SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
(Mark One)
[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE
     ACT OF 1934

For the Fiscal Year Ended December 31, 2002

                                     - OR -

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

For the transition period from _____________ to _____________

Commission File Number: 0-17353

                            FMS FINANCIAL CORPORATION
             -----------------------------------------------------
             (Exact name of registrant as specified in its charter)

                  New Jersey                             22-2916440
---------------------------------------------  ---------------------------------
(State or other jurisdiction of incorporation  (I.R.S. Employer or organization)
                                                     Identification No.)

3 Sunset Road, Burlington, New Jersey                        08016
----------------------------------------                  ----------
(Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code: (609) 386-2400
                                                    --------------

Securities registered pursuant to Section 12(b) of the Act:  None
                                                             ----
Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.10 per share
                     --------------------------------------
                                (Title of Class)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. YES  X  NO    .
                                              ---    ---

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2).  YES     NO  X .
                                         ---     ---

     Based on the closing  sales  price of $12.87 per share of the  registrant's
common stock on March 3, 2003, as reported on the Nasdaq  National Market System
the  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
registrant  was  approximately  $48.6 million.  As of March 3, 2003,  there were
6,463,811 shares outstanding of the registrant's common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions of 2002 Annual Report to Stockholders (Parts II and IV)
2.   Portions of Proxy  Statement for the 2003 Annual  Meeting of  Stockholders.
     (Part III)
                                        1
<PAGE>

                                     PART I

Forward-Looking Statements

     FMS Financial Corporation (the "Corporation" or "Registrant") may from time
to time make written or oral "forward-looking  statements," including statements
contained  in  the  Corporation's  filings  with  the  Securities  and  Exchange
Commission (including this Annual Report on Form 10-K and the exhibits thereto),
in its reports to stockholders and in other  communications  by the Corporation,
which are made in good faith by the  Corporation  pursuant to the "safe  harbor"
provisions of the private securities litigation reform act of 1995.

     These forward-looking  statements involve risks and uncertainties,  such as
statements of the Corporation's plans, objectives,  expectations,  estimates and
intentions,  that are subject to change based on various important factors (some
of which are beyond the Corporation's  control).  The following  factors,  among
others, could cause the Corporation's financial performance to differ materially
from the plans, objectives,  expectations, estimates and intentions expressed in
such  forward-looking  statements:  the strength of the United States economy in
general  and the  strength  of the  local  economies  in which  the  Corporation
conducts operations;  the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the board of governors of
the federal  reserve  system,  inflation,  interest  rate,  market and  monetary
fluctuations;  the timely  development  of and  acceptance  of new  products and
services of the  Corporation  and the perceived  overall value of these products
and services by users,  including the features,  pricing and quality compared to
competitors'  products and  services;  the  willingness  of users to  substitute
competitors' products and services for the Corporation's  products and services;
the success of the  Corporation in gaining  regulatory  approval of its products
and services,  when required;  the impact of changes in financial services' laws
and  regulations  (including  laws  concerning  taxes,  banking,  securities and
insurance);  technological changes,  acquisitions;  changes in consumer spending
and saving  habits;  and the success of the  Corporation  at managing  the risks
involved in the foregoing.

     The  Corporation  cautions that the foregoing list of important  factors is
not exclusive.  The Corporation does not undertake to update any forward-looking
statement,  whether written or oral, that may be made from time to time by or on
behalf of the Corporation.

Item 1.  Business
-----------------

General

     FMS  Financial  Corporation,  a New Jersey  corporation,  headquartered  in
Burlington,  New Jersey,  is the holding  company for Farmers and Mechanics Bank
(the "Bank").  The Corporation conducts no significant business or operations of
its own other than holding all of the outstanding common stock of the Bank. As a
result,  references to the  Corporation  or Registrant  generally  refers to the
consolidated entity which includes the main operating company,  the Bank, unless
the context indicates otherwise.

     The Registrant principally operates through its thirty-nine banking offices
located in Burlington, Camden and Mercer Counties, New Jersey. The Registrant is
primarily engaged in the business of attracting deposits from the general public
and originating loans which are secured by residential real

                                        2

<PAGE>



estate. To a lesser extent, the Registrant also originates consumer,  commercial
business loans and construction loans and invests in U.S. government  securities
and mortgage-related securities.

Competition

     The  Registrant's  primary market area consists of  Burlington,  Camden and
Mercer Counties,  New Jersey, and is one of many financial  institutions serving
this market area. The competition for deposit  products comes from other insured
financial  institutions such as commercial banks, thrift institutions and credit
unions in the  Registrant's  market area.  Deposit  competition  also includes a
number of insurance  products sold by local agents and investment  products such
as mutual funds and other  securities sold by local and regional  brokers.  Loan
competition comes from other insured  financial  institutions such as commercial
banks, thrift institutions and credit unions.

Lending Activities

Analysis of Loan Portfolio

     The following  table sets forth the  composition of the  Registrant's  loan
portfolio in dollar amounts and in  percentages of the respective  portfolios at
the dates indicated.

<TABLE>
<CAPTION>


                                                                     December 31,
                            --------------------------------------------------------------------------------------------------
                                     2002               2001                2000              1999                 1998
                            -------------------  ----------------- -----------------  -------------------  -------------------
                             Carrying Percent   Carrying Percent   Carrying Percent    Carrying Percent     Carrying Percent
                              Value   of Total   Value   of Total    Value  of Total    Value   of Total     Value   of Total
                             -------  --------  -------- --------  -------- --------  --------- --------    -------  --------
                                                                     (In thousands)
<S>                       <C>       <C>     <C>         <C>     <C>        <C>     <C>         <C>      <C>         <C>

Mortgage loans:
  One-to-four family.......  $272,777  74.38%  $259,970    76.11%  $228,428   77.47%  $236,912    77.82%   $245,415    81.07%
  Commercial real estate...    76,354  20.82     60,627    17.75     52,763   17.90     52,544    17.26      45,938    15.18
  Commercial construction..     1,157    .32      4,606     1.35      1,062     .36      3,935     1.29       2,609      .86
  Construction.............       306    .08      1,254      .37        163     .06        973      .32       1,390      .46
                             -------- ------   --------   ------   --------  ------   --------   ------    --------   ------
      Total mortgage loans.   350,594  95.60    326,457    95.58    282,416   95.79    294,364    96.69     295,352    97.57
                             -------- ------   --------   ------   --------  ------   --------   ------    --------   ------
Consumer and other loans:
  Consumer.................     3,522    .96      4,583     1.34      3,900    1.32      3,274     1.08       3,237     1.07
  Commercial business......    12,621   3.44     10,521     3.08      8,522    2.89      6,790     2.23       4,121     1.36
                             -------- ------   --------   ------   --------  ------   --------   ------    --------   ------
   Total consumer and other
         loans.............    16,143   4.40     15,104     4.42     12,422    4.21     10,064     3.31       7,358     2.43
                             -------- ------   --------   ------   --------  ------   --------   ------    --------   ------
      Total loans..........  $366,737 100.00%  $341,561   100.00%  $294,838  100.00%  $304,428   100.00%   $302,710   100.00%
                             ======== ======   ========   ======   ========  ======   ========   ======    ========   ======

</TABLE>


     One-to-Four  Family  Loans.  The  Registrant's   primary  lending  activity
consists of the  origination of one-to-four  family  residential  mortgage loans
("residential  loans") secured by the property in the Registrant's  market area.
The Registrant's  residential loan portfolio also includes second mortgage loans
and home  equity  loans  (including  home  equity  lines of credit  loans).  The
Registrant  generally  originates  mortgage  loans with terms of 15 to 30 years,
amortized  on a monthly  basis,  with  principal  and  interest  due each month.
Typically,  residential  loans  remain  outstanding  for  significantly  shorter
periods than their  contractual  terms because borrowers may refinance or prepay
loans at their option.



                                        3

<PAGE>



     The Registrant  presently offers  residential  loans that adjust every year
after an initial  fixed term of one,  two,  five or seven years,  at an interest
rate indexed higher than the  corresponding  U.S.  Treasury  security index. The
interest rates on these  mortgages  adjust  annually after the one, two, five or
seven year  anniversary date of the loan with an interest rate adjustment cap of
1.5% per year and  presently  not to exceed a rate of 11.5% over the life of the
loan. At December 31, 2002,  adjustable-rate  residential  first  mortgage loans
amounted  to $24.5  million or 6.67% of the total  residential  loan  portfolio.
These  loans  are  generally  not   originated   under  terms,   conditions  and
documentation  which  permit  their  sale in the  secondary  mortgage  market to
Federal Home Loan Mortgage  Corporation  ("FHLMC") and Federal National Mortgage
Association ("FNMA").

     Fixed-rate mortgage loans are generally underwritten according to FHLMC and
FNMA  guidelines.   The  Registrant   periodically  sells  selected   fixed-rate
residential loans, without recourse, to provide additional funds for lending and
to restructure the loan portfolio to improve interest rate risk.  Generally,  if
the property is not owner-occupied, a higher rate of interest is charged on such
loans. At December 31, 2002, $217.9 million,  or 59.41% of the total residential
loan portfolio,  consisted of long-term fixed-rate first mortgage loans, none of
which were classified as held for sale.

     The Registrant's lending policies generally limit the maximum loan-to-value
ratio on owner- occupied  residential  first mortgage loans to 97% of the lesser
of the  appraised  value or purchase  price,  with the  condition  that  private
mortgage insurance is required on loans with  loan-to-value  ratios in excess of
80%. Mortgage loans on investment properties are made at loan-to-value ratios up
to 70%. The loan-to-  value ratio,  maturity and other  provisions  of the loans
made by the Registrant  have generally  reflected the policy of making less than
the maximum loan permissible  under applicable  regulations,  in accordance with
established  lending  practices,  market  conditions and underwriting  standards
maintained  by  the  Registrant.  The  Registrant  requires  fire  and  casualty
insurance on all  properties  securing real estate loans and also performs title
searches to ensure its lien position.

     The Registrant  actively solicits and originates home equity loans and home
equity  lines  of  credit  secured  by  the  equity  in the  borrower's  primary
residence. These loans generally have terms of 10 to 15 years, some of which are
fixed rates and some of which have rates that adjust  based upon the prime rate.
At December  31,  2002,  the  Registrant  had home equity loans in the amount of
$17.7 million,  or 4.83%, of its  residential  loan portfolio and approved $29.5
million in home equity lines of credit, of which $12.7 million was outstanding.

     Commercial  Real  Estate  Loans.  Commercial  real  estate  loans are loans
secured by commercial real estate (e.g.,  shopping centers,  medical  buildings,
retail offices) and multi-family  dwelling units (e.g.,  apartment projects with
more than four units), in the Registrant's  market area.  Commercial real estate
loans and  multi-family  residential  loans have been made in amounts up to $3.8
million,  with most of such loans ranging in size from $100,000 to $1.0 million.
Loans on commercial  properties are generally originated in amounts up to 75% of
the  appraised  value  of  the  property.   Commercial  real  estate  loans  and
multi-family  residential  loans are generally  made at rates which adjust above
the prime  interest rate  (generally 1% to 2%) or a specified  treasury index or
are balloon loans with fixed  interest rates which mature in three to five years
with  principal  amortization  for a period of up to 25 years.  At December  31,
2002, the Registrant's  commercial real estate loan portfolio consisted of $72.1
million of commercial real estate and $4.3 million of multi-family loans.

                                        4

<PAGE>



     Loans secured by commercial real estate are generally  larger and involve a
greater degree of risk than one-to-four  family  residential  mortgage loans. Of
primary  concern,  in commercial and  multi-family  real estate lending,  is the
borrower's  creditworthiness  and the feasibility and cash flow potential of the
property.  Loans secured by income  properties are generally  larger and involve
greater risks than residential  mortgage loans because payments on loans secured
by income  properties are often dependent on successful  operation or management
of the  properties.  As a result,  repayment  of such  loans may be subject to a
greater extent than residential  real estate loans to adverse  conditions in the
real estate market or the economy.

     Construction  Loans.  The  Registrant   originates  loans  to  finance  the
construction  of one-to-four  family  dwellings  and/or  commercial real estate.
Construction  loans to builders are generally made only if the Registrant  makes
the  permanent  mortgage  loan or if the builder has a contract for sale and the
purchaser has received a permanent  mortgage  commitment.  Interim  construction
loans to builders  generally  have terms of up to nine months and interest rates
which adjust above the prime interest rate (generally 1% to 2%).

     Construction  financing is generally  considered to involve a higher degree
of risk of loss than long- term  financing  on improved,  occupied  real estate.
Risk of loss on a  construction  loan is dependent  largely upon the accuracy of
the initial  estimate of the property's  value at completion of construction and
development and the estimated cost (including interest) of construction.  During
the  construction  phase,  a number of factors  could  result in delays and cost
overruns.  If the estimate of  construction  costs proves to be inaccurate,  the
Registrant  may be  required  to advance  funds  beyond  the  amount  originally
committed  to permit  completion  of the  development.  If the estimate of value
proves to be inaccurate,  the  Registrant may be confronted,  at or prior to the
maturity of the loan,  with a project  having a value which is  insufficient  to
assure full repayment.

     Consumer Loans.  Regulations permit federally chartered thrift institutions
to make  secured and  unsecured  consumer  loans up to 35% of the  institution's
assets.  The  Registrant  makes various types of secured and unsecured  consumer
loans including  education  loans,  lines of credit,  automobile  loans (new and
used) and loans secured by deposit accounts. Consumer loans generally have terms
of six months to five years,  some of which are at fixed rates and some of which
have rates that adjust periodically.

     Consumer loans may entail greater risk than residential loans, particularly
in the case of  consumer  loans that are  unsecured  or  secured by assets  that
depreciate rapidly. Repossessed collateral for a defaulted consumer loan may not
be  sufficient  for  repayment  of  the  outstanding  loan,  and  the  remaining
deficiency may not be collectible.

     Commercial  Business Loans.  Commercial  business loans are underwritten on
the basis of the  borrower's  ability to service  such debt from  income and are
generally made to small and mid-sized  companies located within the Registrant's
primary lending area.  Generally,  the Registrant requires additional collateral
of equipment, chattel or other assets before making a commercial business loan.

     Loan  Commitments.  The Registrant  issues loan origination  commitments to
real estate developers and qualified  borrowers  primarily for the construction,
purchase and refinancing of residential  real estate and commercial real estate.
Such commitments are made on specified terms and conditions, including in

                                        5

<PAGE>



most cases, the payment of a non-refundable commitment fee based on a percentage
of the amount of committed funds. Generally,  the commitment requires acceptance
within 15 days of the date of issuance. At December 31, 2002, the Registrant had
$28.1  million  of  commitments  to cover  originations  and  $20.7  million  in
undisbursed  funds on  outstanding  lines of credit.  Management  believes  that
virtually all of the Registrant's commitments will be funded.

Origination of Loans

     Commercial loan origination comes from a variety of sources,  including the
Registrant's  existing  customer  base,  referrals  from  real  estate  offices,
accountants,  financial  advisers,  attorneys,  builders and walk in business as
well  as  solicitations  by  the  Registrant's  business  development  officers.
Residential  mortgage loan customers are derived in a similar  manner.  Consumer
loans are directly  obtained through the Registrant's  network of branch offices
and advertising.

     All applications  are processed in accordance with established  policies of
the  Registrant,  including  the review of credit  references,  verification  of
information  provided  and,  where  real  estate is  involved,  the review of an
appraisal  completed  by an  independent  third party  appraiser  from a list of
approved appraisers that the Registrant maintains.

     Loan  approvals may be approved by loan  officers up to their  individually
assigned  lending limit,  which are  established  and modified  periodically  to
reflect the officer's  expertise  and  experience.  Certain  officers have joint
lending  authorities  that exceed  their  individual  authorities.  The Board of
Directors  approves  loans above the  individual  and joint  authorities  of the
officers. The Board reviews on an annual basis the loan approval authorities.

Non-Performing and Problem Assets

     When a loan is more than 30 days  delinquent,  the borrower is contacted by
mail or phone and payment is requested. If the delinquency continues, subsequent
efforts will be made to contact the delinquent  borrower.  In certain instances,
the  Registrant  may  modify  the loan or  grant a  limited  moratorium  on loan
payments to enable the borrower to reorganize his financial affairs. If the loan
continues in a delinquent  status for 90 days or more, the Registrant  generally
will initiate foreclosure proceedings.

     Loans are generally  placed on non-accrual  status when either principal or
interest is 90 days or more past due.  Interest accrued and unpaid at the time a
loan is placed on non-accrual  status is charged against interest  income.  Such
interest,  when  ultimately  collected,  is  credited  to income  in the  period
received.

                                        6

<PAGE>

     Non-Performing Assets. The following table sets forth information regarding
impaired loans,  troubled debt  restructured and real estate owned assets by the
Registrant at the dates indicated.

<TABLE>
<CAPTION>
                                                                    At December 31,
                                                ----------------------------------------------------
                                                  2002        2001       2000       1999      1998
                                                --------   ---------  ---------   --------  --------
                                                                 (Dollars in Thousands)
<S>                                           <C>        <C>        <C>         <C>      <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
   One-to-four family.........................   $   960    $ 1,348    $   778     $1,386   $1,733
   Commercial real estate.....................     1,786      1,634      1,409      1,510    1,205
   Consumer and other.........................        12         --         24        237      282
                                                 -------    -------    -------     ------   ------
      Total mortgage non-accrual loans........   $ 2,758    $ 2,982    $ 2,211     $3,133   $3,220
                                                 -------     ------    -------     ------   ------
Troubled debt restructuring...................   $   987    $ 1,072    $   790     $  462   $  477
Real estate owned, net........................       291        214        355        449      168
Other non-performing assets...................        88         88         88         88      644
                                                 -------    -------    -------     ------   ------
Total non-performing assets...................   $ 4,124    $ 4,356    $ 3,444     $4,132   $4,509
                                                 -------    -------    -------     ======   ======

Total non-accrual loans to net loans..........      .76%       .89%       .76%      1.05%    1.08%
                                                 ======     ======     ======      =====    =====
Total non-accrual loans to total assets.......      .24%       .31%       .26%       .41%     .47%
                                                 ======     ======     ======      =====    =====
Total non-performing assets to total assets...      .37%       .45%       .41%       .53%     .65%
                                                 ======     ======     ======      =====    =====
</TABLE>


     Classified Assets. OTS regulations provide for a classification  system for
problem assets of insured  institutions  which covers all problem assets.  Under
this  classification   system,   problem  assets  of  insured  institutions  are
classified  as  "substandard,"  "doubtful,"  or "loss."  An asset is  considered
substandard if it is inadequately  protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include  those  characterized  by the  "distinct  possibility"  that the insured
institution  will sustain  "some loss" if the  deficiencies  are not  corrected.
Assets  classified  as  doubtful  have all of the  weaknesses  inherent in those
classified  substandard,  with the  added  characteristic  that  the  weaknesses
present  make  "collection  or  liquidation  in full," on the basis of currently
existing facts,  conditions,  and values,  "highly questionable and improbable."
Assets  classified  as loss are  those  considered  "uncollectible"  and of such
little value that their  continuance  as assets without the  establishment  of a
specific  loss  reserve  is not  warranted.  Assets may be  designated  "special
mention"  because  of  potential   weaknesses  that  do  not  currently  warrant
classification in one of the aforementioned categories.

     When an  insured  institution  classifies  problem  assets  as loss,  it is
required  either to establish a specific  allowance  for losses equal to 100% of
that  portion  of the asset so  classified  or to  charge  off such  amount.  An
institution's  determination  as to the  classification  of its  assets  and the
amount of its valuation allowances is subject to review by the OTS.

     Management's evaluation of the classification of assets and the adequacy of
the reserve  for loan losses is reviewed by the Board on a regular  basis and by
the regulatory agencies as part of their examination process.


                                        7

<PAGE>

     The  following  table  sets  forth the  Registrant's  classified  assets in
accordance with its classification system.


                                     At December 31, 2002
                                     --------------------
                                        (In thousands)

Special mention..................            $  520
Substandard......................             6,404
Doubtful.........................                19
Loss.............................                 3
                                             ------
         Total...................            $6,946
                                             ======


     Provision  for Loan  Losses.  A  provision  for loan  losses is  charged to
operations  based on  management's  evaluation  of the  probable  losses  in the
Registrant's  loan portfolio.  Such  evaluation,  which includes a review of all
loans  of  which  full  collectibility  of  interest  and  principal  may not be
reasonably assured, considers the Registrant's past loan loss experience,  known
and inherent  risks in the  portfolio,  adverse  situations  that may affect the
borrower's ability to repay, estimated value of any underlying  collateral,  and
current economic conditions.

     Management  will continue to review the entire loan  portfolio to determine
the extent,  if any, to which further  additional  loss provisions may be deemed
necessary.  There can be no  assurance  that the  allowance  for losses  will be
adequate  to cover  losses  which may in fact be realized in the future and that
additional provisions for losses will not be required.

     The following  table sets forth an analysis of the  Registrant's  allowance
for loan losses for the periods indicated.

<TABLE>
<CAPTION>
                                                  For the Year Ended December 31,
                                            -----------------------------------------------
                                              2002     2001      2000      1999      1998
                                            -------  --------  --------  --------  --------
                                                        (Dollars in Thousands)

<S>                                       <C>      <C>       <C>       <C>       <C>
Balance at beginning of period...........    $4,231   $3,980    $3,841    $3,342    $3,138
Loans charged-off:
  One-to-four family.....................       (10)     (42)      (40)      (77)      (37)
  Commercial real estate.................        --       --       (83)       --        --
  Construction...........................        --       --        --      (128)       --
  Consumer...............................       (10)      (3)       (9)       --        (1)
  Commercial business....................       (58)      --        --       (28)       --
                                             ------   ------    ------    ------    ------
    Total charge-offs....................       (78)     (45)     (132)     (233)      (38)
Recoveries...............................        15       13        31        78         2
                                             ------   ------    ------    ------    ------
Net loans charged-off....................       (63)     (32)     (101)     (155)      (36)
                                             ------   ------    ------    ------    ------
Provision for loan losses................       149      221       240       654       240
                                             ------   ------     -----    ------    ------
Increase as a result of merger...........        --       62        --        --        --
                                             ------   ------    ------    ------    ------
Balance at end of period.................    $4,317   $4,231    $3,980    $3,841    $3,342
                                             ======   ======    ======    ======    ======
Ratio of net charge-offs to average loans
  outstanding during the period..........      .017%    .010%     .034%     .051%     .012%
                                             ======   ======    ======    ======    ======

</TABLE>

                                        8

<PAGE>



Analysis of the Allowance for Loan Losses

     The  following  table sets forth the  breakdown of the  allowance  for loan
losses by loan category and the percent of loans in each category to total loans
receivable  for the periods  indicated.  The allocation of the allowance to each
category is not necessarily indicative of future losses.

<TABLE>
<CAPTION>

                                                                      At December 31,
                           -------------------------------------------------------------------------------------------------------
                                  2002               2001                 2000                  1999                 1998
                           -------------------  ------------------   -------------------   -------------------  ------------------
                                    Percent of          Percent of           Percent of            Percent of          Percent of
                                     Loans to            Loans to             Loans to              Loans to            Loans to
                           Amount  Total Loans  Amount Total Loans   Amount  Total Loans   Amount  Total Loans  Amount Total Loans
                           ------  -----------  ------ -----------   ------  -----------   ------  -----------  ------ -----------

  Loans:                                                           (Dollars in Thousands)

<S>                     <C>         <C>      <C>      <C>        <C>       <C>        <C>         <C>       <C>       <C>
  One-to-four family...... $1,672      74.38%   $1,339   76.11%     $2,912    77.48%     $2,506      77.82%    $1,929    81.11%
  Commercial real estate..  2,284      20.82     2,311    17.75        887     17.90      1,063      17.26      1,232    15.14
  Commercial construction.     69        .32       100     1.35          9       .36         39       1.29         26      .86
  Construction............     34        .08       222      .37          5       .05         10        .32         14      .46
  Consumer and other......     28        .96        33     1.34         31      1.32         65       1.08         65     1.07
  Commercial business.....    230       3.44       226     3.08        136      2.89        158       2.23         76     1.36
                           ------     ------    ------  ------      ------   ------      ------     ------     ------   ------
   Total allowance for
      loan losses......... $4,317     100.00%   $4,231  100.00%     $3,980   100.00%     $3,841     100.00%    $3,342   100.00%
                           ======     ======    ======  ======      ======   ======      ======     ======     ======   ======
</TABLE>


                                        9

<PAGE>


Investment Activities

     The Registrant is required under federal  regulations to maintain a minimum
amount of liquid assets which may be invested in specified short-term securities
and certain other investments.  The level of liquid assets varies depending upon
several  factors,  including:  (i) the yields on investment  alternatives,  (ii)
management's  judgment as to the  attractiveness of the yields then available in
relation to other  opportunities,  (iii) expectation of future yield levels, and
(iv)  management's  projections as to the short-term demand for funds to be used
in loan  origination  and other  activities.  Investment  securities,  including
mortgage-backed  securities,  are classified at the time of purchase, based upon
management's  intentions  and  abilities,  as  securities  held to  maturity  or
securities  available  for sale.  Debt  securities  acquired with the intent and
ability to hold to maturity are classified as held to maturity and are stated at
cost and adjusted for  amortization of premium and accretion of discount,  which
are  computed  using the level yield method and  recognized  as  adjustments  of
interest income.  All other debt securities are classified as available for sale
to serve principally as a source of liquidity.

     Current   regulatory  and  accounting   guidelines   regarding   investment
securities  (including  mortgage  backed  securities)  require the Registrant to
categorize  securities as "held to maturity," "available for sale" or "trading."
As of December 31, 2002, the  Registrant  had securities  classified as "held to
maturity" and  "available  for sale" in the amount of $506.3  million and $118.6
million,  respectively and had no securities classified as "trading." Securities
classified as "available for sale" are reported for financial reporting purposes
at the fair  market  value with net  changes in the market  value from period to
period included as a separate  component of stockholders'  equity, net of income
taxes. At December 31, 2002, the Registrant's  securities available for sale had
an  amortized  cost of $116.6  million and market  value of $118.6  million (net
unrealized gain of $2.0 million,  net of deferred income taxes).  The changes in
market value in the  Registrant's  available for sale  portfolio  reflect normal
market conditions and vary, either positively or negatively,  based primarily on
changes in general levels of market interest rates relative to the yields of the
portfolio. Additionally, changes in the market value of securities available for
sale do not  affect  the  Corporation's  income  nor does it affect  the  Bank's
regulatory capital requirements or its loan-to- one borrower limit.

     The   Registrant's   investment   securities    "available-for-sale"    and
"held-to-maturity"  portfolios at December 31, 2002, did not contain  securities
of any issuer with an aggregate book value in excess of 10% of the  Registrant's
equity, excluding those issued by the United States government agencies.

     At December 31, 2002, the Registrant's  investment portfolio policy allowed
investments in instruments  such as: (i) U.S.  Treasury  obligations,  (ii) U.S.
federal agency or federally sponsored agency obligations,  (iii) local municipal
obligations,  (iv) mortgage-backed  securities,  (v) banker's acceptances,  (vi)
certificates  of  deposit,  and (vii)  investment  grade  corporate  bonds,  and
commercial paper. The board of directors may authorize additional investments.

     As a source of liquidity and to supplement Registrant's lending activities,
the  Registrant  has  invested  in   residential   mortgage-backed   securities.
Mortgage-backed  securities can serve as collateral for borrowings and,  through
repayments,  as a source of liquidity.  Mortgage-backed  securities  represent a
participation  interest in a pool of  single-family  or other type of mortgages.
Principal  and  interest  payments  are passed  from the  mortgage  originators,
through  intermediaries  (generally  quasi-governmental  agencies) that pool and
repackage the participation  interests in the form of securities,  to investors,
like us. The

                                       10

<PAGE>

quasi-governmental  agencies  guarantee the payment of principal and interest to
investors  and include the Federal  Home Loan  Mortgage  Corporation  ("FHLMC"),
Government National Mortgage Association ("GNMA"), and Federal National Mortgage
Association ("FNMA").

     Mortgage-backed  securities  typically  are issued  with  stated  principal
amounts.  The  securities  are backed by pools of mortgages that have loans with
interest  rates that are  within a set range and have  varying  maturities.  The
underlying  pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage  loans.  Mortgage-backed  securities are generally  referred to as
mortgage participation certificates or pass-through  certificates.  The interest
rate risk  characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable  rate) and the prepayment  risk, are passed on to the  certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying  mortgages.  Expected  maturities will differ from contractual
maturities due to scheduled  repayments and because borrowers may have the right
to  call  or  prepay   obligations   with  or  without   prepayment   penalties.
Mortgage-backed securities issued by FHLMC, GNMA, and FNMA make up a majority of
the pass- through certificates market.

     The  Registrant  also  invests in  mortgage-related  securities,  primarily
collateralized mortgage obligations ("CMOs"), issued or sponsored by GNMA, FNMA,
FHLMC,  as well as  private  issuers.  CMOs  are a type  of debt  security  that
aggregates  pools  of  mortgages  and  mortgage-backed  securities  and  creates
different  classes of CMO securities  with varying  maturities and  amortization
schedules as well as a residual  interest with each class having  different risk
characteristics.  The cash  flows from the  underlying  collateral  are  usually
divided into "tranches" or classes whereby  tranches have descending  priorities
with  respect to the  distribution  of principal  and interest  repayment of the
underlying  mortgages and mortgage backed  securities as opposed to pass-through
mortgage-backed  securities  where  cash flows are  distributed  pro rata to all
security  holders.  Unlike  mortgage-backed  securities  from which cash flow is
received and prepayment risk is shared pro rata by all securities holders,  cash
flows from the mortgages and mortgage-  backed  securities  underlying  CMOs are
paid in accordance  with a predetermined  priority to investors  holding various
tranches of such  securities or obligations.  A particular  tranche or class may
carry  prepayment  risk  which  may be  different  from  that of the  underlying
collateral  and other  tranches.  CMOs  attempt to  moderate  reinvestment  risk
associated  with   conventional   mortgage-backed   securities   resulting  from
unexpected  prepayment activity.  Management believes these securities represent
attractive alternatives relative to other investments due to the wide variety of
maturity, repayment and interest rate options available.


                                       11

<PAGE>

         The following  table sets forth the carrying value of the  Registrant's
investment  securities  held to maturity,  securities  available for sale,  FHLB
stock,  and interest  bearing  deposits and overnight  investments  at the dates
indicated.

<TABLE>
<CAPTION>


                                                                 At December 31,
                                           ---------------------------------------------------
                                              2002                2001                2000
                                           ----------          -----------         -----------
                                                             (In Thousands)
<S>                                       <C>                 <C>                 <C>
Investment securities held to maturity:
  U.S. government and agency securities....  $ 25,915            $ 82,190            $167,923
  Reverse repurchase agreements............        --                  --              60,342
  Municipal bonds..........................    14,503               7,721               3,888
  CMO's....................................   123,809             106,660              43,954
 Mortgage-backed securities................   342,123             272,494             143,752
Investment securities available for sale:
  U.S. government and agency securities....    25,358              15,052              10,206
  CMO's....................................    22,108              12,565              28,156
 Mortgage-backed securities................    71,147              24,352               2,517
                                             --------            --------            --------
     Total investment securities...........   624,963             521,034             460,738
 FHLB stock................................    12,062               8,314               6,315
  Interest bearing deposits and
    overnight investments..................    46,913              31,023              14,862
                                             --------            --------            --------
     Total investments.....................  $683,938            $560,371            $481,915
                                             ========            ========            ========

</TABLE>

                                                        12

<PAGE>

     The following table sets forth the scheduled  maturities,  carrying values,
market values and average yields for the Registrant's  investment  securities at
December 31, 2002.  The  following  table does not take into  consideration  the
effects of unscheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>

                                                                                            More than              Total
                               One Year or Less  One to Five Years  Five to Ten Years       Ten Years        Investment Securities
                              -----------------  -----------------  ------------------  -----------------  -------------------------
                               Carrying Average  Carrying  Average   Carrying  Average  Carrying  Average  Carrying   Market Average
                                Value    Yield    Value     Yield     Value     Yield     Value    Yield    Value     Value   Yield
                              --------  -------  -------   -------   -------   -------    -----    -----   -------   ------- -------
                                                                        (Dollars in Thousands)

<S>                          <C>         <C>       <C>     <C>    <C>          <C>   <C>         <C>   <C>       <C>         <C>
Investment securities held to
maturity:
 U.S. government and
   agency obligations.........  $    --      --% $    --       --%  $21,884      6.28%   $4,031    6.28% $ 25,915  $ 26,547    6.28%
 Municipal bonds..............   14,173    2.40       --       --       100      4.30       230    5.60    14,503    14,510    2.47
 CMO's........................       --      --       --       --     3,341      5.33   120,468    5.57   123,809   124,545    5.56
 Mortgage-backed securities...    1,126    6.76      982     7.57    11,138      6.20   328,877    6.13   342,123   351,622    6.14
Investment securities
   available for sale:
 U.S. government and
   agency obligations.........       --      --   20,217     4.86     5,141      6.40        --      --    25,358    25,358    5.17
 CMO's........................       --      --       --       --     5,508      6.10    16,600    6.16    22,108    22,108    6.15
 Mortgage-backed securities...       --      --       --       --        --        --    71,147    6.08    71,147    71,147    6.08
 FHLB stock...................       --      --       --       --        --        --    12,062    5.45    12,062    12,062    5.45
 Interest-bearing deposits and
   overnight investments......   46,913    1.39       --       --        --        --        --      --    46,913    46,913    1.39
                                -------    ----  -------     ----   -------      ----  --------    ----  --------  --------    ----
   Total......................  $62,212    1.71% $21,199     4.99%  $47,112      6.18% $553,415    5.99% $683,938  $694,812    5.90%
                                =======    ====  =======     ====   =======      ====  ========    ====  ========  ========    ====

</TABLE>

                                       13

<PAGE>

Sources of Funds

     General.  Deposits are the major external source of the Registrant's  funds
for lending and other investment  purposes.  Funds are derived from amortization
and  prepayment  of loans and,  to a lesser  extent,  maturities  of  investment
securities,  borrowings,  mortgage-backed  securities and operations.  Scheduled
loan principal repayments are a relatively stable source of funds, while deposit
inflows and  outflows  and loan  prepayments  are  significantly  influenced  by
general interest rates and market conditions.

     Deposits.  Deposits are attracted from within the Registrant's market areas
of Burlington, Camden and Mercer Counties, New Jersey, through the offering of a
broad selection of deposit  instruments  including  regular  checking  accounts,
non-interest  checking  accounts,   money  market  accounts,   regular  passbook
accounts,  certificates of deposit and IRA accounts.  Deposit account terms vary
according  to the  minimum  balance  required,  the time  periods the funds must
remain on deposit and the interest  rate,  among other  factors.  The Registrant
regularly  evaluates  the  internal  cost of funds,  surveys  rates  offered  by
competing  institutions,  reviews the  Registrant's  cash flow  requirements for
lending and  liquidity and executes  rate changes when deemed  appropriate.  The
Registrant does not have any brokered  deposits and has no present  intention to
accept or solicit such deposits.

     Certificates  of  Deposit  in  Excess  of  $100,000.  The  following  table
indicates the amount of the Registrant's  certificates of deposit of $100,000 or
more by time remaining until maturity as of December 31, 2002.


Maturity Period of Deposits                             Certificates of
                                                            Deposit
                                                        ---------------
                                                         (In Thousands)

Three months or less...................................     $ 9,966
Three through six months...............................       7,043
Six through twelve months..............................       5,897
Over twelve months.....................................       5,210
                                                            -------
     Total.............................................     $28,116
                                                            =======




                                       14

<PAGE>



     Deposit  Rate.  The  following  table  sets forth the  distribution  of the
Registrant's  average balance of deposit accounts at the dates indicated and the
weighted average nominal interest rates on each category of deposits presented.
<TABLE>
<CAPTION>



                                                                           At December 31,
                                --------------------------------------------------------------------------------------------------
                                               2002                             2001                              2000
                                ---------------------------------   -----------------------------    -----------------------------
                                                        Weighted                         Weighted                         Weighted
                                            Percent of   Average             Percent of   Average             Percent of   Average
                                Average        Total     Nominal    Average     Total     Nominal    Average     Total     Nominal
                                Balance      Deposits     Rate      Balance   Deposits     Rate      Balance   Deposits     Rate
                                -------      --------    ------     -------   --------    ------     -------   --------    -----

                                                                       (Dollars In Thousands)

<S>                          <C>           <C>        <C>      <C>           <C>         <C>    <C>           <C>        <C>
Passbook and regular savings..   $141,705      18.93%     1.28%    $117,485      17.48%      2.19%  $102,960      16.56%     2.47%
Checking accounts.............    262,152      35.01       .62      229,598      34.15       1.18    199,378      32.10      1.80
Money market deposit accounts.    109,124      14.57      1.86       75,490      11.22       2.55     67,512      10.87      2.75
Certificates of deposit.......    233,975      31.25      3.58      248,637      36.97       5.14    242,063      38.97      5.14
Surrogate statement...........      1,772        .24      5.91        1,213        .18       6.02      9,314       1.50      5.30
                                 --------     ------      ----     --------    -------       ----   --------     ------      ----
  Total Deposits..............   $748,728     100.00%     1.86%    $672,423    100.00%       2.99%  $621,227     100.00%     3.36%
                                 ========     ======      ====     ========    ======        ====   ========     ======      ====
</TABLE>


                                       15

<PAGE>


Personnel

     As of December 31, 2002 the Registrant had 314 full-time  employees and 239
part-time  employees.   The  employees  are  not  represented  by  a  collective
bargaining  unit.  Management  believes its  relationship  with its employees is
good.

Regulation of the Corporation

     Set forth below is a brief  description of certain laws which relate to the
regulation of the  Corporation.  The description does not purport to be complete
and  is  qualified  in  its  entirety  by  reference  to  applicable   laws  and
regulations.

     General.  The  Corporation  is a unitary  savings and loan holding  company
subject to regulatory oversight by the OTS. As such, the Corporation is required
to  register  and file  reports  with the OTS and is subject to  regulation  and
examination by the OTS. In addition,  the OTS has enforcement authority over the
Corporation  and  its   non-savings   association   subsidiaries,   should  such
subsidiaries  be formed,  which also  permits  the OTS to  restrict  or prohibit
activities  that are determined to be a serious risk to the  subsidiary  savings
association.  This  regulation  and  oversight  is  intended  primarily  for the
protection of the depositors of the Bank and not for the benefit of stockholders
of the Corporation.

     As a unitary savings and loan holding company, the Company generally is not
subject   to  any   restrictions   on  its   business   activities.   While  the
Gramm-Leach-Bliley  Act (the "GLB Act")  terminated the "unitary  thrift holding
company"  exemption  from  activity  restrictions  on a prospective  basis,  the
Company enjoys  grandfathered status under this provision of the GLB Act because
it acquired the Bank prior to May 4, 1999. As a result,  the  Company's  freedom
from activity restrictions as a unitary savings and loan holding company was not
affected by the GLB Act.  However,  if the Company were to acquire control of an
additional  savings  institution,  its business  activities  would be subject to
restriction under the Home Owners' Loan Act. Furthermore, if the Company were in
the future to sell control of the Bank to any other company,  such company would
not succeed to the Company's grandfathered status under the GLB Act and would be
subject to the Home Owner's Loan Act's activity restrictions.

     The continuation of the Company's  exemption from  restrictions on business
activities as a unitary  savings and loan holding company is also subject to the
Company's continued  compliance with the QTL Test. See "- Regulation of the Bank
- Qualified Thrift Lender ("QTL") Test."

     Recent Legislation to Curtail Corporate Accounting Irregularities.  On July
30, 2002,  President  Bush signed into law the  Sarbanes-Oxley  Act of 2002 (the
"Act").  The  Securities  and Exchange  Commission  (the "SEC") has  promulgated
certain regulations  pursuant to the Act and will continue to propose additional
implementing  or clarifying  regulations as necessary in furtherance of the Act.
The  passage  of the Act  and the  regulations  implemented  by the SEC  subject
publicly-traded   companies  to  additional   and  more   cumbersome   reporting
regulations   and  disclosure.   Compliance  with  the  Act  and   corresponding
regulations may increase the Company's expenses.


                                       16

<PAGE>


Regulation of the Bank

     General. Set forth below is a brief description of certain laws that relate
to the regulation of the Bank. The  description  does not purport to be complete
and  is  qualified  in  its  entirety  by  reference  to  applicable   laws  and
regulations.  As a  federally  chartered,  Savings  Association  Insurance  Fund
("SAIF")  insured  savings  association,   the  Bank  is  subject  to  extensive
regulation by the OTS and the FDIC.  Lending  activities  and other  investments
must comply with various federal statutory and regulatory requirements. The Bank
is also  subject to certain  reserve  requirements  promulgated  by the  Federal
Reserve Board.

     The OTS, in  conjunction  with the FDIC,  regularly  examines  the Bank and
prepares  reports for the  consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's  operations.  The Bank's  relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law,  especially in such matters as the ownership of savings  accounts
and the form and content of the Bank's mortgage documents.

     The  Bank  must  file  reports  with the OTS and the  FDIC  concerning  its
activities  and  financial  condition,   in  addition  to  obtaining  regulatory
approvals  prior to entering into certain  transactions  such as mergers with or
acquisitions  of other savings  institutions.  This  regulation and  supervision
establishes a comprehensive  framework of activities in which an institution can
engage and is intended  primarily for the protection of the SAIF and depositors.
The  regulatory  structure  also  gives  the  regulatory  authorities  extensive
discretion in connection with their  supervisory and enforcement  activities and
examination  policies,  including policies with respect to the classification of
assets and the  establishment  of adequate  loan loss  reserves  for  regulatory
purposes.

     Insurance of Deposit  Accounts.  The deposit  accounts held by the Bank are
insured by the SAIF to a maximum of $100,000 for each insured member (as defined
by law and regulation). Insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound  condition  to  continue  operations  or has  violated  any
applicable law, regulation,  rule, order or condition imposed by the FDIC or the
institution's primary regulator.

     The FDIC administers two separate deposit insurance funds.  Generally,  the
Bank Insurance Fund (the "BIF") insures the deposits of commercial banks and the
SAIF insures the deposits of savings  institutions.  The FDIC is  authorized  to
increase  deposit  insurance  premiums  if  it  determines  such  increases  are
appropriate  to maintain  the  reserves of either the SAIF or BIF or to fund the
administration  of the  FDIC.  In  addition,  the  FDIC  is  authorized  to levy
emergency  special  assessments  of BIF and SAIF  members.  The FDIC has set the
deposit  insurance  assessment rates for SAIF member  institutions for the first
six months of 2003 at 0% to 0.27% of insured  deposits on an  annualized  basis,
with the assessment rate for most savings institutions set at 0%.

     In  addition,  all  institutions  insured by the FDIC are  required  to pay
quarterly assessments to fund interest payments on bonds issued by the Financing
Corporation, an agency of the Federal government established to recapitalize the
predecessor  to the SAIF.  These  assessments  will continue until the Financing
Corporation bonds mature in 2017.

                                       17

<PAGE>

     Regulatory Capital  Requirements.  OTS capital  regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets,  (2) a leverage ratio (core capital) equal to at least
3% of total adjusted  assets for savings  institutions  that receive the highest
supervisory  rating for safety and soundness and 4% for all other  thrifts,  and
(3) a  risk-based  capital  requirement  equal  to 8.0% of  total  risk-weighted
assets.  At December 31, 2002,  the Bank was in compliance  with its  regulatory
capital requirements.

     Dividend  and  Other  Capital  Distribution  Limitations.  The OTS  imposes
various  restrictions or requirements on the ability of savings  institutions to
make capital distributions, including cash dividends.

     A savings  association  that is a subsidiary  of a savings and loan holding
company,  such as the Bank must file an  application or a notice with the OTS at
least 30 days before making a capital distribution. Savings associations are not
required to file an application  for  permission to make a capital  distribution
and need only file a notice if the  following  conditions  are met: (1) they are
eligible for expedited  treatment under OTS  regulations,  (2) they would remain
adequately capitalized after the distribution,  (3) the annual amount of capital
distribution  does not exceed net income for that year to date added to retained
net income for the two preceding years, and (4) the capital  distribution  would
not violate any  agreements  between the OTS and the savings  association or any
OTS regulations. Any other situation would require an application to the OTS.

     The OTS may  disapprove an  application  or notice if the proposed  capital
distribution   would:  (i)  make  the  savings   association   undercapitalized,
significantly  undercapitalized,  or  critically  undercapitalized;  (ii)  raise
safety or  soundness  concerns;  or (iii)  violate  a  statute,  regulation,  or
agreement  with  the OTS (or  with  the  FDIC),  or a  condition  imposed  in an
OTS-approved application or notice. Further, a federal savings association, like
the  Bank,  cannot  distribute   regulatory  capital  that  is  needed  for  its
liquidation account.

     Qualified Thrift Lender Test. Federal savings institutions must meet one of
two  Qualified  Thrift  Lender  ("QTL")  tests.  To  qualify as a QTL, a savings
institution must either (i) be deemed a "domestic building and loan association"
under the Internal  Revenue Code by maintaining at least 60% of its total assets
in specified types of assets,  including cash,  certain  government  securities,
loans  secured  by and  other  assets  related  to  residential  real  property,
educational loans and investments in premises of the institution or (ii) satisfy
the statutory QTL test set forth in the Home Owner's Loan Act by  maintaining at
least 65% of its "portfolio  assets" in  certain"Qualified  Thrift  Investments"
(defined  to include  residential  mortgages  and  related  equity  investments,
certain  mortgage-related  securities,  small business loans,  student loans and
credit card loans, and 50% of certain community development loans). For purposes
of the Home Owners' Loan Act, portfolio assets are defined as total assets minus
intangible assets,  property used by the institution in conducting its business,
and liquid  assets  equal to 20% of total  assets.  A savings  institution  must
maintain its status as a QTL on a monthly basis in at least nine out of every 12
months.  A  failure  to  qualify  as a QTL  results  in a number  of  sanctions,
including the imposition of certain operating  restrictions and a restriction on
obtaining  additional advances from its FHLB. At December 31, 2002, the Bank was
in compliance with its QTL  requirement,  with 101.16% of its assets invested in
Qualified Thrift Investments.

     Federal  Home  Loan  Bank  System.  The Bank is a member of the FHLB of New
York,  which is one of 12 regional  FHLBs that  administers  the home  financing
credit  function  of  savings  associations.  Each FHLB  serves as a reserve  or
central bank for its members within its assigned region.  It is funded primarily
from  proceeds  derived from the sale of  consolidated  obligations  of the FHLB
System.  It makes

                                       18

<PAGE>


loans to members  (i.e.,  advances) in accordance  with policies and  procedures
established by the Board of Directors of the FHLB.

     As a member,  the Bank is required to purchase  and  maintain  stock in the
FHLB of New York in an  amount  equal to at  least  1% of its  aggregate  unpaid
residential  mortgage loans, home purchase  contracts or similar  obligations at
the beginning of each year.

     Federal  Reserve  Board  System.  The Federal  Reserve  Board  requires all
depository  institutions to maintain  non-interest bearing reserves at specified
levels against their transaction  accounts (primarily  checking,  NOW, and Super
NOW checking accounts) and non-personal time deposits.  The balances  maintained
to meet the reserve  requirements  imposed by the Federal  Reserve  Board may be
used to satisfy  the  liquidity  requirements  that are  imposed by the OTS.  At
December 31, 2002, the Bank was in compliance  with these Federal  Reserve Board
requirements.

Item 2.  Properties
-------------------

     The Registrant conducts its business through its two administrative offices
located in  Burlington,  New Jersey and its 39 branch  locations in  Burlington,
Camden and Mercer  Counties,  New  Jersey.  All of the  Registrant's  office and
branch  facilities are owned by the  Registrant,  except for seven branch office
locations,  two located in  Lumberton  and the others  located in  Medford,  Mt.
Holly,  Burlington,  Cinnaminson  and  Marlton,  New Jersey.  Management  of the
Registrant  considers  the  physical  condition  of  each  of  the  Registrant's
administrative and branch offices to be good and adequate for the conduct of the
Registrant's business.

Item 3.  Legal Proceedings
--------------------------

     The  Registrant  is  periodically  involved as a plaintiff  or defendant in
various  legal  actions,   such  as  actions  to  enforce  liens,   condemnation
proceedings  on properties in which the  Registrant  holds  mortgage  interests,
matters  involving the making and servicing of mortgage  loans and other matters
incident to the  Registrant's  business.  In the opinion of management,  none of
these actions individually or in the aggregate is believed to be material to the
financial condition or results of operations of the Registrant.

Item 4.  Submission of Matters to a Vote of Security Holders
------------------------------------------------------------

     No matters were  submitted to a vote of security  holders during the fourth
quarter of the fiscal year ended December 31, 2002.


                                     Part II

Item 5.  Market  for the  Registrant's  Common  Equity and  Related  Stockholder
         Matters
--------------------------------------------------------------------------------

     The  information  contained  under  the  section  captioned  "Stock  Market
Information"  in the  Corporation's  2002  Annual  Report to  Stockholders  (the
"Annual Report") is incorporated herein by reference.

Item 6.  Selected Financial Data
--------------------------------

     The information contained in the table captioned "Financial  Highlights" in
the Annual Report is incorporated herein by reference.

                                       19

<PAGE>

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations
--------------------------------------------------------------------------------

     The information contained in the section captioned "Management's Discussion
and Analysis of Financial  Condition  and Results of  Operations"  in the Annual
Report is incorporated herein by reference.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
--------------------------------------------------------------------

     The  information  contained  in the  sections  captioned  "Market  Risk and
Liquidity  Risk"and  "Interest  Rate Risk" in the Annual Report is  incorporated
herein by reference.

Item 8.  Financial Statements and Supplementary Data
----------------------------------------------------

     The  Registrant's  financial  statements  listed  in  Item  14  herein  are
incorporated herein by reference.

Item  9. Changes  in and  Disagreements  with  Accountants  on  Accounting  and
         Financial Disclosure
--------------------------------------------------------------------------------

         None.

                                    Part III

Item 10.  Directors and Executive Officers of the Registrant
------------------------------------------------------------

     The  information  contained  under the sections  captioned  "Section  16(a)
Beneficial Ownership Reporting  Compliance" and "I - Information with Respect to
Nominee for Director,  Directors  Continuing in Office, and Executive Officers -
Election  of  Directors"  and "-  Biographical  Information"  in the 2003  Proxy
Statement are incorporated herein by reference.

Executive Officers of the Corporation Who Are Not Directors


Name and Title                                     Age as of December 31, 2002
--------------                                     ---------------------------

Channing L. Smith                                            59
Vice President and Chief Financial Officer

James E. Igo                                                 46
Senior Vice President and Chief Lending Officer

Thomas M. Topley                                             42
Senior Vice President and Corporate Secretary


     Channing L. Smith has served as Vice President and Chief Financial  Officer
of the  Corporation  and the Bank since October 1994.  In this  capacity,  he is
responsible for the management of the accounting,  treasury,  and investments of
the  Corporation and the Bank. From April 1994 to October 1994, Mr. Smith served
as controller of the Corporation and the Bank.


                                       20

<PAGE>

     James E. Igo has  served as  Senior  Vice  President  and  Senior  Mortgage
Lending Officer of the Corporation and the Bank since November 1991.

     Thomas M. Topley has served as Senior Vice  President of  Operations  since
April 1993 and as  Corporate  Secretary  of the  Corporation  and the Bank since
April 1992.  From June 1990 to April 1993,  Mr. Topley served as Vice  President
and Controller for the Bank.

Item 11.  Executive Compensation
--------------------------------

     The  information  contained  under the  section  captioned  "Proposal  I --
Election of  Directors  -  Executive  Compensation"  in the Proxy  Statement  is
incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

          (a)  Security Ownership of Certain Beneficial Owners

               Information  required  by this  item is  incorporated  herein  by
               reference  to  the  Section  captioned  "Voting   Securities  and
               Principal Holders Thereof" of the Proxy Statement.

          (b)  Security Ownership of Management

               Information  required  by this  item is  incorporated  herein  by
               reference  to the  section  captioned  "Proposal I -- Election of
               Directors" of the Proxy Statement.

          (c)  Management of the Corporation knows of no arrangements, including
               any pledge by any person of  securities of the  Corporation,  the
               operation of which may at a subsequent date result in a change in
               control of the registrant.

          (d)  Securities  Authorized  for Issuance  Under  Equity  Compensation
               Plans


                                       21

<PAGE>

     Set forth  below is  information  as of December  31, 2002 with  respect to
compensation   plans  under  which  equity  securities  of  the  Registrant  are
authorized for issuance.

<TABLE>
<CAPTION>

                                                              EQUITY COMPENSATION PLAN INFORMATION

                                                    (a)                       (b)                        (c)
                                                                                                 Number of securities
                                                                                                 remaining available
                                            Number of securities       Weighted-average           for future issuance
                                             to be issued upon         exercise price of             under equity
                                                exercise of                outstanding            compensation plans
                                            outstanding options,       options,w arrants        (excluding securities
                                            warrants and rights            and rights         reflected in column (a))
                                            -------------------        ------------------     ------------------------


<S>                                           <C>                       <C>                       <C>
Equity compensation plans
  approved by shareholders

Stock Option and
  Incentive Plan........................          115,000                   $ 8.54                          --

Equity compensation plans
  not approved by shareholders                      n/a                       n/a                          n/a
                                                  -------                   ------                      ------
     TOTAL.............................           115,000                   $ 8.54                          --
                                                  =======                   ======                      ======
</TABLE>


Item 13.  Certain Relationships and Related Transactions
--------------------------------------------------------

     The information  required by this item is incorporated  herein by reference
to the section  captioned  "Proposal I --  Election  of  Directors"  and "Voting
Securities and Principal Holders Thereof" of the Proxy Statement.

Item 14.  Controls and Procedures
---------------------------------

     (a)  Evaluation  of  disclosure  controls  and  procedures.  Based on their
evaluation  as of a date within 90 days of the filing date of this Annual Report
on Form  10-K,  the  Registrant's  principal  executive  officer  and  principal
financial officer have concluded that the Registrant's  disclosure  controls and
procedures  (as defined in Rules  13a-14(c) and 15d-14(c)  under the  Securities
Exchange  Act of 1934  (the  "Exchange  Act"))  are  effective  to  ensure  that
information  required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded,  processed,  summarized and reported
within the time periods  specified in Securities and Exchange  Commission  rules
and forms.

     (b) Changes in internal controls.  There were no significant changes in the
Registrant's  internal  controls or in other  factors  that could  significantly
affect these controls subsequent to the date of their evaluation,  including any
corrective  actions  with  regard  to  significant   deficiencies  and  material
weaknesses.

                                       22

<PAGE>


Item 15.  Exhibits, Financial Statements, and Reports on Form 8-K
-----------------------------------------------------------------

     (a)  Listed below are all financial  statements  and exhibits filed as part
          of this report, and are incorporated by reference.

          1.   The  consolidated   statements  of  financial  condition  of  FMS
               Financial  Corporation and subsidiary as of December 31, 2002 and
               2001, 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 December 31, 2002,  together with the
               related   notes   and  the   independent   auditors'   report  of
               PricewaterhouseCoopers LLP, independent accountants.

          2.   Schedules omitted as they are not applicable.

          3.   Exhibits

               The  following Exhibits are filed as part of this report:
<TABLE>
<CAPTION>

<S>                    <C>       <C>
                           3.1      Certificate of Incorporation*
                           3.2      Bylaws*
                           4        Agreement to furnish copy to Securities and
                                    Exchange Commission upon request of
                                    Indenture dated July 28, 1994, relating to
                                    10% Subordinated Debentures due 2004 in
                                    aggregate principal amount of $10 million**
                           10.1     Stock Option and Incentive Plan***
                           13       Portions of the 2002 Annual Report to Stockholders
                           21       Subsidiaries of the Registrant
                           23       Consent of Independent Accountants
                           99.0     Certification pursuant to 18 USC Section 1350 as adopted pursuant to
                                    Section 906 of the Sarbanes-Oxley Act of
                                    2002.

                  ---------------
                  *        Incorporated by reference to the Registrant's Form S-1 Registration Statement No.
                           33-24340.
                  **       Incorporated by reference to the Registrant's Annual
                           Report on Form 10-K for the fiscal year ended
                           December 31, 1994.
                  ***      Incorporated by reference to the Registrant's Form S-8 Registration Statement No.
                           33-24340.

</TABLE>
     (b)  No  Reports  on Form 8-K were  filed  during  the last  quarter of the
          fiscal year covered by this Report.


                                       23
<PAGE>



                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of March 24, 2003.

                                           FMS FINANCIAL CORPORATION




                                           By:/s/ Craig W. Yates
                                              ----------------------------------
                                              Craig W. Yates, President and
                                              Chief Executive Officer
                                              (Duly Authorized Representative)


     Pursuant to the  requirement of the Securities  Exchange Act of 1934,  this
report  has been  signed  below on March 24,  2003 by the  following  persons on
behalf of the registrant and in the capacities indicated.
<TABLE>
<CAPTION>


<S>                                                      <C>
/s/ Craig W. Yates
-------------------------------------------
Craig W. Yates
President, Chief Executive Officer and Director
(Principal Executive Officer)

/s/ Channing L. Smith                                         /s/ Edward J. Staats, Jr.
-------------------------------------------                   -------------------------------------------------------
Channing L. Smith                                             Edward J. Staats, Jr.,
Vice President and Chief Financial Officer                    Chairman of the Board
(Principal Financial and Accounting Officer)

/s/ Wayne H. Page                                             /s/ James C. Lignana
-------------------------------------------                   -------------------------------------------------------
Wayne H. Page                                                 James C. Lignana
Director                                                      Director

/s/ Dominic W. Flamini                                        /s/ Vincent R. Farias
-------------------------------------------                   -------------------------------------------------------
Dominic W. Flamini                                            Vincent R. Farias
Director                                                      Director

/s/ Roy D. Yates                                              /s/ Mary Wells
-------------------------------------------                   -------------------------------------------------------
Roy D. Yates                                                  Mary Wells
Director                                                      Director

/s/ Joseph W. Clarke, Jr.
-------------------------------------------
Joseph W. Clarke, Jr.
Director
</TABLE>


                                       24


<PAGE>

                            SECTION 302 CERTIFICATION


     I, Craig W. Yates,  President and Chief Executive  Officer of FMS Financial
Corporation, certify that:

1.   I  have  reviewed  this  annual  report  on  Form  10-K  of  FMS  Financial
     Corporation;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     (a)  designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     (b)  evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     (c)  presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's  other certifying  officer and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):

     (a)  all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     (b)  any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officer and I have  indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.


Date: March 24, 2003                 /s/Craig W. Yates
                                     -----------------------------------
                                     Craig W. Yates
                                     President and Chief Executive Officer
<PAGE>

                            SECTION 302 CERTIFICATION


     I, Channing L. Smith,  Vice  President and Chief  Financial  Officer of FMS
Financial Corporation, certify that:

1.   I  have  reviewed  this  annual  report  on  Form  10-K  of  FMS  Financial
     Corporation;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     (a)  designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     (b)  evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     (c)  presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's  other certifying  officer and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):

     (a)  all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     (b)  any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officer and I have  indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.



Date: March 24, 2003                 /s/Channing L. Smith
                                     --------------------------------
                                     Channing L. Smith
                                     Vice President and Chief Financial Officer