---

|                                
|--------------------------------
|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 MARCH 31, 2008                                                   
|  |                                                                                        
|o | 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 o

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

|                                                |             
|----------------------------------------------- | ------------
|Transitional small
 business disclosure format: | Yes
 o
 No x

The Registrant
had 1,900,509 common shares outstanding as of May 5, 2008.

---



CROSS
REFERENCE INDEX

|                |  |                                                                                                                                                         |  |         
|--------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|                |  |                                                                                                                                                         |  | Page    
|                |  |                                                                                                                                                         |  |         
|                |  | PART
 I                                                                                                                                                 |  |         
|               
|Item 1          |  | Consolidated
 Statements of Financial Condition as of March 31, 2008 and December 31,
 2007 (unaudited)                                                 |  | 4       
|                |  | Consolidated Statements of Operations for the Three
 Months Ended March 31, 2008 and 2007 (unaudited)                                                   |  | 5       
|                |  | Consolidated Statements of Changes in
Stockholders
 Equity for the Three Months Ended March 31, 2008 and the Year Ended December
 31, 2007 (unaudited) |  | 6       
|                |  | Consolidated Statements of Cash Flows for the Three
 Months Ended March 31, 2008 and 2007 (unaudited)                                                   |  | 7       
|                |  | Notes to Consolidated Financial Statements for the
 Three Months Ended March 31, 2008 and 2007 (unaudited)                                              |  | 8 to 13 
|                |  |                                                                                                                                                         |  |         
|Item 2          |  | Managements Discussion and Analysis of
Financial
 Condition and Results of Operations                                                                  |  | 13 to 19
|Item 3          |  | Control and Procedures                                                                                                                                  |  | 19      
|                |  |                                                                                                                                                         |  |         
|                |  | PART II                                                                                                                                                 |  |         
|                |  |                                                                                                                                                         |  |         
|Item 1          |  | Legal Proceedings                                                                                                                                       |  | 19 to 20
|Item 4          |  | Submission of Matters to a Vote of Security
Holders                                                                                                     |  | 20      
|                |  |                                                                                                                                                         |  |         
|                |  |                                                                                                                                                         |  |         
|Signature
 Page |  |                                                                                                                                                         |  | 21      
|                |  |                                                                                                                                                         |  |         
|                |  | Exhibit 31.1, 31.2, 32.1, 32.2                                                                                                                          |  | 22 to 25
|                |  |                                                                                                                                                         |  |         
|                |  |                                                                                                                                                         |  |         
|                |  |                                                                                                                                                         |  |         

2

---



Forward-Looking Statements

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

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

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

3

---



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

|                                                                                                                                         |  |                 |             |                    |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ----------- | ------------------ | - | ----------- | -
|                                                                                                                                         |  | March 31,
 2008 |             | December 31,
 2007 |  
|                                                                                                                                         |  |                 |             |                    |  
|                                                                                                                                         |  |                 |             |                    |   |             |  
|Assets:                                                                                                                                  |  |                 |             |                    |   |             |  
|Cash and due from banks                                                                                                                  |  | $               | 22,162,554  |                    | $ | 17,696,879  |  
|Investment securities, available for sale                                                                                                |  |                 | 121,880,050 |                    |   | 117,814,117 |  
|Loans receivable                                                                                                                         |  |                 | 61,337,096  |                    |   | 62,373,078  |  
|Allowance for loan loss                                                                                                                  |  |                 | (919,450    | )                  |   | (927,161    | )
|                                                                                                                                         |  |                 |             |                    |   |             |  
|Loans receivable, net                                                                                                                    |  |                 | 60,417,646  |                    |   | 61,445,917  |  
|Bank premises and equipment, net                                                                                                         |  |                 | 3,824,211   |                    |   | 3,931,679   |  
|Accrued interest receivable                                                                                                              |  |                 | 709,237     |                    |   | 799,249     |  
|Deferred taxes                                                                                                                           |  |                 | 102,908     |                    |   | 991,297     |  
|Other assets                                                                                                                             |  |                 | 1,112,731   |                    |   | 1,114,431   |  
|                                                                                                                                         |  |                 |             |                    |   |             |  
|Total assets                                                                                                                             |  | $               | 210,209,337 |                    | $ | 203,793,569 |  
|                                                                                                                                         |  |                 |             |                    |   |             |  
|Liabilities and stockholders equity:                                                                                                    |  |                 |             |                    |   |             |  
|Liabilities:                                                                                                                             |  |                 |             |                    |   |             |  
|Deposits:                                                                                                                                |  |                 |             |                    |   |             |  
|Demand and checking                                                                                                                      |  | $               | 63,036,898  |                    | $ | 62,525,053  |  
|NOW                                                                                                                                      |  |                 | 18,745,240  |                    |   | 16,931,113  |  
|Money market                                                                                                                             |  |                 | 23,457,102  |                    |   | 20,534,721  |  
|Savings                                                                                                                                  |  |                 | 11,057,143  |                    |   | 11,349,111  |  
|Time                                                                                                                                     |  |                 | 64,932,174  |                    |   | 64,738,564  |  
|                                                                                                                                         |  |                 |             |                    |   |             |  
|Total Deposits                                                                                                                           |  |                 | 181,228,557 |                    |   | 176,078,562 |  
|Escrow deposits                                                                                                                          |  |                 | 420,307     |                    |   | 255,881     |  
|Subordinated debt                                                                                                                        |  |                 | 5,155,000   |                    |   | 5,155,000   |  
|Accounts payable and accrued expenses                                                                                                    |  |                 | 1,203,806   |                    |   | 1,420,321   |  
|                                                                                                                                         |  |                 |             |                    |   |             |  
|Total liabilities                                                                                                                        |  |                 | 188,007,670 |                    |   | 182,909,764 |  
|                                                                                                                                         |  |                 |             |                    |   |             |  
|                                                                                                                                         |  |                 |             |                    |   |             |  
|                                                                                                                                         |  |                 |             |                    |   |             |  
|                                                                                                                                         |  |                 |             |                    |   |             |  
|Stockholders equity:                                                                                                                    |  |                 |             |                    |   |             |  
|Common stock, ($.0001 par value, 3,000,000 shares
authorized,
 1,900,509 issued and outstanding at March 31, 2008 and December 31, 2007) |  |                 | 190         |                    |   | 190         |  
|Additional paid in capital                                                                                                               |  |                 | 9,091,367   |                    |   | 9,107,119   |  
|Retained earnings                                                                                                                        |  |                 | 13,474,309  |                    |   | 13,226,395  |  
|Unearned Employee Stock Ownership Plan
shares                                                                                            |  |                 | (1,028,558  | )                  |   | (1,070,827  | )
|Accumulated other comprehensive income (loss), net of
taxes of $579,526
 and ($330,668), respectively                                    |  |                 | 664,359     |                    |   | (379,072    | )
|                                                                                                                                         |  |                 |             |                    |   |             |  
|Total stockholders equity                                                                                                               |  |                 | 22,201,667  |                    |   | 20,883,805  |  
|                                                                                                                                         |  |                 |             |                    |   |             |  
|                                                                                                                                         |  |                 |             |                    |   |             |  
|Total liabilities and stockholders
equity                                                                                               |  | $               | 210,209,337 |                    | $ | 203,793,569 |  
|                                                                                                                                         |  |                 |             |                    |   |             |  

See notes to consolidated financial
statements.

4

---



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

|                                                     |  |                                       |           |                                       |   |           |  
|---------------------------------------------------- |  | ------------------------------------- | --------- | ------------------------------------- | - | --------- | -
|                                                     |  | Three months
  ended
  March 31, 2008 |           | Three months
  ended
  March 31, 2007 |  
|                                                     |  |                                       |           |                                       |  
|Interest and
  dividend income:                      |  |                                       |           |                                       |   |           |  
|Loans receivable                                     |  | $                                     | 1,244,491 |                                       | $ | 1,572,353 |  
|Investment securities                                |  |                                       | 1,384,297 |                                       |   | 1,300,460 |  
|Other interest earning assets                        |  |                                       | 102,293   |                                       |   | 247,065   |  
|                                                     |  |                                       |           |                                       |   |           |  
|Total interest income                                |  |                                       | 2,731,081 |                                       |   | 3,119,878 |  
|Interest
  expense:                                  |  |                                       |           |                                       |   |           |  
|NOW                                                  |  |                                       | 32,231    |                                       |   | 28,789    |  
|Money market                                         |  |                                       | 96,092    |                                       |   | 85,850    |  
|Savings                                              |  |                                       | 18,982    |                                       |   | 24,428    |  
|Subordinated debt                                    |  |                                       | 89,040    |                                       |   | 89,040    |  
|Time                                                 |  |                                       | 519,447   |                                       |   | 615,136   |  
|                                                     |  |                                       |           |                                       |   |           |  
|Total interest expense                               |  |                                       | 755,792   |                                       |   | 843,243   |  
|Net interest
  income                                |  |                                       | 1,975,289 |                                       |   | 2,276,635 |  
|Provision
  (credit) for loan loss                   |  |                                       | 30,000    |                                       |   | (30,000   | )
|                                                     |  |                                       |           |                                       |   |           |  
|Net interest income 
  after provision for loan loss |  |                                       | 1,945,289 |                                       |   | 2,306,635 |  
|                                                     |  |                                       |           |                                       |   |           |  
|Non-interest
  income:                               |  |                                       |           |                                       |   |           |  
|Loan fees                                            |  |                                       | 22,223    |                                       |   | 27,468    |  
|Service charges on deposits                          |  |                                       | 479,615   |                                       |   | 416,908   |  
|Net rental income (loss)                             |  |                                       | (1,011    | )                                     |   | 14,813    |  
|Other income                                         |  |                                       | 65,075    |                                       |   | 82,174    |  
|                                                     |  |                                       |           |                                       |   |           |  
|Total non-interest income                            |  |                                       | 565,902   |                                       |   | 541,363   |  
|                                                     |  |                                       |           |                                       |   |           |  
|Non-interest
  expenses:                             |  |                                       |           |                                       |   |           |  
|Salaries and benefits                                |  |                                       | 910,408   |                                       |   | 1,017,330 |  
|Occupancy expenses                                   |  |                                       | 357,724   |                                       |   | 337,975   |  
|Legal expense                                        |  |                                       | 54,086    |                                       |   | 14,526    |  
|Professional fees                                    |  |                                       | 61,400    |                                       |   | 51,600    |  
|Computer expense                                     |  |                                       | 55,106    |                                       |   | 67,216    |  
|Directors fees                                      |  |                                       | 57,250    |                                       |   | 52,150    |  
|Other expenses                                       |  |                                       | 342,176   |                                       |   | 315,359   |  
|                                                     |  |                                       |           |                                       |   |           |  
|Total non-interest expenses                          |  |                                       | 1,838,150 |                                       |   | 1,856,156 |  
|                                                     |  |                                       |           |                                       |   |           |  
|Income before income taxes                           |  |                                       | 673,041   |                                       |   | 991,842   |  
|Provision/(benefit)
  for income taxes:              |  |                                       |           |                                       |   |           |  
|Current                                              |  |                                       | 332,900   |                                       |   | 442,730   |  
|Deferred                                             |  |                                       | (21,804   | )                                     |   | 19,341    |  
|                                                     |  |                                       |           |                                       |   |           |  
|Total provision for income taxes                     |  |                                       | 311,096   |                                       |   | 462,071   |  
|                                                     |  |                                       |           |                                       |   |           |  
|Net income                                           |  | $                                     | 361,945   |                                       | $ | 529,771   |  
|                                                     |  |                                       |           |                                       |   |           |  
|Earnings per
  share:                                |  |                                       |           |                                       |   |           |  
|Basic                                                |  | $                                     | 0.20      |                                       | $ | 0.29      |  
|                                                     |  |                                       |           |                                       |   |           |  
|Diluted                                              |  | $                                     | 0.19      |                                       | $ | 0.28      |  
|                                                     |  |                                       |           |                                       |   |           |  
|Comprehensive
  income                               |  | $                                     | 1,405,376 |                                       | $ | 862,229   |  
|                                                     |  |                                       |           |                                       |   |           |  
|Book value
  per common share                        |  | $                                     | 11.68     |                                       | $ | 9.85      |  
|                                                     |  |                                       |           |                                       |   |           |  

See notes to
consolidated financial statements.

5

---



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

|                                                                                    |  |                             |           |                |   |                                |  |                  |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|----------------------------------------------------------------------------------- |  | --------------------------- | --------- | -------------- | - | ------------------------------ |  | ---------------- | --------- | ------------------------ | - | --------------------------------------------------- | - | ------------------------------ | ---------- | - | - | ---------- | - | - | ---------- | -
|                                                                                    |  | Number of
  Common
  Shares |           | Common
  Stock |   | Additional
  Paid-In
  Capital |  | RetainedEarnings |           | Unearned
  ESOP
  Shares |   | Accumulated
  Other
  Comprehensive
  Income (Loss) |   | Total
  Stockholders
  Equity |           
|                                                                                    |  |                             |           |                |   |                                |  |                  |           |                          |   |                                                     |   |                                |           
|Balance at
  January 1, 2007                                                        |  |                             | 1,891,759 |                | $ | 189                            |  | $                | 8,667,665 |                          | $ | 11,293,200                                          |   | $                              | (1,239,905 | ) | $ | (1,379,878 | ) | $ | 17,341,271 |  
|                                                                                    |  |                             |           |                |   |                                |  |                  |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Exercise of stock option,
  including tax benefit                                   |  |                             | 8,750     |                |   | 1                              |  |                  | 77,832    |                          |   |                                                     |   |                                |            |   |   |            |   |   | 77,833     |  
|Stock-based compensation                                                            |  |                             |           |                |   |                                |  |                  | 162       |                          |   |                                                     |   |                                |            |   |   |            |   |   | 162        |  
|Amortization of earned portion 
  of ESOP common stock                              |  |                             |           |                |   |                                |  |                  |           |                          |   |                                                     |   |                                | 169,078    |   |   |            |   |   | 169,078    |  
|Amortization of deficit fair 
  value of cost - ESOP                                |  |                             |           |                |   |                                |  |                  | (37,566   | )                        |   |                                                     |   |                                |            |   |   |            |   |   | (37,566    | )
|Transfer from ESOP repurchase 
  obligation                                         |  |                             |           |                |   |                                |  |                  | 399,026   |                          |   |                                                     |   |                                |            |   |   |            |   |   | 399,026    |  
|Cash dividends declared 
  ($0.06 per share)                                        |  |                             |           |                |   |                                |  |                  |           |                          |   | (114,031                                            | ) |                                |            |   |   |            |   |   | (114,031   | )
|Comprehensive income:                                                               |  |                             |           |                |   |                                |  |                  |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Net income                                                                          |  |                             |           |                |   |                                |  |                  |           |                          |   | 2,047,226                                           |   |                                |            |   |   |            |   |   | 2,047,226  |  
|Other comprehensive income, net:                                                    |  |                             |           |                |   |                                |  |                  |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Change in unrealized loss on 
  securities available for sale,
  net of tax effects |  |                             |          |                |   |                               |  |                  |          |                          |   |                                                    |   |                                |           |   |   | 1,000,806  |   |   | 1,000,806  |  
|                                                                                    |  |                             |           |                |   |                                |  |                  |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Total comprehensive income                                                          |  |                             |           |                |   |                                |  |                  |           |                          |   |                                                     |   |                                |            |   |   |            |   |   | 3,048,032  |  
|                                                                                    |  |                             |           |                |   |                                |  |                  |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Balance at December 31, 2007                                                        |  |                             | 1,900,509 |                |   | 190                            |  |                  | 9,107,119 |                          |   | 13,226,395                                          |   |                                | (1,070,827 | ) |   | (379,072   | ) |   | 20,883,805 |  
|                                                                                    |  |                             |           |                |   |                                |  |                  |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|                                                                                    |  |                             |           |                |   |                                |  |                  |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Stock-based compensation                                                            |  |                             |           |                |   |                                |  |                  | 320       |                          |   |                                                     |   |                                |            |   |   |            |   |   | 320        |  
|Amortization of earned portion 
  of ESOP common stock                              |  |                             |           |                |   |                                |  |                  |           |                          |   |                                                     |   |                                | 42,269     |   |   |            |   |   | 42,269     |  
|Amortization of deficit fair 
  value of cost - ESOP                                |  |                             |           |                |   |                                |  |                  | (16,072   | )                        |   |                                                     |   |                                |            |   |   |            |   |   | (16,072    | )
|Cash dividends declared 
  ($0.06 per share)                                        |  |                             |           |                |   |                                |  |                  |           |                          |   | (114,031                                            | ) |                                |            |   |   |            |   |   | (114,031   | )
|Comprehensive income:                                                               |  |                             |           |                |   |                                |  |                  |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Net income                                                                          |  |                             |           |                |   |                                |  |                  |           |                          |   | 361,945                                             |   |                                |            |   |   |            |   |   | 361,945    |  
|Other comprehensive income, net:                                                    |  |                             |           |                |   |                                |  |                  |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Change in unrealized loss on 
  securities available for sale,
  net of tax effects |  |                             |          |                |   |                               |  |                  |          |                          |   |                                                    |   |                                |           |   |   | 1,043,431  |   |   | 1,043,431  |  
|                                                                                    |  |                             |           |                |   |                                |  |                  |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Total comprehensive income                                                          |  |                             |           |                |   |                                |  |                  |           |                          |   |                                                     |   |                                |            |   |   |            |   |   | 1,405,376  |  
|                                                                                    |  |                             |           |                |   |                                |  |                  |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Balance at
  March 31, 2008                                                         |  |                             | 1,900,509 |                | $ | 190                            |  | $                | 9,091,367 |                          | $ | 13,474,309                                          |   | $                              | (1,028,558 | ) | $ | 664,359    |   | $ | 22,201,667 |  
|                                                                                    |  |                             |           |                |   |                                |  |                  |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  

See notes to consolidated
financial statements.

6

---



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

|                                                                                    |  |                                       |            |                                       |   |            |  
|----------------------------------------------------------------------------------- |  | ------------------------------------- | ---------- | ------------------------------------- | - | ---------- | -
|                                                                                    |  | Three months
  ended
  March 31, 2008 |            | Three months
  ended
  March 31, 2007 |  
|                                                                                    |  |                                       |            |                                       |  
|CASH FLOWS FROM OPERATING
  ACTIVITIES:                                             |  |                                       |            |                                       |   |            |  
|Net income                                                                          |  | $                                     | 361,945    |                                       | $ | 529,771    |  
|Adjustments to reconcile net income to net cash 
  provided by operating activities |  |                                       |            |                                       |   |            |  
|Depreciation and amortization                                                       |  |                                       | 150,994    |                                       |   | 143,851    |  
|Accretion of income, net of amortization of
premium                                 |  |                                       | (53,399    | )                                     |   | (57,712    | )
|ESOP compensation expense                                                           |  |                                       | 26,197     |                                       |   | 36,533     |  
|Stock-based compensation expense                                                    |  |                                       | 320        |                                       |   |           |  
|Provision/(credit) for loan losses                                                  |  |                                       | 30,000     |                                       |   | (30,000    | )
|Decrease/(increase) in prepaid and other
assets                                     |  |                                       | 1,700      |                                       |   | (47,681    | )
|Decrease/(increase) in accrued interest
receivable                                  |  |                                       | 90,012     |                                       |   | (2,706     | )
|(Increase)/decrease in deferred income
taxes                                        |  |                                       | (21,804    | )                                     |   | 19,341     |  
|Decrease in accrued expenses and other
liabilities                                  |  |                                       | (216,515   | )                                     |   | (304,818   | )
|                                                                                    |  |                                       |            |                                       |   |            |  
|Net cash provided by operating activities                                           |  |                                       | 369,450    |                                       |   | 286,579    |  
|                                                                                    |  |                                       |            |                                       |   |            |  
|                                                                                    |  |                                       |            |                                       |   |            |  
|CASH FLOWS FROM INVESTING
  ACTIVITIES:                                             |  |                                       |            |                                       |   |            |  
|Net decrease in loan receivable                                                     |  |                                       | 1,031,224  |                                       |   | 4,948,058  |  
|Proceeds from repayment of investment securities,
available for sale                |  |                                       | 7,407,082  |                                       |   | 5,666,281  |  
|Purchases of investment securities, available for
sale                              |  |                                       | (9,498,945 | )                                     |   |           |  
|Purchases of premises and equipment                                                 |  |                                       | (43,526    | )                                     |   | (683,723   | )
|                                                                                    |  |                                       |            |                                       |   |            |  
|Net cash (used in)/provided by investing
activities                                 |  |                                       | (1,104,165 | )                                     |   | 9,930,616  |  
|                                                                                    |  |                                       |            |                                       |   |            |  
|                                                                                   
|CASH FLOWS FROM FINANCING
  ACTIVITIES:                                             |  |                                       |            |                                       |   |            |  
|Net increase/(decrease) in deposits                                                 |  |                                       | 5,314,421  |                                       |   | (4,078,623 | )
|Cash dividends paid                                                                 |  |                                       | (114,031   | )                                     |   |           |  
|                                                                                    |  |                                       |            |                                       |   |            |  
|Net cash provided by financing activities                                           |  |                                       | 5,200,390  |                                       |   | (4,078,623 | )
|                                                                                    |  |                                       |            |                                       |   |            |  
|                                                                                    |  |                                       |            |                                       |   |            |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                           |  |                                       | 4,465,675  |                                       |   | 6,138,572  |  
|                                                                                    |  |                                       |            |                                       |   |            |  
|                                                                                    |  |                                       |            |                                       |   |            |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                      |  |                                       | 17,696,879 |                                       |   | 25,363,069 |  
|                                                                                    |  |                                       |            |                                       |   |            |  
|                                                                                    |  |                                       |            |                                       |   |            |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                            |  | $                                     | 22,162,554 |                                       | $ | 31,501,641 |  
|                                                                                    |  |                                       |            |                                       |   |            |  
|                                                                                    |  |                                       |            |                                       |   |            |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                   |  |                                       |            |                                       |   |            |  
|Cash paid during the period for:                                                    |  |                                       |            |                                       |   |            |  
|Interest                                                                            |  | $                                     | 1,061,869  |                                       | $ | 995,097    |  
|                                                                                    |  |                                       |            |                                       |   |            |  
|Taxes                                                                               |  | $                                     | 322,000    |                                       | $ | 541,294    |  
|                                                                                    |  |                                       |            |                                       |   |            |  
|                                                                                    |  |                                       |            |                                       |   |            |  
|Transfer of construction in progress to premises
and equipment                      |  | $                                     |           |                                       | $ | 2,142,866  |  
|                                                                                    |  |                                       |            |                                       |   |            |  

See notes to consolidated
financial statements.

7

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VSB BANCORP, INC.

|                                                                                              
|----------------------------------------------------------------------------------------------
|NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED 
 MARCH 31, 2008AND2007
|                                                                                              

1.       GENERAL

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

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

The
accompanying unaudited interim consolidated financial statements have been
prepared in accordance with the instructions for Form 10-QSB and Rule 10-01 of
Regulation S-X and, therefore, do not include all the disclosures necessary for
a complete presentation of the financial statements in conformity with U.S.
generally accepted accounting principles. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation of the results of operations for the interim period. The
results of operations for the three months ended March 31, 2008 are not
necessarily indicative of the results that may be expected for the entire year
or any other interim period.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Principles of Consolidation - The
consolidated financial statements of
the Company include the accounts of the Company, including its subsidiary
Victory State Bank. All significant inter-company accounts and transactions
between the Company and Bank have been eliminated in consolidation.

Use of Estimates - The preparation of
financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the amounts of revenues and expenses during the reporting period. Actual
results can differ from those estimates. The allowance for loan losses,
prepayment estimates on the mortgage-backed securities and Collateralized
Mortgage Obligation portfolios, contingencies and fair values of financial
instruments are particularly subject to change.

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

8

---



Cash and Cash Equivalents  Cash and
cash equivalents consists of cash
on hand, due from banks and interest-bearing deposits. Net cash flows are
reported for customer loan and deposit transactions and interest-bearing
deposits. Regulation D of the Board of Governors of the Federal Reserve System
requires that Victory State Bank maintain non-interest-bearing deposits or cash
on hand as reserves against its demand deposits. The amount of reserves which
Victory State Bank is required to maintain depends upon its level of
transaction accounts. During the fourteen day period from March 27, 2008
through April 9, 2008, Victory State Bank was required to maintain reserves,
after deducting vault cash, of $2,855,000. Reserves are required to be
maintained on a fourteen day basis, so, from time to time, Victory State Bank
may use available cash reserves on a day to day basis, so long as the fourteen
day average reserves satisfy Regulation D requirements. Victory State Bank is
required to report transaction account levels to the Federal Reserve on a
weekly basis.

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

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

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

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

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

9

---



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

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

The
Company considers a loan to be impaired when, based on current information, it
is probable that the Company will be unable to collect all principal and
interest payments due according to the contractual terms of the loan agreement.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Impairment is measured on a loan by
loan basis for commercial and construction loans. Impaired loans are measured
based on the present value of expected future cash flows discounted at the
loans effective interest rate or, as a practical expedient, at the loans
observable market price or the fair value of the collateral. The fair value of
the collateral, as reduced by costs to sell, is utilized if a loan is
collateral dependent. Large groups of smaller balance homogeneous loans, such
as consumer loans and residential loans, are collectively evaluated for
impairment.

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

Subordinated Debt - In August of 2003, the
Company formed VSB
Capital Trust I (the Trust). The Trust is a statutory business trust
organized under Delaware law and the Company owns all of its common securities.
The Trust issued $5.0 million of Trust Preferred Capital Securities to an
independent investor and $155,000 of common securities to the Company. The
Company issued a $5.16 million subordinated debenture to the Trust. The
subordinated debenture is the sole asset of the Trust. The subordinated
debenture and the Trust Preferred Capital Securities pay interest and
dividends, respectively, on a quarterly basis, at a rate of 6.909%, for the
first five years. They mature thirty years after the issuance of the securities
and are non-callable for five years. After the first five years, the Trust
Preferred Securities may be called by the Company at any quarterly interest
payment date at par and the rate of interest that fluctuates quarterly based
upon 300 basis points over the 90 day LIBOR rate. The Trust is not consolidated
with the Company.

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

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

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.

10

---



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

Basic and Diluted Net Income Per Common
Share - Basic net income per share of common stock
is based on 1,845,097 shares and 1,826,519 shares, the weighted average number
of common shares outstanding for the three months ended March 31, 2008 and
2007, respectively. Diluted net income per share of common stock is based on
1,893,420 and 1,876,460, the weighted average number of common shares and
potentially dilutive common shares outstanding for the three months ended March
31, 2008 and 2007, respectively. The weighted average number of potentially
dilutive common shares excluded in calculating diluted net income per common
share due to the anti-dilutive effect is 80,124 and 51,184 shares for the three
months ended March 31, 2008 and 2007, respectively. Common stock equivalents
were calculated using the treasury stock method.

The
reconciliation of the numerators and the denominators of the basic and diluted
per share computations for the three months ended March 31, are as follows:

|                                            |  |                                    |         |                                    |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|------------------------------------------- |  | ---------------------------------- | ------- | ---------------------------------- |  | ----------------- |  | ----------- | ---- | ------------------------- | - | ----------------- |  |  | --------- |  | - | ---- | 
|Reconciliation
 of EPS                      |  | Three months ended
 March 31, 2008 |         | Three months ended
 March 31, 2007 | 
|                                            |  |                                    |         |                                    | 
|                                            |  | Net
 Income                        |         | Weighted
 Average
 Shares          |  | Per Share
 Amount |  | Net
 Income |      | Weighted
 Average
 Shares |   | Per Share
 Amount | 
|                                            |  |                                    |         |                                    |  |                   |  |             |      |                           |   |                   | 
|                                            |  |                                    |         |                                    |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|Basic earnings per common share             |  |                                    |         |                                    |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|Net income available to common stockholders |  | $                                  | 361,945 |                                    |  | 1,845,097         |  | $           | 0.20 |                           | $ | 529,771           |  |  | 1,826,519 |  | $ | 0.29 | 
|                                            |  |                                    |         |                                    |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|                                            |  |                                    |         |                                    |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|Effect of dilutive shares                   |  |                                    |         |                                    |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|Weighted average shares, if converted       |  |                                    |         |                                    |  | 48,323            |  |             |      |                           |   |                   |  |  | 49,941    |  |   |      | 
|                                            |  |                                    |         |                                    |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|                                            |  |                                    |         |                                    |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|Diluted earnings per common share           |  |                                    |         |                                    |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 
|Net income available to common stockholders |  | $                                  | 361,945 |                                    |  | 1,893,420         |  | $           | 0.19 |                           | $ | 529,771           |  |  | 1,876,460 |  | $ | 0.28 | 
|                                            |  |                                    |         |                                    |  |                   |  |             |      |                           |   |                   |  |  |           |  |   |      | 

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

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

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

11

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

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

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

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

Assets and Liabilities Measured on a Recurring Basis

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

|                                |  |                                                 |             |                                                                      |   |                                                       |  |                                                 |             |  |   |   | 
|------------------------------- |  | ----------------------------------------------- | ----------- | -------------------------------------------------------------------- | - | ----------------------------------------------------- |  | ----------------------------------------------- | ----------- |  | - | - | 
|                                |  | Fair Value Measurements at March 31, 2008 Using |            
|                                |  |                                                 |            
|                                |  | March 31,
  2008                                |             | Quoted Prices in
  Active Markets for
  Identical Assets
  (Level 1) |   | Significant
  Other
  Observable
  Inputs
  (Level 2) |  | Significant
  Unobservable
  Inputs
  (Level 3) |            
|                                |  |                                                 |            
|Assets:                         |  |                                                 |             |                                                                      |   |                                                       |  |                                                 |             |  |   |   | 
|Available for sale
  securities |  | $                                               | 121,880,050 |                                                                      | $ |                                                      |  | $                                               | 121,880,050 |  | $ |  | 

Impaired loans
are reported at the fair value of the underlying collateral if repayment is
expected solely from the collateral. Collateral values are estimated using
Level 3 inputs based on internally customized discounting criteria. As of March
31, 2008, we did not have any impaired loans that were collateral dependent.

Certain
financial assets and financial liabilities are measured at fair value on a
nonrecurring basis, that is, the instruments are not measured at fair value on
an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of impairment). Financial
assets and financial liabilities measured at fair value on a non-recurring
basis were not significant at March 31, 2008.

12

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

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

Item 2

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

Financial Condition at March 31, 2008

Total assets
were $210,209,337 at March 31, 2008, an increase of $6,415,768 or, 3.1%, from
December 31, 2007. The increase resulted from the investment of funds available
to us as the result of an increase in deposits. The deposit increase was caused
generally by our efforts to grow our franchise and specifically by the deposit
increases at our branch offices. We invested these funds, together with funds
resulting from a decrease in net loans receivable, primarily in investment
securities available for sale and overnight investments, both of which
increased. The net increase in assets can be summarized as follows:

|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
| | A $4,465,675
  net increase in cash and cash equivalents                                    
|  |                                                                                             
| | A $4,065,933
  net increase in investment securities available for sale; partially offset by
|  |                                                                                             
| | A $1,028,271
  net decrease in net loans receivable.                                        

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.

Our
deposits (including escrow deposits) were $181,648,864 at March 31, 2008, an
increase of $5,314,421, or 3.0%, from December 31, 2007. The increase in
deposits resulted from increases of $2,922,381 in money market, $1,814,127 in
NOW, $676,271 in non-interest demand deposit and $193,610 in time deposits
accounts, partially offset by a decrease of $291,968 in savings accounts.

13

---



Total
stockholders equity was $22,201,667 at March 31, 2008, an increase of
$1,317,862 from December 31, 2007. The increase reflected net income of
$361,945 for the three months ended March 31, 2008, increased by in the net
unrealized gain on securities available for sale of $1,043,431, increased by a
reduction of $42,269 in Unearned ESOP shares reflecting the effect of the
gradual payment of the loan we made to fund the ESOPs purchase of our stock.
This was partially offset by the use of $114,031, representing the $0.06 per
share, to pay our second cash dividend.

The
unrealized gain on securities available for sale is excluded from the
calculation of regulatory capital. Management does not anticipate selling
securities in this
portfolio, but changes in market interest rates or in the demand for funds may
change managements plans with respect to the securities portfolio. If there is
a material increase in interest rates, the market value of the available for
sale portfolio may decline. Management believes that the principal and interest
payments on this portfolio, combined with the existing liquidity, will be
sufficient to fund loan growth and potential deposit outflow.

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

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 March 31, 2008, we owned $121.9 million of securities that are either
collateralized by residential mortgage loans or that represent shares in pools
of such loans. However, 94.1% of those securities are issued or guaranteed by
FNMA, GNMA or FHLMC. The remainder of the securities portfolio is all
investment grade fixed-rate securities rated AAA that are at least five years
old. None of those securities have experienced ratings downgrades 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. We believe that the turmoil
in the national housing and residential mortgage markets has had an adverse
effect on some of our customers. An apparent slow down in the local housing
market and a noticeable reduction in the availability of residential mortgage
loans seems to have had an adverse effect on our customers and reduced their
business activity. We believe that this, in turn, has caused a reduction in
their demand for loans from us, such as construction loans to build new homes.
It also appears to have adversely affected the level of deposits they maintain.

Results of Operations for the Three Months
Ended March 31, 2008 and March 31, 2007

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

14

---



General.
We had net income of $361,945 for the quarter ended March 31, 2008, compared to
net income of $529,771 for the comparable quarter in 2007. The principal
categories which make up the 2008 net income are:

| |   |                                                    
| | - | ---------------------------------------------------
| |  | Interest
  income of $2,731,081                    
| |   |                                                    
| |  | Reduced by
  interest expense of $755,792          
| |   |                                                    
| |  | Reduced by a
  provision for loan losses of $30,000
| |   |                                                    
| |  | Increased by
  non-interest income of $565,902     
| |   |                                                    
| |  | Reduced by
  non-interest expense of $1,838,150    
| |   |                                                    
| |  | Reduced by
  $311,096 in income tax expense        

We
discuss each of these categories individually and the reasons for the
differences between the quarters ended March 31, 2008 and 2007 in the following
paragraphs. In general, the principal reason for the decline in net income when
comparing the first quarter of 2008 with the same quarter in 2007 was a
reduction in the yield on interest-earning assets, primarily in the loan
portfolio and in other-interest earning assets, which reduced interest income.

Interest
Income.Interest income was $2,731,081 for the quarter
ended March 31, 2008, compared to $3,119,878 for the quarter ended March 31,
2007, a decrease of $388,797, or 12.5%. The
principal reasons for this decrease was a 214 basis point decrease in the yield
on our loan portfolio and a 201 basis point decrease in the yield of
other-interest earning assets. These decreases in yield, coupled with a
$6,287,872 decrease in the average balance of other interest-earning assets
(principally overnight investments) caused a $327,862, or 20.9% decrease in
interest income. The average balance of overnight investments decreased
primarily due to the use of excess funds to purchase higher yielding investment
securities. The continued slow real
estate market in Staten Island, which has reduced construction and commercial
loan originations, hampered our efforts to increase our loan portfolio. The
average yield on our loans decreased because the majority of our loans have
adjustable rates tied to the prime rate which decreased 300 basis points from
March 2007 to March 2008.

The
average yield on our investment securities portfolio increased 2 basis points,
from 4.73% to 4.75%, due to the purchase of new investment securities at higher
market rates than the yields on the principal paydowns we received. The yield
on investment securities 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 increased by $5,721,129, or 5.13%,
between the periods. The increase in volume and the increase in yield resulted
in an overall $83,837 increase in interest income from investment securities.
The investment securities portfolio represented 89.5% of average non-loan
interest earning assets in the 2008 period compared to 84.8% in the 2007
period.

Interest
Expense. Interest expense was $755,792 for the quarter
ended March 31, 2008, compared to $843,243 for the quarter ended March 31,
2007, a decrease of 10.4%. The decrease was primarily the result of a decrease
in the rates we paid on deposits, specifically time deposits. Decreases in the
average balance of savings accounts, time accounts and now accounts also helped
reduce interest expense. Our average
cost of funds decreased to 2.51% from 2.79% between the periods due to a
decline in market interest rates that began in approximately September 2007.

15

---



Net
Interest Income Before Provision for Loan Losses. Net
interest income before the provision for loan losses was $1,975,289 for the
quarter ended March 31, 2008, a decrease of $301,346, or 13.2% over the
$2,276,635 in the comparable 2007 quarter. The decrease resulted principally
from margin compression as the yield on average interest-earning assets
decreased by 83 basis points, as compared to a 28 basis point reduction in the
average cost of funds in the first quarter of 2008. This effect caused our net
interest spread to decrease to 3.13% in the first quarter of 2008 from 3.68% in
the first quarter of 2007 and caused our net interest margin to decrease to
4.07% in the first quarter of 2008 from 4.72% in the first quarter of 2007. The
drop in the yield on interest-earning assets was both larger in magnitude and
faster than the drop in the cost of deposits. Both the target fed funds and the
prime rate were reduced by 75 basis points during the last four months of 2007
and by an additional 200 basis points during the first quarter of 2008. Our
daily adjustable prime-based loans and overnight investments dropped an equal
number of basis points in step with those reductions. We cannot re-price our
liabilities downward in the same manner because a large portion of those
liabilities, specifically time deposits and subordinated debt, have fixed rates
and thus they can only adjust at maturity. In addition, we could not decrease
the cost of other interest-bearing deposits by the same magnitude (275 basis
points) because they initially had lower interest rates and thus the reduction
could only be a fraction of the reduction in the target federal funds rate.
However, we note that the daily adjustable rate prime based loans are now at
their interest rate floors and, in effect, have become fixed rate loans until
the prime rate adjusts upward.

Provision
for Loan Losses.We took a provision for loan losses
of $30,000 for the quarter ended March 31, 2008 compared to a credit to the
provision for loan losses of $30,000 for the quarter ended March 31, 2007. The
increase in the provision was the result of a moderate increase in loan
delinquencies. The provision for loan losses in any period depends upon the
amount necessary to bring the allowance for loan losses to the level management
believes is appropriate, after taking into account charge offs and recoveries.
Our allowance for loan losses is based on managements evaluation of the risks
inherent in our loan portfolio and the general economy. Management periodically
evaluates both broad categories of performing loans and problem loans individually
to assess the appropriate level of the allowance.

Although
management uses available information to assess the appropriateness of the
allowance on a quarterly basis in consultation with outside advisors and the
board of directors, changes in national or local economic conditions, the
circumstances of individual borrowers, or other factors, may change, increasing
the level of problem loans and requiring an increase in the level of the
allowance. The allowance for loan losses represented 1.50% of total loans at
March 31, 2008, but there can be no assurance that a higher level, or a higher
provision for loan losses, will not be necessary in the future.

Non-interest
Income.Non-interest income was $565,902 for the three
months ended March 31, 2008, compared to $541,363 during the same period last
year. The $24,539, or 4.5%, increase in non-interest income was a direct result
of a $62,707 increase in service charges on deposits (primarily non-sufficient
fund fees), partially offset by a decrease of $17,099 in other income and a
decrease in net rental income of $15,824. Service fees on deposit accounts,
principally non-sufficient funds fees, increased from 2007 to 2008 due to an
increase in the number of non-sufficient fund transactions coupled with our
decision to increase per item charges for both insufficient fund and bounced
check fees and other deposit fees in March of 2008. The decrease in other
income was a result of the loss of a check cashing customer and the decrease in
net rental income was due to the vacancy of one of the Banks subleased
properties.

Non-interest
Expense. Non-interest expense was $1,838,150 for the
quarter ended March 31, 2008, compared to $1,856,156 for the quarter ended
March 31, 2007. The principal causes of the $18,006 decrease were:

|  |                                                                                                                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | $106,922
  decrease in salaries and benefits expense, due in part to the retirement of
  the former president and reduced incentive and ESOP compensation expense;                                                                                                                 
|  |                                                                                                                                                                                                                                                                                    
| | $19,749
  increase in occupancy expenses due to the operation of our new main office in
  Great Kills;                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                    
| | $39,560
  increase in legal expenses due to an increase in loans in the process of
  collection; and                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                    
| | $26,817
  increase in other expenses due to a $14,965 increase in advertising expenses
  in connection with the Banks new advertising campaign and increases in
  expenses associated with the Banks conversion to online processing for ATMs,
  debit cards and online bill pay.

16

---



Income
Tax Expense. Income tax expense was $311,096 for the
quarter ended March 31, 2008, compared to income tax expense of $462,071 for
the quarter ended March 31, 2007. The reduction in income tax expense was due
to the $318,801 decrease in income before income taxes in the 2008 quarter. Our
effective tax rate for the quarter ended March 31, 2008 was 46.2% and for the
quarter ended March 31, 2007 was 46.6%.

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

|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|------------------------------------------------------------------ |  | ------------------------------------- | ----------- | ------------------------------------- | - | ------------- |  | ----------------- | ---- | -------- | - | ------------- | - | - | --------- |  |  | ----- | -
|                                                                   |  | Three
  Months Ended
  March 31, 2008 |             | Three
  Months Ended
  March 31, 2007 |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|                                                                   |  | Average
  Balance                     |             | Interest                              |   | Yield/
  Cost |  | Average
  Balance |      | Interest |   | Yield/
  Cost |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Assets:                                                            |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Interest-earning assets:                                           |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Loans receivable                                                   |  | $                                     | 62,991,593  |                                       | $ | 1,244,491     |  |                   | 7.88 | %        | $ | 63,248,356    |   | $ | 1,572,353 |  |  | 10.02 | %
|Investment securities, afs                                         |  |                                       | 117,303,627 |                                       |   | 1,384,297     |  |                   | 4.75 |          |   | 111,582,498   |   |   | 1,300,460 |  |  | 4.73  |  
|Other interest-earning assets                                      |  |                                       | 13,742,193  |                                       |   | 102,293       |  |                   | 2.99 |          |   | 20,030,065    |   |   | 247,065   |  |  | 5.00  |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Total interest-earning assets                                      |  |                                       | 194,037,413 |                                       |   | 2,731,081     |  |                   | 5.64 |          |   | 194,860,919   |   |   | 3,119,878 |  |  | 6.47  |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Non-interest earning assets                                        |  |                                       | 13,159,112  |                                       |   |               |  |                   |      |          |   | 16,607,790    |   |   |           |  |  |       |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Total assets                                                       |  | $                                     | 207,196,525 |                                       |   |               |  |                   |      |          | $ | 211,468,709   |   |   |           |  |  |       |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Liabilities and equity:                                            |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Interest-bearing liabilities:                                      |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Savings accounts                                                   |  | $                                     | 10,993,663  |                                       |   | 18,982        |  |                   | 0.69 |          | $ | 12,410,880    |   |   | 24,428    |  |  | 0.80  |  
|Time accounts                                                      |  |                                       | 65,193,032  |                                       |   | 519,447       |  |                   | 3.20 |          |   | 66,760,483    |   |   | 615,136   |  |  | 3.74  |  
|Money market accounts                                              |  |                                       | 21,853,581  |                                       |   | 96,092        |  |                   | 1.77 |          |   | 18,383,022    |   |   | 85,850    |  |  | 1.89  |  
|Now accounts                                                       |  |                                       | 17,877,491  |                                       |   | 32,231        |  |                   | 0.73 |          |   | 19,765,134    |   |   | 28,789    |  |  | 0.59  |  
|Subordinated debt                                                  |  |                                       | 5,155,000   |                                       |   | 89,040        |  |                   | 6.95 |          |   | 5,155,000     |   |   | 89,040    |  |  | 6.91  |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Total interest-bearing liabilities                                 |  |                                       | 121,072,767 |                                       |   | 755,792       |  |                   | 2.51 |          |   | 122,474,519   |   |   | 843,243   |  |  | 2.79  |  
|Checking accounts                                                  |  |                                       | 63,047,901  |                                       |   |               |  |                   |      |          |   | 68,086,917    |   |   |           |  |  |       |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Total deposits and subordinated debt                               |  |                                       | 184,120,668 |                                       |   |               |  |                   |      |          |   | 190,561,436   |   |   |           |  |  |       |  
|Other liabilities                                                  |  |                                       | 1,355,991   |                                       |   |               |  |                   |      |          |   | 2,794,791     |   |   |           |  |  |       |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Total liabilities                                                  |  |                                       | 185,476,659 |                                       |   |               |  |                   |      |          |   | 193,356,227   |   |   |           |  |  |       |  
|Equity                                                             |  |                                       | 21,719,866  |                                       |   |               |  |                   |      |          |   | 18,112,482    |   |   |           |  |  |       |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Total liabilities and equity                                       |  | $                                     | 207,196,525 |                                       |   |               |  |                   |      |          | $ | 211,468,709   |   |   |           |  |  |       |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Net interest income/net interest rate spread                       |  |                                       |             |                                       | $ | 1,975,289     |  |                   | 3.13 | %        |   |               |   | $ | 2,276,635 |  |  | 3.68  | %
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Net interest earning assets/net interest margin                    |  | $                                     | 72,964,646  |                                       |   |               |  |                   | 4.07 | %        | $ | 72,386,400    |   |   |           |  |  | 4.72  | %
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Ratio of interest-earning assets to interest-bearing
  liabilities |  |                                       | 1.60        | x                                     |   |               |  |                   |      |          |   | 1.59          | x |   |           |  |  |       |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Return on Average Assets (1)                                       |  |                                       | 0.69        | %                                     |   |               |  |                   |      |          |   | 1.01          | % |   |           |  |  |       |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Return on Average Equity (1)                                       |  |                                       | 6.59        | %                                     |   |               |  |                   |      |          |   | 11.75         | % |   |           |  |  |       |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  
|Tangible Equity to Total Assets                                    |  |                                       | 10.56       | %                                     |   |               |  |                   |      |          |   | 8.94          | % |   |           |  |  |       |  
|                                                                   |  |                                       |             |                                       |   |               |  |                   |      |          |   |               |   |   |           |  |  |       |  

(1) Ratios have been annualized.

17

---



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 three months ended March 31, 2008, we had a net increase in total deposits of $5,314,421
due to increases of $2,922,381 in money market, $1,814,127 in NOW,
$676,271 in non-interest demand deposit and $193,610 in time deposits accounts.
This was partially offset by a decrease of $291,968 in savings accounts. We received proceeds from repayment of
investment securities of $7,407,082 and we had a reduction in net loans of
$1,031,224. We used $9,498,945 of available funds to purchase new
investment securities. These changes
resulted in an overall increase in cash and cash equivalents of $4,465,675.

In
contrast, during the three months ended March 31, 2007, we had a net decrease in total deposits of
$4,078,623 as a result of a $3,227,654 decrease in demand deposits, a $902,986
decrease in time deposits, a $103,498 decline in savings accounts and a
$195,675 decline in money market accounts, partially offset by a $351,190
increase in NOW accounts. We received proceeds from repayment of investment
securities of $5,666,281 which we used to fund the deposit outflow. We had a
net loan reduction of $4,948,058 and we used $2,826,589 of cash, of which
$683,723 was purchased in 2008, 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 $6,138,572.

Victory
State Bank satisfied all capital ratio requirements of the Federal Deposit
Insurance Corporation at March 31, 2008, with a Tier I Leverage Capital ratio
of 11.37%, a ratio of Tier I Capital to Risk-Weighted Assets ratio of 27.13%,
and a Total Capital to Risk-Weighted Assets ratio of 28.20%.

VSB
Bancorp, Inc. satisfied all capital ratio requirements of the Federal Reserve
at March 31, 2008, with a Tier I Leverage Capital ratio of 12.81%, a ratio of
Tier I Capital to Risk-Weighted Assets ratio of 29.98%, and a Total Capital to
Risk-Weighted Assets ratio of 31.02%.

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

Contractual Obligations and Commitments at March 31, 2008

|                                                                     |  |                       |            |                      |   |                      |  |                    |           |                           |   |           |  |   |            | 
|-------------------------------------------------------------------- |  | --------------------- | ---------- | -------------------- | - | -------------------- |  | ------------------ | --------- | ------------------------- | - | --------- |  | - | ---------- | 
|Contractual
  Obligations                                            |  | Payment due by Period |           
|                                                                     |  |                       |           
|                                                                     |  | Less than
  One Year  |            | One to three
  years |   | Four to five
  years |  | After
  five years |           | Total Amounts
  committed |  
|                                                                     |  |                       |            |                      |   |                      |  |                    |           |                           |  
|                                                                     |  |                       |            |                      |   |                      |  |                    |           |                           |   |           |  |   |            | 
|Minimum annual rental payments under non-cancelable operating leases |  | $                     | 395,383    |                      | $ | 806,908              |  | $                  | 838,254   |                           | $ | 2,109,857 |  | $ | 4,150,402  | 
|Remaining contractual maturities of time deposits                    |  |                       | 61,680,058 |                      |   | 1,304,167            |  |                    | 1,947,949 |                           |   |          |  |   | 64,932,174 | 
|                                                                     |  |                       |            |                      |   |                      |  |                    |           |                           |   |           |  |   |            | 
|Total contractual cash obligations                                   |  | $                     | 62,075,441 |                      | $ | 2,111,075            |  | $                  | 2,786,203 |                           | $ | 2,109,857 |  | $ | 69,082,576 | 
|                                                                     |  |                       |            |                      |   |                      |  |                    |           |                           |   |           |  |   |            | 

|                  |  |                                           |            |                      |   |                      |  |                    |   |                           |   |   |  |   |            | 
|----------------- |  | ----------------------------------------- | ---------- | -------------------- | - | -------------------- |  | ------------------ | - | ------------------------- | - | - |  | - | ---------- | 
|Other commitments |  | Amount of commitment Expiration by Period |           
|                  |  |                                           |           
|                  |  | Less than
  One Year                      |            | One to three
  years |   | Four to five
  years |  | After
  five years |   | Total Amounts
  committed |  
|                  |  |                                           |            |                      |   |                      |  |                    |   |                           |  
|                  |  |                                           |            |                      |   |                      |  |                    |   |                           |  
|                  |  |                                           |            |                      |   |                      |  |                    |   |                           |   |   |  |   |            | 
|Loan commitments  |  | $                                         | 23,533,370 |                      | $ | 6,426,009            |  | $                  |  |                           | $ |  |  | $ | 29,959,379 | 
|                  |  |                                           |            |                      |   |                      |  |                    |   |                           |   |   |  |   |            | 

18

---



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 March 31, 2008, we undertook
an evaluation of our disclosure controls and procedures under the supervision
and with the participation of Raffaele M. Branca, President, CEO and CFO.
Disclosure controls are the systems and procedures we use that are designed to
ensure that information we are required to disclose in the reports we file or
submit under the Securities Exchange Act of 1934 (such as annual reports on
Form 10-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. Mr. Branca concluded that our current disclosure controls and
procedures are effective in ensuring that such information is (i) collected and
communicated to senior management in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms. Since our last evaluation of our disclosure controls, we
have not made any significant changes in, or corrective actions taken
regarding, either our internal controls or other factors that could
significantly affect those controls.

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

Part II

Item 1  Legal Proceedings

The Bank is a
defendant in an action pending in Supreme Court, Richmond County, commenced by
IndyMac Bank, F.S.B. against the Bank, LaMattina & Associates, Inc. (LAI)
and various individuals and entities alleged to be officers, directors or
otherwise to have relationships with LAI. 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.

19

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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. Pre-trial discovery among the parties is in process.

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.

Item 4  Submission of Matters to a Vote of
Security Holders

No matters were submitted to security holders for a vote during the period from
January 1, 2008 through March 31, 2008. VSB Bancorp, Inc. held its fifth Annual
Meeting of Stockholders on April 29, 2008 at its principal office, 4142 Hylan
Boulevard, Staten Island, New York 10308 at 5:00 P.M. At that meeting,
1,649,631 shares of the capital stock of the Company were represented in person
or by proxy, being 86.8% of all outstanding shares of the capital stock of the
Company, with a quorum being present. The Annual Meeting was held for the
purpose of voting on two proposals, with the results of the voting as follows:

| |    |                                                        
| | -- | -------------------------------------------------------
| | 1. | The election
  of three directors for three-year terms:

| |                        |  |             |           |                                |  |                  |   |                                |        |  |  |     |  
| | ---------------------- |  | ----------- | --------- | ------------------------------ |  | ---------------- | - | ------------------------------ | ------ |  |  | --- | -
| | Director
  Elected     |  | Votes
  For |           | Percentage of
  shares
  voted |  | Votes
  Withheld |   | Percentage of
  shares
  voted |       
| |                        |  |             |           |                                |  |                  |   |                                |       
| |                        |  |             |           |                                |  |                  |   |                                |        |  |  |     |  
| | Raffaele M. Branca     |  |             | 1,601,327 |                                |  | 97.1             | % |                                | 48,304 |  |  | 2.9 | %
| | Robert S. Cutrona, Sr. |  |             | 1,602,536 |                                |  | 97.1             | % |                                | 47,095 |  |  | 2.9 | %
| | Chaim Farkas           |  |             | 1,603,118 |                                |  | 97.2             | % |                                | 46,513 |  |  | 2.8 | %

| |                                                                                                                                                                               |                                                                                                                                                            
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | No other
  persons received any votes.                                                                                                                                       
| |                                                                                                                                                                               |                                                                                                                                                            
| | The
  following directors continued as directors of the Company: Alfred C. Johnsen,
  Carlos Perez MD, Bruno Savo, Joseph J. LiBassi, Merton Corn and Joan Nerlino
  Caddell.
| |                                                                                                                                                                               |                                                                                                                                                            
| | 2.                                                                                                                                                                            | The
  ratification of the appointment of Crowe Chizek and Company LLC as our
  independent public accountants for the fiscal year ending December 31, 2008.

| |             |  |                                |      |                 |  |                                |  |                              |     |   |  |        | 
| | ----------- |  | ------------------------------ | ---- | --------------- |  | ------------------------------ |  | ---------------------------- | --- | - |  | ------ | 
| | Votes
  For |  | Percentage of
  shares
  voted |      | Votes
  Against |  | Percentage of
  shares
  voted |  | Proxies
  marked
  Abstained |    
| |             |  |                                |      |                 |  |                                |  |                              |    
| |             |  |                                |      |                 |  |                                |  |                              |     |   |  |        | 
| | 1,589,823   |  |                                | 99.2 | %               |  | 12,917                         |  |                              | 0.8 | % |  | 46,891 | 

There were no
broker non-votes.

20

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Signature Page

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

|                     |                                        
|-------------------- | ---------------------------------------
|                     | VSB Bancorp, Inc.                      
|                     |                                        
|Date:
  May 14, 2008 | /s/ Raffaele
  M. Branca               
|                     |                                        
|                     | Raffaele M.
  Branca                   
|                     | President
  and Chief Executive Officer

EXHIBIT INDEX

|                  |  |                                                                     | 
|----------------- |  | ------------------------------------------------------------------- | 
|Exhibit
Number    |  | Description
of Exhibit                                             
|                  |  |                                                                    
|31.1              |  | Rule
  13A-14(a)/15D-14(a) Certification of Chief Executive Officer
|31.2              |  | Rule
  13A-14(a)/15D-14(a) Certification of Chief Financial Officer
|32.1              |  | Certification
  by CEO pursuant to 18 U.S.C. 1350.                 
|32.2              |  | Certification
  by CFO pursuant to 18 U.S.C. 1350.                 
|                  |  |                                                                     | 
|                  | 
|                  |  |                                                                     | 
|Item 6 - Exhibits | 
|                  |  |                                                                     | 
|Exhibit
Number    |  | Description
of Exhibit                                             
|                  |  |                                                                    
|31.1              |  | Rule
  13A-14(a)/15D-14(a) Certification of Chief Executive Officer
|31.2              |  | Rule
  13A-14(a)/15D-14(a) Certification of Chief Financial Officer
|32.1              |  | Certification
  by CEO pursuant to 18 U.S.C. 1350.                 
|32.2              |  | Certification
  by CFO pursuant to 18 U.S.C. 1350.                 

21

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