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

FORM 10-Q

| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| | x | QUARTERLY REPORT PURSUANT
  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| |   | FOR THE QUARTER ENDED
September 30, 2008                                                 
| |   |                                                                                          
| | o | TRANSITION REPORT PURSUANT
  TO SECTION 13 OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD 
| |  

COMMISSION
  FILE NUMBER 0-50237

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

Indicate by check mark
whether the registrant (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

Yes x No o


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

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

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act):

Yes o No x


Par Value: $0.0001 Class of
Common Stock

The Registrant had 1,898,984
common shares outstanding as of November 5, 2008.

---



CROSS REFERENCE INDEX

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

2

---



Forward-Looking Statements

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

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

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

3

---



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

|                                                                                                                                                                                    |  |                    |             |                   |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | ----------------- | - | ----------- | -
|                                                                                                                                                                                    |  | September 30, 2008 |             | December 31, 2007 |  
|                                                                                                                                                                                    |  |                    |             |                   |  
|                                                                                                                                                                                    |  |                    |             |                   |   |             |  
|Assets:                                                                                                                                                                             |  |                    |             |                   |   |             |  
|Cash and due from banks                                                                                                                                                             |  | $                  | 15,609,220  |                   | $ | 17,696,879  |  
|Investment securities, available for sale                                                                                                                                           |  |                    | 120,743,189 |                   |   | 117,814,117 |  
|Loans receivable                                                                                                                                                                    |  |                    | 64,925,020  |                   |   | 62,373,078  |  
|Allowance for loan loss                                                                                                                                                             |  |                    | (942,550    | )                 |   | (927,161    | )
|                                                                                                                                                                                    |  |                    |             |                   |   |             |  
|Loans receivable, net                                                                                                                                                               |  |                    | 63,982,470  |                   |   | 61,445,917  |  
|Bank premises and equipment, net                                                                                                                                                    |  |                    | 3,787,631   |                   |   | 3,931,679   |  
|Accrued interest receivable                                                                                                                                                         |  |                    | 765,340     |                   |   | 799,249     |  
|Deferred taxes                                                                                                                                                                      |  |                    | 1,296,799   |                   |   | 991,297     |  
|Other assets                                                                                                                                                                        |  |                    | 722,401     |                   |   | 1,114,431   |  
|                                                                                                                                                                                    |  |                    |             |                   |   |             |  
|Total assets                                                                                                                                                                        |  | $                  | 206,907,050 |                   | $ | 203,793,569 |  
|                                                                                                                                                                                    |  |                    |             |                   |   |             |  
|Liabilities and stockholders equity:                                                                                                                                               |  |                    |             |                   |   |             |  
|Liabilities:                                                                                                                                                                        |  |                    |             |                   |   |             |  
|Deposits:                                                                                                                                                                           |  |                    |             |                   |   |             |  
|Demand and checking                                                                                                                                                                 |  | $                  | 60,884,999  |                   | $ | 62,525,053  |  
|NOW                                                                                                                                                                                 |  |                    | 17,961,859  |                   |   | 16,931,113  |  
|Money market                                                                                                                                                                        |  |                    | 19,987,754  |                   |   | 20,534,721  |  
|Savings                                                                                                                                                                             |  |                    | 13,128,463  |                   |   | 11,349,111  |  
|Time                                                                                                                                                                                |  |                    | 70,910,856  |                   |   | 64,738,564  |  
|                                                                                                                                                                                    |  |                    |             |                   |   |             |  
|Total Deposits                                                                                                                                                                      |  |                    | 182,873,931 |                   |   | 176,078,562 |  
|Escrow deposits                                                                                                                                                                     |  |                    | 399,486     |                   |   | 255,881     |  
|Subordinated debt                                                                                                                                                                   |  |                    |            |                   |   | 5,155,000   |  
|Accounts payable and accrued expenses                                                                                                                                               |  |                    | 1,457,802   |                   |   | 1,420,321   |  
|                                                                                                                                                                                    |  |                    |             |                   |   |             |  
|Total liabilities                                                                                                                                                                   |  |                    | 184,731,219 |                   |   | 182,909,764 |  
|                                                                                                                                                                                    |  |                    |             |                   |   |             |  
|                                                                                                                                                                                    |  |                    |             |                   |   |             |  
|Stockholders equity:                                                                                                                                                               |  |                    |             |                   |   |             |  
|Common stock, ($.0001 par value, 3,000,000 shares authorized,
  1,923,884 issued and outstanding at September 30, 2008 and 1,900,509 issued
  and outstanding at December 31, 2007) |  |                    | 192         |                   |   | 190         |  
|Additional paid in capital                                                                                                                                                          |  |                    | 9,219,384   |                   |   | 9,107,119   |  
|Retained earnings                                                                                                                                                                   |  |                    | 14,213,337  |                   |   | 13,226,395  |  
|Unearned Employee Stock Ownership Plan shares                                                                                                                                       |  |                    | (944,019    | )                 |   | (1,070,827  | )
|Accumulated other comprehensive loss, net of taxes of $269,271 and
  $330,668, respectively                                                                                         |  |                    | (313,063    | )                 |   | (379,072    | )
|                                                                                                                                                                                    |  |                    |             |                   |   |             |  
|Total stockholders equity                                                                                                                                                          |  |                    | 22,175,831  |                   |   | 20,883,805  |  
|                                                                                                                                                                                    |  |                    |             |                   |   |             |  
|Total liabilities and stockholders
equity                                                                                                                                          |  | $                  | 206,907,050 |                   | $ | 203,793,569 |  
|                                                                                                                                                                                    |  |                    |             |                   |   |             |  

See notes to consolidated
financial statements.

4

---



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

|                                                  |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|------------------------------------------------- |  | ----------------------------------------- | --------- | ----------------------------------------- | - | ---------------------------------------- | - | ---------------------------------------- | --------- | - | - | --------- | -
|                                                  |  | Three months
  ended
  September 30, 2008 |           | Three months
  ended
  September 30, 2007 |   | Nine months
  ended
  September 30, 2008 |   | Nine months
  ended
  September 30, 2007 |          
|                                                  |  |                                           |           |                                           |   |                                          |   |                                          |          
|Interest and dividend income:                     |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Loans receivable                                  |  | $                                         | 1,276,288 |                                           | $ | 1,500,123                                |   | $                                        | 3,693,696 |   | $ | 4,573,820 |  
|Investment securities                             |  |                                           | 1,474,099 |                                           |   | 1,320,528                                |   |                                          | 4,289,758 |   |   | 3,914,686 |  
|Other interest earning assets                     |  |                                           | 48,314    |                                           |   | 297,268                                  |   |                                          | 225,159   |   |   | 809,094   |  
|                                                  |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Total interest income                             |  |                                           | 2,798,701 |                                           |   | 3,117,919                                |   |                                          | 8,208,613 |   |   | 9,297,600 |  
|Interest expense:                                 |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|NOW                                               |  |                                           | 31,612    |                                           |   | 37,940                                   |   |                                          | 96,545    |   |   | 96,689    |  
|Money market                                      |  |                                           | 64,094    |                                           |   | 137,741                                  |   |                                          | 232,695   |   |   | 321,150   |  
|Savings                                           |  |                                           | 19,754    |                                           |   | 24,531                                   |   |                                          | 56,927    |   |   | 74,314    |  
|Subordinated debt                                 |  |                                           | 36,606    |                                           |   | 89,040                                   |   |                                          | 214,685   |   |   | 267,119   |  
|Time                                              |  |                                           | 365,462   |                                           |   | 619,975                                  |   |                                          | 1,265,289 |   |   | 1,862,985 |  
|                                                  |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Total interest expense                            |  |                                           | 517,528   |                                           |   | 909,227                                  |   |                                          | 1,866,141 |   |   | 2,622,257 |  
|Net interest income                               |  |                                           | 2,281,173 |                                           |   | 2,208,692                                |   |                                          | 6,342,472 |   |   | 6,675,343 |  
|Provision (credit) for loan loss                  |  |                                           | 40,000    |                                           |   | (15,000                                  | ) |                                          | 125,000   |   |   | (45,000   | )
|                                                  |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Net interest income after provision for loan loss |  |                                           | 2,241,173 |                                           |   | 2,223,692                                |   |                                          | 6,217,472 |   |   | 6,720,343 |  
|                                                  |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Non-interest income:                              |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Loan fees                                         |  |                                           | 11,778    |                                           |   | 15,658                                   |   |                                          | 55,286    |   |   | 63,658    |  
|Service charges on deposits                       |  |                                           | 544,686   |                                           |   | 457,023                                  |   |                                          | 1,570,203 |   |   | 1,319,422 |  
|Net rental income (loss)                          |  |                                           | 13,796    |                                           |   | (2,568                                   | ) |                                          | 23,888    |   |   | (876      | )
|Other income                                      |  |                                           | 33,705    |                                           |   | 69,524                                   |   |                                          | 144,724   |   |   | 233,989   |  
|                                                  |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Total non-interest income                         |  |                                           | 603,965   |                                           |   | 539,637                                  |   |                                          | 1,794,101 |   |   | 1,616,193 |  
|                                                  |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Non-interest expenses:                            |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Salaries and benefits                             |  |                                           | 866,644   |                                           |   | 936,903                                  |   |                                          | 2,645,315 |   |   | 2,892,221 |  
|Occupancy expenses                                |  |                                           | 376,699   |                                           |   | 352,297                                  |   |                                          | 1,092,889 |   |   | 1,032,022 |  
|Legal expense                                     |  |                                           | 67,939    |                                           |   | 52,384                                   |   |                                          | 187,725   |   |   | 50,750    |  
|Professional fees                                 |  |                                           | 62,900    |                                           |   | 56,700                                   |   |                                          | 186,400   |   |   | 153,000   |  
|Computer expense                                  |  |                                           | 63,772    |                                           |   | 64,604                                   |   |                                          | 176,076   |   |   | 201,975   |  
|Directors fees                                   |  |                                           | 54,200    |                                           |   | 52,600                                   |   |                                          | 169,150   |   |   | 160,450   |  
|Other expenses                                    |  |                                           | 343,576   |                                           |   | 318,873                                  |   |                                          | 1,078,502 |   |   | 974,050   |  
|                                                  |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Total non-interest expenses                       |  |                                           | 1,835,730 |                                           |   | 1,834,361                                |   |                                          | 5,536,057 |   |   | 5,464,468 |  
|                                                  |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Income
  before income taxes                      |  |                                           | 1,009,408 |                                           |   | 928,968                                  |   |                                          | 2,475,516 |   |   | 2,872,068 |  
|Provision/(benefit) for income taxes:             |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Current                                           |  |                                           | 777,900   |                                           |   | 381,296                                  |   |                                          | 1,511,490 |   |   | 1,229,835 |  
|Deferred                                          |  |                                           | (311,196  | )                                         |   | 51,393                                   |   |                                          | (366,898  | ) |   | 108,162   |  
|                                                  |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Total provision for income taxes                  |  |                                           | 466,704   |                                           |   | 432,689                                  |   |                                          | 1,144,592 |   |   | 1,337,997 |  
|                                                  |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Net income                                        |  | $                                         | 542,704   |                                           | $ | 496,279                                  |   | $                                        | 1,330,924 |   | $ | 1,534,071 |  
|                                                  |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Earnings per share:                               |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Basic                                             |  | $                                         | 0.29      |                                           | $ | 0.27                                     |   | $                                        | 0.72      |   | $ | 0.84      |  
|                                                  |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Diluted                                           |  | $                                         | 0.29      |                                           | $ | 0.26                                     |   | $                                        | 0.71      |   | $ | 0.82      |  
|                                                  |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Comprehensive income                              |  | $                                         | 576,720   |                                           | $ | 1,261,399                                |   | $                                        | 1,396,933 |   | $ | 2,066,807 |  
|                                                  |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  
|Book value per common share                       |  | $                                         | 11.53     |                                           | $ | 10.52                                    |   | $                                        | 11.53     |   | $ | 10.52     |  
|                                                  |  |                                           |           |                                           |   |                                          |   |                                          |           |   |   |           |  

See notes to consolidated
financial statements.

5

---



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

|                                                                                 |  |                               |           |                |   |                                |  |                     |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|-------------------------------------------------------------------------------- |  | ----------------------------- | --------- | -------------- | - | ------------------------------ |  | ------------------- | --------- | ------------------------ | - | --------------------------------------------------- | - | ------------------------------ | ---------- | - | - | ---------- | - | - | ---------- | -
|                                                                                 |  | Number
  of
  Common
  Shares |           | Common
  Stock |   | Additional
  Paid-In
  Capital |  | Retained
  Earnings |           | Unearned
  ESOP
  Shares |   | Accumulated
  Other
  Comprehensive
  Income (Loss) |   | Total
  Stockholders
  Equity |           
|                                                                                 |  |                               |           |                |   |                                |  |                     |           |                          |   |                                                     |   |                                |           
|Balance
  at January 1, 2007                                                     |  |                               | 1,891,759 |                | $ | 189                            |  | $                   | 8,667,665 |                          | $ | 11,293,200                                          |   | $                              | (1,239,905 | ) | $ | (1,379,878 | ) | $ | 17,341,271 |  
|                                                                                 |  |                               |           |                |   |                                |  |                     |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Exercise of stock
  option, including tax benefit                                |  |                               | 8,750     |                |   | 1                              |  |                     | 77,832    |                          |   |                                                     |   |                                |            |   |   |            |   |   | 77,833     |  
|Stock-based
  compensation                                                       |  |                               |           |                |   |                                |  |                     | 162       |                          |   |                                                     |   |                                |            |   |   |            |   |   | 162        |  
|Amortization of
  earned portion of ESOP common stock                            |  |                               |           |                |   |                                |  |                     |           |                          |   |                                                     |   |                                | 169,078    |   |   |            |   |   | 169,078    |  
|Amortization of
  deficit fair value of cost - ESOP                              |  |                               |           |                |   |                                |  |                     | (37,566   | )                        |   |                                                     |   |                                |            |   |   |            |   |   | (37,566    | )
|Transfer from
  ESOP repurchase obligation                                       |  |                               |           |                |   |                                |  |                     | 399,026   |                          |   |                                                     |   |                                |            |   |   |            |   |   | 399,026    |  
|Cash dividends
  declared ($0.06 per share)                                      |  |                               |           |                |   |                                |  |                     |           |                          |   | (114,031                                            | ) |                                |            |   |   |            |   |   | (114,031   | )
|Comprehensive
  income:                                                          |  |                               |           |                |   |                                |  |                     |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Net income                                                                       |  |                               |           |                |   |                                |  |                     |           |                          |   | 2,047,226                                           |   |                                |            |   |   |            |   |   | 2,047,226  |  
|Other
  comprehensive income, net:                                               |  |                               |           |                |   |                                |  |                     |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Change in
  unrealized loss on securities available for sale, net of tax effects |  |                               |          |                |   |                               |  |                     |          |                          |   |                                                    |   |                                |           |   |   | 1,000,806  |   |   | 1,000,806  |  
|                                                                                 |  |                               |           |                |   |                                |  |                     |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Total
  comprehensive income                                                     |  |                               |           |                |   |                                |  |                     |           |                          |   |                                                     |   |                                |            |   |   |            |   |   | 3,048,032  |  
|                                                                                 |  |                               |           |                |   |                                |  |                     |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Balance
  at December 31, 2007                                                   |  |                               | 1,900,509 |                |   | 190                            |  |                     | 9,107,119 |                          |   | 13,226,395                                          |   |                                | (1,070,827 | ) |   | (379,072   | ) |   | 20,883,805 |  
|                                                                                 |  |                               |           |                |   |                                |  |                     |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|                                                                                 |  |                               |           |                |   |                                |  |                     |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Exercise of stock
  option, including tax benefit                                |  |                               | 23,375    |                |   | 2                              |  |                     | 164,857   |                          |   |                                                     |   |                                |            |   |   |            |   |   | 164,859    |  
|Stock-based
  compensation                                                       |  |                               |           |                |   |                                |  |                     | 959       |                          |   |                                                     |   |                                |            |   |   |            |   |   | 959        |  
|Amortization of
  earned portion of ESOP common stock                            |  |                               |           |                |   |                                |  |                     |           |                          |   |                                                     |   |                                | 126,808    |   |   |            |   |   | 126,808    |  
|Amortization of
  deficit fair value of cost - ESOP                              |  |                               |           |                |   |                                |  |                     | (53,551   | )                        |   |                                                     |   |                                |            |   |   |            |   |   | (53,551    | )
|Cash dividends declared
  ($0.06 per share)                                      |  |                               |           |                |   |                                |  |                     |           |                          |   | (343,982                                            | ) |                                |            |   |   |            |   |   | (343,982   | )
|Comprehensive
  income:                                                          |  |                               |           |                |   |                                |  |                     |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Net income                                                                       |  |                               |           |                |   |                                |  |                     |           |                          |   | 1,330,924                                           |   |                                |            |   |   |            |   |   | 1,330,924  |  
|Other
  comprehensive income, net:                                               |  |                               |           |                |   |                                |  |                     |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Change in
  unrealized loss on securities available for sale, net of tax effects |  |                               |          |                |   |                               |  |                     |          |                          |   |                                                    |   |                                |           |   |   | 66,009     |   |   | 66,009     |  
|                                                                                 |  |                               |           |                |   |                                |  |                     |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Total
  comprehensive income                                                     |  |                               |           |                |   |                                |  |                     |           |                          |   |                                                     |   |                                |            |   |   |            |   |   | 1,396,933  |  
|                                                                                 |  |                               |           |                |   |                                |  |                     |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  
|Balance
  at September 30, 2008                                                  |  |                               | 1,923,884 |                | $ | 192                            |  | $                   | 9,219,384 |                          | $ | 14,213,337                                          |   | $                              | (944,019   | ) | $ | (313,063   | ) | $ | 22,175,831 |  
|                                                                                 |  |                               |           |                |   |                                |  |                     |           |                          |   |                                                     |   |                                |            |   |   |            |   |   |            |  

6

---



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

|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|---------------------------------------------------------------------------------- |  | ------------------------------------- | ----------- | ------------------------------------- | - | ------------------------------------ | - | ------------------------------------ | ----------- | - | - | ----------- | -
|                                                                                   |  | Three months
  ended
  Sept. 30, 2008 |             | Three months
  ended
  Sept. 30, 2007 |   | Nine months
  ended
  Sept. 30, 2008 |   | Nine months
  ended
  Sept. 30, 2007 |            
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |            
|CASH FLOWS FROM OPERATING ACTIVITIES:                                              |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|Net income                                                                         |  | $                                     | 542,704     |                                       | $ | 496,279                              |   | $                                    | 1,330,924   |   | $ | 1,534,071   |  
|Adjustments to reconcile net income to net cash provided by operating
  activities |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|Depreciation and amortization                                                      |  |                                       | 161,329     |                                       |   | 160,243                              |   |                                      | 465,925     |   |   | 468,265     |  
|Accretion of income, net of amortization of premium                                |  |                                       | (51,907     | )                                     |   | (58,635                              | ) |                                      | (163,219    | ) |   | (166,619    | )
|ESOP compensation expense                                                          |  |                                       | 23,680      |                                       |   | 31,123                               |   |                                      | 73,257      |   |   | 102,662     |  
|Stock-based compensation expense                                                   |  |                                       | 320         |                                       |   |                                     |   |                                      | 959         |   |   |            |  
|Provision/(credit) for loan losses                                                 |  |                                       | 40,000      |                                       |   | (15,000                              | ) |                                      | 125,000     |   |   | (45,000     | )
|Decrease/(increase) in prepaid and other assets                                    |  |                                       | 353,431     |                                       |   | 78,465                               |   |                                      | 392,030     |   |   | (97,176     | )
|(Increase)/decrease in accrued interest receivable                                 |  |                                       | (33,296     | )                                     |   | (10,013                              | ) |                                      | 33,909      |   |   | 343         |  
|(Increase)/decrease in deferred income taxes                                       |  |                                       | (136,522    | )                                     |   | 51,393                               |   |                                      | (366,898    | ) |   | 134,543     |  
|Increase/(decrease) in accrued expenses and other
liabilities                      |  |                                       | 68,249      |                                       |   | 209,488                              |   |                                      | 37,481      |   |   | (445,973    | )
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|Net cash provided by operating activities                                          |  |                                       | 967,988     |                                       |   | 943,343                              |   |                                      | 1,929,368   |   |   | 1,485,116   |  
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                              |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|Net (increase)/decrease in loan receivable                                         |  |                                       | (1,741,617  | )                                     |   | 1,419,437                            |   |                                      | (2,563,409  | ) |   | 6,961,389   |  
|Proceeds from repayment of investment securities, available for
sale               |  |                                       | 6,021,304   |                                       |   | 11,598,851                           |   |                                      | 20,423,422  |   |   | 24,358,579  |  
|Purchases of investment securities, available for sale                             |  |                                       | (1,547,630  | )                                     |   | (8,002,116                           | ) |                                      | (23,160,013 | ) |   | (19,513,770 | )
|Purchases of premises and equipment                                                |  |                                       | (153,994    | )                                     |   | (36,193                              | ) |                                      | (321,878    | ) |   | (791,328    | )
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|Net cash provided by/(used in) investing activities                                |  |                                       | 2,578,063   |                                       |   | 4,979,979                            |   |                                      | (5,621,878  | ) |   | 11,014,870  |  
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                              |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|Net (decrease)/ increase in deposits                                               |  |                                       | (5,787,118  | )                                     |   | (8,654,645                           | ) |                                      | 6,938,974   |   |   | (5,611,356  | )
|Payment of Subordinated Debt                                                       |  |                                       | (5,155,000  | )                                     |   |                                     |   |                                      | (5,155,000  | ) |   |            |  
|Exercise stock option                                                              |  |                                       | 112,859     |                                       |   |                                     |   |                                      | 164,859     |   |   |            |  
|Cash dividends paid                                                                |  |                                       | (115,433    | )                                     |   |                                     |   |                                      | (343,982    | ) |   |            |  
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|Net cash (used in)/provided by financing activities                                |  |                                       | (10,944,692 | )                                     |   | (8,654,645                           | ) |                                      | 1,604,851   |   |   | (5,611,356  | )
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|NET(DECREASE)/ INCREASE IN CASH AND CASH EQUIVALENTS                               |  |                                       | (7,398,641  | )                                     |   | (2,731,323                           | ) |                                      | (2,087,659  | ) |   | 6,888,630   |  
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                     |  |                                       | 23,007,861  |                                       |   | 34,983,022                           |   |                                      | 17,696,879  |   |   | 25,363,069  |  
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|CASH AND CASH EQUIVALENTS,END OF PERIOD                                            |  | $                                     | 15,609,220  |                                       | $ | 32,251,699                           |   | $                                    | 15,609,220  |   | $ | 32,251,699  |  
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                  |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|Cash paid during the period for:                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|Interest                                                                           |  | $                                     | 517,965     |                                       | $ | 793,429                              |   | $                                    | 2,154,201   |   | $ | 2,844,837   |  
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|Taxes                                                                              |  | $                                     | 522,933     |                                       | $ | 300,000                              |   | $                                    | 1,250,259   |   | $ | 1,507,459   |  
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  
|Transfer of construction in progress to premises and
equipment                     |  | $                                     |            |                                       | $ |                                     |   | $                                    |            |   | $ | 2,142,866   |  
|                                                                                   |  |                                       |             |                                       |   |                                      |   |                                      |             |   |   |             |  

7

---



VSB BANCORP, INC.

|                                                                                                       
|-------------------------------------------------------------------------------------------------------
|NOTES TO
  CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREEAND NINEMONTHS ENDED SEPTEMBER30,
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. Our
common stock now trades on the NASDAQ Global Market (NASDAQ GM) effective
August 4, 2008, under the stock symbol VSBN.

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

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

|   |                                             
|-- | --------------------------------------------
|2. | SUMMARY
  OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

8

---



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

Cash and Cash Equivalents  Cash and
cash equivalents consists of cash
on hand, due from banks and interest-bearing deposits. Net cash flows are
reported for customer loan and deposit transactions and interest-bearing
deposits. Regulation D of the Board of Governors of the Federal Reserve System
requires that Victory State Bank maintain non-interest-bearing deposits or cash
on hand as reserves against its demand deposits. The amount of reserves which
Victory State Bank is required to maintain depends upon its level of
transaction accounts. During the fourteen day period from September 25, 2008
through October 8, 2008, Victory State Bank was required to maintain reserves,
after deducting vault cash, of $3,464,000. 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 was the sole asset of the Trust. On August 8, 2008, the
Company repaid the subordinated debenture in full at par, received payment of
$155,000 on account of its common securities of the Trust, and all the
outstanding Trust Preferred Capital Securities were likewise redeemed, thereby
ending the entire arrangement. 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 fifteen 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 1,871,845 shares and 1,831,436 shares, the weighted average number
of common shares outstanding for the three months ended September 30, 2008 and
2007, respectively. Diluted net income per share of common stock is based on
1,898,437 and 1,876,451, the weighted average number of common shares and
potentially dilutive common shares outstanding for the three months ended
September 30, 2008 and 2007, respectively. The weighted average number of
potentially dilutive common shares excluded in calculating diluted net income
per common share due to the anti-dilutive effect is 54,758 and 56,110 shares
for the three months ended September 30, 2008 and 2007, respectively. Common
stock equivalents were calculated using the treasury stock method.

Basic
net income per share of common stock is based on 1,855,523 shares and 1,828,997
shares, the weighted average number of common shares outstanding for the nine
months ended September 30, 2008 and 2007, respectively. Diluted net income per
share of common stock is based on 1,882,966 and 1,877,025, the weighted average
number of common shares and potentially dilutive common shares outstanding for
the nine months ended September 30, 2008 and 2007, respectively. The weighted
average number of potentially dilutive common shares excluded in calculating
diluted net income per common share due to the anti-dilutive effect is 50,207
and 53,097 shares for the nine months ended September 30, 2008 and 2007,
respectively. Common stock equivalents were calculated using the treasury stock
method.

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

|                                            |  |                                           |         |                                           |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|------------------------------------------- |  | ----------------------------------------- | ------- | ----------------------------------------- |  | -------------------- |  | ------------ | ---- | --------------------------- | - | -------------------- |  |  | --------- |  | - | ---- | 
|Reconciliation of EPS                       |  | Three
  months ended
  September 30, 2008 |         | Three
  months ended
  September 30, 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 |  | $                                         | 542,704 |                                           |  | 1,871,845            |  | $            | 0.29 |                             | $ | 496,279              |  |  | 1,831,436 |  | $ | 0.27 | 
|                                            |  |                                           |         |                                           |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|                                            |  |                                           |         |                                           |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|Effect of dilutive shares                   |  |                                           |         |                                           |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|Weighted average shares, if converted       |  |                                           |         |                                           |  | 26,592               |  |              |      |                             |   |                      |  |  | 45,015    |  |   |      | 
|                                            |  |                                           |         |                                           |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|                                            |  |                                           |         |                                           |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|Diluted earnings per common share           |  |                                           |         |                                           |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|Net income available to common stockholders |  | $                                         | 542,704 |                                           |  | 1,898,437            |  | $            | 0.29 |                             | $ | 496,279              |  |  | 1,876,451 |  | $ | 0.26 | 
|                                            |  |                                           |         |                                           |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 

11

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|                                            |  |                                          |           |                                          |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|------------------------------------------- |  | ---------------------------------------- | --------- | ---------------------------------------- |  | -------------------- |  | ------------ | ---- | --------------------------- | - | -------------------- |  |  | --------- |  | - | ---- | 
|Reconciliation of EPS                       |  | Nine
  months ended
  September 30, 2008 |           | Nine
  months ended
  September 30, 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 |  | $                                        | 1,330,924 |                                          |  | 1,855,523            |  | $            | 0.72 |                             | $ | 1,534,071            |  |  | 1,828,997 |  | $ | 0.84 | 
|                                            |  |                                          |           |                                          |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|Effect of dilutive shares                   |  |                                          |           |                                          |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|Weighted average shares, if converted       |  |                                          |           |                                          |  | 27,443               |  |              |      |                             |   |                      |  |  | 48,028    |  |   |      | 
|                                            |  |                                          |           |                                          |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|Diluted earnings per common share           |  |                                          |           |                                          |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 
|Net income available to common stockholders |  | $                                        | 1,330,924 |                                          |  | 1,882,966            |  | $            | 0.71 |                             | $ | 1,534,071            |  |  | 1,877,025 |  | $ | 0.82 | 
|                                            |  |                                          |           |                                          |  |                      |  |              |      |                             |   |                      |  |  |           |  |   |      | 

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 August 4, 2008, the Company listed its
common stock on the NASDAQ Global Market. We are no longer required to
reclassify out of stockholders equity an amount equal to the put option of the
allocated ESOP shares and we re-classed the 2006 put option allocation in the
first quarter of 2007.

Stock Repurchase Program On
September 8, 2008, the Company announced
that its Board of Directors had authorized a Rule 10b5-1 stock repurchase
program for the repurchase of up to 100,000 shares of the Companys common
stock. Stock repurchases under the program will be accounted for using the cost
method, in which the Company will reflect the entire cost of repurchased shares
as a separate reduction of stockholders equity on its balance sheet.

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

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

12

---



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 September 30, 2008 Using |            
|                                |  |                                                       |            
|                                |  | September
  30, 2008                                  |             | Quoted
  Prices in Active Markets for Identical Assets (Level 1) |   | Significant Other
  Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |            
|                                |  |                                                       |             |                                                                  |   |                                                 |  |                                           |            
|Assets:                         |  |                                                       |             |                                                                  |   |                                                 |  |                                           |             |  |   |   | 
|Available for sale
  securities |  | $                                                     | 120,743,189 |                                                                  | $ |                                                |  | $                                         | 120,743,189 |  | $ |  | 

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 September 30, 2008, we did
not have any impaired loans that were collateral dependent.

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

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

13

---



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 AccountingPrinciples 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 September 30, 2008

Total assets were
$206,907,050 at September 30, 2008, an increase of $3,113,481 or, 1.5%, from
December 31, 2007. The increase resulted from the investment of funds available
to us as the result of an increase in deposits. The deposit increase was caused
generally by our efforts to grow our franchise and specifically by the deposit
increases at our branch offices. We invested these funds primarily in
investment securities available for sale. The net increase in assets can be
summarized as follows:

|  |                                                                            
|- | ---------------------------------------------------------------------------
|· | A $2,929,072 net increase
  in investment securities available for sale and
| 
|· | A $2,536,553 net increase
  in net loans receivable, partially offset by   
| 
|· | A $2,087,659 net decrease
  in cash and cash equivalents.                  

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

Our
deposits (including escrow deposits) were $183,273,417 at September 30, 2008,
an increase of $6,938,974 or 3.9%, from December 31, 2007. The increase in
deposits resulted from increases of $6,172,292 in time deposits, $1,779,352 in
savings accounts and $1,030,746 in NOW accounts, partially offset by a decrease
of $1,496,449 in non-interest demand deposits and $546,967 in money market
accounts.

Total
stockholders equity was $22,175,831 at September 30, 2008, an increase of
$1,292,026 from December 31, 2007. The increase reflected (i) net income of
$1,330,924 for the nine months ended September 30, 2008, (ii) an increase of
additional paid in capital of $164,857 due to the exercise by management and
directors of 23,375 options, (iii) a reduction in the net unrealized loss on
securities available for sale of $66,009 and (iv) a reduction of $126,808 in
Unearned ESOP shares reflecting the gradual payment of the loan we made to fund
the ESOPs purchase of our stock. These increases were partially offset by
$343,982 of dividends paid, representing the three $0.06 per share quarterly
cash dividends in 2008.

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

14

---



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.
We do not hold any loans in our portfolio of the type that are commonly known
as subprime residential mortgage loans. At September 30, 2008, we owned $120.7
million of securities that are either collateralized by residential mortgage
loans or that represent shares in pools of such loans. However, 94.8% of those
securities are issued or guaranteed by FNMA (Fannie Mae), GNMA (Ginnie Mae) or
FHLMC (Freddie Mac). The remainder of the securities portfolio is all
investment grade fixed-rate securities rated AAA that are at least five years
old. None of those securities have experienced ratings downgrades. Those
securities issued or guaranteed by Fannie Mae or Freddie Mac are entirely
securities in which we have a relatively senior position in the cash flow
received on the underlying mortgages and there is at least one significant
class in each security with a lower cash flow priority. As a result, we
anticipate that even if here are defaults on the underlying mortgages and even
if Fannie Mae or Freddie Mac suffers from economic difficulties, the ultimate
recovery of the entire amount owed of the securities we have purchased is
reasonably certain.

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

The Effect of Declining Market Interest Rates.

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

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

15

---



One
tool we use to manage market interest rate declines is the imposition of
interest rate floors on our prime-based loans. For most of our loans, once the
prime rate falls below 6% (which occurred on March 18, 2008), the interest rate
remains at 7% per annum regardless of further declines in interest rates. The
interest rate floors are one reason for the increase in our spread that we have
recently experienced, with spread being 3.13% for the first quarter of 2008,
increasing to 3.50% in the second quarter and 3.84% in the third quarter.

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

FDIC Temporary Liquidity Program and Capital Purchase Program

The
FDIC has recently instituted the Temporary Liquidity Program in which the FDIC
will guarantee, with certain limitations, all senior unsecured debt of eligible
financial institutions. The FDIC has also recently increased insurance coverage
on non-interest bearing demand accounts to an unlimited amount, but with the
payment of an additional assessment fee. The United States Department of the
Treasury recently announced a Capital Purchase Program (CPP) in which the
Treasury will purchase preferred stock from approved institutions, with certain
limitations and restrictions. These three programs are all entirely voluntary.
VSB Bancorp, Inc. and Victory State Bank, have strong capital (Tier 1 Capital
ratio in excess of 10% and Total Risk Based Capital ratio in excess of 25%). We
have reported positive and increased quarterly earnings in 2008 and we did not
originate or invest in subprime mortgages nor in FNMA and FHLMC preferred
stock. Although all of the details of the Treasury and FDIC programs have not
yet been announced, we do not currently anticipate that we will participate in
any of these programs.

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

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

General. We had net income of $542,704 for
the
quarter ended September 30, 2008, compared to net income of $496,279 for the
comparable quarter in 2007. The principal categories which make up the 2008 net
income are:

| |   |                                                    
| | - | ---------------------------------------------------
| | · | Interest income of
  $2,798,701                    
| |   |                                                    
| | · | Reduced by interest
  expense of $517,528          
| |   |                                                    
| | · | Reduced by a provision for
  loan losses of $40,000
| |   |                                                    
| | · | Increased by non-interest
  income of $603,965     
| |   |                                                    
| | · | Reduced by non-interest
  expense of $1,835,730    
| |   |                                                    
| | · | Reduced by $466,704 in
  income tax expense        

16

---



We
discuss each of these categories individually and the reasons for the
differences between the quarters ended September 30, 2008 and 2007 in the
following paragraphs. In general, the principal reason for the increase in net
income when comparing the third quarter of 2008 with the same quarter in 2007
was an improvement in our  interest rate spread and
margin and an increase in non-interest income due to the increase in service
charges on deposit accounts (primarily insufficient fund fees) in March of
2008. We were able to maintain the yield on our investment security portfolio
as we purchase new securities, with the same risk parameters that we have
purchased in the past, at yields comparable to the overall portfolio yield.

Interest
Income.Interest
income was $2,798,701 for the quarter ended September 30, 2008, compared to
$3,117,919 for the quarter ended September 30, 2007, a decrease of $319,218, or
10.2%. The principal reason for this decrease was a 224 basis point decrease in
the yield on our loan portfolio due to lower market interest rates. The effect
of the decline in yields was partially mitigated by a $4,704,165 increase in
the average balance of loans, our highest yielding asset category. We also used
liquid assets, such as overnight investments, to purchase investment securities
as we reduced the average balance of overnight investments by $13,519,866 and
reallocated the funds to increase the average balance of higher yielding
investment securities.

The
3 basis point increase in the average yield on our investment securities
portfolio, from 4.72% to 4.75%, was due to the purchase of new investment
securities at higher market rates than the yields on the principal paydowns we
received. The yield on investment securities did not decrease as the other
interest-earning assets because most of the bonds and notes in our investment
portfolio have either fixed interest rates or interest rates that react more
slowly to changes in market interest rate conditions. The average balance of
our investment portfolio increased by $12,360,237, or 11.13%, between the
periods. The increase in volume and the increase in yield resulted in an
overall $153,571 increase in interest income from investment securities. The
investment securities portfolio represented 92.0% of average non-loan interest
earning assets in the 2008 period compared to 82.1% in the 2007 period.

Interest
Expense. Interest
expense was $517,528 for the quarter ended September 30, 2008, compared to
$909,227 for the quarter ended September 30, 2007, a decrease of 43.1%. The
decrease was primarily the result of the repayment of the subordinated debt in
August 2008 coupled with a decrease in the rates we paid on deposits,
specifically time deposits (166 basis point decrease) and money market accounts
(93 basis point decrease). Our average cost of funds, excluding the effect of
interest-free demand deposits, decreased to 1.68% from 2.84% between the
periods due to the decline in market interest rates.

Net
Interest Income Before Provision for Loan Losses. Net interest income before the provision for
loan losses was $2,281,173 for the quarter ended September 30, 2008, an
increase of $72,481, or 3.3% over the $2,208,692 in the comparable 2007
quarter. Our net interest spread increased to 3.84% in the third quarter of
2008 from 3.46% in the third quarter of 2007. We were able to main the spread
due to the reallocation of overnight investments into investment securities and
our net interest margin increased to 4.48% in the third quarter of 2008 from
4.45% in the third quarter of 2007.

Provision
for Loan Losses.We
took a provision for loan losses of $40,000 for the quarter ended September 30,
2008 compared to a credit provision for loan losses of $15,000 for the quarter
ended September 30, 2007. The increase in the provision was the result of an
increase in loan delinquencies. The provision for loan losses in any period
depends upon the amount necessary to bring the allowance for loan losses to the
level management believes is appropriate, after taking into account charge offs
and recoveries. Our allowance for loan losses is based on managements
evaluation of the risks inherent in our loan portfolio and the general economy.
Management periodically evaluates both broad categories of performing loans and
problem loans individually to assess the appropriate level of the allowance.

Although
management uses available information to assess the appropriateness of the
allowance on a quarterly basis in consultation with outside advisors and the
board of directors, changes in national or local economic conditions, the
circumstances of individual borrowers, or other factors, may change, increasing
the level of problem loans and requiring an increase in the level of the
allowance. The allowance for loan losses represented 1.45% of total loans at
September 30, 2008, but there can be no assurance that a higher level, or a
higher provision for loan losses, will not be necessary in the future.

17

---



Non-interest
Income.Non-interest
income was $603,965 for the three months ended September 30, 2008, compared to
$539,637 during the same period last year. The $64,328, or 11.9%, increase in
non-interest income was a direct result of an $87,663 increase in service
charges on deposits and an increase in net rental income of $16,364, partially
offset by a decrease of $35,819 in other income. Service fees on deposit
accounts, principally non-sufficient funds fees, increased from 2007 to 2008
due to an increase in the number of non-sufficient fund transactions coupled
with our decision to increase per item charges for both insufficient fund and
bounced check fees and other deposit fees in March of 2008. The increase in net
rental income was due to the occupancy of one of the Banks subleased
properties. The decrease in other income was a result of the loss of a check
cashing customer and the fee income associated with that business.

Non-interest
Expense. Non-interest
expense was $1,835,730 for the quarter ended September 30, 2008, compared to
$1,834,361 for the quarter ended September 30, 2007. The shifts in the
individual categories were:

| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | $24,402 increase in
  occupancy expenses due to higher utility bills;                                                                                            
|
| | · | $15,555 increase in legal
  expenses primarily due to increased collection costs                                                                                 
|
| | · | $24,703 increase in other
  expenses due to an increase in advertising expenses in connection with the
  Banks new advertising campaign                         
|
| | · | $70,259 decrease in
  salaries and benefits expense, due in part to the retirement of the former
  president and reduced incentive and ESOP compensation expense.

Income
Tax Expense. Income
tax expense was $466,704 for the quarter ended September 30, 2008, compared to
income tax expense of $432,689 for the quarter ended September 30, 2007. The
increase in income tax expense was due to the $80,440 increase in income before
income taxes in the 2008 quarter. Our effective tax rate for the quarter ended
September 30, 2008 was 46.2% and for the quarter ended September 30, 2007 was
46.6%.

Results of Operations for the Nine Months Ended September 30,
2008 and September 30, 2007

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

General. We had net income of $1,330,924
for the
nine months ended September 30, 2008, compared to net income of $1,534,071 for
the comparable period in 2007. The principal categories which make up the 2008
net income are:

| |   |                                                     
| | - | ----------------------------------------------------
| | · | Interest income of
  $8,208,613                     
| |   |                                                     
| | · | Reduced by interest
  expense of $1,866,141         
| |   |                                                     
| | · | Reduced by a provision for
  loan losses of $125,000
| |   |                                                     
| | · | Increased by non-interest
  income of $1,794,101    
| |   |                                                     
| | · | Reduced by non-interest
  expense of $5,536,057     
| |   |                                                     
| | · | Reduced by $1,144,592 in
  income tax expense       

We
discuss each of these categories individually and the reasons for the differences
between the nine months ended September 30, 2008 and 2007 in the following
paragraphs. In general, the principal reasons for the decline in net income
when comparing the first nine months of 2008 with the same period in 2007 were
(i) a reduction in the yield on interest-earning assets, primarily in the loan
portfolio and other-interest earning assets, which reduced interest
income, and (ii) an increase in the provision for loan loss. These were
partially offset by the decrease in interest expense due to the drop in the
cost of deposits.

18

---



Interest
Income.Interest
income was $8,208,613 for the nine months ended September 30, 2008, compared to
$9,297,600 for the nine months ended September 30, 2007, a decrease of
$1,088,987, or 11.7%. The principal reasons for this decrease were a 221 basis
point decrease in the yield on our loan portfolio and a 265 basis point
decrease in the yield of other-interest earning assets (principally overnight
investments). The decrease was partially offset by the higher average balance
of the investment security portfolio with a higher yield, as we reduced other
interest earning assets and reallocated the funds to increase the average
balance of investment securities. As a result, the average balance of overnight
investments decreased by $8,798,003.

The
average yield on our investment securities portfolio increased 4 basis points,
from 4.71% to 4.75%, due to the purchase of new investment securities at
slightly higher market rates than the yields on the principal paydowns we
received. The yield on investment securities did not decrease as did the yields
on other interest earning assets because most of the bonds and notes in our
investment portfolio have either fixed interest rates or interest rates that
react more slowly to changes in market interest rate conditions. The average
balance of our investment portfolio increased by $9,574,688, or 8.62%, between
the periods. The increase in volume and the increase in yield resulted in an
overall $375,072 increase in interest income from investment securities. The
investment securities portfolio represented 90.3% of average non-loan interest
earning assets in the 2008 period compared to 83.6% in the 2007 period.

Interest
Expense. Interest
expense was $1,866,141 for the nine months ended September 30, 2008, compared
to $2,622,257 for the nine months ended September 30, 2007, a decrease of
28.8%. The decrease was primarily the result of the repayment of the
subordinated debt in August 2008 coupled with a decrease in the rates we paid
on deposits, specifically time deposits (a 126 basis point decrease in cost)
and money market accounts (a 55 basis point decrease in cost). Our average cost
of funds, excluding the effect of interest-free demand deposits, decreased to
2.03% from 2.82% between the periods due to a decline in market interest rates
that began in approximately September 2007.

Net
Interest Income Before Provision for Loan Losses. Net interest income before the provision for
loan losses was $6,342,472 for the nine months ended September 30, 2008, a
decrease of $332,871, or 5.0% over the $6,675,343 in the comparable 2007
period. The decrease resulted principally from a decrease in the yield on our
loan portfolio, which was greater than the decrease in the average cost of our
deposits, including demand deposits, partially offset by a decrease in the cost
of time deposits and an increase in interest income from our investment
security portfolio. Our net interest spread decreased to 3.53% in the first
nine months of 2008 from 3.58% in the same period of 2007 and our net interest
margin, which includes the effect of interest-free demand deposits and capital
as funding sources, decreased to 4.29% in the first nine months of 2008 from
4.59% in the same period of 2007.

Provision
for Loan Losses.We
took a provision for loan losses of $125,000 for the nine months ended
September 30, 2008 compared to a credit to the provision for loan losses of
$45,000 for the nine months ended September 30, 2007. The increase in the
provision was the result of an increase in loan delinquencies and charge-offs.
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 1.45% of total
loans at September 30, 2008, but there can be no assurance that a higher level,
or a higher provision for loan losses, will not be necessary in the future.

19

---



Non-interest
Income.Non-interest
income was $1,794,101 for the nine months ended September 30, 2008, compared to
$1,616,193 during the same period last year. The $177,908, or 11.0%, increase
in non-interest income was a direct result of a $250,781 increase in service
charges on deposits (primarily non-sufficient fund fees) and an increase in net
rental income of $24,764, partially offset by a decrease of $89,265 in other
income. Service charges on deposits increased 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 increase in net rental income was due to the
occupancy of one of the Banks subleased properties that was previously vacant.
The decrease in other income was a result of the loss of a check cashing
customer that had previously generated substantial fee income.

Non-interest
Expense. Non-interest
expense was $5,536,057 for the nine months ended September 30, 2008, compared
to $5,464,468 for the nine months ended September 30, 2007. The principal
causes of the $71,589 increase were:

| |   |                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | $60,867 increase in
  occupancy expenses due to higher utility costs and the operation of our new
  main office in Great Kills, which opened in February 2007;                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                              
| | · | $136,975 increase in legal
  expenses primarily due to new collection matters and because in 2007 we
  received a reimbursement from our insurance company of legal fees previously
  expensed.                                                                                              
| |   |                                                                                                                                                                                                                                                                                              
| | · | $104,452 increase in other
  expenses due to a $74,013 increase in advertising expenses in connection with
  the Banks new advertising campaign and a $40,110 recovery in 2007 of part of
  a reserve expensed in 2005 for a legal claim that we settled for less than the
  reserve in 2007
| |   |                                                                                                                                                                                                                                                                                              
| | · | $246,906 decrease in
  salaries and benefits expense, due in part to the retirement of the former
  president and reduced incentive and ESOP compensation expense.                                                                                                                           

Income
Tax Expense. Income
tax expense was $1,144,592 for the nine months ended September 30, 2008,
compared to income tax expense of $1,337,997 for the nine months ended
September 30, 2007. The reduction in income tax expense was due to the $396,552
decrease in income before income taxes in the 2008 period. Our effective tax
rate for the nine months ended September 30, 2008 was 46.2% and for the quarter
ended September 30, 2007 was 46.6%.

20

---



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

|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|------------------------------------------------------------------ |  | ------------------------------------- | ----------- | ------------------------------------- | - | ------------------------------------ |  | ------------------------------------ | ---- | -------- | - | ------------- | - | ----------------- | --------- | -------- |  | ------------- | - | ----------------- | ----------- | -------- | - | ------------- |  |  | ---- | - | - | ----------- | - | - | --------- |  |  | ---- | -
|                                                                   |  | Three
  Months Ended
  Sept. 30, 2008 |             | Three
  Months Ended
  Sept. 30, 2007 |   | Nine
  Months Ended
  Sept. 30, 2008 |  | Nine
  Months Ended
  Sept. 30, 2007 |     
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |     
|                                                                   |  | Average
  Balance                     |             | Interest                              |   | Yield/
  Cost                        |  | Average
  Balance                    |      | Interest |   | Yield/
  Cost |   | Average
  Balance |           | Interest |  | Yield/
  Cost |   | Average
  Balance |             | Interest |   | Yield/
  Cost | 
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               | 
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               | 
|Assets:                                                            |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Interest-earning
  assets:                                         |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Loans receivable                                                   |  | $                                     | 64,032,229  |                                       | $ | 1,276,288                            |  |                                      | 7.61 | %        | $ | 59,328,064    |   | $                 | 1,500,123 |          |  | 9.85          | % | $                 | 63,070,716  |          | $ | 3,693,696     |  |  | 7.77 | % | $ | 60,982,376  |   | $ | 4,573,820 |  |  | 9.98 | %
|Investment
  securities, afs                                       |  |                                       | 123,434,653 |                                       |   | 1,474,099                            |  |                                      | 4.75 |          |   | 111,074,416   |   |                   | 1,320,528 |          |  | 4.72          |   |                   | 120,617,836 |          |   | 4,289,758     |  |  | 4.75 |   |   | 111,043,148 |   |   | 3,914,686 |  |  | 4.71 |  
|Other
  interest-earning assets                                    |  |                                       | 10,683,945  |                                       |   | 48,314                               |  |                                      | 1.80 |          |   | 24,203,811    |   |                   | 297,268   |          |  | 4.87          |   |                   | 13,025,631  |          |   | 225,159       |  |  | 2.31 |   |   | 21,823,634  |   |   | 809,094   |  |  | 4.96 |  
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Total
  interest-earning assets                                    |  |                                       | 198,150,827 |                                       |   | 2,798,701                            |  |                                      | 5.52 |          |   | 194,606,291   |   |                   | 3,117,919 |          |  | 6.30          |   |                   | 196,714,183 |          |   | 8,208,613     |  |  | 5.56 |   |   | 193,849,158 |   |   | 9,297,600 |  |  | 6.40 |  
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Non-interest
  earning assets                                      |  |                                       | 12,807,546  |                                       |   |                                      |  |                                      |      |          |   | 13,590,653    |   |                   |           |          |  |               |   |                   | 12,983,052  |          |   |               |  |  |      |   |   | 14,920,697  |   |   |           |  |  |      |  
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Total assets                                                       |  | $                                     | 210,958,373 |                                       |   |                                      |  |                                      |      |          | $ | 208,196,944   |   |                   |           |          |  |               |   | $                 | 209,697,235 |          |   |               |  |  |      |   | $ | 208,769,855 |   |   |           |  |  |      |  
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Liabilities
  and equity:                                          |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Interest-bearing
  liabilities:                                    |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Savings accounts                                                   |  | $                                     | 12,625,903  |                                       |   | 19,754                               |  |                                      | 0.62 |          | $ | 11,684,293    |   |                   | 24,531    |          |  | 0.83          |   | $                 | 11,813,603  |          |   | 56,927        |  |  | 0.64 |   | $ | 12,082,515  |   |   | 74,314    |  |  | 0.82 |  
|Time accounts                                                      |  |                                       | 71,347,390  |                                       |   | 365,462                              |  |                                      | 2.04 |          |   | 66,513,594    |   |                   | 619,975   |          |  | 3.70          |   |                   | 68,528,843  |          |   | 1,265,289     |  |  | 2.47 |   |   | 66,788,460  |   |   | 1,862,985 |  |  | 3.73 |  
|Money market
  accounts                                            |  |                                       | 19,020,866  |                                       |   | 64,094                               |  |                                      | 1.34 |          |   | 24,043,528    |   |                   | 137,741   |          |  | 2.27          |   |                   | 20,600,694  |          |   | 232,695       |  |  | 1.51 |   |   | 20,828,643  |   |   | 321,150   |  |  | 2.06 |  
|Now accounts                                                       |  |                                       | 17,695,783  |                                       |   | 31,612                               |  |                                      | 0.71 |          |   | 19,471,134    |   |                   | 37,940    |          |  | 0.77          |   |                   | 17,984,043  |          |   | 96,545        |  |  | 0.72 |   |   | 19,672,772  |   |   | 96,689    |  |  | 0.66 |  
|Subordinated debt                                                  |  |                                       | 2,129,239   |                                       |   | 36,606                               |  |                                      | 6.91 |          |   | 5,155,000     |   |                   | 89,040    |          |  | 6.91          |   |                   | 4,139,051   |          |   | 214,685       |  |  | 6.91 |   |   | 5,155,000   |   |   | 267,119   |  |  | 6.91 |  
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Total interest-bearing
  liabilities                               |  |                                       | 122,819,181 |                                       |   | 517,528                              |  |                                      | 1.68 |          |   | 126,867,549   |   |                   | 909,227   |          |  | 2.84          |   |                   | 123,066,234 |          |   | 1,866,141     |  |  | 2.03 |   |   | 124,527,390 |   |   | 2,622,257 |  |  | 2.82 |  
|Checking accounts                                                  |  |                                       | 65,085,696  |                                       |   |                                      |  |                                      |      |          |   | 60,571,625    |   |                   |           |          |  |               |   |                   | 63,638,445  |          |   |               |  |  |      |   |   | 63,532,608  |   |   |           |  |  |      |  
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Total deposits
  and subordinated debt                             |  |                                       | 187,904,877 |                                       |   |                                      |  |                                      |      |          |   | 187,439,174   |   |                   |           |          |  |               |   |                   | 186,704,679 |          |   |               |  |  |      |   |   | 188,059,998 |   |   |           |  |  |      |  
|Other liabilities                                                  |  |                                       | 1,254,024   |                                       |   |                                      |  |                                      |      |          |   | 1,617,370     |   |                   |           |          |  |               |   |                   | 1,192,190   |          |   |               |  |  |      |   |   | 2,012,645   |   |   |           |  |  |      |  
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Total liabilities                                                  |  |                                       | 189,158,901 |                                       |   |                                      |  |                                      |      |          |   | 189,056,544   |   |                   |           |          |  |               |   |                   | 187,896,869 |          |   |               |  |  |      |   |   | 190,072,643 |   |   |           |  |  |      |  
|Equity                                                             |  |                                       | 21,799,472  |                                       |   |                                      |  |                                      |      |          |   | 19,140,400    |   |                   |           |          |  |               |   |                   | 21,800,366  |          |   |               |  |  |      |   |   | 18,697,212  |   |   |           |  |  |      |  
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Total liabilities
  and equity                                     |  | $                                     | 210,958,373 |                                       |   |                                      |  |                                      |      |          | $ | 208,196,944   |   |                   |           |          |  |               |   | $                 | 209,697,235 |          |   |               |  |  |      |   | $ | 208,769,855 |   |   |           |  |  |      |  
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Net
  interest income/net interest rate spread                     |  |                                       |             |                                       | $ | 2,281,173                            |  |                                      | 3.84 | %        |   |               |   | $                 | 2,208,692 |          |  | 3.46          | % |                   |             |          | $ | 6,342,472     |  |  | 3.53 | % |   |             |   | $ | 6,675,343 |  |  | 3.58 | %
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Net
  interest earning assets/net interest margin                  |  | $                                     | 75,331,646  |                                       |   |                                      |  |                                      | 4.48 | %        | $ | 67,738,742    |   |                   |           |          |  | 4.45          | % | $                 | 73,647,949  |          |   |               |  |  | 4.29 | % | $ | 69,321,768  |   |   |           |  |  | 4.59 | %
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Ratio
  of interest-earning assets to interest-bearing liabilities |  |                                       | 1.61        | x                                     |   |                                      |  |                                      |      |          |   | 1.53          | x |                   |           |          |  |               |   |                   | 1.60        | x        |   |               |  |  |      |   |   | 1.56        | x |   |           |  |  |      |  
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Return on Average
  Assets (1)                                     |  |                                       | 0.97        | %                                     |   |                                      |  |                                      |      |          |   | 0.92          | % |                   |           |          |  |               |   |                   | 0.84        | %        |   |               |  |  |      |   |   | 0.97        | % |   |           |  |  |      |  
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Return on Average
  Equity (1)                                     |  |                                       | 9.40        | %                                     |   |                                      |  |                                      |      |          |   | 9.99          | % |                   |           |          |  |               |   |                   | 8.07        | %        |   |               |  |  |      |   |   | 10.89       | % |   |           |  |  |      |  
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  
|Tangible Equity
  to Total Assets                                  |  |                                       | 10.72       | %                                     |   |                                      |  |                                      |      |          |   | 9.57          | % |                   |           |          |  |               |   |                   | 10.72       | %        |   |               |  |  |      |   |   | 9.57        | % |   |           |  |  |      |  
|                                                                   |  |                                       |             |                                       |   |                                      |  |                                      |      |          |   |               |   |                   |           |          |  |               |   |                   |             |          |   |               |  |  |      |   |   |             |   |   |           |  |  |      |  

(1) Ratios have
been annualized.

21

---



Liquidity and Capital Resources

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

During
the nine months ended September 30, 2008, we had a net increase in total
deposits of $6,938,974 due to increases of $6,172,292 in time deposits,
$1,779,352 in savings accounts and $1,030,746 in NOW, partially offset by a
decrease of $1,496,449 in non-interest demand deposits and a $546,967 decrease
in money market accounts. We also received proceeds from repayment of
investment securities of $20,423,422. We used $23,160,013 of available funds to
purchase new investment securities, $5,155,000 to repay our subordinated debt
and we had a net loan increase of $2,563,409. These changes resulted in an
overall decrease in cash and cash equivalents of $2,087,659.

In
contrast, during the nine months ended September 30, 2007, we had a net decrease in total deposits of
$5,611,356 due to a $4,621,334 decrease in time deposits, a $4,824,412 decrease
in demand and checking accounts and a $1,416,790 decrease in savings accounts
partially offset by a $5,226,118 increase in money market accounts and a
$25,062 increase in NOW accounts. We received proceeds from repayment of
investment securities of $24,358,579 and we had a net loan reduction of
$6,961,389. After funding the deposit decline, we used $19,513,770 of available funds to purchase new investment
securities. We also used
$2,934,194 of cash for capitalized leasehold improvements and equipment for our
new main office in Great Kills. These changes resulted in an overall increase
in cash and cash equivalents of $6,888,630.

Victory State Bank satisfied all capital
ratio requirements of the Federal Deposit Insurance Corporation at September
30, 2008, with a Tier I Leverage Capital ratio of 10.31%, a ratio of Tier I
Capital to Risk-Weighted Assets ratio of 24.01%, and a Total Capital to
Risk-Weighted Assets ratio of 25.06%.

VSB
Bancorp, Inc. satisfied all capital ratio requirements of the Federal Reserve
at September 30, 2008, with a Tier I Leverage Capital ratio of 10.66%, a ratio
of Tier I Capital to Risk-Weighted Assets ratio of 25.10%, and a Total Capital
to Risk-Weighted Assets ratio of 26.15%.

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

22

---



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

Contractual Obligations and Commitments at September 30, 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 |  | $                       | 397,978    |                        | $ | 814,209                |  | $                  | 846,750   |                             | $ | 1,894,566 |  | $ | 3,953,503  | 
|Remaining contractual maturities of time deposits                    |  |                         | 67,870,301 |                        |   | 1,022,814              |  |                    | 2,017,741 |                             |   |          |  |   | 70,910,856 | 
|                                                                     |  |                         |            |                        |   |                        |  |                    |           |                             |   |           |  |   |            | 
|Total contractual cash obligations                                   |  | $                       | 68,268,279 |                        | $ | 1,837,023              |  | $                  | 2,864,491 |                             | $ | 1,894,566 |  | $ | 74,864,359 | 
|                                                                     |  |                         |            |                        |   |                        |  |                    |           |                             |   |           |  |   |            | 

|                  |  |                                             |            |                        |   |                        |  |                    |       |                             |   |   |  |   |            | 
|----------------- |  | ------------------------------------------- | ---------- | ---------------------- | - | ---------------------- |  | ------------------ | ----- | --------------------------- | - | - |  | - | ---------- | 
|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  |  | $                                           | 23,120,233 |                        | $ | 5,023,898              |  | $                  | 7,453 |                             | $ |  |  | $ | 28,151,584 | 
|                  |  |                                             |            |                        |   |                        |  |                    |       |                             |  

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

Non-Performing Loans

Management
closely monitors non-performing loans and other assets with potential problems
on a regular basis. We had nine non-performing loans, totaling $2,088,050, at
September 30, 2008, compared to six non-performing loans, totaling $960,217, at
December 31, 2007. The following is information about the six largest
non-performing loans, totaling $1,928,726 in outstanding principal balance.
Management believes it has taken appropriate steps with a view towards
maximizing recovery and minimizing loss on these loans.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|· | $859,968 in three loans
  to a builder secured and cross-collateralized by first mortgage liens on
  three lots in Staten Island on which single family houses are being built. The
  loans are past maturity and we have commenced foreclosure actions. The
  builder has contracts to sell two of the houses and those houses are near
  completion. The sale of the two houses at the contract price, if consummated,
  would be sufficient to pay off all three loans.                                                                                                                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|· | $556,321 in a loan to a
  business that has ceased operations but which loan is secured by a first
  mortgage on real property in Suffolk County and personally guaranteed by the
  principals. The property is listed for sale at a price substantially in
  excess of the loan amount. The loan is past due and we negotiated and
  extended an interim work out, pending the completion of a sale of the
  property. The borrower has made a substantial cash deposit sufficient to
  bring the loan current, and to pay interest through at least September 2008.
  The borrowers and the guarantors signed the work out documents in October and
  we then applied the deposit as agreed.                                
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|· | $512,437 in two loans to
  related local businesses. Both loans are in default and confessions of
  judgment have been filed. We have a security interest in the businesses,
  personal guaranties of the principals and others, and $100,000 of cash
  collateral. The borrowers had contracts to sell the businesses upon terms
  that sufficient to repay our loans, but the closings were contingent upon the
  receipt of approval of the New York State regulator responsible for
  regulating the businesses. That approval was received just prior to September
  30, 2008, but the closing of the sale had not yet occurred. The businesses
  were sold in early October and our loans were repaid in their entirety.

23

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Critical Accounting Policies and Judgments

We
are required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the amounts of revenues
and expenses during the reporting period. The allowance for loan losses,
prepayment estimates on the mortgage-backed securities and Collateralized
Mortgage Obligation portfolios, contingencies and fair values of financial
instruments are particularly subject to change and to managements estimates.
Actual results can differ from those estimates and may have an impact on our
financial statements.

Item 4 Controls and Procedures

Evaluation
of Disclosure Controls and Procedures: As of September 30, 2008, we
undertook an evaluation of our disclosure controls and procedures under the
supervision and with the participation of Raffaele M. Branca, President, CEO
and CFO. Disclosure controls are the systems and procedures we use that are
designed to ensure that information we are required to disclose in the reports
we file or submit under the Securities Exchange Act of 1934 (such as annual
reports on Form 10-K and quarterly periodic reports on Form 10-Q) is recorded,
processed, summarized and reported, in a manner which will allow senior
management to make timely decisions on the public disclosure of that
information. Mr. Branca concluded that our current disclosure controls and
procedures are effective in ensuring that such information is (i) collected and
communicated to senior management in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms. Since our last evaluation of our disclosure controls, we
have not made any significant changes in, or corrective actions taken
regarding, either our internal controls or other factors that could
significantly affect those controls.

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

Part II

Item 1  Legal Proceedings

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

IndyMac
Bank, F.S.B. (Old IndyMac), was closed by the Office of Thrift Supervision
(OTS) and the Federal Deposit Insurance Corporation (FDIC) was appointed as
its conservator in July 2008. The OTS then created a new bank (New IndyMac)
and many of the assets of Old IndyMac were transferred to New IndyMac. The Bank
has been advised by opposing legal counsel that the claim in the litigation is
owned by Old IndyMac, which is being liquidated by the FDIC. The Bank has been advised
that the holder of the claim against the Bank intends to continue to pursue its
claim against the Bank. The Bank intends to diligently defend the litigation.

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
and other routine proceedings arising it the ordinary course of business.
Management believes that such other routine legal proceedings in the aggregate
are immaterial to our financial condition or results of operations.

24

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Signature Page

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

|                          |  |                                        
|------------------------- |  | ---------------------------------------
|                          |  | VSB Bancorp, Inc.                      
|                          |  |                                        
|Date:
  November 12, 2008 |  | /s/ Raffaele
  M. Branca               
|                          |  |                                        
|                          |  | Raffaele M.
  Branca                   
|                          |  | President
  and Chief Executive Officer

EXHIBIT INDEX

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

Item 6 - Exhibits

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

25

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