Okay...sorry..found the problem.

in includes/modules/create_account.php around line 445 you'll find this:
$state = ($flag_show_pulldown_states) ? ($state == '' ? ' ' : $state) : $zone_name;

remove the   so that it looks like this:

$state = ($flag_show_pulldown_states) ? ($state == '' ? '' : $state) : $zone_name;

Perhaps there's a reason for the space? Any advice?