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, 2004


[ ] 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 1,505,022 common shares outstanding as of November 4, 2004.
<PAGE>

                              CROSS REFERENCE INDEX

                                     PART I
<TABLE>
<CAPTION>
                                                                                                                Page
                                                                                                                ----
<S>          <C>                                                                                                 <C>
Item 1       Consolidated Statements of Financial Condition as of September 30, 2004 and
                         December 31, 2003 (unaudited).                                                          4
             Consolidated Statements of Operations for the Three and Nine Months Ended
                         September 30, 2004 and 2003 (unaudited).                                                5
                         Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended
                         September 30, 2004 and the Year Ended December 31, 2003 (unaudited).                    6
                         Consolidated Statements of Cash Flows for the Three and Nine Months Ended
                         September 30, 2004 and 2003 (unaudited).                                                7
               Notes to Consolidated Financial Statements for the Three and Nine Months Ended
                         September 30, 2004 and 2003 (unaudited).                                                8 to 12
Item 2       Management's Discussion and Analysis of Financial Condition and Results of Operations               13 to 22
Item 3       Control and Procedures                                                                              22 to 23
                                     PART II

Item 2       Signature Page                                                                                      24

             Exhibit 31.1, 31.2, 32.1, 32.2                                                                      25 to 30
</TABLE>

                                       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
                                                               (unaudited)

                                                      September 30,     December 31,
                                                          2004              2003
                                                      -------------    -------------
<S>                                                   <C>              <C>
Assets:
 Cash and due from banks                              $  50,764,203    $  30,187,741
 Money market investments, held to maturity                 585,742          599,356
 Investment securities, available for sale              109,973,728       83,171,547
 Loans receivable                                        68,872,304       67,981,461
  Allowance for loan loss                                (1,237,048)      (1,162,776)
                                                      -------------    -------------
    Loans receivable, net                                67,635,256       66,818,685
 Bank premises and equipment, net                         1,894,453        2,132,154
 Accrued interest receivable                                664,062          588,232
 Deferred taxes                                           1,455,474          934,710
 Other assets                                               673,750          542,545
                                                      -------------    -------------
      Total assets                                    $ 233,646,668    $ 184,974,970
                                                      =============    =============

Liabilities and stockholders' equity:
Liabilities:
 Deposits:
    Demand and checking                               $ 103,735,325    $  77,416,339
    NOW                                                  22,545,445       23,627,653
    Money market                                         23,084,095       23,709,155
    Savings                                              13,202,516       10,394,955
    Time                                                 51,329,237       32,287,215
                                                      -------------    -------------
       Total Deposits                                   213,896,618      167,435,317
 Escrow deposits                                            440,116          267,484
 Trust preferred securities                               5,000,000        5,000,000
 Accounts payable and accrued
  expenses                                                2,201,029        1,630,544
                                                      -------------    -------------
     Total liabilities                                  221,537,763      174,333,345
                                                      -------------    -------------

Stockholders' equity:
 Common stock, ($.0001 par value, 3,000,000 shares
    authorized, 1,505,022 issued and outstanding at
    September 30, 2004; 1,055,998 issued and
    outstanding at December 31, 2003)                           150              106
 Additional paid in capital                               8,900,442        7,031,499
 Retained earnings                                        5,387,005        3,779,686
 Unallocated ESOP Shares                                 (1,620,331)              --
 Accumulated other comprehensive loss,
   net of taxes of $487,063 and $148,001,
   respectively                                            (558,361)        (169,666)
                                                      -------------    -------------

    Total stockholders' equity                           12,108,905       10,641,625
                                                      -------------    -------------

     Total liabilities and stockholders'
        equity                                        $ 233,646,668    $ 184,974,970
                                                      =============    =============
</TABLE>

See notes to consolidated 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, 2004    Sep. 30, 2003    Sep. 30, 2004    Sep. 30, 2003
                                        -------------    -------------    -------------    -------------
<S>                                     <C>              <C>              <C>              <C>
Interest and dividend income:
 Loans receivable                       $   1,335,491    $   1,349,614    $   3,952,991    $   3,766,538
 Investment securities                      1,074,268          495,576        2,815,246        1,466,620
 Other interest earning assets                 87,848           54,542          160,493          176,034
                                        -------------    -------------    -------------    -------------
     Total interest income                  2,497,607        1,899,732        6,928,730        5,409,192

Interest expense:
 NOW                                           25,494           30,199           76,168           96,241
 Money market                                  50,924           57,946          150,876          209,473
 Savings                                       16,910           13,228           45,090           44,650
 Trust preferred                               86,362           31,666          259,087           31,666
 Time                                         107,626           83,732          267,620          263,678
                                        -------------    -------------    -------------    -------------
     Total interest expense                   287,316          216,771          798,841          645,708

Net interest income                         2,210,291        1,682,961        6,129,889        4,763,484
Provision for loan loss                        30,000           50,000          130,000          120,000
                                        -------------    -------------    -------------    -------------
    Net interest income
       after provision for loan loss        2,180,291        1,632,961        5,999,889        4,643,484
                                        -------------    -------------    -------------    -------------

Non-interest income:
 Loan fees                                     23,109           27,262           57,306           91,571
 Service charges on deposits                  428,587          354,889        1,264,253        1,010,821
 Net rental income                              3,799            9,792           23,593           18,755
 Other income                                  15,570           15,839           52,848           46,066
                                        -------------    -------------    -------------    -------------
     Total non-interest income                471,065          407,782        1,398,000        1,167,213
                                        -------------    -------------    -------------    -------------

Non-interest expenses:
 Salaries and benefits                        853,144          706,875        2,483,512        2,063,439
 Occupancy expenses                           248,119          230,309          707,596          715,632
 Legal expense                                 36,890           36,545          121,188           90,223
 Professional fees                             49,814           37,880          145,591          113,905
 Computer expense                              60,914           74,539          196,140          217,237
 Other expenses                               244,175          227,857          734,681          725,356
                                        -------------    -------------    -------------    -------------
     Total non-interest expenses            1,493,056        1,314,005        4,388,708        3,925,792

       Income before income taxes           1,158,300          726,738        3,009,181        1,884,905
                                        -------------    -------------    -------------    -------------

Provision/(benefit) for income taxes:
 Current                                      589,434          372,959        1,583,564          945,959
 Deferred                                     (49,975)         (34,541)        (181,702)         (67,910)
                                        -------------    -------------    -------------    -------------
     Total provision for income taxes         539,459          338,418        1,401,862          878,049

              Net income                $     618,841    $     388,320    $   1,607,319    $   1,006,856
                                        =============    =============    =============    =============
Basic income per common share           $        0.43    $        0.28    $        1.13    $        0.72
                                        =============    =============    =============    =============
Diluted net income per share            $        0.41    $        0.26    $        1.08    $        0.69
                                        =============    =============    =============    =============
Comprehensive income                    $   1,435,201    $     347,743    $   1,218,624    $     735,716
                                        =============    =============    =============    =============
Book value per common share             $        8.05    $        7.42    $        8.05    $        7.42
                                        =============    =============    =============    =============
</TABLE>

See notes to consolidated financial statements.

All per share data has been adjusted for the 4 for 3 stock split, payable on
March 8, 2004.

                                       5
<PAGE>

<TABLE>
<CAPTION>
                                                          VSB Bancorp, Inc.
                                     Consolidated Statements of Changes in Stockholders' Equity
                                Year Ended December 31, 2003 and Nine Months Ended September 30, 2004
                                                             (unaudited)

                                                                                                         Accumulated
                                 Number of                   Additional                  Unallocated        Other         Total
                                  Common         Common       Paid-In        Retained        ESOP       Comprehensive  Stockholders'
                                  Shares         Stock        Capital        Earnings       Shares      Income/(Loss)     Equity
                               ------------   ------------  ------------   ------------  ------------   ------------   ------------
<S>                               <C>         <C>           <C>            <C>           <C>            <C>            <C>
 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                                                                                         (596,878)      (596,878)
  Net income                             --             --            --      1,520,373            --             --      1,520,373
                               ------------   ------------  ------------   ------------  ------------   ------------   ------------
Total comprehensive income                                                                                                  923,495


 Balance at December 31, 2003     1,055,998            106     7,031,499      3,779,686            --       (169,666)    10,641,625
                               ------------   ------------  ------------   ------------  ------------   ------------   ------------

Exercise of stock option             22,720              2       177,802                                                    177,804
4 for 3 stock split and
  purchase of fractional
  shares                            351,984             35          (368)                                                      (333)
Purchase of newly issued
   common stock by ESOP              74,320              7     1,690,773                                                  1,690,780
Issuance of ESOP shares                                                                    (1,690,780)                   (1,690,780)
Amortization of earned
    portion of ESOP common
    stock                                                                                      70,449                        70,449
Amortization of excess fair
    value of cost - ESOP                                             736                                                        736
Comprehensive income:
  Other comprehensive
  income, net:
    Unrealized holding
    loss arising
    during the year                                                                                         (388,695)      (388,695)
  Net income                             --             --            --      1,607,319            --             --      1,607,319
                               ------------   ------------  ------------   ------------  ------------   ------------   ------------
Total comprehensive income                                                                                                1,218,624

 Balance at September 30, 2004    1,505,022   $        150  $  8,900,442   $  5,387,005  $ (1,620,331)  $   (558,361)  $ 12,108,905
                               ============   ============  ============   ============  ============   ============   ============
</TABLE>
                                       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, 2004    Sep. 30, 2003    Sep. 30, 2004    Sep. 30, 2003
                                                                  -------------    -------------    -------------    -------------
<S>                                                               <C>              <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                      $     618,841    $     388,320    $   1,607,319    $   1,006,856
  Adjustments to reconcile net income to net cash
    used in operating activities
  Depreciation and amortization                                         121,602          125,760          376,475          384,090
  Accretion of income, net of amortization of premium                   (56,450)         118,021         (101,123)         190,868
  ESOP compensation expense                                              42,411               --           71,185               --
  Provision for loan losses                                              30,000           50,000          130,000          120,000
  (Increase)/decrease in prepaid and other assets                       (47,078)         260,728         (131,205)         (72,890)
  Increase in accrued interest receivable                               (68,918)         (97,225)         (75,830)        (133,846)
  (Increase)/decrease in deferred income taxes                          (49,975)          23,398         (181,702)         (53,920)
  (Decrease)/increase in accrued expenses and other liabilities        (350,634)           3,290          570,485           97,680
                                                                  -------------    -------------    -------------    -------------
        Net cash provided by operating activities                       239,799          872,292        2,265,604        1,538,838
                                                                  -------------    -------------    -------------    -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Net decrease/(increase) in loan receivable                          2,310,484       (2,437,328)        (718,850)      (7,826,113)
  Proceeds from maturities of money market investments                  333,114               --        2,665,774               --
  Proceeds from repayment of investments securities,
      available for sale                                              9,305,693       18,296,077       22,877,999       42,096,530
  Purchases of money market investments                                (305,683)              --       (2,652,160)              --
  Purchase of investments securities, available for sale            (23,303,371)     (34,796,334)     (50,534,535)     (75,421,382)
  Purchases of premises and equipment                                   (81,814)         (29,384)        (135,586)        (228,887)
  (Loss)/gain on the sale of other assets                                (3,188)              --           (3,188)           5,464
                                                                  -------------    -------------    -------------    -------------
        Net cash used in investing activities                       (11,744,765)     (18,966,969)     (28,500,546)     (41,374,388)
                                                                  -------------    -------------    -------------    -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase in deposits                                           23,944,240       11,027,726       46,633,933       49,669,035
  Issuance of Trust Preferred Securities                                     --        5,000,000               --        5,000,000
  Cost of Holding Company reorganization                                     --             (410)              --          (44,987)
  Exercise stock option                                                  10,200               --          177,804               --
  Proceeds from ESOP loan                                             1,690,780               --        1,690,780               --
  Purchase of ESOP shares                                            (1,690,780)              --       (1,690,780)              --
  4 for 3 stock split and the purchase of fractional shares                  --               --             (333)              --
                                                                  -------------    -------------    -------------    -------------
        Net cash provided by financing activities                    23,954,440       16,027,316       46,811,404       54,624,048
                                                                  -------------    -------------    -------------    -------------
NET INCREASE/(DECREASE) IN CASH
  AND CASH EQUIVALENTS                                               12,449,474       (2,067,361)      20,576,462       14,788,498
                                                                  -------------    -------------    -------------    -------------
CASH AND CASH EQUIVALENTS,
  BEGINNING OF PERIOD                                                38,314,729       42,951,662       30,187,741       26,095,803
                                                                  -------------    -------------    -------------    -------------
CASH AND CASH EQUIVALENTS,
  END OF PERIOD                                                   $  50,764,203    $  40,884,301    $  50,764,203    $  40,884,301
                                                                  =============    =============    =============    =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:
  Cash paid during the period for:
    Interest                                                      $     286,180    $     180,810    $     876,096    $     607,890
                                                                  =============    =============    =============    =============
    Taxes                                                         $     658,331    $     325,045    $   1,591,532    $     961,592
                                                                  =============    =============    =============    =============
</TABLE>
See notes to consolidated financial statements.

                                       7
<PAGE>

VSB Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2004 AND 2003 (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").

     Principles of Consolidation - The consolidated financial statements of the
Company include the accounts of the Company, including its subsidiaries, Victory
State Bank (the "Bank"), VSB Capital Trust I (the "Trust") and VSB Employee
Stock Ownership Plan Trust ("ESOP"). All significant inter-company accounts and
transactions between the Company and Bank, the Trust or the ESOP have been
eliminated in consolidation. All adjustments consisting of normal recurring
accruals, which in the opinion of management are necessary for fair presentation
of the consolidated financial statements, have been included.

     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 - Cash and cash equivalents include cash on hand
and cash due from banks (including cash items in process of clearing).
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 is required to maintain depends upon its level of transaction
accounts. During the fourteen day period from September 30, 2004 through October
13, 2004, Victory State Bank was required to maintain reserves, after deducting
vault cash, of $6,386,000. 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.

                                       8
<PAGE>

     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.

     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 to reflect probable incurred losses 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. We apply
payments received on non-accrual loans to the outstanding principal balance due.
On a limited basis, we may apply a payment to interest on a non-accrual loan if
there is no impairment of principal and no estimatible loss on this asset. We
continue 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 monthly interest payments are current.

     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.

     We consider a loan to be impaired when, based on current information, it is
probable that we 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 - We periodically evaluate 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, we 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

                                       9
<PAGE>

than the carrying amount, an impairment will be recognized. We report these
assets at the lower of the carrying value or fair value, less the cost to sell.

     Trust Preferred Securities - In August of 2003, we formed VSB Capital Trust
I (the "Trust"). The Trust is a statutory business trust organized under
Delaware law and we own all of its common securities. The Trust issued $5.0
million of Trust Preferred Capital Securities to an independent investor and
$155,000 of common securities to us. We issued a $5.16 million subordinated
debenture 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 nominal 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 Trust Preferred
Securities may be called by the Company at any quarterly interest payment date
at par and the rate of interest then fluctuates quarterly based upon 300 basis
points over the 90 day LIBOR rate. VSB Bancorp, Inc. files as a small business
issuer with the SEC, as such it is not required to adopt FIN 46 or FIN 46-R
until after December 15, 2004. The adoption of FIN46-R will result in the
deconsolidation of the trust preferred securities. The Company believes that the
adoption of FIN46-R will not have a material impact on the consolidated
financial statements

     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.

     Income Taxes - We utilize 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.

     Commitments and Off Balance Sheet Instruments - In the ordinary course of
business, we have entered into off-balance sheet financial instruments,
primarily consisting of commitments to extend credit.

     Basic and Diluted Net Income Per Common Share - Basic net income per share
of common stock is based on 1,432,088 and 1,422,723 shares, the weighted average
number of shares of common stock outstanding for the three and nine months ended
September 30, 2004. Diluted net income per share of common stock is based on
1,497,324 and 1,487,088 shares, the weighted average number of shares of common
stock and common stock equivalents outstanding for the three and nine months
ended September 30, 2004, and is calculated using the treasury stock method. The
weighted average number of common stock equivalents excluded in calculating
diluted net income per common share due to the anti-dilutive effect is 43,309
and 44,180 for the three and nine months ended September 30, 2004. Common stock
equivalents were calculated using the treasury stock method.

     The following table presents a reconciliation of the components used to
compute basic and diluted earnings per share for the three and nine month period
ended September 30, 2004 and 2003.

                                       10
<PAGE>

<TABLE>
<CAPTION>
                                                        Three Months Ended            Nine Months Ended
                                                           September 30,                 September 30,
                                                   ---------------------------   ---------------------------
                                                       2004           2003           2004           2003
                                                   ------------   ------------   ------------   ------------
    <S>                                            <C>            <C>            <C>            <C>
    Basic earnings per share
    Net income as reported                         $    618,841   $    388,320   $  1,607,319   $  1,006,856
    Weighted average common
        shares outstanding                            1,432,088      1,407,997      1,422,723      1,407,997
                                                   ------------   ------------   ------------   ------------

            Basic earnings per share               $       0.43   $       0.28   $       1.13   $       0.72
                                                   ============   ============   ============   ============

    Earnings per share assuming dilution
    Net income available to common
    shareholders                                   $    618,841   $    388,320   $  1,607,319   $  1,006,856
                                                   ============   ============   ============   ============

    Weighted average common
        shares outstanding                            1,432,088      1,407,997      1,422,723      1,407,997
    Add dilutive effect of:
            Stock options                                65,236         58,068         64,365         55,425
                                                   ------------   ------------   ------------   ------------
    Weighted average common and dilutive
             potential common shares outstanding      1,497,324      1,466,065      1,487,088      1,463,422
                                                   ------------   ------------   ------------   ------------

            Diluted earnings per share             $       0.41   $       0.26   $       1.08   $       0.69
                                                   ============   ============   ============   ============
</TABLE>
All per share data has been adjusted for the 4 for 3 stock split, payable on
March 8, 2004.


     Stock Based Compensation - At September 30, 2004, we had stock-based
employee compensation plans. We account 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 stock granted under these
plans have an exercise price equal to the market value of the underlying stock
on the date of grant. On May 1, 2004, we formed the VSB Bancorp, Inc. Employee
Stock Ownership Plan ("ESOP"). The ESOP trust then purchased 74,320 shares of
newly issued common stock from VSB Bancorp, Inc. The purchase price of the
common stock was $22.75 per share. The ESOP borrowed $1,690,780 from VSB
Bancorp, Inc. for this common stock purchase. We account for the ESOP in
accordance with Statement of Position 93-6 ("SOP 93-6"). Allocation of ESOP
shares will be accrued over a ten year period beginning May 1, 2004.

     The following table illustrates the effect on net income and earnings per
share if expense was measured using fair value recognition of FASB Statement No.
123, Accounting for Stock-Based Compensation.

                                       11
<PAGE>

<TABLE>
<CAPTION>
                                                            Three Months Ended               Nine Months Ended
                                                                September 30,                   September 30,
                                                        ----------------------------    ----------------------------
                                                            2004            2003            2004            2003
                                                        ------------    ------------    ------------    ------------
<S>                                                     <C>             <C>             <C>             <C>
    Net income as reported                              $    618,841    $    388,320    $  1,607,319    $  1,006,856
    Deduct: Stock-based compensation expense
         determined under the fair value based method        (10,966)         (5,167)        (32,898)        (15,500)
                                                        ------------    ------------    ------------    ------------

    Pro forma net income                                     607,875         383,153       1,574,421         991,356

    Basic earnings per share as reported                $       0.43    $       0.28    $       1.13    $       0.72
    Pro forma basic earnings per share                  $       0.42    $       0.27    $       1.11    $       0.70

    Diluted earnings per share as reported              $       0.41    $       0.26    $       1.08    $       0.69
    Pro forma diluted earnings per share                $       0.41    $       0.26    $       1.06    $       0.68
</TABLE>
All per share data has been adjusted for the 4 for 3 stock split, payable on
March 8, 2004.


Recently-Issued Accounting Standards - In March 2004, the SEC issued Staff
Accounting Bulletin (SAB) No. 105 "Application of Accounting Principles to Loan
Commitments". This SAB related to Financial Accounting Standards Board (FASB)
Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities"
for valuing loan commitments, considered to be derivatives, on mortgage loans
that will be sold. This SAB is effective for commitments entered into after
April 1, 2004. The adoption of SAB No. 105 did not have a material impact on our
financial position or results of operation.

         In March 2004, the FASB Emerging Issues Task Force ("EITF") reached a
consensus regarding EITF 03-1, "The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments." The consensus clarifies the meaning
of other-than-temporary impairment and its application to investments classified
as either available-for-sale or held-to-maturity under SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities," and investments accounted
for under the cost method or the equity method. The recognition and measurement
guidance for which the consensus was reached is to be applied to
other-than-temporary impairment evaluations. In September 2004, the Financial
Accounting Standards Board ("FASB") issued a final FASB Staff Position, FSP EITF
Issue 03-01-1, which has delayed the effective date for the measurement and
recognition guidance of EITF 03-01. The comment period is currently open related
to this staff position. The implementation date is unknown until further
guidance is issued by the FASB. We are currently evaluating the impact of
adopting EITF 03-01.

Management continuously monitors emerging issues and accounting bulletins, some
of which could potentially impact the Company's financial statements

                                       12
<PAGE>

Item 2

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


Financial Condition

         Our total assets were $233,646,668 at September 30, 2004, an increase
of $48,671,698, or 26.3%, since December 31, 2003. 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 and specifically by the deposit increases at all our branch
offices. Our investment of these funds generated the following increase in
assets.

         o   A  $20,576,462 increase in cash and due from banks
         o   A  $26,802,181 increase in investment securities available for sale
         o   An $   816,571 increase in net loans receivable.

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

         Our deposits (including escrow deposits) were $214,336,734 at September
30, 2004, an increase of $46,633,933, or 27.8%, from December 31, 2003, which
provided most of the funds used for the increase in assets. The increase in
deposits includes a $26,491,618 increase in non-interest demand deposits, a
$19,042,022 increase in time deposits and a $2,807,561 increase in savings
accounts, partially offset by a decrease of $1,082,208 in NOW accounts and a
decrease of $625,060 in money market accounts. The time deposit increase
includes a $5 million time deposit from the City of New York, into our St.
George branch, under the City's new Bank Development District deposit program.

         Total stockholders' equity was $12,108,905 at September 30, 2004, an
increase of $1,467,280 during the first nine months of 2004. The increase
reflected net income of $1,607,319 for the nine months ended September 30, 2004
reduced by an increase of $388,695 in other comprehensive loss due to an
increase in the unrealized loss in securities available for sale during the
first nine months of 2004. The market value decrease is excluded from the
calculation of regulatory capital. Management does not anticipate selling
securities in this portfolio but changes in market interest rates or demand for
funds may change management's plans with respect to the securities portfolio. If
there is a material increase in interest rates, the market value of the
available for sale portfolio may decline further. Management believes that the
principal and interest payments on this portfolio, combined with the existing
liquidity, will be sufficient to fund loan growth.

         The increase in stockholders' equity also included an increase of
$177,804 in additional paid in capital due to the exercise of options to
purchase 22,720 shares of common stock and an increase in additional paid in
capital of $70,449 reflecting the earned portion of the amortization of the ESOP
common stock. The ESOP purchased 74,320 shares of our common stock out of our
authorized but unissued common stock, which had no net effect on capital on the
purchase date. The purchase price for the ESOP common stock was $22.75 per
share, the fair market value of the common stock when the ESOP purchased the
shares, for a total purchase price of $1.7 million. VSB Bancorp, Inc. satisfied
all capital ratio requirements of the Federal Reserve at September 30, 2004,
with a Tier I Leverage Capital ratio of 8.14%, a ratio of Tier I Capital to
Risk-Weighted Assets ratio of 16.69%, and a Total Capital to Risk-Weighted
Assets ratio of 18.68%.

                                       13
<PAGE>

         In May of 2004, after receiving approval from our stockholders, we
established the VSB Bancorp Inc. Employee Stock Ownership Plan (the "ESOP"). The
ESOP purchased 74,320 shares of our common stock out of our authorized but
unissued common stock. The purchase price of $22.75 per share, the fair market
value of the common stock on the dates the ESOP purchased the shares, for a
total purchase price of $1.7 million. We made a loan to the ESOP to pay the
entire purchase price of the shares. The ESOP will repay the loan principally
from the cash contributions from Victory State Bank and from cash dividends, if
any, which we pay on our common stock held by the ESOP. The loan has a ten year
term, with periodic payments due annually sufficient to repay the loan,
including interest, in monthly installments over the term of the loan. The
interest rate is fixed at 4.00%, the prime rate on the date of the loan.
Employees are not permitted to make contributions to the ESOP.

         The stock purchased with the proceeds of the loan is pledged as
security for the loan. However, as the loan is repaid, the stock will be
released from the security interest gradually pro rata, regardless of the market
value of the stock at the time the loan payment is made. As shares are released
from the security interest, they will be allocated to accounts of each
participant in the ESOP. For federal and New York State income tax purposes,
contributions to the ESOP will be tax deductible to VSB Bancorp when the
contribution is made. In addition, if cash dividends are paid on the shares and
are applied to repay the loan, the amount of those dividends will be deductible
by VSB Bancorp for tax purposes. If dividends are promptly distributed in cash
to participants, then they also become tax deductible to VSB Bancorp.

         In general, when stock is released from the security interest of the
ESOP loan as the result of a contribution made to pay the ESOP loan, the stock
is allocated to each participant based upon the relative compensation of each
participant for the year in which the stock is released. Other amounts
contributed to the ESOP that are allocated to employees will also be allocated
based upon compensation. Likewise, other profits to be allocated to employee
accounts, such as any gain on the sale of unallocated stock held by the ESOP,
will be allocated to employees based upon their relative ESOP account balances.

         For financial statement reporting purposes, we record the compensation
expense related to the ESOP when shares are to be released from the security
interest for the loan. The amount of the compensation expense will be based upon
the fair market value of the shares at that time, not the original purchase
price. The initial sale of shares to the ESOP does not increase our capital by
the amount of the purchase price because the purchase price was paid by a loan
we made to the ESOP. Instead, we record an increase in capital as the shares are
allocated or committed to be allocated to employee accounts (i.e., as the ESOP
loan is gradually repaid), based upon the fair market value of the shares at
that time. When we calculate earnings per share, only shares allocated or
committed to be allocated to employee accounts will be considered to be
outstanding. However, all shares that the ESOP owns are legally outstanding, so
they have voting rights and, if we pay dividends, dividends will be paid on all
ESOP shares.

         In August of 2003, we 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 Trust
Preferred Securities may be called by the Company at any quarterly interest
payment date at par and the interest rate fluctuates quarterly based upon 300
basis points over the 90 day LIBOR rate. 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

                                       14
<PAGE>

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.

         We opened for business in November 1997 and management has worked
throughout the past seven years to grow our franchise. From one office in 1997,
we now have four offices and we have announced a fifth branch location in the
Rosebank section of Staten Island, subject to regulatory approval. 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 $233.6 million, total
deposits of $214.3 million and capital of $12.1 million by September 30, 2004.

         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 current economy and competition 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 in the third quarter of 2003. 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.

Results of Operations for the Quarters Ended September 30, 2004 and September
30, 2003

         General. We had net income of $618,841 for the quarter ended September
30, 2004, compared to net income of $388,320 for the comparable quarter in 2003.
The principal categories which make up the 2004 net income are:

            o   Interest income of $2,497,607
            o   Reduced by interest expense of $287,316
            o   Reduced by the provision for loan losses of $30,000
            o   Increased by non-interest income of $471,065
            o   Reduced by non-interest expense of $1,493,056
            o   Reduced by $539,459 in income tax expense.

         We discuss each of these categories individually and the reasons for
the differences between the quarter ended September 30, 2004 and the comparable
quarter in 2003 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 loans are generated by new branches and deposits at the branches are invested
in interest earning assets. The implementation of the ESOP increases
compensation expense as the ESOP loan is repaid through contributions to the
ESOP, which may be partially offset through the use of cash dividends, if
declared.

                                       15
<PAGE>

         Interest Income. Interest income was $2,497,607 for the quarter ended
September 30, 2004, compared to $1,899,732 for the quarter ended September 30,
2003, an increase of $597,875, or 31.5%. The principal reason for the increase
was a $32,993,212 increase in the average balance of investment securities, as
we deployed the cash from our deposit growth into investment securities. We
invested new deposits and the proceeds of the trust preferred securities
offering in investment securities, pending planned redeployment in loans as,
when and if appropriate opportunities are available. The increase in the volume
of investment securities, coupled with a 1.33% increase in the average yield on
those securities, generated a $578,692 increase in interest earned on investment
securities. The reported yield in the third quarter of 2003 was lower because a
higher level of refinancing in the mortgages underlying our CMOs required an
accelerated amortization of the premiums we had paid when we purchased the CMOs.

         The average balance of our loans decreased by 4.1%, from $71,248,645
during the 2003 quarter to $68,317,088 during the 2004 quarter, which was the
principal reason for a $14,123 decrease in interest income from loans. Seeking
to limit the adverse effects of lower market interest rates, we shifted our
lending strategy to require minimum rates on a larger portion of our prime-based
loan portfolio. Finally, we had a $32,388 increase in income from overnight
funds and other interest earning assets, as the average balance increased
$2,114,440 and the yield increased 41 basis points.

         Interest Expense. Interest expense was $287,316 for the quarter ended
September 30, 2004, compared to $216,771 for the quarter ended September 30,
2003, an increase of 32.5%. The increase was the direct result of $54,696 of
interest on trust preferred securities and was partially offset by the lower
rates paid on principal interest bearing deposit categories - savings, time
deposit, money market and NOW accounts - as the lower interest rate environment
offset the growth of our deposit base. Our average cost of funds increased from
0.91% to 1.05% between the periods because the trust preferred securities, at a
6.91% cost, were outstanding for all of the 2004 period but for only about half
the 2003 quarter and because of a greater percentage of higher costing time
deposits to total deposits. Our average cost of interest-bearing deposits
(excluding the cost of the trust preferred securities) declined from 0.79 % to
0.77%, due to the general decline in market interest rates and the re-pricing of
our time deposits. Furthermore, we continued to increase the volume of
non-interest checking accounts, a zero cost funding source, which represented
45% of the growth in average total deposits. This increase was a direct result
of our efforts to increase low cost funding sources.

         Net Interest Income Before Provision for Loan Losses. Net interest
income before the provision for loan losses was $2,210,291 for the quarter ended
September 30, 2004, an increase of $527,330, or 31.3% over the $1,682,961 we had
in the comparable 2003 quarter. The increase was driven primarily by the
increase in the volume of interest-earning assets. We have continued to
implement our growth strategy which resulted in an increase of $32,544,397 in
interest earning assets, most of which consisted of investment securities. Our
interest rate spread improved from 3.78% in the 2003 quarter to 4.09% in the
2004 quarter, principally for the following reasons:

         o   lower market interest rates allowed us to decrease our cost of
             deposits, thereby offsetting the increase in our average costs due
             to the higher expense of the trust preferred securities;
         o   we were more aggressive in imposing minimum interest rate floors on
             our new loan originations to combat the effects of the low prime
             interest rate;
         o   we purchased investment securities with higher yields than the
             securities on our books in the 2003 quarter; and
         o   we purchased investment securities from funds provided by new
             deposits rather than lower yielding overnight investments.

         Loans are our highest yielding asset category, and due to interest rate
floors on many of our prime-based loans, our loan yields have been relatively
constant in recent quarters. In contrast, the average yield on other (non-loan)
interest earning assets was approximately 3.70% during the 2004 quarter,
compared to approximately 2.44% during the 2003 quarter. This improvement

                                       16
<PAGE>

resulted from our strategy to increase the volume of investment securities with
higher yields than overnight investments and the reduction in the amortization
of premiums in the mortgage-backed security portfolio due a slow down in
prepayments as interest rates increased. The average level of investment
securities represented 77.9% of non-loan earning assets in the 2004 quarter
compared to 71.9% in the 2003 quarter. The growth in the loan portfolio was
slower than the growth in the investment securities portfolio due to competitive
pressures for loans in our marketplace.

         Most of our loans have interest rates that are based upon the
fluctuating prime rate, which was 4.75% at the end of the third quarter of 2004
as compared to 4.00% in the third quarter of 2003. Many of our prime-based loans
have interest rate floors. The loans, which are most commonly made at interest
rates from 100 to 150 basis points above the prime rate, have interest rate
floors that are usually at 7.00%, so the increase in the prime rate from 4.00%
to 4.75% did not result in a substantial increase in our yield on those loans.
If the prime rate increases, the rate of interest on these loans will not
increase until the prime rate reaches from 5.50% to 6.00%, while our cost of
funds can be expected to increase as market interest rates begin to rise.

         Provision for Loan Losses. The provision for loan losses was $30,000
for the quarter ended September 30, 2004, compared to $50,000 for the quarter
ended September 30, 2003. The decrease in the provision was primarily due to a
moderate decrease in the rate of delinquencies in the loan portfolio and the
slowed loan growth. 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 appropriate, after taking into account charge offs and recoveries.
Our allowance for loan losses reflects probable incurred losses based on
management's evaluation of the 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
appropriateness 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 1.80% of total loans at September 30, 2004, 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 $471,065 for the three
months ended September 30, 2004, compared to $407,782 during the same period
last year. The $63,283, or 15.5%, increase in non-interest income was a direct
result of a $73,698 increase in service charges on deposits, more specifically
because of the increase in the deposit base and a related increase in aggregate
overdraft fees charged to customers.

         Non-interest Expense. Non-interest expense was $1,493,056 for the
quarter ended September 30, 2004, compared to $1,314,005 for the quarter ended
September 30, 2003. The principal causes were:

    o  $146,269 in higher salary and benefits costs due to normal salary
       increases, a slight increase in staffing to support growth, the
       compensation expense associated with the ESOP and higher benefit costs.
    o  $11,934 in higher professional fees due to higher costs involved with
       running a SEC registered company.
    o  $17,810 increase in occupancy expenses as we implemented new T1 WAN
       connections between branches

         There was a $13,625 decrease in computer expenses due to the retirement
of certain depreciable assets, which partially offset the increase in
non-interest expense.

         Income Tax Expense. Income tax expense was $539,459 for the quarter
ended September 30, 2004, compared to income tax expense of $338,418 for the
quarter ended September 30, 2003, due to the $431,562 increase of income before
income taxes in the 2004 quarter. Our effective tax rate remained the same for
the quarter ended September 30, 2004 and 2003 at 46.6%.

                                       17
<PAGE>

Results of Operations for the Nine Months Ended September 30, 2004 and September
30, 2003

         General. We had net income of $1,607,319 for the nine months ended
September 30, 2004, compared to net income of $1,006,856 for the comparable nine
months in 2003. The principal categories which make up the 2004 net income are:

               o    Interest income of $6,928,730
               o    Reduced by interest expense of $798,841
               o    Reduced by the provision for loan losses of $130,000
               o    Increased by non-interest income of $1,398,000
               o    Reduced by non-interest expense of $4,388,708
               o    Reduced by $1,401,862 in income tax expense.

         We discuss each of these categories individually and the reasons for
the differences between the nine months ended September 30, 2004 and the
comparable nine months in 2003 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. The
implementation of the ESOP increases compensation expense as the ESOP loan is
repaid through contributions to the ESOP, which may be partially offset through
the use of cash dividends, if declared.

         Interest Income. Interest income was $6,928,730 for the nine months
ended September 30, 2004, compared to $5,409,192 for the nine months ended
September 30, 2003, an increase of $1,519,538, or 28.1%. The principal reason
for the increase was a $33,122,495 increase in the average balance of investment
securities, as we deployed available funds into investment securities to improve
yields over other non-loan investments. We also invested new deposits and the
proceeds of the trust preferred securities offering in investment securities,
pending planned redeployment in loans as, when and if appropriate opportunities
are available. The increase in the volume of investment securities, coupled with
a 0.70% increase in the average yield on those securities, generated a
$1,348,626 increase in interest earned on investment securities. The reported
yield in the first nine months of 2003 was lower due to accelerated amortization
of premiums in the CMO portfolio, resulting from the higher level of refinancing
in the underlying mortgages.

         We increased the average balance of our loans by 1.9% from $67,371,037
during the first nine months of 2003 to $68,659,373 during the first nine months
of 2004 and average yield increased by 21 basis points. These were the principal
reasons for an $186,453 increase in interest income from loans. Seeking to limit
the adverse effects of lower market interest rates, we shifted our lending
strategy to require minimum rates on a larger portion of our prime-based loan
portfolio. We also received $18,550 of interest during the nine months on prior
period loans that had been designated as non-accrual and which were paid in full
in 2004. In contrast, during the first nine months of 2003, reported interest
was reduced by $28,000 because we designated a number of loans as non-accrual
and reversed interest income that we had accrued but not received. Finally, we
had a $15,541 decrease in income from overnight funds and other interest earning
assets as we invested less in those categories because of their lower yields.

         Interest Expense. Interest expense was $798,841 for the nine months
ended September 30, 2004, compared to $645,708 for the nine months ended
September 30, 2003, an increase of 23.7%. The increase was the direct result of
$227,421 of interest on trust preferred securities and was partially offset by
the lower rates paid on principal interest bearing deposit categories - savings,
time deposit, money market and NOW accounts - as the lower interest rate
environment offset the growth of our deposit base. Our average cost of funds
increased from 0.98% to 1.06% between the periods because of the 6.91% average
cost of the trust preferred securities and the related increase in its average
balance of $4,379,562 for the applicable periods. Our average cost of
interest-bearing deposits (excluding the trust preferred securities) declined
from 0.94 % to 0.75% due to the general decline in market interest rates and the

                                       18
<PAGE>

re-pricing of our time deposits. Furthermore, we continued to increase the
volume of non-interest checking accounts, a zero cost funding source, which
represented 44% of the growth in average total deposits. This increase was a
direct result of our efforts to increase low cost funding sources. The recent
increase in the Federal Funds rate to 1.75% from 1.00% in 2004 is likely to
cause our cost of deposits to increase.

         Net Interest Income Before Provision for Loan Losses. Net interest
income before the provision for loan losses was $6,129,889 for the nine months
ended September 30, 2004, an increase of $1,366,405, or 28.7% over the
$4,763,484 we had in the comparable nine months of 2003. The increase was driven
primarily by the increase in the volume of interest-earning assets. We have
continued to implement our growth strategy which resulted in an increase of
$30,999,122 in interest earning assets, most of which increase was invested in
investment securities. Our interest rate spread improved in the nine months of
2004 to 4.14% from 3.95% in the nine months of 2003, principally for the
following reasons:

         o    lower market interest rates allowed us to decrease our cost of
              deposits, thereby offsetting the increase in our average costs due
              to the expense of the trust preferred securities;
         o    we were more aggressive in imposing minimum interest rate floors
              on our new loan originations to combat the effects of the low
              prime interest rate;
         o    we deployed available cash and funds from deposit growth into
              higher yielding investment securities rather than overnight
              investments; and
         o    as discussed above, we received interest during the first nine
              months of 2004 on a non-accruing loan that was paid for a prior
              period and we had the reverse situation in the first nine months
              of 2003 due to designating loans as non-accrual.

         Loans are our highest yielding asset category, and due to interest rate
floors on many of our prime-based loans, our loan yields have been relatively
constant in recent quarters. In contrast, the average yield on other (non-loan)
interest earning assets was approximately 3.64% during the first nine months of
2004, compared to approximately 2.77% during the first nine months of 2003. This
improvement resulted from our strategy to reduce overnight and similar
investments in favor of investment securities with higher yields, the recent
increases in the Federal Funds rate and the reduction in the amortization of
premiums in the mortgage-backed security portfolio due to slower prepayments.
The average level of investment securities represented 80.9% of non-loan earning
assets in the first nine months of 2004 compared to 69.4% in the first nine
months of 2003. The growth in the loan portfolio was slower than the growth in
the investment securities portfolio due to competitive pressures for loans in
our marketplace.

         Provision for Loan Losses. The provision for loan losses was $130,000
for the nine months ended September 30, 2004, compared to $120,000 for the nine
months ended September 30, 2003. The increase in the provision was primarily due
to a moderate increase in the rate of delinquencies and charge-offs in the loan
portfolio.

         Non-interest Income. Non-interest income was $1,398,000 for the nine
months ended September 30, 2004, compared to $1,167,213 during the same period
last year. The $230,787, or 19.8%, increase in non-interest income was a direct
result of a $253,432 increase in service charges on deposits, more specifically
because of the increase in the deposit base and a related increase in aggregate
overdraft fees charged to customers.

         Non-interest Expense. Non-interest expense was $4,388,708 for the nine
months ended September 30, 2004, compared to $3,925,792 for the nine months
ended September 30, 2003. The principal causes were:

  o   $420,073 in higher salary and benefits costs due to normal salary
      increases, a slight increase in staffing to support growth, compensation
      expense related to our ESOP and higher benefit costs.

                                       19
<PAGE>

  o   $30,965 in higher legal expenses due to, in part to becoming a SEC
      registered company and lease negotiations on our pending branch.
  o   $31,686 in higher professional fees primarily due to becoming a SEC
      registered company, and increased costs due to our growth.
  o   $8,036 decrease in occupancy expenses and a $21,097 decrease in computer
      expenses due to the retirement of certain depreciable assets.

         Income Tax Expense. Income tax expense was $1,401,862 for the nine
months ended September 30, 2004, compared to income tax expense of $878,049 for
the nine months ended September 30, 2003, due to the $1,124,276 increase of
income before income taxes in the first nine months of 2004. Our effective tax
rate remained the same for the nine months ended September 30, 2004 and 2003 at
46.6%.

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

                                                     Three                                         Three
                                                  Months Ended                                  Months Ended
                                                 Sep. 30, 2004                                 Sep. 30, 2003
                                  ------------------------------------------    ------------------------------------------
                                    Average                       Yield/          Average                       Yield/
                                    Balance        Interest        Cost           Balance        Interest        Cost
                                  ------------   ------------   ------------    ------------   ------------   ------------
<S>                               <C>            <C>                    <C>     <C>            <C>                    <C>
Assets:
Interest-earning assets:
  Loans receivable                $ 68,317,088   $  1,335,491           7.78%   $ 71,248,645   $  1,349,614           7.52%
  Money market investments             589,156          1,746           1.18         220,854            828           1.49
  Investment securities, afs        97,280,749      1,074,268           4.39      64,287,537        495,576           3.06
  Other interest-earning assets     26,968,064         86,102           1.27      24,853,624         53,714           0.86
                                  ------------   ------------                   ------------   ------------
  Total interest-earning assets    193,155,057      2,497,607           5.14     160,610,660      1,899,732           4.69

Non-interest earning assets         14,277,060                                    10,977,079
                                  ------------                                  ------------
  Total assets                    $207,432,117                                  $171,587,739
                                  ============                                  ============

Liabilities and equity:
Interest-bearing liabilities:
  Savings accounts                $ 13,449,113         16,910           0.50    $  9,515,298         13,228           0.55
  Time accounts                     43,112,683        107,626           0.99      30,764,264         83,732           1.08
  Money market accounts             23,147,249         50,924           0.88      25,492,919         57,946           0.90
  Now accounts                      23,996,409         25,494           0.42      27,057,938         30,199           0.44
  Trust preferred                    5,000,000         86,362           6.91       1,847,826         31,666           6.80
                                  ------------   ------------                   ------------   ------------
    Total interest-bearing
      liabilities                  108,705,454        287,316           1.05      94,678,245        216,771           0.91
  Checking accounts                 85,524,196                                    65,143,301
                                  ------------                                  ------------
Total deposits                     194,229,650                                   159,821,546
Other liabilities                    2,210,716                                     1,397,538
                                  ------------                                  ------------
  Total liabilities                196,440,366                                   161,219,084
Equity                              10,991,751                                    10,368,655
                                  ------------                                  ------------
  Total liabilities and equity    $207,432,117                                  $171,587,739
                                  ============                                  ============

Net interest income/net
 interest rate spread                            $  2,210,291           4.09%                  $  1,682,961           3.78%
                                                 ============   ============                   ============   ============

Net interest earning assets/
 net interest margin              $ 84,449,603                          4.55%   $ 65,932,415                          4.16%
                                  ============                  ============    ============                  ============

Ratio of interest-earning
 assets to interest-bearing
 liabilities                              1.78 x                                        1.70 x
                                  ============                                  ============

<CAPTION>

                                                     Nine                                         Nine
                                                  Months Ended                                 Months Ended
                                                 Sep. 30, 2004                                Sep. 30, 2003
                                  ------------------------------------------   ------------------------------------------
                                    Average                       Yield/         Average                       Yield/
                                    Balance        Interest        Cost          Balance        Interest        Cost
                                  ------------   ------------   ------------   ------------   ------------   ------------
<S>                                <C>           <C>                    <C>    <C>            <C>                    <C>
Assets:
Interest-earning assets:
  Loans receivable                  68,659,373   $  3,952,991           7.68%  $ 67,371,037   $  3,766,538           7.47%
  Money market investments             580,311          5,010           1.15         74,155          1,554           2.80
  Investment securities, afs        88,228,775      2,815,246           4.26     55,106,280      1,466,620           3.56
  Other interest-earning assets     20,264,644        155,483           1.02     24,182,509        174,480           0.96
                                  ------------   ------------                  ------------   ------------
  Total interest-earning assets    177,733,103      6,928,730           5.20    146,733,981      5,409,192           4.93

Non-interest earning assets         12,349,274                                    9,911,875
                                  ------------                                 ------------
  Total assets                    $190,082,377                                 $156,645,856
                                  ============                                 ============

Liabilities and equity:
Interest-bearing liabilities:
  Savings accounts                $ 12,044,085         45,090           0.50   $  8,798,181         44,650           0.68
  Time accounts                     36,488,927        267,620           0.98     27,544,142        263,678           1.28
  Money market accounts             23,387,096        150,876           0.86     25,212,142        209,473           1.11
  Now accounts                      24,161,860         76,168           0.42     25,706,480         96,241           0.50
  Trust preferred                    5,000,000        259,087           6.91        620,438         31,666           6.82
                                  ------------   ------------                  ------------   ------------
    Total interest-bearing
      liabilities                  101,081,968        798,841           1.06     87,881,383        645,708           0.98
  Checking accounts                 75,821,008                                   57,248,040
                                  ------------                                 ------------
Total deposits                     176,902,976                                  145,129,423
Other liabilities                    1,919,346                                    1,396,634
                                  ------------                                 ------------
  Total liabilities                178,822,322                                  146,526,057
Equity                              11,260,055                                   10,119,799
                                  ------------                                 ------------
  Total liabilities and equity    $190,082,377                                 $156,645,856
                                  ============                                 ============

Net interest income/net
 interest rate spread                            $  6,129,889           4.14%                 $  4,763,484           3.95%
                                                 ============   ============                  ============   ============

Net interest earning assets/
 net interest margin              $ 76,651,135                          4.60%  $ 58,852,598                          4.34%
                                  ============                  ============   ============                  ============

Ratio of interest-earning
 assets to interest-bearing
 liabilities                              1.76 x                                       1.67 x
                                  ============                                 ============
</TABLE>

See notes to consolidated financial statements.



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, 2004, we had a net increase
in deposits of $46,633,933 and proceeds from repayment of investment securities
totaled $22,877,999. We used those funds to finance a $718,850 increase in our

                                       20
<PAGE>

loan portfolio and to purchase $53,186,695 of investment securities and money
market investments. The increase in deposits is primarily attributable to
deposit increases at all our branches and the $5 million time deposit from the
City of New York, into our St. George branch, under the City's new Bank
Development District deposit program.

         In contrast, during the comparable period of 2003, deposits increased
by $49,669,035 and proceeds from the repayment of investment securities totaled
$42,096,530. We used those funds to finance a $7,826,113 increase in our loan
portfolio and to purchase $75,421,382 of investment securities and money market
investments.

         The principal reason that we entered into the trust preferred
securities transaction discussed above 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% as Tier 1
capital. The Company contributed $4.2 million of the proceeds of the trust
preferred securities to 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, 2004, with a Tier I Leverage Capital ratio of
8.19%, a ratio of Tier I Capital to Risk-Weighted Assets ratio of 16.77%, and a
Total Capital to Risk-Weighted Assets ratio of 17.99%.

         In the first nine months of 2004 and 2003, funds available to us
exceeded the amount of investments we chose to make, so we experienced a
$20,576,462 increase in cash and cash equivalents in the first nine months of
2004 pending reinvestment in loans and investment securities compared to 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, 2004 were $50,764,203.
One of the important tasks facing management in upcoming periods is to seek to
satisfactorily deploy this level of cash and cash equivalents, as well as a
portion of our investment securities, into higher yielding interest-earning
assets such as loans.

The following table sets forth our contractual obligations and commitments for
future lease payments, time deposit maturities and loan commitments.


Contractual Obligations and Commitments at September 30, 2004

<TABLE>
<CAPTION>
Contractual Obligations                                           Payment due by Period
                                           -------------------------------------------------------------------

                                            Less than    One to three  Four to five     After     Total Amounts
                                             One Year       years         years      five years     committed
                                           -----------   -----------   -----------   -----------   -----------
<S>                                        <C>           <C>           <C>           <C>           <C>
Minimum annual rental  payments under
      non-cancelable operating leases      $   332,830   $   582,706   $   443,034   $ 1,453,410   $ 2,811,980
Remaining contractual maturities of time
      deposits                              33,403,504    14,984,958     1,553,614     1,387,161    51,329,237
                                           -----------   -----------   -----------   -----------   -----------
 Total contractual cash obligations        $33,736,334   $15,567,664   $ 1,996,648   $ 2,840,571   $54,141,217
                                           ===========   ===========   ===========   ===========   ===========


Other commitments                                       Amount of commitment Expiration by Period
                                           -------------------------------------------------------------------

                                            Less than    One to three  Four to five     After     Total Amounts
                                             One Year       years         years      five years     committed
                                           -----------   -----------   -----------   -----------   -----------

                                           -----------   -----------   -----------   -----------   -----------
Loan commitments                           $29,254,496   $ 8,394,000   $        --   $        --   $37,648,496
                                           ===========   ===========   ===========   ===========   ===========
</TABLE>

                                       21
<PAGE>

         Our loan commitments shown in the above table represent both
commitments to make new loans and obligations to make additional advances on
existing loans, such as construction loans in process and lines of credit.
Substantially all of these commitments involve loans with fluctuating interest
rates, so the outstanding commitments do not expose us to interest rate risks
upon fluctuations in market rates. We consider the amount of outstanding
commitments when we assess our allowance for loan losses.


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 report on Form 10-KSB as
filed on March 24, 2004. 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 methodology for determining the allowance for loan losses to be a
critical accounting policy.

         Allowance for loan losses - The Company's 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 appropriate loan loss allowance. The Company identifies and
evaluates the following pools of similar loan categories when analyzing the
Allowance for Loan Losses: (i) Commercial Loans - Secured and Unsecured; (ii)
Real Estate Loans - Commercial and One-to-four family; (iii) Construction Loans
- Commercial and One-to-four family and (iv) Other Loans - Consumer and Other
Loans.

         It is the policy of the Company to provide a valuation allowance for
estimated losses on loans to reflect probable incurred losses 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 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.

Item 3 - Controls and Procedures

         Evaluation of Disclosure Controls and Procedures: As of September 30,
2004, 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

                                       22
<PAGE>

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.

                                       23
<PAGE>

Part II

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 10, 2004             /s/ MERTON CORN
                                         ---------------------------------------
                                         Merton Corn
                                         President and Chief Executive Officer



     Date: November 10, 2004             /s/ RAFFAELE M. BRANCA
                                         ---------------------------------------
                                         Raffaele M. Branca
                                         Executive Vice President and Chief
                                         Financial Officer



                                  EXHIBIT INDEX

Exhibit
Number         Description of Exhibit
------         ----------------------
31.1           Rule 13A-14(a)/15D-14(a) Certification of Chief Executive Officer
31.2           Rule 13A-14(a)/15D-14(a) Certification of Chief Financial Officer
32.1           Certification by CEO pursuant to 18 U.S.C. 1350.
32.2           Certification by CFO pursuant to 18 U.S.C. 1350.



---------------------------------
Item 6 - Exhibits

Exhibit
Number         Description of Exhibit
------         ----------------------
31.1           Rule 13A-14(a)/15D-14(a) Certification of Chief Executive Officer
31.2           Rule 13A-14(a)/15D-14(a) Certification of Chief Financial Officer
32.1           Certification by CEO pursuant to 18 U.S.C. 1350.
32.2           Certification by CFO pursuant to 18 U.S.C. 1350.

                                       24