $     244       $    244
                                                                           =========       ========

     Cash dividends on unallocated ESOP shares                             $      69       $     64
                                                                           =========       ========

     Transfer from loans held for sale to loans receivable                 $      --       $    686
                                                                           =========       ========

     Transfer from loans to real estate acquired in settlement of loans    $     347       $  1,981
                                                                           =========       ========
</TABLE>

See accompanying notes to consolidated financial statements.


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                JUNE 30, 2002 (UNAUDITED) AND SEPTEMBER 30, 2001

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,  2001,  which is
derived from the September 30, 2001 audited consolidated  financial  statements)
have been prepared in accordance with accounting  principles  generally accepted
in the United States of America for interim  financial  information and with the
rules and  regulations of the Securities and Exchange  Commission.  Accordingly,
they do not include all of the information and footnotes  required by accounting
principles  generally  accepted  in the United  States of America  for  complete
financial  statements.  In the opinion of management,  all adjustments  (none of
which  were  other  than  normal  recurring   accruals)  necessary  for  a  fair
presentation of the financial position and results of operations for the periods
presented have been included.

     The results of  operations  for the three and nine month periods ended June
30, 2002 are not necessarily indicative of the results of operations that may be
expected for the year ended  September 30, 2002. The preparation of consolidated
financial statements in accordance with accounting principles generally accepted
in the United States of America requires  management to make certain  estimates.
These amounts may be revised in future  periods  because of changes in the facts
and circumstances underlying their estimation.

     Certain amounts in the June 30, 2001 consolidated financial statements have
been  reclassified  to  conform  with the  presentation  adopted  in 2002.  Such
reclassifications   did  not  change  net  income  or  stockholders'  equity  as
previously reported.

NOTE 3.  EARNINGS PER SHARE

     For purposes of computing  basic and diluted  earnings per share,  weighted
average shares outstanding  excludes  unallocated ESOP shares that have not been
committed to be released. The deferred compensation obligation discussed in note
5 that is fully  funded with  shares of the  Company's  common  stock has no net
impact on the  denominators  of the Company's  earnings per share  computations.
Diluted  earnings per share  includes the  potentially  dilutive  effects of the
Company's  stock-based  benefit plans.  There were no antidilutive stock options
for the three and nine months ended June 30, 2002 and 2001. A reconciliation  of
the denominators of the basic and diluted earnings per share  computations is as
follows:
<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED
                                                                  JUNE 30,
                                                             2002          2001
                                                          ----------    ----------
         <S>                                              <C>           <C>
         Average shares issued and outstanding             3,289,607     3,289,607
         Less: Unvested MRP shares                           (31,038)      (72,862)
         Less: Unallocated ESOP shares                      (216,108)     (184,207)
                                                          ----------    ----------
         Average basic shares for earnings per share       3,042,461     3,032,538
         Add: Unvested MRP shares                             31,038        72,862
         Add: Potential common stock pursuant to stock
               option plan                                    90,660        86,684
                                                          ----------    ----------
         Average dilutive shares for earnings per share    3,164,159     3,192,084
                                                          ==========    ==========
</TABLE>

                                       9
<PAGE>
<TABLE>
<CAPTION>
                                                             NINE MONTHS ENDED
                                                                  JUNE 30,
                                                             2002          2001
                                                          ----------    ----------
<S>                                                       <C>           <C>
Average shares issued and outstanding                     3,289,607     3,289,607
Less: Unvested MRP shares                                   (38,464)      (80,472)
Less: Unallocated ESOP shares                              (224,280)     (191,252)
                                                         ----------    ----------
Average basic shares for earnings per share               3,026,863     3,017,883

Add: Unvested MRP shares                                     38,464        80,472
Add: Potential common stock pursuant to stock
      option plan                                            88,561        72,147
                                                         ----------    ----------
Average dilutive shares for earnings per share            3,153,888     3,170,502
                                                         ==========    ==========
</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. In connection with
the special cash  dividend,  the ESOP  received  $1,043,000  on its  unallocated
shares of the Company's  stock.  The ESOP purchased an additional  51,374 shares
with this  dividend.  During the three and nine  months  ended June 30, 2002 and
2001, 7,179 and 7,045 and 24,382 and 21,134 shares of stock were committed to be
released  and  approximately  $172,000 and $135,000 and $500,000 and $403,000 of
compensation expense was recognized, respectively.

NOTE 5.  DEFERRED COMPENSATION

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

     Prior to the Conversion,  amounts deferred by each participant  accumulated
interest  at a rate equal to the  highest  rate of  interest  paid on the Bank's
one-year   certificates   of  deposit.   In  connection   with  the  Conversion,
participants  in the plan were given the opportunity to  prospectively  elect to
have their  deferred  compensation  balance  earn a rate of return  equal to the
total  return of the  Company's  stock.  All  participants  elected  this option
concurrent  with the  Conversion,  so the Company  purchases its common stock to
fund this  obligation.  Refer to the Company's notes to  consolidated  financial
statements,  incorporated  by reference in the  Company's  2001 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,  2002  and  2001  was  $72,000  and  $68,000  and  $236,000  and   $203,000,
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 $192,000  and $260,000 and $712,000
and  $787,000  associated  with the MRP was  recorded  during the three and nine
months ended June 30, 2002 and 2001, respectively.

                                       10
<PAGE>

NOTE 7.  STOCK OPTION AND INCENTIVE PLAN

     On June 6, 2000 the Company's  stockholders approved the 1st State Bancorp,
Inc. 2000 Stock Option and Incentive Plan (the "Plan"). The purpose of this plan
is to  advance  the  interests  of the  Company  through  providing  select  key
employees and directors of the Bank with the opportunity to acquire  shares.  By
encouraging  such stock  ownership,  the Company  seeks to  attract,  retain and
motivate  the  best   available   personnel   for   positions   of   substantial
responsibility  and to provide  incentives to the key  employees and  directors.
Under the Plan, the Company  granted  316,312  options to purchase its $0.01 par
value common stock in fiscal year 2000. The exercise price per share is equal to
the fair market  value per share on the date of the grant of the stock.  Options
granted  under the Stock  Option  Plan are 100% vested on the date of the grant,
and all options  expire 10 years from the date of the grant.  As a result of the
one-time cash dividend of $5.17 paid on October 2, 2000,  the exercise price for
the options repriced from $18.44 to $14.71.

NOTE 8. NEW ACCOUNTING PRONOUNCEMENT

     In July 2001, the FASB issued Statement of Financial  Accounting  Standards
No. 141 (Statement  141),  "Business  Combinations",  and Statement of Financial
Accounting  Standards No. 142 (Statement  142),  "Goodwill and Other  Intangible
Assets".  Statement 141 requires that the purchase  method of accounting be used
for all business combinations  initiated after June 30, 2001. Statement 141 also
specifies  criteria  which  must  be met for  intangible  assets  acquired  in a
purchase  method  business  combination to be recognized and reported apart from
goodwill.  Statement  142  requires  that  goodwill and  intangible  assets with
indefinite  useful  lives  no  longer  be  amortized,  but  instead  tested  for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 also requires that  identifiable  intangible  assets with definite
useful lives be amortized over their respective  estimated useful lives to their
estimated  residual  values,  and reviewed for  impairment  in  accordance  with
Statement  121,  "Accounting  for the  Impairment of  Long-Lived  Assets and for
Long-Lived  Assets to Be Disposed Of". The adoption of SFAS No. 141 and SFAS No.
142 did not have a  material  effect  on the  Company's  consolidated  financial
statements  other than providing  enhanced  disclosures  for mortgage  servicing
rights. As of January 1, 2002, the Company had no goodwill and had no intangible
assets related to deposit and branch purchase acquisitions.

The rights to service  mortgage loans for others are included in other assets on
the  consolidated   balance  sheet.   Mortgage  servicing  rights  ("MSRs")  are
capitalized  based on the allocated cost which is determined when the underlying
loans are sold. MSRs are amortized over a period which  approximates the life of
the underlying loans as an adjustment of income.  Impairment reviews of MSRs are
performed on a quarterly basis. As of June 30, 2002 and September 30, 2001, MSRs
totaled  $352,000 and  $209,000,  respectively,  and no valuation  allowance was
required.

Amortization  expense totaled $43,000 and $56,000 for the nine months ended June
30, 2002 and 2001, respectively.

The estimated  amortization  expense for the mortgage  servicing  rights for the
years ended September 30, 2002,  2003,  2004, 2005 and 2006 and thereafter is as
follows:

                                        Estimated Amortization Expense

             2002                                $ 43,000
             2003                                  38,000
             2004                                  38,000
             2005                                  38,000
             2006                                  38,000
             2007 and thereafter                   14,000
                                                 --------
                                                 $209,000
                                                 ========

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


                                       11
<PAGE>

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

FORWARD-LOOKING STATEMENTS

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

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

GENERAL

     1st State Bancorp,  Inc. was formed in November 1998 and became the holding
company  for 1st State Bank on April 23,  1999.  As a result,  portions  of this
discussion  (as of dates and for periods  prior to April 23, 1999) relate to the
financial condition and results of operations of 1st State Bank.

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

     Our operations are influenced  significantly  by local economic  conditions
and by policies of financial  institution  regulatory  authorities.  Our cost of
funds is  influenced  by interest  rates on competing  investments  and by rates
offered on similar investments by competing financial institutions in our market
area, as well as general market interest rates.  Lending activities are affected
by the demand for  financing  of real estate and other types of loans,  which in
turn is affected by the interest  rates at which such  financing may be offered.
The primary manner in which the economy impacts our business is our credit risk.
Most of our customers are small businesses in our immediate market area that are
more  vulnerable  to recent  declines in the local  economy  than  larger,  more
diversified  companies whose revenues are supported by customers in a variety of
locations.  Our customer base includes textile  companies that are continuing to
feel the negative impact of the NAFTA  legislation and the downturn in our local
and regional economy. Such changes may impact future operations and earnings.

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

                                       12
<PAGE>

     Beginning  in the late  1980's,  we have sought to  gradually  increase the
percentage of our assets  invested in commercial  real estate loans,  commercial
loans and consumer loans, which have shorter terms and adjust more frequently to
changes in interest rates than single-family residential mortgage loans.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2002 AND SEPTEMBER 30, 2001

     Total  assets  increased  by $15.3  million or 4.5% from $336.8  million at
September 30, 2001 to $352.1  million at June 30, 2002.  Increases in investment
securities were partially offset by decreases in cash and loans receivable, net.
Asset growth was primarily funded by increases in deposits.

     Cash and cash  equivalents  decreased  $6.1  million,  or 23.5%  from $26.0
million at September 30, 2001 to $19.9 million at June 30, 2002.  Because of the
relatively low interest  rates on overnight  funds,  we invested  excess cash in
short term government agency securities to increase our yield on these funds.

     Investment securities available for sale increased $33.4 million from $55.5
million at  September  30,  2001 to $88.9  million at June 30,  2002.  As market
interest  rates fell during the nine  months  ended June 30,  2002,  many of the
Company's callable investment securities were called by the issuers.  During the
nine months  ended June 30, 2002,  we received  $44.7  million in proceeds  from
sales,  maturities and issuer calls of investment securities available for sale.
We reinvested $78.1 in investment securities available for sale during this time
period.

     Loans  receivable,  net  decreased by $7.1  million,  or 3.2%,  from $222.3
million at September 30, 2001 to $215.2 million at June 30, 2002, and loans held
for sale  decreased $2.1 million from $3.3 million at September 30, 2001 to $1.2
million at June 30,  2002.  During the nine  months  ended  June 30,  2002,  our
mortgage  originations,  sales  and  prepayments  were  at  record  levels.  The
attractive mortgage rate environment encouraged many borrowers to take advantage
of this opportunity to refinance their existing mortgage loans at lower interest
rates.  We sold  these  longer  term,  lower  rate  mortgage  loans to limit our
interest rate risk. The decrease in the loans held for sale resulted from timing
differences  in the funding of loan sales.  We sold $49.3  million in fixed rate
mortgage  loans  during the nine months  ended June 30,  2002  compared to $37.5
million  for the nine months  ended June 30,  2001.  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 June 30,  2002,
commercial, construction and commercial real estate loans totaled $118.2 million
and  account for 53.9% of gross  loans  compared to $110.6  million and 48.9% at
September  30,  2001.  One to four  family  residential  loans at June 30,  2002
totaled $72.6 million or 33.2% of gross loans compared to $86.9 million or 38.5%
at September 30, 2001.

     Deposits  increased $10.8 million from $248.4 million at September 30, 2001
to $259.2  million at June 30,  2002.  Certificates  of deposit at June 30, 2002
totaled  $160.8  million or 62.0% of total  deposits.  At  September  30,  2001,
certificates of deposit  totaled $159.7 million or 64.3% of total  deposits.  We
continue to emphasize transaction accounts, which generally carry lower interest
rates than certificates of deposit.  Transaction accounts increased $7.2 million
or 11.5% from $62.6  million at September  30, 2001 to $69.8 million at June 30,
2002.

     Stockholders'  equity  increased  by $3.1  million  from  $63.6  million at
September  30, 2001 to $66.7  million at June 30, 2002 as a result of net income
of $2.8 million,  release of ESOP shares of $500,000,  and vesting of MRP shares
of $518,000.  These increases were offset by cash dividends declared of $721,000
and a decrease in unrealized losses on available for sale securities of $32,000.

COMPARISON  OF  OPERATING  RESULTS FOR THE THREE  MONTHS ENDED JUNE 30, 2002 AND
2001

     Net Income.  We recorded net income of $986,000 for the quarter  ended June
30,  2002,  as  compared  to  $893,000  for the  quarter  ended  June 30,  2001,
representing an increase of $93,000,  or 10.4%.  For the three months ended June
30,  2002  basic  and  diluted   earnings   per  share  were  $0.32  and  $0.31,
respectively.  The Company reported basic and diluted earnings per share for the
quarter  ended  June 30,  2001 of $0.29 and $0.28 per share,  respectively.  The
increase in net income resulted primarily from increased net interest income and
decreased  operating  expenses  which were offset  partially by decreased  other
income and increased income taxes.

     Net Interest Income.  Net interest income,  the difference between interest
earned  on  loans  and  investments   and  interest  paid  on   interest-bearing
liabilities,  for the three  months  ended June 30,  2002 was $3.2  million,  an
increase  of  $160,000  compared  to the same  quarter in the prior  year.  This
increase  reflects a $1.1 million decrease in interest income that was more than
offset by the $1.2 million decrease in total interest  expense.  The average net
interest margin  decreased 13 basis points from 3.76% for the three months ended
June 30, 2001 to 3.89% for the quarter ended June 30, 2002.

                                       13
<PAGE>

     Interest Income. The decrease in interest income for the three months ended
June  30,  2002   resulted   from  an  increase  of  $6.4   million  in  average
interest-earning assets compared to the same quarter in the prior year which was
more than offset by a decrease in yield on interest-earning assets of 1.46% from
7.48% for the three  months  ended June 30,  2001 to 6.02% for the three  months
ended June 30, 2002.  The increased  volume of average  interest-earning  assets
increased  interest  income by  approximately  $120,000 and the decreased  yield
decreased  interest  income  by  approximately   $1.2  million.   Average  loans
outstanding   decreased  $13.9  million  coupled  with  a  decrease  in  average
interest-bearing  overnight  funds of $7.5 million were offset by an increase in
average investment  securities of $27.9 million. We experienced  unusually heavy
mortgage  loan  prepayments  during  the nine  months  ended  June  30,  2002 as
borrowers took advantage of the attractive  mortgage rates and refinanced  their
existing  mortgage loans.  During this time we invested the loan prepayments and
excess overnight funds into investment securities.

     Interest Expense. Interest expense decreased in the three months ended June
30, 2002 which resulted from an increase in average interest-bearing liabilities
of $2.4 million and a decrease in the cost of  interest-bearing  liabilities  of
1.89% from 4.50% for the three months ended June 30, 2001 to 2.61% for the three
months ended June 30, 2002. Average deposits increased by $805,000 while average
FHLB  advances  increased  $1.6 million for the three months ended June 30, 2002
compared  to the same  quarter  in the  prior  year.  The  increase  in  average
interest-bearing liabilities increased interest expense by approximately $27,000
while the decrease in the average cost of interest-bearing liabilities decreased
interest expense by approximately $1.3 million.

                                       14
<PAGE>

     The following table presents average balances and average rates earned/paid
by the Company for the quarter ended June 30, 2002 compared to the quarter ended
June 30, 2001.
<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED                        THREE MONTHS ENDED
                                                           JUNE 30, 2002                             JUNE 30, 2001
                                                                           DOLLARS IN THOUSANDS

                                                 AVERAGE                     YIELD/      AVERAGE                    YIELD/
                                                 BALANCE        INTEREST     COST        BALANCE      INTEREST      COST
<S>                                                <C>         <C>           <C>         <C>         <C>           <C>
Assets:
Loans receivable (1)                               $214,339    $3,492        6.52%       $228,239    $4,625        8.11%
Investment securities (2)                           101,822     1,413        5.55          73,962     1,182        6.39
Interest-bearing overnight deposits                  13,174        50        1.51          20,710       230        4.45
                                                   --------    ------       -----        --------    ------       -----
  Total interest-earning assets (4)                 329,335     4,955        6.02         322,911     6,037        7.48
Non interest-earning assets                          22,601                                23,327
                                                   --------                              --------
  Total assets                                     $351,936                              $346,238
                                                   ========                              ========

Liabilities and stockholders' equity:
Interest bearing checking                            32,836        38        0.47          30,265        84        1.11
Money market investment accounts                     26,232        83        1.26          21,186       179        3.38
Passbook and statement savings                       28,457       102        1.44          26,486       143        2.16
Certificates of deposit                             159,727     1,252        3.14         168,510     2,319        5.50
FHLB advances                                        21,593       281        5.20          20,000       273        5.45
                                                   --------    ------       -----        --------    ------       -----
  Total interest-bearing liabilities                268,845     1,756        2.61         266,447     2,998        4.50
Non interest-bearing liabilities                     17,450                                18,040
                                                   --------                              --------
  Total liabilities                                 286,295                               284,487
Stockholders' equity                                 65,641                                61,751
                                                   --------                              --------
  Total liabilities and stockholders' equity       $351,936                              $346,238
                                                   ========                              ========

Net interest income                                            $3,199                                $3,039
                                                               ======                                ======
Interest rate spread                                                        3.41%                                 2.98%
Net interest margin (3)                                                     3.89%                                 3.76%
Ratio of average interest-earning assets                                  122.50%                               121.19%
<FN>
(1)  Includes  nonaccrual  loans and loans held for sale,  net of discounts  and
     allowance for loan losses.
(2)  Includes FHLB of Atlanta stock.
(3)  Represents  net  interest   income  divided  by  the  average   balance  of
     interest-earning assets.
(4)  Due to immateriality, the interest income and yields related to certain tax
     exempt assets have not been adjusted to reflect a fully taxable  equivalent
     yield.
</FN>
</TABLE>

     Provision  for Loan  Losses.  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, 2002 and 2001.  The provision for loan losses was impacted by the
continued  shift in the  portfolio to  commercial  loans which  require a larger
allocation of allowance for loan losses.  The effects of this continued shift in
the  portfolio  were  offset to a certain  degree in 2002 by a decrease in total
loans. See also "Asset Quality."

     Other Income. Other income decreased $292,000,  or 34.0%, from $860,000 for
the quarter ended June 30, 2001 to $568,000 for the quarter ended June 30, 2002.
Mortgage  banking income,  net decreased  $183,000 from $338,000 for the quarter
ended  June 30,  2001 to  $155,000  for the  quarter  ended June 30,  2002.  The
decrease in mortgage  banking  income  resulted from a decreased  volume of loan
originations  and  sales.  During  the  quarter  ended  June 30,  2002,  we sold
fixed-rate  mortgage loans held for sale of $7.2 million  compared with sales of
$19.8 million in the prior year.  Commissions from sales of annuities and mutual
funds  decreased  $109,000  from $240,000 for the quarter ended June 30, 2001 to
$131,000  for the quarter  ended June 30,  2002.  The  decrease is the result of
decreased  sales of

                                       15
<PAGE>

annuity and mutual funds. Sales of annuity and mutual funds totaled $3.0 million
for the quarter  ended June 30, 2002 compared with sales of $4.9 million for the
quarter ended June 30, 2001.

     Operating  Expenses.  Total  operating  expenses  were $2.2 million for the
quarters  ended June 30, 2002, a decrease of $270,000  from the $2.4 million for
the quarter  ended June 30,  2001.  Compensation  and related  benefits  expense
decreased  $104,000,  or 6.4% from $1.6  million for the quarter  ended June 30,
2001 to $1.5  million  for the quarter  ended June 30,  2002.  Of this  decrease
$68,000 was  related to lower MRP expense in the quarter  ended June 30, 2002 as
the final vesting date for the MRPs was June 6, 2002. Also contributing to lower
compensation  expense was a decrease  in  incentives  paid  related to the lower
volume of  mortgage  originations  and  decreased  annuity and mutual fund sales
during the quarter  ended June 30, 2002 as compared  with the quarter ended June
30, 2001.  During the quarter ended June 30, 2002,  the Company  recognized  net
income from real estate  operations  of $24,000  compared to the net losses from
real estate  operations of $30,000 that were  expensed  during the quarter ended
June 30, 2001. Other operating expenses were $365,000 for the quarter ended June
30, 2002, a decrease of $90,000 from the $455,000 for the quarter ended June 30,
2001.  Expenses for the quarter ended June 30, 2001 included expenses  necessary
for the installation of the Bank's check imaging system.

     Income Tax Expense.  Income tax expense  increased $45,000 from tax expense
of  $497,000  for the quarter  ended June 30,  2001 to $542,000  for the quarter
ended June 30, 2002.  The increase  resulted from a $138,000  increase in income
before  income  taxes.  The  effective  tax rates  were  35.5% and 35.8% for the
quarters ended June 30, 2002 and 2001, respectively.

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 2002 AND 2001

     Net  Income.  We  recorded  net income of $2.8  million for the nine months
ended June 30, 2002, an increase of $186,000  over the $2.6 million  reported in
the nine months  ended June 30,  2001.  For the nine months ended June 30, 2002,
basic and diluted  earnings  per share were $0.91 and $0.87,  respectively.  The
Company  reported basic and diluted earnings per share for the nine months ended
June 30,  2001 of $0.85 and  $0.81,  respectively.  The  increase  in net income
resulted primarily from increased other income and decreased  operating expenses
which was partially offset by decreased net interest income and increased income
taxes.  The  decline in the net  interest  income  resulted  primarily  from the
interest rate cuts by the Federal  Reserve  during  calendar 2001. The rate cuts
caused a greater  reduction in the interest income than in interest  expense for
the nine months ended June 30, 2002.

     Net Interest Income.  Net interest income,  the difference between interest
earned  on  loans  and  investments   and  interest  paid  on   interest-bearing
liabilities,  decreased  by $236,000 or 2.6% for the nine months  ended June 30,
2002, compared to the same nine months in the prior year. This decrease reflects
a $3.7 million decrease in interest income that was partially offset by the $3.5
million  decrease in total  interest  expense.  The average net interest  margin
decreased  14 basis points from 3.81% for the nine months ended June 30, 2001 to
3.67% for the nine months ended June 30, 2002.

     Interest Income.  The decrease in interest income for the nine months ended
June 30, 2002 was due to a decrease in yield on interest-earning assets of 1.62%
from 7.77% for the nine months  ended June 30, 2001 to 6.15% for the nine months
ended June 30, 2002 that was partially  offset by an increase of $4.3 million in
average  interest-earning  assets compared to the same period in the prior year.
The  increased  volume of average  interest-earning  assets  increased  interest
income by  approximately  $250,000 and the decreased  yield  decreased  interest
income by approximately $4.0 million.  Average investment  securities  increased
interest-earning  assets by $18.6  million for the nine  months  compared to the
prior year.  These  increases were offset in part by a decrease in average loans
outstanding  of $12.7  million  and a  decrease  in  interest-bearing  overnight
deposits  of  $1.6  million.  We  experienced   unusually  heavy  mortgage  loan
prepayments  during  the nine  months  ended  June 30,  2002 as  borrowers  took
advantage  of the  attractive  mortgage  rates  and  refinanced  their  existing
mortgage  loans.  During  this  time  we  invested  the  loan  prepayments  into
investment securities.

     Interest Expense.  Interest expense decreased in the nine months ended June
30,  2002 due to a decrease  in  average  interest-bearing  liabilities  of $1.8
million and a decrease in the cost of interest-bearing liabilities of 1.71% from
4.76% for the nine months ended June 30, 2001 to 3.05% for the nine months ended
June 30, 2002.  Average  deposits  decreased by $2.8 million  while average FHLB
advances increased $1.0 million for the nine months ended June 30, 2002 compared
to  the  same  nine  months  in  the  prior  year.   The   decrease  in  average
interest-bearing liabilities decreased interest expense by approximately $64,000
and the decrease in the average cost of interest-bearing  liabilities  decreased


                                       16
<PAGE>

interest expense by approximately $3.4 million.

     The following table presents average balances and average rates earned/paid
by the  Company for the nine  months  ended June 30,  2002  compared to the nine
months ended June 30, 2001.
<TABLE>
<CAPTION>
                                                         NINE MONTHS ENDED                        NINE MONTHS ENDED
                                                           JUNE 30, 2002                             JUNE 30, 2001
                                                                           DOLLARS IN THOUSANDS

                                                   AVERAGE                   YIELD/      AVERAGE                    YIELD/
                                                   BALANCE      INTEREST     COST        BALANCE      INTEREST      COST
<S>                                                <C>         <C>           <C>         <C>         <C>           <C>
Assets:
Loans receivable (5)                               $217,934   $10,891       6.66%        $230,603   $14,642           8.47%
Investment securities (6)                            94,589     3,993        5.63          76,001     3,517           6.17
Interest-bearing overnight deposits                  14,097       191        1.81          15,722       629           5.33
                                                   --------   -------      ------        --------   -------         ------
  Total interest-earning assets (8)                 326,620    15,075        6.15         322,326    18,788           7.77
Non interest-earning assets                          22,270                                23,755
                                                   --------                              --------
  Total assets                                     $348,890                              $346,081
                                                   ========                              ========

Liabilities and stockholders' equity
Interest bearing checking                            31,658       115        0.48          30,172       338           1.49
Money market investment accounts                     27,504       288        1.39          20,507       630           4.10
Passbook and statement savings                       27,232       316        1.55          26,694       460           2.30
Certificates of deposit                             157,852     4,530        3.83         169,661     7,287           5.73
FHLB advances                                        21,697       842        5.18          20,699       853           5.49
                                                   --------    ------       -----        --------    ------         ------
  Total interest-earning liabilities                265,943     6,091        3.05         267,733     9,568           4.76
Non interest-earning liabilities                     18,176                                17,675
                                                     ------                                ------
  Total liabilities                                 284,120                               285,408
Stockholders' equity                                 64,771                                60,673
                                                   --------                              --------
  Total liabilities and stockholders' equity       $348,890                              $346,081
                                                   ========                              ========

Net interest income                                            $8,984                                $9,220
                                                               ======                                ======
Interest rate spread                                                        3.10%                                     3.01%
Net interest margin (7)                                                     3.67%                                     3.81%
Ratio of average interest-earning assets                                  122.82%                                   120.39%
<FN>
(5)  Includes  nonaccrual  loans and loans held for sale,  net of discounts  and
     allowance for loan losses.
(6)  Includes FHLB of Atlanta stock.
(7)  Represents  net  interest   income  divided  by  the  average   balance  of
     interest-earning assets.
(8)  Due to immateriality, the interest income and yields related to certain tax
     exempt assets have not been adjusted to reflect a fully taxable  equivalent
     yield.
</FN>
</TABLE>

     Provision  for Loan  Losses.  The  provision  for loan losses is charged to
earnings to maintain the total  allowance for loan losses at a level  considered
adequate to absorb  estimated  probable  losses  inherent in the loan  portfolio
based on  existing  loan  levels and types of loans  outstanding,  nonperforming
loans,  prior  loan  loss  experience,  general  economic  conditions  and other
factors.  Provisions for loan losses  totaled  $180,000 for both the nine months
ended June 30, 2002 and 2001.  The provision for loan losses was impacted by the
continued  shift in the  portfolio to  commercial  loans which  require a larger
allocation of allowance for loan losses.  The effects of this continued shift in
the  portfolio  were  offset to a certain  degree in 2002 by a decrease in total
loans. See also "Asset Quality."

     Other Income. Other income increased $376,000,  or 20.4%, from $1.8 million
for the nine  months  ended June 30,  2001 to $2.2  million  for the nine months
ended June 30, 2002.  Mortgage  banking  income,  net  increased  $263,000

                                       17
<PAGE>

from  $658,000  for the nine months ended June 30, 2001 to $921,000 for the nine
months ended June 30, 2002.  During the nine months ended June 30, 2002, we sold
fixed-rate  mortgage loans held for sale of $49.3 million compared with sales of
$37.5 million during the nine months ended June 30, 2001.  Customer service fees
increased  $153,000,  or 29.3% from  $522,000 for the nine months ended June 30,
2001 to $675,000 for the nine months ended June 30, 2002. This increase  results
primarily  from  growth in the  number of  transaction  accounts  and  increased
service  charges.  Gains on sales  of  investment  securities  of  $47,000  were
recognized  during the nine months  ended June 30, 2002 that were not present in
the  prior  year.  Commissions  from the sales of  annuities  and  mutual  funds
decreased  $108,000  from  $459,000  for the nine months  ended June 30, 2001 to
$351,000 for the nine months ended June 30, 2002.  This  decrease was the result
of diminished  sales of annuities and mutual funds.  Sales of these  non-insured
products  were $6.5  million for the nine months ended June 30, 2002, a decrease
of $1.5 million from the $8.0 million sold in the same period in the prior year.

     Operating Expenses. Total operating expenses were $6.7 million for the nine
months  ended June 30,  2002,  a  decrease  of  $212,000,  or 3.1% over the $6.9
million  recorded  for the nine months  ended June 30,  2001.  Compensation  and
related benefits expense increased $71,000 from $4.6 million for the nine months
ended June 30, 2001 to $4.7  million for the nine  months  ended June 30,  2002.
This  increase  resulted from  increased  salary and benefit costs as well as an
increase in number of employees.  The Company recognized income from real estate
operations  of $56,000  during the nine months  ended June 30, 2002  compared to
expenses  of  $36,000  in the same  period in the prior  year.  Other  operating
expenses decreased $173,000 from $1.3 million for the nine months ended June 30,
2001 to $1.1 million for the nine months ended June 30, 2002.

     Income Tax Expense.  Income tax expense increased $166,000 from tax expense
of $1.4  million for the nine months ended June 30, 2001 to $1.6 million for the
nine months ended June 30, 2002. The increase  resulted from a $352,000 increase
in income before income taxes.  The effective tax rates were 36.5% and 35.5% for
the nine months ended June 30, 2002 and 2001, respectively.  The increase in the
effective tax rate was primarily due to an increase in  non-deductible  expenses
over the prior period.

COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK

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

Off-balance sheet financial  instruments whose contract amounts represent credit
and interest rate risk are summarized as follows:
<TABLE>
<CAPTION>
                                                             June 30, 2002    September 30, 2001
                                                             -------------    ------------------
                                                                 (dollars in thousands)
<S>                                                             <C>                <C>
Commitments to originate new loans                              5,537              9,119
Commitments to originate new loans held for sale                 --                  241
Unfunded commitments to extend credit under existing
     equity line and commercial lines of credit                70,316             56,907
Commercial letters of credit                                      425                256
Commitments to sell loans held for sale                         1,143              2,157
</TABLE>

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

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

                                       18
<PAGE>

case basis.  The amounts of  collateral  obtained,  if deemed  necessary  by the
Company upon extension of credit, is based on management's  credit evaluation of
the borrower.

Commitments  to sell loans held for sale are agreements to sell loans to a third
party at an agreed upon price.  At June 30, 2002,  the  aggregate  fair value of
these commitments exceeded the book value of the loans to be sold.

CONTRACTUAL OBLIGATIONS
<TABLE>
<CAPTION>
As of June 30, 2002

                                                                   Payments due by period
                                                                   ----------------------
                                                                  (Dollars in thousands)
                                      Less than
                                       1 year           1-3 years         4-5 years        Over 5 years        Total
                                    ------------        ---------         ---------        ------------        -----
<S>                                  <C>                   <C>               <C>                              <C>
Deposits                             $  230,914            19,986            8,347                --          259,247
Long-term borrowings                         --                --               --            20,000           20,000
Lease obligations                            19                56               42                38              155
                                    -----------         ---------           ------           -------         --------
Total contractual cash
    obligations                     $   230,933            20,042            8,389            20,038          279,402
                                    ===========         =========           ======           =======         ========
</TABLE>

CRITICAL ACCOUNTING POLICIES

The  Company's  significant  accounting  policies are set forth in note 1 of the
consolidated  financial  statements  as of September 30, 2001 which was filed on
Form 10-K. Of these significant  accounting policies,  the Company considers its
policy  regarding  the  allowance  for  loan  losses  to be  its  most  critical
accounting policy,  because it requires management's most subjective and complex
judgments.  In addition,  changes in economic  conditions can have a significant
impact on the  allowance  for loan losses and  therefore  the provision for loan
losses and results of operations. The Company has developed appropriate policies
and  procedures  for  assessing  the adequacy of the  allowance for loan losses,
recognizing  that this process  requires a number of  assumptions  and estimates
with respect to its loan portfolio. The Company's assessments may be impacted in
future  periods by  changes in  economic  conditions,  the impact of  regulatory
examinations,  and the discovery of information  with respect to borrowers which
is not  known to  management  at the time of the  issuance  of the  consolidated
financial statements.

ASSET QUALITY

At June 30, 2002, the Company had  approximately  $6.0 million in non-performing
assets  (nonaccrual  loans and real estate owned) or 1.69% of total  assets.  At
September  30, 2001,  non-performing  assets were $2.9 million or 0.85% of total
assets.  At June 30, 2002 and  September 30, 2001,  impaired  loans totaled $3.7
million and $2.5  million,  respectively,  as defined by  Statement of Financial
Accounting  Standards  No. 114,  "Accounting  by Creditors  for  Impairment of a
Loan." The impaired loans at June 30, 2002 result from two unrelated  commercial
loan  customers,  both of which have loans secured by commercial real estate and
business  assets in Alamance  County.  At September 30, 2001, the impaired loans
resulted from real estate loans  secured by  commercial  real estate in Alamance
County owned by two unrelated commercial loan customers.  At June 30, 2002, $3.3
million of the  impaired  loans are on  non-accrual  status,  and their  related
reserve for loan losses  totaled  $160,000.  At September 30, 2001,  $433,000 of
impaired loans was on nonaccrual  status,  and their related  reserve for losses
totaled $45,000.  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 $3.7 million
and  $3.8  million  during  the  three  and nine  months  ended  June 30,  2002,
respectively.  Interest  income of $50,000  and  $146,000  has been  recorded on
impaired  loans in the three and nine months ended June 30, 2002,  respectively.
The Bank's net chargeoffs for the three and nine months ended June 30, 2002 were
$0 and  $91,000,  respectively.  The Bank's  allowance  for loan losses was $3.7
million at June 30, 2002 and $3.6 million at September  30, 2001. As a result of
our continued shift toward  commercial,  construction,  consumer and home equity
loans,  the recent  decrease in  residential  mortgage  loans,  the  increase in
non-performing  loans as a  percentage

                                       19
<PAGE>
of total  loans as well as the  continued  decline  in the  local  and  regional
economy, the ratio of the allowance for loan losses to total loans, net of loans
in process and deferred  loan fees  increased to 1.69% at June 30, 2002 compared
to 1.60% at September 30, 2001.

     The following table presents an analysis of our nonperforming assets:
<TABLE>
<CAPTION>
                                                           At                      At                      At
                                                        June 30,              September 30,             June 30,
                                                          2002                    2001                    2001
                                                          ----                    ----                    ----
<S>                                                     <C>                    <C>                     <C>
Nonperforming loans:
Nonaccrual loans                                        $3,728                 $     878               $   1,112
Loans 90 days past due and accruing                         --                        --                      --
Restructured loans                                          --                        --                      --
                                                        ------                 ---------               ---------
Total nonperforming loans                                3,728                       878                   1,112
Other real estate                                        2,226                     1,981                   1,981
                                                        ------                 ---------               ---------
Total nonperforming assets                              $5,954                 $   2,859               $   3,093
                                                        ======                 =========               =========
Nonperforming loans to loans receivable, net              1.73%                     0.39%                   0.50%
Nonperforming assets as a percentage
 of loans and other real estate owned                     2.74%                     1.27%                   1.38%
Nonperforming assets to total assets                      1.69%                     0.85%                   0.89%
</TABLE>

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 June 30, 2002, we had $5.6 million in
classified  assets  consisting of $3.4 million in substandard and loss loans and
$2.2 million in real estate owned. At September 30, 2001, we had $3.6 million in
substandard  assets consisting of $1.6 million in loans and $2.0 million in real
estate owned.

In addition to regulatory classifications, we also classify as "special mention"
and "watch"  assets  that are  currently  performing  in  accordance  with their
contractual  terms but may  become  classified  or  nonperforming  assets in the
future.  At June 30,  2002,  we have  identified  approximately  $2.3 million in
assets classified as special mention and $31.3 million as watch.

LIQUIDITY AND CAPITAL RESOURCES

     The Bank must meet certain liquidity requirements  established by the State
of North Carolina Office of the Commissioner of Banks (the  "Commissioner").  At
June 30, 2002, 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, 2002, cash and cash equivalents
totaled  $19.9  million.  We have  other  sources  of  liquidity  should we need
additional funds.  During the three and nine months ended June 30, 2002, we sold
loans totaling $7.2 million and $49.3 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
$90 million at June 30, 2002.
                                       20
<PAGE>

     We  anticipate  that we will have  sufficient  funds  available to meet our
current  commitments.  At June 30, 2002, we had $5.5 million in  commitments  to
originate  new loans,  $70.3  million in unfunded  commitments  to extend credit
under  existing  equity  lines and  commercial  lines of credit and  $425,000 in
standby letters of credit. At June 30, 2002,  certificates of deposit, which are
scheduled to mature within one year,  totaled $132.5 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, 2002 and is
deemed to be "well capitalized."

     The Federal Reserve also mandates capital  requirements on all bank holding
companies,  including 1st State  Bancorp,  Inc. These capital  requirements  are
similar to those imposed by the FDIC on the Bank. At June 30, 2002,  the Company
was in compliance with the capital requirements of the Federal Reserve.

     On October 2, 2000, the Company paid a one-time  special cash  distribution
of $5.17 to its stockholders.  The distribution was made to manage the Company's
capital and enhance  shareholder  value.  Returning  capital to the stockholders
reduced the Company's  equity to asset ratio from 21.2% to 17.2%.  The Company's
equity to asset ratio at June 30, 2002 was 18.9%. The Company's capital level is
sufficient to support future growth.

     The Company has declared cash  dividends per common share of $0.08 for each
of the quarters in fiscal 2002 and fiscal  2001.  The  Company's  ability to pay
dividends is dependent upon earnings.  The Company's  dividend  payout ratio for
the three months ended June 30, 2002,  September  30, 2001 and June 30, 2001 was
25.8%, 32.0% and 28.6%, respectively.

ACCOUNTING ISSUES

     In July 2001, the FASB issued Statement of Financial  Accounting  Standards
No. 141 (Statement  141),  "Business  Combinations",  and Statement of Financial
Accounting  Standards No. 142 (Statement  142),  "Goodwill and Other  Intangible
Assets".  Statement 141 requires that the purchase  method of accounting be used
for all business combinations  initiated after June 30, 2001. Statement 141 also
specifies  criteria  which  must  be met for  intangible  assets  acquired  in a
purchase  method  business  combination to be recognized and reported apart from
goodwill.  Statement  142  requires  that  goodwill and  intangible  assets with
indefinite  useful  lives  no  longer  be  amortized,  but  instead  tested  for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 also requires that  identifiable  intangible  assets with definite
useful lives be amortized over their respective  estimated useful lives to their
estimated  residual  values,  and reviewed for  impairment  in  accordance  with
Statement  121,  "Accounting  for the  Impairment of  Long-Lived  Assets and for
Long-Lived  Assets to Be Disposed Of". The adoption of SFAS No. 141 and SFAS No.
142 did not have a  material  effect  on the  Company's  consolidated  financial
statements  other than providing  enhanced  disclosures  for mortgage  servicing
rights. For the periods presented herein, the Company had no goodwill and had no
intangible assets related to deposit and branch purchase acquisitions.

     On October 3, 2001,  the FASB  issued  Statement  of  Financial  Accounting
Standards  No. 144.  Accounting  for the  Impairment  or Disposal of  Long-Lived
Assets (SFAS No. 144),  which addresses  financial  accounting and reporting for
the impairment or disposal of long-lived  assets.  While SFAS No. 144 supercedes
SFAS No.  121  (Accounting  for the  Impairment  of  Long-Lived  Assets  and for
Long-Lived  Assets  to Be  Disposed  Of),  it  retains  many of the  fundamental
provisions of SFAS No. 121.

     SFAS No. 144 also  supersedes the  accounting  and reporting  provisions of
FASB Opinion No. 30 (Reporting the Results of Operations - Reporting the Effects
of  Disposal  of a  Segment  of  a  Business,  and  Extraordinary,  Unusual  and
Infrequently Occurring Events and Transactions) for the disposal of a segment of
a  business.  However,  it retains the  requirement  in Opinion No. 30 to report
separately  discontinued  operations and extends the reporting to a component of
an entity  that  either  has been  disposed  of (by sale,  abandonment,  or in a
distribution  to owners) or is classified  as held for sale.  By broadening  the
presentation of discontinued  operations to include more disposal  transactions,
the FASB has enhanced  management's  ability to provide  information  that helps
financial statement users to assess the effects of disposal

                                       21
<PAGE>

transactions on the ongoing  operations of an entity. The provisions of SFAS No.
144 are  effective for financial  statements  issued for fiscal years  beginning
after December 15, 2001, and interim periods within those fiscal years. Adoption
of SFAS No.  144 is not  expected  to have a  material  impact on the  Company's
consolidated financial statements.

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

                                       22
<PAGE>

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, 2001. The Company does not believe that any material adverse
changes in market risk exposures occurred since September 30, 2001.

                                       23
<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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

     99   Certification

(b.) Reports on Form 8-K. During the quarter ended June 30, 2002, the registrant
     -------------------
     did not file any current reports on Form 8-K.


                                       24
<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 14, 2002              James C. McGill
                                    President and Chief Executive Officer
                                    (Principal Executive Officer)


                                    /s/ A. Christine Baker
                                    --------------------------------------------
Date:  August 14, 2002              A. Christine Baker
                                    Executive Vice President
                                    Treasurer and Secretary
                                    (Principal Financial and Accounting Officer)


                                       25