UNITED STATES
SECURITY AND EXCHANGE COMMISSIONWASHINGTON,
D.C. 20849

FORM 10-Q

|                                                                                          
|------------------------------------------------------------------------------------------
|xQUARTERLY REPORT PURSUANT
  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|FOR
  THE QUARTER ENDED JUNE 30, 2008                                                     
|                                                                                          
|oTRANSITION REPORT
  PURSUANT TO SECTION 13 OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD 

COMMISSION FILE NUMBER 0-50237

|                                                              
|--------------------------------------------------------------
|VSB Bancorp, Inc.                                             
|                                                              
|(Exact name of registrant as specified in its charter)        
|                                                              
|New York                                                      
|                                                              
|(State or other jurisdiction of incorporation or organization)
|                                                              
|11 - 3680128                                                  
|                                                              
|(I. R. S. Employer Identification No.)                        
|                                                              
|4142 Hylan Boulevard, Staten Island, New
  York 10308         
|                                                              
|(Address of principal executive offices)                      
|                                                              
|(718) 979-1100                                                
|                                                              
|Registrants telephone number                                 
|                                                              
|Common Stock                                                  
|                                                              
|(Title of Class)                                              

Indicate by check mark whether
the registrant (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.                           
                                  
                 
                                    Yes x No o

Indicate by check mark
whether the registrant is a large accelerated filer, a non-accelerated filer or
a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.

|                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------
|Large Accelerated Filer o          Accelerated Filer o          Non-Accelerated Filer o          Smaller Reporting Company x

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act): Yes o No x

Par Value: $0.0001 Class of
Common Stock

The Registrant had 1,923,884
common shares outstanding as of August 5, 2008.

---



CROSS REFERENCE INDEX

|                 |                                                                                                                                                        |    |         
|---------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | -- | --------
|                 |                                                                                                                                                        |    | Page    
|                 |                                                                                                                                                        |    |         
|                 | PART
  I                                                                                                                                               |    |         
|                 |                                                                                                                                                        |    |         
|Item 1           | Consolidated Statements of Financial Condition as of
  June 30, 2008 and December 31, 2007 (unaudited)                                                 |    | 4       
|                 | Consolidated Statements of Operations for the Three
  and Six Months Ended June 30, 2008 and 2007 (unaudited)                                          |    | 5       
|                 | Consolidated Statements of Changes in Stockholders
  Equity for the Six Months Ended June 30, 2008 and the Year Ended December 31,
  2007 (unaudited) |    | 6       
|                 | Consolidated Statements of Cash Flows for the Three
  and Six Months Ended June 30, 2008 and 2007 (unaudited)                                          |    | 7       
|                 | Notes to Consolidated Financial Statements for the
  Three and Six Months Ended June 30, 2008 and 2007 (unaudited)                                     |    | 8 to 13 
|                 |                                                                                                                                                        |    |         
|Item 2           | Managements Discussion and Analysis of Financial
  Condition and Results of Operations                                                                |    | 14 to 24
|Item 4           | Controls
  and Procedures                                                                                                                              |    | 24      
|                 |                                                                                                                                                        |    |         
|                 | PART II                                                                                                                                                |    |         
|                 |                                                                                                                                                        |    |         
|Item 1           | Legal
  Proceedings                                                                                                                                    |    | 24      
|                 |                                                                                                                                                        |    |         
|Signature
  Page |                                                                                                                                                        | 25
|                 |                                                                                                                                                        |    |         
|                 | Exhibit 31.1, 31.2, 32.1,
  32.2                                                                                                                       |    | 26 to 29

2

---



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:

| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | 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;
| |   |                                                                                                                                                                                                                                          
| | · | changes in market interest
  rates or changes in the speed at which market interest rates change;                                                                                                                                        
| |   |                                                                                                                                                                                                                                          
| | · | changes in laws and regulations
  affecting the financial service industry;                                                                                                                                                              
| |   |                                                                                                                                                                                                                                          
| | · | changes in competition;
  and                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                          
| | · | changes in consumer
  preferences by our customers or the customers of our business borrowers.                                                                                                                                           

Please
do not place undue reliance on any forward-looking statement, which speaks only
as of the date made. There are many factors, including those 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. We do not undertake any obligation to
update any forward-looking statement after it is made.

3

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

|                                                                                                                                                                               |  |               |             |                   |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ----------- | ----------------- | - | ----------- | -
|                                                                                                                                                                               |  | June 30, 2008 |             | December 31, 2007 |  
|                                                                                                                                                                               |  |               |             |                   |  
|                                                                                                                                                                              
|Assets:                                                                                                                                                                        |  |               |             |                   |   |             |  
|Cash and due from banks                                                                                                                                                        |  | $             | 23,007,861  |                   | $ | 17,696,879  |  
|Investment securities, available for sale                                                                                                                                      |  |               | 125,126,744 |                   |   | 117,814,117 |  
|Loans receivable                                                                                                                                                               |  |               | 63,111,018  |                   |   | 62,373,078  |  
|Allowance for loan loss                                                                                                                                                        |  |               | (859,459    | )                 |   | (927,161    | )
|                                                                                                                                                                               |  |               |             |                   |   |             |  
|Loans receivable, net                                                                                                                                                          |  |               | 62,251,559  |                   |   | 61,445,917  |  
|Bank premises and equipment, net                                                                                                                                               |  |               | 3,794,967   |                   |   | 3,931,679   |  
|Accrued interest receivable                                                                                                                                                    |  |               | 732,044     |                   |   | 799,249     |  
|Deferred taxes                                                                                                                                                                 |  |               | 1,193,766   |                   |   | 991,297     |  
|Other assets                                                                                                                                                                   |  |               | 1,075,832   |                   |   | 1,114,431   |  
|                                                                                                                                                                               |  |               |             |                   |   |             |  
|Total assets                                                                                                                                                                   |  | $             | 217,182,773 |                   | $ | 203,793,569 |  
|                                                                                                                                                                               |  |               |             |                   |   |             |  
|Liabilities and stockholders equity:                                                                                                                                          |  |               |             |                   |   |             |  
|Liabilities:                                                                                                                                                                   |  |               |             |                   |   |             |  
|Deposits:                                                                                                                                                                      |  |               |             |                   |   |             |  
|Demand and checking                                                                                                                                                            |  | $             | 66,517,191  |                   | $ | 62,525,053  |  
|NOW                                                                                                                                                                            |  |               | 19,129,591  |                   |   | 16,931,113  |  
|Money market                                                                                                                                                                   |  |               | 20,414,574  |                   |   | 20,534,721  |  
|Savings                                                                                                                                                                        |  |               | 12,483,717  |                   |   | 11,349,111  |  
|Time                                                                                                                                                                           |  |               | 70,323,445  |                   |   | 64,738,564  |  
|                                                                                                                                                                               |  |               |             |                   |   |             |  
|Total Deposits                                                                                                                                                                 |  |               | 188,868,518 |                   |   | 176,078,562 |  
|Escrow deposits                                                                                                                                                                |  |               | 192,017     |                   |   | 255,881     |  
|Subordinated debt                                                                                                                                                              |  |               | 5,155,000   |                   |   | 5,155,000   |  
|Accounts payable and accrued expenses                                                                                                                                          |  |               | 1,389,553   |                   |   | 1,420,321   |  
|                                                                                                                                                                               |  |               |             |                   |   |             |  
|Total liabilities                                                                                                                                                              |  |               | 195,605,088 |                   |   | 182,909,764 |  
|                                                                                                                                                                               |  |               |             |                   |   |             |  
|                                                                                                                                                                               |  |               |             |                   |   |             |  
|Stockholders equity:                                                                                                                                                          |  |               |             |                   |   |             |  
|Common stock, ($.0001 par value, 3,000,000 shares authorized,
  1,908,634 issued and outstanding at June 30, 2008 and 1,900,509 issued and
  outstanding at December 31, 2007) |  |               | 191         |                   |   | 190         |  
|Additional paid in capital                                                                                                                                                     |  |               | 9,124,796   |                   |   | 9,107,119   |  
|Retained earnings                                                                                                                                                              |  |               | 13,786,066  |                   |   | 13,226,395  |  
|Unearned Employee Stock Ownership Plan shares                                                                                                                                  |  |               | (986,289    | )                 |   | (1,070,827  | )
|Accumulated other comprehensive loss, net of taxes of $302,760 and
  $330,668, respectively                                                                                    |  |               | (347,079    | )                 |   | (379,072    | )
|                                                                                                                                                                               |  |               |             |                   |   |             |  
|                                                                                                                                                                              
|Total stockholders equity                                                                                                                                                     |  |               | 21,577,685  |                   |   | 20,883,805  |  
|                                                                                                                                                                               |  |               |             |                   |   |             |  
|                                                                                                                                                                              
|Total liabilities and stockholdersequity                                                                                                                                      |  | $             | 217,182,773 |                   | $ | 203,793,569 |  
|                                                                                                                                                                               |  |               |             |                   |   |             |  

See notes to consolidated financial statements.

4

---



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

|                                                  |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|------------------------------------------------- |  | ------------------------------ | --------- | ------------------------------ | - | ---------------------------- | - | ---------------------------- | --------- | - | - | --------- | -
|                                                  |  | Three monthsendedJune 30, 2008 |           | Three monthsendedJune 30, 2007 |   | Six monthsendedJune 30, 2008 |   | Six monthsendedJune 30, 2007 |          
|                                                  |  |                                |           |                                |   |                              |   |                              |          
|Interest and dividend income:                     |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Loans receivable                                  |  | $                              | 1,172,917 |                                | $ | 1,501,344                    |   | $                            | 2,417,408 |   | $ | 3,073,697 |  
|Investment securities                             |  |                                | 1,431,362 |                                |   | 1,293,698                    |   |                              | 2,815,659 |   |   | 2,594,158 |  
|Other interest earning assets                     |  |                                | 74,552    |                                |   | 264,761                      |   |                              | 176,845   |   |   | 511,826   |  
|                                                  |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Total interest income                             |  |                                | 2,678,831 |                                |   | 3,059,803                    |   |                              | 5,409,912 |   |   | 6,179,681 |  
|Interest expense:                                 |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|NOW                                               |  |                                | 32,702    |                                |   | 29,960                       |   |                              | 64,933    |   |   | 58,749    |  
|Money market                                      |  |                                | 72,509    |                                |   | 97,559                       |   |                              | 168,601   |   |   | 183,409   |  
|Savings                                           |  |                                | 18,191    |                                |   | 25,355                       |   |                              | 37,173    |   |   | 49,783    |  
|Subordinated debt                                 |  |                                | 89,039    |                                |   | 89,039                       |   |                              | 178,079   |   |   | 178,079   |  
|Time                                              |  |                                | 380,380   |                                |   | 627,874                      |   |                              | 899,827   |   |   | 1,243,010 |  
|                                                  |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Total interest expense                            |  |                                | 592,821   |                                |   | 869,787                      |   |                              | 1,348,613 |   |   | 1,713,030 |  
|Net interest income                               |  |                                | 2,086,010 |                                |   | 2,190,016                    |   |                              | 4,061,299 |   |   | 4,466,651 |  
|Provision (credit) for loan loss                  |  |                                | 55,000    |                                |   |                             |   |                              | 85,000    |   |   | (30,000   | )
|                                                  |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Net interest income after provision for loan loss |  |                                | 2,031,010 |                                |   | 2,190,016                    |   |                              | 3,976,299 |   |   | 4,496,651 |  
|                                                  |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Non-interest income:                              |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Loan fees                                         |  |                                | 21,285    |                                |   | 20,532                       |   |                              | 43,508    |   |   | 48,000    |  
|Service charges on deposits                       |  |                                | 545,902   |                                |   | 445,491                      |   |                              | 1,025,517 |   |   | 862,399   |  
|Net rental income (loss)                          |  |                                | 11,103    |                                |   | (13,121                      | ) |                              | 10,092    |   |   | 1,692     |  
|Other income                                      |  |                                | 45,944    |                                |   | 82,291                       |   |                              | 111,019   |   |   | 164,465   |  
|                                                  |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Total non-interest income                         |  |                                | 624,234   |                                |   | 535,193                      |   |                              | 1,190,136 |   |   | 1,076,556 |  
|                                                  |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Non-interest expenses:                            |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Salaries and benefits                             |  |                                | 868,263   |                                |   | 937,988                      |   |                              | 1,778,671 |   |   | 1,955,318 |  
|Occupancy expenses                                |  |                                | 358,466   |                                |   | 341,750                      |   |                              | 716,190   |   |   | 679,725   |  
|Legal expense (recovery)                          |  |                                | 65,700    |                                |   | (16,160                      | ) |                              | 119,786   |   |   | (1,634    | )
|Professional fees                                 |  |                                | 62,100    |                                |   | 44,700                       |   |                              | 123,500   |   |   | 96,300    |  
|Computer expense                                  |  |                                | 57,198    |                                |   | 70,155                       |   |                              | 112,304   |   |   | 137,371   |  
|Directors fees                                   |  |                                | 57,700    |                                |   | 55,700                       |   |                              | 114,950   |   |   | 107,850   |  
|Other expenses                                    |  |                                | 392,750   |                                |   | 339,818                      |   |                              | 734,926   |   |   | 655,177   |  
|                                                  |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Total non-interest expenses                       |  |                                | 1,862,177 |                                |   | 1,773,951                    |   |                              | 3,700,327 |   |   | 3,630,107 |  
|                                                  |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Income before income taxes                        |  |                                | 793,067   |                                |   | 951,258                      |   |                              | 1,466,108 |   |   | 1,943,100 |  
|Provision/(benefit) for income taxes:             |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Current                                           |  |                                | 400,690   |                                |   | 405,809                      |   |                              | 733,590   |   |   | 848,539   |  
|Deferred                                          |  |                                | (33,898   | )                              |   | 37,428                       |   |                              | (55,702   | ) |   | 56,769    |  
|                                                  |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Total provision for income taxes                  |  |                                | 366,792   |                                |   | 443,237                      |   |                              | 677,888   |   |   | 905,308   |  
|                                                  |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Net
  income                                      |  | $                              | 426,275   |                                | $ | 508,021                      |   | $                            | 788,220   |   | $ | 1,037,792 |  
|                                                  |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Earnings per share:                               |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Basic                                             |  | $                              | 0.23      |                                | $ | 0.28                         |   | $                            | 0.43      |   | $ | 0.57      |  
|                                                  |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Diluted                                           |  | $                              | 0.23      |                                | $ | 0.27                         |   | $                            | 0.42      |   | $ | 0.55      |  
|                                                  |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Comprehensive income (loss)                       |  | $                              | (585,163  | )                              | $ | (56,821                      | ) | $                            | 820,213   |   | $ | 805,408   |  
|                                                  |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  
|Book value per common share                       |  | $                              | 11.31     |                                | $ | 9.84                         |   | $                            | 11.31     |   | $ | 9.84      |  
|                                                  |  |                                |           |                                |   |                              |   |                              |           |   |   |           |  

See notes to consolidated financial statements.

5

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VSB Bancorp, Inc.Consolidated Statements of Changes in Stockholders Equity 
Year Ended December 31, 2007 and Six Months Ended June 30, 2008 
(unaudited)

|                                                                                 |  |                           |           |                |   |                              |  |                     |           |                        |   |                                                 |   |                              |            |   |   |            |   |   |            |  
|-------------------------------------------------------------------------------- |  | ------------------------- | --------- | -------------- | - | ---------------------------- |  | ------------------- | --------- | ---------------------- | - | ----------------------------------------------- | - | ---------------------------- | ---------- | - | - | ---------- | - | - | ---------- | -
|                                                                                 |  | Number
  of Common Shares |           | Common
  Stock |   | Additional
  Paid-In Capital |  | Retained
  Earnings |           | Unearned
  ESOP Shares |   | Accumulated
  Other Comprehensive Income (Loss) |   | Total
  Stockholders Equity |           
|                                                                                 |  |                           |           |                |   |                              |  |                     |           |                        |   |                                                 |   |                              |           
|                                                                                 |  |                           |           |                |   |                              |  |                     |           |                        |   |                                                 |   |                              |           
|Balance
  at January 1, 2007                                                     |  |                           | 1,891,759 |                | $ | 189                          |  | $                   | 8,667,665 |                        | $ | 11,293,200                                      |   | $                            | (1,239,905 | ) | $ | (1,379,878 | ) | $ | 17,341,271 |  
|                                                                                 |  |                           |           |                |   |                              |  |                     |           |                        |   |                                                 |   |                              |            |   |   |            |   |   |            |  
|Exercise of stock
  option, including tax benefit                                |  |                           | 8,750     |                |   | 1                            |  |                     | 77,832    |                        |   |                                                 |   |                              |            |   |   |            |   |   | 77,833     |  
|Stock-based
  compensation                                                       |  |                           |           |                |   |                              |  |                     | 162       |                        |   |                                                 |   |                              |            |   |   |            |   |   | 162        |  
|Amortization of
  earned portion of ESOP common stock                            |  |                           |           |                |   |                              |  |                     |           |                        |   |                                                 |   |                              | 169,078    |   |   |            |   |   | 169,078    |  
|Amortization of
  deficit fair value of cost - ESOP                              |  |                           |           |                |   |                              |  |                     | (37,566   | )                      |   |                                                 |   |                              |            |   |   |            |   |   | (37,566    | )
|Transfer from
  ESOP repurchase obligation                                       |  |                           |           |                |   |                              |  |                     | 399,026   |                        |   |                                                 |   |                              |            |   |   |            |   |   | 399,026    |  
|Cash dividends
  declared ($0.06 per share)                                      |  |                           |           |                |   |                              |  |                     |           |                        |   | (114,031                                        | ) |                              |            |   |   |            |   |   | (114,031   | )
|Comprehensive
  income:                                                          |  |                           |           |                |   |                              |  |                     |           |                        |   |                                                 |   |                              |            |   |   |            |   |   |            |  
|Net income                                                                       |  |                           |           |                |   |                              |  |                     |           |                        |   | 2,047,226                                       |   |                              |            |   |   |            |   |   | 2,047,226  |  
|Other
  comprehensive income, net:                                               |  |                           |           |                |   |                              |  |                     |           |                        |   |                                                 |   |                              |            |   |   |            |   |   |            |  
|Change in
  unrealized loss on securities available for sale, net of tax effects |  |                           |          |                |   |                             |  |                     |          |                        |   |                                                |   |                              |           |   |   | 1,000,806  |   |   | 1,000,806  |  
|                                                                                 |  |                           |           |                |   |                              |  |                     |           |                        |   |                                                 |   |                              |            |   |   |            |   |   |            |  
|Total
  comprehensive income                                                     |  |                           |           |                |   |                              |  |                     |           |                        |   |                                                 |   |                              |            |   |   |            |   |   | 3,048,032  |  
|                                                                                 |  |                           |           |                |   |                              |  |                     |           |                        |   |                                                 |   |                              |           
|Balance
  at December 31, 2007                                                   |  |                           | 1,900,509 |                |   | 190                          |  |                     | 9,107,119 |                        |   | 13,226,395                                      |   |                              | (1,070,827 | ) |   | (379,072   | ) |   | 20,883,805 |  
|                                                                                 |  |                           |           |                |   |                              |  |                     |           |                        |   |                                                 |   |                              |            |   |   |            |   |   |            |  
|Exercise of stock
  option, including tax benefit                                |  |                           | 8,125     |                |   | 1                            |  |                     | 51,999    |                        |   |                                                 |   |                              |            |   |   |            |   |   | 52,000     |  
|Stock-based
  compensation                                                       |  |                           |           |                |   |                              |  |                     | 639       |                        |   |                                                 |   |                              |            |   |   |            |   |   | 639        |  
|Amortization of
  earned portion of ESOP common stock                            |  |                           |           |                |   |                              |  |                     |           |                        |   |                                                 |   |                              | 84,538     |   |   |            |   |   | 84,538     |  
|Amortization of
  deficit fair value of cost - ESOP                              |  |                           |           |                |   |                              |  |                     | (34,961   | )                      |   |                                                 |   |                              |            |   |   |            |   |   | (34,961    | )
|Cash dividends
  declared ($0.06 per share)                                      |  |                           |           |                |   |                              |  |                     |           |                        |   | (228,549                                        | ) |                              |            |   |   |            |   |   | (228,549   | )
|Comprehensive
  income:                                                          |  |                           |           |                |   |                              |  |                     |           |                        |   |                                                 |   |                              |            |   |   |            |   |   |            |  
|Net income                                                                       |  |                           |           |                |   |                              |  |                     |           |                        |   | 788,220                                         |   |                              |            |   |   |            |   |   | 788,220    |  
|Other
  comprehensive income, net:                                               |  |                           |           |                |   |                              |  |                     |           |                        |   |                                                 |   |                              |            |   |   |            |   |   |            |  
|Change in
  unrealized loss on securities available for sale, net of tax effects |  |                           |          |                |   |                             |  |                     |          |                        |   |                                                |   |                              |           |   |   | 31,993     |   |   | 31,993     |  
|                                                                                 |  |                           |           |                |   |                              |  |                     |           |                        |   |                                                 |   |                              |            |   |   |            |   |   |            |  
|Total
  comprehensive income                                                     |  |                           |           |                |   |                              |  |                     |           |                        |   |                                                 |   |                              |            |   |   |            |   |   | 820,213    |  
|                                                                                 |  |                           |           |                |   |                              |  |                     |           |                        |   |                                                 |   |                              |            |   |   |            |   |   |            |  
|Balance
  at June 30, 2008                                                       |  |                           | 1,908,634 |                | $ | 191                          |  | $                   | 9,124,796 |                        | $ | 13,786,066                                      |   | $                            | (986,289   | ) | $ | (347,079   | ) | $ | 21,577,685 |  
|                                                                                 |  |                           |           |                |   |                              |  |                     |           |                        |   |                                                 |   |                              |            |   |   |            |   |   |            |  

6

---



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

|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|---------------------------------------------------------------------------------- |  | ------------------------------ | ----------- | ------------------------------ | - | ---------------------------- | - | ---------------------------- | ----------- | - | - | ----------- | -
|                                                                                   |  | Three monthsendedJune 30, 2008 |             | Three monthsendedJune 30, 2007 |   | Six monthsendedJune 30, 2008 |   | Six monthsendedJune 30, 2007 |            
|                                                                                   |  |                                |             |                                |   |                              |   |                              |            
|CASH FLOWS FROM OPERATING ACTIVITIES:                                              |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|Net income                                                                         |  | $                              | 426,275     |                                | $ | 508,021                      |   | $                            | 788,220     |   | $ | 1,037,792   |  
|Adjustments to reconcile net income to net cash provided by operating
  activities |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|Depreciation and amortization                                                      |  |                                | 153,602     |                                |   | 164,171                      |   |                              | 304,596     |   |   | 308,022     |  
|Accretion of income, net of amortization of premium                                |  |                                | (57,913     | )                              |   | (50,272                      | ) |                              | (111,312    | ) |   | (107,984    | )
|ESOP compensation expense                                                          |  |                                | 23,380      |                                |   | 35,006                       |   |                              | 49,577      |   |   | 71,539      |  
|Stock-based compensation expense                                                   |  |                                | 319         |                                |   |                             |   |                              | 639         |   |   |            |  
|Provision/(credit) for loan losses                                                 |  |                                | 55,000      |                                |   |                             |   |                              | 85,000      |   |   | (30,000     | )
|Decrease/(increase) in prepaid and other assets                                    |  |                                | 36,899      |                                |   | (127,960                     | ) |                              | 38,599      |   |   | (175,641    | )
|(Increase)/decrease in accrued interest receivable                                 |  |                                | (22,807     | )                              |   | 13,062                       |   |                              | 67,205      |   |   | 10,356      |  
|(Increase)/decrease in deferred income taxes                                       |  |                                | (208,572    | )                              |   | 63,809                       |   |                              | (230,376    | ) |   | 83,150      |  
|Increase/(decrease) in accrued expenses and other liabilities                      |  |                                | 185,747     |                                |   | (350,643                     | ) |                              | (30,768     | ) |   | (655,461    | )
|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|Net cash provided by operating activities                                          |  |                                | 591,930     |                                |   | 255,194                      |   |                              | 961,380     |   |   | 541,773     |  
|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                              |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|Net (increase)/decrease in loan receivable                                         |  |                                | (1,853,016  | )                              |   | 593,894                      |   |                              | (821,792    | ) |   | 5,541,952   |  
|Proceeds from repayment of investment securities, available for sale               |  |                                | 6,995,036   |                                |   | 7,093,447                    |   |                              | 14,402,118  |   |   | 12,759,728  |  
|Purchases of investment securities, available for sale                             |  |                                | (12,113,438 | )                              |   | (11,511,654                  | ) |                              | (21,612,383 | ) |   | (11,511,654 | )
|Purchases of premises and equipment                                                |  |                                | (124,358    | )                              |   | (71,412                      | ) |                              | (167,884    | ) |   | (755,135    | )
|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|Net cash (used in)/provided by investing activities                                |  |                                | (7,095,776  | )                              |   | (3,895,725                   | ) |                              | (8,199,941  | ) |   | 6,034,891   |  
|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                              |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|Net increase in deposits                                                           |  |                                | 7,411,671   |                                |   | 7,121,912                    |   |                              | 12,726,092  |   |   | 3,043,289   |  
|Exercise stock option                                                              |  |                                | 52,000      |                                |   |                             |   |                              | 52,000      |   |   |            |  
|Cash dividends paid                                                                |  |                                | (114,518    | )                              |   |                             |   |                              | (228,549    | ) |   |            |  
|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|Net cash provided by financing activities                                          |  |                                | 7,349,153   |                                |   | 7,121,912                    |   |                              | 12,549,543  |   |   | 3,043,289   |  
|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                          |  |                                | 845,307     |                                |   | 3,481,381                    |   |                              | 5,310,982   |   |   | 9,619,953   |  
|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                     |  |                                | 22,162,554  |                                |   | 31,501,641                   |   |                              | 17,696,879  |   |   | 25,363,069  |  
|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                           |  | $                              | 23,007,861  |                                | $ | 34,983,022                   |   | $                            | 23,007,861  |   | $ | 34,983,022  |  
|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                  |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|Cash paid during the period for:                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|Interest                                                                           |  | $                              | 574,367     |                                | $ | 1,056,311                    |   | $                            | 1,636,236   |   | $ | 2,051,408   |  
|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|Taxes                                                                              |  | $                              | 405,326     |                                | $ | 666,165                      |   | $                            | 727,326     |   | $ | 1,207,459   |  
|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  
|Transfer of construction in progress to premises and equipment                     |  | $                              |            |                                | $ |                             |   | $                            |            |   | $ | 2,142,866   |  
|                                                                                   |  |                                |             |                                |   |                              |   |                              |             |   |   |             |  

7

---



VSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND
SIXMONTHSENDED JUNE 30, 2008 AND 2007

---

|   |        
|-- | -------
|1. | GENERAL

VSB
Bancorp, Inc. (Bancorp or Company) is the holding company for Victory State
Bank (Bank), a New York State chartered commercial bank. On May 30, 2003 as
the result of a reorganization of the Bank into the holding company form of
organization, the stockholders of the Bank became the stockholders of VSB
Bancorp, Inc. As a result of the reorganization the stockholders of VSB
Bancorp, Inc. received 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 the 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 the Bank. No
stockholders of the Bank exercised dissenters rights to receive cash instead
of shares of the Company. The transaction between these entities under common
control was accounted for at historical cost on an as if pooled basis. Our
common stock now trades on the NASDAQ Global Market (NASDAQ GM) effective
August 4, 2008, under the stock symbol VSBN.

Through
the Bank, the Company is primarily engaged in the business of commercial
banking, and to a lesser extent retail banking. The Bank gathers deposits from
individuals and businesses primarily in Staten Island, New York and makes loans
throughout that community. The Bank invests funds that are not used for lending
primarily in government securities, mortgage backed securities and
collateralized mortgage obligations. Customer deposits are insured, up to the
applicable limit, by the Federal Deposit Insurance Corporation (FDIC). The
Bank is supervised by the New York State Banking Department and the FDIC.

The
accompanying unaudited interim consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and Rule 10-01 of
Regulation S-X and, therefore, do not include all the disclosures necessary for
a complete presentation of the financial statements in conformity with U.S.
generally accepted accounting principles. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation of the results of operations for the interim period. The
results of operations for the three and six months ended June 30, 2008 are not
necessarily indicative of the results that may be expected for the entire year
or any other interim period.

|   |                                             
|-- | --------------------------------------------
|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 consolidated 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 subsidiary Victory State Bank. All significant
inter-company accounts and transactions between the Company and Bank have been
eliminated in consolidation.

Use
of Estimates -
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. The allowance for loan losses, prepayment estimates on the
mortgage-backed securities and Collateralized Mortgage Obligation portfolios,
contingencies and fair values of financial instruments are particularly subject
to change.

8

---



Reclassifications
Some items in
the prior year financial statements were reclassified to conform to the current
presentation.

Cash
and Cash Equivalents
 Cash and cash equivalents consists of cash on hand, due from banks and
interest-bearing deposits. Net cash flows are reported for customer loan and
deposit transactions and interest-bearing deposits. 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 19, 2008 through July 2, 2008, Victory State Bank was
required to maintain reserves, after deducting vault cash, of $3,123,000.
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. Victory State Bank is required to report transaction account
levels to the Federal Reserve on a weekly basis.

Interest-bearing
bank balances Interest-bearing
bank balances mature overnight and are carried at cost.

Investment
Securities, Available for Sale - Investment securities, available for sale, are to be held for an
unspecified 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. Interest income includes
amortization of purchase premium and accretion of purchase discount. Premiums
and discounts are recognized in interest income using a method that
approximates the level yield method without anticipating prepayments, except
for mortgage-backed securities where prepayments are estimated. Unrealized
holding gains or losses, net of deferred income taxes, are excluded from
earnings and reported as other comprehensive income in a separate component of
stockholders equity until realized. Declines in the fair value of securities
below their cost that are other than temporary are reflected as realized
losses. In estimating other-than-temporary losses, management considers: (1)
the length of time and extent that fair value has been less than cost, (2) the
financial condition and near term prospects of the issuer, and (3) the Company
s ability and intent to hold the security for a period sufficient to allow for
any anticipated recovery in fair value.

The
Company invests primarily in agency Collateralized Mortgage-Backed Obligations
(CMOs) with estimated average lives primarily 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 probable
incurred losses on loans based on the Companys past loan loss experience,
known and inherent risks in the portfolio, adverse situations which may affect
the borrowers ability to repay, estimated value of underlying collateral and
current economic conditions in the Companys lending area. The allowance is
increased by provisions for loan losses charged to earnings 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
appropriate.

9

---



The
Company has a policy that all loans 90 days past due are placed on non-accrual
status. It is the Companys policy to cease the accrual of interest on loans to
borrowers past due less than 90 days where a probable loss is estimated and to
reverse out of income all interest that is due. The Company applies payments
received on non-accrual loans to the outstanding principal balance due before
applying any amount to interest, until the loan is restored to an accruing
status. On a limited basis, the Company may apply a payment to interest on a
non-accrual loan if there is no impairment or no estimated loss on this asset.
The Company continues to accrue interest on construction loans that are 90 days
past contractual maturity date if the loan is expected to be paid in full in
the next 60 days and all interest is paid up to date.

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

The
Company considers a loan to be impaired when, based on current information, it
is probable that the Company will be unable to collect all principal and
interest payments due according to the contractual terms of the loan agreement.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Impairment is measured on a loan by
loan basis for commercial and construction loans. 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. Large groups of smaller balance homogeneous loans, such as
consumer loans and residential loans, are collectively evaluated for
impairment.

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

Subordinated
Debt - In August
of 2003, the Company formed VSB Capital Trust I (the Trust). The Trust is a
statutory business trust organized under Delaware law and the Company owns 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 the Company. The Company 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 rate of 6.909%, for the
first five years. 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 that fluctuates quarterly based
upon 300 basis points over the 90 day LIBOR rate. The Trust is not consolidated
with the Company.

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. Leasehold improvements
are amortized at the lesser of their useful life or the term of the lease.

Federal
Home Loan Bank (FHLB) Stock - The Bank is a member of the FHLB system. Members are required to own a
certain amount of stock based on the level of borrowings and other factors, and
may invest in additional amounts. FHLB stock is carried at cost, classified as
a restricted security, and periodically evaluated for impairment. Because this
stock is viewed as a long term investment, impairment is based on ultimate
recovery of par value, which is the price the Bank pays for the FHLB Stock.
Both cash and stock dividends are reported as income.

10

---



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

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

Basic
and Diluted Net Income Per Common Share - Basic net income per share of common stock
is based on 1,849,448 shares and 1,828,982 shares, the weighted average number
of common shares outstanding for the three months ended June 30, 2008 and 2007,
respectively. Diluted net income per share of common stock is based on
1,880,697 and 1,877,695, the weighted average number of common shares and
potentially dilutive common shares outstanding for the three months ended June
30, 2008 and 2007, respectively. The weighted average number of potentially
dilutive common shares excluded in calculating diluted net income per common
share due to the anti-dilutive effect is 55,843 and 52,412 shares for the three
months ended June 30, 2008 and 2007, respectively. Common stock equivalents
were calculated using the treasury stock method.

Basic
net income per share of common stock is based on 1,847,272 shares and 1,827,758
shares, the weighted average number of common shares outstanding for the six
months ended June 30, 2008 and 2007, respectively. Diluted net income per share
of common stock is based on 1,880,409 and 1,877,098, the weighted average
number of common shares and potentially dilutive common shares outstanding for
the six months ended June 30, 2008 and 2007, respectively. The weighted average
number of potentially dilutive common shares excluded in calculating diluted
net income per common share due to the anti-dilutive effect is 48,349 and 51,785
shares for the six months ended June 30, 2008 and 2007, respectively. Common
stock equivalents were calculated using the treasury stock method.

The
reconciliation of the numerators and the denominators of the basic and diluted
per share computations for the three and six months ended June 30, are as
follows:

|                                            |  |                                    |         |                                    |  |             |  |        |      |          |   |             |  |  |           |  |   |      | 
|------------------------------------------- |  | ---------------------------------- | ------- | ---------------------------------- |  | ----------- |  | ------ | ---- | -------- | - | ----------- |  |  | --------- |  | - | ---- | 
|                                            |  | Three
  months ended June 30, 2008 |         | Three
  months ended June 30, 2007 | 
|                                            |  |                                    |         |                                    | 
|                                            |  |                                    |         | Weighted                           |  |             |  |        |      | Weighted |   |             | 
|                                            |  | Net                                |         | Average                            |  | Per
  Share |  | Net    |      | Average  |   | Per
  Share | 
|Reconciliation of EPS                       |  | Income                             |         | Shares                             |  | Amount      |  | Income |      | Shares   |   | Amount      | 
|                                            |  |                                    |         |                                    |  |             |  |        |      |          |   |             | 
|                                            |  |                                    |         |                                    |  |             |  |        |      |          |   |             |  |  |           |  |   |      | 
|Basic earnings per common share             |  |                                    |         |                                    |  |             |  |        |      |          |   |             |  |  |           |  |   |      | 
|                                            |  |                                    |         |                                    |  |             |  |        |      |          |   |             |  |  |           |  |   |      | 
|Net income available to common stockholders |  | $                                  | 426,575 |                                    |  | 1,849,448   |  | $      | 0.23 |          | $ | 508,021     |  |  | 1,828,982 |  | $ | 0.28 | 
|                                            |  |                                    |         |                                    |  |             |  |        |      |          |   |             |  |  |           |  |   |      | 
|                                            |  |                                    |         |                                    |  |             |  |        |      |          |   |             |  |  |           |  |   |      | 
|Effect of dilutive shares                   |  |                                    |         |                                    |  |             |  |        |      |          |   |             |  |  |           |  |   |      | 
|                                            |  |                                    |         |                                    |  |             |  |        |      |          |   |             |  |  |           |  |   |      | 
|Weighted average shares, if converted       |  |                                    |         |                                    |  | 31,249      |  |        |      |          |   |             |  |  | 48,713    |  |   |      | 
|                                            |  |                                    |         |                                    |  |             |  |        |      |          |   |             |  |  |           |  |   |      | 
|                                            |  |                                    |         |                                    |  |             |  |        |      |          |   |             |  |  |           |  |   |      | 
|Diluted earnings per common share           |  |                                    |         |                                    |  |             |  |        |      |          |   |             |  |  |           |  |   |      | 
|                                            |  |                                    |         |                                    |  |             |  |        |      |          |   |             |  |  |           |  |   |      | 
|Net income available to common stockholders |  | $                                  | 426,575 |                                    |  | 1,880,697   |  | $      | 0.23 |          | $ | 508,021     |  |  | 1,877,695 |  | $ | 0.27 | 
|                                            |  |                                    |         |                                    |  |             |  |        |      |          |   |             |  |  |           |  |   |      | 

11

---



|                                            |  |                                  |         |                                  |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|------------------------------------------- |  | -------------------------------- | ------- | -------------------------------- |  | -------------------- |  | ------------ | ---- | --------------------------- | - | -------------------- |  |  | --------- |  | - | ---- | 
|                                            |  | Six
  months ended June 30, 2008 |         | Six
  months ended June 30, 2007 | 
|                                            |  |                                  |         |                                  | 
|Reconciliation of EPS                       |  | Net
  Income                     |         | Weighted
  Average
  Shares      |  | Per
  Share
  Amount |  | Net
  Income |      | Weighted
  Average
  Shares |   | Per
  Share
  Amount | 
|                                            |  |                                  |         |                                  |  |                      |  |              |      |                             |   |                      | 
|                                            |  |                                  |         |                                  |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|Basic earnings per common share             |  |                                  |         |                                  |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|                                            |  |                                  |         |                                  |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|Net income available to common stockholders |  | $                                | 788,220 |                                  |  | 1,847,272            |  | $            | 0.43 |                             | $ | 1,037,792            |  |  | 1,827,758 |  | $ | 0.57 | 
|                                            |  |                                  |         |                                  |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|                                            |  |                                  |         |                                  |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|Effect of dilutive shares                   |  |                                  |         |                                  |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|                                            |  |                                  |         |                                  |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|Weighted average shares, if converted       |  |                                  |         |                                  |  | 33,137               |  |              |      |                             |   |                      |  |  | 49,340    |  |   |      | 
|                                            |  |                                  |         |                                  |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|                                            |  |                                  |         |                                  |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|Diluted earnings per common share           |  |                                  |         |                                  |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|                                            |  |                                  |         |                                  |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|Net income available to common stockholders |  | $                                | 788,220 |                                  |  | 1,880,409            |  | $            | 0.42 |                             | $ | 1,037,792            |  |  | 1,877,098 |  | $ | 0.55 | 
|                                            |  |                                  |         |                                  |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 

Stock
Based Compensation
- FAS 123, Revised, requires companies to record compensation expense for stock
options provided to employees in return for employment service. The cost is
measured at the fair value of the options when granted, and this cost is
expensed over the employment service period, which is normally the vesting
period of the options. This applies to awards granted or modified in fiscal
years beginning in 2006.

Employee
Stock Ownership Plan (ESOP)- The cost of shares issued to the ESOP, but
not yet allocated to participants, is shown as a reduction of stockholders
equity. Compensation expense is based on the market price of shares as they are
committed to be released to participant accounts. Cash dividends on allocated
ESOP shares reduce retained earnings; cash dividends on unearned ESOP shares
reduce debt and accrued interest. As of March 16, 2007, the Company listed its
common stock on the NASDAQ Capital Market. We are no longer required to
reclassify out of stockholders equity an amount equal to the put option of the
allocated ESOP shares and we re-classed the 2006 put option allocation in the
first quarter of 2007.

Comprehensive
Income- Comprehensive income consists of net income
and other comprehensive income. Other comprehensive income includes unrealized
gains and losses, net of taxes, on securities available for sale which are also
recognized as separate components of equity.

Fair
Value Option and Fair Value Measurement - In September 2006, the FASB issued
Statement No. 157, Fair Value Measurements. This Statement
defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. This Statement establishes a
fair value hierarchy about the assumptions used to measure fair value and
clarifies assumptions about risk and the effect of a restriction on the sale or
use of an asset. The standard is effective for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued Staff Position (FSP)
157-2, Effective
Date of FASB Statement No. 157. This FSP delays the effective date
of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value on a recurring basis (at
least annually) to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years. The impact of adoption was not material.

Statement 157 establishes a
fair value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair
value:

| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Level 1: Quoted prices
  (unadjusted) for identical assets or liabilities in active markets that the
  entity has the ability to access as of the measurement date.                                                                                                      
| |                                                                                                                                                                                                                                                                          
| | Level 2: Significant other
  observable inputs other than Level 1 prices such as quoted prices for similar
  assets or liabilities; quoted prices in markets that are not active; or other
  inputs that are observable or can be corroborated by observable market data.
| |                                                                                                                                                                                                                                                                          
| | Level 3: Significant
  unobservable inputs that reflect a reporting entitys own assumptions about
  the assumptions that market participants would use in pricing and asset or
  liability.                                                                             

12

---



The fair value of securities
available for sale are determined by obtaining quoted prices on nationally
recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a
mathematical technique widely used to in the industry to value debt securities
without relying exclusively on quoted prices for the specific securities but
rather by relying on the securities relationship to other benchmark quoted
securities (Level 2 inputs).

Assets
and Liabilities Measured on a Recurring Basis

Assets and liabilities
measured at fair value on a recurring basis are summarized below:

|                              |  |                                                  |             |                                                                      |   |                                                       |  |                                                 |             |  |   |   | 
|----------------------------- |  | ------------------------------------------------ | ----------- | -------------------------------------------------------------------- | - | ----------------------------------------------------- |  | ----------------------------------------------- | ----------- |  | - | - | 
|                              |  | Fair Value Measurements
  at June 30, 2008 Using |            
|                              |  |                                                  |            
|                              |  | June 30,
  2008                                  |             | Quoted Prices in
  Active Markets for
  Identical Assets
  (Level 1) |   | Significant
  Other
  Observable
  Inputs
  (Level 2) |  | Significant
  Unobservable
  Inputs
  (Level 3) |            
|                              |  |                                                  |            
|Assets:                       |  |                                                  |             |                                                                      |   |                                                       |  |                                                 |             |  |   |   | 
|Available for sale securities |  | $                                                | 125,126,744 |                                                                      | $ |                                                      |  | $                                               | 125,126,744 |  | $ |  | 

Impaired loans are reported
at the fair value of the underlying collateral if repayment is expected solely
from the collateral. Collateral values are estimated using Level 3 inputs based
on internally customized discounting criteria. As of June 30, 2008, we did not
have any impaired loans that were collateral dependent.

Certain
financial assets and financial liabilities are measured at fair value on a
nonrecurring basis, that is, the instruments are not measured at fair value on
an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of impairment). Financial
assets and financial liabilities measured at fair value on a non-recurring
basis were not significant at June 30, 2008.

Recently-Issued
Accounting Standards
- SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities-Including an amendment of
FASB Statement No. 115. SFAS 159 permits entities
to choose to measure eligible items at fair value at specified election dates.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings at each subsequent reporting date. The fair
value option (i) may be applied instrument by instrument, with certain
exceptions, (ii) is irrevocable (unless a new election date occurs) and (iii)
is applied only to entire instruments and not to portions of instruments. SFAS
159 is effective for the Company on January 1, 2008. The Company chose not to
exercise the valuation option permitted it under SFAS 159.

On
November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan
Commitments Recorded at Fair Value through Earnings(SAB 109).
Previously, SAB 105, Application of Accounting Principles to Loan
Commitments, stated that in measuring the fair value of a derivative
loan commitment, a company should not incorporate the expected net future cash
flows related to the associated servicing of the loan. SAB 109 supersedes SAB
105 and indicates that the expected net future cash flows related to the
associated servicing of the loan should be included in measuring fair value for
all written loan commitments that are accounted for at fair value through
earnings. SAB 105 also indicated that internally-developed intangible assets
should not be recorded as part of the fair value of a derivative loan
commitment, and SAB 109 retains that view. SAB 109 is effective for derivative
loan commitments issued or modified in fiscal quarters beginning after December
15, 2007. The adoption of this standard was not material.

13

---



Item 2
Managements Discussion and Analysis of Financial Condition and Results of
Operations

Financial Condition
at June 30, 2008

Total assets were
$217,182,773 at June 30, 2008, an increase of $13,389,204 or, 6.8%, from
December 31, 2007. The increase resulted from the investment of funds
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 our branch offices. We invested these funds primarily
in investment securities available for sale and to fund an increase in
overnight investments. The net
increase in assets can be summarized as follows:

|  |                                                                            
|- | ---------------------------------------------------------------------------
|· | A $5,310,982 net increase
  in cash and cash equivalents                   
|  |                                                                            
|· | A $7,312,627 net increase
  in investment securities available for sale and
|  |                                                                            
|· | An $805,642 net increase
  in net loans receivable.                        

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

Our
deposits (including escrow deposits) were $189,060,535 at June 30, 2008, an
increase of $12,726,092, or 7.2%, from December 31, 2007. The increase in
deposits resulted from increases of $5,584,881 in time deposits, $3,928,274 in
non-interest demand deposits, $2,198,478 in NOW and $1,134,606 in savings
accounts, partially offset by a decrease of $120,147 in money market accounts.

Total
stockholders equity was $21,577,685 at June 30, 2008, an increase of $693,880
from December 31, 2007. The increase reflected net income of $788,220 for the
six months ended June 30, 2008, increased by a reduction in the net unrealized loss on securities
available for sale of $31,993 and increased by a reduction of $84,538 in
Unearned ESOP shares reflecting the effect of the gradual payment of the loan
we made to fund the ESOPs purchase of our stock. This was partially offset by
the use of $228,549, representing the two $0.06 per share cash dividends that
we paid in 2008.

The
unrealized loss on securities available for sale is excluded from the
calculation of regulatory capital. Management does not anticipate selling
securities in this portfolio, but changes in market interest rates or in the
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. Management believes that the
principal and interest payments on this portfolio, combined with the existing
liquidity, will be sufficient to fund loan growth and potential deposit
outflow.

For
financial statement reporting purposes, we record the compensation expense
related to the ESOP when shares are committed to be released from the security
interest for the loan. The amount of the compensation expense is 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 did not increase our capital by the
amount of the purchase price because the purchase price was paid by the loan we
made to the ESOP. Instead, capital increases 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 are 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.

14

---



Effect
of Adverse Conditions in the Residential Mortgage Market.

We
do not expect that adverse conditions in the residential mortgage market
throughout the United States will have a direct adverse effect on our financial
condition or results of operations. We are not a residential mortgage lender.
We do not hold any loans in our portfolio of the type that are commonly known
as subprime residential mortgage loans. At June 30, 2008, we owned $125.1
million of securities that are either collateralized by residential mortgage
loans or that represent shares in pools of such loans. However, 94.7% of those
securities are issued or guaranteed by FNMA (Fannie Mae), GNMA (Ginnie Mae) or
FHLMC (Freddie Mac). The remainder of the securities portfolio is all
investment grade fixed-rate securities rated AAA that are at least five years
old. None of those securities have experienced ratings downgrades. Those
securities issued or guaranteed by Fannie Mae or Freddie Mac are entirely
securities in which we have a relatively senior position in the cash flow
received on the underlying mortgages and there is at least one significant
class in each security with a lower cash flow priority. As a result, we
anticipate that even if here are defaults on the underlying mortgages and even
if Fannie Mae or Freddie Mac suffers from economic difficulties, the ultimate
recovery of the entire amount owed of the securities we have purchased is
reasonably certain.

Many
of our customers, both loan and deposit customers, are involved in the
residential construction business in Staten Island. We believe that the turmoil
in the national housing and residential mortgage markets has had an adverse
effect on some of our customers. An apparent slow down in the local housing
market and a noticeable reduction in the availability of residential mortgage
loans seems to have had an adverse effect on our customers and reduced their
business activity. We believe that this, in turn, has caused a reduction in
their demand for loans from us, such as construction loans to build new homes.
It also appears to have adversely affected the level of deposits they maintain.

The Effect of
Declining Market Interest Rates.

Market interest rates, especially short term
market interest rates, declined substantially from September 2007 to April 2008
as the Federal Reserve reduced the target federal funds rate, which resulted in
an immediate and equal reduction in the prime lending rate. The prime rate and
the target overnight federal funds rate both declined by 325 basis points
during that period, with the most dramatic decline being a 200 basis point
decline in the two months from January 22, 2008 through March 18, 2008. As a
result, our loan yields (usually based on the prime rate) and our overnight
investment yields (based upon the target federal funds rate) declined as market
interest rates decline.

The
decline in loan yields and earnings on overnight investments was more rapid
than the decline in our cost of funds for a number of reasons. Approximately
one-third of our deposits are interest-free checking accounts and the rates on
those accounts (already at zero) do not decline as market rates decline. The
rates we pay on interest-bearing deposits, because of their lower starting
point, cannot be reduced by as much as the basis point decline in market rates
because of the need to maintain customer relationships, competitive pressures
and the simple fact that if we price our time deposit rate at, hypothetically,
50% of the prime rate, then if the prime rate declines 100 basis points, then
deposit rate only declines 50 basis points. In addition, customers have the
ability to exercise discretion in moving funds between different types of deposits
to maximize their interest earnings.

We
have some flexibility in allocating our investment choices between the three
categories of earning assets  loans, investment securities and other
investments (principally overnight investments). As interest rates declined, we
elected to invest more of our available liquid assets into investment
securities instead of overnight investments. This shift in the mix of our
investments allowed us to reduce the effect of declining interest rates because
investment securities tend to have higher yields that overnight investments. We
were also able to reinvest the payments we received on existing investment
securities in securities with rates comparable to the rates we were earning on
the securities being repaid because many of the securities being repaid were
purchased a number of
years ago before market interest rates reached their recent peak towards the
end of 2006.

15

---



Results of Operations
for the Three Months Ended June 30, 2008 and June 30, 2007

Our results
of operations depend primarily on net interest income, which is the difference
between the income we earn on our loan and investment portfolios and our cost
of funds, consisting primarily of interest we pay on customer deposits. Our
operating expenses principally consist of employee compensation and benefits,
occupancy expenses, professional fees, advertising and marketing expenses and
other general and administrative expenses. Our results of operations are
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.

General.
We had net income of $426,275 for the quarter ended June 30, 2008, compared to
net income of $508,021 for the comparable quarter in 2007. The principal
categories which make up the 2008 net income are:

| |   |                                                    
| | - | ---------------------------------------------------
| | · | Interest
  income of $2,678,831                    
| |   |                                                    
| | · | Reduced by
  interest expense of $592,821          
| |   |                                                    
| | · | Reduced by a
  provision for loan losses of $55,000
| |   |                                                    
| | · | Increased by
  non-interest income of $624,234     
| |   |                                                    
| | · | Reduced by
  non-interest expense of $1,862,177    
| |   |                                                    
| | · | Reduced by
  $366,792 in income tax expense        

We
discuss each of these categories individually and the reasons for the
differences between the quarters ended June 30, 2008 and 2007 in the following
paragraphs. In general, the principal reason for the decline in net income when
comparing the second quarter of 2008 with the same quarter in 2007 was a
reduction in the yield on interest-earning assets, primarily in the loan
portfolio and in other-interest earning assets, which reduced interest income.
We were able to maintain the yield on our investment security portfolio as we
purchase new securities, with the same risk parameters that we have purchased
in the past, at yields comparable to the overall portfolio yield.

Interest
Income.Interest
income was $2,678,831 for the quarter ended June 30, 2008, compared to
$3,059,803 for the quarter ended June 30, 2007, a decrease of $380,972, or 12.5%.
The principal reasons for this decrease was a 231 basis point decrease in the
yield on our loan portfolio, partially mitigated by a $1,775,129 increase in
the average loan balance, and a 297 basis point decrease in the yield of
other-interest earning assets (principally overnight investments). The decrease
in interest income was partially offset by the increase in the investment
security portfolio as we reduced other interest-earning assets and reallocated
the funds to increase the average balance of investment securities. We also had
a slight increase in the overall investment securities portfolio yield. The
average balance of overnight investments decreased by $6,476,062 primarily due
to the use of excess funds to purchase higher yielding investment securities.

The
6 basis point increase in the average yield on our investment securities
portfolio, from 4.69% to 4.75%, was due to the purchase of new investment
securities at higher market rates than the yields on the principal paydowns we
received. The yield on investment securities did not decrease as the other
interest-earning assets because most of the bonds and notes in our investment
portfolio have either fixed interest rates or interest rates that react more
slowly to changes in market interest rate conditions. The average balance of
our investment portfolio increased by $10,561,973, or 9.56%, between the
periods. The increase in volume and the increase in yield resulted in an
overall $137,664 increase in interest income from investment securities. The
investment securities portfolio represented 89.2% of average non-loan interest
earning assets in the 2008 period compared to 83.9% in the 2007 period.

16

---



Interest
Expense. Interest expense was $592,821 for the quarter
ended June 30, 2008, compared to $869,787 for the quarter ended June 30, 2007,
a decrease of 31.8%. The decrease was primarily the result of a decrease in the rates we paid on deposits,
specifically time deposits (153 basis point decrease) and money market accounts
(27 basis point decrease). Our average cost of funds, excluding the effect of
interest-free demand deposits, decreased to 1.90% from 2.84% between the
periods due to the decline in market interest rates.

Net
Interest Income Before Provision for Loan Losses. Net interest income before the provision for
loan losses was $2,086,010 for the quarter ended June 30, 2008, a decrease of
$104,006, or 4.8% over the $2,190,016 in the comparable 2007 quarter. The
decrease resulted principally from a decrease in the yield on our loan
portfolio, which was greater than the decrease in our average cost of deposits,
including demand deposits. Our net interest spread increased to 3.50% in the
second quarter of 2008 from 3.49% in the second quarter of 2007. We were able
to main the spread due to the reallocation of overnight investments into
investment securities. However, our net interest margin decreased to 4.20% in
the second quarter of 2008 from 4.51% in the second quarter of 2007 because the
margin takes into account the effect of interest free demand deposits and
capital, which are less valuable funding sources when market interest rates are
lower as they can be invested only at lower yields.

Provision
for Loan Losses.We took a provision for loan losses
of $55,000 for the quarter ended June 30, 2008 compared to no provision for
loan losses for the quarter ended June 30, 2007. The increase in the provision
was the result of an increase in loan delinquencies. 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 is based
on managements evaluation of the risks inherent in our loan portfolio and the
general economy. Management periodically evaluates both broad categories of
performing loans and problem loans individually to assess the appropriate level
of the allowance.

Although
management uses available information to assess the 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 1.36% of total loans at
June 30, 2008, 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 $624,234 for the three
months ended June 30, 2008, compared to
$535,193 during the same period last year. The $89,041, or 16.6%, increase in non-interest
income was a direct result of a $100,411 increase in service charges on
deposits (primarily non-sufficient fund fees) and an increase in net rental
income of $24,224, partially offset by a decrease of $36,347 in other income.
Service fees on deposit accounts, principally non-sufficient funds fees,
increased from 2007 to 2008 due to an increase in the number of non-sufficient
fund transactions coupled with our decision to increase per item charges for
both insufficient fund and bounced check fees and other deposit fees in June of
2008. The increase in net rental income was due to the occupancy of one of the
Banks subleased properties. The decrease in other income was a result of the
loss of a check cashing customer and the fee income associated with that
business.

Non-interest
Expense. Non-interest expense was $1,862,177 for the
quarter ended June 30, 2008, compared to $1,773,951 for the quarter ended June
30, 2007. The principal causes of the $88,226 increase were:

| |   |                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | $16,716 increase in
  occupancy expenses due to higher utility bills;                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                               
| | · | $81,860
  increase in legal
  expenses primarily because in 2007 we received a reimbursement from our
  insurance company of legal fees previously expensed and new collection
  matters                                                                                                      
| |   |                                                                                                                                                                                                                                                                                               
| | · | $52,932 increase in other
  expenses due to a $24,304 increase in advertising expenses in connection with
  the Banks new advertising campaign, and a $40,110 recovery in 2007 of part
  of a reserve expensed in 2005 for a legal claim that we settled for less than
  the reserve in 2007.
| |   |                                                                                                                                                                                                                                                                                               
| | · | $69,725 decrease in
  salaries and benefits expense, due in part to the retirement of the former
  president and reduced incentive and ESOP compensation expense.                                                                                                                             

17

---



Income
Tax Expense. Income tax expense was $366,792 for the
quarter ended June 30, 2008, compared to income tax expense of $443,237 for the
quarter ended June 30, 2007. The reduction in income tax expense was due to the
$158,191 decrease in income before income taxes in the 2008 quarter. Our
effective tax rate for the quarter ended June 30, 2008 was 46.2% and for the
quarter ended June 30, 2007 was 46.6%.

Results of Operations
for the Six Months Ended June 30, 2008 and June 30, 2007

Our results
of operations depend primarily on net interest income, which is the difference
between the income we earn on our loan and investment portfolios and our cost
of funds, consisting primarily of interest we pay on customer deposits. Our
operating expenses principally consist of employee compensation and benefits,
occupancy expenses, professional fees, advertising and marketing expenses and
other general and administrative expenses. Our results of operations are
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.

General.
We had net income of $788,220 for the six months ended June 30, 2008, compared
to net income of $1,037,792 for the comparable period in 2007. The principal
categories which make up the 2008 net income are:

| |   |                                                    
| | - | ---------------------------------------------------
| | · | Interest
  income of $5,409,912                    
|
| | · | Reduced by
  interest expense of $1,348,613        
|
| | · | Reduced by a
  provision for loan losses of $85,000
|
| | · | Increased by
  non-interest income of $1,190,136   
|
| | · | Reduced by
  non-interest expense of $3,700,327    
|
| | · | Reduced by
  $677,888 in income tax expense        

We
discuss each of these categories individually and the reasons for the
differences between the six months ended June 30, 2008 and 2007 in the
following paragraphs. In general, the principal reason for the decline in net
income when comparing the first six months of 2008 with the same period in 2007
was a reduction in the yield on interest-earning assets, primarily in the loan
portfolio and in other-interest earning assets, which reduced interest income.

Interest
Income.Interest
income was $5,409,912 for the six months ended June 30, 2008, compared to
$6,179,681 for the six months ended June 30, 2007, a decrease of $769,769, or
12.5%. The principal reasons for this decrease was a 224 basis point decrease
in the yield on our loan portfolio and a 251 basis point decrease in the yield
of other-interest earning assets (principally overnight investments). The
decrease was partially offset by the higher average balance of the investment
security portfolio as we reduced other interest earning assets and reallocated
the funds to increase the average balance of investment securities. We also had
a slight increase in the investment securities portfolio yield. The average
balance of overnight investments decreased by $6,404,478, primarily due to the
use of excess funds to purchase higher yielding investment securities.

The
average yield on our investment securities portfolio increased 4 basis points,
from 4.71% to 4.75%, due to the purchase of new investment securities at
slightly higher market rates than the yields on the principal paydowns
we received. The yield on investment securities did not decrease as the other
interest earning assets because most of the bonds and notes in our investment
portfolio have either fixed interest rates or interest rates that react more
slowly to changes in market interest rate conditions. The average balance of
our investment portfolio increased by $8,166,695, or 7.36%, between the
periods. The increase in volume and the increase in yield resulted in an
overall $221,501 increase in interest income from investment securities. The
investment securities portfolio represented 89.4% of average non-loan interest
earning assets in the 2008 period compared to 84.3% in the 2007 period.

18

---



Interest
Expense. Interest expense was $1,348,613 for the six
months ended June 30, 2008, compared to $1,713,030
for the six months ended June 30, 2007, a decrease of 21.3%. The decrease was
primarily the result of a decrease in the rates we paid on deposits,
specifically time deposits (a 105 basis point decrease in cost) and money
market accounts (a 35 basis point decrease in cost). Our average cost of funds,
excluding the effect of interest-free demand deposits, decreased to 2.20% from
2.80% between the periods due to a decline in market interest rates that began
in approximately September 2007.

Net
Interest Income Before Provision for Loan Losses. Net interest income before the provision for
loan losses was $4,061,299 for the six months ended June 30, 2008, a decrease
of $405,352, or 9.1% over the $4,466,651 in the comparable 2007 period. The
decrease resulted principally from a decrease in the yield on our loan
portfolio, which was greater than the decrease in the average cost of our
deposits, including demand deposits, and the yield and average balance of our
other interest earning assets partially offset by a decrease in the cost of
time deposits and an increase in interest income from our investment security
portfolio. Our net interest spread decreased to 3.33% in the first six months
of 2008 from 3.61% in the same period of 2007 and our net interest margin,
which includes the effect of interest-free demand deposits and capital as
funding sources, decreased to 4.15% in the first six months of 2008 from 4.63%
in the same period of 2007.

Provision
for Loan Losses.We
took a provision for loan losses of $85,000 for the six months ended
June 30, 2008 compared to a credit to the provision for loan losses of $30,000
for the six months ended June 30, 2007. The increase in the provision was the
result of an increase in loan delinquencies. 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 is based on
managements evaluation of the risks inherent in our loan portfolio and the
general economy. Management periodically evaluates both broad categories of
performing loans and problem loans individually to assess the appropriate level
of the allowance.

Although
management uses available information to assess the 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 1.36% of total loans at
June 30, 2008, 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 $1,190,136 for the six
months ended June 30, 2008, compared to
$1,076,556 during the same period last year. The $113,580, or 10.6%, increase
in non-interest income was a direct result of a $163,118 increase in service
charges on deposits (primarily non-sufficient fund fees) and an increase in net
rental income of $8,400, partially offset by a decrease of $53,446 in other
income. Service fees on deposit accounts, principally non-sufficient funds
fees, increased from 2007 to 2008 due to an increase in the number of
non-sufficient fund transactions coupled with our decision to increase per item
charges for both insufficient fund and bounced check fees and other deposit
fees in June of 2008. The increase in net rental income was due to the
occupancy of one of the Banks subleased properties that was previously vacant.
The decrease in other income was a result of the loss of a check cashing
customer that had previously generated substantial fee income.

Non-interest
Expense. Non-interest expense was $3,700,327 for the
six months ended June 30, 2008, compared to $3,630,107 for the six months ended
June 30, 2007. The principal causes of the $70,220 increase were:

| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | $36,465 increase in
  occupancy expenses due to higher utility costs and the operation of our new
  main office in Great Kills, which opened in February 2007;                          
| |   |                                                                                                                                                                                         
| | · | $121,420 increase in legal
  expenses primarily because in 2007 we received a reimbursement from our
  insurance company of legal fees previously expensed and new collection
  matters.

19

---



| |   |                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | $79,749 increase in other
  expenses due to a $39,269 increase in advertising expenses in connection with
  the Banks new advertising campaign and a $40,110 recovery in 2007 of part of
  a reserve expensed in 2005 for a legal claim that we settled for less than
  the reserve in 2007
| |   |                                                                                                                                                                                                                                                                                             
| | · | $176,647 decrease in
  salaries and benefits expense, due in part to the retirement of the former
  president and reduced incentive and ESOP compensation expense.                                                                                                                          

Income
Tax Expense. Income
tax expense was $677,888 for the six months ended June 30, 2008,
compared to income tax expense of $905,308 for the six months ended June 30,
2007. The reduction in income tax expense was due to the $476,992 decrease in income
before income taxes in the 2008 period. Our effective tax rate for the six
months ended June 30, 2008 was 46.2% and for the quarter ended June 30, 2007
was 46.6%.

20

---



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

|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|------------------------------------------------------------------ |  | -------------------------------- | ----------- | -------------------------------- | - | ------------------------------ |  | ------------------------------ | ---- | -------- | - | ------------- | - | ----------------- | --------- | -------- |  | ------------- | - | ----------------- | ----------- | -------- | - | ------------- |  |  | ---- | - | - | ----------- | - | - | --------- |  |  | ---- | -
|                                                                   |  | Three Months Ended June 30, 2008 |             | Three Months Ended June 30, 2007 |   | Six Months Ended June 30, 2008 |  | Six Months Ended June 30, 2007 |     
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |     
|                                                                   |  | Average
  Balance                |             | Interest                         |   | Yield/
  Cost                  |  | Average
  Balance              |      | Interest |   | Yield/
  Cost |   | Average
  Balance |           | Interest |  | Yield/
  Cost |   | Average
  Balance |             | Interest |   | Yield/
  Cost | 
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               | 
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Assets:                                                            |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Interest-earning assets:                                           |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Loans receivable                                                   |  | $                                | 62,185,996  |                                  | $ | 1,172,917                      |  |                                | 7.47 | %        | $ | 60,410,867    |   | $                 | 1,501,344 |          |  | 9.78          | % | $                 | 62,584,676  |          | $ | 2,417,408     |  |  | 7.70 | % | $ | 61,823,241  |   | $ | 3,073,697 |  |  | 9.94 | %
|Investment securities, afs                                         |  |                                  | 121,089,026 |                                  |   | 1,431,362                      |  |                                | 4.75 |          |   | 110,527,053   |   |                   | 1,293,698 |          |  | 4.69          |   |                   | 119,193,950 |          |   | 2,815,659     |  |  | 4.75 |   |   | 111,027,255 |   |   | 2,594,158 |  |  | 4.71 |  
|Other interest-earning assets                                      |  |                                  | 14,704,057  |                                  |   | 74,552                         |  |                                | 2.04 |          |   | 21,180,119    |   |                   | 264,761   |          |  | 5.01          |   |                   | 14,209,342  |          |   | 176,845       |  |  | 2.50 |   |   | 20,613,820  |   |   | 511,826   |  |  | 5.01 |  
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Total interest-earning assets                                      |  |                                  | 197,979,079 |                                  |   | 2,678,831                      |  |                                | 5.40 |          |   | 192,118,039   |   |                   | 3,059,803 |          |  | 6.33          |   |                   | 195,987,968 |          |   | 5,409,912     |  |  | 5.53 |   |   | 193,464,316 |   |   | 6,179,681 |  |  | 6.41 |  
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Non-interest earning assets                                        |  |                                  | 12,990,338  |                                  |   |                                |  |                                |      |          |   | 14,599,860    |   |                   |           |          |  |               |   |                   | 13,071,773  |          |   |               |  |  |      |   |   | 15,596,744  |   |   |           |  |  |      |  
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Total assets                                                       |  | $                                | 210,969,417 |                                  |   |                                |  |                                |      |          | $ | 206,717,899   |   |                   |           |          |  |               |   | $                 | 209,059,741 |          |   |               |  |  |      |   | $ | 209,061,060 |   |   |           |  |  |      |  
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Liabilities and equity:                                            |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Interest-bearing liabilities:                                      |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Savings accounts                                                   |  | $                                | 11,816,546  |                                  |   | 18,191                         |  |                                | 0.62 |          | $ | 12,158,415    |   |                   | 25,355    |          |  | 0.84          |   | $                 | 11,402,990  |          |   | 37,173        |  |  | 0.66 |   | $ | 12,284,927  |   |   | 49,783    |  |  | 0.82 |  
|Time accounts                                                      |  |                                  | 69,021,801  |                                  |   | 380,380                        |  |                                | 2.22 |          |   | 67,095,405    |   |                   | 627,874   |          |  | 3.75          |   |                   | 67,104,083  |          |   | 899,827       |  |  | 2.70 |   |   | 66,928,171  |   |   | 1,243,010 |  |  | 3.75 |  
|Money market accounts                                              |  |                                  | 20,940,525  |                                  |   | 72,509                         |  |                                | 1.39 |          |   | 20,014,699    |   |                   | 97,559    |          |  | 1.96          |   |                   | 21,399,289  |          |   | 168,601       |  |  | 1.58 |   |   | 19,194,558  |   |   | 183,409   |  |  | 1.93 |  
|Now accounts                                                       |  |                                  | 18,385,134  |                                  |   | 32,702                         |  |                                | 0.72 |          |   | 19,785,685    |   |                   | 29,960    |          |  | 0.61          |   |                   | 18,129,757  |          |   | 64,933        |  |  | 0.72 |   |   | 19,775,262  |   |   | 58,749    |  |  | 0.60 |  
|Subordinated debt                                                  |  |                                  | 5,155,000   |                                  |   | 89,039                         |  |                                | 6.91 |          |   | 5,155,000     |   |                   | 89,039    |          |  | 6.91          |   |                   | 5,155,000   |          |   | 178,079       |  |  | 6.91 |   |   | 5,155,000   |   |   | 178,079   |  |  | 6.91 |  
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Total interest-bearing liabilities                                 |  |                                  | 125,319,006 |                                  |   | 592,821                        |  |                                | 1.90 |          |   | 124,209,204   |   |                   | 869,787   |          |  | 2.84          |   |                   | 123,191,119 |          |   | 1,348,613     |  |  | 2.20 |   |   | 123,337,918 |   |   | 1,713,030 |  |  | 2.80 |  
|Checking accounts                                                  |  |                                  | 62,800,182  |                                  |   |                                |  |                                |      |          |   | 62,044,199    |   |                   |           |          |  |               |   |                   | 62,906,868  |          |   |               |  |  |      |   |   | 65,037,639  |   |   |           |  |  |      |  
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Total deposits and subordinated debt                               |  |                                  | 188,119,188 |                                  |   |                                |  |                                |      |          |   | 186,253,403   |   |                   |           |          |  |               |   |                   | 186,097,987 |          |   |               |  |  |      |   |   | 188,375,557 |   |   |           |  |  |      |  
|Other liabilities                                                  |  |                                  | 968,801     |                                  |   |                                |  |                                |      |          |   | 1,638,568     |   |                   |           |          |  |               |   |                   | 1,160,933   |          |   |               |  |  |      |   |   | 2,213,557   |   |   |           |  |  |      |  
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Total liabilities                                                  |  |                                  | 189,087,989 |                                  |   |                                |  |                                |      |          |   | 187,891,971   |   |                   |           |          |  |               |   |                   | 187,258,920 |          |   |               |  |  |      |   |   | 190,589,114 |   |   |           |  |  |      |  
|Equity                                                             |  |                                  | 21,881,428  |                                  |   |                                |  |                                |      |          |   | 18,825,928    |   |                   |           |          |  |               |   |                   | 21,800,821  |          |   |               |  |  |      |   |   | 18,471,946  |   |   |           |  |  |      |  
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Total liabilities and equity                                       |  | $                                | 210,969,417 |                                  |   |                                |  |                                |      |          | $ | 206,717,899   |   |                   |           |          |  |               |   | $                 | 209,059,741 |          |   |               |  |  |      |   | $ | 209,061,060 |   |   |           |  |  |      |  
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Net interest income/net interest rate spread                       |  |                                  |             |                                  | $ | 2,086,010                      |  |                                | 3.50 | %        |   |               |   | $                 | 2,190,016 |          |  | 3.49          | % |                   |             |          | $ | 4,061,299     |  |  | 3.33 | % |   |             |   | $ | 4,466,651 |  |  | 3.61 | %
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Net interest earning assets/net interest margin                    |  | $                                | 72,660,073  |                                  |   |                                |  |                                | 4.20 | %        | $ | 67,908,835    |   |                   |           |          |  | 4.51          | % | $                 | 72,796,849  |          |   |               |  |  | 4.15 | % | $ | 70,126,398  |   |   |           |  |  | 4.63 | %
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Ratio of interest-earning assets to interest-bearing
  liabilities |  |                                  | 1.58        | x                                |   |                                |  |                                |      |          |   | 1.55          | x |                   |           |          |  |               |   |                   | 1.59        | x        |   |               |  |  |      |   |   | 1.57        | x |   |           |  |  |      |  
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Return on Average Assets (1)                                       |  |                                  | 0.79        | %                                |   |                                |  |                                |      |          |   | 0.96          | % |                   |           |          |  |               |   |                   | 0.75        | %        |   |               |  |  |      |   |   | 0.99        | % |   |           |  |  |      |  
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Return on Average Equity (1)                                       |  |                                  | 7.65        | %                                |   |                                |  |                                |      |          |   | 10.50         | % |                   |           |          |  |               |   |                   | 7.17        | %        |   |               |  |  |      |   |   | 11.18       | % |   |           |  |  |      |  
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Tangible Equity to Total Assets                                    |  |                                  | 9.94        | %                                |   |                                |  |                                |      |          |   | 8.65          | % |                   |           |          |  |               |   |                   | 9.94        | %        |   |               |  |  |      |   |   | 8.65        | % |   |           |  |  |      |  
|                                                                   |  |                                  |             |                                  |   |                                |  |                                |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  

(1) Ratios have been annualized

21

---



Liquidity and Capital Resources

Our
primary sources of funds are increases in deposits, proceeds from the repayment
of investment securities, and the repayment of loans. We use these funds to
purchase new investment securities and to fund new and renewing loans in our
loan portfolio. Remaining funds are invested in short-term liquid assets such
as overnight
federal funds loans and bank deposits.

During
the six months ended June 30, 2008, we had a net increase in total deposits of
$12,726,092 due to increases of $5,584,881 in time deposits, $3,928,274 in
non-interest demand deposits, $2,198,478 in NOW accounts and $1,134,606 in
savings accounts, partially offset by a decrease of $120,147 in money market
accounts. We also received proceeds from repayment of investment securities of
$14,402,118. We used $21,612,383 of available funds to purchase new investment
securities and we had a net loan increase of $821,792. These changes resulted
in an overall increase in cash and cash equivalents of $5,310,982.

In
contrast, during the six months ended June 30, 2007, we had a net increase in
total deposits of $3,043,289 as a result of a $5,344,775 increase in money
market accounts, a $874,352 increase in NOW accounts and a $713,595 increase in
time deposits, partially offset by a $3,124,974 decrease in demand and checking
accounts and a $764,459 decrease in savings accounts. We also received proceeds
from repayment of investment securities of $12,759,728. We used $11,511,654 of
available funds to purchase new investment securities. We had a net loan
reduction of $5,541,952 and we used $2,898,001 of cash for capitalized
leasehold improvements and equipment for our new main office in Great Kills.
These changes resulted in an overall increase in cash and cash equivalents of
$9,619,953.

Victory
State Bank satisfied all capital ratio requirements of the Federal Deposit
Insurance Corporation at June 30, 2008, with a Tier I Leverage Capital ratio of
10.07%, a ratio of Tier I Capital to Risk-Weighted Assets ratio of 23.43%, and
a Total Capital to Risk-Weighted Assets ratio of 24.40%.

VSB
Bancorp, Inc. satisfied all capital ratio requirements of the Federal Reserve
at June 30, 2008, with a Tier I Leverage Capital ratio of 12.76%, a ratio of
Tier I Capital to Risk-Weighted Assets ratio of 29.17%, and a Total Capital to
Risk-Weighted Assets ratio of 30.10%.

Just
prior to the filing of this report, we unwound our trust preferred securities
transaction by calling (and repaying) the $5,155,000 subordinated debenture we
had on our balance sheet at June 30, 2008. We used available cash to repay the
debenture and we expect that the repayment will have no material adverse effect
on our liquidity. We elected to repay the debenture and end the trust preferred
transaction because we believe that the future cost to us (3 month LIBOR plus
300 basis points per annum) will exceed the value of the additional capital
that the transaction gives us for regulatory capital purposes. Victory State Bank
and VSB Bancorp, Inc. were both well-capitalized for regulatory capital
purposes after the debenture was repaid.

22

---



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

Contractual
Obligations and Commitments at June 30, 2008

|                                                                     |  |                         |            |                        |   |                        |  |                    |           |                             |   |           |  |   |            | 
|-------------------------------------------------------------------- |  | ----------------------- | ---------- | ---------------------- | - | ---------------------- |  | ------------------ | --------- | --------------------------- | - | --------- |  | - | ---------- | 
|                                                                     |  | Payment
  due by Period |           
|                                                                     |  |                         |           
|Contractual Obligations                                              |  | Less
  than
  One Year  |            | One
  to three
  years |   | Four
  to five
  years |  | After
  five years |           | Total
  Amounts
  committed |  
|                                                                     |  |                         |            |                        |   |                        |  |                    |           |                             |  
|                                                                     |  |                         |            |                        |   |                        |  |                    |           |                             |  
|                                                                     |  |                         |            |                        |   |                        |  |                    |           |                             |   |           |  |   |            | 
|Minimum annual rental payments under non-cancelable operating
leases |  | $                       | 396,673    |                        | $ | 810,403                |  | $                  | 842,482   |                             | $ | 2,002,767 |  | $ | 4,052,325  | 
|Remaining contractual maturities of time deposits                    |  |                         | 67,131,254 |                        |   | 1,234,481              |  |                    | 1,957,710 |                             |   |          |  |   | 70,323,445 | 
|                                                                     |  |                         |            |                        |   |                        |  |                    |           |                             |   |           |  |   |            | 
|Total contractual cash obligations                                   |  | $                       | 67,527,927 |                        | $ | 2,044,884              |  | $                  | 2,800,192 |                             | $ | 2,002,767 |  | $ | 74,375,770 | 
|                                                                     |  |                         |            |                        |   |                        |  |                    |           |                             |   |           |  |   |            | 

|                  |  |                                             |            |                        |   |                        |  |                    |   |                             |   |   |  |   |            | 
|----------------- |  | ------------------------------------------- | ---------- | ---------------------- | - | ---------------------- |  | ------------------ | - | --------------------------- | - | - |  | - | ---------- | 
|                  |  | Amount
  of commitment Expiration by Period |           
|                  |  |                                             |           
|Other commitments |  | Less
  than
  One Year                      |            | One
  to three
  years |   | Four
  to five
  years |  | After
  five years |   | Total
  Amounts
  committed |  
|                  |  |                                             |            |                        |   |                        |  |                    |   |                             |  
|                  |  |                                             |            |                        |   |                        |  |                    |   |                             |  
|Loan commitments  |  | $                                           | 20,844,927 |                        | $ | 7,437,976              |  | $                  |  |                             | $ |  |  | $ | 28,282,903 | 
|                  |  |                                             |            |                        |   |                        |  |                    |   |                             |   |   |  |   |            | 

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 risk upon fluctuation
in market rates.

Non-Performing Loans

Management
closely monitors non-performing loans and other assets with potential problems
on a regular basis. We had twelve non-performing loans, totaling $2,741,337, at
June 30, 2008, compared to six non-performing loans, totaling $960,217, at
December 31, 2007. The following is information about the seven largest
non-performing loans, totaling $2,308,726 in outstanding principal balance.
Management believes it has taken appropriate steps with a view towards
maximizing recovery and minimizing loss on these loans.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|· | $859,968 in three loans to
  a builder secured and cross-collateralized by first mortgage liens on three
  lots in Staten Island on which single family houses are being built. The
  loans are past maturity and we have commenced foreclosure actions. The
  builder has contracts to sell two of the houses and those houses are near
  completion. The sale of the two houses at the contract price, if consummated,
  would be sufficient to pay off all three loans.                                                                                                                                                                                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|· | $666,321 in a loan to a
  business that has ceased operations but which loan is secured by a first
  mortgage on real property in Suffolk County and personally guaranteed by the
  principals. The property is listed for sale at a price substantially in
  excess of the loan amount. The loan is past due and we negotiated an interim
  work out, pending the completion of a sale of the property. The borrower has
  made a substantial cash deposit sufficient to bring the loan current, and to
  pay interest through at least August 2008. The borrowers and the guarantors
  signed the work out documents in July and we then applied the deposit as
  agreed.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|· | $512,437 in two loans to
  related local businesses. Both loans are in default and confessions of
  judgment have been filed. We have a security interest in the businesses,
  personal guaranties of the principals and others, and $100,000 of cash
  collateral. Contracts to sell the two businesses have been signed and the
  purchaser has submitted applications to the state regulatory authority that
  must approve the sale. We anticipate that regulatory approval will be
  received and that a subsequent sale will generate proceeds sufficient to pay
  off the loans.                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|· | $270,000 in a loan to a
  builder secured by a first mortgage lien on two new houses in Staten Island.
  The loan was past maturity and we commenced a foreclosure action. The
  borrower has sold one of the houses and the loan has subsequently been repaid
  in full.                                                                                                                                                                                                                                                                                                                                                                                                  

23

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Critical Accounting
Policies and Judgments

We
are required 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. The allowance for loan losses, prepayment
estimates on the mortgage-backed securities and Collateralized Mortgage
Obligation portfolios, contingencies and fair values of financial instruments
are particularly subject to change and to managements estimates. Actual
results can differ from those estimates and may have an impact on our financial
statements.

Item 4 Controls and Procedures

Evaluation
of Disclosure Controls and Procedures: As of June 30, 2008, we undertook an
evaluation of our disclosure controls and procedures under the supervision and
with the participation of Raffaele M. Branca, President, CEO 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-K and quarterly periodic reports on Form 10-Q) 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. Mr. 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 1  Legal Proceedings

The
Bank is a defendant in an action pending in Supreme Court, Richmond County,
commenced by IndyMac Bank, F.S.B. against the Bank, LaMattina & Associates,
Inc. (LAI) and various individuals and entities alleged to be officers,
directors or otherwise to have relationships with LAI. See the Companys
quarterly report for the quarter ended March 31, 2008 for information with
respect to this proceeding.

IndyMac Bank, F.S.B. (Old
IndyMac), was closed by the Office of Thrift Supervision (OTS) and the
Federal Deposit Insurance Corporation (FDIC) was appointed as its conservator
in July 2008. The OTS then created a new bank (New IndyMac) and many of the
assets of Old IndyMac were transferred to New IndyMac. The Bank does not yet
have a definitive answer to whether the claim in the litigation is owned by Old
IndyMac, New IndyMac, or some other entity. The Bank has no information that
the holder of the claim intends to discontinue its claim against the Bank as a
result the closure of Old IndyMac.

VSB
Bancorp, Inc., is not involved in any pending legal proceedings. The Bank, from
time to time, is involved in routine
collection proceedings in the ordinary course of business on loans in default.
Management believes that such other routine legal proceedings in the aggregate
are immaterial to our financial condition or results of operations.

24

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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 12, 2008 | /s/ Raffaele M. Branca               
|                      |                                      
|                      | Raffaele M. Branca                   
|                      | President and Chief Executive Officer

EXHIBIT
INDEX

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

Item
6 - Exhibits

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

25

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