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 JUNE 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 1,504,462 common shares outstanding as of August 5, 2004.

<PAGE>

                              CROSS REFERENCE INDEX

                                     PART I
                                                                        Page
                                                                        ----
Item 1     Consolidated Statements of Financial Condition as of
           June 30, 2004 and December 31, 2003 (unaudited).              4
           Consolidated Statements of Operations for the Three
               and Six Months Ended June 30, 2004 and 2003
               (unaudited).                                              5
           Consolidated Statements of Changes in Stockholders'
               Equity for the Six Months Ended June 30, 2004 and the
               Year Ended December 31, 2003 (unaudited).                 6
           Consolidated Statements of Cash Flows for the Three and
               Six Months Ended June 30, 2004 and 2003 (unaudited).      7
           Consolidated Average Balance Sheets for the Three and
               Six Months Ended June 30, 2004 and 2003 (unaudited).      8
           Notes to Consolidated Financial Statements for the Three
               and Six Months Ended June 30, 2004 and 2003 (unaudited).  9 to 13
Item 2     Management's Discussion and Analysis of Financial
               Condition and Results of Operations                      13 to 23
Item 3     Control and Procedures                                       23

                                   PART II

Item 2     Changes in Securities                                        23


           Signature Page                                               24

           Exhibit 31.1, 31.2, 32.1, 32.2                               25 to 30

                                       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>

                                VSB Bancorp, Inc.
                 Consolidated Statements of Financial Condition
                                   (unaudited)

<TABLE>
<CAPTION>
                                                        June 30,        December 31,
                                                          2004              2003
                                                      -------------    -------------
<S>                                                   <C>              <C>
Assets:
 Cash and due from banks                              $  38,314,729    $  30,187,741
 Money market investments, held to maturity                 613,173          599,356
 Investment securities, available for sale               94,475,381       83,171,547
 Loans receivable                                        71,101,485       67,981,461
  Allowance for loan loss                                (1,210,005)      (1,162,776)
                                                      -------------    -------------
    Loans receivable, net                                69,891,480       66,818,685
 Bank premises and equipment, net                         1,931,053        2,132,154
 Accrued interest receivable                                595,144          588,232
 Deferred taxes                                           2,117,617          934,710
 Other assets                                               626,672          542,545
                                                      -------------    -------------
      Total assets                                    $ 208,565,249    $ 184,974,970
                                                      =============    =============

Liabilities and stockholders' equity:
Liabilities:
 Deposits:
    Demand and checking                               $  87,217,521    $  77,416,339
    NOW                                                  27,367,217       23,627,653
    Money market                                         23,482,798       23,709,155
    Savings                                              13,154,148       10,394,955
    Time                                                 38,882,201       32,287,215
                                                      -------------    -------------
       Total Deposits                                   190,103,885      167,435,317
 Escrow deposits                                            288,609          267,484
 Trust preferred securities                               5,000,000        5,000,000
 Accounts payable and accrued
  expenses                                                2,551,663        1,630,544
                                                      -------------    -------------
     Total liabilities                                  197,944,157      174,333,345
                                                      -------------    -------------

Stockholders' equity:
 Common stock, ($.0001 par value, 3,000,000 shares
    authorized, 1,503,462 issued and outstanding at
    June 30, 2004; 1,055,998 issued and
    outstanding at December 31, 2003)                           150              106
 Additional paid in capital                               8,890,099        7,031,499
 Retained earnings                                        4,768,164        3,779,686
 Unallocated ESOP Shares                                 (1,662,600)              --
 Accumulated other comprehensive loss,
   net of taxes of $1,199,181 and $148,001,
   respectively                                          (1,374,721)        (169,666)
                                                      -------------    -------------

    Total stockholders' equity                           10,621,092       10,641,625
                                                      -------------    -------------

     Total liabilities and stockholders'
        equity                                        $ 208,565,249    $ 184,974,970
                                                      =============    =============
</TABLE>

See notes to consolidated financial statements.

                                       4
<PAGE>

                                VSB Bancorp, Inc.
                      Consolidated Statements of Operations
                                   (unaudited)

<TABLE>
<CAPTION>
                                        Three months     Three months      Six months       Six months
                                            ended            ended            ended            ended
                                        June 30, 2004    June 30, 2003    June 30, 2004    June 30, 2003
                                        -------------    -------------    -------------    -------------
<S>                                     <C>              <C>              <C>              <C>
Interest and dividend income:
 Loans receivable                       $   1,303,760    $   1,253,241    $   2,617,500    $   2,416,924
 Investment securities                        897,354          498,444        1,740,978          971,044
 Other interest earning assets                 45,862           69,780           72,645          121,492
                                        -------------    -------------    -------------    -------------
     Total interest income                  2,246,976        1,821,465        4,431,123        3,509,460

Interest expense:
 NOW                                           26,892           35,396           50,674           66,042
 Money market                                  52,142           69,716           99,952          151,527
 Savings                                       14,742           16,840           28,180           31,422
 Trust preferred                               86,362           88,655          172,725               --
 Time                                          81,882               --          159,994          179,946
                                        -------------    -------------    -------------    -------------
     Total interest expense                   262,020          210,607          511,525          428,937

Net interest income                         1,984,956        1,610,858        3,919,598        3,080,523
Provision for loan loss                        50,000           30,000          100,000           70,000
                                        -------------    -------------    -------------    -------------
    Net interest income
       after provision for loan loss        1,934,956        1,580,858        3,819,598        3,010,523
                                        -------------    -------------    -------------    -------------

Non-interest income:
 Loan fees                                     18,674           23,481           34,197           64,309
 Service charges on deposits                  407,976          318,883          835,666          655,932
 Net rental income                             11,762           13,138           19,794            8,963
 Other income                                  14,741           19,603           37,278           30,227
                                        -------------    -------------    -------------    -------------
     Total non-interest income                453,153          375,105          926,935          759,431
                                        -------------    -------------    -------------    -------------

Non-interest expenses:
 Salaries and benefits                        834,101          681,783        1,630,368        1,356,564
 Occupancy expenses                           228,150          235,003          459,477          485,323
 Legal expense                                 53,423           25,028           84,298           53,678
 Professional fees                             49,527           41,525           95,777           76,025
 Computer expense                              70,532           69,333          135,226          142,698
 Other expenses                               236,103          245,551          490,506          497,499
                                        -------------    -------------    -------------    -------------
     Total non-interest expenses            1,471,836        1,298,223        2,895,652        2,611,787

       Income before income taxes             916,273          657,740        1,850,881        1,158,167
                                        -------------    -------------    -------------    -------------

Provision/(benefit) for income taxes:
 Current                                      516,217          323,599          994,130          573,000
 Deferred                                     (89,252)         (18,309)        (131,727)         (33,369)
                                        -------------    -------------    -------------    -------------
     Total provision for income taxes         426,965          305,290          862,403          539,631

              Net income                $     489,308    $     352,450    $     988,478    $     618,536
                                        =============    =============    =============    =============

Basic income per common share           $        0.34    $        0.25    $        0.70    $        0.44
                                        =============    =============    =============    =============

Diluted net income per share            $        0.33    $        0.24    $        0.67    $        0.42
                                        =============    =============    =============    =============

Comprehensive income/(loss)             $    (958,821)   $     310,453    $    (216,577)   $     384,973
                                        =============    =============    =============    =============

Book value per common share             $        7.06    $        7.18    $        7.06    $        7.18
                                        =============    =============    =============    =============
</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>

                                VSB Bancorp, Inc.
           Consolidated Statements of Changes in Stockholders' Equity
         Year Ended December 31, 2003 and Six Months Ended June 30, 2004
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                                                       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             21,160              2       167,602                                                    167,604
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                                                                                      28,180                        28,180
Amortization of excess fair
    value of cost - ESOP                                             593                                                        593
Comprehensive loss:
  Other comprehensive loss,
    net: unrealized holding
    loss arising during the
    year                                                                                                  (1,205,055)    (1,205,055)
  Net income                             --             --            --        988,478            --             --        988,478
                               ------------   ------------  ------------   ------------  ------------   ------------   ------------
Total comprehensive loss                                                                                                   (216,577)

 Balance at June 30, 2004         1,503,462   $        150  $  8,890,099   $  4,768,164  $ (1,662,600)  $ (1,374,721)  $ 10,621,092
                               ============   ============  ============   ============  ============   ============   ============
</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.

                                       6
<PAGE>

                                VSB Bancorp, Inc.
                      Consolidated Statements of Cash Flows
                                   (unaudited)

<TABLE>
<CAPTION>
                                                              Three months     Three months      Six months       Six months
                                                                  ended            ended            ended            ended
                                                              June 30, 2004    June 30, 2003    June 30, 2004    June 30, 2003
                                                              -------------    -------------    -------------    -------------
<S>                                                           <C>              <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                  $     489,308    $     352,450    $     988,478    $     618,536
  Adjustments to reconcile net income to net cash
    used in operating activities
  Depreciation and amortization                                     128,930          127,081          254,873          258,330
  Accretion of income, net of amortization of premium               (25,861)          61,844          (44,673)          72,847
  ESOP compensation expense                                          28,774               --           28,773               --
  Provision for loan losses                                          50,000           30,000          100,000           70,000
  Increase in prepaid and other assets                              (88,228)        (409,825)         (84,127)        (333,618)
  Increase in accrued interest receivable                           (34,974)         (32,008)          (6,912)         (36,621)
  Increase in deferred income taxes                                 (89,252)         (62,258)        (131,726)         (77,318)
  Increase in accrued expenses and other liabilities                718,428           13,193          921,119           94,390
                                                              -------------    -------------    -------------    -------------

        Net cash provided by operating activities                 1,177,125           80,477        2,025,805          666,546
                                                              -------------    -------------    -------------    -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Net increase in loan receivable                                (3,556,833)      (5,103,225)      (3,029,334)      (5,388,785)
  Proceeds from maturities of money market investments            1,971,834               --        2,332,660               --
  Proceeds from repayment of investments securities,
      available for sale                                          8,905,657       12,780,272       13,572,306       23,800,453
  Purchases of money market investments                          (2,045,123)              --       (2,346,477)              --
  Purchase of investments securities, available for sale        (27,231,164)     (17,261,251)     (27,231,164)     (40,625,048)
  Purchases of premises and equipment                               (45,349)         (37,681)         (53,772)        (199,503)
  Gain on the sale of other assets                                       --            5,464               --            5,464
                                                              -------------    -------------    -------------    -------------

        Net cash used in investing activities                   (22,000,978)      (9,616,421)     (16,755,781)     (22,407,419)
                                                              -------------    -------------    -------------    -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase in deposits                                       21,483,889       14,230,388       22,689,693       38,641,309
  Cost of Holding Company reorganization                                 --          (44,577)              --          (44,577)
  Exercise stock option                                             118,580               --          167,604               --
  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                21,602,469       14,185,811       22,856,964       38,596,732
                                                              -------------    -------------    -------------    -------------

NET INCREASE IN CASH
  AND CASH EQUIVALENTS                                              778,616        4,649,867        8,126,988       16,855,859
                                                              -------------    -------------    -------------    -------------

CASH AND CASH EQUIVALENTS,
  BEGINNING OF PERIOD                                            37,536,113       38,301,795       30,187,741       26,095,803
                                                              -------------    -------------    -------------    -------------

CASH AND CASH EQUIVALENTS,
  END OF PERIOD                                               $  38,314,729    $  42,951,662    $  38,314,729    $  42,951,662
                                                              =============    =============    =============    =============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:
  Cash paid during the period for:
    Interest                                                  $     258,755    $     215,261    $     589,916    $     427,080
                                                              =============    =============    =============    =============
    Taxes                                                     $     728,050    $     222,605    $     933,201    $     636,547
                                                              =============    =============    =============    =============
</TABLE>

See notes to consolidated financial statements.

                                       7
<PAGE>

                                VSB Bancorp, Inc.
                       Consolidated Average Balance Sheets
                                   (unaudited)

<TABLE>
<CAPTION>
                                                          Three                                 Three
                                                       Months Ended                          Months Ended
                                                      June 30, 2004                          June 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                       $ 69,350,806   $  1,303,760     7.56%   $ 66,165,606   $  1,253,241     7.60%
  Money market investments                    598,774          1,699     1.14              --             --       --
  Investment securities, afs               86,212,208        897,354     4.19      55,366,249        498,615     3.61
  Other interest-earning assets            21,491,783         44,163     0.83      26,823,769         69,609     1.04
                                         ------------   ------------             ------------   ------------
  Total interest-earning assets           177,653,571      2,246,976     5.09     148,355,624      1,821,465     4.92

Non-interest earning assets                11,238,921                               9,466,226
                                         ------------                            ------------
  Total assets                           $188,892,492                            $157,821,850
                                         ============                            ============

Liabilities and equity:
Interest-bearing liabilities:
  Savings accounts                       $ 11,918,814         14,742     0.50    $  9,010,225         16,840     0.75
  Time accounts                            34,571,649         81,882     0.95      30,376,084         88,655     1.17
  Money market accounts                    24,278,830         52,142     0.86      23,840,943         69,716     1.17
  Now accounts                             25,798,759         26,892     0.42      26,705,691         35,396     0.53
  Trust preferred                           5,000,000         86,362     6.91              --             --       --
                                         ------------   ------------             ------------   ------------
    Total interest-bearing liabilities    101,568,052        262,020     1.04      89,932,943        210,607     0.94
  Checking accounts                        73,689,060                              56,351,187
                                         ------------                            ------------
Total deposits                            175,257,112                             146,284,130
Other liabilities                           1,835,024                               1,487,115
                                         ------------                            ------------
  Total liabilities                       177,092,136                             147,771,245
Equity                                     11,800,356                              10,050,603
                                         ------------                            ------------
  Total liabilities and equity           $188,892,492                            $157,821,848
                                         ============                            ============

Net interest income/net interest
 rate spread                                            $  1,984,956     4.05%                  $  1,610,858     3.98%
                                                        ============   ======                   ============   ======

Net interest earning assets/net
 interest margin                         $ 76,085,519                    4.49%   $ 58,422,681                    4.36%
                                         ============                  ======    ============                  ======

Ratio of interest-earning assets to
 interest-bearing liabilities                    1.75 x                                  1.65 x
                                         ============                            ============


<CAPTION>
                                                         Six                                     Six
                                                     Months Ended                            Months Ended
                                                     June 30, 2004                           June 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                       $ 68,832,397   $  2,617,500     7.62%   $ 65,415,738   $  2,416,924     7.45%
  Money market investments                    575,839          3,264     1.14              --             --       --
  Investment securities, afs               83,653,052      1,740,978     4.19      50,522,922        971,770     3.88
  Other interest-earning assets            16,876,102         69,381     0.83      23,843,884        120,766     1.02
                                         ------------   ------------             ------------   ------------
  Total interest-earning assets           169,937,390      4,431,123     5.23     139,782,544      3,509,460     5.06

Non-interest earning assets                11,374,789                               9,372,971
                                         ------------                            ------------
  Total assets                           $181,312,179                            $149,155,515
                                         ============                            ============

Liabilities and equity:
Interest-bearing liabilities:
  Savings accounts                       $ 11,333,850         28,180     0.50    $  8,438,827         31,422     0.75
  Time accounts                            33,140,654        159,994     0.97      25,949,997        179,946     1.40
  Money market accounts                    23,508,337         99,952     0.86      25,061,017        151,527     1.22
  Now accounts                             24,245,495         50,674     0.42      25,036,297         66,042     0.53
  Trust preferred                           5,000,000        172,725     6.95              --             --       --
                                         ------------   ------------             ------------   ------------
    Total interest-bearing liabilities     97,228,336        511,525     1.06      84,486,138        428,937     1.02
  Checking accounts                        70,916,100                              53,277,979
                                         ------------                            ------------
Total deposits                            168,144,436                             137,764,117
Other liabilities                           1,772,060                               1,397,123
                                         ------------                            ------------
  Total liabilities                       169,916,496                             139,161,240
Equity                                     11,395,683                               9,994,275
                                         ------------                            ------------
  Total liabilities and equity           $181,312,179                            $149,155,515
                                         ============                            ============

Net interest income/net interest
 rate spread                                            $  3,919,598     4.17%                  $  3,080,523     4.04%
                                                        ============   ======                   ============   ======

Net interest earning assets/net
 interest margin                         $ 72,709,054                    4.63%   $ 55,296,406                    4.44%
                                         ============                  ======    ============                  ======

Ratio of interest-earning assets to
 interest-bearing liabilities                    1.75 x                                  1.65 x
                                         ============                            ============
</TABLE>

See notes to consolidated financial statements.

                                       8
<PAGE>

VSB Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED
JUNE 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") and VSB Capital Trust I (the "Trust"). All significant
inter-company accounts and transactions between the Company and Bank or the
Trust 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 June 24, 2004 through July 7,
2004, Victory State Bank was required to maintain reserves, after deducting
vault cash, of $5,665,000. 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.

                                       9
<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 all interest is paid up to date.

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

     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

                                       10
<PAGE>

estimate the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows is less
than the carrying amount, an impairment will be recognized. 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 1,425,198 and 1,417,989 shares, the weighted average
number of shares of common stock outstanding for the three and six months ended
June 30, 2004. Diluted net income per share of common stock is based on
1,491,673 and 1,482,942 shares, the weighted average number of shares of common
stock and common stock equivalents outstanding for the three and six months
ended June 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 43,560
and 45,152 for the three and six months ended June 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 six month period
ended June 30, 2004 and 2003.

                                       11
<PAGE>

<TABLE>
<CAPTION>
                                                      Three Months Ended          Six Months Ended
                                                            June 30,                  June 30,
                                                    -----------------------   -----------------------
                                                       2004         2003         2004         2003
                                                    ----------   ----------   ----------   ----------
<S>                                                 <C>          <C>          <C>          <C>
     Basic earnings per share
     Net income as reported                         $  489,308   $  352,450   $  988,478   $  618,536
     Weighted average common
         shares outstanding                          1,425,128    1,407,997    1,417,989    1,407,997
                                                    ----------   ----------   ----------   ----------

             Basic earnings per share               $     0.34   $     0.25   $     0.70   $     0.44
                                                    ==========   ==========   ==========   ==========

     Earnings per share assuming dilution
     Net income available to common
     shareholders                                   $  489,308   $  352,450   $  988,478   $  618,536
                                                    ==========   ==========   ==========   ==========

     Weighted average common
         shares outstanding                          1,425,128    1,407,997    1,417,989    1,407,997
     Add dilutive effect of:
             Stock options                              66,545       54,048       64,953       54,004
                                                    ----------   ----------   ----------   ----------
     Weighted average common and dilutive
              potential common shares outstanding    1,491,673    1,462,045    1,482,942    1,462,001
                                                    ----------   ----------   ----------   ----------

             Diluted earnings per share             $     0.33   $     0.24   $     0.67   $     0.42
                                                    ==========   ==========   ==========   ==========
</TABLE>

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

     Stock Based Compensation - At June 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") whereby 74,320 shares were purchased by the ESOP
trust from VSB Bancorp, Inc. from newly issued common stock. 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 plan in
accordance with Statement of Position 93-6 ("SOP 93-6"). ESOP shares will be
earned 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.

                                       12
<PAGE>

<TABLE>
<CAPTION>
                                                              Three Months Ended               Six Months Ended
                                                                   June 30,                        June 30,
                                                         ----------------------------    ----------------------------
                                                             2004            2003            2004            2003
                                                         ------------    ------------    ------------    ------------
<S>                                                      <C>             <C>             <C>             <C>
     Net income as reported                              $    489,308    $    352,450    $    988,478    $    618,536
     Deduct: Stock-based compensation expense
          determined under the fair value based method        (10,966)         (5,167)        (21,932)        (10,333)
                                                         ------------    ------------    ------------    ------------

     Pro forma net income                                     478,342         347,283         966,546         608,203

     Basic earnings per share as reported                $       0.34    $       0.25    $       0.70    $       0.44
     Pro forma basic earnings per share                  $       0.34    $       0.25    $       0.68    $       0.43

     Diluted earnings per share as reported              $       0.33    $       0.24    $       0.67    $       0.42
     Pro forma diluted earnings per share                $       0.32    $       0.24    $       0.65    $       0.42
</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.

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

Item 2

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

Financial Condition

     Our total assets were $208,565,249 at June 30, 2004, an increase of
$23,590,279, or 12.8%, 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 $ 8,126,988 increase in cash and due from banks
     o    A $11,303,834 increase in investment securities available for sale
     o    A $ 3,072,795 increase in net loans receivable.

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

                                       13
<PAGE>

         Our deposits were $190,392,494 at June 30, 2004, an increase of
$22,689,693, or 13.5%, from December 31, 2003, which provided most of the funds
used for the increase in assets. The increase in deposits 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 and a $9,822,307 increase
in non-interest demand deposits, a $3,739,564 increase in NOW accounts and a
$2,759,193 increase in savings accounts.

         Total stockholders' equity was $10,621,092 at June 30, 2004, a decrease
of $20,533 during the first six months of 2004. The decrease was a result of an
increase of $1,205,055 in other comprehensive loss due to an increase in the
unrealized loss in securities available for sale during the first six 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 net decrease in stockholders' equity was partially offset by net
income of $988,478 for the six months, an increase of $167,604 in additional
paid in capital due to the exercise of options to purchase 21,160 shares of
common stock and an increase in additional paid in capital of $28,180 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 on the dates 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 June 30, 2004, with a Tier I
Leverage Capital Ratio of 8.47%, a ratio of Tier I Capital to Risk-Weighted
Assets Ratio of 16.14%, and a Total Capital to Risk-Weighted Assets Ratio of
18.37%.

         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, cash dividends paid on the shares will be
applied to repay the loan, so 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

                                       14
<PAGE>

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 is being paid by a
loan we make 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
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 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 $208.6 million, total
deposits of $190.4 million and capital of $10.6 million by June 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

                                       15
<PAGE>

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 June 30, 2004 and June 30, 2003

         General. We had net income of $489,308 for the quarter ended June 30,
2004, compared to net income of $352,450 for the comparable quarter in 2003. The
principal categories which make up the 2004 net income are:

          o    Interest income of $2,246,976
          o    Reduced by interest expense of $262,020
          o    Reduced by the provision for loan losses of $50,000
          o    Increased by non-interest income of $453,153
          o    Reduced by non-interest expense of $1,471,836
          o    Reduced by $426,965 in income tax expense.

         We discuss each of these categories individually and the reasons for
the differences between the quarter ended June 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 deposits and loans are gradually generated by new branches and then invested
in interest earning assets. The implementation of the ESOP will increase
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 $2,246,976 for the quarter ended
June 30, 2004, compared to $1,821,465 for the quarter ended June 30, 2003, an
increase of $425,511, or 23.4%. The principal reason for the increase was a
$30,845,959 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 0.58% increase in the average yield on
those securities, generated a $398,910 increase in interest earned on investment
securities. The reported yield in the second quarter of 2003 reflected
accelerated amortization of premiums directly attributed to prepayments in the
CMO portfolio, resulting from the higher level of refinancing in the underlying
mortgages.

         We increased the average balance of our loans by 4.8% from $66,165,606
during the 2003 quarter to $69,350,806 during the 2004 quarter, which was the
principal reason for a $50,519 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. Finally, we had a $23,918 decrease in income from overnight
funds and other interest earning assets as we redeployed funds invested in those
categories into investment securities to improve yields.

         Interest Expense. Interest expense was $262,020 for the quarter ended
June 30, 2004, compared to $210,607 for the quarter ended June 30, 2003, an
increase of 24.4%. The increase was the direct result of $86,362 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 0.94% to
1.04% between the periods because of the 6.95% average cost of the trust
preferred securities. Our average cost of interest-bearing deposits (excluding

                                       16
<PAGE>

the cost of the trust preferred securities) declined from 0.94 % to 0.73%, 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 43% 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 $1,984,956 for the quarter ended
June 30, 2004, an increase of $374,098, or 23.2% over the $1,610,858 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 $29,297,947 in interest earning
assets, most of which increase was invested in investment securities. Our
interest rate spread improved from 3.98% in the 2003 quarter to 4.05% 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; and
          o    we shifted investments from overnight type investments to
               investment securities with higher yields while also using new
               funds to increase the volume of investment securities.

         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 3.50% during the 2004 quarter,
compared to approximately 2.77% during the 2003 quarter. This improvement
resulted from our strategy to reduce overnight and similar investments in favor
of investment securities with higher yields and the reduction in the
amortization of premiums in the mortgage-backed security portfolio. The average
level of investment securities represented 79.6% of non-loan earning assets in
the 2004 quarter compared to 67.4% 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 4.00% through the first quarter of 2004 as
compared to 4.25% in the first quarter of 2003. Despite the prime rate decline,
the effect of that decline on our yields was moderated because many of our
prime-based loans have interest rate floors. 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 decline in the prime rate
from 4.25% to 4.00% did not result in a reduction in our yield on those loans.
However, we note that as 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. The yield on our non-loan investments decreased from the 2003 quarter to
the 2004 quarter because declining market rates drove down the yields we could
earn on those investments, but the decrease was tempered by our shifting of the
mix of investments towards higher yielding investment securities and away from
lower yielding other interest earning assets.

         Provision for Loan Losses. The provision for loan losses was $50,000
for the quarter ended June 30, 2004, compared to $30,000 for the quarter ended
June 30, 2003. The increase in the provision was primarily due to a moderate
increase in the rate of delinquencies in the loan portfolio. The provision for
loan losses in any period depends upon the amount necessary to bring the
allowance for loan losses to the level management believes is 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.

                                       17
<PAGE>

         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 1.70% of total loans at June 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 $453,153 for the three
months ended June 30, 2004, compared to $375,105 during the same period last
year. The $78,048, or 20.8%, increase in non-interest income was a direct result
of an $89,093 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 $1,471,836 for the
quarter ended June 30, 2004, compared to $1,298,223 for the quarter ended June
30, 2003. The principal causes were:

     o    $152,318 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    $28,395 in higher legal expense due to the operation of our holding
          company and lease negotiations on our pending branch.
     o    $8,002 in higher professional fees due to higher costs involved with
          running a SEC registered company.
     o    $6,853 decrease in occupancy expenses due to the retirement of certain
          depreciable assets and a $9,448 decrease in other expenses due our
          cost control efforts.

         Income Tax Expense. Income tax expense was $426,965 for the quarter
ended June 30, 2004, compared to income tax expense of $305,290 for the quarter
ended June 30, 2003, due to the $258,533 increase of income before income taxes
in the 2004 quarter. Our effective tax rate remained the same for the quarter
ended June 30, 2004 and 2003 at 46.6%.


Results of Operations for the Six Months Ended June 30, 2004 and June 30, 2003


         General. We had net income of $988,478 for the six months ended June
30, 2004, compared to net income of $618,536 for the comparable six months in
2003. The principal categories which make up the 2004 net income are:

          o    Interest income of $4,431,123
          o    Reduced by interest expense of $511,525
          o    Reduced by the provision for loan losses of $100,000
          o    Increased by non-interest income of $926,935
          o    Reduced by non-interest expense of $2,895,652
          o    Reduced by $862,403 in income tax expense.

         We discuss each of these categories individually and the reasons for
the differences between the six months ended June 30, 2004 and the comparable
six 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 will increase 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.

                                       18
<PAGE>

         Interest Income. Interest income was $4,431,123 for the six months
ended June 30, 2004, compared to $3,509,460 for the six months ended June 30,
2003, an increase of $921,663, or 26.3%. The principal reason for the increase
was a $33,130,130 increase in the average balance of investment securities, as
we deployed available funds into investment securities to improve yields. 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 0.31% increase in the average yield on
those securities, generated a $769,934 increase in interest earned on investment
securities. The reported yield in the first half of 2003 reflected accelerated
amortization of premiums directly attributed to prepayments in the CMO
portfolio, resulting from the higher level of refinancing in the underlying
mortgages.

         We increased the average balance of our loans by 5.2% from $65,415,738
during the first six months of 2003 to $68,832,397 during the first six months
of 2004, which was the principal reason for a $200,576 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 six months on account of a prior period for loans that had been
designated as non-accrual. In contrast, during the first six months of 2003,
reported interest was reduced by $23,000 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 $24,929 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 $511,525 for the six months
ended June 30, 2004, compared to $428,937 for the six months ended June 30,
2003, an increase of 19.3%. The increase was the direct result of $172,725 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
1.02% to 1.06% between the periods because of the 6.95% average cost of the
trust preferred securities. Our average cost of interest-bearing deposits
(excluding the cost of the trust preferred securities) declined from 1.02 % to
0.74% 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
42% 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 $3,919,598 for the six months
ended June 30, 2004, an increase of $839,075, or 27.2% over the $3,080,523 we
had in the comparable six 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 $30,154,846 in
interest earning assets, most of which increase was invested in investment
securities. Our interest rate spread improved in the six months of 2004 to 4.17%
from 4.04% in the six month 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 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 shifted investments from overnight type investments to
               investment securities with higher yields while also using new
               funds to increase the volume of investment securities; and
          o    as discussed above, we received interest during the first six
               months of 2004 on a non-accruing loan that was paid for a prior
               period and we had the reverse situation in the first six months
               of 2003 due to designating loans as non-accrual.

                                       19
<PAGE>

         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 3.59% during the first six months of
2004, compared to approximately 2.96% during the first six months of 2003. This
improvement resulted from our strategy to reduce overnight and similar
investments in favor of investment securities with higher yields and the
reduction in the amortization of premiums in the mortgage-backed security
portfolio. The average level of investment securities represented 82.7% of
non-loan earning assets in the first six months of 2004 compared to 67.9% in the
first six 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 $100,000
for the six months ended June 30, 2004, compared to $70,000 for the six months
ended June 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.

         Although management uses available information to assess 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 1.70% of total loans at June 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 $926,935 for the six
months ended June 30, 2004, compared to $759,431 during the same period last
year. The $167,504, or 22.1%, increase in non-interest income was a direct
result of a $179,734 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 $2,895,652 for the six
months ended June 30, 2004, compared to $2,611,787 for the six months ended June
30, 2003. The principal causes were:

     o    $273,804 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.
     o    $30,620 in higher legal expenses due to, in part to becoming a SEC
          registered company and lease negotiations on our pending branch.
     o    $19,752 in higher professional fees due to, in part to becoming a SEC
          registered company, and increased costs due to our growth.
     o    $25,846 decrease in occupancy expenses and a $7,472 decrease in
          computer expenses due to the retirement of certain depreciable assets.

         Income Tax Expense. Income tax expense was $862,403 for the six months
ended June 30, 2004, compared to income tax expense of $539,631 for the six
months ended June 30, 2003, due to the $692,714 increase of income before income
taxes in the first six months of 2004. Our effective tax rate remained the same
for the six months ended June 30, 2004 and 2003 at 46.6%.

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 six months ended June 30, 2004, we had a net increase in
deposits of $22,689,693 and proceeds from repayment of investment securities
totaled $13,572,306. We used those funds to finance a $3,029,334 increase in our
loan portfolio and to purchase $27,231,164 of investment securities and money

                                       20
<PAGE>

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 $38,641,309 and proceeds from the repayment of investment securities totaled
$23,800,453. We used those funds to finance a $5,388,785 increase in our loan
portfolio and to purchase $40,625,048 of investment securities and money market
investments.

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

         The principal reason that we entered into the trust preferred
securities transaction was to increase regulatory capital to support growth.
Although the proceeds of the trust preferred securities do not constitute
capital under GAAP, the Board of Governors of the Federal Reserve System permits
a bank holding company to include such proceeds as capital when determining
satisfaction of regulatory capital ratios, up to 25% 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
June 30, 2004, with a Tier I Leverage Capital Ratio of 8.64%, a ratio of Tier I
Capital to Risk-Weighted Assets Ratio of 16.45%, and a Total Capital to
Risk-Weighted Assets Ratio of 17.68%.

         In the first six months of 2004 and 2003, funds available to us
exceeded the amount of investments we chose to make, so we experienced a
$8,126,988 increase in cash and cash equivalents in the first six months of 2004
pending reinvestment in loans and investment securities compared to a
$16,855,859 increase in cash and cash equivalents during the first six months of
2003. Total cash and cash equivalents at June 30, 2004 were $38,314,729. 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.

                                       21
<PAGE>

Contractual Obligations and Commitments at June 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      $     331,829   $     611,885   $     440,986   $   1,510,037   $   2,894,737
Remaining contractual maturities of time
      deposits                                23,181,179      12,721,229       2,979,793              --      38,882,201
                                           -------------   -------------   -------------   -------------   -------------
 Total contractual cash obligations        $  23,513,008   $  13,333,114   $   3,420,779   $   1,510,037   $  41,776,938
                                           =============   =============   =============   =============   =============


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                          $  16,059,312   $   7,328,500   $          --   $          --   $  23,387,812
                                           =============   =============   =============   =============   =============
</TABLE>

         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 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 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 adequate 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.

                                       22
<PAGE>

         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 June 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
the Securities Exchange Act of 1934 (such as annual reports on Form 10-KSB and
quarterly periodic reports on Form 10-QSB) is recorded, processed, summarized
and reported, in a manner which will allow senior management to make timely
decisions on the public disclosure of that information. Messrs. Corn and Branca
concluded that our current disclosure controls and procedures are effective in
ensuring that such information is (i) collected and communicated to senior
management in a timely manner, and (ii) recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms. Since
our last evaluation of our disclosure controls, we have not made any significant
changes in, or corrective actions taken regarding, either our internal controls
or other factors that could significantly affect those controls.

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

Part II

Item 2 - Changes in Securities

         During the period covered by this report, the Board of Directors and
the shareholders approved the establishment of our ESOP. Effective May 10, 2004
the ESOP purchased 74,320 shares of our common stock directly from us out of our
authorized but unissued common stock. The purchase price was $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 $1,690,780. We made a loan to the ESOP to
pay the entire purchase price of the shares. The loan is repayable in annual
installments over a ten-year period. The securities will be registered under the
Securities Act of 1933 prior to the end on 2004. No shares will be released or
distributed by the ESOP until 2005 at the earliest. 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.

                                       23
<PAGE>

Signature Page

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



                                           VSB Bancorp, Inc.



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



     Date: August 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.



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

                                       24