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 December 31, 2000

     OR

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

         For the transition period from ______ to ______

                         Commission file number: 0-25859

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


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

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


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

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

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

         As of February 2, 2000, the issuer had 3,289,607 shares of common stock
issued and outstanding.


<PAGE>



                                    CONTENTS

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

Item 1.  Financial Statements

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

         Consolidated Statements of Income for the Three Months Ended
           December 31, 2000 and 1999 (unaudited)............................2

         Consolidated Statements of Stockholders' Equity and Comprehensive
           Income for the Three Months Ended December 31, 2000 and
           1999 (unaudited)..................................................3

         Consolidated Statements of Cash Flows for the Three Months Ended
           December 31, 2000 and 1999 (unaudited)............................4

         Notes to Consolidated Financial Statements..........................6

Item 2.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations.........................................8

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.........11


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

Item 1.  Legal Proceedings..................................................12

Item 2.  Changes in Securities and Use of Proceeds..........................12

Item 3.  Defaults Upon Senior Securities....................................12

Item 4.  Submission of Matters to a Vote of Security Holders................12

Item 5.  Other Information..................................................12

Item 6.  Exhibits and Reports on Form 8-K...................................12


SIGNATURES..................................................................13


<PAGE>

                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

                    DECEMBER 31, 2000 AND SEPTEMBER 30, 2000

                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                             AT                 AT
                                                                         DECEMBER 31,        SEPTEMBER 30,
                                                                            2000                2000
                                                                         ------------        -------------
                                                                         (Unaudited)
                                      ASSETS

<S>                                                                         <C>                   <C>
Cash and cash equivalents                                                   $ 20,776              33,107
Investment securities:
     Held to maturity (fair value of $66,131 and $65,173
         at December 31, 2000 and September 30, 2000, respectively)           66,705              67,232
     Available for sale (cost of $9,961 and $10,019
         at December 31, 2000 and September 30, 2000, respectively)            9,864               9,752
Loans held for sale, at lower of cost or fair value                            3,753               5,533
Loans  receivable  (net of  allowance  for loan  losses of $3,564
    and $3,536 at December 31, 2000 and September 30, 2000, respectively)    229,785             223,595
Federal Home Loan Bank stock, at cost                                          1,650               1,650
Premises and equipment                                                         8,709               8,453
Accrued interest receivable                                                    2,563               2,653
Other assets                                                                   3,343               3,552
                                                                            --------            --------
          Total assets                                                      $347,148             355,527
                                                                            ========            ========
                LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Deposit accounts                                                          $258,070             254,405
  Advances from Federal Home Loan Bank                                        25,000              20,000
  Advance payments by borrowers for property taxes and insurance                 354                 151
  Dividend payable                                                               263              17,270
  Other liabilities                                                            3,166               4,492
                                                                            --------            --------
          Total liabilities                                                  286,853             296,318
                                                                            --------            --------

Stockholders' Equity:
   Preferred stock, $0.01 par value, 1,000,000 shares authorized;
         none issued                                                              --                  --
   Common stock, $0.01 par value, 7,000,000 shares authorized;
         3,289,607 shares issued and outstanding                                  33                  33
   Additional paid-in capital                                                 35,579              35,587
   Unearned ESOP shares                                                       (4,813)             (4,950)
   Unearned compensation - management recognition plan                        (1,101)             (1,296)
   Deferred compensation                                                       2,928               2,679
   Treasury stock for deferred compensation                                   (2,928)             (2,679)
   Retained income - substantially restricted                                 30,659              29,999
   Accumulated other comprehensive loss - net unrealized
        loss on investment securities available for sale                         (62)               (164)
                                                                            --------            --------
        Total stockholders' equity                                            60,295              59,209
                                                                            --------            --------
        Total liabilities and stockholders' equity                          $347,148             355,527
                                                                            ========            ========
</TABLE>

See accompanying notes to the consolidated financial statements.

                                       1
<PAGE>


                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME

              FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999

                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                          FOR THE THREE MONTHS ENDED
                                                                                  DECEMBER 31,
                                                                         ---------------------------
                                                                            2000               1999
                                                                         ---------          --------
<S>                                                                      <C>                  <C>
Interest income:
   Interest and fees on loans                                            $   5,090            4,392
   Interest and dividends on investments                                     1,217            1,472
   Overnight deposits                                                          203               92
                                                                         ---------          -------
         Total interest income                                               6,510            5,956
                                                                         ---------          -------

Interest expense:
    Deposit accounts                                                         2,977            2,334
    Borrowings                                                                 303              356
                                                                         ---------          -------
         Total interest expense                                              3,280            2,690
                                                                         ---------          -------

         Net interest income                                                 3,230            3,266

Provision for loan losses                                                       60               60
                                                                         ---------          -------
         Net interest income after provision for loan losses                 3,170            3,206
                                                                         ---------          -------

Other income:
   Service fees on loans sold                                                   20               23
   Customer service fees                                                       156              141
   Commissions from sales of annuities and mutual funds                        111               80
   Mortgage banking income (loss), net                                         128              (83)
   Other                                                                        42               46
                                                                         ---------          -------
         Total other income                                                    457              207
                                                                         ---------          -------
Operating expenses:
   Compensation and related benefits                                         1,543            1,176
   Occupancy and equipment                                                     277              245
   Deposit insurance premiums                                                   12               33
   Other expenses                                                              411              290
                                                                         ---------          -------
         Total operating expenses                                            2,243            1,744
                                                                         ---------          -------
         Income before income taxes                                          1,384            1,669

Income taxes                                                                   483              577
                                                                         ---------          -------

         Net income                                                      $     901            1,092
                                                                         =========          =======

         Earnings per share:

         Basic                                                           $    0.30          $  0.37
         Diluted                                                         $    0.29          $  0.37
</TABLE>

See accompanying notes to the consolidated financial statements.

                                       2

<PAGE>

                             1ST STATE BANCORP, INC.
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
              FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
                                   (UNAUDITED)
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

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


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

Comprehensive income:
     Net income                                                     --                --               --              --
     Other comprehensive income-unrealized
       loss on securities available-for-sale net
       of income taxes of $45                                       --                --               --              --

Total comprehensive income
Release of ESOP shares                                              --                 2              142              --
Deferred compensation                                               --                --               --              --
Treasury stock held for deferred compensation                       --                --               --              --
Cash dividend declared                                              --                --               --              --
Cash dividend on unallocated ESOP shares                            --                --               --              --
                                                                  ----            ------           ------          ------
Balance at December 31, 1999                                      $ 32            49,218           (4,328)             --
                                                                  ====            ======           ======          ======



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

Comprehensive income:
     Net income                                                     --                --               --              --
     Other comprehensive income-unrealized
       loss on securities available-for-sale net
       of income taxes of $68                                       --                --               --              --

Total comprehensive income
Release of ESOP shares                                              --                (8)             137              --
Deferred compensation                                               --                --               --              --
Treasury stock held for deferred compensation                       --                --               --              --
MRP share amortization                                              --                --               --             195
Cash dividend declared                                              --                --               --              --
Cash dividend on unallocated ESOP shares                            --                --               --              --
                                                                  ----            ------           ------          ------
Balance at December 31, 2000                                      $ 33            35,579           (4,813)         (1,101)
                                                                  ====            ======           ======          ======

<CAPTION>

                                                                TREASURY
                                                                STOCK FOR                    OTHER          TOTAL
                                                  DEFERRED      DEFERRED       RETAINED    COMPREHENSIVE  STOCKHOLDERS'
                                                 COMPENSATION  COMPENSATION     INCOME     INCOME (LOSS)     EQUITY
                                                 ------------  ------------    --------    -------------  ------------

<S>                                                  <C>         <C>            <C>          <C>            <C>
Balance at September 30, 1999                        2,373       (2,373)        26,960       (123)          71,615

Comprehensive income:
     Net income                                       --           --            1,092        --             1,092
     Other comprehensive income-unrealized
       loss on securities available-for-sale net
       of income taxes of $45                         --           --             --          (67)             (67)
                                                                                                            ------
Total comprehensive income                                                                                   1,025
Release of ESOP shares                                --           --             --          --               144
Deferred compensation                                  217         --             --          --               217
Treasury stock held for deferred compensation         --           (217)          --          --              (217)
Cash dividend declared                                --           --             (253)       --              (253)
Cash dividend on unallocated ESOP shares              --           --               18        --                18
                                                    ------       ------         ------       ----           ------
Balance at December 31, 1999                         2,590       (2,590)        27,817       (190)          72,549
                                                    ======       ======         ======       ====           ======

Balance at September 30, 2000                        2,679       (2,679)        29,999       (164)          59,209

Comprehensive income:
     Net income                                       --           --              901        --               901
     Other comprehensive income-unrealized
       loss on securities available-for-sale net
       of income taxes of $68                         --           --             --          102              102
                                                                                                            ------
Total comprehensive income                                                                                   1,003
Release of ESOP shares                                --           --             --          --               129
Deferred compensation                                  249         --             --          --               249
Treasury stock held for deferred compensation         --           (249)          --          --              (249)
MRP share amortization                                --           --             --          --               195
Cash dividend declared                                --           --             (263)       --              (263)
Cash dividend on unallocated ESOP shares              --           --               22        --                22
                                                    ------       ------         ------       ----           ------
Balance at December 31, 2000                         2,928       (2,928)        30,659        (62)          60,295
                                                    ======       ======         ======       ====           ======
</TABLE>


See accompanying notes to the consolidated financial statements.

                                       3
<PAGE>


                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999

                                   (UNAUDITED)

                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                          FOR THE THREE MONTHS ENDED
                                                                                  DECEMBER 31,
                                                                         ---------------------------
                                                                            2000               1999
                                                                         ---------          --------
<S>                                                                      <C>                  <C>
Cash flows from operating activities:
   Net income                                                             $   901            $ 1,092
   Adjustment to reconcile net income to net cash provided by
       (used in) operating activities:
           Provision for loan losses                                           60                 60
           Depreciation                                                       146                118
           Deferred tax expense                                               (38)               (30)
           Amortization of premiums and discounts, net                         (5)                (9)
           Release of  ESOP shares                                            129                144
           Vesting of MRP shares                                              263                 --
           Loan origination fees and unearned discounts
               deferred, net of current amortization                           44                 31
           Net loss on sale of loans                                           63                152
           Proceeds from loans held for sale                                6,195              2,519
           Originations of loans held for sale                             (5,164)            (3,288)
           Decrease (increase) in other assets                                111                (61)
           Decrease in accrued interest receivable                             90                207
           Decrease in other liabilities                                   (1,326)            (2,207)
                                                                          -------            -------
                  Net cash provided by (used in) operating activities       1,469             (1,272)
                                                                          -------            -------
Cash flows from investing activities:
    Purchase of FHLB stock                                                     --               (290)
    Purchases of investment securities held to maturity                        --             (1,996)
    Proceeds from maturities of investment securities available for sale       60              1,106
    Proceeds from maturities of investment securities
        held to maturity                                                      530              2,004
    Net increase in loans receivable                                       (5,608)            (6,843)
    Purchases of premises and equipment                                      (402)               (63)
                                                                          -------            -------
                  Net cash used in investing activities                    (5,420)            (6,082)
                                                                          -------            -------

                                                                                         (Continued)
</TABLE>

                                       4
<PAGE>

                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

              FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999

                                   (UNAUDITED)

                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                          FOR THE THREE MONTHS ENDED
                                                                                  DECEMBER 31,
                                                                         ---------------------------
                                                                            2000               1999
                                                                         ---------          --------
<S>                                                                      <C>                <C>
Cash flows from financing activities:
   Net increase (decrease) in deposits                                    $  3,665          $ (5,304)
   Advances from the Federal Home Loan Bank                                  5,000            11,000
   Repayments of advances from Federal Home Loan Bank                           --            (2,000)
   Return of capital dividend payment                                      (17,007)               --
   Dividends paid on common stock                                             (241)             (235)
   Increase in advance payments by borrowers for
       property taxes and insurance                                            203               157
                                                                          --------          --------

              Net cash provided by (used in)  financing activities          (8,380)            3,618
                                                                          --------          --------

        Net decrease in cash and cash equivalents                          (12,331)           (3,736)

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

Cash and cash equivalents at end of period                                $ 20,776          $ 11,921
                                                                          ========          ========

Payments are shown below for the following:
       Interest                                                           $  3,342          $  2,622
                                                                          ========          ========

       Income taxes                                                       $     27          $    261
                                                                          ========          ========

Noncash investing and financing activities:
     Deferred compensation to be settled in Company's stock               $    249          $    217
                                                                          ========          ========

     Unrealized gains (losses) on investment securities
          available for sale                                              $    170          $   (112)
                                                                          ========          ========

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

     Cash dividends on unallocated ESOP and MRP shares                    $     22          $     18
                                                                          ========          ========

     Transfer from loans held for sale to loans receivable                $    686          $     --
                                                                          ========          ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       5
<PAGE>

                     1ST STATE BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              DECEMBER 31, 2000 (UNAUDITED) AND SEPTEMBER 30, 2000


NOTE 1.  NATURE OF BUSINESS

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

NOTE 2.  BASIS OF PRESENTATION

     The accompanying  consolidated  financial  statements (which are unaudited,
except for the  consolidated  balance  sheet at  September  30,  2000,  which is
derived from the September 30, 2000 audited consolidated  financial  statements)
have been prepared in accordance with generally accepted  accounting  principles
for interim  financial  information  and with the rules and  regulations  of the
Securities and Exchange Commission.  Accordingly, they do not include all of the
information and footnotes required by generally accepted  accounting  principles
for complete financial statements. In the opinion of management, all adjustments
(none of which were other than normal recurring  accruals)  necessary for a fair
presentation of the financial position and results of operations for the periods
presented have been included.

     The results of  operations  for the three month period  ended  December 31,
2000 are not  necessarily  indicative of the results of  operations  that may be
expected for the year ended  September 30, 2001. The preparation of consolidated
financial statements in accordance with generally accepted accounting principles
requires  management to make certain estimates.  These amounts may be revised in
future  periods  because of changes  in the facts and  circumstances  underlying
their estimation.

NOTE 3.  EARNINGS PER SHARE

     The Company's  earnings per share for the three month period ended December
31, 2000 is based on basic and diluted  weighted average shares of 3,007,030 and
3,152,285,respectively,  of common  stock  outstanding,  excluding  ESOP and MRP
benefit plan shares not committed to be released or granted. For the three month
period ended December 31, 1999, both basic and diluted  weighted  average shares
were 2,935,902.
<TABLE>
<CAPTION>
                                                                                   2000         1999
         <S>                                                                    <C>            <C>
         Average shares outstanding, excluding MRP shares                       3,163,125      3,163,125
         Add: weighted average vested MRP shares issued                            42,163          --
         Less: weighted average unallocated ESOP shares                          (198,258)      (227,223)
                                                                                ---------      ---------
         Basic shares for earnings per share                                    3,007,030      2,935,902

         Add: unvested MRP shares                                                  84,319          --

         Add: potential common stock pursuant to stock
               option plan  (See Note 7)                                           60,936          --
                                                                                ---------      ---------
         Dilutive shares for earnings per share                                 3,152,285      2,935,902
                                                                                =========      =========
</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


                                       6
<PAGE>

purchased by the ESOP. During the three months ended December 31, 2000 and 1999,
7,097 and 7,331 shares of stock were committed to be released and  approximately
$129,000 and $144,000 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  2000 Annual Report on
Form 10-K for a discussion  of the Company's  accounting  policy with respect to
this deferred  compensation plan and the related treasury stock purchased by the
Company to fund this obligation.

     The expense  related to this plan for the three months  ended  December 31,
2000 and 1999 was $68,000 and $39,000, respectively. This expense is included in
compensation expense.

NOTE 6.  MANAGEMENT RECOGNITION PLAN

     The Company has a Management  Recognition  Plan  ("MRP")  which serves as a
means of providing existing directors and officers of the bank with an ownership
interest in the  company.  On June 6, 2000,  restricted  stock awards of 126,482
shares  were  granted.  The  shares  awarded  under  the MRP  were  issued  from
authorized but unissued shares of common stock at no cost to the recipients. The
shares vest at a rate of 33 1/3% per year with a one-third immediate vest on the
date of the grant.  Compensation expense of $263,000 associated with the MRP was
recorded during the quarter ended December 31, 2000.

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.

NOTE 8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

     On October 1, 2000,  the  Company had no  embedded  derivative  instruments
requiring separate accounting treatment and had identified fixed rate conforming
loan commitments as its only  freestanding  derivative  instrument.  The Company
does not currently  engage in hedging  activities.  The commitments to originate
fixed rate  conforming  loans  totaled  $664,000 and $ 1,114,000 at December 31,
2000 and October 1, 2000, respectively.  The fair value of these commitments was
less  than $ 5,000 on these  dates and  therefore  the  adoption  of SFAS 133 on
October 1, 2000 as well as the impact of applying  SFAS 133 at December 31, 2000
was not material to the Company's consolidated financial statements.


                                       7
<PAGE>


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

FORWARD-LOOKING STATEMENTS

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

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

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2000 AND SEPTEMBER 30, 2000

     Total  assets  decreased  by $8.4  million or 2.4% from  $355.5  million at
September  30, 2000 to $347.1  million at December 31, 2000.  This  decrease was
largely a result of the $17.0 million return of capital  dividend which was paid
to stockholders on October 2, 2000.

     Cash and cash  equivalents  decreased $12.3 million,  or 37.2%,  from $33.1
million at  September  30,  2000 to $20.8  million at  December  31,  2000.  The
decrease in cash and cash equivalents resulted primarily from the payment of the
$17.0 million return of capital  dividend on October 2, 2000.  This decrease was
partially offset by an increase in cash and cash equivalents from an increase of
$5.0 million in borrowed money.  Investment securities,  both available for sale
and  held to  maturity,  were  relatively  unchanged.  Investments  decreased  a
combined total of $400,000, or 0.5%, from $77.0 million at September 30, 2000 to
$76.6 million at December 31, 2000.

     Loans  receivable,  net  increased by $6.2  million,  or 2.8%,  from $223.6
million at  September  30, 2000 to $229.8  million at December  31,  2000.  This
increase was offset somewhat by a $1.7 million  decrease in loans held for sale.
Loans held for sale  decreased  30.9% from $5.5 million at September 30, 2000 to
$3.8 million at December 31, 2000.  Commercial loans increased $6.0 million,  or
14.0%,  compared to September  30, 2000 levels  reflecting  current loan demand.
Interest  rates  declined  during the quarter  and we sold more of our  mortgage
production.  We  continue  to  emphasize  commercial,  commercial  real  estate,
consumer loans and equity lines of credit that carry variable rates and/or short
term maturities.

     Stockholders'  equity  increased  by $1.1  million  from  $59.2  million at
September  30,  2000 to $60.3  million at  December  31, 2000 as a result of net
income of $901,000, release of ESOP shares of $129,000, vesting of MRP shares of
$195,000,  and a decrease in unrealized  losses on available for sale securities
of $102,000. These increases were offset by dividends declared of $241,000.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND
1999

     Net Income.  We  recorded  net income of  $901,000  for the  quarter  ended
December 31, 2000, as compared to $1,092,000  for the quarter ended December 31,
1999,  representing a decrease of $191,000, or 17.5%. For the three months ended
December  31,  2000 basic and diluted  earnings  per share were $0.30 and $0.29,
respectively.  The Company reported basic and diluted earnings per share for the
quarter ended  December 31, 1999 of $0.37 per share.  The decrease in net income
resulted  primarily from decreased net interest  income and increased  operating
expenses  that were offset  partially  by increased  other income and  decreased
income taxes. The decline in net interest income resulted from the impact of the
decline in cash  equivalents used to fund the special return on capital dividend
of $17.0  million,  which was paid on October 2, 2000 and decreased net interest
margins.  The  return  of  capital  dividend  decreased  the  ratio  of  average
interest-earning assets to average interest-bearing  liabilities from 126.2% for
the three  months  ended  December 31, 1999 to 121.0% for the three months ended
December 31, 2000.

     Net Interest Income.  Net interest income,  the difference between interest
earned  on  loans  and  investments   and  interest  paid  on   interest-bearing
liabilities,  decreased by $36,000 or 1.1% for the three  months ended  December
31, 2000, compared to the same quarter in the prior year. This decrease reflects
a $554,000 increase in interest income that was more than offset by the $590,000


                                       8
<PAGE>

increase in total interest expense. The average net interest margin decreased 15
basis points from 4.16% for the three  months  ended  December 31, 1999 to 4.01%
for the quarter ended December 31, 2000.

     Interest Income. The increase in interest income for the three months ended
December   31,  2000  was  due  to  an  increase  of  $8.6  million  in  average
interest-earning  assets  compared to the same  quarter in the prior year and an
increase in yield on  interest-earning  assets of 0.49% from 7.59% for the three
months ended  December 31, 1999 to 8.08% for the three months ended December 31,
2000. The increased volume of average interest-earning assets increased interest
income by  approximately  $250,000 and the increased  yield  increased  interest
income by approximately  $304,000.  An increase in average loans  outstanding of
$20.4  million  coupled with an increase in average  interest-bearing  overnight
funds of $5.5 million increased interest-earning assets for the quarter compared
to the prior year.  These increases were offset in part by a decrease in average
investments of $17.3 million.  Average investments  decreased to provide cash to
pay the special return of capital dividend.

     Interest  Expense.  Interest  expense  increased  in the three months ended
December 31, 2000 due to an increase in average interest-bearing  liabilities of
$17.7 million and an increase in the cost of interest-bearing  liabilities of 60
basis points from 4.33% for the three  months  ended  December 31, 1999 to 4.93%
for the three months ended  December 31,  2000.  Average  deposits  increased by
$21.6 million while average FHLB advances  decreased  $3.9 million for the three
months ended  December 31, 2000  compared to the same quarter in the prior year.
The increase in average interest-bearing  liabilities increased interest expense
by   approximately   $183,000   while  the  increase  in  the  average  cost  of
interest-bearing   liabilities   increased  interest  expense  by  approximately
$407,000.

     The following table presents average balances and average rates earned/paid
by the Company for the quarter  ended  December 31, 2000 compared to the quarter
ended December 31, 1999.
<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED                            THREE MONTHS ENDED
                                                     DECEMBER 31, 2000                             DECEMBER 31, 1999
                                                                             DOLLARS IN THOUSANDS
                                                 AVERAGE                   YIELD/             AVERAGE                 YIELD/
                                                 BALANCE       INTEREST    COST               BALANCE      INTEREST   COST
                                                 -------       --------   ------              -------      --------  ------
<S>                                              <C>              <C>      <C>                 <C>          <C>      <C>
Assets:
Loans receivable (1)                             231,424          5,090    8.80%               211,028      4,392    8.32%
Investment securities (2)                         78,560          1,217    6.20                 95,831      1,471    6.14
Interest-bearing overnight deposits               12,340            203    6.58                  6,875         93    5.41
                                                 -------          -----                        -------      -----
  Total interest-earning assets                  322,324          6,510    8.08                313,734      5,956    7.59
Non interest-earning assets                       21,881                                        21,182
                                                 -------                                       -------
  Total assets                                   344,205                                       334,916

Liabilities and stockholders' equity:
Deposits                                         244,755          2,977    4.87%               223,112      2,334    4.18%
FHLB advances                                     21,630            303    5.60                 25,565        356    5.57
                                                 -------          -----                        -------      -----
  Total interest-earning liabilities             266,385          3,280    4.93                248,677      2,690    4.33
Non interest-earning liabilities                  17,995                                        14,214
                                                 -------                                       -------
  Total liabilities                              284,380                                       262,891
Stockholders' equity                              59,825                                        72,025
                                                 -------                                       -------
  Total liabilities and stockholders'
     equity                                      344,205                                       334,916

Net interest income                                               3,230                                     3,266
Interest rate spread                                                       3.15%                                     3.26%
Net interest margin (3)                                                    4.01%                                     4.16%
Ratio of average interest-earning assets
  to average interest-bearing liabilities                                121.00%                                   126.16%
<FN>
(1)  Includes  nonaccrual  loans and loans held for sale,  net of discounts  and
     allowance for loan losses.
(2)  Includes FHLB of Atlanta stock.
(3)  Represents  net  interest   income  divided  by  the  average   balance  of
     interest-earning assets.
</FN>
</TABLE>

                                       9
<PAGE>

     Provision  for Loan  Losses.  The  provision  for loan losses is charged to
earnings to maintain the total  allowance for loan losses at a level  considered
adequate to absorb  estimated  probable  losses  inherent in the loan  portfolio
based on  existing  loan  levels and types of loans  outstanding,  nonperforming
loans,  prior  loan  loss  experience,  general  economic  conditions  and other
factors.  Provisions for loan losses  totaled  $60,000 for both the three months
ended December 31, 2000 and 1999.

     Other Income. Other income increased $250,000, or 120.8%, from $207,000 for
the quarter ended  December 31 1999 to $457,000 for the quarter  ended  December
31, 2000. Mortgage banking income, net increased $211,000 from a loss of $83,000
for the quarter  ended  December  31, 1999 to income of $128,000 for the quarter
ended  December 31, 2000.  During the quarter  ended  December 31, 2000, we sold
fixed-rate  mortgage  loans  held  for sale of $6.2  million  and  recognized  a
$108,000 gain on the sale.  The Bank was also able to record a nominal  recovery
on its lower of cost or fair value  valuation  reserve on loans held for sale of
$20,000. During the quarter ended December 31, 1999, we sold fixed-rate mortgage
loans held for sale of $2.5  million and  recognized  a gain of $36,000 from the
sale of these loans; however, the increase in interest rates during this quarter
required a $119,000  charge to earnings to record the loans held for sale to the
lower of cost or fair value.  Customer service fees increased $15,000,  or 10.6%
from  $141,000  for the quarter  ended  December  31,  1999 to $156,000  for the
quarter ended December 31, 2000. This increase results  primarily from growth in
the number of  transaction  accounts.  In  addition,  during the  quarter  ended
December  31,  2000,  commissions  from  sales of  annuities  and  mutual  funds
increased  $31,000 or 38.8% from $80,000 for the quarter ended December 31, 1999
to $111,000 for the quarter ended December 31, 2000. The increase  resulted from
a slightly higher volume of sales of annuities and mutual fund products.

     Operating  Expenses.  Total  operating  expenses  were $2.2 million for the
quarter ended December 31, 2000, an increase of $500,000, or 29.4% over the $1.7
million recorded for the three months ended December 31, 1999.  Compensation and
related benefits expense increased $300,000,  or 25.0% from $1.2 million for the
quarter ended  December 31, 1999 to $1.5 million for the quarter ended  December
31, 2000.  This increase was primarily the result of the MRP expense of $263,000
for the quarter  ended  December  31, 2000,  which was not present in 1999.  The
increases in other categories of operating  expenses  generally are attributable
to the growth of the Company  including the operating  expenses  associated with
the Bank's  seventh  branch,  which opened on September 27, 2000. We expect that
other  operating  expenses will continue to increase in subsequent  periods as a
result of increased cost associated with operating a public company.

     Income Tax Expense.  Income tax expense  decreased $94,000 from tax expense
of $577,000 for the quarter ended  December 31, 1999 to $483,000 for the quarter
ended  December 31,  2000.  The decrease  resulted  from a $285,000  decrease in
income before income taxes. The effective tax rates were 34.9% and 34.6% for the
quarters ended December 31, 2000 and 1999, respectively.

ASSET QUALITY

     At  December  31,  2000,  we had  approximately  $3.0  million  of loans in
nonaccrual  status as compared  with $2.9  million at  September  30,  2000.  At
December 31, 2000 and  September 30, 2000,  impaired  loans totaled $2.5 million
and $2.6 million,  respectively, as defined by Statement of Financial Accounting
Standards  No. 114,  "Accounting  by Creditors  for  Impairment  of a Loan." The
impaired  loans result from two  unrelated  loan  customers,  both of which have
loans  secured by  commercial  real estate  properties  in Alamance  County.  At
December 31, 2000,  all of the $2.5 million of impaired  loans is on non-accrual
status, and their related reserve for loan losses totaled $245,000. There was no
impact on the  provision  as  management  had  already  anticipated  the  loans'
performance  in setting the allowance for loan losses in previous  periods.  The
average  carrying  value of  impaired  loans was $2.7  million  during the three
months ended  December  31, 2000.  No interest  income was  recognized  on these
impaired  loans  during the three months  ended  December 31, 2000.  All amounts
received  on these  impaired  loans have been  recorded  as a  reduction  of the
principal  balance of the loan.  The Bank's net  chargeoffs for the three months
ended  December  31, 2000 and 1999 were  $32,000 and $1,000,  respectively.  The
allowance  for loan  losses was $3.6  million or 1.53% of  outstanding  loans at
December 31, 2000.  This  compares to 1.56 % at September  30, 2000 and 1.71% at
December 31, 1999.

LIQUIDITY AND CAPITAL RESOURCES

     The Bank must meet certain liquidity requirements  established by the State
of North Carolina Office of the Commissioner of Banks (the  "Commissioner").  At
December  31, 2000,  the Bank's  liquidity  ratio  exceeded  such  requirements.
Liquidity generally refers to the Bank's ability to generate adequate amounts of
funds to meet its cash needs.  Adequate  liquidity  guarantees


                                       10
<PAGE>

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  December  31,  2000,  cash and cash
equivalents  totaled $20.8 million. We have other sources of liquidity should we
need additional funds. During the three months ended December 31, 2000 and 1999,
we sold loans totaling $6.2 million and $2.5 million,  respectively.  Additional
sources of funds  include FHLB of Atlanta  advances.  Other sources of liquidity
include loans and investment  securities designated as available for sale, which
totaled $13.6 million at December 31, 2000.

     We  anticipate  that we will have  sufficient  funds  available to meet our
current commitments. At December 31, 2000, we had $5.9 million in commitments to
originate  new loans,  $56.2  million in unfunded  commitments  to extend credit
under existing  equity lines and commercial  lines of credit and $1.8 million in
standby letters of credit. At December 31, 2000,  certificates of deposit, which
are scheduled to mature within one year, totaled $132.1 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 December 31, 2000 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 December  31,  2000,  the
Company was in compliance with the capital requirements of the Federal Reserve.

ACCOUNTING ISSUES

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

     On October 1, 2000,  the  Company had no  embedded  derivative  instruments
requiring separate accounting treatment and had identified fixed rate conforming
loan commitments as its only  freestanding  derivative  instrument.  The Company
does not currently  engage in hedging  activities.  The commitments to originate
fixed rate  conforming  loans  totaled  $664,000 and $ 1,114,000 at December 31,
2000 and October 1, 2000, respectively.  The fair value of these commitments was
less  than $ 5,000 on these  dates and  therefore  the  adoption  of SFAS 133 on
October 1, 2000 as well as the impact of applying  SFAS 133 at December 31, 2000
was not material to the Company's consolidated financial statements.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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


                                       11
<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.  None.
                  --------

         (b.)     Reports  on Form 8-K.  During the  quarter ended  December 31,
                  --------------------
                  2000,  the  registrant  did not file any current reports on
                  Form 8-K.



                                       12
<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:  February 7, 2001                    -------------------------------------
                                           James C. McGill
                                           President and Chief Executive Officer
                                           (Principal Executive Officer)


                                           /s/ A. Christine Baker
Date:  February 7, 2001                    -------------------------------------
                                           A. Christine Baker
                                           Executive Vice President
                                           Treasurer and Secretary
                                           (Principal Financial and Accounting
                                           Officer)