A significant increase in the penetration of distributed generation has resulted in a possibility of operating distribution systems with distributed generation in islanded mode. However, over-current protection of an islanded distribution system is still an issue due to the difference in fault current when the system is connected to the grid and when it is islanded. This paper proposes the use of adaptive protection, using local information, to overcome the challenges of the overcurrent protection in distribution systems with distributed generation. The trip characteristics of the relays are updated by detecting operating states (grid connected or island) and the faulted section. The paper also proposes faulted section detection using the time over-current characteristics of the protective relays. Simulation results show that the operating state and faulted section can be correctly identified and the protection system settings can be updated to clear the fault quicker.