UNITED STATES
                        SECURITY AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20849


                                   FORM 10-QSB


[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
              ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2003


[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OF THE EXCHANGE ACT FOR THE
                                TRANSITION PERIOD


                         COMMISSION FILE NUMBER 0-50237



                                VSB Bancorp, Inc.
                 ----------------------------------------------
                 (Name of Small Business Issuer in its charter)


                                    New York
         --------------------------------------------------------------
         (State or other jurisdiction of incorporation or organization)


                                  11 - 3680128
                     --------------------------------------
                     (I. R. S. Employer Identification No.)


                 3155 Amboy Road, Staten Island, New York 10306
                 ----------------------------------------------
                    (Address of principal executive offices)


                                 (718) 979-1100
                            -------------------------
                            Issuer's telephone number


                                  Common Stock
                                ----------------
                                (Title of Class)


The Registrant had 1,055,998 common shares outstanding as of October 31, 2003.
<PAGE>

                              CROSS REFERENCE INDEX


                                     PART I
                                                                          Page
                                                                        --------

Item 1   Statements of Financial Condition as of September 30, 2003
            (unaudited) and December 31, 2002 .........................        4

         Statements of Operations for the Three and Nine Months
            Ended September 30, 2003 and 2002 (unaudited) .............        5

         Statements of Changes in Shareholders' Equity for the Nine
            Months Ended September 30, 2003 (unaudited) and the
            Years Ended December 31, 2002 and 2001. ...................        6

         Statements of Cash Flows for the Three and Nine Months Ended
            September 30, 2003 and 2002 (unaudited) ...................        7

         Average Balance Sheets for the Three and Nine Months Ended
            September 30, 2003 and 2002 (unaudited) ...................        8

         Notes to Financial Statements for the Three and Nine Months
            Ended September 30, 2003 and 2002 (unaudited) .............  9 to 12

Item 2   Management's Discussion and Analysis of Financial Condition
            and Results of Operations ................................. 12 to 19

Item 3   Control and Procedures .......................................       20


                                     PART II

Item 2   Changes in Securities ........................................       20


         Signature Page ...............................................       21

         Certifications ............................................... 22 to 23

         Exhibit 99.1 .................................................       24


                                        2
<PAGE>

                           Forward-Looking Statements

         When used in this periodic report, or in any written or oral statement
made by us or our officers, directors or employees, the words and phrases "will
result," "expect," "will continue," "anticipate," "estimate," "project," or
similar terms are intended to identify "forward-looking statements". A variety
of factors could cause our actual results and experiences to differ materially
from the anticipated results or other expectations expressed in any
forward-looking statements. Some of the risks and uncertainties that may affect
our operations, performance, development and results, the interest rate
sensitivity of our assets and liabilities, and the adequacy of our loan loss
allowance, include, but are not limited to:

     o   deterioration in local, regional, national or global economic
         conditions which could result in, among other things, an increase in
         loan delinquencies, a decrease in property values, or a change in the
         real estate turnover rate;
     o   changes in market interest rates or changes in the speed at which
         market interest rates change;
     o   changes in laws and regulations affecting the financial service
         industry;
     o   changes in competition; and
     o   changes in consumer preferences.

         Please do not place undue reliance on any forward-looking statement,
which speaks only as of the date we make it. There are many factors, including
those we have described above, that could affect our future business activities
or financial performance and could cause our actual future results or
circumstances to differ materially from those we anticipate or project.

                                        3
<PAGE>

<TABLE>
<CAPTION>
                                 VSB Bancorp, Inc.
                  Consolidated Statements of Financial Condition


                                                     September 30,     December 31,
                                                         2003             2002
                                                     -------------    -------------
                                                      (unaudited)
<S>                                                  <C>              <C>
Assets:
 Cash and due from banks                             $  40,884,301    $  26,095,803
 Investment securities, available for sale              75,414,010       42,999,660
 Loans receivable                                       71,273,755       63,414,511
  Allowance for loan loss                               (1,117,279)      (1,168,358)
                                                     -------------    -------------
   Loans receivable, net                                70,156,476       62,246,153
 Bank premises and equipment, net                        2,238,496        2,399,163
 Accrued interest receivable                               558,482          424,636
 Deferred taxes                                            562,093          263,889
 Other assets                                              488,212          415,322
                                                     -------------    -------------
    Total assets                                     $ 190,302,070    $ 134,844,626
                                                     =============    =============

Liabilities and shareholders' equity:
Liabilities:
 Deposits:
   Demand and checking                               $  78,810,482    $  45,506,450
   NOW                                                  28,012,020       26,573,121
   Money market                                         25,894,466       26,025,830
   Savings                                               9,979,595        7,626,798
   Time                                                 30,230,420       17,778,031
                                                     -------------    -------------
    Total Deposits                                     172,926,983      123,510,230
 Escrow deposits                                           444,417          192,135
 Trust preferred securities                              5,000,000               --
 Accounts payable and accrued
  expenses                                               1,476,824        1,379,144
                                                     -------------    -------------
    Total liabilities                                  179,848,224      125,081,509
                                                     -------------    -------------

Shareholders' equity:
 Common stock, ($.0001 par value, 3,000,000 shares
  authorized, 1,055,998 issued and outstanding at
  September 30, 2003; 1,056,000 issued and
  outstanding at December 31, 2002)                            106              106
 Additional paid in capital                              7,031,499        7,076,486
 Retained earnings                                       3,266,169        2,259,313
 Accumulated other comprehensive income, net
  of taxes of $136,089 and $380,372,
  respectively                                             156,072          427,212
                                                     -------------    -------------

    Total shareholders' equity                          10,453,846        9,763,117
                                                     -------------    -------------

    Total liabilities and shareholders'
     equity                                          $ 190,302,070    $ 134,844,626
                                                     =============    =============
</TABLE>


See notes to financial statements

                                        4
<PAGE>

<TABLE>
<CAPTION>
                                            VSB Bancorp, Inc.
                                  Consolidated Statements of Operations
                                               (unaudited)


                                         Three months     Three months     Nine months      Nine months
                                            ended            ended            ended            ended
                                        Sep. 30, 2003    Sep. 30, 2002    Sep. 30, 2003    Sep. 30, 2002
                                        -------------    -------------    -------------    -------------
<S>                                     <C>              <C>              <C>              <C>
Interest and dividend income:
 Loans receivable                       $   1,349,614    $   1,102,140    $   3,766,538    $   3,153,966
 Investment securities                        495,576          450,648        1,466,620        1,438,808
 Other interest earnings assets                54,542           67,219          176,034          116,510
                                        -------------    -------------    -------------    -------------
   Total interest income                    1,899,732        1,620,007        5,409,192        4,709,284

Interest expense:
 NOW                                           30,199           26,211           96,241           70,497
 Money market                                  57,946           64,300          209,473          176,874
 Savings                                       13,228           18,422           44,650           55,909
 Trust preferred                               31,666               --           31,666               --
 Time                                          83,732           98,152          263,678          292,791
                                        -------------    -------------    -------------    -------------
   Total interest expense                     216,771          207,085          645,708          596,071

Net interest income                         1,682,961        1,412,922        4,763,484        4,113,213

Provision for loan loss                        50,000           60,000          120,000          275,000
                                        -------------    -------------    -------------    -------------
   Net interest income
    after provision for loan loss           1,632,961        1,352,922        4,643,484        3,838,213
                                        -------------    -------------    -------------    -------------

Non-interest income:
 Loan fees                                     27,262           24,540           91,571           60,785
 Service charges on deposits                  354,889          305,828        1,010,821          854,628
 Net rental income                              9,792            6,570           18,755           12,212
 Other income                                  15,839            8,924           46,066           22,378
                                        -------------    -------------    -------------    -------------
   Total non-interest income                  407,782          345,862        1,167,213          950,003
                                        -------------    -------------    -------------    -------------

Non-interest expenses:
 Salaries and benefits                        706,875          612,756        2,063,439        1,703,733
 Occupancy expenses                           230,309          191,339          715,632          610,609
 Legal expense                                 36,545           11,509           90,223           55,468
 Professional fees                             37,880           35,070          113,905          105,110
 Computer expense                              74,539           59,545          217,237          178,774
 Other expenses                               227,857          200,392          725,356          594,340
                                        -------------    -------------    -------------    -------------
   Total non-interest expenses              1,314,005        1,110,611        3,925,792        3,248,034

     Income before income taxes               726,738          588,173        1,884,905        1,540,182
                                        -------------    -------------    -------------    -------------

Provision/(benefit) for income taxes:
 Current                                      372,959          308,258          945,959          867,777
 Deferred                                     (34,541)         (31,312)         (67,910)        (142,305)
                                        -------------    -------------    -------------    -------------
   Total provision for income taxes           338,418          276,946          878,049          725,472

       Net income                       $     388,320    $     311,227    $   1,006,856    $     814,710
                                        =============    =============    =============    =============

Basic income per common share           $        0.37    $        0.30    $        0.95    $        0.78
                                        =============    =============    =============    =============

Fully diluted net income per share      $        0.35    $        0.29    $        0.92    $        0.76
                                        =============    =============    =============    =============

Book value per common share             $        9.90    $        8.71    $        9.90    $        8.71
                                        =============    =============    =============    =============
</TABLE>


See notes to financial statements

                                        5
<PAGE>

<TABLE>
<CAPTION>
                                                        VSB Bancorp, Inc.
                                   Consolidated Statements of Changes in Shareholders' Equity
                              Year Ended December 31, 2002 and Nine Months Ended September 30, 2003
                                                           (unaudited)


                                                                                                    Accumulated
                                        Number of                     Additional                       Other           Total
                                         Common          Common        Paid-In         Retained     Comprehensive   Stockholders'
                                         Shares          Stock         Capital         Earnings    Earnings/(Loss)     Equity
                                      ------------    ------------   ------------    ------------   ------------    ------------

<S>                                      <C>          <C>            <C>             <C>            <C>             <C>
Balance at December 31, 2001             1,050,000    $        105   $  6,999,895    $  1,079,005   $    142,021    $  8,221,026


Exercise of stock option                     6,000               1         76,591                                         76,592
Comprehensive income:
  Other comprehensive income, net:
    unrealized holding gain arising
    during the year                                                                                      285,191         285,191
  Net income                                    --              --             --       1,180,308             --       1,180,308
                                      ------------    ------------   ------------    ------------   ------------    ------------
Total comprehensive income                                                                                             1,465,499


Balance at December 31, 2002             1,056,000             106      7,076,486       2,259,313        427,212       9,763,117
                                      ------------    ------------   ------------    ------------   ------------    ------------

Cost of holding company
    reorganization                              (2)                       (44,987)                                       (44,987)
Comprehensive income:
  Other comprehensive income, net:
    unrealized holding loss arising
    during the year                                                                                     (271,140)       (271,140)
  Net income                                    --              --             --       1,006,856             --       1,006,856
                                      ------------    ------------   ------------    ------------   ------------    ------------
Total comprehensive income                                                                                               735,716


Balance at September 30, 2003            1,055,998    $        106   $  7,031,499    $  3,266,169   $    156,072    $ 10,453,846
                                      ============    ============   ============    ============   ============    ============
</TABLE>


See notes to financial statements

                                        6
<PAGE>

<TABLE>
<CAPTION>
                                                     VSB Bancorp, Inc.
                                           Consolidated Statements of Cash Flows
                                                        (unaudited)


                                                            Three months     Three months     Nine months      Nine months
                                                               ended            ended            ended            ended
                                                           Sep. 30, 2003    Sep. 30, 2002    Sep. 30, 2003    Sep. 30, 2002
                                                           -------------    -------------    -------------    -------------
<S>                                                        <C>              <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                               $     388,320    $     311,227    $   1,006,856    $     814,710
  Adjustments to reconcile net loss to net cash
    used in operating activities
  Depreciation and amortization                                  125,760           92,487          384,090          279,614
  Amortization of premium, net of accretion of income            118,021          (30,822)         190,868          (79,903)
  Provision for loan losses                                       50,000           60,000          120,000          275,000
  (Decrease)/increase in prepaid and other assets                260,728          507,301          (72,890)         630,041
  (Increase)/decrease in accrued interest receivable             (97,225)          16,231         (133,846)         (18,330)
  Decrease/(increase) in deferred income taxes                    23,398          (31,312)         (53,920)         (73,069)
  Increase in accrued expenses and other liabilities               3,290          173,307           97,680          214,741
                                                           -------------    -------------    -------------    -------------

        Net cash provided by operating activities                872,292        1,098,419        1,538,838        2,042,804
                                                           -------------    -------------    -------------    -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Net increase in loan receivable                             (2,437,328)        (199,534)      (7,826,113)      (8,217,566)
  Proceeds from maturities of money market investments                --          100,000               --          350,187
  Proceeds from repayment of investments securities,
      available for sale                                      18,296,077        5,046,513       42,096,530       14,785,086
  Purchases of money market investments                               --         (100,000)              --         (400,000)
  Purchase of investments securities, available for sale     (34,796,334)      (8,590,057)     (75,421,382)     (13,045,184)
  Purchases of premises and equipment                            (29,384)        (375,403)        (228,887)        (861,598)
  Proceeds from sale of other assets                                  --               --               --           30,000
  Gain on the sale of other assets                                    --               --            5,464               --
                                                           -------------    -------------    -------------    -------------

        Net cash used in investing activities                (18,966,969)      (4,118,481)     (41,374,388)      (7,359,075)
                                                           -------------    -------------    -------------    -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase in deposits                                    11,027,726       15,806,929       49,669,035       29,355,803
  Issuance of Trust Preferred Securities                       5,000,000               --        5,000,000               --
  Cost of Holding Company reorganization                            (410)              --          (44,987)              --
                                                           -------------    -------------    -------------    -------------

        Net cash provided by financing activities             16,027,316       15,806,929       54,624,048       29,355,803
                                                           -------------    -------------    -------------    -------------

NET (DECREASE)/INCREASE IN CASH
  AND CASH EQUIVALENTS                                        (2,067,361)      12,786,867       14,788,498       24,039,532
                                                           -------------    -------------    -------------    -------------

CASH AND CASH EQUIVALENTS,
  BEGINNING OF PERIOD                                         42,951,662       19,764,180       26,095,803        8,511,515
                                                           -------------    -------------    -------------    -------------

  END OF PERIOD                                            $  40,884,301    $  32,551,047    $  40,884,301    $  32,551,047
                                                           =============    =============    =============    =============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:
  Cash paid during the period for:
    Interest                                               $     396,071    $     211,487    $     607,890    $     602,298
                                                           =============    =============    =============    =============
    Taxes                                                  $     547,650    $     293,139    $     961,592    $     825,856
                                                           =============    =============    =============    =============
</TABLE>


See notes to financial statements

                                        7
<PAGE>

<TABLE>
<CAPTION>
                                                VSB Bancorp, Inc.
                                       Consolidated Average Balance Sheets
                                                   (unaudited)


                                                      Three                                 Three
                                                   Months Ended                          Months Ended
                                                September 30, 2003                    September 30, 2002
                                       -----------------------------------   -----------------------------------
                                          Average                   Yield/      Average                   Yield/
                                          Balance       Interest     Cost       Balance       Interest     Cost
                                       ------------   ------------  ------   ------------   ------------  ------

<S>                                    <C>            <C>            <C>     <C>            <C>            <C>
Assets:
Interest-earning assets:
  Loans receivable                     $ 71,248,645   $  1,349,614   7.52%   $ 57,506,979   $  1,102,140   7.44%
  Money market investments                  220,854            828   1.49         100,000          1,113   4.42
  Investment securities, AFS             64,287,537        495,576   3.06      34,135,872        450,648   5.24
  Other interest-earning assets          24,853,624         53,714   0.86      17,972,692         66,106   1.46
                                       ------------   ------------           ------------   ------------
  Total interest-earning assets         160,610,660      1,899,732   4.69     109,715,543      1,620,007   5.77

Non-interest earning assets              10,977,079                             6,363,695
                                       ------------                          ------------
  Total assets                         $171,587,739                          $116,079,238
                                       ============                          ============

Liabilities and equity:
Interest-bearing liabilities:
  Savings accounts                     $  9,515,298         13,228   0.55    $  8,124,879         18,422   0.90
  Time accounts                          30,764,264         83,732   1.08      17,577,331         98,152   2.22
  Money market accounts                  25,492,919         57,946   0.90      17,139,001         64,300   1.49
  NOW accounts                           27,057,938         30,199   0.44      18,178,967         26,211   0.57
  Trust preferred                         1,847,826         31,666   6.80              --             --     --
                                       ------------   ------------   ----    ------------   ------------   ----
  Total interest-bearing liabilities     94,678,245        216,771   0.91      61,020,178        207,085   1.35
  Checking accounts                      65,143,301                            44,723,415
                                       ------------                          ------------
Total deposits                          159,821,546                           105,743,593
Other liabilities                         1,397,538                             1,196,098
                                       ------------                          ------------
  Total liabilities                     161,219,084                           106,939,691
Equity                                   10,368,655                             9,139,547
                                       ------------                          ------------
  Total liabilities and equity         $171,587,739                          $116,079,238
                                       ============                          ============

Net interest income/net
 interest rate spread                                 $  1,682,961   3.78%                  $  1,412,922   4.42%
                                                      ============   ====                   ============   ====
Net interest earning assets/
 net interest margin                   $ 65,932,415                  4.16%   $ 48,695,365                  5.02%
                                       ============                  ====    ============                  ====


Ratio of interest-earning assets to
 interest-bearing liabilities                  1.70 x                                1.80 x
                                       ============                          ============


<CAPTION>
                                                      Nine                                  Nine
                                                   Months Ended                          Months Ended
                                                September 30, 2003                    September 30, 2002
                                       -----------------------------------   -----------------------------------
                                          Average                   Yield/      Average                   Yield/
                                          Balance       Interest     Cost       Balance       Interest     Cost
                                       ------------   ------------  ------   ------------   ------------  ------

<S>                                    <C>            <C>            <C>     <C>            <C>            <C>
Assets:
Interest-earning assets:
  Loans receivable                     $ 67,371,037   $  3,766,538   7.47%   $ 55,779,450   $  3,153,966   7.50%
  Money market investments                   74,155          1,554   2.80          95,076          2,233   3.14
  Investment securities, AFS             55,106,280      1,466,620   3.56      35,726,247      1,438,808   5.38
  Other interest-earning assets          24,182,509        174,480   0.96      10,296,710        114,277   1.48
                                       ------------   ------------           ------------   ------------
  Total interest-earning assets         146,733,981      5,409,192   4.93     101,897,483      4,709,284   6.15

Non-interest earning assets               9,911,875                             6,398,588
                                       ------------                          ------------
  Total assets                         $156,645,856                          $108,296,071
                                       ============                          ============

Liabilities and equity:
Interest-bearing liabilities:
  Savings accounts                     $  8,798,181         44,650   0.68    $  8,224,213         55,909   0.91
  Time accounts                          27,544,142        263,678   1.28      16,738,890        292,791   2.34
  Money market accounts                  25,212,142        209,473   1.11      15,361,539        176,874   1.54
  NOW accounts                           25,706,480         96,241   0.50      17,034,837         70,497   0.55
  Trust preferred                           620,438         31,666   6.82              --             --     --
                                       ------------   ------------   ----    ------------   ------------   ----
  Total interest-bearing liabilities     87,881,383        645,708   0.98      57,359,479        596,071   1.39
  Checking accounts                      57,248,040                            41,110,243
                                       ------------                          ------------
Total deposits                          145,129,423                            98,469,722
Other liabilities                         1,396,634                             1,150,803
                                       ------------                          ------------
  Total liabilities                     146,526,057                            99,620,525
Equity                                   10,119,799                             8,675,546
                                       ------------                          ------------
  Total liabilities and equity         $156,645,856                          $108,296,071
                                       ============                          ============

Net interest income/net
 interest rate spread                                 $  4,763,484   3.95%                  $  4,113,213   4.76%
                                                      ============   ====                   ============   ====
Net interest earning assets/
 net interest margin                   $ 58,852,598                  4.34%   $ 44,538,004                  5.36%
                                       ============                  ====    ============                  ====


Ratio of interest-earning assets to
 interest-bearing liabilities                  1.67 x                                1.78 x
                                       ============                          ============
</TABLE>


                                        8
<PAGE>

VSB Bancorp, Inc.

NOTES TO FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
--------------------------------------------------------------------------------

1.   GENERAL

         VSB Bancorp, Inc. ("Bancorp" or "Company") became the holding company
for Victory State Bank, a New York State chartered commercial bank, on May 30,
2003 as the result of a reorganization of Victory State Bank into the holding
company form of organization. The stockholders of Victory State Bank became the
stockholders of VSB Bancorp, Inc. as a result of the reorganization, receiving
three shares of VSB Bancorp, Inc. stock for each two shares of Victory State
Bank stock. Each stockholder owned the same percentage interest in VSB Bancorp
immediately after the reorganization that the stockholder owned in Victory State
Bank immediately before the reorganization, subject to immaterial differences
due to adjustments for cash in lieu of fractional shares. VSB Bancorp now owns
100% of the capital stock of Victory State Bank. No stockholders of Victory
State Bank exercised dissenter's rights to receive cash instead of shares of VSB
Bancorp. The transaction between these entities under common control was
accounted for at historical cost on an as if pooled basis.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         The following is a description of the significant accounting and
reporting policies followed in preparing and presenting the accompanying
financial statements. These policies conform with accounting principles
generally accepted in the United States of America ("GAAP").

         Risks and Uncertainties - The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the amounts of revenues and expenses during the reporting period. Actual results
can differ from those estimates.

         Cash and Cash Equivalents - Regulation D of the Board of Governors of
the Federal Reserve system requires that Victory State Bank maintain
non-interest-bearing deposits or cash on hand as reserves against its demand
deposits. The amount of reserves which Victory State Bank was required to
maintain depends upon its level of transaction accounts. During the fourteen day
period from September 18, 2003 through October 1, 2003, Victory State Bank is
required to maintain reserves, after deducting vault cash, of $4,209,000.
Reserves are required to be maintained on a fourteen day basis, so, from time to
time, Victory State Bank may use available cash reserves on a day to day basis,
so long as the fourteen day average reserves satisfy Regulation D requirements.
Due to increases in the volume of transaction accounts, Victory State Bank is
now required to report transaction account levels to the Federal Reserve on a
weekly basis.

         Money Market Investments, Held to Maturity - Money market investments
represent short-term investments (with original maturities of one year or less)
which are held to maturity. These investments are carried at cost, adjusted for
the accretion of discount or the amortization of premium using a method which
approximates the level yield method over the period to maturity. Carrying values
of these investments approximate current market values.

         Investment Securities, Available for Sale - Investment securities,
available for sale, are to be held for an indefinite period of time and include
securities that management intends to use as part of its asset/liability
strategy. These securities may be sold in response to changes in interest rates,
prepayments or other factors and are carried at estimated fair value. Gains or
losses on the sale of such securities are determined by the specific
identification method. Premiums and discounts are recognized in interest income
using a method that approximates the level yield method. Unrealized holding
gains or losses, net of deferred income tax, are excluded from earnings and
reported as other comprehensive income (net of tax amount) in a separate
component of stockholders' equity until realized.

                                        9
<PAGE>

         The Company invests primarily in agency Collateralized Mortgage-Backed
Obligations ("CMOs") with average lives under 4.5 years and Mortgage-Backed
Securities. These securities are primarily issued by the Federal National
Mortgage Association ("FNMA"), the Government National Mortgage Association
("GNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") and are
primarily comprised of mortgage pools guaranteed by FNMA, GNMA or FHLMC. The
Company also invests in whole loan CMOs, all of which are AAA rated. These
securities expose the Company to risks such as interest rate, prepayment and
credit risk and thus pay a higher rate of return than comparable treasury
issues.

         Loans Receivable - Loans receivable, that management has the intent and
ability to hold for the foreseeable future or until maturity or payoff, are
stated at unpaid principal balances, adjusted for deferred net origination and
commitment fees and the allowance for loan losses. Interest income on loans is
credited as earned.

         It is the policy of the Company to provide a valuation allowance for
estimated losses on loans based on the Company's past loan loss experience,
known and inherent risks in the portfolio, adverse situations which may affect
the borrower's ability to repay, estimated value of underlying collateral and
current economic conditions in the Company's lending area. The allowance is
increased by provisions for loan losses charged to operations and is reduced by
charge-offs, net of recoveries. While management uses available information to
estimate losses on loans, future additions to the allowance may be necessary
based upon the expected growth of the loan portfolio and any changes in economic
conditions beyond management's control. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on judgments different from those of
management. Management believes, based upon all relevant and available
information, that the allowance for loan losses is adequate.

         The Company has a policy that all loans 90 days past due are placed on
non-accrual status. It is the Company's policy to cease the accrual of interest
on loans to borrowers past due less than 90 days where a probable loss is
estimated and to reverse out of income all interest that is due. The Company
continues to accrue interest on construction loans that are 90 days past
contractual maturity date if the loan is expected to be paid in full in the next
60 days and all interest is paid up to date.

         Loan origination fees and certain direct loan origination costs are
deferred and the net amount recognized over the contractual loan terms using the
level-yield method, adjusted for periodic prepayments in certain circumstances.

         The Company considers a loan to be impaired when, based on current
information, it is probable that the Company will be unable to collect all
principal and interest payments due according to the contractual terms of the
loan agreement. Impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral. The fair value of the collateral, as reduced by costs
to sell, is utilized if a loan is collateral dependent.

         Long-Lived Assets - The Company periodically evaluates the
recoverability of long-lived assets, such as premises and equipment, to ensure
the carrying value has not been impaired. In performing the review for
recoverability, the Company would estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows is less than the carrying amount, an impairment will
be recognized. The Company reports these assets at the lower of the carrying
value or fair value, less the cost to sell.

         Premises and Equipment - Premises, leasehold improvements, and
furniture and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are accumulated by the straight-line
method over the estimated useful lives of the respective assets, which range
from three to ten years.

                                       10
<PAGE>

         Income Taxes - The Company utilizes the liability method to account for
income taxes. Under this method, deferred tax assets and liabilities are
determined on differences between financial reporting and the tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
expected to be in effect when the differences are expected to reverse. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.

         Financial Instruments - In the ordinary course of business, the Company
has entered into off-balance sheet financial instruments, primarily consisting
of commitments to extend credit.

         Basic and Fully-Diluted Net Income Per Common Share - Basic net income
per share of common stock is based on 1,055,998, the weighted average number of
common stock outstanding. Fully-diluted net income per share of common stock is
based on 1,099,543 and 1,097,584, the weighted average number of common stock
and common stock equivalents outstanding for the three and nine months ended
September 30, 2003, respectively, and is calculated using the treasury method.
The weighted average number of common stock equivalents excluded in calculating
fully-diluted net income per common share due to the anti-dilutive effect is
40,305 and 42,264 for the three and nine months ended September 30, 2003,
respectively. Common stock equivalents were calculated using the treasury stock
method.

         Stock Based Compensation - At September 30, 2003, the Company had
stock-based employee compensation plans. The Company accounts for these plans
under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. No stock-based employee compensation expense has been
reflected in net income for stock options as all rights and options to purchase
the Company's stock granted under these plans have an exercise price equal to
the market value of the underlying stock on the date of grant.

         If compensation cost for the stock option plans awards had been
measured based on the fair value of the stock options awarded at the grant
dates, net income and diluted earnings per common share would have been reduced
to the pro-forma amounts reflected on the table below for the three and nine
months ended September 30, 2003 and 2002.


<TABLE>
<CAPTION>
                                              For the three   For the three   For the nine    For the nine
                                              Months Ended    Months Ended    Months Ended    Months Ended
                                              September 30,   September 30,   September 30,   September 30,
                                                  2003            2002            2003            2002
                                              -------------   -------------   -------------   -------------

<S>                                           <C>             <C>             <C>             <C>
Net Income
    As reported                               $     388,320   $     311,227   $   1,006,856   $     814,710
    Less: Total stock-based compensation
    expense determined under the fair value
    method for all rewards, net of related
    tax effects                                       5,167           5,736          15,501          17,208
                                              -------------   -------------   -------------   -------------

Pro-forma                                     $     383,153   $     305,491   $     991,355   $     797,502
                                              =============   =============   =============   =============


Diluted earnings per common share
    As reported                               $        0.35   $        0.29   $        0.92   $        0.76
    Less: Total stock-based compensation
    expense determined under the fair value
    method for all rewards, net of related
    tax effects                                          --            0.01            0.01            0.02
                                              -------------   -------------   -------------   -------------

Pro-forma                                     $        0.35   $        0.28   $        0.91   $        0.74
                                              =============   =============   =============   =============
</TABLE>

                                       11
<PAGE>

Recently-Issued Accounting Standards - In May 2003, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
150 "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150"), which establishes how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of SFAS
150 did not have a material impact on its financial position or results of
operations.

         In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research Bulletin
(ARB) 51. FIN 46 addresses consolidation by business enterprises of variable
interest entities (`VIE'). FIN 46 requires a VIE to be consolidated by a company
if that company is subject to a majority of the risk of loss from the VIE's
activities or entitled to receive a majority of the entity's residual returns,
or both. The provisions are effective for any new entities that are originated
subsequent to January 31, 2003. For entities that were originated prior to
February 1, 2003, the provisions of FIN 46 were to be effective July 31, 2003.
In October 2003, the FASB deferred the implementation of this Interpretation in
its entirety. Accordingly, the Company has delayed the adoption of the
Interpretation and does not expect it to have a material impact on the
consolidated financial statements.

Item 2

Management's Discussion and Analysis of Financial Condition and Results of
Operations

Financial Condition

         Our total assets were $190,302,070 at September 30, 2003, an increase
of $55,457,444, or 41.1%, since December 31, 2002. The increase resulted from
the investment of funds which were available to us as the result of an increase
in deposits. The deposit increase was caused generally by our efforts to grow
our franchise, the receipt of $10 million time deposit from the New York State
Comptroller's Office and specifically by the increase in our deposits at our new
Hylan Branch which we opened in December 2002, coupled with deposit increases at
our other offices. Our investment of these funds generated the following
increases in assets.

     o   A $32,414,350 increase in investment securities available for sale
     o   A $ 7,910,323 increase in net loans receivable
     o   A $14,788,498 increase in cash and due from banks.

In addition, we also experienced increases in other asset categories due to
normal fluctuations in operations.

         Our deposits were $173,371,400 at September 30, 2003, an increase of
$49,669,035, or 40.2%, from December 31, 2002, which provided most of the funds
used for the increase in assets. Substantially all of the increase in deposits
was due to a $33,556,314 increase in non-interest demand deposits and a
$12,452,389 increase in time deposits.

         In August of 2003, the Company formed VSB Capital Trust I (the
"Trust"). The Trust is a statutory business trust organized under Delaware law
and its common securities are wholly owned by the Company. The Trust issued $5.0
million of Trust Preferred Capital Securities to an independent investor and
$155,000 of common securities to the Company. The Company issued a subordinated
debenture aggregating $5.16 million to the Trust. The subordinated debenture is
the sole asset of the Trust. The subordinated debenture and the Trust Preferred
Capital Securities pay interest and dividends, respectively, on a quarterly
basis, at a rate of 6.909%. They mature thirty years after the issuance of the
securities and are non-callable for five years. After the first five years, the

                                       12
<PAGE>

Trust Preferred Securities may be called by the Company at any quarterly
interest payment date at par. The holders of the Trust Preferred Securities do
not have mandatory redemption rights except in the event of default or other
specified conditions. Dividends on the Trust Preferred Capital Securities are
recorded as interest expense. Costs associated with the issuance of the
securities totaling $142,500 were capitalized and are being amortized over five
years, the estimated life of the securities. VSB Capital Trust I is consolidated
with VSB Bancorp, Inc. under the principles of consolidation, whereby the
subordinated debt and inter-company payables and receivables are eliminated,
leaving the trust preferred securities and the associated interest payable as
liabilities of the Bancorp offset by the cash received from the issuance of the
trust preferred securities.

         On August 28, 2003, VSB Bancorp, Inc. received the net proceeds of
$4.86 million from the $5 million trust preferred securities that it issued. The
Bancorp can include up to 25% of its total capital base as Tier 1 capital from
the $5 million trust preferred issue.

         We opened for business in November 1997 and management has worked
throughout the past six years to grow our franchise. From one office in 1997, we
now have four offices. From no deposits, no loans and less than $7.0 million of
assets on the day we opened for business in 1997, we have grown to total assets
of $190.3 million, total deposits of $173.4 million and capital of $10.5 million
by September 30, 2003.

         Management intends to exert efforts to continue growing our company in
the future. However, both internal and external factors could adversely affect
our future growth. The recent down turn in the economy has made it more
difficult for us to originate new loans that meet our underwriting standards.
Not only does that cause us to invest available funds in lower-yielding
securities and deposits with other banks, but it also slows the development of
non-loan relationships which sometimes flow from cross-selling to loan
customers.

         A continuation of adverse general economic conditions could make it
difficult for us to execute our growth plans. Furthermore, regulatory capital
requirements could have a negative effect on our ability to grow if growth
outpaces our ability to support that growth with increased capital. We increased
our capital through an offering of trust preferred securities at the holding
company level by VSB Bancorp in the third quarter of this year. We contributed
substantially all of the proceeds of the offering to our subsidiary, Victory
State Bank, thus increasing its capital and allowing us to satisfy regulatory
capital requirements applicable to both the bank and the bank holding company
while we continue to grow. However, trust preferred securities cause us to incur
an interest expense at the holding company level.

         Total shareholder's equity was $10,453,846 at September 30, 2003, an
increase of $690,729 during the first nine months. The increase reflected net
income of $1,006,856 for the nine months, reduced by a decline of $271,140 in
other comprehensive income due to a reduction in the unrealized gain in
securities available for sale during the first nine months of 2003. VSB Bancorp,
Inc. satisfied all capital ratio requirements of the Federal Reserve at
September 30, 2003, with a Tier I Leverage Capital Ratio of 7.65%, a ratio of
Tier I Capital to Risk-Weighted Assets Ratio of 14.57%, and a Total Capital to
Risk-Weighted Assets Ratio of 17.42%.


Results of Operations for the Quarters Ended September 30, 2003 and September
30, 2002

         General. We had net income of $388,320 for the quarter ended September
30, 2003, compared to net income of $311,227 for the comparable quarter in 2002.
The principal categories which make up the 2003 net income are:

     o   Interest income of $1,899,732
     o   Reduced by interest expense of $216,771
     o   Reduced by the provision for loan losses of $50,000

                                       13
<PAGE>

     o   Increased by non-interest income of $407,782
     o   Reduced by non-interest expense of $1,314,005
     o   Reduced by $338,418 in income tax expense.

         We discuss each of these categories individually and the reasons for
the differences between the quarter ended September 30, 2003 and the comparable
quarter in 2002 in the following paragraphs. The over-riding factor affecting
the changes in our operating results in all these categories is our continued
implementation of our growth strategy as we discussed above. Opening new
branches, as we did in December 2002, initially has a dampening effect on net
income because we must begin incurring the staffing and occupancy expense of a
new branch before we generate funds from that branch for investment. However, we
expect that the longer term consequences of branch expansion will be positive,
as deposits and loans are gradually generated by new branches and then invested
in interest earning assets.

         Interest Income. Interest income was $1,899,732 for the quarter ended
September 30, 2003, compared to $1,620,007 for the quarter ended September 30,
2002, an increase of 17.3%. We increased the average balance of our loans from
$57,506,979 during the 2002 quarter to $71,248,645 during the 2003 quarter and
our loan yield increased 8 basis points due to the realization of interest
income on loans previously classified as non-accrual. This was the fuel that
drove the $247,474 increase in interest income from loans, representing most of
the $279,725 overall increase in interest income. Although our average yield on
interest-earning assets declined by 108 basis points, due to the continuing low
market interest rates, the effect of the increase in average volume outweighed
the effect of this decrease in yield. We also experienced a $12,677 decrease in
income from other interest earning assets and a $44,928 increase in interest
from investment securities. Management invested most of the increase in funds
not required to fund loans in other interest earning assets rather than in
investment securities because of the inherent volatility of the demand deposit
base and the limited number of effective alternatives available in this low
interest rate environment.

         Interest Expense. Interest expense was $216,771 for the quarter ended
September 30, 2003, compared to $207,085 for the quarter ended September 30,
2002, an increase of 4.7%. The increase was the direct result of $31,666 of
interest on trust preferred securities and increases in the average balance of
all principal interest-bearing deposit categories - money market accounts, NOW
accounts, certificates of deposit and savings accounts - as we sought funds to
grow our asset base. However, the increase in interest expense was substantially
moderated because of declines in market interest rate conditions. Our average
cost of funds declined from 1.35% to 0.91% between the periods. Although only a
44 basis point decline, the decline represented a 32.6% decrease in our cost of
funds. Furthermore, we continued to increase the volume of non-interest checking
accounts as a zero cost funding source.

         Net Interest Income Before Provision for Loan Losses. Net interest
income before the provision for loan losses was $1,682,961 for the quarter ended
September 30, 2003, an increase of $270,039 over the $1,412,922 we had in the
comparable 2002 quarter. The increase was driven entirely by the increase in the
volume of interest-earning assets, but was partially offset by a 64 basis point
decline in our interest rate spread and an 86 basis point decline in our net
interest margin. The spread and margin declined principally due to the effects
of declining market interest rates coupled with a reduction in the percentage of
our average assets invested in loans between the periods because the percentage
growth in assets exceeded the percentage of loan growth.

         Loans are our highest yielding asset category, and the average rate we
earned on loans was 7.52% during the 2003 quarter, having increased 8 basis
points from the 2002 quarter. In contrast, the average yield on other (non-loan)
interest earning assets was only approximately 2.4% during the 2003 quarter,
compared to approximately 3.9% during the 2002 quarter. An increase in the
percentage of assets invested in interest earning assets other than loans had
the effect of decreasing our overall average yield. The growth in the loan
portfolio has been significantly outstripped by the growth of the Bancorp's
asset base, due primarily to the gathering of deposits and to a lesser extent,
the issuance of $5 million in trust preferred securities.

                                       14
<PAGE>

         Most of our loans have interest rates that are based upon the
fluctuating prime rate, which was 4.75% through most of 2002, declining to 4.25%
in November 2002 and declining to 4.00% in June 2003. Despite the prime rate
decline, the effect of that decline on our yields was moderated because many of
our prime-based loans have interest rate floors which have been reached, so that
the decline in the prime rate in November 2002 and June 2003 did not cause the
rates on those loans to further decline. In contrast, the yield on non-loan
investments decreased because declining market rates drove down the yields we
could earn on those investments and we shifted the mix of investments towards
higher yielding investment securities and away from lower yielding other
interest earning assets because of the excess cash received from the growth of
the Bank's deposit base and to a lesser extent the proceeds from the issuance of
trust preferred securities.

         The average interest rate spread was 3.78% for the three months ended
September 30, 2003, compared to 4.42% for the same period in 2002 and the
average interest rate margin was 4.16% for the 2003 quarter, compared to 5.02%
for the same quarter last year. The difference between the average interest rate
spread and the average interest rate margin reflects the level of capital and
non-interest-bearing checking accounts which we have to fund interest-earning
assets. However, the decline in the difference between our spread and the margin
from 60 basis points (5.02% minus 4.42%) for the 2002 quarter to 38 basis points
(4.16% minus 3.78%) reflects that non-interest-bearing demand deposits and
capital are more valuable as funding sources when market interest rates are
higher and they can be invested in higher yielding assets. Furthermore, as we
grow and leverage our capital, non-interest bearing capital represents a
decreasing percentage of our funding sources.

         Provision for Loan Losses. The provision for loan losses was $50,000
for the quarter ended September 30, 2003, compared to $60,000 for the quarter
ended September 30, 2002. The reduction in the provision was primarily due to a
reduction in the rate of delinquencies in the loan portfolio. The provision for
loan losses in any period depends upon the amount necessary to bring the
allowance for loan losses to the level management believes is adequate, after
taking into account charge offs and recoveries. Our allowance for loan losses is
based on management's evaluation of the risks inherent in our loan portfolio and
the general economy. Management periodically evaluates both broad categories of
performing loans and problem loans individually to assess the appropriate level
of the allowance.

         Although management uses available information to assess the adequacy
of the allowance on a quarterly basis in consultation with outside advisors and
the board of directors, changes in national or local economic conditions, the
circumstances of individual borrowers, or other factors, may change, increasing
the level of problem loans and requiring an increase in the level of the
allowance. The allowance for loan losses represented 1.57% of total loans at
September 30, 2003, but there can be no assurance that a higher level, or a
higher provision for loan losses, will not be necessary in the future.

         Non-interest Income. Non-interest income was $407,782 for the three
months ended September 30, 2003, compared to $345,862 during the same period
last year. The $61,920 increase was caused primarily by a $49,061 increase in
service charges on deposits as a direct result of an increase in total deposits
and an increase in overdraft fees charged to customers.

         Non-interest Expense. Non-interest expense was $1,314,005 for the
quarter ended September 30, 2003, compared to $1,110,611 for the quarter ended
September 30, 2002. Of the $203,394 increase, the principal causes were:

     o   $94,119 in higher salary and benefits costs due to an increase in
         staffing to support growth and higher benefit costs. We had 49 full
         time equivalent employees at September 30, 2003 compared to 43 at
         September 30, 2002.
     o   $38,970 in higher occupancy expense, primarily due to the opening of
         our Hylan Branch in December 2002.
     o   An increase of $27,465 in "other expenses" which also reflected the
         effects of growth of the various expense categories.

                                       15
<PAGE>

         Income Tax Expense. Income tax expense was $338,418 for the quarter
ended September 30, 2003, compared to income tax expense of $276,946 for the
quarter ended September 30, 2002. Our effective tax rate declined from 47.1% for
the quarter ended September 30, 2002 to 46.6% for the quarter ended September
30, 2003, due to a reduction of the corporate tax rate in New York State.


Results of Operations for the Nine Months Ended September 30, 2003 and September
30, 2002

         General. We had net income of $1,006,856 for the nine months ended
September 30, 2003, compared to net income of $814,710 for the comparable nine
months in 2002. The principal categories which make up the 2003 net income are:

     o   Interest income of $5,409,192
     o   Reduced by interest expense of $645,708
     o   Reduced by the provision for loan losses of $120,000
     o   Increased by non-interest income of $1,167,213
     o   Reduced by non-interest expense of $3,925,792
     o   Reduced by $878,049 in income tax expense.

         We discuss each of these categories individually and the reasons for
the differences between the nine months ended September 30, 2003 and the
comparable nine months in 2002 in the following paragraphs. The over-riding
factor affecting the changes in our operating results in all these categories is
our continued implementation of our growth strategy as we discussed above.
Opening new branches initially has a dampening effect on net income because we
must begin incurring the staffing and occupancy expense of a new branch before
we generate funds from that branch for investment. However, we expect that the
longer term consequences of branch expansion will be positive, as deposits and
loans are gradually generated by new branches and then invested in interest
earning assets.

         Interest Income. Interest income was $5,409,192 for the nine months
ended September 30, 2003, compared to $4,709,284 for the nine months ended
September 30, 2002, an increase of 14.9%. We increased the average balance of
our loans from $55,779,450 during the first nine months of 2002 to $67,371,037
during the first nine months of 2003, which was the fuel that drove a $612,572
increase in interest income from loans, representing most of the $699,908
overall increase in interest income. Although our average yield on
interest-earning assets declined by 122 basis points, the effect of the increase
in average volume outweighed the effect of this decrease in yield. We also
experienced a $59,524 increase in income from other interest earning assets and
a $27,812 increase in interest from investment securities. Management invested
most of the increase in funds not required to fund loans in investment
securities because of the higher yield available on investment securities as
opposed to the yield on other interest-earning assets.

         Interest Expense. Interest expense was $645,708 for the nine months
ended September 30, 2003, compared to $596,071 for the nine months ended
September 30, 2002, an increase of 8.3%. The increase was the direct result of
$31,666 of interest on trust preferred securities and of increases in the
average balance of all principal interest-bearing deposit categories - money
market accounts, NOW accounts, certificates of deposit and savings accounts - as
we sought funds to grow our asset base. However, the increase in interest
expense was substantially moderated because of declines in market interest rate
conditions. Our average cost of funds declined from 1.39% to .98% between the
periods. Although, only a 41 basis point decline, the decline represented a
29.5% decrease in our cost of funds. Furthermore, we continued to increase the
volume of non-interest checking accounts as a zero cost funding source.

         Net Interest Income Before Provision for Loan Losses. Net interest
income before the provision for loan losses was $4,763,484 for the nine months
ended September 30, 2003, an increase of $650,271 over the $4,113,213 we had in

                                       16
<PAGE>

the comparable nine months of 2002. The increase was driven entirely by the
increase in the volume of interest-earning assets, but was partially offset by
an 81 basis point decline in our interest rate spread and a 102 basis point
decline in our net interest margin. The spread and margin declined principally
due to the effects of declining market interest rates coupled with a reduction
in the percentage of our average assets invested in loans between the periods
due to assets growing at a greater percentage of assets as compared to the
percentage of loan growth.

         Loans are our highest yielding asset category, and the average rate we
earned on loans was 7.47% during the first nine months of 2003, substantially
the same yield from the first nine months of 2002. In contrast, the average
yield on other (non-loan) interest earning assets was only approximately 2.8%
during the first nine months of 2003, compared to approximately 4.5% during the
first nine months of 2002. An increase in the percentage of assets invested in
interest earning assets other than loans had the effect of decreasing our
overall average yield. The growth in the loan portfolio has been significantly
outstripped by the growth of the Bancorp's asset base, due primarily to the
gathering of deposits and to a lesser extent, the issuance of $5 million in
trust preferred securities.

         The stability in the loan yield was not reflective of the approximately
170 basis point decline in the yield on other interest earning assets. Most of
our loans have interest rates that are based upon the fluctuating prime rate.
Despite the prime rate decline, the effect of that decline on our yields was
moderated because many of our prime-based loans have interest rate floors which
have been reached, so that the decline in the prime rate in June 2003 did not
cause the rates on those loans to further decline. In contrast, the yield on
non-loan investments declined more rapidly because declining market rates drove
down the yields we could earn on those investments and we shifted the mix of
investments towards lower yielding other earning assets and away from higher
yielding investment securities because of the volatility associated with the
larger demand deposit base and the timing of loans to be financed.

         The average interest rate spread was 3.95% for the nine months ended
September 30, 2003, compared to 4.76% for the same period in 2002 and the
average interest rate margin was 4.34% for the nine months ended September 30,
2003, compared to 5.36% for the same six months last year. The difference
between the average interest rate spread and the average interest rate margin
reflects the level of capital and non-interest-bearing checking accounts which
we have to fund interest-earning assets. However, the decline in the difference
between our spread and the margin from 60 basis points (5.36% minus 4.76%) for
the nine months ended September 30, 2003 to 39 basis points (4.34% minus 3.95%)
for the same nine months this year reflects that non-interest-bearing demand
deposits and capital are more valuable as funding sources when market interest
rates are higher and they can be invested in higher yielding assets.
Furthermore, as we grow and leverage our capital, non-interest bearing capital
represents a decreasing percentage of our funding sources.

         Provision for Loan Losses. The provision for loan losses was $120,000
for the nine months ended September 30, 2003, compared to $275,000 for the nine
months ended September 30, 2002. The reduction in the provision was primarily
due to a reduction in the rate of delinquencies in the loan portfolio and the
decrease in the level of non-accrual loans. The provision for loan losses in any
period depends upon the amount necessary to bring the allowance for loan losses
to the level management believes is adequate, after taking into account charge
offs and recoveries. Our allowance for loan losses is based on management's
evaluation of the risks inherent in our loan portfolio and the general economy.
Management periodically evaluates both broad categories of performing loans and
problem loans individually to assess the appropriate level of the allowance.

         Non-interest Income. Non-interest income was $1,167,213 for the nine
months ended September 30, 2003, compared to $950,003 during the same period
last year. The $217,210 increase was caused primarily by a $156,193 increase in
service charges on deposits as a direct result of an increase in total deposit
accounts and an increase in overdraft fees charged to customers. The $30,786
increase in loan fees was attributed to the increase in letter of credit fees
collected in the first quarter of 2003.

                                       17
<PAGE>

         Non-interest Expense. Non-interest expense was $3,925,792 for the nine
months ended September 30, 2003, compared to $3,248,034 for the nine months
ended September 30, 2002. Of the $677,758 increase, the principal causes were:

     o   $359,706 in higher salary and benefits costs due to an increase in
         staffing to support growth. We had 49 full time equivalent employees at
         September 30, 2003 compared to 43 at September 30, 2002.
     o   $105,023 in higher occupancy expense, primarily due to the opening of
         our Hylan Branch in December 2002.
     o   An increase of $131,016 in "other expenses" which also reflected the
         effects of growth on other expense categories.

         Income Tax Expense. Income tax expense was $878,049 for the nine months
ended September 30, 2003, compared to income tax expense of $725,472 for the
nine months ended September 30, 2002. Our effective tax rate declined from 47.1%
for the nine months ended September 30, 2002 to 46.6% for the nine months ended
September 30, 2003, due to a reduction of the corporate tax rate in New York
State.

Liquidity and Capital Resources

         Our primary sources of funds are increases in deposits and proceeds
from the repayment of investment securities. We use these funds principally to
purchase new investment securities and to fund increases in our loan portfolio.

         During the nine months ended September 30, 2003, we had a net increase
in deposits of $49,669,035 and proceeds from repayment of investment securities
totaled $42,096,530. The increase in deposits is primarily attributable to the
opening of a fourth branch in December 2002 and the receipt of a $10 million
time deposit from the State of New York Comptroller's office due to Bank's
establishment of a banking development district in St. George. As we discussed
above, our loan portfolio grew during the first nine months of 2003. Therefore,
we used $7,826,113 of the available funds to fund loan growth. Substantially all
of the remainder of the funds available for investment were used to purchase
investment securities in the amount of $75,421,382 and to increase cash and cash
equivalents.

         In contrast, during the comparable period of 2002, deposits increased
by $29,355,803 and proceeds from the repayment of investment securities totaled
$14,785,086. We used these funds to finance an $8,217,566 increase in loan
portfolio and the purchase $13,445,184 of investment securities and money market
investments.

         In August 2003, the Company completed an issuance of $5.0 million of
trust preferred securities. The trust preferred securities were issued by a
special purpose business trust, VSB Capital Trust I, owned by the Company and
sold to an independent investor. The securities have a maturity of 30 years and
the holders are entitled to receive cumulative cash distributions at rate of
6.909% per annum. In general, the securities will be callable by the Company
after five years.

         The principal reason that the Company entered into the trust preferred
securities transaction was to increase regulatory capital to support growth.
Although the proceeds of the trust preferred securities do not constitute
capital under GAAP, the Board of Governors of the Federal Reserve System permits
a bank holding company to include such proceeds as capital when determining
satisfaction of regulatory capital ratios, up to 25% of total capital. The
Company contributed $4.2 million of the proceeds of the trust preferred
securities to the Victory State Bank as additional capital in order to increase
the bank's capital ratios and allow for future growth. Victory State Bank
satisfied all capital ratio requirements of the Federal Deposit Insurance
Corporation, at September 30, 2003, with a Tier I Leverage Capital Ratio of
8.50%, a ratio of Tier I Capital to Risk-Weighted Assets Ratio of 15.51%, and a
Total Capital to Risk-Weighted Assets Ratio of 16.70%.

                                       18
<PAGE>

         In both the first nine months of 2002 and 2003, funds available to us
exceeded the amount of investments we chose to make, so we experienced a
$24,039,532 increase in cash and cash equivalents in the first nine months of
2002 and a $14,788,498 increase in cash and cash equivalents during the first
nine months of 2003. Total cash and cash equivalents at September 30, 2003 were
$40,884,301. One of the important tasks facing management in upcoming periods is
to seek to satisfactorily deploy this level of cash and cash equivalent into
higher yielding interest-earning such as loans.


Critical Accounting Policies and Judgments

         The Company's consolidated financial statements are prepared based on
the application of certain accounting policies, the most significant of which
are described in Note 2 "Summary of Significant Accounting Policies" in the
Notes to the Consolidated Financial Statements and in the Management's
Discussion and Analysis of Financial Condition and Results of Operations: Impact
of New Accounting Pronouncements" in the Company's Form 10 as filed on April 4,
2003. Certain of these policies require numerous estimates and strategic or
economic assumptions that may prove inaccurate or subject to variations and may
significantly affect the Company's reported results and financial position for
the period or future periods. The use of estimates, assumptions, and judgments
are necessary when financial assets and liabilities are required to be recorded
at, or adjusted to reflect, fair value. The Company's assets and liabilities
that are carried at fair value inherently result in more financial statement
volatility. Fair values and the information used to record valuation adjustments
for certain assets and liabilities are based on either quoted market prices or
provided by other independent third-party sources, when available. When such
information is not available, the Company's management estimates valuation
adjustments primarily by using internal cash flow and other financial modeling
techniques. Changes in underlying factors, assumptions, or estimates in any of
these areas could have a material impact on the Company's future financial
condition and results of operations. We consider the allowance for loan losses
to be a critical accounting policy.

         Allowance for loan losses - The Banks' Allowance for Loan Losses is
established through a provision for loan losses based on management's evaluation
of the risks inherent in its loan portfolio and the general economy. Such
evaluation, which includes a review of all loans on which full collectibility
may not be reasonably assured, considers among other matters, the estimated net
realizable value of the underlying collateral, economic conditions, any
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance. The Bank identifies and evaluates
the following pools or similar loan categories when evaluating the Allowance for
Loan Losses: Commercial Loans - Secured and Unsecured; Real Estate Loans -
Commercial and One-to-four family; Construction Loans - Commercial and
One-to-four family and Other Loans - Consumer and Other Loans.

         It is the policy of the Bank to provide a valuation allowance for
estimated losses on loans based on the Bank's past loan loss experience, known
and inherent risks in the portfolio, adverse situations which may affect the
borrower's ability to repay, estimated value of underlying collateral and
current economic conditions in the Bank's lending area. The allowance is
increased by provisions for loan losses charged to operations and is reduced by
charge-offs, net of recoveries. While management uses available information to
estimate losses on loans, future additions to the allowance may be necessary
based upon the expected growth of the loan portfolio and any changes in economic
conditions beyond management's control. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on judgments different from those of
management. Management believes, based upon all relevant and available
information, that the allowance for loan losses is adequate.

                                       19
<PAGE>

Item 3 - Controls and Procedures

         Evaluation of Disclosure Controls and Procedures: Within the 90 day
period prior to the filing of this report, we undertook an evaluation of our
disclosure controls and procedures under the supervision and with the
participation of Merton Corn, our President and CEO, and Raffaele Branca, our
Executive Vice President and CFO. Disclosure controls are the systems and
procedures we use that are designed to ensure that information we are required
to disclose in the reports we file or submit under the Securities Exchange Act
of 1934 (such as annual reports on Form 10-KSB and quarterly periodic reports on
Form 10-QSB) is recorded, processed, summarized and reported, in a manner which
will allow senior management to make timely decisions on the public disclosure
of that information. Messrs. Corn and Branca concluded that our current
disclosure controls and procedures are effective in ensuring that such
information is (i) collected and communicated to senior management in a timely
manner, and (ii) recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. Since our last evaluation of our
disclosure controls, we have not made any significant changes in, or corrective
actions taken regarding, either our internal controls or other factors that
could significantly affect those controls.

         We intend to continually review and evaluate the design and
effectiveness of our disclosure controls and procedures and to correct any
deficiencies that we may discover. Our goal is to ensure that senior management
has timely access to all material financial and non-financial information
concerning our business so that they can evaluate that information and make
determinations as to the nature and timing of disclosure of that information.
While we believe the present design of our disclosure controls and procedures is
effective to achieve this goal, future events may cause us to modify our
disclosure controls and procedures.


Part II

Item 2 - Changes in Securities

         Our common stock was issued in exchange for the outstanding securities
of Victory State Bank in a holding company reorganization which was exempt from
registration under the Securities Act of 1933 pursuant to Section 3(a)(12). The
exchange was effective at the close of business on May 30, 2003. All the shares
we issued were common stock. There was no underwriter in connection with the
transaction. We issued our common stock on a three for two exchange basis, so
each stockholder of Victory State Bank was entitled to receive three shares of
our common stock for each two shares of Victory State Bank stock that they
owned. Victory State Bank had 704,000 shares of common stock outstanding prior
to the reorganization, so we issued 1,055,998 common shares of VSB Bancorp, Inc.
upon consummation of the reorganization, subject to the final adjustment based
upon settlement for fractional shares in cash. We settled for fractional shares
in cash at the rate of $8.88 for each one-half share of our common stock, with a
total settlement of two common shares of VSB Bancorp, Inc. common stock.

         In connection with the issuance of trust preferred securities discussed
elsewhere herein, we agreed that if there is a default in our guaranty of the
payment of amounts owed on the trust preferred securities, or if we elect to
defer payment of interest on those securities, then we will not pay any
dividends on our common stock.

                                       20
<PAGE>

Signature Page

         In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.



                                       VSB Bancorp, Inc.



Date: November 12, 2003                /s/ MERTON CORN
                                       -----------------------------------------
                                       Merton Corn
                                       President and Chief Executive Officer



Date: November 12, 2003                /s/ RAFFAELE M. BRANCA
                                       -----------------------------------------
                                       Raffaele M. Branca
                                       Executive Vice President and Chief
                                       Financial Officer





                                  EXHIBIT INDEX


Exhibit
Number            Description of Exhibit
------            ----------------------

99.1              Certification pursuant to 18 U.S.C. Section 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



-------------------------



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