EXHIBIT 13

                       2004 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>

Dear Stockholder:

      With a full year behind us since our conversion to a fully public company,
Sound Federal  continues to grow and operate with the same  principles that have
guided us since 1891. We continue to expand the Sound Federal franchise,  but we
are also mindful of the challenges posed by an uncertain economy and the current
interest  rate  environment.  However,  we  believe  that  expanding  the Bank's
franchise  while  interest  rates are low provides an opportunity to attract new
customers at a lower cost than in a higher interest rate  environment.  As such,
we are pleased to report the following:

      o     We opened our Stamford branch in September 2003. This branch now has
            over $39.0 million in deposits.

      o     We opened our Brookfield, Connecticut branch office in May 2004.

      o     We signed a lease agreement for a branch office in Carmel, New York,
            which is expected to open in October 2004.

      The expansion of any franchise  requires an investment in  infrastructure,
including people, and marketing costs. Each branch we open is carefully selected
to maximize growth in our existing market area and in the contiguous  areas. The
Brookfield  and  Carmel  branches  expand  our  presence  to the  north of Sound
Federal's existing branch network.  They are in the fastest growing areas of the
region as the suburbs of metropolitan New York City continue to expand outward.

      Sound Federal is also executing other  components of its business plan. We
continually evaluate ways to leverage the capital raised in the 2003 conversion.
The de-novo branch strategy is one of the means to do so. We are also mindful of
providing our stockholders with value by implementing stock repurchase  programs
and by paying quarterly cash dividends.  During fiscal 2004, we accomplished the
following:

      o     Completed  the  repurchase  of  530,482  shares  under  the  program
            announced last year.

      o     Announced our second repurchase program for 637,332 shares.

      o     Increased the quarterly cash dividend to $0.06 per share.


                                       1
<PAGE>

      Net income for fiscal 2004  amounted  to $6.6  million as compared to $8.5
million in fiscal 2003.  This  decrease in net income is a result of  decreasing
net interest  margins as a result of the continued low market interest rates and
an  increase  in  operating  expenses  which  is a  natural  consequence  of the
Company's  growth  as well as of  increased  expenses  for  the  Employee  Stock
Ownership  Plan.  To put the  decrease  in net income from fiscal 2003 in proper
perspective, it is important to note that our fiscal 2003 earnings were a record
high for the  Company,  reflecting  the  favorable  net  interest  margins  that
followed  the period of  declining  rates in 2002 and 2003.  During those years,
interest  rates  were  falling  faster  on our  deposits  than on our  loans and
securities  portfolios.  As a result,  our interest rate spread and net interest
margin  increased.  As consumers  began to refinance their mortgage loans and as
the rates on adjustable  rate  securities  began to reprice lower,  our interest
rate  spread  and net  interest  margin  began  to  decrease  and to  return  to
historical  norms.  By way of  comparison,  net income was $5.8 million and $2.7
million in fiscal years 2002 and 2001.

      As Sound Federal continues to move forward on its journey,  your Board and
Management will continue to explore  possibilities and opportunities to grow the
value of your investment in Sound Federal.

      We thank you for your continued confidence and support and we look forward
with great enthusiasm to the  opportunities we expect to confront and with pride
in our past achievements.

/s/ Richard P. McStravick                       /s/ Bruno J. Gioffre


                                       2
<PAGE>

Selected Consolidated Financial Information
(In thousands)

<TABLE>
<CAPTION>
                                                                               At or for the Years Ended March 31,
                                                            ------------------------------------------------------------------------
                                                              2004            2003            2002           2001(1)          2000
                                                            ------------------------------------------------------------------------
<S>                                                         <C>             <C>             <C>             <C>             <C>
Results of Operations:
Net interest income                                         $ 26,192        $ 25,839        $ 18,906        $ 14,568        $ 10,668
Provision for loan losses                                        275             275             175             208             100
Non-interest income                                            1,041             890             731             382             294
Non-interest expense                                          16,106          12,709          10,316          10,033           7,027
                                                            --------        --------        --------        --------        --------
Income before income tax expense                              10,852          13,745           9,146           4,709           3,835
Income tax expense                                             4,234           5,219           3,376           2,050           1,443
                                                            --------        --------        --------        --------        --------
Net income                                                  $  6,618        $  8,526        $  5,770        $  2,659        $  2,392
                                                            ========        ========        ========        ========        ========

Financial Condition:
Total assets                                                $890,541        $796,088        $623,985        $552,934        $332,344
Loans, net                                                   478,455         427,684         418,368         293,807         180,932
Mortgage-backed securities:
  Available for sale                                         255,853         212,484         104,134         115,931          24,980
  Held to maturity                                                --              --              --          25,177          32,210
Other securities:
  Available for sale                                          81,877          82,564          46,097          41,595          37,385
  Held to maturity                                                --              --              --           3,038           3,448
Deposits                                                     708,330         604,260         519,905         473,546         275,772
Borrowings                                                    35,000          35,000          34,922          14,698              --
Stockholders' equity                                         137,059         138,321          61,015          56,929          52,689
</TABLE>


                                       3
<PAGE>

Selected Consolidated Financial Information (continued)
(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                               At or for the Years Ended March 31,
                                                                      ----------------------------------------------------
                                                                         2004       2003       2002       2001(1)    2000
                                                                      ----------------------------------------------------
<S>                                                                      <C>        <C>        <C>        <C>        <C>
Performance Ratios:
Return on average assets                                                 0.79%      1.23%      1.01%      0.56%      0.77%
Return on average equity                                                 4.87      10.50       9.85       4.89       4.48
Average interest rate spread (2)                                         2.98       3.71       3.31       2.96       2.99
Net interest margin (3)                                                  3.24       3.93       3.51       3.26       3.55
Efficiency ratio (4)                                                    59.14      47.65      52.72      64.80      62.19
Dividend payout ratio (5)                                               40.74      20.90      22.22      50.00      58.82

Per Common Share Data:
Basic earnings per share                                              $  0.54    $  0.67    $  0.45    $  0.20    $  0.17
Diluted earnings per share                                               0.52       0.65       0.44       0.20       0.17
Book value per share (6)                                                10.40      10.44       4.62       4.28       3.81
Tangible book value per share (6)                                        9.34       9.39       3.56       3.23       3.81
Dividends per share                                                      0.22       0.14       0.10       0.10       0.10

Capital Ratios:
Average equity to average total assets (consolidated)                   16.15%     11.68%     10.26%     11.42%     17.12%
Tier 1 leverage capital at end of period (Bank only)                    10.92      11.29       6.54       6.35      13.72

Asset Quality Data:
Total non-performing loans                                            $ 1,981    $   477    $   755    $   933    $   969
Total non-performing assets                                             1,981        477        869      1,130      1,024
</TABLE>

(1)   Information beginning in fiscal 2001 includes the acquisition of Peekskill
      Financial Corporation which was completed in July 2000. At the time of the
      acquisition,  Peekskill  had  total  assets of  $201.5  million  and total
      deposits of $152.4 million.

(2)   Represents   the  difference   between  the  weighted   average  yield  on
      interest-earning  assets and the weighted average cost of interest-bearing
      liabilities.

(3)   Represents  net interest  income as a percent of average  interest-earning
      assets.

(4)   Computed  by  dividing  non-interest  expense  by the sum of net  interest
      income and non-interest income.

(5)   Dividend  payout ratio is calculated by dividing cash  dividends per share
      by basic earnings per share for the period.

(6)   Computed  based on total  common  shares  issued,  less  treasury  shares.
      Tangible book value excludes goodwill.


                                       4
<PAGE>

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

General

      Our principal business has historically  consisted of offering savings and
other  deposits to the general public and using the funds from these deposits to
make loans secured by residential real estate.  Our net income depends primarily
upon our net interest  income,  which is the difference  between interest income
earned  on  interest-earning  assets,  such as loans  and  investments,  and the
interest  expense paid on deposits.  To a much lesser degree,  our net income is
affected by non-interest  income,  such as banking service charges and fees. Net
income is also affected by, among other things,  provisions  for loan losses and
non-interest   expenses.   Our  principal   non-interest   expenses  consist  of
compensation  and benefits,  occupancy and equipment,  data  processing  service
fees,  advertising  and  promotion  and other  expenses,  such as ATM  expenses,
professional  fees and  insurance  premiums.  Our net  income  also is  affected
significantly  by general  economic  and  competitive  conditions,  particularly
changes in market interest rates;  government legislation and policies affecting
fiscal affairs,  housing and financial  institutions;  monetary  policies of the
Federal Reserve System; and the actions of bank regulatory authorities.

Forward-Looking Statements

      When  used in this  Annual  Report,  the  words or  phrases  "will  likely
result," "are  expected  to," "will  continue,"  "is  anticipated,"  "estimate,"
"project"  or similar  expressions  are  intended to  identify  "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995. Such statements reflect our current view with respect to future-looking
events and are  subject  to certain  risks and  uncertainties  that could  cause
actual results to differ  materially  from  Management's  current  expectations.
Among others, these risks and uncertainties  include changes in general economic
conditions,  changes in policies by regulatory agencies,  hostilities  involving
the United  States,  fluctuations  in  interest  rates,  demand for loans in the
Company's  market area,  changes in the quality or  composition of the Company's
loan and investment portfolios,  changes in accounting  principles,  policies or
guidelines  and other  economic,  competitive,  governmental  and  technological
factors  affecting our operations,  markets and products.  The Company wishes to
caution  readers  not  to  place  undue  reliance  on any  such  forward-looking
statements,  which speak only as of the date made.  The Company wishes to advise
readers  that the factors  listed  above could  affect the  Company's  financial
performance  and could cause the Company's  actual results for future periods to
differ materially from its forward-looking statements.

Second-Step Conversion

      On June 13,  2002,  Sound  Federal,  MHC  adopted a plan to  convert  to a
capital stock corporation. The conversion and offering were completed on January
6, 2003. Upon  conversion,  shares of Sound Federal Bancorp common stock held by
the public were exchanged for shares of Sound Federal Bancorp,  Inc., a Delaware
holding  company  (the  "Company"),  which  became the  parent  company of Sound
Federal Savings (the "Bank") (as part of the transaction,  Sound Federal Savings
and Loan Association  changed its name to Sound Federal  Savings).  In addition,
shares of the Company were offered for sale to the Bank's depositors and certain
borrowers  in a  subscription  offering.  The  shares  sold in the  subscription
offering represent the ownership interest of Sound Federal,  MHC.  References to
Sound Federal Bancorp,  Inc. or the Company include  references before and after
the conversion.

      The  second-step  conversion  was  accounted  for as a change in corporate
form,  with no  resulting  change  in the  historical  carrying  amounts  of the
Company's assets and liabilities. Consolidated stockholders'


                                       5
<PAGE>

equity  increased by the net cash proceeds from the offering.  All references to
share data  (including  the number of shares  and per share  amounts)  have been
adjusted  for all  periods to reflect the  additional  shares  outstanding  as a
result of the offering and share exchange.

      Sound  Federal  Bancorp,  Inc.  sold  7,780,737  shares of common stock at
$10.00 per share in the offering. In addition,  each outstanding share of common
stock of Sound  Federal  Bancorp was  converted  into  2.7667  shares of the new
corporation  resulting  in the  issuance  of  5,444,263  shares to our  existing
stockholders.  A total of 13,225,000  shares were outstanding as a result of the
offering and share  exchange.  Net cash proceeds  from the offering  amounted to
$70.1  million,  including $5.1 million  withdrawn from deposit  accounts at the
Bank to fill subscriptions.

Critical Accounting Policies

      Accounting  policies  considered  particularly  critical to our  financial
results  include the allowance for loan losses,  accounting for goodwill and the
recognition  of  interest  income and  interest  expense.  The  methodology  for
determining  the allowance  for loan losses is considered a critical  accounting
policy  by  management  due  to  the  high  degree  of  judgment  involved,  the
subjectivity  of the  assumptions  utilized and the potential for changes in the
economic environment that could result in changes to the amount of the allowance
for loan  losses  considered  necessary.  Management  considers  accounting  for
goodwill to be a critical policy because  goodwill must be tested for impairment
at least annually using an approach that involves the estimation of fair values.
Estimating  fair values  involves a high degree of judgment and  subjectivity in
the  assumptions  utilized.  Interest  income  on  loans,  securities  and other
interest-earning  assets is accrued  monthly  unless  management  considers  the
collection  of  interest  to be  doubtful.  When loans are placed on  nonaccrual
status  (contractually past due 90 days or more), unpaid interest is reversed by
charging  interest income and crediting an allowance for  uncollected  interest.
Interest  payments  received on nonaccrual loans (including  impaired loans) are
recognized as income unless future collections are doubtful.  Loans are returned
to  accrual  status  when   collectibility  is  no  longer  considered  doubtful
(generally,  when all payments have been brought  current).  Interest expense on
deposits, borrowings and other interest-bearing liabilities is accrued monthly.

Management of Market Risk

      Our most significant form of market risk is interest rate risk. Our assets
consist  primarily of fixed-rate  mortgage loans,  which have longer  maturities
than our  liabilities,  which consist  primarily of deposits.  Our interest rate
risk  management  program  focuses  primarily  on  evaluating  and  managing the
composition of assets and  liabilities  in the context of various  interest rate
scenarios.  Factors beyond management's  control,  such as market interest rates
and competition, also have an impact on interest income and interest expense. We
do not own any trading assets and have not engaged in hedging  transactions such
as interest rate swaps and caps.

      We attempt to manage  interest  rate risk and to minimize  the exposure of
earnings  to changes in market  interest  rates.  During the low  interest  rate
environment  that has existed in recent  years,  we have  followed the following
strategies  to  manage  interest  rate  risk:  (i)  purchasing  adjustable  rate
mortgage-backed securities issued by Fannie Mae, Freddie Mac or Ginnie Mae, (ii)
purchasing  securities  with an  average  life of five  years or less and  (iii)
originating a greater volume of adjustable  rate mortgage loans. By investing in
shorter term and adjustable rate financial instruments, we believe we are better
positioned  to react to  increases  in market  interest  rates.  However,  these
financial instruments generally bear lower yields than longer term or fixed rate
instruments.  Thus,  during the recent  sustained  period of declining  interest
rates,  these  strategies  have resulted in lower levels of interest income than
would be obtained by investing in longer term fixed rate instruments. Management
believes,  however,  that  maintaining  a  significant  portion of our assets in
short-term  investments  enables us to take  advantage  of increases in interest
rates,  reduces the  exposure of earnings  to  interest  rate  fluctuations  and
enhances long-term profitability.

      Management  monitors interest rate sensitivity  through the use of a model
that  estimates  the change in the Bank's net  portfolio  value  ("NPV") and net
interest  income  ("NII") in  response  to a range of assumed


                                       6
<PAGE>

changes in market  interest  rates.  NPV is the present  value of expected  cash
flows from assets,  liabilities,  and off-balance sheet items. Management is not
aware of any known trends that would  significantly  affect the timing or amount
of the expected cash flows utilized in the model.  The model, as currently used,
estimates  the effect on NPV and NII of  instantaneous  and permanent 100 to 300
basis point  increases and a 100 basis point decrease in market  interest rates,
with no effect  given to any actions that  management  might take to counter the
effect of interest rate movements.  We historically estimated the effects of 100
to 300 basis point decreases in interest rates.  However,  given the current low
level of market  interest rates and the low  probability of further  significant
declines in absolute  rates,  we did not  calculate the effects of interest rate
decreases greater than 100 basis points.

      The table below sets forth, as of March 31, 2004, the estimated changes in
the Bank's  NPV and NII that  would  result  from the  designated  instantaneous
changes in interest rates.

                                   Estimated Increase       Estimated Increase
  Changes in                      (Decrease) in NPV(1)      (Decrease) in NII
Interest Rates    Estimated       --------------------      ------------------
(Basis Points)       NPV           Amount     Percent            Percent
--------------    ---------       --------   ---------      ------------------
                               (Dollars in thousands)

    +300          $ 56,680       $(52,681)    (48.2)%            (17.2)%
    +200            55,572        (31,789)    (29.1)             (10.2)
    +100            96,058        (13,303)    (12.2)              (4.4)
      0            109,361             --        --                 --
    -100           121,798         12,437      11.4                4.9

----------
(1)   Represents  the decrease in the estimated  NPV at the indicated  change in
      interest rates compared to the NPV assuming no change in interest rates.

      Computations of prospective effects of hypothetical  interest rate changes
are based on numerous  assumptions  including relative levels of market interest
rates,  loan  prepayments  and deposit  decay,  and should not be relied upon as
indicative  of actual  results.  Further,  the  computations  do not reflect any
actions management may undertake in response to changes in interest rates.

      The above table  indicates  that at March 31, 2004,  in the event of a 100
basis point decrease in interest  rates,  we would expect to experience an 11.4%
increase  in NPV and a 4.9%  increase  in NII. In the event of a 200 basis point
increase in interest  rates,  we would expect to experience a 29.1%  decrease in
NPV and a 10.2% decrease in NII.  Subsequent to March 31, 2004,  there have been
no  significant  changes  in our  interest  rate  risk  exposures  or how  those
exposures would be managed.

      Certain shortcomings are inherent in the methodology used to model changes
in NPV and NII. The model requires that management make certain assumptions that
may or may not  reflect  the  manner in which  yields  and costs  will  actually
respond to changes in market interest rates.  Further,  the  computations do not
reflect any actions  management may undertake in response to changes in interest
rates. In this regard,  the table presented  assumes that (i) the composition of
the interest  sensitive  assets and  liabilities  existing at the beginning of a
period will remain constant over the period being measured and (ii) a particular
change  in  interest  rates  is  reflected  uniformly  across  the  yield  curve
regardless  of the  duration or repricing  of specific  assets and  liabilities.
Accordingly,  although the table  provides an  indication  of interest rate risk
exposure at a particular point in time,  these  measurements are not intended to
and do not  provide a  precise  forecast  of the  effect  of  changes  in market
interest rates on our net interest income,  and will differ from actual results.
Additionally,  the interest  rate risk  guidelines  established  by the Board of
Directors  are not  strict  limitations.  While  a goal  of the  Asset/Liability
Management  Committee  and the  Board of  Directors  is to limit  projected  NPV
changes within the Board's  guidelines,  we will not necessarily limit projected
changes in NPV if the required action would present a  disproportionate  risk to
continued profitability.


                                       7
<PAGE>

Comparison of Financial Condition at March 31, 2004 and 2003

Assets.  The Company's total assets amounted to $890.5 million at March 31, 2004
as compared to $796.1 million at March 31, 2003.  The $94.4 million  increase in
total  assets  is  primarily  due to a  $42.7  million  increase  in  securities
available for sale to $337.7 million,  a $50.8 million  increase in net loans to
$478.5  million,  and the  purchase of  bank-owned  life  insurance  with a cash
surrender  value of $10.1 million.  These  increases were partially  offset by a
decrease in federal  funds sold of $15.4  million.  Our asset  growth was funded
principally by a $104.0 million increase in deposits to $708.3 million.

Liabilities. Total deposits were $708.3 million at March 31, 2004 as compared to
$604.3 million at March 31, 2003, an increase of $104.0 million. Certificates of
deposit  increased $82.0 million to $445.7 million from $363.7 million;  savings
and club accounts increased $11.4 million to $148.2 million from $136.8 million;
and money market,  NOW and commercial  checking accounts increased $10.7 million
to $114.4 million from $103.7 million.

Stockholders'  Equity.  Total  stockholders'  equity  decreased  $1.2 million to
$137.1  million at March 31,  2004 as  compared  to $138.3  million at March 31,
2003.  The decrease  reflects the purchase of treasury  shares at a cost of $8.4
million and  dividends  paid of $2.6 million  partially  offset by net income of
$6.6  million,  an  increase  of  $686,000  attributable  to  accumulated  other
comprehensive  income and  proceeds of $268,000  on the  reissuance  of treasury
shares  for  stock  options   exercised.   The  change  in   accumulated   other
comprehensive  income  reflects a decrease of $3.5 million  ($2.1  million after
taxes) in the minimum pension liability,  partially offset by a decrease of $2.4
million  ($1.4  million  after taxes) in the net  unrealized  gain on securities
available for sale.

During fiscal 2004, we completed the  repurchase of 530,482 shares of our common
stock  pursuant  to a  stock  repurchase  program  announced  in July  2003.  We
announced the commencement of a second stock repurchase program in March 2004 to
repurchase up to 637,332 shares of our outstanding  shares of common stock,  and
purchased  10,000  shares prior to March 31. In fiscal 2004,  we  repurchased  a
total of 540,482 shares of the Company's  common stock at a cost of $8.4 million
and reissued 81,185 of these shares upon the exercise of stock options.


                                       8
<PAGE>

Average Balance Sheets

      The following table sets forth average balance sheets,  average yields and
costs,  and certain other  information  for the years ended March 31, 2004, 2003
and 2002.  The table reflects the average yield on  interest-earning  assets and
the average cost of interest-bearing  liabilities  (derived by dividing interest
income or expense by the monthly average balance of  interest-earning  assets or
interest-bearing  liabilities,  respectively),  as  well  as the  net  yield  on
interest-earning assets. No tax-equivalent  adjustments were made, as the effect
thereof was not material.  Nonaccrual  loans were included in the computation of
average  balances,  but have been  included in the table as loans  having a zero
yield.  The  yields  set  forth  below  include  the  effect  of  deferred  loan
origination  fees and  costs,  and  purchase  discounts  and  premiums  that are
amortized or accreted to interest income.

<TABLE>
<CAPTION>
                                                                       For the Years Ended March 31,
                                       ---------------------------------------------------------------------------------------------
                                                    2004                           2003                           2002
                                       ---------------------------------------------------------------------------------------------
                                         Average             Average     Average             Average     Average             Average
                                       Outstanding            Yield/   Outstanding            Yield/   Outstanding            Yield/
                                         Balance   Interest   Rate       Balance   Interest   Rate       Balance   Interest   Rate
                                       ----------- --------  -------   ----------- --------  -------   ----------- --------  -------
                                                                          (Dollars in thousands)
<S>                                     <C>         <C>        <C>     <C>          <C>       <C>      <C>         <C>        <C>
Interest - earning assets:
Loans (1)                               $ 442,466   26,819     6.06%   $ 433,824    29,906    6.89%    $ 342,447   25,560     7.46%
Mortgage-backed securities (2)            243,952    8,909     3.65%     123,009     6,676    5.43%      120,307    8,629     7.17%
Other securities (2)                       85,868    2,629     3.06%      52,232     2,264    4.33%       42,357    2,209     5.22%
Federal funds sold and other
overnight deposits (3)                     30,283      240     0.79%      43,524       526    1.21%       28,537      777     2.72%
Other (4)                                   5,460      142     2.60%       4,320       206    4.77%        4,581      270     5.89%
                                        ------------------             -------------------             ------------------
Total interest - earning assets           808,029   38,739     4.79%     656,909    39,578    6.02%      538,229   37,445     6.96%
                                                    ------                          ------                         ------
Non - interest earning assets              33,941                         38,728                          32,907
                                        ---------                      ---------                       ---------
Total assets                            $ 841,970                      $ 695,637                       $ 571,136
                                        =========                      =========                       =========

Interest - bearing liabilities:
Savings and club accounts               $ 143,926      856     0.59%   $ 124,931     1,185    0.95%    $ 109,469    1,609     1.47%
Money market accounts                      45,923      375     0.82%      38,828       453    1.17%       36,126      674     1.87%
NOW accounts                               53,420      172     0.32%      46,158       272    0.59%       38,954      360     0.92%
Certificates of deposit                   405,837    9,601     2.37%     342,011    10,098    2.95%      302,786   14,760     4.87%
Borrowings                                 39,208    1,495     3.81%      34,977     1,630    4.66%       16,348    1,065     6.51%
Subscription funds from stock offering          -        -         -       4,150        31    0.75%            -        -         -
Mortgage escrow funds                       3,800       48     1.26%       4,501        70    1.56%        4,314       71     1.64%
                                        ------------------             -------------------             ------------------
Total interest - bearing liabilities      692,114   12,547     1.81%     595,556    13,739    2.31%      507,997   18,539     3.65%
                                                    ------                          ------                         ------
Non - interest-bearing liabilities         13,910                         18,845                           4,545
                                        ---------                      ---------                       ---------
Total liabilities                         706,024                        614,401                         512,542
Stockholders' equity                      135,946                         81,236                          58,594
                                        ---------                      ---------                       ---------
Total liabilities and
stockholders' equity                    $ 841,970                      $ 695,637                       $ 571,136
                                        =========                      =========                       =========
Net interest income                                 26,192                          25,839                         18,906
                                                    ======                          ======                         ======
Average interest rate spread (5)                               2.98%                          3.71%                           3.31%
Net earning assets (6)                  $ 115,915                      $  61,353                       $  30,232
                                        =========                      =========                       =========
Net interest margin (7)                                        3.24%                          3.93%                           3.51%
Ratio of interest - earning assets
to interest - bearing liabilities            1.17x                          1.10x                           1.06x
</TABLE>

(1)   Balances include net deferred loan origination costs and the allowance for
      loan losses.

(2)   Average outstanding balances are based on amortized cost. As a result, the
      average  balances  and yields do not include the effect of changes in fair
      value of securities available for sale.

(3)   Other overnight deposits represent an  interest-earning  demand account at
      the Federal Home Loan Bank of New York.

(4)   Consists primarily of Federal Home Loan Bank Stock.

(5)   Net interest rate spread  represents the  difference  between the yield on
      average interest-earning assets and the cost of average interest - bearing
      liabilities.

(6)   Net earning assets  represent  total  interest-  earning assets less total
      interest - bearing liabilities.

(7)   Net interest  margin  represents  net interest  income  divided by average
      total interest - earning assets.


                                       9
<PAGE>

Rate/Volume Analysis

      The  following  table  presents  the dollar  amount of changes in interest
income and interest expense for the major categories of interest-earning  assets
and interest-bearing  liabilities.  Information is provided for each category of
interest-earning  assets and interest-bearing  liabilities,  with respect to (i)
changes  attributable to changes in volume (i.e., changes in balances multiplied
by the prior-period rate) and (ii) changes  attributable to rate (i.e.,  changes
in rate  multiplied  by  prior-period  balances).  For  purposes  of this table,
changes attributable to both rate and volume,  which cannot be segregated,  have
been allocated proportionately to the change due to volume and the change due to
rate.

<TABLE>
<CAPTION>
                                                                                For the Years Ended March 31,
                                                      ----------------------------------------------------------------------------
                                                                 2004 vs. 2003                           2003 vs. 2002
                                                      ------------------------------------   -------------------------------------
                                                      Increase (Decrease)                    Increase (Decrease)
                                                             Due to                                Due to
                                                      -------------------   Total Increase   -------------------    Total Increase
                                                      Volume         Rate     (Decrease)     Volume        Rate       (Decrease)
                                                      ------------------------------------   -------------------------------------
                                                                 (In thousands)
<S>                                                   <C>          <C>          <C>          <C>          <C>          <C>
Interest-earning assets:
Loans                                                 $   584      $(3,671)     $(3,087)     $ 6,414      $(2,068)     $ 4,346
Mortgage-backed securities                              4,959       (2,726)       2,233          189       (2,142)      (1,953)
Other securities                                        1,162         (797)         365          467         (412)          55
Federal funds and other overnight deposits               (134)        (152)        (286)         297         (548)        (251)
Other                                                      45         (109)         (64)         (35)         (29)         (64)
                                                      -------      -------      -------      -------      -------      -------

Total interest-earning assets                           6,616       (7,455)        (839)       7,332       (5,199)       2,133
                                                      -------      -------      -------      -------      -------      -------

Interest-bearing liabilities:
Savings and club accounts                                 163         (492)        (329)         204         (628)        (424)
Money market accounts                                      74         (152)         (78)          48         (269)        (221)
NOW accounts                                               38         (138)        (100)          58         (146)         (88)
Certificates of deposit                                 1,690       (2,187)        (497)       1,722       (6,384)      (4,662)
Borrowings                                                183         (318)        (135)         936         (371)         565
Subscription funds from stock offering                    (31)          --          (31)          31           --           31
Mortgage escrow funds                                     (10)         (12)         (22)           3           (4)          (1)
                                                      -------      -------      -------      -------      -------      -------

Total interest-bearing liabilities                      2,107       (3,299)      (1,192)       3,002       (7,802)      (4,800)
                                                      -------      -------      -------      -------      -------      -------

Net interest income                                   $ 4,509      $(4,156)     $   353      $ 4,330      $ 2,603      $ 6,933
                                                      =======      =======      =======      =======      =======      =======
</TABLE>


                                       10
<PAGE>

Comparison of Results of Operations for the Years Ended March 31, 2004 and 2003

      Net Income.  Net income  amounted to $6.6 million or diluted  earnings per
share of $0.52 for the year ended March 31, 2004, as compared to $8.5 million or
diluted  earnings  per share of $0.65 for the prior  year.  The  decrease in net
income for the year ended March 31, 2004 was due to an increase of $3.4  million
in  non-interest  expense,  partially  offset by  increases  of  $353,000 in net
interest income and $151,000 in  non-interest  income and a decrease of $985,000
in income tax expense.

      Interest Income.  Interest income totaled $38.7 million for the year ended
March 31, 2004, as compared to $39.6 million for the prior year. The decrease in
interest  income  reflects a 123 basis point  decrease  in the average  yield on
interest-earning  assets to 4.79% from 6.02%, partially offset by an increase of
$151.1 million in average  interest-earning assets to $808.0 million as compared
to $656.9  million for the prior year.  The  increase in the average  balance of
interest-earning  assets was due  primarily to  increases  of $154.6  million in
securities available for sale and $8.7 million in net loans, partially offset by
a $13.2 million decrease in federal funds sold and other overnight deposits. The
decrease  in  the  average  yield  on   interest-earning   assets  reflects  the
origination of loans at lower rates than the existing portfolio, the purchase of
securities at lower rates than the existing portfolio and the downward repricing
of adjustable-rate securities during recent periods of declining interest rates.

      Loans.  For the year  ended  March  31,  2004,  interest  income  on loans
amounted to $26.8 million as compared to $29.9 million for the prior year.  This
decrease was due to an 83 basis point decrease in the yield earned to 6.06% from
6.89%,  partially  offset by an $8.7 million  increase in the average balance to
$442.5 million from $433.8 million.

      We originated $186.7 million of new loans during fiscal 2004. In addition,
$151.3 million of existing  mortgage loans were  refinanced with us. These loans
were  originated  at rates  lower than the  average  yield  being  earned on the
existing loan portfolio. As a result, the decline in average yield earned on the
loan portfolio continued during fiscal 2004. The yield on the loan portfolio may
decrease  further until market  interest  rates begin to increase.  However,  as
market  interest  rates  increase,  the volume of loans  originated may decrease
which would result in slower  growth of the loan  portfolio or a decrease in the
loan portfolio.

      Mortgage-Backed   and  Other  Securities.   Interest  on   mortgage-backed
securities increased $2.2 million to $8.9 million for fiscal 2004 as compared to
$6.7  million for the prior year.  The increase was due to an increase of $120.9
million in the average balance to $244.0 million, partially offset by a decrease
of 178 basis  points in the average  yield to 3.65% from 5.43%.  The increase in
the average balance of mortgage-backed securities reflects the investment of the
net proceeds  from the  Company's  stock  offering as well as the  investment of
funds from deposit growth.  The decrease in the average yield is a result of the
downward  repricing  of  adjustable  rate  mortgage-backed  securities  and  the
accelerated  amortization  of purchase  premiums as a result of  prepayments  on
mortgage-backed  securities.  In  addition,  new  purchases  of  mortgage-backed
securities are at lower rates than the existing portfolio.

      Interest on other securities increased $365,000 to $2.6 million for fiscal
2004 as compared to $2.3  million for 2003.  The increase was due to an increase
of $33.6  million in the  average  balance to $85.9  million  for the year ended
March 31,  2004,  partially  offset  by a  decrease  of 127 basis  points in the
average yield to 3.06% from 4.33%.

      Federal Funds Sold and Other Overnight Deposits.  For the year ended March
31,  2004,  interest on federal  funds and other  overnight  deposits  decreased
$286,000 to $240,000,  reflecting a 42 basis point decrease in the average yield
to 0.79%  and a  decrease  of $13.2  million  in the  average  balance  to $30.3
million.  The decrease in the average  yield is the result of the  continued low
market interest rates.


                                       11
<PAGE>


      Other Earning  Assets.  Other earning assets consist  primarily of FHLB of
New York common stock.  The FHLB of New York suspended the October 2003 dividend
on this stock and  declared a  dividend  in January  2004 that was less than the
amounts previously paid.  Dividends on FHLB of New York common stock amounted to
$141,000 in fiscal 2004 as compared to $195,000 in fiscal 2003.

      Interest Expense.  For the year ended March 31, 2004,  interest expense on
interest-bearing  liabilities  decreased  $1.2  million  to  $12.5  million,  as
compared to $13.7  million for the year ended March 31,  2003.  The  decrease in
interest  expense  was due to a 50 basis point  decrease in the average  cost of
these liabilities to 1.81% from 2.31%,  partially offset by an increase of $96.6
million  in the  average  balance  of  interest-bearing  liabilities  to  $692.1
million.  The increase in the average  balance of  interest-bearing  liabilities
includes deposit growth in the Somers branch,  which opened in July 2002, and in
the Stamford  branch,  which opened in September  2003, as well as growth in the
existing branches. The decrease in the average cost of liabilities is the result
of declining market interest rates during recent periods.

      Interest  expense on certificates of deposit  amounted to $9.6 million for
fiscal 2004 as compared to $10.1  million for fiscal 2003.  The decrease was due
to a 58 basis point decrease in the average cost to 2.37%, partially offset by a
$63.8  million  increase in the average  balance of  certificates  of deposit to
$405.8 million as compared to $342.0 million for the prior year. The increase in
the average balance  includes growth at the Bank's new branch offices as well as
at our existing branches.

      Interest on savings accounts decreased $329,000 to $856,000 in fiscal 2004
as compared to $1.2 million in fiscal 2003. The average cost of savings accounts
decreased  36 basis  points to 0.59%,  partially  offset by an increase of $19.0
million in the average balance of savings accounts to $143.9 million.

      Interest expense on money market and NOW accounts amounted to $547,000 for
fiscal  2004 as compared to  $725,000  for the prior year.  The average  cost of
these  accounts  decreased  40 basis  points  to 0.73%,  partially  offset by an
increase  of $14.4  million in the  average  balance of these  accounts to $99.3
million.

      Interest  expense  on  borrowings  was $1.5  million  for  fiscal  2004 as
compared to $1.6 million for fiscal 2003.  The decrease in interest  expense was
due to an 85 basis points  decrease in the average cost of  borrowings to 3.81%,
partially offset by a $4.2 million increase in the average balance of borrowings
to $39.2 million.

      Net  Interest  Income.  For the year ended March 31,  2004,  net  interest
income  amounted to $26.2  million as  compared  to $25.8  million for the prior
year.  The interest rate spread was 2.98% and 3.71% and the net interest  margin
was 3.24% and 3.93% for the respective  fiscal years.  The decreases in interest
rate spread and net interest  margin are  primarily  the result of the effect of
mortgage  refinancings and lower returns on our investment portfolio as interest
rates  remained at 40 year lows. If interest rates remain at these low levels or
decrease  further,  mortgage  refinancings  may continue to adversely affect the
Company's interest rate spread and net interest margin. In addition, as interest
rates  increase,  the cost of our  interest-bearing  liabilities  will  increase
faster than the yield on interest-earning  assets. As a result, our net interest
rate spread and net  interest  margin may  decrease.  The adverse  effect on net
interest income of the decreases in interest rate spread and net interest margin
was substantially offset by earning asset growth and an increase in the ratio of
interest-earning  assets to  interest-bearing  liabilities  to 1.17 for the year
ended March 31, 2004 from 1.10 for fiscal 2003.  The higher ratio in fiscal 2004
was due primarily to the  investment  of net proceeds  from the Company's  stock
offering.

      In December  2003,  the  Company  purchased a  bank-owned  life  insurance
("BOLI")  product  for  $10.0  million.   The  BOLI  purchase  was  funded  from
interest-earning  assets,  however, the BOLI asset is classified separately from
interest-earning  assets on the  consolidated  balance sheet.  As a result,  the
ratio of average interest-earning assets to average interest-bearing liabilities
is expected to decrease  in future  periods.  The changes in the cash  surrender
value of the BOLI are recognized as non-interest  income. The Company's interest
rate spread and net interest  margin may  decrease as a result of the  financial
statement


                                       12
<PAGE>

classification of the BOLI asset and related income.  For the period ended March
31, 2004, non-interest income related the BOLI amounted to $85,000.

      Provision for Loan Losses. Management regularly reviews the loan portfolio
and makes  provisions  for loan  losses in  amounts  required  to  maintain  the
allowance  for loan losses in  accordance  with  generally  accepted  accounting
principles.  The  allowance  consists  of  losses  that  are both  probable  and
estimable at the date of the financial statements. The allowance for loan losses
consists of amounts  allocated to specific  nonperforming  loans and to loans in
each major portfolio category. Loan categories such as single-family residential
mortgage loans (including home equity lines of credit),  which represented 85.6%
of total loans at March 31,  2004,  are  generally  evaluated on an aggregate or
"pool" basis.  Our allowance  for loan losses is  predominately  determined on a
pool basis by applying loss factors to the current  balances of the various loan
categories. The loss factors are determined by management based on an evaluation
of our  historical  loss  experience,  delinquency  trends,  volume  and type of
lending conducted,  and the impact of current economic  conditions in our market
area.

      The provision for loan losses was $275,000 for fiscal years 2004 and 2003.
Non-performing  loans  amounted to $2.0 million or 0.41% of total loans at March
31, 2004, as compared to $477,000 or 0.11% of total loans at March 31, 2003. The
increase in  non-performing  loans is primarily the result of the delinquency of
one borrower's  mortgage and home equity loans which total  $805,000.  The loans
are secured by a single family home with a loan-to-value ratio of less than 60%.
The allowance  for loan losses  amounted to $2.7 million or 0.57% of total loans
at March 31, 2004 and $2.4  million or 0.57% of total  loans at March 31,  2003.
Charge-offs  amounted  to $5,000 and  $54,000 for the years ended March 31, 2004
and  2003,  respectively.  The  increase  in the  allowance  for loan  losses is
primarily  due to an increase in the  origination  of  adjustable  rate mortgage
loans,  commercial  mortgage  loans and  commercial  loans (not  secured by real
estate) as well as overall portfolio growth.  Adjustable-rate mortgage loans can
involve  greater  credit risk than  fixed-rate  loans because as interest  rates
increase, the underlying payments by the borrower increase,  thus increasing the
risk of default by the  borrower.  At the same time,  the  marketability  of the
underlying  collateral may be adversely  affected by higher  interest  rates. At
March 31,  2004,  adjustable  rate loans  accounted  for 27.1% of total loans as
compared to 19.7% at March 31, 2003.

      Non-Interest  Income.  Non-interest income consists principally of service
charges on deposit  accounts,  fees earned on the sale of  investment  products,
late  charges on loans and  various  other  service  fees.  Non-interest  income
totaled  $1.0  million for fiscal 2004 as compared to $890,000  for fiscal 2003.
The increase in non-interest income was primarily due to higher levels of income
from  service  charges on deposit  accounts,  late  charges on loans and various
other service fees.

      Non-Interest  Expense.  For the year ended  March 31,  2004,  non-interest
expense increased $3.4 million to $16.1 million as compared to $12.7 million for
the prior year.  This increase was due primarily to increases of $2.2 million in
compensation  and  benefits,  $545,000 in occupancy  and  equipment  expense and
$457,000 in other non-interest expense.

      The increase in compensation  and benefits is primarily due to an $800,000
increase in compensation  expense and a $698,000  increase in ESOP expense.  The
increase in compensation expense is due primarily to normal salary increases and
increases  in staff to support  the growth in the  Company's  lending and branch
operations. The Company had 119 full-time equivalent employees at March 31, 2004
as  compared  to 110  full-time  equivalent  employees  at March 31,  2003.  The
increase  in ESOP  expense  reflects  the  increase  in shares  committed  to be
released  for  allocation  as a result  of the  second-step  conversion  and the
increase in the market value of those shares. Compensation expense is recognized
for the ESOP  equal to the fair value of shares  committed  to be  released  for
allocation to participant  accounts.  The  difference  between the fair value at
that time and the ESOP's  original  acquisition  cost is charged or  credited to
stockholders'  equity. For fiscal 2004, the difference credited to stockholders'
equity amounted to $727,000 as compared to $261,000 for 2003.


                                       13
<PAGE>

      The increase in occupancy  and  equipment  expense is primarily due to new
branch  locations and the  Company's new corporate  office which opened in April
2003.

      Income  Taxes.  For the years ended  March 31,  2004 and 2003,  income tax
expense amounted to $4.2 million and $5.2 million,  respectively.  The effective
tax rates for those same periods were 39.0% and 38.0%,  respectively.  The 18.9%
decrease in fiscal 2004 income tax expense primarily reflects the 21.0% decrease
in pre-tax income.

Comparison of Results of Operations for the Years Ended March 31, 2003 and 2002

      Net Income.  Net income amounted to $8.5 million,  or diluted earnings per
share of $0.65 for fiscal 2003 as compared to $5.8 million, or $0.44 per diluted
share for fiscal  2002.  The increase in net income for the year ended March 31,
2003  is  primarily  due to a $6.9  million  increase  in net  interest  income,
partially  offset by increases of $2.4 million in non-interest  expense and $1.8
million in income tax expense.

      Interest Income.  Interest income totaled $39.6 million for the year ended
March 31,  2003,  as  compared to $37.4  million  for the prior  year.  The $2.2
million  increase in interest  income  reflects an increase of $118.7 million in
average  interest-earning assets to $656.9 million as compared to $538.2 million
for the prior year, partially offset by a 94 basis point decrease in the average
yield on  interest-earning  assets to 6.02%  from  6.96%.  The  increase  in the
average  balance of  interest-earning  assets was due  primarily to increases in
loans ($91.4  million),  federal funds sold and other overnight  deposits ($15.0
million),  mortgage-backed  securities ($2.7 million) and other securities ($9.9
million). The decrease in the average yield on interest-earning  assets reflects
the origination of fixed-rate loans at lower rates and the downward repricing of
adjustable-rate securities during recent periods of declining interest rates. In
addition,  federal  funds  sold and other  overnight  deposits,  which earn less
interest than longer-term  interest-earning assets, represented a larger portion
of  interest-earning  assets (6.6% of total  interest-earning  assets for fiscal
2003, as compared to 5.3% for fiscal 2002).

      Loans.  For the year  ended  March  31,  2003,  interest  income  on loans
amounted to $29.9  million as compared to $25.6  million for fiscal  2002.  This
increase was due to a $91.4 million  increase in the average balance of loans to
$433.8  million,  partially  offset by a 57 basis  point  decrease  in the yield
earned to 6.89% from 7.46%.

      The growth of the loan  portfolio  was  principally  a result of increased
mortgage loan  originations as borrowers  sought to take advantage of the lowest
market  interest  rates in 40 years.  These low market  interest rates created a
robust  housing  market and also  compelled  many  consumers to refinance  their
existing  mortgage loans. The Company  originated $216.3 million of loans during
the year ended March 31,  2003,  with rates lower than the average  yield of the
existing loan portfolio. As a result, the decline in average yield earned on the
loan  portfolio  continued in fiscal 2003.  The yield on the loan  portfolio may
decrease further until market interest rates begin to increase.

      Mortgage-Backed  Securities.  Interest on  mortgage-backed  securities for
fiscal 2003  decreased  $1.9 million to $6.7 million as compared to $8.6 million
for fiscal  2002.  The decrease was due to a decrease of 174 basis points in the
average  yield to 5.43%  from  7.17%,  partially  offset by an  increase  in the
average balance of mortgage-backed securities of $2.7 million to $123.0 million.
The  decrease  in the average  yield is a result of the  downward  repricing  of
adjustable   rate   mortgage-backed   securities.   In  addition,   as  existing
mortgage-backed  securities repay, new purchases of  mortgage-backed  securities
are at lower rates than the existing portfolio. During fiscal 2003, we purchased
$160.4  million of  mortgage-backed  securities  and received  $52.3  million in
principal repayments.

      Other  Securities.  Interest  on  other  securities  (consisting  of  U.S.
Government  and  agency  securities,   municipal   securities  and  mutual  fund
investments)  increased  $55,000 to $2.3  million for fiscal 2003 as


                                       14
<PAGE>

compared to $2.2 million for the prior year. The increase was due to an increase
of $9.9 million in the average balance to $52.2 million,  partially offset by an
89 basis point decrease in the yield earned to 4.33% from 5.22% for fiscal 2003.

      Federal Funds Sold and Other Overnight Deposits.  For the year ended March
31, 2003,  interest on federal funds sold and other overnight deposits decreased
$251,000 to $526,000, reflecting a 151 basis point decrease in the average yield
to 1.21%,  partially  offset by an  increase  of $15.0  million  in the  average
balance to $43.5  million.  The  decrease  in the  average  yield  reflects  the
decrease in market interest rates during fiscal 2003.

      Interest Expense.  For the year ended March 31, 2003,  interest expense on
interest-bearing  liabilities  decreased  $4.8  million  to  $13.7  million,  as
compared to $18.5  million for the year ended March 31,  2002.  The  decrease in
interest  expense was due to a 134 basis point  decrease in the average  cost to
2.31%  from  3.65%,  partially  offset by an  increase  of $87.6  million in the
average balance of interest-bearing liabilities to $595.6 million.

      Interest  expense on certificates of deposit amounted to $10.1 million for
fiscal 2003 as compared to $14.8  million for fiscal 2002.  The decrease was due
to a 192 basis point decrease in the average cost to 2.95%,  partially offset by
a $39.2 million  increase in the average  balance of  certificates of deposit to
$342.0 million as compared to $302.8 million for the prior year. The decrease in
the  average  cost of  certificates  of  deposits  was the  result of  declining
interest rates in fiscal 2003. The increase in the average  balance was a result
of the new branch offices, as well as deposit growth in the existing branches.

      Interest expense on savings and club accounts decreased $424,000 in fiscal
2003 to $1.2  million as compared to $1.6  million in fiscal  2002.  The average
cost of savings and club accounts decreased 52 basis points to 0.95%,  partially
offset by an increase of $15.5 million in the average balance to $124.9 million.

      For the year ended March 31,  2003,  interest  expense on money market and
NOW  accounts  amounted to  $725,000  as compared to $1.0  million for the prior
year.  The average  cost of these  accounts  decreased 53 basis points to 0.85%,
partially  offset by an increase of $9.9 million in the average balance to $85.0
million.

      For the year ended March 31, 2003, interest expense on borrowings was $1.6
million as compared to $1.1 million for the prior year. The increase in interest
expense  was due to an  increase  of $18.6  million  in the  average  balance of
borrowings to $35.0 million,  partially offset by a decrease of 185 basis points
in the average cost of borrowings to 4.66%.  The increase in borrowings was used
to fund loan originations.

      Net Interest  Income.  Net interest  income  amounted to $25.8 million for
fiscal 2003 as compared to $18.9  million for fiscal  2002.  The  interest  rate
spread was 3.71% and 3.31% and the net  interest  margin was 3.93% and 3.51% for
the respective periods.

      Provision for Loan Losses.  The provision for loan losses was $275,000 for
the year ended  March 31,  2003 as  compared  to  $175,000  for the prior  year.
Non-performing  loans  amounted to $477,000 or 0.11% of total loans at March 31,
2003,  as compared to  $755,000 or 0.18% of total loans at March 31,  2002.  The
allowance  for loan losses  amounted to $2.4  million or 0.57% of total loans at
March 31,  2003 and $2.2  million  or 0.53% of total  loans at March  31,  2002.
Charge-offs  amounted to $54,000  during  fiscal 2003 as compared to $15,000 for
the prior year.  The increase in the  provision  and  allowance  for loan losses
reflects our continued substantial origination of adjustable-rate mortgage loans
and overall portfolio growth. Adjustable-rate mortgage loans can involve greater
credit risk than  fixed-rate  loans  because as  interest  rates  increase,  the
underlying  payments  by the  borrower  increase,  thus  increasing  the risk of
default by the borrower.  At the same time, the  marketability of the underlying
collateral  may be adversely  affected by higher  interest  rates.  At March 31,
2003,  adjustable  rate loans  accounted for 19.7% of total loans as compared to
15.0% at March 31, 2002.


                                       15
<PAGE>

      Non-Interest  Income.  Non-interest income consists principally of service
charges on deposit  accounts,  fees earned on the sale of  investment  products,
late  charges on loans and  various  other  service  fees.  Non-interest  income
totaled  $890,000  for the year ended March 31, 2003 as compared to $731,000 for
the year ended March 31, 2002, and included service charges and fees of $831,000
and  $662,000 for the  respective  years.  The increase is due  primarily to the
increases in deposit and loan accounts  which  generate the service  charges and
fees.  Non-interest  income for the year ended March 31, 2003 included a gain on
the sale of real estate owned of $59,000 as compared to $69,000 for fiscal 2002.

      Non-Interest  Expense.  For the year ended  March 31,  2003,  non-interest
expense increased $2.4 million to $12.7 million as compared to $10.3 million for
the prior year.  This increase was due primarily to increases of $1.4 million in
compensation and benefits, $174,000 in occupancy and equipment expense, $331,000
in advertising and promotion expense and $392,000 in other non-interest expense.
The increase in  compensation  and  benefits is primarily  due to a $1.1 million
increase in compensation  costs,  and a $286,000  increase in ESOP expense.  The
increase in compensation  expense is due primarily to normal salary increases as
well as an increase in staff for the New  Rochelle  and Somers  branches,  which
were opened in  December  2001 and July 2002,  respectively,  and to support the
growth in the Company's lending and branch operations.  Included in compensation
and  benefits is pension  expense of $317,000 and $256,000 for fiscal years 2003
and 2002, respectively.

      The increases in the other categories of non-interest expense are also due
to the operating  expenses for the new branches and  increased  costs related to
the Company's  growth.  Occupancy and equipment expense for the year ended March
31, 2002 was reduced by a refund of  $170,000  of real estate  taxes  related to
branch locations.

      Income  Taxes.  For the years ended  March 31,  2003 and 2002,  income tax
expense amounted to $5.2 million and $3.4 million,  respectively.  The effective
tax rates for those same periods were 38.0% and 36.9%, respectively.

Liquidity and Capital Resources

      Our  liquidity  management  objective  is to ensure  the  availability  of
sufficient  cash flows to meet all  financial  commitments  and to capitalize on
opportunities for expansion.  Liquidity management addresses our ability to meet
deposit withdrawals on demand or at contractual maturity, to repay borrowings as
they mature, and to fund new loans and investments as opportunities arise.

      Our primary  investing  activities are the  origination of mortgage loans,
and  the  purchase  of  short-term  investments,  government  agency  bonds  and
adjustable  rate  mortgage-backed   securities.   These  activities  are  funded
primarily by deposit growth and principal  repayments on loans,  mortgage-backed
securities  and other  investment  securities.  During fiscal 2004,  the Company
originated  loans of $186.7 million and purchased  securities of $198.7 million.
These were funded by $146.4 million in principal payments,  maturities and calls
of securities,  $135.6  million in loan principal  repayments and an increase in
deposits of $104.0 million.

      At March 31, 2004, we had  outstanding  loan  origination  commitments and
unused lines of credit of $74.9 million. If we require funds beyond our internal
funding capabilities, borrowings other than securities repurchase agreements, of
up to $79.8 million are  available  from the Federal Home Loan Bank of New York.
At March 31, 2004,  approximately $321.5 million in certificates of deposit were
scheduled to mature within one year.  Our experience has been that a substantial
portion of our maturing certificate of deposit accounts are renewed.

      The following table summarizes the contractual  obligations of the Company
by  contractual  payment  period  as of  March  31,  2004.  Further  information
concerning  borrowings,  loan  commitments and lease  commitments is included in
Notes 7 and 10 to the Consolidated Financial Statements.


                                       16
<PAGE>

<TABLE>
<CAPTION>

                                                     Payments Due By
                             ------------------------------------------------------------
                                          Less Than         1-3        3 - 5    More Than
                               Total        1 Year         Years       Years     5 Years
                             ------------------------------------------------------------
                                                      (In thousands)
<S>                           <C>           <C>          <C>          <C>        <C>
Borrowings                    $ 35,000      $ 6,000      $ 14,000     $ 15,000   $     -
Loan commitments                74,891       74,891             -            -         -
Lease commitments                6,708          755         1,796        1,702     2,455
Securities purchases             4,000        4,000             -            -         -
                             ------------------------------------------------------------
   Total                      $120,599      $85,646      $ 15,796     $ 16,702   $ 2,455
                             ============================================================

</TABLE>


      Office of Thrift  Supervision  regulations  require savings  associations,
such as Sound  Federal  Savings,  to meet three  minimum  capital  standards:  a
tangible capital ratio requirement of 1.5% of total assets as adjusted under the
Office of Thrift Supervision  regulations;  a leverage ratio requirement of 4.0%
of core capital to such adjusted  total assets;  and a risk-based  capital ratio
requirement  of 8.0% of core  and  supplementary  capital  to  total  risk-based
assets.  We satisfied  these  minimum  capital  standards at March 31, 2004 with
tangible and leverage  capital  ratios of 10.9% and a total  risk-based  capital
ratio of 25.0%,  and we were  classified as a  well-capitalized  institution for
regulatory  purposes.  In  determining  the amount of  risk-weighted  assets for
purposes of the risk-based capital requirement, a savings association multiplies
its assets and credit equivalent amounts for certain  off-balance sheet items by
risk-weights,  which range from 0% for cash and  obligations  issued by the U.S.
Government  or its agencies to 100% for assets such as consumer  and  commercial
loans,  as assigned  by the Office of Thrift  Supervision  capital  regulations.
These capital requirements,  which are applicable to Sound Federal Savings only,
do not consider additional capital retained by Sound Federal Bancorp, Inc.

Impact of Inflation and Changing Prices

      The Consolidated Financial Statements and related Notes have been prepared
in conformity with accounting principles generally accepted in the United States
of America,  which require the  measurement of financial  position and operating
results without considering the change in the relative purchasing power of money
over  time due to  inflation.  The  impact  of  inflation  is  reflected  in the
increased cost of our operations.  Unlike most industrial companies,  nearly all
of our assets and  liabilities  are  financial in nature.  As a result,  our net
income is directly  impacted by changes in interest rates,  which are influenced
by inflationary  expectations.  Our ability to match the interest sensitivity of
our financial assets to the interest sensitivity of our financial liabilities as
part of our  interest  rate risk  management  program may reduce the effect that
changes in interest  rates have on our net income.  Changes in interest rates do
not  necessarily  move to the same  extent  as  changes  in  prices of goods and
services.  In the current interest rate environment,  liquidity and the maturity
structure  of our assets and  liabilities  are  critical to the  maintenance  of
acceptable  levels of net income.  Management  believes  that by  maintaining  a
significant  portion of our assets in short-term  investments,  adjustable  rate
mortgage-backed  securities  and  adjustable  rate  loans,  we  will  be able to
redeploy our assets in a rising interest rate environment.

Recent Accounting Pronouncements

      In December 2003, the Financial Accounting Standards Board ("FASB") issued
FASB  Interpretation  No.  46  (revised),  Consolidation  of  Variable  Interest
Entities ("FIN 46R"), which addresses how a business  enterprise should evaluate
whether it has a controlling financial interest in an entity through means other
than voting rights and,  accordingly,  should  consolidate the variable interest
entity ("VIE"). FIN 46R replaces FASB Interpretation No. 46, which was issued in
January  2003.  As a public  company  that is not a small  business  issuer  (as
defined in applicable  SEC  regulations),  the Company was required to apply FIN
46R to  variable  interests  as of March 31,  2004.  For any VIE's  that must be
consolidated under FIN 46R that were created before January 1, 2004, the assets,
liabilities and noncontrolling  interests of the VIE initially would be measured



                                       17
<PAGE>

at their carrying amounts and any difference between the net amount added to the
balance sheet and any  previously  recognized  interest would be recorded as the
cumulative  effect of an accounting  change. If determining the carrying amounts
is not practicable,  fair value at the date FIN 46R first applies may be used to
measure the assets,  liabilities  and  noncontrolling  interest of the VIE.  The
Company held no interests  in VIE's as of March 31, 2004 and,  accordingly,  the
adoption  of FIN  46R  did  not  affect  the  Company's  consolidated  financial
statements.

      In December 2003, the FASB also issued  Statement of Financial  Accounting
Standards No. 132  (revised),  Employers'  Disclosures  about Pensions and Other
Postretirement  Benefits ("SFAS No. 132R"). This standard prescribes  employers'
disclosures about pension plans and other postretirement benefit plans, but does
not change the measurement or recognition of those plans.  SFAS No. 132R retains
and revises the disclosure  requirements  contained in the original standard. It
also requires additional disclosures about the assets, obligations,  cash flows,
and net  periodic  benefit  cost of  defined  benefit  pension  plans  and other
postretirement   benefit   plans.   The  Company  has  provided  the  applicable
disclosures in the  consolidated  financial  statements  included in this Annual
Report.  Certain  disclosures  will also be  required in the  Company's  interim
financial statements beginning with the quarter ending June 30, 2004.

      Statement  of  Financial  Accounting  Standards  No. 150,  Accounting  for
Certain  Financial  Instruments  with  Characteristics  of both  Liabilities and
Equity  ("SFAS No. 150"),  was issued in May 2003.  This  statement  establishes
standards  for  the   classification   and  measurement  of  certain   financial
instruments with  characteristics of both liabilities and equity. Under SFAS No.
150, certain freestanding  financial  instruments that embody obligations of the
issuer, and that are now classified as equity, must be classified as liabilities
(or as  assets  in some  circumstances).  SFAS No.  150 also  includes  required
disclosures for financial instruments within its scope. For SEC registrants such
as the Company,  SFAS No. 150 was generally effective for financial  instruments
entered into or modified  after May 31, 2003 and  otherwise at the  beginning of
the first  interim  period  beginning  after June 15, 2003 (July 1, 2003 for the
Company). The effective date has been deferred indefinitely for certain types of
mandatorily  redeemable  financial  instruments.  The Company currently does not
have any financial instruments that are within the scope of SFAS No. 150.


                                       18
<PAGE>



            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Sound Federal Bancorp, Inc.:

We have audited the  accompanying  consolidated  balance sheets of Sound Federal
Bancorp,  Inc. and subsidiary (the "Company") as of March 31, 2004 and 2003, and
the related consolidated  statements of income, changes in stockholders' equity,
and cash flows for each of the years in the  three-year  period  ended March 31,
2004. These  consolidated  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position of Sound  Federal
Bancorp,  Inc. and  subsidiary as of March 31, 2004 and 2003, and the results of
their  operations  and their cash flows for each of the years in the  three-year
period  ended  March  31,  2004,  in  conformity  with U.S.  generally  accepted
accounting principles.

/s/ KPMG LLP

Stamford, Connecticut
May 21, 2004


                                       19
<PAGE>

                   SOUND FEDERAL BANCORP, INC. AND SUBSIDIARY
                           Consolidated Balance Sheets

<TABLE>
<CAPTION>

(In thousand, except share and per share data)                                                At March 31,
                                                                                            2004        2003
                                                                                         ---------    ---------
<S>                                                                                      <C>          <C>
Assets

Cash and due from banks                                                                  $  10,455    $   8,776
Federal funds sold and other overnight deposits                                             20,756       36,121
                                                                                         ---------    ---------
   Total cash and cash equivalents                                                          31,211       44,897
                                                                                         ---------    ---------
Securities  available  for sale,  at fair value  (including  $38,000 and $29,100
   pledged as collateral for borrowings under repurchase agreements at
   March 31, 2004 and 2003, respectively) (Notes 3 and 7)                                  337,730      295,048
Loans, net (Note 4):
  Mortgage loans                                                                           477,771      428,575
  Consumer and commercial loans                                                              3,396        1,551
  Allowance for loan losses                                                                 (2,712)      (2,442)
                                                                                         ---------    ---------
            Total loans, net                                                               478,455      427,684
                                                                                         ---------    ---------
 Accrued interest receivable                                                                 3,623        3,678
 Federal Home Loan Bank stock                                                                5,303        4,141
 Premises and equipment, net (Note 5)                                                        5,630        5,467
 Goodwill (Note 2)                                                                          13,970       13,970
 Prepaid pension costs (Note 9)                                                              2,547            -
 Bank-owned life insurance                                                                  10,085            -
 Other assets                                                                                1,987        1,203
                                                                                         ---------    ---------
            Total assets                                                                 $ 890,541    $ 796,088
                                                                                         =========    =========
Liabilities and Stockholders' Equity

Liabilities:

  Deposits (Note 6)                                                                      $ 708,330    $ 604,260
  Borrowings (Note 7)                                                                       35,000       35,000
  Mortgagors' escrow funds                                                                   4,522        4,603
  Due to brokers for securities purchased                                                    4,000       10,495
  Accrued expenses and other liabilities (Note 9)                                            1,630        3,409
                                                                                         ---------    ---------
            Total liabilities                                                              753,482      657,767
                                                                                         ---------    ---------

  Commitments and contingencies (Note 10)

Stockholders' equity (Notes 1 and 11):

   Preferred stock ($0.01 par value; 1,000,000 shares authorized;
     none issued and outstanding)                                                                -            -
   Common stock ($0.01 par value; 24,000,000 shares authorized;
     13,636,170 and 13,247,133 shares issued at March 31, 2004 and 2003, respectively)         136          132
   Additional paid-in capital                                                              102,637       95,395
   Treasury stock, at cost (459,297 shares)                                                 (7,150)           -
   Common stock held by Employee Stock Ownership Plan ("ESOP") (Note 9)                     (6,556)      (7,059)
   Unearned stock awards (Note 9)                                                           (5,618)        (100)
   Retained earnings                                                                        52,908       49,937
   Accumulated other comprehensive income, net of taxes (Note 12)                              702           16
                                                                                         ---------    ---------
            Total stockholders' equity                                                     137,059      138,321
                                                                                         ---------    ---------
            Total liabilities and stockholders' equity                                   $ 890,541    $ 796,088
                                                                                         =========    =========

</TABLE>



See accompanying notes to consolidated financial statements.


                                       20
<PAGE>

                   SOUND FEDERAL BANCORP, INC. AND SUBSIDIARY
                        Consolidated Statements of Income

<TABLE>
<CAPTION>
                                                           Years Ended March 31,
                                                       ---------------------------
(In thousands, except per share data)                    2004     2003      2002
                                                       -------   -------   -------
<S>                                                    <C>       <C>       <C>
Interest and Dividend Income

 Loans                                                 $26,819   $29,906   $25,560
 Mortgage-backed and other securities                   11,538     8,940    10,838
 Federal funds sold and other overnight deposits           240       526       777
 Other earning assets                                      142       206       270
                                                       -------   -------   -------
 Total interest and dividend income                     38,739    39,578    37,445
                                                       -------   -------   -------
Interest Expense

 Deposits (Note 6)                                      11,004    12,008    17,403
 Borrowings                                              1,495     1,630     1,065
  Other interest-bearing liabilities                        48       101        71
                                                       -------   -------   -------
 Total interest expense                                 12,547    13,739    18,539
                                                       -------   -------   -------
 Net interest income                                    26,192    25,839    18,906
 Provision for loan losses (Note 4)                        275       275       175
                                                       -------   -------   -------
 Net interest income after provision for loan losses    25,917    25,564    18,731
                                                       -------   -------   -------
Non-Interest Income

 Service charges and fees                                  955       831       662
 Other non-interest income                                  86        59        69
                                                       -------   -------   -------
  Total non-interest income                              1,041       890       731
                                                       -------   -------   -------
Non-Interest Expense

 Compensation and benefits (Note 9)                      8,733     6,540     5,137
 Occupancy and equipment                                 2,291     1,746     1,572
 Data processing service fees                            1,025       959       866
 Advertising and promotion                               1,020       884       553
 Other                                                   3,037     2,580     2,188
                                                       -------   -------   -------
 Total non-interest expense                             16,106    12,709    10,316
                                                       -------   -------   -------
 Income before income tax expense                       10,852    13,745     9,146
 Income tax expense (Note 8)                             4,234     5,219     3,376
                                                       -------   -------   -------
 Net income                                            $ 6,618   $ 8,526   $ 5,770
                                                       =======   =======   =======
Earnings per share (Note 13):

   Basic                                               $  0.54   $  0.67   $  0.45
   Diluted                                                0.52      0.65      0.44
                                                       =======   =======   =======
</TABLE>

See accompanying notes to consolidated financial statements.


                                       21
<PAGE>

                   SOUND FEDERAL BANCORP, INC. AND SUBSIDIARY
           Consolidated Statements of Changes in Stockholders' Equity
                For the Years Ended March 31, 2004, 2003 and 2002
                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                                        Accumulated
                                              Additional               Common     Unearned                 Other           Total
                                     Common     Paid-in   Treasury   Stock Held     Stock   Retained   Comprehensive   Stockholders'
                                     Stock      Capital    Stock       by ESOP     Awards   Earnings       Income         Equity
                                     ------   ----------  --------   ----------   --------  --------   -------------   -------------
<S>                                  <C>        <C>       <C>         <C>          <C>      <C>           <C>            <C>
Balance at March 31, 2001            $  521     $22,399   $(3,867)    $(1,297)     $(392)   $ 37,313      $ 2,252        $ 56,929
Net income                                -           -         -           -          -       5,770            -           5,770
Other comprehensive loss (Note 12)        -           -         -           -          -           -       (1,151)         (1,151)
                                                                                                                         --------
     Total comprehensive income                                                                                             4,619
Dividends paid ($0.10 per share)          -           -         -           -          -        (517)           -            (517)
Purchases of treasury stock               -           -      (483)          -          -           -            -            (483)
Issuance of common stock for
  exercise of stock options               1          72         -           -          -           -            -              73
Vesting of stock awards                   -           -         -           -        148           -            -             148
ESOP shares committed to be
  released for allocation                 -          54         -         192          -           -            -             246
                                     ------     -------   -------     -------      -----    --------      -------        --------
Balance at March 31, 2002               522      22,525    (4,350)     (1,105)      (244)     42,566        1,101          61,015

</TABLE>


                                       22
<PAGE>

                    SOUND FEDERAL BANCORP INC. AND SUBSIDIARY

           Consolidated Statements of Changes in Stockholders' Equity
                For the Years Ended March 31, 2004, 2003 and 2002
                 (In thousands, except share and per share data)


<TABLE>
<CAPTION>
                                                                                                        Accumulated
                                              Additional               Common     Unearned                 Other           Total
                                     Common     Paid-in   Treasury   Stock Held     Stock   Retained   Comprehensive   Stockholders'
                                     Stock      Capital    Stock       by ESOP     Awards   Earnings       Income         Equity
                                     ------   ----------  --------   ----------   --------  --------   -------------   -------------
<S>                                  <C>      <C>         <C>         <C>         <C>       <C>           <C>            <C>
Balance at March 31, 2002            $  522   $  22,525   $(4,350)    $(1,105)    $  (244)  $ 42,566      $ 1,101        $  61,015
Net income                                -           -         -           -           -      8,526            -            8,526
Other comprehensive loss (Note 12)        -           -         -           -           -          -       (1,085)          (1,085)
                                                                                                                         ---------
  Total comprehensive income                                                                                                 7,441
Dividends paid ($0.14 per share)          -           -         -           -           -     (1,155)           -           (1,155)
Issuance of common stock for
 exercise of stock options                -         188         -           -           -          -            -              188
Reorganization and related stock
 offering (Note 1):
   Merger of Sound Federal, MHC        (281)        647         -           -           -          -            -              366
   Treasury stock retired               (44)     (4,306)    4,350           -           -          -            -                -
   Exchange of common stock
    (1,967,782 shares exchanged
    for 5,444,263 shares)              (143)        141         -           -           -          -            -               (2)
   Proceeds from stock offering,
    net of related costs
    (7,780,737 shares issued)            78      75,832         -           -           -          -            -           75,910
   Common stock acquired by ESOP
    (622,458 shares)                      -           -         -      (6,225)          -          -            -           (6,225)
Vesting of stock awards and
 related tax benefits                     -         107         -           -         144          -            -              251
ESOP shares committed to be
 released for allocation                  -         261         -         271           -          -            -              532
                                     ------   ---------   -------     -------     -------   --------      -------        ---------
Balance at March 31, 2003               132      95,395         -      (7,059)       (100)    49,937           16          138,321

Net income                                -           -         -           -           -      6,618            -            6,618
Other comprehensive income (Note 12)      -           -         -           -           -          -          686              686
                                                                                                                         ---------
   Total comprehensive income                                                                                                7,304
Dividends paid ($0.22 per share)          -           -         -           -           -     (2,648)           -           (2,648)
Common stock issued for grants of
 stock awards                             4       5,909         -           -      (5,913)         -            -                -
Purchases of treasury stock
 (540,482 shares)                         -           -    (8,417)          -           -          -            -           (8,417)
Reissuance of treasury stock for
 exercise of stock options
 (81,185 shares)                          -           -     1,267           -           -       (999)           -              268
Tax benefit from exercise of
 stock options                            -         373         -           -           -          -            -              373
Vesting of stock awards and
 related tax benefits                     -         153         -           -         395          -            -              548
ESOP shares committed to be
 released for allocation                  -         727         -         503           -          -            -            1,230
 Tax benefit for dividends on
  unallocated ESOP shares                 -          80         -           -           -          -            -               80
                                     ------   ---------   -------     -------     -------   --------      -------        ---------
Balance at March 31, 2004            $  136   $ 102,637   $(7,150)    $(6,556)    $(5,618)  $ 52,908      $   702        $ 137,059
                                     ======   =========   =======     =======     =======   ========      =======        =========

</TABLE>

See accompanying notes to consolidated financial statements.


                                       23
<PAGE>

                   SOUND FEDERAL BANCORP, INC. AND SUBSIDIARY
                      Consolidated Statements of Cash Flows
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                               Years Ended March 31,
                                                                      ---------------------------------------
                                                                         2004           2003           2002
                                                                      ---------      ---------      ---------
<S>                                                                   <C>            <C>            <C>
Operating Activities

  Net income                                                          $   6,618      $   8,526      $   5,770
  Adjustments to reconcile net income to net
      cash provided by operating activities:
      Provision for loan losses                                             275            275            175
      Depreciation, amortization and accretion                            2,549          1,458            706
      ESOP and stock award expense                                        1,625            676            394
      Income taxes                                                         (800)         1,095          2,883
      Pension costs                                                          81         (2,612)           (65)
      Other adjustments, net                                               (777)          (414)           773
                                                                      ---------      ---------      ---------
          Net cash provided by operating activities                       9,571          9,004         10,636
                                                                      ---------      ---------      ---------
Investing Activities

 Purchases of securities available for sale                            (198,707)      (229,693)       (57,737)
 Proceeds from payments, maturities and calls of securities
      available for sale                                                146,415         96,724         90,224
 Disbursements for loan originations, net of principal repayments       (52,027)       (10,395)      (125,367)
 Net decrease in certificates of deposit                                      -              -          2,491
 Purchases of Federal Home Loan Bank stock                               (1,162)             -           (396)
 Purchase of bank-owned life insurance                                  (10,000)             -              -
 Purchases of premises and equipment                                       (968)          (714)          (294)
 Proceeds from sales of real estate owned                                     -            344            405
                                                                      ---------      ---------      ---------
           Net cash used in investing activities                       (116,449)      (143,734)       (90,674)
                                                                      ---------      ---------      ---------
Financing Activities

 Net increase in deposits                                               104,070         84,355         46,359
 Proceeds from borrowings                                                47,000          7,000         20,000
 Repayment of borrowings                                                (47,000)        (7,082)             -
 Net  (decrease) increase in mortgagors' escrow funds                       (81)          (418)           535
 Purchases of treasury stock                                             (8,417)             -           (483)
 Proceeds from stock offering, net of related costs                           -         70,051              -
 Proceeds from exercise of stock options                                    268            100             73
 Payment of cash dividends on common stock                               (2,648)        (1,155)          (517)
 Cash payment in lieu of fractional shares in reorganization                  -             (2)             -
                                                                      ---------      ---------      ---------
        Net cash provided by financing activities                        93,192        152,849         65,967
                                                                      ---------      ---------      ---------
  (Decrease) increase in cash and cash equivalents                      (13,686)        18,119        (14,071)
  Cash and cash equivalents at beginning of year                         44,897         26,778         40,849
                                                                      ---------      ---------      ---------
  Cash and cash equivalents at end of year                            $  31,211      $  44,897      $  26,778
                                                                      =========      =========      =========
Supplemental Information

  Interest paid                                                       $  12,711      $  13,699      $  18,443
  Income taxes paid                                                       4,921          4,104          1,980
  Loans transferred to real estate owned                                      -            171            253
  (Decrease) increase in  due to brokers for securities purchased        (6,495)        10,495              -
                                                                      =========      =========      =========

</TABLE>

See accompanying notes to consolidated financial statements.


                                       24
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

(1)   Reorganization and Conversion

      Initial Public Offering

      On October 8, 1998,  Sound  Federal  Bancorp  issued  shares of its common
      stock  in  connection  with  a  Plan  of   Reorganization   (the  "Initial
      Reorganization")  and related  Subscription  and  Community  Offering (the
      "Initial Offering"). In the Initial Reorganization,  Sound Federal Savings
      and Loan Association  converted from a federally  chartered mutual savings
      association  to a federally  chartered  stock savings  association.  Sound
      Federal Savings and Loan Association became the wholly-owned subsidiary of
      Sound Federal Bancorp, which became the majority-owned subsidiary of Sound
      Federal, MHC (the "Mutual Holding Company").

      Sound Federal Bancorp issued approximately 54% of its shares to the Mutual
      Holding Company and the remaining 46% to other shareholders, including the
      Company's Employee Stock Ownership Plan (the "ESOP") and the Sound Federal
      Savings  and  Loan  Association  Charitable  Foundation  (the  "Charitable
      Foundation"). After deducting offering costs of $1.1 million, the net cash
      proceeds from the Initial  Offering were $20.0  million,  attributable  to
      shares sold to  stockholders  other than the Mutual Holding  Company,  the
      ESOP and the Charitable Foundation.

      Second Step Conversion

      On June 13, 2002,  the  respective  Boards of  Directors of Sound  Federal
      Bancorp and the Mutual Holding  Company adopted a plan to convert from the
      mutual  holding form of  organization  to a fully public  holding  company
      structure (the  "Conversion").  The Conversion was completed on January 6,
      2003. At that time, the Mutual  Holding  Company merged into the Bank, and
      no longer  exists.  Sound Federal  Bancorp was succeeded by a new Delaware
      corporation known as Sound Federal Bancorp,  Inc. (the "Holding Company").
      Common shares  representing  the ownership  interest of the Mutual Holding
      Company were sold in a  subscription  offering  and a community  offering.
      Common shares owned by public  shareholders  (shareholders  other than the
      Mutual  Holding  Company)  were  converted  into the right to receive  new
      shares of the Holding  Company's  common stock  determined  pursuant to an
      exchange ratio.  Immediately after the Conversion and exchange of existing
      shares for new shares,  the public  shareholders  owned the same aggregate
      percentage  of  the  Holding   Company's  common  stock  that  they  owned
      immediately prior to the Conversion, excluding any shares purchased in the
      offering.  As part of these  transactions,  Sound Federal Savings and Loan
      Assocation  changed its name to Sound Federal Savings (the "Bank"),  which
      is now a wholly-owned  subsidiary of the Holding Company. The Bank and the
      Holding Company are referred to herein as "the Company".

      The Holding  Company sold  7,780,737  shares of common stock at $10.00 per
      share in the offering,  including 622,458 shares purchased by the ESOP. In
      addition,  each of the outstanding shares of common stock of Sound Federal
      Bancorp  (1,967,782  shares, net of 444,926 treasury shares) was converted
      into  2.7667  shares  of  the  Holding  Company   resulting  in  5,444,263
      outstanding  shares.  A total of 13,225,000  shares were  outstanding as a
      result of the offering and share exchange.

      Net cash proceeds from the offering were as follows (in thousands):


         Total cash proceeds (7,780,737 shares)                      $ 77,807
         Offering costs                                                (1,897)
                                                                     --------
            Net offering proceeds                                      75,910
         Assets received from the Mutual Holding Company                  366
                                                                     --------
         Increase in common stock and additional paid-in capital       76,276
         Shares purchased by the ESOP (622,458 shares)                 (6,225)
                                                                     --------
         Net cash proceeds                                           $ 70,051
                                                                     ========



                                       25
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      The Conversion and related  transactions  were accounted for at historical
      cost,  with no  resulting  change in the  historical  carrying  amounts of
      assets and liabilities. Consolidated stockholders' equity increased by the
      net cash  proceeds  from the  offering.  Share and per share  data for all
      periods have been adjusted to reflect the additional shares outstanding as
      a result of the offering and share exchange.

(2)   Summary of Significant Accounting Policies

      The  Bank  is a  community-oriented  savings  institution  whose  business
      primarily  consists of accepting deposits from customers within its market
      area and investing  those funds in mortgage  loans secured by  one-to-four
      family  residences  and in  mortgage-backed  and  other  securities.  To a
      significantly  lesser extent,  funds are invested in commercial  mortgage,
      construction  and  consumer  loans.  The  Bank's  primary  market  area is
      Westchester  County,  New  York  and  Fairfield  County,   Connecticut.  A
      full-service office is also located in Rockland County, New York.

      Deposits  are  insured  up to  applicable  limits of the  Federal  Deposit
      Insurance  Corporation   ("FDIC").   As  a   federally-chartered   savings
      association,  the  Bank's  primary  regulator  is  the  Office  of  Thrift
      Supervision  ("OTS").  The Holding  Company is also subject to supervision
      and regulation by the OTS.

      Basis of Presentation

      The consolidated  financial statements include the accounts of the Holding
      Company, the Bank, Sound REIT, First Federal REIT and Mamaroneck Advisors,
      Inc. Sound REIT and First Federal REIT are real estate  investment  trusts
      that hold a portion of the Company's  mortgage-related assets.  Mamaroneck
      Advisors,  Inc.  is a  wholly-owned  subsidiary  of the Bank that  offered
      investment  products  and services to the Bank's  customers.  Beginning in
      December 2003,  these  services are provided to customers  directly by the
      Bank. All significant  intercompany  accounts and  transactions  have been
      eliminated in consolidation.

      The  consolidated  financial  statements  have been prepared in conformity
      with  accounting  principles  generally  accepted in the United  States of
      America. In preparing the consolidated financial statements, management is
      required  to make  estimates  and  assumptions  that  affect the  reported
      amounts of assets,  liabilities,  income and expense. Actual results could
      differ  significantly  from these estimates.  A material  estimate that is
      particularly  susceptible  to near-term  change is the  allowance for loan
      losses, which is discussed below.

      Certain  reclassifications have been made to prior year amounts to conform
      to the current year  presentation.  For purposes of reporting  cash flows,
      cash  equivalents  consist  of  federal  funds  sold and  other  overnight
      deposits.

      Securities

      The   Company   may   classify   its   securities   as   held-to-maturity,
      available-for-sale  or trading.  Securities classified as held to maturity
      are  limited to debt  securities  for which the  entity  has the  positive
      intent and ability to hold to maturity.  Trading  securities  are debt and
      equity  securities that are bought  principally for the purpose of selling
      them in the near term. All other debt and equity securities are classified
      as available for sale.

      Management determines the appropriate  classification of securities at the
      purchase date.  Securities held to maturity are carried at amortized cost.
      Trading  securities are carried at fair value,  with unrealized  gains and
      losses recognized in earnings.  Securities  available for sale are carried
      at fair value, with unrealized gains and losses excluded from earnings and
      reported on a net-of-tax  basis as a separate  component of  stockholders'
      equity  (accumulated  other  comprehensive  income or loss).  The  Company
      classified  all  securities  as available  for sale during the years ended
      March 31, 2004, 2003 and 2002.

      Premiums and discounts on debt securities are amortized to interest income
      on a level-yield  basis over the terms of the  securities.  Realized gains
      and losses on sales of securities  are  determined  based on the amortized
      cost of the specific securities sold.  Unrealized losses on securities are
      charged to earnings when the decline in fair value of a security is judged
      to be other than temporary.


                                       26
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


      Allowance for Loan Losses

      The allowance  for loan losses is increased by provisions  for loan losses
      charged to  income.  Losses are  charged  to the  allowance  when all or a
      portion  of a loan is  deemed  to be  uncollectible.  Recoveries  of loans
      previously  charged-off are credited to the allowance for loan losses when
      realized. Management's periodic determination of the allowance is based on
      continuing  reviews  of  the  portfolio,   using  a   consistently-applied
      methodology.  The  allowance  for loan losses  consists of losses that are
      both probable and estimable at the date of the  financial  statements.  In
      determining the allowance for loan losses,  management  considers  factors
      such as the  Company's  past  loan  loss  experience,  known  risks in the
      portfolio, adverse situations affecting a borrower's ability to repay, the
      estimated value of underlying collateral, and current economic conditions.

      Determining the allowance for loan losses involves significant  management
      judgments  utilizing the best information  available.  Those judgments are
      subject to further  review by various  sources,  including  the  Company's
      regulators.  Changes in the allowance may be necessary in the future based
      on changes in economic and real estate market conditions,  new information
      obtained  regarding known problem loans, the  identification of additional
      problem  loans  and  other  factors,  certain  of  which  are  outside  of
      management's control.

      A loan is considered to be impaired when, based on current information and
      events,  it is  probable  that the  Company  will be unable to collect all
      principal and interest  contractually  due. The Company  reviews loans for
      impairment  that  are  individually   evaluated  for   collectibility   in
      accordance with the Company's normal loan review  procedures  (principally
      loans in the  multi-family,  commercial  mortgage  and  construction  loan
      portfolios).   Smaller-balance  homogeneous  loans,  such  as  residential
      mortgage and consumer loans,  are  collectively  evaluated for impairment.
      The  measurement  of an impaired loan is based on (i) the present value of
      expected  future cash flows  discounted at the loan's  effective  interest
      rate, (ii) the loan's  observable  market price or (iii) the fair value of
      the collateral if the loan is collateral  dependent.  If the measure of an
      impaired loan is less than its recorded investment,  an impairment loss is
      recognized as part of the allowance for loan losses.

      Interest and Fees on Loans

      Interest is accrued monthly based on outstanding principal balances unless
      management considers the collection of interest to be doubtful (generally,
      when loans are contractually past due ninety days or more). When loans are
      placed on  nonaccrual  status,  unpaid  interest  is  reversed by charging
      interest  income and  crediting an  allowance  for  uncollected  interest.
      Interest payments received on nonaccrual loans (including  impaired loans)
      are recognized as income unless future collections are doubtful. Loans are
      returned to accrual  status when  collectibility  is no longer  considered
      doubtful (generally, when all payments have been brought current).

      Loan  origination  fees and  certain  direct  loan  origination  costs are
      deferred and the net fee or cost is amortized  to interest  income,  using
      the level-yield  method,  over the  contractual  term of the related loan.
      Unamortized  fees and costs  applicable to prepaid loans are recognized in
      interest income at the time of prepayment.

      Federal Home Loan Bank Stock

      As a member of the Federal Home Loan Bank  ("FHLB") of New York,  the Bank
      is  required  to hold a  certain  amount  of FHLB  stock.  This  stock  is
      considered to be a  non-marketable  equity security and,  accordingly,  is
      carried at cost.

      Goodwill

      Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and
      Other Intangible Assets, requires that goodwill and intangible assets with
      indefinite useful lives no longer be amortized,  but instead be tested for
      impairment  at  least  annually  using a  fair-value-based  approach.  The
      Company adopted SFAS No. 142 as of April 1, 2001. As a result, the Company
      ceased  amortizing  the  goodwill  that  was  recorded  in the  July  2000
      acquisition  of  Peekskill  Financial  Corporation  and  its  wholly-owned
      subsidiary, First Federal Savings Bank. Goodwill recorded in the



                                       27
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      acquisition was $14.7 million,  with a remaining  balance of $14.0 million
      upon  adoption  of  SFAS  No.  142.  The  Company  did not  recognize  any
      impairment  of goodwill  during the years ended March 31,  2004,  2003 and
      2002.

      Real Estate Owned

      Real estate properties acquired through foreclosure are recorded initially
      at fair value less  estimated  sales costs,  with the resulting  writedown
      charged to the  allowance  for loan losses.  Thereafter,  an allowance for
      losses on real  estate  owned is  established  by a charge to  expense  to
      reflect any subsequent  declines in fair value.  Fair value  estimates are
      based on recent appraisals and other available information. Costs incurred
      to develop or improve properties are capitalized,  while holding costs are
      charged to expense.

      Premises and Equipment

      Land  is  carried  at  cost.   Buildings   and   improvements,   leasehold
      improvements,  and  furniture  and  equipment  are  carried  at cost  less
      accumulated   depreciation  and  amortization.   Depreciation  expense  is
      recognized on a straight-line basis over the estimated useful lives of the
      related assets, which are 40 years for buildings and improvements and 3 to
      7  years  for  furniture   and   equipment.   Amortization   of  leasehold
      improvements  is recognized on a  straight-line  basis over the shorter of
      the terms of the  respective  leases or the estimated  useful lives of the
      assets,  resulting  in  amortization  periods  ranging from 5 to 20 years.
      Costs  incurred  to  improve  or extend  the life of  existing  assets are
      capitalized. Repairs and maintenance are charged to expense.

      Securities Repurchase Agreements

      The Company is a party to securities  repurchase agreements with the FHLB.
      These agreements  provide for the transfer of securities to the FHLB under
      an agreement to repurchase  the  identical  securities at a fixed price in
      the future. These agreements are accounted for as secured financings.  The
      proceeds  from the  transaction  are  recorded as  borrowed  funds and the
      underlying securities are included in the Company's securities portfolio.

      Income Taxes

      Income  taxes are  accounted  for under  the asset and  liability  method.
      Deferred  taxes  are  recognized  for the  estimated  future  tax  effects
      attributable to "temporary  differences"  between the financial  statement
      carrying  amounts of existing assets and liabilities and their  respective
      tax bases.  Deferred tax assets and liabilities are measured using enacted
      tax rates expected to apply to taxable income in future years.  The effect
      on deferred tax assets and liabilities of an enacted change in tax laws or
      rates is  recognized in income tax expense in the period that includes the
      enactment date of the change.

      Deferred tax liabilities are recognized for all temporary differences that
      will result in future taxable  income.  Deferred tax assets are recognized
      for all temporary  differences  that will result in future tax deductions,
      subject to  reduction  of the assets by a valuation  allowance  in certain
      circumstances.  This  valuation  allowance is  recognized  if, based on an
      analysis of  available  evidence,  management  determines  that it is more
      likely than not that a portion or all of the  deferred tax assets will not
      be realized.  The valuation  allowance is subject to  adjustment  based on
      changes in  circumstances  that  affect  management's  judgment  about the
      realizability  of the  deferred  tax  assets.  Adjustments  to increase or
      decrease the valuation allowance are charged or credited, respectively, to
      income tax expense.

      Bank-Owned Life Insurance

      The cash surrender value of bank-owned life insurance ("BOLI") is recorded
      on the Company's  consolidated balance sheet as an asset and the change in
      the cash surrender value is recorded as non-interest income. The amount by
      which any death benefits  received exceeds a policy's cash surrender value
      is recorded in non-interest  income at the time of receipt.  BOLI policies
      were purchased in  consideration  of the Company's  obligations  under the
      supplemental  executive retirement plan and the Directors Retirement Plan,
      which are described in Note 9.


                                       28
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


      Stock-Based Compensation Plans

      Compensation expense is recognized for the ESOP equal to the fair value of
      shares  committed to be released for allocation to  participant  accounts.
      Any difference between the fair value at that time and the ESOP's original
      acquisition   cost  is  charged  or  credited  to   stockholders'   equity
      (additional paid-in capital).  The cost of unallocated ESOP shares (shares
      not yet committed to be released) is deducted from stockholders' equity.

      The  Company's  stockholders  approved  the Sound  Federal  Bancorp,  Inc.
      Incentive  Stock  Benefit  Plan (the "ISB Plan") in February  2004.  Among
      other things, the ISB Plan authorizes the grant of stock options and stock
      awards.  The Sound  Federal  Bancorp  1999 Stock  Option  Plan (the "Stock
      Option  Plan") and the  Recognition  and  Retention  Plan (the "RRP") were
      approved by  stockholders  in October 1999. Each plan is described in Note
      9. The Company  accounts for  stock-based  compensation in accordance with
      Accounting  Principles Board ("APB") Opinion No. 25,  Accounting for Stock
      Issued   to   Employees,   and   related   Interpretations.   Accordingly,
      compensation  expense is not  recognized  for fixed  stock  options if the
      exercise price of the option equals the fair value of the underlying stock
      on the date of the grant.  The fair value of shares  awarded under the ISB
      and  RRP,   measured  at  the  grant  date,   is  recognized  as  unearned
      compensation  (a deduction  from  stockholders'  equity) and  amortized to
      compensation expense as the shares become vested.

      SFAS No. 123, Accounting for Stock-Based Compensation,  encourages the use
      of a fair-value-based method of accounting for employee stock compensation
      plans, but permits the continued use of the  intrinsic-value-based  method
      of  accounting  prescribed  by APB Opinion No. 25. Under SFAS No. 123, the
      grant-date  fair value of options is  recognized as  compensation  expense
      over the vesting period.  The Company has elected to continue to apply APB
      Opinion No. 25 and disclose the pro forma information required by SFAS No.
      123. Had stock-based  compensation  expense been recognized for all of the
      Company's  stock  option  grants  in  accordance  with SFAS No.  123,  the
      Company's net income and earnings per common share would have been reduced
      to the following pro forma amounts for the years ended March 31:

<TABLE>
<CAPTION>

                                                                    2004           2003            2002
                                                                -------------  -------------   -------------
                                                                   (In thousands, except per share data)

<S>                                                           <C>            <C>             <C>
Net income, as reported                                       $      6,618   $      8,526    $      5,770
Add stock award expense included in reported
   net income, net of related tax effects                              242             89              93
Deduct stock award and stock option expense determined
   under the fair-value-based method, net of
   related tax effects                                                (768)          (168)           (179)
                                                              -------------  -------------   -------------
Pro forma net income                                          $      6,092   $      8,447    $      5,684
                                                              =============  =============   =============

Earnings per share:

   Basic, as reported                                         $       0.54   $       0.67    $       0.45
                                                              =============  =============   =============
   Basic, pro forma                                           $       0.49   $       0.66    $       0.44
                                                              =============  =============   =============

   Diluted, as reported                                       $       0.52   $       0.65    $       0.44
                                                              =============  =============   =============
   Diluted, pro forma                                         $       0.48   $       0.64    $       0.44
                                                              =============  =============   =============

</TABLE>


      The per-share  fair value of stock options was estimated on the grant date
      using the  Black-Scholes  option pricing  model.  Stock option grants were
      made in fiscal 2004 (none in fiscal 2003 and 2002).  The fair value of the
      options  granted in fiscal  2004 was $4.19 per share,  computed  using the
      Black-Scholes option pricing model and the following assumptions: dividend
      yield of 1.6%,  volatility rate of approximately  21%,  risk-free interest
      rate of 4.7% and expected option life of 7 years.


                                       29
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


      Earnings Per Share

      Basic  earnings  per share  ("EPS") is  computed  by  dividing  net income
      applicable to common stock by the weighted average number of common shares
      outstanding  for the period.  Unearned  stock  awards are not  included in
      outstanding shares until they become vested.  Diluted EPS is computed in a
      manner  similar to basic EPS,  except that the weighted  average number of
      common shares outstanding is increased to include the number of additional
      common shares that would have been outstanding if all potentially dilutive
      common  shares  (such as stock  options and  unearned  stock  awards) were
      issued or became  vested  during the  reporting  period.  For  purposes of
      computing  both  basic  and  diluted  EPS,   outstanding   shares  exclude
      unallocated  ESOP  shares that have not been  committed  to be released to
      participants.

      Segment Information

      SFAS No. 131,  Disclosures  about  Segments of an  Enterprise  and Related
      Information,   requires  public  companies  to  report  certain  financial
      information about significant  revenue-producing  segments of the business
      for  which  such  information  is  available  and  utilized  by the  chief
      operating decision maker. As a community-oriented  financial  institution,
      substantially all of the Company's operations involve the delivery of loan
      and deposit products to customers.  Management  makes operating  decisions
      and assesses  performance  based on an ongoing  review of these  community
      banking operations,  which constitute the Company's only operating segment
      for financial reporting purposes.


                                       30
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


(3)   Securities Available for Sale

      The following are summaries of securities available for sale:



<TABLE>
<CAPTION>
                                                          Gross Unrealized
                                             Amortized    -----------------       Fair
                                                Cost      Gains     Losses        Value
                                              --------    ------    -------     --------
                                                           (In thousands)
<S>                                           <C>         <C>       <C>         <C>
March 31, 2004
--------------
Pass-through securities guaranteed by:
    Ginnie Mae                                $ 89,213    $  464    $  (349)    $ 89,328
    Fannie Mae                                  44,359       426       (133)      44,652
    Freddie Mac                                 18,626       241        (28)      18,839
Collateralized mortgage obligations
  guaranteed by:

    Ginnie Mae                                   8,815        27        (38)       8,804
    Fannie Mae                                  36,824       127       (316)      36,635
    Freddie Mac                                 57,350       426       (181)      57,595
                                              --------    ------    -------     --------
          Total mortgage-backed securities     255,187     1,711     (1,045)     255,853
U.S. Government and agency securities           59,546       277        (42)      59,781
Municipal securities                               854       148         --        1,002
Mutual fund shares                              21,000       177        (83)      21,094
                                              --------    ------    -------     --------
          Total securities                    $336,587    $2,313    $(1,170)    $337,730
                                              ========    ======    =======     ========
March 31, 2003
--------------
Pass-through securities guaranteed by:
    Ginnie Mae                                $102,010    $1,388    $   (36)    $103,362
    Fannie Mae                                  32,502       523        (28)      32,997
    Freddie Mac                                 22,781       522        (10)      23,293
Collateralized mortgage obligations
  guaranteed by:

    Ginnie Mae                                   8,615        98         --        8,713
    Fannie Mae                                  16,243       205        (29)      16,419
    Freddie Mac                                 27,478       356       (134)      27,700
                                              --------    ------    -------     --------
          Total mortgage-backed securities     209,629     3,092       (237)     212,484
U.S. Government and agency securities           59,075       348        (14)      59,409
Municipal securities                               849       126         --          975
Mutual fund shares                              22,000       180         --       22,180
                                              --------    ------    -------     --------
          Total securities                    $291,553    $3,746    $  (251)    $295,048
                                              ========    ======    =======     ========

</TABLE>


      Debt  securities  available  for  sale at  March  31,  2004  consisted  of
      adjustable  rate securities and fixed rate securities with amortized costs
      of $141.1 million and $174.5 million, and weighted average yields of 2.92%
      and 3.60%,  respectively.  Debt securities available for sale at March 31,
      2003 consisted of adjustable  rate  securities  and fixed rate  securities
      with amortized  costs of $154.0 million and $115.5  million,  and weighted
      average yields of 4.54% and 4.22%, respectively.

      There  were no sales of  securities  available  for sale  during the years
      ended March 31, 2004, 2003 and 2002.


                                       31
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


      The following table  summarizes,  for all securities in an unrealized loss
      position at March 31, 2004, the aggregate fair values and gross unrealized
      losses  by  length  of time  those  securities  had  been in a  continuous
      unrealized loss position:

<TABLE>
<CAPTION>
                                                Less Than 12 Months   12 Months or Longer          Total
-----------------------------------------------------------------------------------------------------------------
                                                 Fair     Unrealized    Fair    Unrealized    Fair     Unrealized
                                                 Value      Losses      Value      Losses     Value     Losses
-----------------------------------------------------------------------------------------------------------------
Pass-through securities guaranteed by:
<S>                                            <C>         <C>         <C>         <C>      <C>         <C>
     Ginnie Mae                                $ 53,437    $  (340)    $  355      $ (9)    $ 53,792    $  (349)
     Fannie Mae                                  12,937       (116)     1,539       (17)      14,476       (133)
     Freddie Mac                                  4,166        (28)         -         -        4,166        (28)
Collateralized mortgage obligations
  guaranteed by:
     Ginnie Mae                                   4,126        (38)         -         -        4,126        (38)
     Fannie Mae                                  19,813       (316)         -         -       19,813       (316)
     Freddie Mac                                 26,936       (181)         -         -       26,936       (181)
U.S. Government and agency securities            11,839        (31)     2,434       (11)      14,273        (42)
Mutual fund shares                               15,917        (83)         -         -       15,917        (83)
-----------------------------------------------------------------------------------------------------------------
     Total temporarily-impaired securities     $149,171    $(1,133)    $4,328      $(37)    $153,499    $(1,170)
=================================================================================================================
</TABLE>


      The Company invests primarily in mortgage-backed  securities guaranteed by
      Ginnie Mae,  Fannie Mae and Freddie  Mac, as well as U.S.  Government  and
      Agency securities.  The unrealized losses at March 31, 2004 were caused by
      increases  in  market  yields  subsequent  to  purchase.   There  were  no
      individual  securities with unrealized losses that were significant dollar
      amounts at March 31, 2004. A total of 154 securities  were in a continuous
      unrealized loss position for less than 12 months, and 19 securities for 12
      months or longer. There were no debt securities past due or securities for
      which the  Company  currently  believes  it is not  probable  that it will
      collect  all  amounts  due  according  to  the  contractual  terms  of the
      security.  Because the Company  has the  ability to hold  securities  with
      unrealized  losses  until  a  market  price  recovery  (which,   for  debt
      securities  may be until  maturity),  the Company did not  consider  these
      securities to be other-than-temporarily impaired at March 31, 2004.

      The  following is a summary of the  amortized  cost and fair value of debt
      securities  available  for sale at March 31, 2004,  with amounts  shown by
      remaining  term  to  contractual   maturity  for  categories   other  than
      mortgage-backed  securities.  Actual  maturities  may  differ  from  these
      amounts  because  certain  issuers  have the right to call or redeem their
      obligations prior to contractual maturity.


                                                     Amortized           Fair
                                                        Cost             Value
                                                      --------          --------
                                                            (In thousands)

      Mortgage-backed securities                      $255,187          $255,853
      U.S. Government and agency
        securities due:
        Over one to five years                          42,491            42,657
        Over five to ten years                           6,157             6,168
        Over ten years                                  10,898            10,956
      Municipal securities due:

        Over five to ten years                             118               138
        Over ten years                                     736               864
                                                      --------          --------
        Total debt securities                         $315,587          $316,636
                                                      ========          ========


                                       32
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


(4)   Loans

      Loans are summarized as follows:

                                                              March 31,
                                                      --------------------------
                                                        2004             2003
                                                           (In thousands)
      Mortgage loans:
         Residential properties:
             One-to-four family                       $ 375,714       $ 343,608
             Home equity lines of credit                 35,185          44,364
             Multi-family                                 8,472           7,118
         Commercial properties                           43,153          27,866
         Construction loans                              13,723           4,117
         Deferred loan origination costs, net             1,524           1,502
                                                      -------------------------
                                                        477,771         428,575
                                                      -------------------------
      Consumer loans:
         Secured personal loans                           2,293           1,139
         Other loans                                        305             412
      Commercial loans                                      798               -
                                                      -------------------------
                                                          3,396           1,551
                                                      -------------------------
            Total loans                                 481,167         430,126

      Allowance for loan losses                          (2,712)         (2,442)
                                                      -------------------------
            Total loans, net                          $ 478,455       $ 427,684
                                                      =========================


      Gross  principal  balances at March 31, 2004 consisted of fixed rate loans
      of $349.5  million  and  adjustable  rate  loans of $130.1  million,  with
      weighted average yields of 6.25% and 5.05%,  respectively.  Fixed rate and
      adjustable  rate loans at March 31, 2003 totaled  $344.0 million and $84.6
      million, with weighted average yields of 7.00% and 5.75%, respectively.

      The  Company  primarily  originates  mortgage  loans  secured by  existing
      single-family   residential   properties.   The  Company  also  originates
      multi-family and commercial mortgage loans, construction loans, commercial
      loans and consumer loans. Substantially all of the mortgage loan portfolio
      is secured by real estate properties  located in Westchester  County,  New
      York,  and  Fairfield  County,  Connecticut.  The ability of the Company's
      borrowers to make principal and interest payments is dependent upon, among
      other things,  the level of overall economic  activity and the real estate
      market  conditions  prevailing within the Company's  concentrated  lending
      area.


                                       33
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


      Activity in the allowance for loan losses is summarized as follows for the
      years ended March 31:


                                             2004           2003          2002
                                            -------       -------       -------
                                                      (In thousands)

      Balance at beginning of year          $ 2,442       $ 2,221       $ 2,047
      Provision for loan losses                 275           275           175
      Charge-offs                                (5)          (54)          (15)
      Recoveries                                  -             -            14
                                            ------------------------------------
      Balance at end of year                $ 2,712       $ 2,442       $ 2,221
                                            ====================================




      The principal balances of nonaccrual loans past due ninety days or more at
      March 31 are as follows:


                                                     2004        2003       2002
                                                    ------       ----       ----
                                                           (In thousands)

      Mortgage loans:
         One-to-four family                         $1,359       $449       $690
         Home equity lines of credit                   617         18         65
      Consumer loans                                     5         10          -
                                                    ----------------------------
         Total nonaccrual loans                     $1,981       $477       $755
                                                    ============================



      Gross  interest  income  that would have been  recorded  if the  foregoing
      nonaccrual loans had remained current in accordance with their contractual
      terms totaled $124,000,  $43,000 and $67,000 for the years ended March 31,
      2004,  2003 and 2002,  respectively,  compared to interest income actually
      recognized of $71,000, $20,000 and $20,000, respectively.

      The  Company   had  no  impaired   loans  at  March  31,  2004  and  2003,
      respectively,  within the scope of SFAS No. 114,  Accounting  by Creditors
      for Impairment of a Loan. The Company determines the need for an allowance
      for loan  impairment  under  SFAS No.  114 on a  loan-by-loan  basis.  The
      average recorded investment in impaired loans was $0, $54,000 and $105,000
      for the years  ended  March 31,  2004,  2003 and  2002,  respectively.  No
      interest  income was  recognized  on impaired  loans while such loans were
      considered to be impaired.

      Provisions  for losses and other  activity in the  allowance for losses on
      real  estate  owned were  insignificant  during the years  ended March 31,
      2004, 2003 and 2002.


                                       34
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


(5)   Premises and Equipment

      A summary of premises and equipment at March 31 follows:



                                                            2004          2003
                                                          --------      -------
                                                              (In thousands)

      Land                                                $    592      $   592
      Buildings and improvements                             4,313        4,313
      Leasehold improvements                                 2,364        1,817
      Furniture and equipment                                2,842        2,627
                                                          ----------------------
                                                            10,111        9,349

      Less accumulated depreciation and amortization        (4,481)      (3,882)
                                                          ----------------------
             Premises and equipment, net                  $  5,630      $ 5,467
                                                          ======================



(6)   Deposits

      The following is a summary of deposit balances and weighted average stated
      interest rates at March 31:


                                                 2004               2003
      --------------------------------------------------------------------------
                                             Rate     Amount    Rate    Amount
      --------------------------------------------------------------------------
                                                   (Dollars in thousands)

      Savings and club accounts              0.51%   $148,231   0.81%   $136,846
      Money market accounts                  0.73      47,338   1.09      45,331
      NOW accounts                           0.24      54,616   0.46      50,912
      Commercial checking                       -      12,404      -       7,457
      --------------------------------------------------------------------------
      Total                                  0.47     262,589   0.76     240,546
      --------------------------------------------------------------------------

      Certificates of deposit by remaining
       term to contractual maturity:
        Within one year                      1.87     321,473   2.33     264,353
        After one but within three years     2.91      97,270   2.80      74,772
        After three years                    4.24      26,998   4.49      24,589
      --------------------------------------------------------------------------
      Total                                  2.24     445,741   2.57     363,714
      --------------------------------------------------------------------------
      Total deposits                         1.58%   $708,330   1.85%   $604,260
      ==========================================================================


      Certificates  of deposit  with  denominations  of $100,000 or more totaled
      $108.8 million and $78.1 million at March 31, 2004 and 2003, respectively.


                                       35
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


      Interest  expense on deposits is summarized as follows for the years ended
      March 31:

                                                 2004        2003         2002
                                               -------      -------      -------
                                                        (In thousands)

      Savings and club accounts                $   856      $ 1,185      $ 1,609
      Money market and NOW accounts                547          725        1,034
      Certificates of deposit                    9,601       10,098       14,760
                                               -------      -------      -------
            Total                              $11,004      $12,008      $17,403
                                               =======      =======      =======



(7)   Borrowings

      Borrowings  under  securities  repurchase  agreements  with  the  FHLB are
      summarized as follows:


                                                                  March 31,
                                               Coupon     ----------------------
       Maturity Date                             Rate        2004         2003
       -------------                             ----        ----         ----
                                                          (Dollars in thousands)

      January 2008 (1)                           5.42%     $10,000      $10,000
      December 2008 (1)                          4.72        5,000        5,000
      March 2004                                 3.57           --        7,000
      March 2005                                 4.22        6,000        6,000
      March 2006                                 2.27        7,000        7,000
      March 2007                                 2.65        7,000           --
                                                           -------      -------
      Total borrowings                                     $35,000      $35,000
                                                           =======      =======
      Weighted average interest rate                         3.93%        4.11%
      Accrued interest payable                             $   131      $   149


      (1)   Callable quarterly.



      The securities  transferred to the FHLB in repurchase  agreements  include
      U.S.  Government and agency securities and  mortgage-backed  securities of
      $14.1  million and $23.9  million,  respectively,  at March 31, 2004 ($9.7
      million  and $19.4  million,  respectively,  at March 31,  2003).  Accrued
      interest  receivable on these securities  totaled $225,000 and $206,000 at
      March 31, 2004 and 2003, respectively.

      In  addition  to  securities  repurchase  agreements,  the  Bank  may have
      outstanding  borrowings from the FHLB of up to approximately $79.8 million
      at March 31, 2004, in a combination of term advances and overnight  funds.
      Borrowings  are  secured by the Bank's  investment  in FHLB stock and by a
      blanket security  agreement.  This agreement requires the Bank to maintain
      as  collateral  certain  qualifying  assets  (such as  one-to-four  family
      residential  mortgage loans) with a fair value, as defined, at least equal
      to 110% of any outstanding advances.


                                       36
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


(8)   Income Taxes

      Income tax expense  consists  of the  following  components  for the years
      ended March 31:

                                           2004            2003            2002
                                          ------          ------          ------
                                                     (In thousands)
      Federal:
           Current                        $3,627          $3,553          $2,722
           Deferred                           11           1,033             252
                                          ------          ------          ------
                                           3,638           4,586           2,974
                                          ------          ------          ------
      State:
           Current                           575             436             374
           Deferred                           21             197              28
                                          ------          ------          ------
                                             596             633             402
                                          ------          ------          ------
      Total:
           Current                         4,202           3,989           3,096
           Deferred                           32           1,230             280
                                          ------          ------          ------
                                          $4,234          $5,219          $3,376
                                          ======          ======          ======


      The following is a  reconciliation  of expected  income taxes (computed at
      the applicable  Federal statutory tax rate) to the Company's actual income
      tax expense for the years ended March 31:


                                              2004          2003        2002
                                             -------      -------      -------
                                                  (Dollars in thousands)

      Taxes at Federal statutory rate        $ 3,690      $ 4,811      $ 3,110
      State tax expense, net of Federal
         tax benefit                             390          411          265
      Nondeductible ESOP expense                 248           72           18
      Other reconciling items, net               (94)         (75)         (17)
                                             -------      -------      -------
      Actual income tax expense              $ 4,234      $ 5,219      $ 3,376
                                             =======      =======      =======
      Effective income tax rate                39.0%        38.0%        36.9%




                                       37
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


      The tax effects of temporary  differences  that give rise to the Company's
      deferred tax assets and liabilities are as follows at March 31:


                                                                 2004      2003
                                                               -------    ------
                                                                 (In thousands)
      Deferred tax assets:
           Allowance for loan losses                           $ 1,085    $  990
           Deferred compensation                                   494       368
           Director retirement plan                                259       219
           Accrued pension costs                                   133       780
           Purchase accounting adjustments on loans
             and securities                                        125       335
           Other deductible temporary differences                   50        26
                                                               -------    ------
                 Total deferred tax assets                       2,146     2,718
                                                               -------    ------
      Deferred tax liabilities:
           Prepaid pension costs                                 1,015        --
           Deferred loan costs                                     609       646
           Net unrealized gain on securities available
             for sale                                              441     1,426
           Purchase accounting adjustment on buildings             151       159
           Other taxable temporary differences                      --        95
                                                               -------    ------
                 Total deferred tax liabilities                  2,216     2,326
                                                               -------    ------
      Net deferred tax (liability) asset                       $   (70)   $  392
                                                               =======    ======



      In assessing the realizability of the Company's total deferred tax assets,
      management  considers whether it is more likely than not that some portion
      or all of those  assets  will not be  realized.  Based  upon  management's
      consideration of historical and anticipated future pre-tax income, as well
      as the  reversal  period for the items  giving  rise to the  deferred  tax
      assets and liabilities,  a valuation allowance for deferred tax assets was
      not considered necessary at March 31, 2004 and 2003.

      As a thrift institution,  the Bank is subject to special provisions in the
      Federal and New York State tax laws  regarding  its allowable tax bad debt
      deductions   and  related  tax  bad  debt   reserves.   These   deductions
      historically  were determined  using methods based on loss experience or a
      percentage of taxable income.  Tax bad debt reserves  represent the excess
      of allowable deductions over actual bad debt losses, and include a defined
      base-year  amount.  SFAS No. 109  requires  recognition  of  deferred  tax
      liabilities with respect to reserves in excess of the base-year amount, as
      well as any  portion of the  base-year  amount  that is expected to become
      taxable (or "recaptured") in the foreseeable future.

      The Bank's  base-year  tax bad debt  reserves  totaled  $9.0  million  for
      Federal tax  purposes at both March 31, 2004 and 2003,  and $12.3  million
      and  $10.9  million  for State tax  purposes  at March 31,  2004 and 2003,
      respectively.  In accordance  with SFAS No. 109,  deferred tax liabilities
      have not been recognized with respect to these reserves, since the Company
      does not expect that these amounts will become taxable in the  foreseeable
      future.  Under the tax laws, events that would result in taxation of these
      reserves  include (i)  redemptions  of the Bank's stock or certain  excess
      distributions by the Bank to the Holding Company,  and (ii) failure of the
      Bank to maintain a specified  qualifying assets ratio or meet other thrift
      definition  tests  for New  York  State  tax  purposes.  The  unrecognized
      deferred tax  liabilities  with respect to the Bank's  base-year  reserves
      totaled  approximately $3.9 million and $3.8 million at March 31, 2004 and
      2003, respectively.



                                       38
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements





(9)   Employee Benefit and Stock-Based Compensation Plans

      Pension Plans

      The Company maintains two  non-contributory  defined benefit pension plans
      that cover  substantially all full-time employees who meet certain age and
      service  requirements.  Benefits  are  based  on the  employee's  years of
      accredited  service and  average  compensation  for the three  consecutive
      years that produce the highest average. The Company's funding policy is to
      contribute  the  amounts  required  by  applicable  regulations,  although
      additional  amounts  may be  contributed  from time to time.  The  Company
      expects to contribute $192,000 to the plans in fiscal 2005.

      Plan assets are invested in the Guaranteed  Deposit Account ("GDA") of the
      General Account at the Connecticut General Life Insurance Company. The GDA
      provides a guarantee from  Connecticut  General Life Insurance  Company of
      invested principal amounts and accumulated  credited interest.  The GDA is
      invested primarily in publicly-traded and privately-placed debt securities
      and  mortgage  loans.  The GDA also  invests  in real  estate  and  equity
      investments.  The investment goal is to achieve a long-term rate of return
      sufficient  to provide for benefit  obligations,  including  the effect of
      future  compensation  levels,  while  minimizing  investment risks such as
      credit risk and interest rate risk. The expected  long-term rate of return
      on plan assets used to determine  net periodic  benefit  expense was based
      principally on the long-term historical yield earned on the GDA.


                                       39
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


      The following table  summarizes  changes in the plans'  projected  benefit
      obligations  and the fair  value of the  plans'  assets.  The  table  also
      provides  a  reconciliation  of  the  funded  status  to  the  net  amount
      recognized in the consolidated balance sheets,  followed by the components
      of the net amount recognized.

<TABLE>
<CAPTION>
                                                                          2004       2003
                                                                        --------    -------
                                                                          (In thousands)

<S>                                                                     <C>         <C>
      Change in projected benefit obligations:
           Beginning of year                                            $  9,807    $ 8,442
           Service cost                                                      341        259
           Interest cost                                                     623        589
           Actuarial loss                                                    147        914
           Plan amendments                                                    --         61
           Benefits paid                                                    (467)      (458)
                                                                        --------    -------
           End of year                                                    10,451      9,807
                                                                        --------    -------
      Change in fair value of plan assets:
           Beginning of year                                               7,098      6,655
           Actual return on plan assets                                      746        369
           Employer contributions                                          2,862        532
           Benefits paid                                                    (467)      (458)
                                                                        --------    -------
           End of year                                                    10,239      7,098
                                                                        --------    -------
      Funded status                                                         (212)    (2,709)
      Employer contributions after the measurement date (December 31)        488      2,563
      Unrecognized net actuarial loss (1)                                  2,227      2,236
      Unrecognized past service liability                                     44         50
                                                                        --------    -------
      Net amount recognized at end of year                              $  2,547    $ 2,140
                                                                        ========    =======
      Amounts recognized in the consolidated balance sheets:

           Prepaid (accrued) pension cost                               $  2,547    $(1,375)
           Intangible asset                                                   --         47
           Pre-tax charge to accumulated other comprehensive income           --      3,468
                                                                        --------    -------
           Net amount recognized in the consolidated balance sheets     $  2,547    $ 2,140
                                                                        ========    =======
</TABLE>


      (1)  Unrecognized  net actuarial  gains and losses in excess of 10% of the
      greater  of the  projected  benefit  obligation  or the fair value of plan
      assets are amortized over the average  remaining  service period of active
      plan participants.

      The plans'  accumulated  benefit  obligations  were $9.1  million and $8.5
      million at March 31, 2004 and 2003, respectively.


                                       40
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


      The  components of the net periodic  pension  expense and the  significant
      actuarial assumptions were as follows:



<TABLE>
<CAPTION>
                                                                 2004       2003      2002
                                                                 -----     -----     -----
                                                                   (Dollars in thousands)

<S>                                                              <C>       <C>       <C>
      Service cost                                               $ 341     $ 259     $ 190
      Interest cost                                                623       589       641
      Expected return on plan assets                              (700)     (600)     (651)
      Recognized net actuarial loss                                111        59        53
      Amortization of prior service cost and net
           transition obligation                                     5        10         7
      Settlement charge                                             --        --        16
                                                                 -----     -----     -----
           Net periodic pension expense                          $ 380     $ 317     $ 256
                                                                 =====     =====     =====

      Weighted-average  assumptions used to determine
        projected benefit obligations at
        March 31:

           Discount rate                                          6.25%     6.50%     7.00%
           Rate of compensation increase                          3.50%     4.00%     4.25%

      Weighted-average  assumptions used to determine net
        periodic benefit expense for the years ended March 31:

           Discount rate                                          6.50%     7.00%     7.25%
           Expected long-term rate of
                return on plan assets                             8.50%     9.00%     9.00%
           Rate of compensation increase                          4.00%     4.25%     4.75%

</TABLE>

      The Company also has a supplemental  executive  retirement plan which is a
      non-qualified  plan  providing  benefits  to certain  key  employees.  The
      supplemental  benefits  represent the  difference  between the pension and
      ESOP  benefits  the  executive  would be entitled  to receive  under those
      plans,  without considering the applicable  limitations under the tax law,
      and the actual benefits after  considering such  limitations.  The accrued
      liability for the supplemental plan was $333,000 at March 31, 2004 and the
      related expense was $38,000 for the year then ended.

      Director Retirement Plan

      The Company maintains a non-qualified,  unfunded Director  Retirement Plan
      which is an amendment  and  restatement  of the former  Director  Emeritus
      Plan. Under the Director Retirement Plan, any person who was a director on
      January 1, 2004,  who  retires or dies after age 70 and who  completes  15
      years of continuous  service as a director  becomes  entitled to an annual
      retirement  benefit for the longer of 20 years or his/her lifetime,  equal
      to the amount of annual fees paid for attendance at regular  monthly board
      meetings during the preceding  twelve months plus the amount of any annual
      stipend paid to such director in that year. The Director  Retirement  Plan
      also provides for benefits in the event of early retirement or disability.
      In the event of a change in control, directors will be credited with years
      of service as if they had remained members of the Board of Directors until
      age 70 and be entitled  to benefits  payable in a lump sum, at the time of
      the change in control.  A retired  director will receive the present value
      of the  remaining  benefit,  paid in a lump sum at the time of a change in
      control.

      Under the former Director  Emeritus Plan,  benefit  payments would be made
      for a period not to exceed 15 years or to age 85 or until the death of the
      director  emeritus,  whichever  came first.  Directors  would  qualify for
      emeritus



                                       41
<PAGE>


                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

      status upon attaining age 70 with at least 15 years of board service.  The
      effect of adopting the Director  Retirement Plan during fiscal 2004 was an
      increase of $1.1 million in the projected benefit obligation.

      The following table  summarizes  changes in the plan's  projected  benefit
      obligation.  The table also provides a reconciliation of the funded status
      to the accrued benefit cost recognized in the consolidated balance sheets.


                                                              2004        2003
                                                            -------      ------
                                                              (In thousands)

      Change in projected benefit obligation:
           Beginning of year                                $   796      $ 741
           Service cost                                          11          9
           Interest cost                                         48         52
           Actuarial (gain) loss                               (261)        37
           Plan amendments                                    1,082         --
           Benefits paid                                        (43)       (43)
                                                            -------      -----
           End of year                                        1,633        796

      Fair value of plan assets                                  --         --
                                                            -------      -----
      Funded status                                          (1,633)      (796)
      Unrecognized net actuarial loss                          (325)       (64)
      Unrecognized prior service cost                         1,398        395
                                                            -------      -----
      Accrued benefit cost at end of year                   $  (560)     $(465)
                                                            =======      =====




      The  components of the net periodic  expense for the plan and the discount
      rates used to determine the projected benefit obligation were as follows:

                                                    2004       2003        2002
                                                    ----      -----       -----
                                                      (Dollars in thousands)

      Service cost                                  $ 11      $   9       $  10
      Interest cost                                   48         52          50
      Recognized net actuarial loss                   --         (3)         (6)
      Amortization of prior service cost              79         79          79
                                                    ----      -----       -----
           Net periodic expense                     $138      $ 137       $ 133
                                                    ====      =====       =====
      Discount rate used to determine the
        projected benefit obligation at March 31    5.75%      6.25%       7.25%


      Savings Plan

      The Company maintains an employee savings plan under Section 401(k) of the
      Internal Revenue Code.  Eligible  employees are able to make contributions
      to the plan of up to 10% of their compensation. Prior to February 1, 1999,
      the Company made matching  contributions equal to 50% of the participant's
      contributions  to the plan. The Company ceased its matching  contributions
      effective February 1, 1999.


                                       42
<PAGE>
                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


      Employee Stock Ownership Plan

      In connection with the Initial Offering,  the Company  established an ESOP
      for eligible employees who meet certain age and service  requirements.  In
      fiscal  1999,  the ESOP  borrowed  approximately  $1.9  million from Sound
      Federal  Bancorp and used the funds to purchase  531,563  shares of common
      stock  sold in the  Offering.  This  loan has a  10-year  term  and  bears
      interest at the prime rate.  In fiscal 2003,  the ESOP  purchased  622,458
      shares of common stock in the second-step  conversion with the proceeds of
      a $6.2 million  loan from the Company,  which has a 20-year term and bears
      interest  at  6.0%.  The Bank  makes  periodic  contributions  to the ESOP
      sufficient to satisfy the debt service requirements of the loans. The ESOP
      uses  these  contributions  and  any  dividends  received  by the  ESOP on
      unallocated  shares to make principal and interest  payments on the loans,
      which had a total  unpaid  principal  balance of $6.8 million at March 31,
      2004 and $7.2 million at March 31, 2003.

      Shares  purchased  by the ESOP are held in a suspense  account by the plan
      trustee until allocated to participant accounts.  Shares released from the
      suspense  account  are  allocated  to  participants  on the basis of their
      relative  compensation  in the  year of  allocation.  Participants  become
      vested in the allocated shares over a period not to exceed five years. Any
      forfeited  shares  are  allocated  to  other   participants  in  the  same
      proportion as contributions.

      ESOP expense was $1.2  million,  $532,000 and $246,000 for the years ended
      March 31, 2004, 2003 and 2002,  respectively.  The cost of the ESOP shares
      that  have  not  yet  been  allocated  or  committed  to  be  released  to
      participants  is deducted from  stockholders'  equity  (782,944 shares and
      867,222 shares at March 31, 2004 and 2003,  respectively).  The fair value
      of these  shares was  approximately  $11.5  million at March 31,  2004 and
      $10.9 million at March 31, 2003.

      Stock Options

      In October  1999,  the  stockholders  approved  the Stock  Option Plan and
      option grants were made for 583,048  shares at an exercise price of $3.298
      per  share.   These  options  have  a  10-year  term  and  may  be  either
      non-qualified  stock options or incentive stock options.  The options vest
      at a rate of 20% on  each  of  five  annual  vesting  dates.  Each  option
      entitles  the holder to purchase  one share of common stock at an exercise
      price equal to the fair market value of the stock on the grant date.

      On February 4, 2004,  the  stockholders  approved the ISB Plan. A total of
      700,266 shares of authorized  but unissued  common stock were reserved for
      issuance  under this plan. On February 5, 2004,  initial  grants were made
      under the ISB Plan for 665,253  shares at an exercise  price of $15.20 per
      share.  Options have a 10-year term and may be either  non-qualified stock
      options or incentive  stock options.  The options vest at a rate of 20% on
      each of five annual  vesting  dates.  Each option  entitles  the holder to
      purchase one share of common stock at an exercise  price equal to the fair
      market value of the stock on the grant date.

      Stock option activity is summarized below:


<TABLE>
<CAPTION>
                                        Options Outstanding             Options Exercisable
                                 ------------------------------     ---------------------------
                                               Weighted Average                Weighted Average
                                   Number       Exercise Price       Number     Exercise Price
                                 ---------     ----------------     ---------------------------
<S>                              <C>                <C>             <C>             <C>
      At March 31, 2001            583,048          $ 3.298         233,219         $3.298
      Exercised                    (22,133)           3.298
                                 ---------
      At March 31, 2002            560,915            3.298         348,723         $3.298
      Exercised                    (30,433)           3.298
                                 ---------
      At March 31, 2003            530,482            3.298         428,818         $3.298
      Granted                      665,253           15.200
      Exercised                    (81,185)           3.298
                                 ---------
      At March 31, 2004          1,114,550           10.402         582,347         $6.014
                                 =========
</TABLE>



                                       43
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


      Additional   information   for  outstanding  and  exercisable  options  at
      March 31, 2004 follows:

                                   Options              Options
          Exercise Price         Outstanding          Exercisable
          --------------         -----------          -----------
            $ 3.298                 449,297             449,297
             15.200                 665,253             133,050
                                  ---------             -------
                                  1,114,550             582,347
                                  =========             =======

      Stock Awards

      The  Company  granted  stock  awards  pursuant to the RRP  established  in
      October 1999 and the ISB Plan established in February 2004. The purpose of
      both plans is to provide  officers  and  directors  of the Company  with a
      proprietary  interest  in the Company in a manner  designed  to  encourage
      their  retention.  Through  March 31, 2004, a total of 389,037 and 291,524
      shares have been  awarded  under the ISB Plan and RRP,  respectively.  The
      awards vest at a rate of 20% on each of five  annual  vesting  dates.  The
      shares  awarded  pursuant to the RRP have fully vested.  The first vesting
      date for  shares  awarded  under  the ISB Plan is in  November  2004.  The
      expense  recognized  for stock awards  amounted to $395,000,  $144,000 and
      $148,000 for the years ended March 31, 2004, 2003 and 2002, respectively.

(10)  Commitments and Contingencies

      Off-Balance Sheet Financial Instruments

      The Company's  off-balance  sheet financial  instruments at March 31, 2004
      and 2003 were limited to loan origination commitments of $34.0 million and
      $27.4 million, respectively, and unused lines of credit (principally fixed
      rate home equity  lines)  extended to customers of $40.9 million and $39.5
      million, respectively. Substantially all of these commitments and lines of
      credit  have been  provided  to  customers  within the  Company's  primary
      lending area  described in Note 4. Loan  origination  commitments at March
      31, 2004 consisted of adjustable rate and fixed rate  commitments of $23.0
      million and $11.0 million,  respectively,  with weighted average yields of
      4.63% and 6.07%,  respectively.  Loan origination commitments at March 31,
      2003  consisted  of  adjustable  rate and fixed rate  commitments  of $9.8
      million and $17.6 million,  respectively,  with weighted average yields of
      5.16% and 6.26%, respectively.

      Loan   origination   commitments  and  lines  of  credit  are  contractual
      agreements to lend to customers  within specified time periods at interest
      rates and on other terms  specified  in the  agreements.  These  financial
      instruments  involve  elements  of credit risk and  interest  rate risk in
      addition to the amounts for funded loans  recognized  in the  consolidated
      balance sheets. The contractual amounts of commitments and lines of credit
      represent  the  Company's  maximum  potential   exposure  to  credit  loss
      (assuming that the  agreements are fully funded and any collateral  proves
      to  be  worthless),   but  do  not  necessarily   represent   future  cash
      requirements  since  certain  agreements  may expire  without  being fully
      funded. Loan commitments generally have fixed expiration dates (ranging up
      to three months) or other termination  clauses and may require the payment
      of a fee by the customer.  Commitments  and lines of credit are subject to
      the same credit approval process applied in the Company's  general lending
      activities,   including  a  case-by-case   evaluation  of  the  customer's
      creditworthiness and related collateral requirements.


                                       44
<PAGE>


                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


      Operating Lease Commitments

      The Company is obligated under  non-cancelable  operating leases for seven
      branch  offices and the  Company's  corporate  office.  Rent expense under
      operating  leases was $808,000,  $433,000 and $304,000 for the years ended
      March 31, 2004, 2003 and 2002, respectively. At March 31, 2004, the future
      minimum rental payments under  operating  lease  agreements for the fiscal
      years ending March 31 are $755,000 in 2005,  $892,000 in 2006, $904,000 in
      2007,  $923,000 in 2008, $779,000 in 2009, and a total of $2.5 million for
      2010 and thereafter.

      Legal Proceedings

      In the normal  course of  business,  the  Company is  involved  in various
      outstanding  legal  proceedings.  In  the  opinion  of  management,  after
      consultation  with legal  counsel,  the outcome of such legal  proceedings
      should not have a material  effect on the Company's  financial  condition,
      results of operations or liquidity.

(11)  Regulatory Matters

      Regulatory Capital Requirements

      OTS regulations  require savings  institutions to maintain a minimum ratio
      of tangible  capital to total adjusted  assets of 1.5%, a minimum ratio of
      Tier I (core)  capital  to total  adjusted  assets of 4.0%,  and a minimum
      ratio of Total (core and supplementary) capital to risk-weighted assets of
      8.0%.

      Under its prompt  corrective  action  regulations,  the OTS is required to
      take  certain  supervisory  actions  with  respect to an  undercapitalized
      institution.  Such  actions  could  have a direct  material  effect on the
      institution's financial statements.  The regulations establish a framework
      for the  classification  of depository  institutions into five categories:
      well capitalized, adequately capitalized, undercapitalized,  significantly
      undercapitalized,   and   critically   undercapitalized.   Generally,   an
      institution  is  considered  well  capitalized  if it has a Tier I  (core)
      capital  ratio of at least 5.0%, a Tier I risk-based  capital  ratio of at
      least 6.0%, and a Total risk-based capital ratio of at least 10.0%.

      The foregoing  capital  ratios are based in part on specific  quantitative
      measures of assets,  liabilities  and certain  off-balance  sheet items as
      calculated  under  regulatory  accounting  practices.  Capital amounts and
      classifications are also subject to qualitative judgments by the OTS about
      capital  components,  risk  weightings  and other  factors.  These capital
      requirements  apply  only  to the  Bank,  and do not  consider  additional
      capital retained by the Holding Company.

      Management  believes that, as of March 31, 2004 and 2003, the Bank met all
      capital adequacy  requirements to which it was subject.  Further, the most
      recent  OTS  notification  categorized  the  Bank  as  a  well-capitalized
      institution  under the prompt corrective  action  regulations.  There have
      been no  conditions  or events  since that  notification  that  management
      believes have changed the Bank's capital classification.


                                       45
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


      The  following  is a summary  of the Bank's  actual  capital  amounts  and
      ratios,  compared to the OTS requirements for minimum capital adequacy and
      for classification as a well-capitalized  institution.  In accordance with
      the applicable  regulatory  requirements,  the Bank's actual  tangible and
      Tier 1 capital amounts  exclude  goodwill and the after-tax net unrealized
      gain on securities  available for sale, while the Total risk-based capital
      amounts include the allowance for loan losses.


<TABLE>
<CAPTION>
                                                                        OTS Requirements
                                                        ---------------------------------------------------
                                                                                     Classification as Well
                                      Bank Actual       Minimum Capital Adequacy           Capitalized
                                  ------------------    ------------------------     ----------------------
                                   Amount      Ratio         Amount      Ratio          Amount      Ratio
                                  -------      -----        -------      -----         -------      -----
                                                            (Dollars in thousands)

<S>                               <C>           <C>         <C>           <C>          <C>            <C>
      March 31, 2004
      Tangible capital            $95,143       10.9%       $13,071       1.5%         $43,571        5.0%
      Tier I (core) capital        95,143       10.9         34,858       4.0           52,285        6.0
      Risk-based capital:
            Tier I                 95,143       24.3
            Total                  97,855       25.0         31,377       8.0           39,221       10.0

      March 31, 2003
      Tangible capital            $87,313       11.3%       $11,604       1.5%         $38,679        5.0%
      Tier I (core) capital        87,313       11.3         30,944       4.0           46,415        6.0
      Risk-based capital:
            Tier I                 87,313       23.5
            Total                  89,755       24.2         29,698       8.0           37,123       10.0


</TABLE>

      Dividend Limitations

      Under OTS regulations, savings associations such as the Bank generally may
      declare  annual cash dividends up to an amount equal to net income for the
      current  year  plus  retained  net  income  for the two  preceding  years.
      Dividends in excess of this amount require OTS approval.  Unlike the Bank,
      the Holding  Company is not subject to OTS  regulatory  limitations on the
      payment of dividends to its shareholders.

      Liquidation Rights

      Upon  completion of the  second-step  conversion in January 2003, the Bank
      established  a  special  "liquidation  account"  in  accordance  with  OTS
      regulations.  The  account  was  established  for the  benefit of Eligible
      Account Holders and  Supplemental  Eligible Account Holders (as defined in
      the plan of  conversion)  in an  amount  equal to the  greater  of (i) the
      Mutual Holding  Company's  ownership  interest in the retained earnings of
      Sound Federal Bancorp as of the date of its latest balance sheet contained
      in the prospectus,  or (ii) the retained  earnings of the Bank at the time
      that the Bank  reorganized  into the Mutual Holding  Company in 1998. Each
      Eligible  Account  Holder and  Supplemental  Eligible  Account Holder that
      continues  to  maintain  his or her  deposit  account at the Bank would be
      entitled,  in the event of a complete  liquidation  of the Bank,  to a pro
      rata  interest  in the  liquidation  account  prior to any  payment to the
      stockholders of the Holding  Company.  The liquidation  account is reduced
      annually on December 31 to the extent that  Eligible  Account  Holders and
      Supplemental  Eligible  Account  Holders  have  reduced  their  qualifying
      deposits as of each anniversary date.  Subsequent increases in deposits do
      not restore such account holder's interest in the liquidation account. The
      Bank may not pay cash dividends or make other capital distributions if the
      effect  thereof  would be to reduce  its  stockholder's  equity  below the
      amount of the liquidation account.


                                       46
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


(12)  Comprehensive Income

      Comprehensive  income represents the sum of net income and items of "other
      comprehensive  income or loss" that are reported directly in stockholders'
      equity,  such  as the  change  during  the  period  in the  after-tax  net
      unrealized  gain or loss on  securities  available  for sale  and  minimum
      pension  liability  adjustments.   The  Company  has  reported  its  total
      comprehensive  income  in  the  consolidated   statements  of  changes  in
      stockholders' equity.

      The Company's other  comprehensive  income (loss) is summarized as follows
      for the years ended March 31:


<TABLE>
<CAPTION>
                                                     2004        2003        2002
                                                    -------     -------     -------
                                                            (In thousands)

<S>                                                 <C>         <C>         <C>
      Net unrealized holding (loss) gain arising
           during the period on securities
           available for sale                       $(2,352)    $ 1,533     $(1,850)
      Additional minimum pension liability            3,468      (3,298)       (170)
      Related deferred income tax effect               (430)        680         869
                                                    -------     -------     -------
      Other comprehensive income (loss)             $   686     $(1,085)    $(1,151)
                                                    =======     =======     =======

</TABLE>


      The Company's accumulated other comprehensive income, which is included in
      stockholders' equity, is summarized as follows at March 31:

                                                        2004        2003
                                                      -------     -------
                                                         (In thousands)

      Net unrealized holding gain on securities
       available for sale                             $ 1,143     $ 3,495
      Additional minimum pension liability                 --      (3,468)
      Related deferred income taxes                      (441)        (11)
                                                      -------     -------
      Accumulated other comprehensive income          $   702     $    16
                                                      =======     =======



                                       47
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


(13)  Earnings Per Share

      The  following  is  a  summary  of  the   Company's   earnings  per  share
      calculations.  For purposes of computing basic EPS, net income  applicable
      to common stock equaled net income for each year presented.

                                                   Years Ended March 31,
                                           -------------------------------------
                                                2004       2003        2002
                                              -------     -------     -------
                                           (In thousands, except per share data)

      Net income                              $ 6,618     $ 8,526     $ 5,770
                                              =======     =======     =======
      Weighted average common shares
           outstanding for computation of
           basic EPS (1)                       12,367      12,801      12,835
      Common-equivalent shares for the
           dilutive effect of stock
           options and stock awards (2)           346         312         155
                                              -------     -------     -------
      Weighted average common shares for
           computation of diluted EPS          12,713      13,113      12,990
                                              =======     =======     =======
      Earnings per common share:
           Basic                              $  0.54     $  0.67     $  0.45
           Diluted                               0.52        0.65        0.44
                                              =======     =======     =======



      (1)   All  weighted  average  share data has been  adjusted to reflect the
            shares issued in the second-step  conversion.  Excludes shares under
            stock awards that have not vested and  unallocated  ESOP shares that
            have not been released or committed to be released to  participants.

      (2)   Represents  an  incremental  number of  shares,  computed  using the
            treasury stock method, with respect to outstanding stock options and
            unvested stock awards.


                                       48
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


(14)  Fair Values of Financial Instruments

      SFAS No.  107,  Disclosures  about  Fair Value of  Financial  Instruments,
      requires disclosures for financial instruments for which it is practicable
      to estimate fair value. The definition of a financial  instrument includes
      many  of  the  assets  and   liabilities   recognized   in  the  Company's
      consolidated  balance sheets, as well as certain  off-balance sheet items.
      Fair value is  defined in SFAS No. 107 as the amount at which a  financial
      instrument  could be exchanged in a current  transaction  between  willing
      parties, other than in a forced sale or liquidation.

      Quoted  market  prices are used to estimate  fair values when those prices
      are  available.  However,  active  markets  do not exist for many types of
      financial  instruments.  Consequently,  fair values for these  instruments
      must be estimated by management  using  techniques such as discounted cash
      flow analysis and comparison to similar  instruments.  Estimates developed
      using these methods are highly subjective and require judgments  regarding
      significant matters such as the amount and timing of future cash flows and
      the  selection of discount  rates that  appropriately  reflect  market and
      credit risks.  Changes in these  judgments often have a material effect on
      the fair value estimates.  Since these estimates are made as of a specific
      point in time, they are susceptible to material  near-term  changes.  Fair
      values  disclosed  in  accordance  with SFAS No.  107 do not  reflect  any
      premium or discount that could result from the sale of a large volume of a
      particular  financial  instrument,   nor  do  they  reflect  possible  tax
      ramifications or estimated transaction costs.

      The  following is a summary of the  carrying  amounts and  estimated  fair
      values of the Company's  financial  assets and liabilities  (none of which
      were held for trading purposes) at March 31:

                                               2004                  2003
                                        ------------------    ------------------
                                        Carrying     Fair     Carrying    Fair
                                         Amount      Value     Amount     Value
                                        --------    ------    --------    ------
                                                     (In millions)

      Financial assets:
        Cash and cash equivalents        $ 31.2     $ 31.2     $ 44.9     $ 44.9
        Securities available for sale     337.7      337.7      295.0      295.0
        Loans                             478.5      484.4      427.7      444.6
        Accrued interest receivable         3.6        3.6        3.7        3.7
        FHLB stock                          5.3        5.3        4.1        4.1

      Financial liabilities:
        Savings certificate accounts      445.7      448.8      363.7      369.0
        Other deposit accounts            262.6      262.6      240.5      240.5
        Borrowings                         35.0       36.2       35.0       36.4
        Mortgagors' escrow funds            4.5        4.5        4.6        4.6
                                         ======     ======     ======     ======


      The  following  is a  description  of the  valuation  methods  used by the
      Company to estimate the fair values of its financial instruments:

      Securities

      The fair  values  of  securities  were  based on  market  prices or dealer
      quotes.


                                       49
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements


      Loans

      For  valuation  purposes,  the  loan  portfolio  was  segregated  into its
      significant  categories,  such as residential  mortgage loans and consumer
      loans.  These categories were further analyzed,  where  appropriate,  into
      components based on significant financial  characteristics such as type of
      interest rate (fixed or adjustable).  Generally, management estimated fair
      values by discounting the  anticipated  cash flows at current market rates
      for loans with similar terms to borrowers of similar credit quality.

      Deposit Liabilities

      The fair values of savings certificate accounts represent contractual cash
      flows  discounted  using interest rates currently  offered on certificates
      with similar  characteristics  and remaining  maturities (but are not less
      than the net amount at which depositors  could settle their accounts).  In
      accordance  with SFAS No. 107, the fair values of other  deposit  accounts
      (those  with  no  stated  maturity,  such as  passbook  and  money  market
      accounts) are equal to the carrying amounts payable on demand.  These fair
      values  do not  include  the  value  of core  deposit  relationships  that
      comprise a significant  portion of the Company's deposit base.  Management
      believes  that  these  core  deposit  relationships  provide a  relatively
      stable, low-cost funding source that has a substantial  unrecognized value
      separate from the deposit balances.

      Borrowings

      The fair value of securities repurchase agreements represents  contractual
      repayments   discounted  using  interest  rates  currently   available  on
      borrowings with similar characteristics and remaining maturities.

      Other Financial Instruments

      The remaining  financial  assets and  liabilities  listed in the preceding
      table have fair values that approximate the respective carrying amounts in
      the  consolidated  balance sheets because the  instruments  are payable on
      demand or have  short-term  maturities  and present  relatively low credit
      risk  and  interest  rate  risk.  Fair  values  of  the  loan  origination
      commitments and unused lines of credit described in Note 10 were estimated
      based on an analysis of the interest rates and fees  currently  charged to
      enter into similar  transactions,  considering  the remaining terms of the
      instruments  and  the  creditworthiness  of  the  potential borrowers.  At
      March 31, 2004 and 2003, the fair values of these instruments approximated
      the related carrying amounts.

(15)  Parent Company Condensed Financial Statements

      Set forth below are condensed financial statements of the Holding Company:


                                                                  March 31,
                                                            --------------------
      Condensed Balance Sheets                                2004        2003
                                                                (In thousands)

      Assets
      Interest-bearing deposits at subsidiary bank          $ 21,711    $ 35,868
      Loans receivable from ESOP                               6,818       7,185
      Investment in subsidiary bank                          109,820     101,329
      Due from subsidiary bank                                 4,190         609
      Other assets                                             1,102         259
                                                            --------    --------
                 Total assets                               $143,641    $145,250
                                                            ========    ========
      Liabilities                                           $  6,582    $  6,929
      Stockholders' Equity                                   137,059     138,321
                                                            --------    --------
                 Total liabilities and
                  stockholders' equity                      $143,641    $145,250
                                                            ========    ========



                                       50
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements

                                                       Years Ended March 31,
                                                  -----------------------------
Condensed Statements of Income                     2004        2003       2002
                                                  -------    -------    -------
                                                          (In thousands)

Interest income                                   $   499    $   167    $   269
Other expenses                                       (397)      (251)      (208)
                                                  -------    -------    -------
 Income (loss) before income taxes and
     equity in undistributed earnings of
     subsidiary bank                                  102        (84)        61
Income tax expense (benefit)                           90        (14)        56
                                                  -------    -------    -------
Income (loss) before equity in
     undistributed earnings of
     subsidiary bank                                   12        (70)         5
Equity in undistributed earnings of
     subsidiary bank                                6,606      8,596      5,765
                                                  -------    -------    -------
Net income                                        $ 6,618    $ 8,526    $ 5,770
                                                  =======    =======    =======


                                                       Years Ended March 31,
                                                  -----------------------------
Condensed Statements of Cash Flows                  2004       2003      2002
                                                  --------   --------   -------
                                                         (In thousands)

Operating Activities
Net income                                       $  6,618   $  8,526    $ 5,770
Adjustments to reconcile net income to
     net cash used in operating activities:
        Equity in undistributed earnings of
           subsidiary bank                         (6,606)    (8,596)    (5,765)
        Increase in due from subsidiary bank       (3,581)       (94)      (217)
        Other                                        (158)       (60)        60
                                                 --------   --------    -------
           Net cash used in operating
              activities                           (3,727)      (224)      (152)
                                                 --------   --------    -------
Investing Activities
Cash contributed to subsidiary bank                    --    (38,323)        --
ESOP loan repayments                                  367        192        192
                                                 --------   --------    -------
           Net cash provided by (used in)
              investing activities                    367    (38,131)       192
                                                 --------   --------    -------
Financing Activities
Purchases of treasury stock                        (8,417)        --       (483)
Proceeds from stock offering, net                      --     70,051         --
Proceeds from exercise of stock options               268        100         73
Payment of cash dividends on common stock          (2,648)    (1,155)      (517)
Cash payment in lieu of fractional shares              --         (2)        --
                                                 --------   --------    -------
           Net cash (used in) provided by
              financing activities                (10,797)    68,994       (927)
                                                 --------   --------    -------
Net (decrease) increase in cash and
     cash equivalents                             (14,157)    30,639       (887)
Cash and cash equivalents at beginning of year     35,868      5,229      6,116
                                                 --------   --------    -------
Cash and cash equivalents at end of year         $ 21,711   $ 35,868    $ 5,229
                                                 ========   ========    =======


                                       51
<PAGE>

                   Sound Federal Bancorp, Inc. and Subsidiary
                   Notes to Consolidated Financial Statements



(16)  Quarterly Results of Operations (Unaudited)

      The  following is a condensed  summary of quarterly  results of operations
      for the years ended March 31, 2004 and 2003:

                                           First     Second     Third    Fourth
                                           Quarter   Quarter   Quarter   Quarter
                                           ------    ------    ------    -------
                                           (In thousands, except per share data)

      Year Ended March 31, 2004
      -------------------------

      Interest and dividend income         $9,791    $9,272    $9,873    $ 9,803
      Interest expense                      3,261     3,067     3,186      3,033
                                           ------    ------    ------    -------
      Net interest income                   6,530     6,205     6,687      6,770

      Provision for loan losses                50        75        75         75
      Non-interest income                     285       228       252        276
      Non-interest expense                  3,984     3,648     3,936      4,538
                                           ------    ------    ------    -------
      Income before income tax expense      2,781     2,710     2,928      2,433
      Income tax expense                    1,064     1,060     1,133        977
                                           ------    ------    ------    -------
      Net income                           $1,717    $1,650    $1,795    $ 1,456
                                           ======    ======    ======    =======
      Basic earnings per common share      $ 0.14    $ 0.13    $ 0.15    $  0.12
      Diluted earnings per common share      0.14      0.13      0.14       0.12
                                           ======    ======    ======    =======

      Year Ended March 31, 2003
      -------------------------

      Interest and dividend income         $9,805    $9,798    $9,870    $10,105
      Interest expense                      3,520     3,530     3,472      3,217
                                           ------    ------    ------    -------
      Net interest income                   6,285     6,268     6,398      6,888

      Provision for loan losses                75        50        50        100
      Non-interest income                     170       224       229        267
      Non-interest expense                  2,843     3,209     3,330      3,327
                                           ------    ------    ------    -------
      Income before income tax expense      3,537     3,233     3,247      3,728
      Income tax expense                    1,376     1,203     1,220      1,420
                                           ------    ------    ------    -------
      Net income                           $2,161    $2,030    $2,027    $ 2,308
                                           ======    ======    ======    =======
      Basic earnings per common share      $ 0.17    $ 0.16    $ 0.16    $  0.19
      Diluted earnings per common share      0.17      0.16      0.15       0.18
                                           ======    ======    ======    =======





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<PAGE>

Corporate Information

Headquarters
1311 Mamaroneck Avenue
White Plains, New York 10605
914-761-3636

Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
1-800-866-1340

Annual Meeting
August 12, 2004 4:00 p.m.
Sound Federal Bancorp, Inc.
Corporate Headquarters
1311 Mamaroneck Avenue
White Plains, NY 10605

Common Stock Information

The  Company's  common stock is traded on the Nasdaq  National  Market under the
symbol  "SFFS."  At  March  31,  2004,  the  common  stock  was  held  by  2,027
stockholders  of record.  Market prices and  dividends for the indicated  fiscal
quarters (adjusted to reflect the impact of the second-step  conversion) were as
follows:


                               Market Price
                            ------------------
 Quarter Ended                High         Low          Dividends
 -------------                ----         ---          ---------

June 30, 2002               $ 8.62       $ 5.43          $ 0.03
September 30, 2002            9.99         7.95            0.03
December 31, 2002            11.13         9.45            0.03
March 31, 2003               12.63        10.44            0.05
June 30, 2003                14.05        12.53            0.05
September 30, 2003           16.42        13.10            0.05
December 31, 2003            17.35        14.44            0.06
March 31, 2004               16.26        14.52            0.06

General Counsel
James Staudt, Esquire

Special Counsel
Luse Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, DC 20015

Independent Auditors
KPMG LLP
3001 Summer Street
Stamford, Connecticut 06905


Investor Relations
Anthony J. Fabiano

Senior Vice-President, Chief Financial Officer
  and Corporate Secretary
Sound Federal Bancorp, Inc.
1311 Mamaroneck Avenue
White Plains, New York 10605
914-761-3636

Annual Report on Form 10-K

A copy of the  Company's  Form 10-K, as filed with the  Securities  and Exchange
Commission, is available without charge by written request to Investor Relations
at the address set forth above.


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<PAGE>

Directors of the Company and the Bank

Bruno J. Gioffre, Chairman of the Board
Richard P. McStravick, President and Chief
  Executive Officer
Roberta I. Bernhardt
Joseph Dinolfo
Donald H. Heithaus
Joseph A. Lanza
Eldorus Maynard
James Staudt
Samuel T. Telerico

Directors Emeriti

Paul F. Starck, Chairman Emeritus
George W. Brown
Arthur C. Phillips

Officers of the Company and the Bank

Richard P. McStravick, President and
Chief Executive Officer

Anthony J. Fabiano, Senior Vice-President,
Chief Financial Officer and Corporate Secretary

Officers of the Bank

Accounting
Frank Rossi, Vice President and Controller
Terri Anne Stollmer, Assistant Vice President
Mark Madoff, Assistant Vice President

Branches
Michael Bulgia, Assistant Vice-President
Doreen Leonard, Assistant Vice-President
Arthur Murphy, Assistant Vice-President
Heather Smeriglio, Assistant Vice-President
Marie Stacy, Assistant Vice-President
John Anderson, Assistant Treasurer
Sylvia Astrologo, Assistant Treasurer
Henry Benvenuto, Assistant Treasurer
Thomas W. Burns, Assistant Treasurer
Debra LoBello, Assistant Treasurer
Lisa Greco, Assistant Treasurer
Maria Jose, Assistant Treasurer
Patricia Soravilla, Assistant Treasurer
Lynne Vaughn, Assistant Treasurer

Branch Operations
Sheila V. Torpey, Vice-President
Sara Ricci, Assistant Vice-President

Business Development
William J. LaCalamito, Vice-President
Richard L. Perna, Assistant Vice-President

Commercial Lending
Vito LaRusso, Vice-President

Compliance
Michael J. Ceruzzi, Vice-President

Executive Secretary
Linda Lunapiena, Assistant Vice-President

Human Resources
Judy E. Malinowski, Vice-President

Lending
Joseph Filanowski, Vice-President
Mary K. Harrison, Vice-President
Timothy Murphy, Vice-President
Lorenzo Aperocho, Assistant Vice-President
Janice Holiday, Assistant Treasurer
Mary A. Maida, Assistant Secretary
Jennifer Penrod, Assistant Vice-President

Information Technology
Jean Degl, Vice-President

Marketing
Robert V. Galante Jr., Vice-President

Audit
Charles Zivian, Vice-President

Branch Locations

Mamaroneck
300 Mamaroneck Avenue
Mamaroneck, New York 10543
914-698-6400

Harrison
389 Halstead Avenue
Harrison, New York 10528
914-835-0500

Rye Brook
115 South Ridge Street
Rye Brook, New York 10573
914-939-0100

New City
180 South Main Street
New City, New York 10956
845-639-3400

Cos Cob
100 East Putnam Avenue
Cos Cob, Connecticut 06807
203-862-8400

Peekskill
1019 Park Street
Peekskill, New York 10566
914-737-2777

Yorktown Heights
1961 Commerce Street
Yorktown Heights, New York 10598
914-962-3883


                                       54
<PAGE>

Cortlandt Town Center
Route 6
Cortlandt, New York 10547
914-528-1117

New Rochelle
88 Fourth Street
New Rochelle, New York 10801
914-633-0345

Somers
302 Somers Commons
Baldwin Place, New York 10589
914-621-2111

Stamford
599 Newfield Avenue
Stamford, Connecticut 06905
203-348-8800

Brookfield
247 Federal Road
Brookfield, Connecticut 06804


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