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

                                   FORM 10-QSB


[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                       FOR THE QUARTER ENDED JUNE 30, 2007

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

                            FOR THE TRANSITION PERIOD

                         COMMISSION FILE NUMBER 0-50237

                                VSB BANCORP, INC.
                 ----------------------------------------------
                 (Name of Small Business Issuer in its charter)

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

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

               4142 Hylan Boulevard, Staten Island, New York 10308
               ---------------------------------------------------
                    (Address of principal executive offices)

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

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

Check whether the issuer (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 [ ]

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

Transitional small business disclosure format:                    Yes [ ] No [X]

The Registrant had 1,891,759 common shares outstanding as of July 30, 2007.

================================================================================

<PAGE>

                              CROSS REFERENCE INDEX

<TABLE>
<CAPTION>
                                                                                          Page
                                                                                        --------
<S>                                                                                     <C>
                                     PART I

Item 1   Consolidated Statements of Financial Condition as of June 30, 2007 and
          December 31, 2006 (unaudited).                                                4
         Consolidated Statements of Operations for the Three and Six Months Ended
          June 30, 2007 and 2006 (unaudited)                                            5
         Consolidated Statements of Changes in Stockholders' Equity for the Six
          Months Ended June 30, 2007 and the Year Ended December 31, 2006 (unaudited)   6
         Consolidated Statements of Cash Flows for the Three and Six Months Ended
          June 30, 2007 and 2006 (unaudited)                                            7
         Notes to Consolidated Financial Statements for the Three and Six Months
          Ended June 30, 2007 and 2006 (unaudited)                                      8 to 14

Item 2   Management's Discussion and Analysis of Financial Condition and Results
          of Operations                                                                 14 to 24
Item 3   Control and Procedures                                                         24

                                     PART II

Item 1   Legal Proceedings                                                              25

Signature Page                                                                          26

         Exhibit 31.1, 31.2, 32.1, 32.2                                                 27 to 30
</TABLE>

                                        2
<PAGE>

                           FORWARD-LOOKING STATEMENTS

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

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

                                VSB BANCORP, INC.
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                    JUNE 30,       DECEMBER 31,
                                                                                      2007             2006
                                                                                  -------------    -------------
<S>                                                                               <C>              <C>
ASSETS:
 Cash and due from banks                                                          $  34,983,022    $  25,363,069
 Investment securities, available for sale                                          112,098,277      113,770,611
 Loans receivable                                                                    60,890,255       66,410,677
  Allowance for loan loss                                                            (1,023,205)      (1,128,824)
                                                                                  -------------    -------------
    Loans receivable, net                                                            59,867,050       65,281,853
 Bank premises and equipment, net                                                     4,144,342        1,554,363
 Accrued interest receivable                                                            795,325          805,681
 Deferred taxes                                                                       2,150,208        2,030,647
 Other assets                                                                         1,111,310        3,078,535
                                                                                  -------------    -------------
      Total assets                                                                $ 215,149,534    $ 211,884,759
                                                                                  =============    =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
 Deposits:
    Demand and checking                                                           $  64,287,827    $  67,371,582
    NOW                                                                              20,810,121       19,935,769
    Money market                                                                     23,703,782       18,359,007
    Savings                                                                          11,762,026       12,526,485
    Time                                                                             68,942,839       68,229,244
                                                                                  -------------    -------------
      Total Deposits                                                                189,506,595      186,422,087
 Escrow deposits                                                                        219,844          261,063
 Subordinated debt                                                                    5,155,000        5,155,000
 Accounts payable and accrued expenses                                                1,650,851        2,306,312
                                                                                  -------------    -------------
      Total liabilities                                                             196,532,290      194,144,462
                                                                                  -------------    -------------
Employee Stock Ownership Plan Repurchase Obligation                                           -          399,026

STOCKHOLDERS' EQUITY:
 Common stock, ($.0001 par value, 3,000,000 shares authorized, 1,891,759 issued
  and outstanding at June 30, 2007 and December 31, 2006)                                   189              189
 Additional paid in capital                                                           9,053,691        8,667,665
 Retained earnings                                                                   12,330,992       11,293,200
 Unearned Employee Stock Ownership Plan shares                                       (1,155,366)      (1,239,905)
 Accumulated other comprehensive loss,
   net of taxes of $1,406,390 and $1,203,679,
   respectively                                                                      (1,612,262)      (1,379,878)
                                                                                  -------------    -------------
    Total stockholders' equity                                                       18,617,244       17,341,271
                                                                                  -------------    -------------
     Total liabilities and stockholders'
      equity                                                                      $ 215,149,534    $ 211,884,759
                                                                                  =============    =============
</TABLE>

See notes to consolidated financial statements.

                                        4
<PAGE>

                                VSB BANCORP, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                        THREE MONTHS     THREE MONTHS     SIX MONTHS       SIX MONTHS
                                            ENDED            ENDED           ENDED            ENDED
                                        JUNE 30, 2007    JUNE 30, 2006   JUNE 30, 2007    JUNE 30, 2006
                                        -------------    -------------   -------------    -------------
<S>                                     <C>              <C>             <C>              <C>
Interest and dividend income:
 Loans receivable                       $   1,501,344    $   1,758,136   $   3,073,697    $   3,506,909
 Investment securities                      1,293,698        1,320,669       2,594,158        2,526,431
 Other interest earning assets                264,761          133,179         511,826          312,627
                                        -------------    -------------   -------------    -------------
     Total interest income                  3,059,803        3,211,984       6,179,681        6,345,967
Interest expense:
 NOW                                           29,960           26,442          58,749           49,645
 Money market                                  97,559           95,447         183,409          179,663
 Savings                                       25,355           21,044          49,783           39,378
 Subordinated debt                             89,039           89,039         178,079          178,079
 Time                                         627,874          531,071       1,243,010          984,954
                                        -------------    -------------   -------------    -------------
     Total interest expense                   869,787          763,043       1,713,030        1,431,719
Net interest income                         2,190,016        2,448,941       4,466,651        4,914,248
Provision (credit) for loan loss                    -                -         (30,000)          25,000
                                        -------------    -------------   -------------    -------------
    Net interest income
       after provision for loan loss        2,190,016        2,448,941       4,496,651        4,889,248
                                        -------------    -------------   -------------    -------------
Non-interest income:
 Loan fees                                     20,532           17,533          48,000           40,300
 Service charges on deposits                  445,491          386,972         862,399          776,728
 Net rental income/(loss)                     (13,121)           3,374           1,692            6,749
 Other income                                  82,291           70,593         164,465          138,244
                                        -------------    -------------   -------------    -------------
     Total non-interest income                535,193          478,472       1,076,556          962,021
                                        -------------    -------------   -------------    -------------

Non-interest expenses:
 Salaries and benefits                        937,988          969,643       1,955,318        2,001,720
 Occupancy expenses                           341,750          279,590         679,725          539,050
 Legal expense/(recovery)                     (16,160)         103,447          (1,634)         162,321
 Professional fees                             44,700           42,000          96,300           90,000
 Computer expense                              70,155           62,097         137,371          122,625
 Directors' fees                               55,700           57,550         107,850          113,450
 Other expenses                               339,818          312,606         655,177          617,040
                                        -------------    -------------   -------------    -------------
     Total non-interest expenses            1,773,951        1,826,933       3,630,107        3,646,206
                                        -------------    -------------   -------------    -------------
       Income before income taxes             951,258        1,100,480       1,943,100        2,205,063
Provision/(benefit) for income taxes:
 Current                                      405,809          509,513         848,539        1,029,487
 Deferred                                      37,428            3,197          56,769           (2,105)
                                        -------------    -------------   -------------    -------------
     Total provision for income taxes         443,237          512,710         905,308        1,027,382
                                        -------------    -------------   -------------    -------------

              Net income                $     508,021    $     587,770   $   1,037,792    $   1,177,681
                                        =============    =============   =============    =============
Basic income per common share           $        0.28    $        0.32   $        0.57    $        0.65
                                        =============    =============   =============    =============
Diluted net income per share            $        0.27    $        0.31   $        0.55    $        0.63
                                        =============    =============   =============    =============
Comprehensive income/(loss)             $     (56,821)   $     134,591   $     805,408    $     198,496
                                        =============    =============   =============    =============
Book value per common share             $        9.84    $        8.01   $        9.84    $        8.01
                                        =============    =============   =============    =============
</TABLE>

All per share data has been adjusted for the 5 for 4 stock split, in the form of
a 25% stock dividend, paid on May 18, 2006. See notes to consolidated financial
statements.

                                        5
<PAGE>

                                VSB BANCORP, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
         YEAR ENDED DECEMBER 31, 2006 AND SIX MONTHS ENDED JUNE 30, 2007
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                      ACCUMULATED
                                     NUMBER OF                ADDITIONAL                 UNEARNED        OTHER           TOTAL
                                      COMMON       COMMON      PAID-IN      RETAINED       ESOP      COMPREHENSIVE   STOCKHOLDERS'
                                      SHARES        STOCK      CAPITAL      EARNINGS      SHARES         LOSS            EQUITY
                                    ----------   ----------   ----------   -----------  -----------  -------------   -------------
<S>                                  <C>         <C>          <C>          <C>          <C>          <C>             <C>
 Balance at December 31, 2005        1,509,822   $      151   $8,743,200   $ 8,621,693  $(1,408,983) $  (1,424,127)  $  14,531,934
Reclass due to the adoption of
 SEC SAB 108                                 -            -            -       125,914            -              -         125,914
                                    ----------   ----------   ----------   -----------  -----------  -------------   -------------
 Balance at January 1, 2006          1,509,822          151    8,743,200     8,747,607   (1,408,983)    (1,424,127)     14,657,848

Exercise of stock option,
    including tax benefit                3,750                    46,232                                                    46,232
Amortization of earned portion
    of ESOP common stock                                                                    169,078                        169,078
5 for 4 stock split and purchase
    of fractional shares               378,187           38         (367)                                                     (329)
Amortization of deficit fair
    value of cost - ESOP                                          (6,785)                                                   (6,785)
Transfer to ESOP repurchase
    obligation                                                  (114,615)                                                 (114,615)
Comprehensive income:
  Net income                                                                 2,545,593                                   2,545,593
  Other comprehensive income, net:
    Change in unrealized loss on
    securities available for
     sale, net of tax effects                -            -            -             -            -         44,249          44,249
                                    ----------   ----------   ----------   -----------  -----------  -------------   -------------
Total comprehensive income                                                                                               2,589,842

 Balance at December 31, 2006        1,891,759          189    8,667,665    11,293,200   (1,239,905)    (1,379,878)     17,341,271
                                    ----------   ----------   ----------   -----------  -----------  -------------   -------------
Amortization of earned portion
    of ESOP common stock                                                                     84,539                         84,539
Amortization of deficit fair
    value of cost - ESOP                                         (13,000)                                                  (13,000)
Transfer from ESOP repurchase
    obligation                                                   399,026                                                   399,026
Comprehensive income:
  Net income                                                                 1,037,792                                   1,037,792
  Other comprehensive income, net:
    Change in unrealized loss on
    securities available for
    sale, net of tax effects                 -            -            -             -            -       (232,384)       (232,384)
                                    ----------   ----------   ----------   -----------  -----------  -------------   -------------
Total comprehensive income                                                                                                 805,408

 Balance at June 30, 2007            1,891,759   $      189   $9,053,691   $12,330,992  $(1,155,366) $  (1,612,262)  $  18,617,244
                                    ==========   ==========   ==========   ===========  ===========  =============   =============
</TABLE>

All per share data has been adjusted for the 5 for 4 stock split, in the form of
a 25% stock dividend,  paid on May 18, 2006. See notes to consolidated financial
statements.

                                        6
<PAGE>

                                VSB BANCORP, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                  THREE MONTHS     THREE MONTHS      SIX MONTHS       SIX MONTHS
                                                                      ENDED            ENDED            ENDED            ENDED
                                                                  JUNE 30, 2007    JUNE 30, 2006    JUNE 30, 2007    JUNE 30, 2006
                                                                  -------------    -------------    -------------    -------------
<S>                                                               <C>              <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                      $     508,021    $     587,770    $   1,037,792    $   1,177,681
  Adjustments to reconcile net income to net cash
    provided by operating activities
  Depreciation and amortization                                         164,171          115,233          308,022          217,558
  Accretion of income, net of amortization of premium                   (50,272)         (96,770)        (107,984)        (187,392)
  ESOP compensation expense                                              35,006           43,772           71,539           84,020
  Provision/(credit) for loan losses                                          -                -          (30,000)          25,000
  (Increase)/decrease in prepaid and other assets                      (127,960)         164,586         (175,641)        (327,547)
  (Increase)/decrease in accrued interest receivable                     13,062          (78,609)          10,356         (101,840)
  Decrease/(increase) in deferred income taxes                           63,809            3,197           83,150           (2,105)
  (Decrease)/increase in accrued expenses and other liabilities        (350,643)        (363,402)        (655,461)        (357,754)
                                                                  -------------    -------------    -------------    -------------
        Net cash provided by operating activities                       255,194          375,777          541,773          527,621
                                                                  -------------    -------------    -------------    -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Net decrease/(increase) in loan receivable                            593,894         (896,471)       5,541,952        2,272,731
  Proceeds from repayment of investment securities,
      available for sale                                              7,093,447        5,308,655       12,759,728       10,121,487
  Purchases of investment securities, available for sale            (11,511,654)     (12,974,093)     (11,511,654)     (23,944,173)
  Purchases of premises and equipment                                   (71,412)        (467,110)        (755,135)        (489,344)
                                                                  -------------    -------------    -------------    -------------
        Net cash (used in)/provided by investing activities          (3,895,725)      (9,029,019)       6,034,891      (12,039,299)
                                                                  -------------    -------------    -------------    -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase/(decrease) in deposits                                 7,121,912        5,513,510        3,043,289        7,974,607
  Exercise stock option                                                       -           42,170                -           42,170
  5 for 4 stock split and the purchase of fractional shares                   -             (329)               -             (329)
                                                                  -------------    -------------    -------------    -------------
        Net cash provided by financing activities                     7,121,912        5,555,351        3,043,289        8,016,448
                                                                  -------------    -------------    -------------    -------------

NET INCREASE/(DECREASE) IN CASH
  AND CASH EQUIVALENTS                                                3,481,381       (3,097,891)       9,619,953       (3,495,230)
                                                                  -------------    -------------    -------------    -------------

CASH AND CASH EQUIVALENTS,
  BEGINNING OF PERIOD                                                31,501,641       30,926,808       25,363,069       31,324,147
                                                                  -------------    -------------    -------------    -------------

CASH AND CASH EQUIVALENTS,
  END OF PERIOD                                                   $  34,983,022    $  27,828,917    $  34,983,022    $  27,828,917
                                                                  =============    =============    =============    =============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:
  Cash paid during the period for:
    Interest                                                      $   1,056,311    $     646,527    $   2,051,408    $   1,441,226
                                                                  =============    =============    =============    =============
    Taxes                                                         $     666,165    $     841,170    $   1,207,459    $   1,226,059
                                                                  =============    =============    =============    =============
  Transfer of construction in progress to premises and
     equipment                                                    $           -    $           -    $   2,142,866    $           -
                                                                  =============    =============    =============    =============
</TABLE>

See notes to consolidated financial statements.

                                        7
<PAGE>

VSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2007 AND 2006

1.   GENERAL

     VSB Bancorp,  Inc.  ("Bancorp" or "Company") became 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,  receiving three shares of
VSB Bancorp,  Inc.  stock for each two shares of Victory State Bank stock.  Each
stockholder owned the same percentage  interest in VSB Bancorp immediately after
the reorganization that the stockholder owned in 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".

     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.


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.

     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

                                        8
<PAGE>

accounts.  During the  fourteen  day period from June 21, 2007  through  July 4,
2007,  Victory  State Bank was required to maintain  reserves,  after  deducting
vault cash, of $2,591,000.  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.

     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.

                                        9
<PAGE>

     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. Both cash and
stock dividends are reported as income.

     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.

                                       10
<PAGE>

     Basic and Diluted Net Income Per Common  Share - Basic net income per share
of common stock is based on 1,828,982 shares and 1,817,155 shares,  the weighted
average number of common shares  outstanding for the three months ended June 30,
2007 and 2006,  respectively.  Diluted  net income per share of common  stock is
based on 1,877,695 and 1,869,463,  the weighted  average number of common shares
and potentially  dilutive  common shares  outstanding for the three months ended
June 30, 2007 and 2006, 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 52,412 and 76,487 shares for the three
months ended June 30, 2007 and 2006, respectively. Common stock equivalents were
calculated  using the treasury stock method.  All per share data throughout this
report has been adjusted to reflect,  retroactively,  a 5-for-4 stock split,  in
the form of a 25% stock  dividend that was declared by the Board of Directors to
stockholders of record on May 3, 2006.

     Basic net income per share of common stock is based on 1,827,758 shares and
1,814,545 shares,  the weighted average number of common shares  outstanding for
the six months  ended June 30, 2007 and 2006,  respectively.  Diluted net income
per share of common  stock is based on  1,877,098  and  1,864,105,  the weighted
average  number  of  common  shares  and  potentially   dilutive  common  shares
outstanding for the six months ended June 30, 2007 and 2006,  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 51,785 and 69,193  shares  for the six months  ended June 30,  2007 and 2006,
respectively.  Common stock equivalents were calculated using the treasury stock
method.  All per share data throughout this report has been adjusted to reflect,
retroactively,  a 5-for-4 stock split,  in the form of a 25% stock dividend that
was declared by the Board of Directors to stockholders of record on May 3, 2006.

     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:

                                       11
<PAGE>

<TABLE>
<CAPTION>
                                           Three Months Ended                              Three Months Ended
                                              June 30, 2007                                   June 30, 2006
                              ---------------------------------------------   ---------------------------------------------
                                                Weighted                                        Weighted
                                   Net           Average        Per Share          Net           Average        Per Share
Reconciliation of EPS            Income          Shares          Amount          Income          Shares          Amount
---------------------------   -------------   -------------   -------------   -------------   -------------   -------------
<S>                           <C>                 <C>         <C>             <C>                 <C>         <C>
Basic income per
  common share
---------------------------
Net income available to
 common stockholders          $     508,021       1,828,982   $        0.28   $     587,770       1,817,155   $        0.32
                                                              =============                                   =============
Effect of dilutive shares
---------------------------
  Weighted average
    shares, if converted                             48,713                                          52,308
                                              -------------                                   -------------
Diluted net income  per
  common share
---------------------------
Net income available to
 common stockholders          $     508,021       1,877,695   $        0.27   $     587,770       1,869,463   $        0.31
                              =============   =============   =============   =============   =============   =============
</TABLE>

<TABLE>
<CAPTION>
                                            Six Months Ended                                Six Months Ended
                                              June 30, 2007                                   June 30, 2006
                              ---------------------------------------------   ---------------------------------------------
                                                Weighted                                        Weighted
                                   Net           Average        Per Share          Net           Average        Per Share
Reconciliation of EPS            Income          Shares          Amount          Income          Shares          Amount
---------------------------   -------------   -------------   -------------   -------------   -------------   -------------
<S>                           <C>                 <C>         <C>             <C>                 <C>         <C>
Basic income per
  common share
---------------------------
Net income available to
 common stockholders          $   1,037,792       1,827,758   $        0.57   $   1,177,681       1,814,545   $        0.65
                                                              =============                                   =============
Effect of dilutive shares
---------------------------
  Weighted average
    shares, if converted                             49,340                                          49,560
                                              -------------                                   -------------
Diluted net income  per
  common share
---------------------------
Net income available to
 common stockholders          $   1,037,792       1,877,098   $        0.55   $   1,177,681       1,864,105   $        0.63
                              =============   =============   =============   =============   =============   =============
</TABLE>

All per share data has been adjusted for the 5 for 4 stock split, in the form of
a 25% stock dividend, paid on May 18, 2006.

     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.  Compensation  cost will also be
recorded  for prior  option  grants  that vest after the date of  adoption.  The
effect on result of operations  will depend on the level of future option grants
and the  calculation  of the fair value of the  options  granted at such  future
date,  as well as the  vesting  periods  provided,  and so cannot  currently  be
predicted.

                                       12
<PAGE>

STOCK OPTIONS

     Options to buy stock are granted to directors, officers and employees under
five stock option plans approved by stockholders between 1998 and 2004 which, in
the aggregate,  provide for issue up to 243,750  options.  Exercise price is the
market price at the date of grant, and  compensation  expense will be recognized
in the income statement in accordance with FAS 123, Revised.  The maximum option
term is ten years, and the options vesting period is up to five years.

     There were no stock option grants in 2007 and 2006.

     The stock option  components of the five stock option plans, as of June 30,
2007, and changes during the six months ended, consist of the following:

<TABLE>
<CAPTION>
                                                                    2007
                                                 ------------------------------------------
                                                                  Weighted
                                                                  Average       Aggregate
                                                                  Exercise      Intrinsic
                                                    Shares         Price          Value
                                                 ------------   ------------   ------------
<S>                                                   <C>       <C>            <C>
Options outstanding                                   177,998   $      10.36
 at the beginning of the year
     Granted                                                -              -
     Canceled                                               -              -
     Exercised                                              -              -
                                                 ------------
Options outstanding at June 30, 2007                  177,998   $      10.36   $    533,994
                                                 ============   ============   ============
Options exercisable at June 30, 2007                  177,998   $      10.36   $    533,994
                                                 ============   ============   ============

Weighted average remaining contractual life of
 options outstanding at June 30 , 2007              4.2 Years
</TABLE>

     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 the Company now lists
on a national  exchange,  NASDAQ Capital  Markets,  it is no longer  required to
reclassify out of stockholders'  equity an amount equal to the put option of the
allocated ESOP shares.

     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.

     Recently-Issued   Accounting   Standards  -  SFAS  No.  157,   "Fair  Value
Measurements."  SFAS  157  defines  fair  value,  establishes  a  framework  for
measuring fair value in generally accepted  accounting  principles,  and expands
disclosures about fair value measurements. SFAS 157 is effective for the Company
on  January  1, 2008 and is not  expected  to have a  significant  impact on the
Company's financial statements.

     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

                                       13
<PAGE>

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 and is not  expected  to have a  significant  impact  on the  Company's
financial statements.

     In July 2006, the FASB issued FASB  Interpretation  No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN
48"), which prescribes a recognition  threshold and measurement  attribute for a
tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim  periods,  disclosure and  transition.  The Company adopted FIN 48 as of
January 1, 2007. A tax position is  recognized  as a benefit only if it is "more
likely than not" that the tax position would be sustained in a tax  examination,
with a tax  examination  being presumed to occur.  The amount  recognized is the
largest  amount of tax benefit that has a greater than 50%  likelihood  of being
realized on  examination.  For tax  positions  not meeting the "more likely than
not"  test,  no tax  benefit  is  recorded.  The  adoption  had no affect on the
Company's consolidated financial position or results of operations.

     The Company and its  subsidiaries are subject to U.S. federal income tax as
well as income tax of the state of New York. The Company is no longer subject to
examination  by taxing  authorities  for years before 2002. The Company does not
expect the total amount of unrecognized tax benefits to  significantly  increase
in the next twelve months.

     The Company  recognizes  interest related to income tax matters as interest
expense  and  penalties  related to income tax  matters  as other  expense.  The
Company did not have any amounts  accrued for interest and  penalties at January
1, 2007 and June 30, 2007.

ITEM 2

MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS

FINANCIAL CONDITION AT JUNE 30, 2007

Total assets were  $215,149,534  at June 30, 2007, an increase of $3,264,775 or,
1.5%, from December 31, 2006. The increase resulted from the investment of funds
which were available to us as the result of an increase in deposits. The deposit
increase  was  caused  generally  by our  efforts  to  grow  our  franchise  and
specifically  by the  deposit  increases  at all  our  branch  offices.  The net
increase in assets can be summarized as follows:

     o    A $9,619,953 increase in cash and equivalents; offset by
     o    A $5,414,803 decrease in net loans receivable; and
     o    A $1,672,334 decrease in investment securities available for sale; and

          $2,142,866,  reported as construction in progress at December 31, 2006
was  transferred  to premises and equipment  when we opened and occupied our new
main office at 4142 Hylan  Boulevard on February 20, 2007. In addition,  we also
experienced  changes in other asset  categories  due to normal  fluctuations  in
operations.

          The decline in loans,  our highest  yielding asset  category,  was the
result of a number of factors.  The  largest  component  of our loans  represent
loans to the  residential  building  trades  and  related  businesses  on Staten
Island.  A slow down in the housing market has reduced  business  activity among
our customers.  In addition,  we have  experienced an increase in competition as
the  number of banks  with  offices  on Staten  Island  has  increased  and some
existing local banks have been acquired by larger banks with greater resources.

                                       14
<PAGE>

          Our deposits (including escrow deposits) were $189,726,439 at June 30,
2007, an increase of $3,043,289,  or 1.6%,  from December 31, 2006. The increase
in deposits  resulted from increases of $874,352 in NOW accounts,  $5,344,775 in
money  market  accounts,  and  $713,595 in time  deposits,  partially  offset by
decreases of $3,124,974 in  non-interest  demand deposit and $764,459 in savings
accounts.  The decrease in non-interest  bearing  accounts was due to the normal
fluctuations  associated  with the demand  accounts  and a softening of the real
estate market, which lowers our aggregate real estate related demand deposits.

          Total  stockholders'  equity  was  $18,617,244  at June 30,  2007,  an
increase of $1,275,973 from December 31, 2006. The increase reflected net income
of $1,037,792 for the six months ended June 30, 2007 increased by a reduction of
$84,539 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.  The  increase  in
stockholders'  equity  was  partially  offset by the  $232,384  increase  of the
unrealized  loss on securities  available for sale for the six months ended June
30, 2007  principally due to the increase in market interest rates,  which drove
down the market value of our fixed rate bond  portfolio,  the  prepayment of the
investment  securities and the change in market interest  rates.  The unrealized
loss 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.

          The change in  stockholders'  equity  also  included  an  increase  of
$386,026 in additional paid in capital primarily due to a $399,026 transfer from
the ESOP repurchase  obligation  back to additional paid in capital.  Our common
stock is now listed on the NASDAQ Capital Market and therefore we no longer have
an obligation to repurchase stock that the ESOP distributes to participants.

          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.

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.  At June 30, 2007, we owned $103.6 million of securities that are either
collateralized  by residential  mortgage loans or that represent shares in pools
of such loans.  However,  92.3% of those  securities are issued or guaranteed by
FNMA,  GNMA  or  FHLMC.  The  remainder  of the  securities'  portfolio  are all
investment grade securities rated AAA. We do not hold any loans in our portfolio
of the type that are commonly known as subprime residential mortgage loans

          Many of our customers,  both loan and deposit customers,  are involved
in the residential  construction  business in Staten Island.  A slow down in the
housing market or a reduction in the availability of residential  mortgage loans
could  have an  adverse  effect  on our  customers  and  reduce  their  business
activity.  This could, in turn, cause a reduction in their demand for loans from
us,  such as  construction  loans to build new homes.  It could also  affect the
level of deposits they maintain.

                                       15
<PAGE>

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2007 AND JUNE 30, 2006

          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 $508,021 for the quarter ended June 30,
2007, compared to net income of $587,770 for the comparable quarter in 2006. The
principal categories which make up the 2007 net income are:

               o    Interest income of $3,059,803
               o    Reduced by interest expense of $869,787
               o    Increased by non-interest income of $535,193
               o    Reduced by non-interest expense of $1,773,951
               o    Reduced by $443,237 in income tax expense

          We discuss each of these  categories  individually and the reasons for
the  differences  between  the  quarters  ended  June  30,  2007 and 2006 in the
following  paragraphs.  In general, the principal reasons for the decline in net
income when  comparing the second  quarter of 2007 with the same quarter in 2006
were a reduction in  interest-earning  assets,  primarily in the loan portfolio,
which reduced  interest income,  and an increase in the cost of deposits,  which
increased interest expense.

          Interest Income.  Interest income was $3,059,803 for the quarter ended
June 30, 2007,  compared to  $3,211,984  for the quarter  ended June 30, 2006, a
decrease of $152,181,  or 4.7%.  The  principal  reason for this  decrease was a
$10,640,572  decrease in the average balance of our loan portfolio.  The decline
in the average  balance of loans was the  principal  component  of a  $6,619,831
decline in average  earning assets from  $198,737,870  for the second quarter of
2006 to  $192,118,039  for the  second  quarter of 2007.  Loans are our  highest
yielding  asset  category,  and to the  extent  that  we are  unable  to  invest
available  funds in  satisfactory  loans,  we must  invest  those funds in lower
yielding  investment  securities  and  overnight  investments  at lower  yields.
Therefore,  the  reduction  in loans  not only  reduced  the  overall  volume of
interest earning assets but also had the effect of reducing average yields.  The
decrease in interest  income from the decline in average loans and a decrease of
$5,445,049  in the  average  balance  of  investment  securities  was  partially
mitigated  by an  increase  of  $9,465,790  in  the  average  balance  of  other
interest-earning  assets,  coupled  with the  increase in the average  yields on
those assets.

          Our average loan yield  declined  slightly  because we  experienced  a
higher level of loan  prepayments in the second quarter of 2006,  which resulted
in the  accelerated  recognition  of origination  fee income.  The yields on all
other  principal  asset  categories  increased  as the Fed Funds rate  increased
during the first half of 2006, causing increases in other interest rate indexes,
such as the Prime Rate, and market interest rates  generally.  The yields on our
other interest earning assets,  principally short-term liquid assets,  increased
more rapidly than the yield on our investment securities.  This occurred because
liquid  assets have short terms and their  yields  adjust more quickly as market
interest rates change while the rates we earn on our  investment  securities are
primarily either fixed rates or rates that adjust at less frequent intervals.

          The average  balance of our loans  decreased  15.0% to $60,410,867 for
the quarter ended June 30, 2007 from  $71,051,439  during the 2006 quarter.  The
decrease in average  balance  reflects  the  volatility  inherent in the shorter
maturity  loans,  the  increase  in  competition  for such loans and the general
softening of the real estate market.  The average yield on loans decreased by 11
basis points,  from 9.89% to 9.78%.  The decline in average

                                       16
<PAGE>

loan  balance was the primary  cause of a $256,792  decrease in interest  income
from our loan portfolio. In the future, fluctuations in the prime rate will have
a direct  effect on our loan  yields,  except to the extent  that a  significant
future  decline in the prime rate may cause a lesser  reduction in yield because
many of our loans have  interest  rate floors that would be  triggered if such a
decline occurs.

          The average yield on our investment  securities portfolio increased 12
basis points, from 4.57% to 4.69%, due to purchase of new investment  securities
at higher  market rates than the yields on the  principal  paydowns we received.
The yield on investment  securities  increased  slowly 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  decreased  by
$5,445,049,  or 4.70%,  between the periods.  The decrease in volume,  partially
offset by the  increase  in yield,  resulted in an overall  $26,971  decrease in
interest income from investment securities.  The investment securities portfolio
represented 83.9% of average non-loan interest earning assets in the 2007 period
compared to 90.8% in the 2006 period.

          Finally, we had a $131,582 increase in income from overnight funds and
other  interest  earning assets due to the higher market rates on short term and
overnight  investments  and an increase in average  balance.  The yield on these
investments  increased  45 basis  points from the second  quarter of 2006 to the
second quarter of 2007,  reflecting the effect of increases in the federal funds
rate  during  the first  half of 2006.  We  increased  the  average  balance  of
overnight   investments  because  they  provide  us  with  greater  reinvestment
flexibility  as we exert efforts to increase our loan  portfolio and because the
gap between the rates on overnight  investments  versus the rates on  investment
securities  narrowed as  short-term  market  rates rose while  longer term rates
remained more steady.

          Interest Expense.  Interest expense was $869,787 for the quarter ended
June 30,  2007,  compared to $763,043 for the quarter  ended June 30,  2006,  an
increase  of 14.0%.  More than 91%,  or  $96,803,  of the  $106,744  increase in
interest  expense  was  represented  by an  increase  in the  cost  of our  time
deposits.  The average balance of time accounts increased by $895,093 (or 1.4%),
and there was a 53 basis point  increase in the average  cost of time  deposits.
The  increase in cost was due to the  increase in market  rates  between the two
comparable quarters.

          Our average cost of funds  increased  from 2.40% to 2.84%  between the
periods,  primarily  due to the increase in the cost of time  deposits and, to a
lesser  extent,   the  increased  cost  of  other  interest  bearing   deposits.
Competition  and the increase in prevailing  market  interest  rates required an
increase in the rates we offered on both new and renewing time  deposits.  While
we were able to limit  interest rate  increases in other  deposit  categories as
market  interest rates rose,  further  increases in market rates, if they occur,
can be  expected  to compel  increases  in the  rates we offer on these  deposit
categories  to  maintain  our  competitive  posture.  Any  further  increase  in
competition  may  accelerate  the increase in our cost of funds  resulting  from
increases in market interest rates as more banks compete for customer deposits.

          Net Interest  Income Before  Provision  for Loan Losses.  Net interest
income before the provision for loan losses was $2,190,016 for the quarter ended
June 30,  2007,  a decrease of  $258,925,  or 10.6% over the  $2,448,941  in the
comparable 2006 quarter.  The decrease resulted  principally from an increase in
our cost of funds and a decline in the  average  balance of our loan  portfolio.
Our net  interest  spread  decreased  to 3.49%  in the  second  quarter  of 2007
compared  to 4.07% in the  second  quarter of 2006 and our net  interest  margin
decreased to 4.51% in the second quarter of 2007 compared to 4.93% in the second
quarter of 2006,  respectively.  On the asset side, the average yield on earning
assets in the 2007 period  declined to 6.33% from 6.47% in the June 2006 period,
or a decrease of 14 basis points. Although market rates increased, the reduction
in average loans and the deployment of funds into lower  yielding  liquid assets
had a greater effect on our average yields.  On the liability side, there was an
increase in our cost of funds of 44 basis  points from 2006 due  principally  to
the increased cost of time deposits.

          Our margin  declined more slowly than our spread  because,  as most of
the average yields on our assets increase,  checking accounts, which represent a
no-cost funding source,  become more valuable because we can invest the proceeds
of those  deposits at higher  yields.  However,  our average  volume of checking
accounts has

                                       17
<PAGE>

declined recently.  This has resulted from a softening real estate market, which
causes the aggregate  balance of demand  deposits to decline due to our strategy
of attracting  deposits from  attorneys and other  customers  linked to the real
estate  businesses.  Management  continually  seeks to  maintain a high level of
non-interest  checking  accounts  through  developing  relationships  with local
businesses and attorneys. Maintaining a high percentage of non-interest checking
accounts is particularly advantageous in a rising rate environment because these
no-cost funds can be invested at the higher yields. However, increases in market
interest  rates  make  interest-bearing  deposit  products  more  attractive  to
customers  and  may  cause  funds  to  shift  from  non-interest  checking  into
interest-bearing deposit products.

          Provision for Loan Losses. We did not take a provision for loan losses
for the quarters  ended June 30, 2007 and 2006. 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 1.68% of total loans at June 30, 2007, 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 $535,193 for the three
months  ended June 30,  2007,  compared to $478,472  during the same period last
year. The $56,721, or 11.9%, increase in non-interest income was a direct result
of a $58,519 increase in service charges on deposits  (primarily  non-sufficient
fund fees),  and a $14,523  increase in other income offset by a decrease in net
rental  income  of  $16,495.  Service  fees  on  deposit  accounts,  principally
non-sufficient  funds fees, increased from 2006 to 2007 as the volume of deposit
account  transactions  generating  fee income  increased.  The increase in other
income is a direct  result of the Bank  taking  on a  select,  limited  group of
licensed consumer check cashing companies as deposit customers.  These companies
generate fee income through per item charges on their deposits.

          Non-interest  Expense.  Non-interest  expense was  $1,773,951  for the
quarter ended June 30, 2007,  compared to $1,826,933  for the quarter ended June
30, 2006. The principal causes of the $52,982 decrease were:

     o    a  $31,655  decrease  in  salaries  and  benefits  expense,  due  to a
          reduction in our incentive  compensation accrual and a decrease in SAR
          related expense due to a decline in our stock price,  partially offset
          by normal salary  increases,  a slight increase in staffing and higher
          benefit costs.
     o    $62,160  in higher  occupancy  expenses  due to the  operation  of our
          branch in  Rosebank  and the  opening of our new main  office in Great
          Kills.
     o    a $119,607 decrease in legal expenses due in part to the reimbursement
          from our insurance company of legal fees previously expensed.

          Income Tax  Expense.  Income tax expense was  $443,237 for the quarter
ended June 30, 2007,  compared to income tax expense of $512,710 for the quarter
ended June 30, 2006. The reduction in income tax expense was due to the $149,222
decrease in income before  income taxes in the 2007  quarter.  Our effective tax
rate remained the same for the quarters ended June 30, 2007 and 2006 at 46.6%.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND JUNE 30, 2006

          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

                                       18
<PAGE>

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 $1,037,792 for the six months ended June
30, 2007,  compared to net income of $1,177,681 for the comparable six months in
2006. The principal categories which make up the 2007 net income are:

               o    Interest income of $6,179,681
               o    Reduced by interest expense of $1,713,030
               o    Increased  by a credit to the  provision  for loan losses of
                    $30,000
               o    Increased by non-interest income of $1,076,556
               o    Reduced by non-interest expense of $3,630,107
               o    Reduced by $905,308 in income tax expense

          We discuss each of these  categories  individually and the reasons for
the  differences  between  the six months  ended  June 30,  2007 and 2006 in the
following  paragraphs.  In general, the principal reasons for the decline in net
income when  comparing the first six months of 2007 with the same period in 2006
were a  reduction  in  average  interest-earning  assets  and  higher  costs  of
deposits,  which  reduced net  interest  income,  and an  increase in  occupancy
expenses due to the  addition of one new branch  office and our new main office,
which was  partially  offset by a recovery  of legal  fees that were  previously
expensed.

          Interest  Income.  Interest  income was  $6,179,681 for the six months
ended June 30, 2007,  compared to  $6,345,967  for the six months ended June 30,
2006, a decrease of $166,286,  or 2.6%.  The principal  reason for this decrease
was a $10,287,107  decrease in the average  balance of our loan  portfolio.  The
decline  in the  average  balance  of loans  was the  principal  component  of a
$5,489,516  decline in average  earning  assets  from  $198,953,832  for the six
months of 2006 to $193,464,316 for the first six months of 2007. This decline in
average loans was partially offset by an increase in the average loan yield. The
decrease in interest  income  from the  decline in average  loans was  partially
mitigated  by an  increase  of  $6,029,538  in  the  average  balance  of  other
interest-earning  assets,  coupled  with the  increase in the average  yields on
investment  securities and other interest earning assets.  Loans are our highest
yielding  asset  category,  and to the  extent  that  we are  unable  to  invest
available  funds in  satisfactory  loans,  we must  invest  those funds in lower
yielding investment securities and overnight investments at lower yields.

          The yields on all  principal  asset  categories  increased  as the Fed
Funds rate increased,  during the first half of 2006, causing increases in other
interest  rate  indexes,  such as the Prime  Rate,  and  market  interest  rates
generally.  The  yields on our loan  portfolio  and our other  interest  earning
assets,  principally  short term liquid assets,  increased more rapidly than the
yield on our investment securities.  This occurred because most of our loans and
liquid  assets tend to have  interest  rates that adjust more  quickly as market
interest rates change while the rates we earn on our  investment  securities are
primarily either fixed rates or rates that adjust at less frequent intervals.

          The average  balance of our loans  decreased  14.3% to $61,823,241 for
the six months ended June 30, 2007 from $72,110,348  during the 2006 period. The
decrease in average  balance  reflects  the  volatility  inherent in the shorter
maturity  loans,  the  increase  in  competition  for such loans and the general
softening of the real estate market.  The average yield on loans increased by 25
basis points,  from 9.69% to 9.94%,  as the Prime Rate rose during the first six
months of 2006. The increase in average yield had a less significant effect than
the decline in average loan balance resulting in a $433,212 decrease in interest
income from our loan  portfolio.  In the future,  fluctuations in the prime rate
will have a direct  effect on our loan  yields,  except to the  extent  that the
effect of a  significant  future  decline  in the prime  rate may cause a lesser
reduction  in yield  because  many of our loans have  interest  rate floors that
would be triggered if such a decline occurs.

                                       19
<PAGE>

          The average yield on our investment  securities portfolio increased 17
basis points,  from 4.54% to 4.71%, due to the purchases of securities at higher
market  interest rates than the yields on the paydown of existing  securities we
received.  The yield on  investment  securities  increased  more slowly than the
yield on loans because most of the bonds and notes in our  investment  portfolio
have either fixed  interest  rates or interest rates that react more slowly than
our loans to changes in market interest rate conditions.  The average balance of
our investment portfolio decreased by $1,231,947,  or 1.1%, between the periods.
The  increase  in yield and  decrease in volume  resulted in an overall  $67,727
increase  in  interest  income  from  investment   securities.   The  investment
securities  portfolio  represented  84.3% of average  non-loan  interest earning
assets in the 2007 period compared to 88.5% in the 2006 period.

          Finally, we had a $199,199 increase in income from overnight funds and
other  interest  earning assets due to the higher market rates on short term and
overnight  investments  and an increase in average  balance.  The yield on these
investments  increased  69 basis points from the first six months of 2006 to the
first six months of 2007,  reflecting  the effect of  increases  in the  federal
funds rate during the first half of 2006.  We increased  the average  balance of
overnight   investments  because  they  provide  us  with  greater  reinvestment
flexibility  as we exert efforts to increase our loan  portfolio and because the
gap between the rates on overnight  investments  versus the rates on  investment
securities  narrowed as  short-term  market  rates rose while  longer term rates
remained more steady.

          Interest  Expense.  Interest expense was $1,713,030 for the six months
ended June 30, 2007,  compared to  $1,431,719  for the six months ended June 30,
2006, an increase of 19.7%. More than 92%, or $258,056, of the $281,311 increase
in  interest  expense  was  represented  by an  increase in the cost of our time
deposits. While the average balance of time accounts only increased by $167,310,
there was a 77 basis point  increase in the average cost of time  deposits.  The
increase  in rate  was due to the  increase  in  market  rates  between  the two
comparable periods.

          Our average cost of funds  increased  from 2.27% to 2.80%  between the
periods,  primarily  due to the  increase in the cost of time  deposits and to a
lesser  extent,   the  increased  cost  of  other  interest  bearing   deposits.
Competition  and the increase in prevailing  market  interest  rates required an
increase in the rates we offered on both new and renewing time  deposits.  While
we were able to limit  interest rate  increases in other  deposit  categories as
market  interest rates rose,  further  increases in market rates, if they occur,
can be  expected  to compel  increases  in the  rates we offer on these  deposit
categories  to  maintain  our  competitive  posture.  Any  further  increase  in
competition  may  accelerate  the increase in our cost of funds  resulting  from
increases in market interest rates as more banks compete for customer deposits.

          Net Interest  Income Before  Provision  for Loan Losses.  Net interest
income before the provision  for loan losses was  $4,466,651  for the six months
ended June 30, 2007, a decrease of $447,597,  or 9.1% over the $4,914,248 in the
comparable 2006 period.  The decrease resulted  principally from the increase in
our cost of funds and the decline in the average  balance of our loan portfolio.
Our net  interest  spread  decreased  to 3.61% in the first  six  months of 2007
compared  to 4.12% in the first six months of 2006 and our net  interest  margin
decreased  to 4.63% in the first six  months  of 2007  compared  to 4.94% in the
first six months of 2006, respectively.  On the asset side, the average yield on
earning  assets in the 2007  period  rose to 6.41%  from  6.39% in the June 2006
period,  or an  increase  of 2 basis  points.  Although  the yield on such asset
categories  increased by more than 2 basis  points,  the reduction in loans as a
percentage of interest  earning assets put downward  pressure on average yields.
On the  liability  side,  there was an increase in our cost of funds of 53 basis
points from 2006.

          Our  margin  declined  more  slowly  than our spread  because,  as the
average yields on our assets  increase,  checking  accounts,  which  represent a
no-cost funding source,  become more valuable because we can invest the proceeds
of those  deposits at higher  yields.  However,  our average  volume of checking
accounts has declined  recently.  This has resulted from a softening real estate
market,  which causes the aggregate balance of demand deposits to decline due to
our strategy of attracting deposits from attorneys and other customers linked to
the real  estate  businesses.  Management  continually  seeks to maintain a high
level of non-interest  checking accounts through  developing  relationships with
local  businesses and attorneys.  Maintaining a high  percentage of non-interest
checking  accounts is  particularly  advantageous  in a rising rate  environment
because  these  no-cost  funds

                                       20
<PAGE>

can be invested at the higher  yields.  However,  increases  in market  interest
rates make  interest-bearing  deposit  products more attractive to customers and
may  cause  funds to shift  from  non-interest  checking  into  interest-bearing
deposit products.

          Provision for Loan Losses.  For the six months ended June 30, 2007, we
took a $30,000  credit to the provision  for loan losses,  compared to a $25,000
provision for loan losses for the six months ended June 30, 2006.  The credit to
the provision for loan losses was due to the decline the loan portfolio balance,
and the level of recoveries on loans previously charged-off,  which are added to
the  allowance  for loan  losses.  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 1.68% of total loans at June 30, 2007, 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 $1,076,556 for the six
months  ended June 30,  2007,  compared to $962,021  during the same period last
year.  The  $114,535,  or 11.9%,  increase in  non-interest  income was a direct
result  of  a  $85,671  increase  in  service  charges  on  deposits  (primarily
non-sufficient  fund fees) and a $26,221 increase in other income.  Service fees
on deposit accounts,  principally non-sufficient funds fees, increased from 2006
to 2007 as the  volume of deposit  account  transactions  generating  fee income
increased. The increase in other income is a direct result of the Bank taking on
a select,  limited group of licensed consumer check cashing companies as deposit
customers. These companies generate fee income through per item charges on their
deposits.

          Non-interest Expense.  Non-interest expense was $3,630,107 for the six
months ended June 30, 2007, compared to $3,646,206 for the six months ended June
30, 2006. The principal causes of the $16,099 decrease were:

     o    a  $46,402  decrease  in  salaries  and  benefits  expense,  due  to a
          reduction in our incentive  compensation accrual and a decrease in SAR
          related  expenses,  due to a  decline  in our stock  price,  partially
          offset by normal salary  increases,  a slight increase in staffing and
          higher benefit costs.
     o    $140,675 in higher  occupancy  expenses  due to the  operation  of our
          branch in  Rosebank  and the  opening of our new main  office in Great
          Kills.
     o    a $163,955  decrease in legal expenses due to the  reimbursement  from
          our  insurance  company  of  legal  fees  previously  expensed  and  a
          reduction in attorney fees from the 2006 period.

          Income Tax Expense. Income tax expense was $905,308 for the six months
ended June 30, 2007,  compared to income tax expense of  $1,027,382  for the six
months ended June 30, 2006. The $122,074 reduction in income tax expense was due
to the $261,963  decrease in income before income taxes in the 2007 period.  Our
effective  tax rate remained the same for the six months ended June 30, 2007 and
2006 at 46.6%.

                                       21
<PAGE>

                                VSB BANCORP, INC.
                       CONSOLIDATED AVERAGE BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                           Three                                     Three
                                                        Months Ended                              Months Ended
                                                       June 30, 2007                             June 30, 2006
                                          ----------------------------------------  ---------------------------------------
                                             Average                       Yield/      Average                      Yield/
                                             Balance        Interest        Cost       Balance        Interest       Cost
                                          -------------   -------------   --------  -------------   -------------  --------
<S>                                       <C>             <C>                 <C>   <C>             <C>                <C>
ASSETS:
Interest-earning assets:
  Loans receivable                        $  60,410,867   $   1,501,344       9.78% $  71,051,439   $   1,758,136      9.89%
  Investment securities, afs                110,527,053       1,293,698       4.69    115,972,102       1,320,669      4.57
  Other interest-earning assets              21,180,119         264,761       5.01     11,714,329         133,179      4.56
                                          -------------   -------------             -------------   -------------
  Total interest-earning assets             192,118,039       3,059,803       6.33    198,737,870       3,211,984      6.47
Non-interest earning assets                  14,599,860                                14,098,652
                                          -------------                             -------------
  Total assets                            $ 206,717,899                             $ 212,836,522
                                          =============                             =============
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
  Savings accounts                        $  12,158,415          25,355       0.84  $  12,885,962          21,044      0.66
  Time accounts                              67,095,405         627,874       3.75     66,200,312         531,071      3.22
  Money market accounts                      20,014,699          97,559       1.96     20,816,866          95,447      1.84
  Now accounts                               19,785,685          29,960       0.61     22,221,904          26,442      0.48
  Subordinated debt                           5,155,000          89,039       6.91      5,155,000          89,039      6.91
                                          -------------   -------------             -------------   -------------
    Total interest-bearing liabilities      124,209,204         869,787       2.84    127,280,044         763,043      2.40
  Checking accounts                          62,044,199                                68,214,024
                                          -------------                             -------------
Total deposits and subordinated debt        186,253,403                               195,494,068
Other liabilities                             1,638,568                                 2,257,210
                                          -------------                             -------------
  Total liabilities                         187,891,971                               197,751,278
Equity                                       18,825,928                                15,085,244
                                          -------------                             -------------
  Total liabilities and equity            $ 206,717,899                             $ 212,836,522
                                          =============                             =============
Net interest income/net interest
 rate spread                                              $   2,190,016       3.49%                 $   2,448,941      4.07%
                                                          =============   ========                  =============  ========
Net interest earning assets/net
 interest margin                          $  67,908,835                       4.51% $  71,457,826                      4.93%
                                          =============                   ========  =============                  ========
Ratio of interest-earning assets
 to interest-bearing liabilities                   1.55x                                     1.56x
                                          =============                             =============
Return on Average Assets (1)                       0.96%                                     1.10%
                                          =============                             =============
Return on Average Equity (1)                      10.50%                                    15.53%
                                          =============                             =============
Tangible Equity to Total Assets                    8.65%                                     6.63%
                                          =============                             =============

<CAPTION>
                                                            Six                                       Six
                                                        Months Ended                              Months Ended
                                                       June 30, 2007                             June 30, 2006
                                          ----------------------------------------  ---------------------------------------
                                             Average                       Yield/      Average                      Yield/
                                             Balance        Interest        Cost       Balance        Interest       Cost
                                          -------------   -------------  ---------  -------------   -------------  --------
<S>                                       <C>             <C>                 <C>   <C>             <C>                <C>
ASSETS:
Interest-earning assets:
  Loans receivable                        $  61,823,241   $   3,073,697       9.94% $  72,110,348   $   3,506,909      9.69%
  Investment securities, afs                111,027,255       2,594,158       4.71    112,259,202       2,526,431      4.54
  Other interest-earning assets              20,613,820         511,826       5.01     14,584,282         312,627      4.32
                                          -------------   -------------             -------------   -------------
  Total interest-earning assets             193,464,316       6,179,681       6.41    198,953,832       6,345,967      6.39
Non-interest earning assets                  15,596,744                                14,124,383
                                          -------------                             -------------
  Total assets                            $ 209,061,060                             $ 213,078,215
                                          =============                             =============
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
  Savings accounts                        $  12,284,927          49,783       0.82  $  13,836,486          39,378      0.57
  Time accounts                              66,928,171       1,243,010       3.75     66,760,861         984,954      2.98
  Money market accounts                      19,194,558         183,409       1.93     20,353,010         179,663      1.78
  Now accounts                               19,775,262          58,749       0.60     21,182,701          49,645      0.47
  Subordinated debt                           5,155,000         178,079       6.91      5,155,000         178,079      6.91
                                          -------------   -------------             -------------   -------------
    Total interest-bearing liabilities      123,337,918       1,713,030       2.80    127,288,058       1,431,719      2.27
  Checking accounts                          65,037,639                                68,253,077
                                          -------------                             -------------
Total deposits and subordinated debt        188,375,557                               195,541,135
Other liabilities                             2,213,557                                 2,461,396
                                          -------------                             -------------
  Total liabilities                         190,589,114                               198,002,531
Equity                                       18,471,946                                15,075,684
                                          -------------                             -------------
  Total liabilities and equity            $ 209,061,060                             $ 213,078,215
                                          =============                             =============
Net interest income/net interest
 rate spread                                              $   4,466,651       3.61%                 $   4,914,248      4.12%
                                                          =============   ========                  =============  ========
Net interest earning assets/net
 interest margin                          $  70,126,398                       4.63% $  71,665,774                      4.94%
                                          =============                   ========  =============                  ========
Ratio of interest-earning assets
 to interest-bearing liabilities                   1.57x                                     1.56x
                                          =============                             =============
Return on Average Assets (1)                       0.99%                                     1.09%
                                          =============                             =============
Return on Average Equity (1)                      11.18%                                    15.45%
                                          =============                             =============
Tangible Equity to Total Assets                    8.65%                                     6.63%
                                          =============                             =============
</TABLE>

(1) Ratios have been annualized.

                                       22
<PAGE>

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,  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 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 $3,043,289 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.

          In contrast,  during the six months  ended June 30,  2006,  our retail
banking activities generated a net increase in deposits of $7,974,607 and we had
a net decrease in loans  receivable of  $2,272,731,  which  combined to generate
$10,247,388  in cash.  In  addition,  we received  proceeds  from  repayment  of
investment securities of $10,121,487.  We used $23,944,173 of available funds to
purchase new investment  securities,  resulting in an overall  reduction in cash
and cash equivalents of $3,495,230.  We applied  available funds  principally to
purchase  the  $23,944,173  of  investment  securities  to  increase  investment
collateral  available  to pledge for the $35  million in  municipal  CDs that we
received in 2006 in connection with the establishment of the banking development
districts in Staten Island.

          Victory State Bank  satisfied all capital  ratio  requirements  of the
Federal Deposit  Insurance  Corporation at June 30, 2007, with a Tier I Leverage
Capital ratio of 11.87%, a ratio of Tier I Capital to Risk-Weighted Assets ratio
of 27.34%, and a Total Capital to Risk-Weighted Assets ratio of 28.49%.

          VSB Bancorp,  Inc.  satisfied  all capital ratio  requirements  of the
Federal  Reserve  at June 30,  2007,  with a Tier I  Leverage  Capital  ratio of
12.20%, a ratio of Tier I Capital to Risk-Weighted Assets ratio of 28.10%, and a
Total Capital to Risk-Weighted Assets ratio of 29.24%.

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

                                       23
<PAGE>

CONTRACTUAL OBLIGATIONS AND COMMITMENTS AT JUNE 30, 2007

<TABLE>
<CAPTION>
                                                                 Payment due by Period
                                        -------------------------------------------------------------------------
                                          Less than    One to three   Four to five      After       Total Amounts
Contractual Obligations                   One Year        years          years        five years      committed
-------------------------------------   ------------   ------------   ------------   ------------   -------------
<S>                                     <C>            <C>            <C>            <C>            <C>
Minimum annual rental  payments under
 non-cancelable operating leases        $    392,314   $    798,263   $    825,690   $  2,428,371   $   4,444,638
Remaining contractual maturities of
 time deposits                            65,947,448      1,275,392      1,719,999              -      68,942,839
                                        ------------   ------------   ------------   ------------   -------------
 Total contractual cash obligations     $ 66,339,762   $  2,073,655   $  2,545,689   $  2,428,371   $  73,387,477
                                        ============   ============   ============   ============   =============
</TABLE>

<TABLE>
<CAPTION>
                                                       Amount of commitment Expiration by Period
                                        -------------------------------------------------------------------------
                                          Less than    One to three   Four to five      After       Total Amounts
Other commitments                         One Year        years          years        five years     committed
-------------------------------------   ------------   ------------   ------------   ------------   -------------
<S>                                     <C>            <C>            <C>            <C>            <C>
Loan commitments                        $ 13,632,338   $  9,296,338   $    595,000   $          -   $  23,523,676
                                        ============   ============   ============   ============   =============
</TABLE>

          Our  loan  commitments   shown  in  the  above  table  represent  both
commitments  to make new loans and  obligations to make  additional  advances on
existing  loans,  such as  construction  loans in  process  and lines of credit.
Substantially all of these commitments  involve loans with fluctuating  interest
rates,  so the  outstanding  commitments  do not expose us to interest rate risk
upon fluctuation in market rates.

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 3 - CONTROLS AND PROCEDURES

          Evaluation of Disclosure Controls and Procedures: As of June 30, 2007,
we undertook an evaluation of our disclosure  controls and procedures  under the
supervision and with the  participation  of Merton Corn,  President and CEO, and
Raffaele M. Branca,  Executive Vice President and CFO.  Disclosure  controls are
the systems and  procedures we use that are designed to ensure that  information
we are  required  to  disclose  in the  reports  we file  or  submit  under  the
Securities  Exchange  Act of 1934  (such as annual  reports  on Form  10-KSB and
quarterly  periodic reports on Form 10-QSB) is recorded,  processed,  summarized
and  reported,  in a manner  which will allow senior  management  to make timely
decisions on the public disclosure of that information.  Messrs. Corn and Branca
concluded that our current  disclosure  controls and procedures are effective in
ensuring  that such  information  is (i) collected  and  communicated  to senior
management in a timely  manner,  and (ii)  recorded,  processed,  summarized and
reported within the time periods  specified in the SEC's rules and forms.  Since
our last evaluation of our disclosure controls, we have not made any significant
changes in, or corrective actions taken regarding,  either our internal controls
or other factors that could significantly affect those controls.

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

                                       24
<PAGE>

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. LAI was a deposit customer of the
Bank  engaged in the business of providing  real estate  settlement  services to
lenders making  residential  mortgage loans.  The plaintiff  alleges that it was
such a lender and that it had provided  funds to LAI by wiring those funds to an
account  of LAI at the  Bank to use to  fund  mortgage  loans  to be made by the
plaintiff,  only to have LAI not use those funds for their intended purpose. The
action was commenced in August 2005. In November 2005, the plaintiff amended its
complaint to add the Bank as a defendant.  The  plaintiff  amended its complaint
again and the Bank moved to dismiss the  claims.  In  February  2007,  the court
dismissed  two of the claims  against  the Bank but  allowed  the  Plaintiff  to
proceed and conduct discovery with respect to two claims, one for negligence and
the other for conversion.

The amended complaint  requests monetary damages against the Bank of $1,817,041.
The Bank intends to defend  aggressively the amended claims and has referred the
litigation  to its  insurance  carrier,  which  has  indicated  that the  claims
asserted  against the Bank are covered by insurance.  The Bank has also asserted
cross-claims  against various former  customers,  principals of those customers,
and other related  persons on the grounds that if the Bank is held liable to the
plaintiff,  then the  liability is the result of the misdeeds or  negligence  of
those other parties.

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.

                                       25
<PAGE>

SIGNATURE PAGE

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


                                           VSB BANCORP, INC.


     Date: August 14, 2007                 /s/ Merton Corn
                                           -------------------------------------
                                           Merton Corn
                                           President and Chief Executive Officer



     Date: August 14, 2007                 /s/ Raffaele M. Branca
                                           -------------------------------------
                                           Raffaele M. Branca
                                           Executive Vice President and
                                           Chief Financial Officer

                                  EXHIBIT INDEX

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

ITEM 6 - EXHIBITS

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

                                       26