UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                             ______________________

                                    FORM 10-Q

(Mark One)
[X]  Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
     Act of 1934

     For the quarterly period ended June 30, 2006

                                       OR

[ ]  Transition  report  pursuant  to  section  13 or  15(d)  of the  Securities
     Exchange Act of 1934

                         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                         (IRS Employer
incorporation 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

     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  reports),  and (2) has been
subject to such filing requirements for the past 90 days. YES X NO . --- ---

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

Large accelerated filer       Accelerated filer      Non-accelerated filer X
                        ---                     ---                       ---

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

     Indicate the number of shares  outstanding to each of the issuer's  classes
of common stock as of the latest practicable date : August 4, 2006.


            Class                                           6,517,713
            -----                                           ---------
   $.10 par value common stock                          Outstanding Shares

<PAGE>

                    FMS FINANCIAL CORPORATION AND SUBSIDIARY
                         QUARTERLY REPORT ON FORM 10-Q
                                 JUNE 30, 2006


                               TABLE OF CONTENTS

                                                                            Page
                                                                            ----

PART I - Financial Information
------------------------------

Item 1 - Financial Statements
         Consolidated Statements of Financial Condition as of
              June 30, 2006 (unaudited) and December 31, 2005                  1

         Consolidated Statements of Operations (unaudited)
              for the three and six months ended June 30, 2006 and
              June 30, 2005                                                    2

         Consolidated Statements of Cash Flows (unaudited)
              for the six months ended June 30, 2006 and
              June 30, 2005                                                    3

         Consolidated Statements of Changes in Stockholders' Equity
              (unaudited) for the six months ended June 30, 2006 and
              June 30, 2005                                                    4

         Notes to Consolidated Financial Statements                        5 - 6

Item 2 - Management's Discussion and Analysis of
         Financial Condition and Results of Operations                    7 - 18

Item 3 - Quantitative and Qualitative Disclosures About Market Risk           19

Item 4 - Controls and Procedures                                              19

PART II - Other Information
---------------------------

Item 1 - Legal Proceedings                                                    20

Item 1A- Risk Factors                                                         20

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds          20

Item 3 - Defaults Upon Senior Securities                                      20

Item 4 - Submission of Matters to a Vote of Security Holders                  20

Item 5 - Other Information                                                    20

Item 6 - Exhibits                                                             20

<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                                   JUNE 30, 2006    DECEMBER 31, 2005
                                                                                   (UNAUDITED)
---------------------------------------------------------------------------------------------------------------------
ASSETS
---------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                <C>
     Cash and amounts due from depository institutions                           $    58,605,384    $    54,479,491
     Interest-bearing deposits                                                            73,437             93,076
     Short term funds                                                                 65,819,710         39,268,382
                                                                                 ---------------    ---------------
        Total cash and cash equivalents                                              124,498,531         93,840,949
     Investment securities held to maturity                                          277,610,487        275,340,435
     Investment securities available for sale                                        154,421,834        155,632,095
     Loans, net                                                                      453,397,342        442,571,357
     Mortgage-backed securities held to maturity                                     179,028,593        208,195,874
     Accrued interest receivable                                                       6,354,309          6,224,371
     Federal Home Loan Bank stock                                                      7,213,520          8,248,420
     Office properties and equipment, net                                             34,912,538         34,801,087
     Deferred income taxes                                                             2,737,592          2,607,641
     Core deposit intangible                                                           1,517,718          1,875,822
     Prepaid expenses and other assets                                                 2,632,265          1,440,857
     FMS Statutory Trust I issue costs, net                                              314,328            484,467
                                                                                 ---------------    ---------------
TOTAL ASSETS                                                                     $ 1,244,639,057    $ 1,231,263,375
                                                                                 ===============    ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------------
Liabilities:
     Interest-bearing deposits                                                   $   746,738,793    $   759,991,442
     Noninterest-bearing deposits                                                    199,523,748        187,075,982
                                                                                 ---------------    ---------------
        Total deposits                                                               946,262,541        947,067,424
     Securities sold under agreements to repurchase                                  165,000,000        175,000,000
     FMS Statutory Trust I and Trust II debentures                                    51,548,000         25,774,000
     Advances by borrowers for taxes and insurance                                     2,359,745          2,132,320
     Accrued interest payable                                                          1,552,626          1,378,353
     Dividends payable                                                                   195,543            195,486
     Other liabilities                                                                 2,116,937          4,633,516
                                                                                 ---------------    ---------------
     Total liabilities                                                             1,169,035,392      1,156,181,099
                                                                                 ---------------    ---------------


Stockholders' Equity:
     Preferred stock - $.10 par value 5,000,000 shares authorized; none issued
     Common stock - $.10 par value 10,000,000 shares authorized; shares
        issued 8,009,392 and 8,006,392 and shares outstanding 6,517,713 and
        6,515,110 as of June 30, 2006 and December 31, 2005, respectively                800,939            800,639
     Additional paid-in capital                                                        8,797,081          8,767,381
     Accumulated other comprehensive loss - net of income taxes                       (3,055,196)        (1,099,630)
     Retained earnings                                                                80,036,934         77,583,683
     Less:  Treasury stock (1,491,679 and 1,491,282 shares, at cost,
        as of June 30, 2006 and December 31, 2005, respectively)                     (10,976,093)       (10,969,797)
                                                                                 ---------------    ---------------
Total stockholders' equity                                                            75,603,665         75,082,276
                                                                                 ---------------    ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                       $ 1,244,639,057    $ 1,231,263,375
                                                                                 ===============    ===============

</TABLE>

See notes to consolidated financial statements.

                                       1
<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
                                                   THREE MONTHS ENDED           SIX MONTHS ENDED
                                                         JUNE 30,                   JUNE 30,
                                               -------------------------   -------------------------
                                                  2006          2005           2006          2005
----------------------------------------------------------------------------------------------------
<S>                                            <C>           <C>           <C>           <C>
INTEREST  INCOME:
Interest income on:
     Loans                                     $ 6,928,371   $ 6,398,813   $13,733,232   $12,600,654
     Mortgage-backed securities                  3,193,610     3,652,465     6,665,688     7,378,480
     Investments                                 5,172,013     4,276,127    10,071,649     8,364,636
                                               -----------   -----------   -----------   -----------
Total interest income                           15,293,994    14,327,405    30,470,569    28,343,770
                                               -----------   -----------   -----------   -----------

INTEREST EXPENSE:
Interest expense on:
     Deposits                                    3,901,782     2,682,399     7,555,879     5,086,189
     Borrowings                                  2,076,796     2,008,478     4,200,521     4,163,256
     Long-term debt                                731,732       443,177     1,298,642       851,676
                                               -----------   -----------   -----------   -----------
Total interest expense                           6,710,310     5,134,054    13,055,042    10,101,121
                                               -----------   -----------   -----------   -----------

NET INTEREST INCOME                              8,583,684     9,193,351    17,415,527    18,242,649
PROVISION FOR LOAN LOSSES                           90,000        90,000       180,000       180,000
                                               -----------   -----------   -----------   -----------

NET INTEREST INCOME AFTER PROVISION
    FOR LOAN LOSSES                              8,493,684     9,103,351    17,235,527    18,062,649
                                               -----------   -----------   -----------   -----------

NONINTEREST INCOME:
     Service charges on accounts                 1,509,465     1,377,941     2,869,999     2,649,546
     Gain on sale of investment securities         364,621             0       364,621             0
     Other income                                   48,495        37,935        86,076        74,817
                                               -----------   -----------   -----------   -----------
Total noninterest income                         1,922,581     1,415,876     3,320,696     2,724,363
                                               -----------   -----------   -----------   -----------

NONINTEREST EXPENSE:
     Salaries and employee benefits              4,793,190     4,458,834     9,614,775     8,834,862
     Occupancy and equipment                     1,504,949     1,385,072     2,971,637     2,821,608
     Purchased services                            699,697       701,740     1,416,721     1,398,923
     Professional fees                             193,877       184,758       390,724       372,008
     Amortization of core deposit intangible       179,052       179,052       358,104       358,104
     Office supplies                               163,398       147,403       327,802       313,673
     Other expenses                                157,937       152,732       308,497       307,199
     Telecommunications                            140,202        80,936       279,171       157,472
     Advertising                                   112,774       104,425       221,692       213,243
                                               -----------   -----------   -----------   -----------
Total noninterest expense                        7,945,076     7,394,952    15,889,123    14,777,092
                                               -----------   -----------   -----------   -----------

INCOME BEFORE INCOME TAXES                       2,471,189     3,124,275     4,667,100     6,009,920

INCOME TAXES                                       961,015     1,281,983     1,822,840     2,466,394
                                               -----------   -----------   -----------   -----------

NET INCOME                                     $ 1,510,174   $ 1,842,292   $ 2,844,260   $ 3,543,526
                                               ===========   ===========   ===========   ===========


BASIC EARNINGS PER COMMON SHARE                $      0.23   $      0.28   $      0.44   $      0.54
                                               ===========   ===========   ===========   ===========

DILUTED EARNINGS PER COMMON SHARE              $      0.23   $      0.28   $      0.44   $      0.54
                                               ===========   ===========   ===========   ===========

Dividends declared per common share            $      0.03   $      0.03   $      0.06   $      0.06
                                               ===========   ===========   ===========   ===========
</TABLE>


See notes to consolidated financial statements.

                                       2
<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
                                                                          SIX MONTHS ENDED JUNE 30,
                                                                           2006             2005
-----------------------------------------------------------------------------------------------------
<S>                                                                     <C>             <C>
OPERATING ACTIVITIES:
Net income                                                              $  2,844,260    $   3,543,526
Adjustments to reconcile net income to net cash provided by
 operating activities:
    Provision for loan losses                                                180,000          180,000
    Amortization and accretion of premiums and discounts on
       investments, net                                                      288,732        1,165,653
    Amortization and accretion of other fees and costs                       508,513          413,982
    Depreciation                                                           1,007,888        1,013,945
Realized (gains) and losses on:
    Disposal of fixed assets                                                   3,082              115
    Sale of investment securities                                           (364,621)               0
(Increase) Decrease in accrued interest receivable                          (129,938)         127,318
(Increase) Decrease in prepaid expenses and other assets                  (1,191,408)          60,407
Increase (Decrease) in accrued interest payable                              174,273         (140,953)
(Decrease) Increase in other liabilities                                  (1,166,032)         329,571
Benefit for deferred income taxes                                           (129,951)        (165,890)
                                                                        ------------    -------------
    Net cash provided by operating activities                              2,024,798        6,527,674
                                                                        ------------    -------------
INVESTING ACTIVITIES:
Proceeds from sale of:
    Investment securities                                                 12,206,808                0
Principal collected and proceeds from maturities of investment
  securities held to maturity                                             12,225,387      217,472,073
Principal collected and proceeds from maturities of investment
  securities available for sale                                            7,819,728       78,973,223
Principal collected and proceeds from maturities of mortgage-
  backed securities                                                       17,158,435       32,031,655
Principal collected on loans, net                                         51,319,876       42,030,061
Loans originated or acquired                                             (62,306,164)     (57,046,347)
Purchase of investment securities and mortgage-backed securities
  held to maturity                                                       (14,533,093)    (221,182,547)
Purchase of investment securities and mortgage-backed securities
  available for sale                                                     (10,000,000)    (117,218,427)
Redemption of Federal Home Loan Bank stock                                 1,034,900        2,500,100
Purchase of office property and equipment                                 (1,122,420)      (1,624,363)
                                                                        ------------    -------------
    Net cash provided (used) by investing activities                      13,803,457      (24,064,572)
                                                                        ------------    -------------

FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits and savings accounts           (2,470,917)      17,396,987
Net increase (decrease) in time deposits                                   1,666,034       (3,962,929)
Net proceeds from issuance of trust capital debentures                    25,774,000                0
Net decrease in FHLB advances                                            (10,000,000)     (10,000,000)
Repayment from securities sold under agreement to repurchase                       0      (40,000,000)
Increase in advances from borrowers for taxes and insurance                  227,425          173,901
Purchase of treasury stock                                                    (6,296)               0
Dividends paid on common stock                                              (390,919)        (390,132)
Net proceeds from issuance of common stock                                    30,000          128,715
                                                                        ------------    -------------
    Net cash provided (used) by financing activities                      14,829,327      (36,653,458)
                                                                        ------------    -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                          30,657,582      (54,190,356)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                            93,840,949      110,577,356
                                                                        ------------    -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                $124,498,531    $  56,387,000
                                                                        ============    =============
Supplemental Disclosures:
    Cash paid for:
       Interest on deposits, advances, and other borrowings             $ 12,880,769    $  10,242,074
       Income taxes                                                        2,188,000        2,800,829
    Non-cash investing and financing activities:
       Dividends declared and not paid at period end                         195,543          195,077
</TABLE>

See notes to consolidated financial statements.

                                       3
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                                            ADDITIONAL   ACCUMULATED                                 TOTAL
                                   COMMON SHARES   COMMON    PAID-IN    COMPREHENSIVE   RETAINED      TREASURY    STOCKHOLDERS'
                                    OUTSTANDING    STOCK     CAPITAL    INCOME (LOSS)   EARNINGS        STOCK        EQUITY
-------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>          <C>       <C>               <C>       <C>          <C>           <C>
Balances at December 31, 2004        6,502,110    $799,129  $8,555,506        $270,784  $71,646,199  ($10,934,999) $70,336,619
Net Income                                                                                3,543,526                  3,543,526
Other comprehensive income
  Unrealized gain on securities
     available for sale, net of
     taxes of $88,421                                                          128,030                                 128,030
                                                                                                                   -----------
Total comprehensive income                                                                                           3,671,556
                                                                                                                   -----------

Dividends declared ($.06)                                                                  (390,178)                  (390,178)
Exercise of stock options                  450          45     128,670                                                 128,715
------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2005            6,502,560    $799,174  $8,684,176        $398,814  $74,799,547  ($10,934,999) $73,746,712
==============================================================================================================================

Balances at December 31, 2005        6,515,110    $800,639  $8,767,381     ($1,099,630) $77,583,683  ($10,969,797) $75,082,276
Net Income                                                                                2,844,260                  2,844,260
Other comprehensive income
  Unrealized loss on securities
     available for sale, net of
     taxes of $1,350,547                                                    (1,955,566)                             (1,955,566)
                                                                                                                   -----------
Total comprehensive income                                                                                             888,694
                                                                                                                   -----------

Dividends declared ($.06)                                                                  (391,009)                  (391,009)
Exercise of stock options                3,000         300      29,700                                                  30,000
Purchase of common stock                  (397)                                                            (6,296)      (6,296)
------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2006            6,517,713    $800,939  $8,797,081     ($3,055,196) $80,036,934  ($10,976,093)  75,603,665
==============================================================================================================================
</TABLE>

See notes to consolidated financial statements.

                                       4
<PAGE>
FMS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
SIX MONTHS ENDED JUNE 30, 2006  (UNAUDITED).


1-GENERAL
In the opinion of management,  the accompanying unaudited consolidated financial
statements  of  FMS  Financial  Corporation  (the  "Corporation")   contain  all
adjustments,  consisting  of normal  recurring  accruals,  necessary  for a fair
presentation of its financial condition,  results of operations,  cash flows and
changes in stockholders' equity for the periods and dates indicated. The results
of  operations  for the  three  and six  months  ended  June  30,  2006  are not
necessarily  indicative of the operating results for the full fiscal year or any
other  interim  period.

The accompanying  unaudited consolidated financial statements have been prepared
in accordance with the instructions for Form 10-Q, and therefore, do not include
all  information  and  notes  necessary  for a fair  presentation  of  financial
condition, results of operations and statements of cash flows in conformity with
generally  accepted  accounting  principles.  These statements should be read in
conjunction  with the  consolidated  statements  and  related  notes,  which are
incorporated  by reference to the  Corporation's  Annual Report on Form 10-K for
the fiscal year ended  December  31,  2005.  The 2005  comparative  Statement of
Financial  Condition  was derived  from the audited  financial  statements.  The
consolidated   financial   statements   include  the   Corporation's   principal
subsidiary, Farmers & Mechanics Bank (the "Bank").



2-LONG-TERM  DEBT
In June 2006, the Corporation  formed a wholly owned  subsidiary,  FMS Statutory
Trust II (Trust II). On June 15, 2006, Trust II issued $25.0 million of floating
rate capital  securities with an interest rate that resets every three months to
LIBOR plus 158 basis points.  At June 30, 2006 long-term debt consisted of $25.8
million of FMS Statutory  Trust II debentures with an interest rate of 6.88% and
$25.8 million of Statutory Trust I debentures with an interest rate of 8.56%. At
December 31, 2005  long-term  debt  consisted of $25.8  million of FMS Statutory
Trust  1  debentures  with  an  interest  rate of  6.69%.

3-REGULATORY  CAPITAL REQUIREMENTS
The Bank is considered  "well  capitalized" by OTS regulations at June 30, 2006.
The  Bank's  regulatory  tangible  and tier 1 (core)  capital  ratios  are $93.5
million,  or 7.51% of total  bank  assets,  and  $98.3  million  or  18.62%  for
risk-based  capital.  FMS's consolidated  capital ratio at June 30, 2006 totaled
6.07%.


4-EARNINGS PER SHARE
The following table set forth the calculation of basic and diluted  earnings per
share for the three months and six months periods ended June 30, 2006 and 2005.
<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED         SIX MONTHS ENDED
                                                              JUNE 30,                 JUNE 30,
                                                      -----------------------   -----------------------
                                                         2006       2005           2006         2005
-------------------------------------------------------------------------------------------------------
<S>                                                   <C>          <C>          <C>          <C>
Basic Earnings per share:
-------------------------
Net income available to common shareholders           $1,510,174   $1,842,292   $2,844,260   $3,543,526

Average common shares outstanding                      6,516,359    6,502,476    6,515,736    6,502,349
Net income per common share                           $     0.23   $     0.28   $     0.44   $     0.54

Diluted Earnings per share:
---------------------------
Net income available to common shareholders
on a diluted basis                                    $1,510,174   $1,842,292   $2,844,260   $3,543,526

Average common shares outstanding                      6,516,359    6,502,476    6,515,736    6,502,349
Additional shares considered in diluted
computation assuming exercise of stock options            13,756       34,970       13,836       36,585
                                                      ----------   ----------   ----------   ----------
Adjusted weighted average common shares outstanding    6,530,115    6,537,446    6,529,572    6,538,934
Net income per common share                           $     0.23   $     0.28   $     0.44   $     0.54
</TABLE>

                                       5
<PAGE>


5-STOCK  OPTIONS
The  Corporation  maintains  an  incentive  stock  option  plan.  The  Financial
Accounting  Standards Board ("FASB") issued Statement of Financial Standards No.
123R in  December  2004,  (SFAS  No.  123R),  which  establishes  standards  for
share-based  payments.  This  statement  has  no  effect  on  the  Corporation's
Consolidated  Statements of Financial  Condition or  Consolidated  Statements of
Operations as no options have been granted  during the six months ended June 30,
2006 or the years ending December 31, 2003, 2004 or 2005.

6-RETIREMENT  PLANS
The Bank  maintains a defined  benefit  pension plan for active  employees.  The
Corporation expects to contribute approximately $1.4 million to our pension plan
in 2006. The components of the net pension cost are as follows:
<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED             SIX MONTHS ENDED
                                                          JUNE 30,                      JUNE 30,
                                                --------------------------       -----------------------
                                                  2006              2005           2006          2005
--------------------------------------------------------------------------------------------------------
<S>                                             <C>               <C>            <C>            <C>
Service cost                                    $256,462          $230,355       $512,924       $460,710
Interest cost                                    205,876           170,627        411,752        341,254
Return on assets                                (219,864)         (203,406)      (439,728)      (406,812)
Net amortization and deferral                      5,008             1,027         10,016          2,054
--------------------------------------------------------------------------------------------------------
Net periodic pension cost                       $247,482          $198,603       $494,964       $397,206
========================================================================================================
</TABLE>


In addition to providing  retirement  plan  benefits the Bank  provides  certain
health  care and life  insurance  benefits  to certain  retired  employees.  The
expected  cost  of   postretirement   benefits  for  2006  is  estimated  to  be
approximately  $43  thousand.  The  components  of net  periodic  postretirement
benefit cost are as follows:
<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED             SIX MONTHS ENDED
                                                          JUNE 30,                      JUNE 30,
                                                --------------------------       -----------------------
                                                  2006              2005           2006          2005
--------------------------------------------------------------------------------------------------------
<S>                                               <C>               <C>           <C>            <C>
Interest cost                                     $6,463            $6,291        $12,926        $12,582
Amortization of prior service cost                (1,766)           (2,835)        (3,532)        (5,670)
Amortization of (gain) loss                         (965)            4,879         (1,930)         9,758
--------------------------------------------------------------------------------------------------------
Net periodic postretirement
benefit costs                                     $3,732            $8,335         $7,464        $16,670
========================================================================================================
</TABLE>

7-RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006,  the  Financial  Accounting  Standards  Board  (FASB)  issued FASB
Interpretation  No.  48-  Accounting  for  Uncertainty  in  Income  Taxes.  This
Interpretation  prescribes a recognition threshold and measurement attribute for
the financial  statement  recognition and measurement of a tax position taken or
expected to be taken in a tax return. The effective date for this Interpretation
is for fiscal years beginning  after December 15, 2006 with earlier  application
encouraged.  The  adoption of this  standard is not  expected to have a material
impact on the Corporation's  Consolidated  Statements of Financial  Condition or
the Consolidated Statements of Operations.

                                       6
<PAGE>

ITEM 2: MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2006.

The  following  discussion  and  analysis  should  be read  with  our  financial
statements and related notes included elsewhere in this report on Form 10-Q. The
Corporation  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 quarterly report on Form
10-Q 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.  The  discussion and analysis in this report may
contain  "forward-looking  statements"  within the meaning of Section 21A of the
Securities and Exchange Act of 1934.

These  forward-looking  statements  involve  risk  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 cautionary statements made
in this  report  should  be  read as  applying  to all  related  forward-looking
statements  wherever they appear in this report.  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.  Such risks and  uncertainties  could  cause  actual
results to differ  materially  from any  future  performance  suggested  in this
report. The Corporation cautions that the foregoing list of important factors is
not exclusive.  The Corporation undertakes no obligation to release publicly the
results of any revisions to these  forward-looking  statements to reflect events
or  circumstances  arising  after the date of this report.  This caution is made
under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995.

CRITICAL ACCOUNTING  ESTIMATE-Provision  for Loan Losses - A critical accounting
estimate is the provision for loan losses.  The provision  remained  constant at
$90 thousand and $180  thousand for the three and six months ended June 30, 2006
compared to the same period in 2005.  At June 30,  2006 the  allowance  for loan
losses  amounted to $5.2 million  compared to $5.1 million at December 31, 2005.
The   determination  of  the  allowance  level  for  loan  losses  is  based  on
management's  analysis of the risk  characteristics  of various  types of loans,
levels of classified  loans,  previous loan loss experience,  the estimated fair
market  value of the  underlying  collateral  and current  economic  conditions.
Additionally,  the mix within the Bank's  portfolio  continues  to change as the
Bank offers a wider variety of products.  Within the loan portfolio, a change is
also occurring as a shift is made from lower  yielding loans (i.e.,  one-to-four
family loans) to higher yielding loans (i.e.,  commercial real estate mortgages,
commercial construction, consumer and commercial business loans). These types of
loans  contain a higher  degree of risk.  The Bank will  continue to monitor its
allowance for loan losses and make future  adjustments to the allowance  through
the provision for loan losses as changing conditions dictate.  Although the Bank
maintains  its  allowance  for loan  losses at a level that it  considers  to be
adequate to provide for the inherent risk of loss in its loan  portfolio,  there
can be no assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods due
to the higher  degree of credit risk which  might  result from the change in the
mix of the loan portfolio or changes in economic


                                       7
<PAGE>

conditions. Most of the Bank's lending activity is with customers located within
southern New Jersey.  Generally, the loans are secured by real estate consisting
of single-family  residential properties.  While this represents a concentration
of credit risk,  the credit  losses  arising  from this type of lending  compare
favorably  with the Bank's  credit loss  experience on its portfolio as a whole.
The ultimate  repayment  of these loans is dependent to a certain  degree on the
local economy and real estate market.


FINANCIAL  CONDITION

TOTAL ASSETS - at June 30, 2006 were $1.2 billion as compared  with total assets
at December 31, 2005 of $1.2 billion.


INVESTMENT  SECURITIES  HELD TO  MATURITY  -  increased  $2.3  million to $277.6
million at June 30, 2006 from $275.3  million at December 31, 2005 primarily due
to purchases of $9.5 million of Municipal  Bonds and $5.0 million in U.S. Agency
Notes,  partially offset by principal  paydowns of $6.4 million in CMO's and the
maturity of $5.8 million of  Municipal  Bonds during the three months ended June
30, 2006.  Investment  securities held to maturity at June 30, 2006 consisted of
$277.6 million in fixed rate securities. A comparison of cost and fair values of
investment securities held to maturity as of June 30, 2006 and December 31, 2005
follows:
<TABLE>
<CAPTION>
                                                JUNE 30, 2006                                  DECEMBER 31, 2005
------------------------------------------------------------------------------------- ----------------------------------
                                               GROSS        GROSS
                             AMORTIZED       UNREALIZED   UNREALIZED        FAIR            AMORTIZED          FAIR
                               COST             GAINS       LOSSES          VALUE              COST            VALUE
-------------------------------------------------------------------------------------- ---------------------------------
<S>                          <C>                <C>       <C>             <C>                <C>             <C>
U. S. Agency Notes           $197,316,474       $    0   ($5,895,803)    $191,420,671       $192,328,423    $190,184,454
CMO's                          65,138,632            0    (3,108,706)      62,029,926         71,621,287      69,647,298
Municipal bonds                15,155,381        1,011              0      15,156,392         11,390,725      11,393,027
-------------------------------------------------------------------------------------- ---------------------------------
Total                        $277,610,487       $1,011   ($9,004,509)    $268,606,989       $275,340,435    $271,224,779
====================================================================================== =================================
</TABLE>


INVESTMENT  SECURITIES  AVAILABLE  FOR SALE - decreased  $1.2  million to $154.4
million at June 30, 2006 from $155.6  million at December 31, 2005. The decrease
is the result of principal  paydowns of $7.8 million of CMO's and MBS's and $3.3
million in market adjustments, partially offset by purchases of $10.0 million of
U.S.  Agency  Notes  during  the six  months  ended  June 30,  2006.  Investment
securities  available  for sale  consisted  of  $150.8  million  in  fixed  rate
securities  and $3.6 million in adjustable  rate  securities at June 30, 2006. A
comparison of cost and fair values of investment  securities  available for sale
as of June 30, 2006 and December 31, 2005 follows:
<TABLE>
<CAPTION>
                                                JUNE 30, 2006                                  DECEMBER 31, 2005
-------------------------------------------------------------------------------------- ---------------------------------
                                             GROSS         GROSS
                             AMORTIZED     UNREALIZED    UNREALIZED        FAIR            AMORTIZED          FAIR
                               COST          GAINS         LOSSES          VALUE              COST            VALUE
-------------------------------------------------------------------------------------- ---------------------------------
<S>                          <C>               <C>        <C>            <C>                <C>             <C>
U. S. Agency Notes           $ 70,397,776      $     0   ($1,916,904)    $ 68,480,872       $ 60,411,063    $ 59,581,396
CMO's                          20,042,079            0      (820,543)      19,221,536         22,350,620      21,990,367
MBS's                          47,939,907       12,118    (1,611,338)      46,340,687         52,082,272      51,642,686
Pass thru                      21,207,239            0      (828,500)      20,378,739         22,647,193      22,417,646
-------------------------------------------------------------------------------------- ---------------------------------
Total                        $159,587,001      $12,118   ($5,177,285)    $154,421,834       $157,491,148    $155,632,095
====================================================================================== =================================
</TABLE>


                                       8
<PAGE>

MORTGAGE-BACKED  SECURITIES HELD TO MATURITY - decreased $29.2 million to $179.0
million at June 30, 2006 from $208.2  million at December 31, 2005. The decrease
is the result of principal paydowns of $17.2 million during the six months ended
June 30,  2006.  The Bank also sold $12.0  million of MBS's  during this period,
which resulted in a realized gain of $365 thousand. The sale of these securities
qualified as maturities in accordance  with FASB No. 115 "Accounting for Certain
Investments in Debt and Equity Securities",  as the Bank had already collected a
substantial  portion  (in  excess  of 85%)  of the  principal  due to  scheduled
payments and prepayments.  Mortgage-backed securities at June 30, 2006 consisted
of $157.1 million in fixed rate  securities and $21.9 million in adjustable rate
securities.  A comparison of cost and fair values of mortgage-backed  securities
held to maturity at June 30, 2006 and December 31, 2005 are summarized below:
<TABLE>
<CAPTION>
                                JUNE 30, 2006                                            DECEMBER 31, 2005
----------------------------------------------------------------------------------- --------------------------------
                                      GROSS          GROSS
                    AMORTIZED       UNREALIZED     UNREALIZED        FAIR              AMORTIZED           FAIR
                      COST            GAINS         LOSSES           VALUE                COST             VALUE
----------------------------------------------------------------------------------- --------------------------------
<S>               <C>               <C>          <C>             <C>                  <C>               <C>
GNMA              $    844,903      $  2,416     $        0      $    847,319         $  4,837,341      $  5,038,378
FNMA                84,556,552       197,413     (2,421,605)       82,332,360          100,492,309       100,386,565
FHLMC               45,345,443        35,149     (1,557,044)       43,823,548           51,765,939        51,190,732
Pass Thru           48,281,695             0     (2,136,189)       46,145,506           51,100,285        49,859,482
----------------------------------------------------------------------------------- --------------------------------
Total             $179,028,593      $234,978    ($6,114,838)     $173,148,733         $208,195,874      $206,475,157
=================================================================================== ================================
</TABLE>

The  following  table  shows the gross  unrealized  losses and fair value of the
Bank's  investments  with  unrealized  losses that are deemed to be  temporarily
impaired,  aggregated by investment  category and length of time that individual
securities  have been in continuous  unrealized  loss position at June 30, 2006.
The Bank has the intent  and  ability to hold  temporarily  impaired  securities
either until maturity or until interest rates reach a level that would eliminate
a loss on sale.
<TABLE>
<CAPTION>
                                   LESS THAN 12 MONTHS              12 MONTHS OR GREATER               TOTAL
                               -------------------------------------------------------------------------------------------
                                                 UNREALIZED                     UNREALIZED                    UNREALIZED
DESCRIPTION OF SECURITY        FAIR VALUE          LOSSES        FAIR VALUE       LOSSES      FAIR VALUE        LOSSES
--------------------------------------------------------------------------------------------------------------------------
<S>                            <C>                <C>            <C>            <C>            <C>            <C>
Available for Sale:
-------------------
U.S. Gov't agencies            $17,894,180        ($284,609)     $50,586,692    ($1,632,295)   $68,480,872    ($1,916,904)

MBSs including pass thrus       29,954,461         (796,264)      35,177,828     (1,643,574)    65,132,289     (2,439,838)

CMOs                             2,939,924         (233,211)      16,281,612       (587,332)    19,221,536       (820,543)
                              --------------------------------------------------------------------------------------------
Total Available for Sale       $50,788,565      ($1,314,084)    $102,046,132    ($3,863,201)  $152,834,697    ($5,177,285)
                              --------------------------------- ----------------------------- ----------------------------

Held to Maturity:
-----------------
U.S. Gov't agencies            $92,347,430      ($2,543,184)     $99,103,241    ($3,352,619)  $191,450,671    ($5,895,803)

MBSs                            51,550,817       (1,331,991)     100,604,335     (4,782,847)   152,155,152     (6,114,838)

CMOs                             2,107,855         (150,640)      59,922,071     (2,958,066)    62,029,926     (3,108,706)
                              --------------------------------------------------------------------------------------------
Total Held to Maturity        $146,006,102      ($4,025,815)    $259,629,647   ($11,093,532)  $405,635,749   ($15,119,347)
                              --------------------------------------------------------------------------------------------
Total                         $196,794,667      ($5,339,899)    $361,675,779   ($14,956,733)  $558,470,446   ($20,296,632)
                              ================= =============== ============== ============== ============== =============
</TABLE>

                                       9
<PAGE>

LOANS,  NET - increased  $10.8  million to $453.4  million at June 30, 2006 from
$442.6  million at December 31, 2005.  This increase was primarily the result of
$62.3  million of loans  originated,  partially  offset by  approximately  $51.3
million of  principal  collected  on loans  during the six months ended June 30,
2006.  The following  table shows loans  receivable  by major  categories at the
dates indicated.
<TABLE>
<CAPTION>
                                      JUNE 30,            DECEMBER 31,
                                       2006                   2005
-----------------------------------------------------------------------
<S>                                 <C>                    <C>
Mortgage Loans                      $289,589,870           $286,476,251
Construction Loans                     3,740,525              1,774,630
Commercial Construction                5,285,612              6,942,091
Consumer Loans                         2,583,176              2,355,697
Commercial Real Estate               132,368,197            127,704,281
Commercial Business                   25,139,434             22,550,190
-----------------------------------------------------------------------

Subtotal                             458,706,814            447,803,140
Less:
     Deferred loan fees                   74,523                168,998
     Allowance for
      loan losses                      5,234,949              5,062,785
-----------------------------------------------------------------------
Total loans, net                    $453,397,342           $442,571,357
=======================================================================
</TABLE>

At June 30, 2006, the recorded investment in loans for which impairment has been
recognized  in  accordance  with SFAS Nos.  114 and 118 totaled  $1.7 million of
which  $985  thousand  related  to loans  that were  individually  measured  for
impairment  with a valuation  allowance of $414  thousand  and $687  thousand of
loans that were collectively  measured for impairment with a valuation allowance
of $14 thousand.  The Bank had $5.2 million in total reserves for loan losses at
June 30, 2006, representing approximately 283% of non-performing assets and 1.2%
of total loans.  For the six months ended June 30,  2006,  the average  recorded
investment in impaired loans was approximately $1.7 million. The Bank recognized
$60 thousand of interest  income on impaired loans for the six months ended June
30, 2006, all of which was recognized on the cash basis.

As of June 30, 2006 the Bank had outstanding  loan commitments of $15.2 million,
of which  $8.5  million  represented  variable  rate  loans  and  $6.7  million,
represented fixed rate loans. The Bank intends to fund these commitments through
scheduled  amortization  of loans  and  mortgage-backed  securities,  additional
borrowings,  and if necessary,  the sale of investment  securities available for
sale.

                                       10
<PAGE>

NON-PERFORMING  ASSETS - The following  table sets forth  information  regarding
non-accrual  loans,  troubled debt  restructured and real estate owned assets by
the Bank.
<TABLE>
<CAPTION>
                                                             JUNE 30,           DECEMBER 31,
                                                               2006                2005
                                                            ----------           ----------
<S>                                                           <C>                  <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
     One-to-four family                                       $687,250             $794,154
     Commercial real estate                                    984,924              984,924
     Consumer and other                                              0                    0
                                                            ----------           ----------
     Total non-accrual loans                                $1,672,174           $1,779,078
                                                            ----------           ----------

     Troubled debt restructuring                               176,060              175,802
     Real estate owned, net                                          0                    0
                                                            ----------           ----------
     Total non-performing assets, net                       $1,848,234           $1,954,880
                                                            ----------           ----------

     Total non-accrual loans to net loans                         0.37%                0.40%
                                                            ==========           ==========
     Total non-accrual loans to total assets                      0.13%                0.14%
                                                            ==========           ==========
     Total non-performing assets to total assets                  0.15%                0.16%
                                                            ==========           ==========
</TABLE>

DEPOSITS -  decreased  $805  thousand  to $946.3  million at June 30,  2006 from
$947.1 million at December 31, 2005.  Checking accounts  decreased $17.9 million
and money market  accounts  decreased $1.2 million for the six months ended June
30, 2006.  These  decreases  were  partially  offset by increases in noninterest
checking  accounts of $12.4 million,  savings  accounts of $4.2 million and time
deposits of $1.7 million  during this period.  Interest  credited to  depositors
accounts for the six months ended June 30, 2006  amounted to $2.1  million.  The
following table sets forth certain information  concerning deposits at the dates
indicated.
<TABLE>
<CAPTION>
                                              JUNE 30, 2006                              DECEMBER 31, 2005
---------------------------------------------------------------------------------------------------------------------
                                                   PERCENT      WEIGHTED                        PERCENT      WEIGHTED
                                                   OF TOTAL     AVERAGE                         OF TOTAL     AVERAGE
                                    AMOUNT         DEPOSITS       RATE           AMOUNT         DEPOSITS       RATE
---------------------------------------------------------------------------------------------------------------------
<S>                                 <C>             <C>          <C>             <C>             <C>          <C>
Non-interest checking               $199,523,748    21.09%       0.00%           $187,075,982    19.75%       0.00%
Checking accounts                    208,383,833    22.02%       2.78%            226,271,954    23.89%       1.88%
Savings accounts                     193,050,333    20.40%       0.60%            188,866,936    19.94%       0.59%
Money market accounts                131,746,824    13.92%       1.13%            132,960,782    14.04%       0.89%
Time deposits                        213,557,803    22.57%       3.09%            211,891,770    22.38%       2.34%
---------------------------------------------------------------------------------------------------------------------
   Total Deposits                   $946,262,541   100.00%       1.63%           $947,067,424   100.00%       1.21%
=====================================================================================================================
</TABLE>

                                       11
<PAGE>

BORROWINGS  - at June 30, 2006  amounted to $165.0  million in  securities  sold
under the  agreement to  repurchase  with a weighted  average  interest  rate of
4.98%.  At  December  31,  2005,  borrowings  consisted  of  $175.0  million  in
securities sold under  agreements to repurchase with a weighted  average rate of
4.93%.


LONG-TERM DEBT - In June 2006, the Corporation formed a wholly owned subsidiary,
FMS  Statutory  Trust II (Trust II). On June 15,  2006,  the trust  issued $25.0
million of floating  rate capital  securities  with an interest rate that resets
every three months to LIBOR plus 158 basis  points.  At June 30, 2006  long-term
debt  consisted of $25.8  million of FMS Statutory  Trust II debentures  with an
interest rate of 6.88% and $25.8 million of Statutory Trust I debentures with an
interest rate of 8.56%.  At December 31, 2005  long-term debt consisted of $25.8
million of FMS Statutory Trust I debentures with an interest rate of 6.69%.


RESULTS OF OPERATIONS

GENERAL
The earnings of the Corporation  depend primarily upon the level of net interest
income,  which is the difference between interest earned on its interest-earning
assets such as loans and investments,  and the interest paid on interest-bearing
liabilities,   such  as  deposits  including   non-interest  checking  accounts,
long-term  debts  and  borrowings.  Net  interest  income is a  function  of the
interest rate spread, which is the difference between the weighted average yield
earned  on  interest-earning  assets  and  the  weighted  average  rate  paid on
interest-bearing liabilities, as well as the average balance of interest-earning
assets as compared to interest-bearing  liabilities. Net income is also affected
by  non-interest  income,  such as  gains  (losses)  on the  sale of  loans  and
investments,  provision for loan losses and real estate owned,  service  charges
and other fees, and operating  expenses,  such as: salaries,  employee benefits,
deposit insurance  premiums,  depreciation,  occupancy and equipment expense and
purchased services expense.

The Corporation  recorded net income for the three months ended June 30, 2006 of
$1.5 million, or $.23 diluted earnings per share as compared to $1.8 million, or
$.28 diluted  earnings per share for the comparable  three month period in 2005.
The  Corporation  recorded  net income for the six months ended June 30, 2006 of
$2.8 million, or $.44 diluted earnings per share as compared to $3.5 million, or
$.54 diluted earnings per share for the comparable period in 2005.

INTEREST RATE SPREAD
The Bank's  interest  income is affected by the  difference  or  "interest  rate
spread" between yields received by the Bank on its  interest-earning  assets and
the  interest  rates  paid  by  the  Bank  on its  interest-bearing  liabilities
including non-interest checking accounts. Net interest income is affected by (i)
the spread between the yield earned on interest-earning  assets and the interest
rates paid on interest-bearing  savings deposits including non-interest checking
accounts  and  borrowings   (liabilities)  and  (ii)  the  relative  amounts  of
interest-earning assets versus interest-bearing liabilities. The Bank's interest
rate spread varies over time because money fund accounts and other flexible rate
accounts  have  become  significant  sources of savings  deposits.  Income  from
investment  securities and  mortgage-backed  securities  depends upon the amount
invested during the period and the yields earned on such  securities.  The yield
on loans changes  principally as a result of existing  mortgage loan repayments,
adjustable rate loan adjustments, sales and the interest rates and volume of new
mortgage  loans.  The average yields and rates are derived by dividing income or
expense by the average balance of  interest-earning  assets or  interest-bearing
liabilities, respectively, for the periods presented.

                                       12
<PAGE>

The following table sets forth certain information relating to the Corporation's
average balance sheet and reflects the average yield on assets and average rates
paid on liabilities for the periods indicated.
<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED JUNE 30,
                               -------------------------------------------------------------------------
                                            2006                                     2005
                               ----------------------------------     ----------------------------------
                               AVERAGE                  AVERAGE       AVERAGE                  AVERAGE
                               BALANCE     INTEREST    YIELD/RATE     BALANCE      INTEREST   YIELD/RATE
                               -------     --------    ----------     -------      --------   ----------
                                                       (DOLLARS IN THOUSANDS)
<S>                            <C>        <C>              <C>    <C>             <C>              <C>
Interest-earning assets:
   Loans receivable            $  457,327    $6,928      6.06%       $  432,904     $ 6,399      5.91%
   Interest-bearing deposit        48,452       534      4.41%           41,750         259      2.48%
   Mortgage-backed securities     256,094     3,194      4.99%          316,948       3,652      4.61%
   Investment securities          367,498     4,638      5.05%          349,581       4,017      4.60%
                               ----------    ------      ----        ----------     -------      ----
Total interest-earning
      assets                    1,129,371    15,294      5.42%        1,141,183      14,327      5.02%
                               ----------    ------      ----        ----------     -------      ----

Interest-bearing liabilities:
   Checking deposits              403,755     1,533      1.52%          410,784         937      0.91%
   Savings deposits               194,227       290      0.60%          201,222         293      0.58%
   Money Market deposits          130,522       384      1.18%          144,909         306      0.84%
   Time deposit                   213,041     1,694      3.18%          206,985       1,147      2.22%
   Borrowings                     165,000     2,077      5.04%          159,333       2,008      5.04%
   Long-Term Debt                  30,070       732      9.74%           25,774         443      6.88%
                               ----------    ------      ----        ----------     -------      ----
Total interest-bearing
      liabilities              $1,136,615     6,710      2.36%       $1,149,007       5,134      1.79%
                               ==========    ------      ----        ==========     -------      ----
Net interest income                          $8,584                                 $ 9,193
                                             ======                                 =======
Interest rate spread                                     3.06%                                   3.23%
                                                         ====                                    ====
Net yield on average interest-earning assets             3.04%                                   3.22%
                                                         ====                                    ====

Ratio of average interest-
   earning assets to average interest-
   bearing liabilities                                  99.36%                                  99.32%
                                                        =====                                   =====
<CAPTION>
                                                       SIX MONTHS ENDED JUNE 30,
                               -------------------------------------------------------------------------
                                            2006                                     2005
                               ----------------------------------     ----------------------------------
                               AVERAGE                  AVERAGE       AVERAGE                  AVERAGE
                               BALANCE     INTEREST    YIELD/RATE     BALANCE      INTEREST   YIELD/RATE
                               -------     --------    ----------     -------      --------   ----------
                                                       (DOLLARS IN THOUSANDS)
<S>                            <C>        <C>              <C>    <C>             <C>              <C>
Interest-earning assets:
   Loans receivable            $  455,736     $13,733      6.03%     $  429,943     $12,601      5.86%
   Interest-bearing deposit        38,638         808      4.18%         51,117         591      2.31%
   Mortgage-backed securities     265,483       6,666      5.02%        322,982       7,378      4.57%
   Investment securities          369,150       9,264      5.02%        338,307       7,774      4.60%
                               ----------     -------      ----      ----------     -------      ----
Total interest-earning
      assets                    1,129,007      30,471      5.40%      1,142,349      28,344      4.96%
                               ----------     -------      ----      ----------     -------      ----

Interest-bearing liabilities:
   Checking deposits              402,493       3,002      1.49%        398,478       1,733      0.87%
   Savings deposits               191,945         569      0.59%        198,706         579      0.58%
   Money Market deposits          130,409         728      1.12%        144,551         590      0.82%
   Time deposit                   212,797       3,256      3.06%        208,745       2,183      2.09%
   Borrowings                     168,306       4,201      4.99%        173,302       4,164      4.81%
   Long-Term Debt                  27,922       1,299      9.30%         25,774         852      6.61%
                               ----------     -------      ----      ----------     -------      ----
Total interest-bearing
      liabilities              $1,133,872      13,055      2.30%     $1,149,556      10,101      1.76%
                               ==========     -------      ----      ==========     -------      ----

Net interest income                           $17,416                               $18,243
                                              =======                               =======
Interest rate spread                                       3.10%                                 3.21%
                                                          =====                                 =====
Net yield on average interest-earning assets               3.09%                                 3.19%
                                                          =====                                 =====

Ratio of average interest-
   earning assets to average interest-bearing
   liabilities                                            99.57%                                99.37%
                                                          =====                                 =====
</TABLE>
                                       13

<PAGE>

RATE/VOLUME ANALYSIS
The following  table describes the extent to which changes in interest rates and
changes in volume of interest-earning  assets and  interest-bearing  liabilities
have affected the Bank's interest income and interest expense during the periods
indicated.  For each category of  interest-earning  assets and  interest-bearing
liabilities,  information is provided on changes  attributable to (i) changes in
rate,  (ii)  changes in volume and (iii)  total  changes in rate and volume (the
combined  effect of changes in both volume and rate, not separately  identified,
has been allocated to rate). A higher level of non-performing  loans affects the
changes in both volume and rate.
<TABLE>
<CAPTION>
                                                 Three Months Ended June 30,               Six Months Ended June 30,
                                                        2006 vs. 2005                            2006 vs. 2005
                                            Increase (Decrease) due to Change in:      Increase (Decrease) due to Change in:
                                            -------------------------------------      -------------------------------------
                                            Rate         Volume           Total         Rate        Volume         Total
                                                     (In Thousands)                             (In Thousands)
                                            -------------------------------------      -------------------------------------
<S>                                        <C>             <C>           <C>            <C>         <C>            <C>
Interest income:
     Loans                                  $  168         $ 361         $   529        $  376      $   756        $ 1,132
     Interest-bearing deposits                 233            42             275           361         (144)           217
     Mortgage-backed securities                243          (701)           (458)          601       (1,313)          (712)
     Investment securities                     415           206             621           781          709          1,490
                                            ------------------------------------        ----------------------------------
     Total change - interest income          1,059           (92)            967         2,119            8          2,127
                                            ------------------------------------        ----------------------------------
Interest expense:
     Checking deposits                         612           (16)            596         1,252           17          1,269
     Savings deposit                             7           (10)             (3)           10          (20)           (10)
     Money market deposit                      108           (30)             78           196          (58)           138
     Time deposit                              513            34             547         1,031           42          1,073
     Borrowings                                  0            69              69           157         (120)            37
     Long-Term Debt                            215            74             289           376           71            447
                                            ------------------------------------        ----------------------------------
     Total change - interest expense         1,455           121           1,576         3,022          (68)         2,954
                                            ------------------------------------        ----------------------------------
Net change in net interest income           $ (396)        $(213)        $  (609)       $ (903)     $    76        $  (827)
                                            ====================================        ==================================
</TABLE>


NET INCOME- QUARTER END
The Corporation  and its subsidiary  recorded net income of $1.5 million for the
quarter ended June 30, 2006, or $0.23 diluted earnings per share, as compared to
net income of $1.8 million,  or $0.28 diluted earnings per share for the quarter
ended June 30, 2005.  Net interest  income was $8.6 million for the three months
ended  June 30,  2006  compared  to $9.2  million  for the same  period in 2005.
Provisions for loan losses were $90 thousand for the quarter ended June 30, 2006
and 2005.  Noninterest  income was $1.9  million for the three months ended June
30, 2006 compared to $1.4 million for the same period in 2005. Total noninterest
expense for the quarter  ended June 30, 2006 was $7.9  million  compared to $7.4
million for the same quarter in 2005.

INTEREST INCOME- QUARTER END
Total interest  income  increased $967 thousand to $15.3 million for the quarter
ended June 30, 2006 from $14.3 million for the same period in 2005. The increase
is attributable to increases in interest income on investment securities of $621
thousand, loans of $529 thousand and interest-bearing deposits of $275 thousand,
partially offset by a decrease in interest income on mortgage-backed  securities
of $458 thousand.

Interest income on investment securities increased $621 thousand to $4.6 million
for the three  months  ended June 30, 2006 from $4.0 million for the same period
in 2005. The average yield of the investment portfolio increased 45 basis points
to 5.05% for the three months ended June 30, 2006 from 4.60% for the same period
in 2005,  which resulted in an interest  income increase of $415 thousand due to
rate changes.  The average  balance


                                       14
<PAGE>

of  investment  securities  increased  $17.9  million to $367.5  million for the
quarter  ended June 30,  2006 from  $349.6  million for the same period in 2005,
which resulted in a volume increase in interest income of $206 thousand.

Interest  income on loans  increased $529 thousand to $6.9 million for the three
months  ended June 30, 2006 from $6.4  million for the same period in 2005.  The
average balance of the loan portfolio  increased $24.4 million to $457.3 million
for the three months ended June 30, 2006 from $432.9 million for the same period
in 2005,  which  resulted  in a  volume  increase  in  interest  income  of $361
thousand.  The average rate on loans  increased 15 basis points to 6.06% for the
three months  ended June 30, 2006 from 5.91% for the same period in 2005,  which
resulted in an increase in interest income of $168 thousand due to rate changes.

Interest income on interest-bearing  deposit investments increased $275 thousand
to $534 thousand for the three months ended June 30, 2006 from $259 thousand for
the  same  period  in  2005.  The  average  yield  of  interest-bearing  deposit
investments  increased 193 basis points to 4.41% for the three months ended June
30, 2006 from 2.48% for the same period in 2005,  which  resulted in an increase
in interest income of $233 thousand due to rate changes.  The average balance of
interest-bearing deposit investments increased $6.7 million to $48.5 million for
the quarter  ended June 30, 2006 from $41.8 million for the same period in 2005,
which resulted in a volume increase in interest income of $42 thousand.

Interest income on mortgage-backed securities decreased by $458 thousand to $3.2
million for the three  months ended June 30, 2006 from $3.7 million for the same
period in 2005. The average  balance of MBS's  decreased $60.8 million to $256.1
million for the three  months  ended June 30,  2006 from $316.9  million for the
same period in 2005,  which  resulted in an interest  income volume  decrease of
$701 thousand.  The average yield of the MBS portfolio increased 38 basis points
to 4.99% for the  quarter  ended June 30, 2006 from 4.61% for the same period in
2005,  which  resulted in an interest  income  increase of $243  thousand due to
changes in rates.


INTEREST EXPENSE- QUARTER END
Total  interest  expense  increased  $1.6  million to $6.7 million for the three
months  ended June 30, 2006 from $5.1  million for the same period in 2005.  The
increases  in interest  expense on  checking  deposits  of $596  thousand,  time
deposits  of  $547  thousand,  long-term  debt of $289  thousand,  money  market
deposits of $78 thousand,  and borrowings of $69 thousand were partially  offset
by a decrease in interest  expense on savings  deposits of $3  thousand.

Interest  expense on checking  deposits  increased $596 thousand to $1.5 million
for the three months ended June 30, 2006 from $937  thousand for the same period
in 2005.  The average  rate on checking  deposits  increased  61 basis points to
1.52% for the  quarter  ended June 30,  2006 from  0.91% for the same  period in
2005,  which resulted in an increase in interest  expense of $612 thousand.  The
average  balance of checking  deposits  decreased $7.0 million to $403.8 million
for the three months ended June 30, 2006 from $410.8 million for the same period
in 2005,  which  resulted  in a  volume  decrease  in  interest  expense  of $16
thousand.

Interest  expense on time deposits  increased  $547 thousand to $1.7 million for
the three  months  ended June 30, 2006 from $1.1  million for the same period in
2005.  The average rate on time deposits  increased 96 basis points to 3.18% for
the quarter  ended June 30,  2006 from 2.22% for the same period in 2005,  which
resulted in a rate increase in interest  expense of $513  thousand.  The average
balance  of time  deposits  increased  $6.0  million to $213.0  million  for the
quarter  ended June 30,  2006 from  $207.0  million for the same period in 2005,
which resulted in an increase in interest expense of $34 thousand.

Interest  expense on long-term debt increased $289 thousand to $732 thousand for
the three months  ended June 30, 2006 from $443  thousand for the same period in
2005.  The average rate increased 286 basis points to 9.74% for the three months
ended June 30, 2006 from 6.88% for the same period in 2005,  which resulted in a


                                       15
<PAGE>

rate  increase  in interest  expense of $215  thousand.  The average  balance of
long-term  debt  increased  $4.3 million to $30.1  million for the quarter ended
June 30, 2006 from $25.8 million for the same period in 2005,  which resulted in
an increase in interest expense of $74 thousand.

Interest  expense  on money  market  deposits  increased  $78  thousand  to $384
thousand  for the three  months  ended June 30, 2006 from $306  thousand for the
same period in 2005.  The average  rate on money  market  deposits  increased 34
basis  points to 1.18% for the  quarter  ended June 30,  2006 from 0.84% for the
same period in 2005,  which resulted in an increase in interest  expense of $108
thousand.  The average balance of money market deposits  decreased $14.4 million
to $130.5  million for the three months ended June 30, 2006 from $144.9  million
for the same period in 2005,  which  resulted  in a volume  decrease in interest
expense of $30 thousand.

Interest  expense on  borrowings  increased $69 thousand to $2.1 million for the
three  months ended June 30, 2006 from $2.0 million for the same period in 2005.
The average  balance of borrowings  increased  $5.7 million to $165.0 million at
June 30, 2006 from $159.3 million for the same period in 2005, which resulted in
a volume increase in interest expense of $69 thousand.  The average rate paid on
borrowings  remained  constant at 5.04% for the quarter ended June 30, 2006 from
the same period in 2005.

Interest expense on savings deposits  decreased $3 thousand to $290 thousand for
the three months  ended June 30, 2006 from $293  thousand for the same period in
2005. The average balance of savings  deposits  decreased $7.0 million to $194.2
million for the three  months  ended June 30,  2006 from $201.2  million for the
same period in 2005,  which resulted in a volume decrease in interest expense of
$10 thousand.  The average rate on savings deposits  increased 2 basis points to
0.60% for the  quarter  ended June 30,  2006 from  0.58% for the same  period in
2005, which resulted in an increase in interest expense of $7 thousand.

INTEREST INCOME- YEAR TO DATE
Total interest income increased $2.1 million to $30.4 million for the six months
ended June 30, 2006 from $28.3 million for the same period in 2005. The increase
is primarily  due to increases in interest  income on  investment  securities of
$1.5  million,  loans of $1.1  million  and  interest-bearing  deposits  of $217
thousand,  partially offset by a decrease in interest income on  mortgage-backed
securities of $712 thousand.

Interest income on investment  securities increased $1.5 million to $9.3 million
for the six months  ended June 30, 2006 from $7.8 million for the same period in
2005. The average yield of the investment portfolio increased 42 basis points to
5.02% for the six months  ended June 30,  2006 from 4.60% for the same period in
2005,  which  resulted in an interest  income  increase  of $781  thousand.  The
average  balance of  investment  securities  increased  $30.9  million to $369.2
million for the six months ended June 30, 2006 from $338.3  million for the same
six month period in 2005, which resulted in a volume increase in interest income
of $709  thousand.  The increase in the average volume since June 2005 is due to
investment purchases of $90.0 million,  partially offset by investment calls and
maturities of $40.6 million and principal paydowns of $48.6 million.

Interest  income on loans  increased  $1.1 million to $13.7  million for the six
months ended June 30, 2006 from $12.6  million for the same period in 2005.  The
average balance of the loan portfolio  increased $25.8 million to $455.7 million
for the six months  ended June 30, 2006 from $429.9  million for the same period
in 2005,  which  resulted  in a  volume  increase  in  interest  income  of $756
thousand.  The  increase  in the  average  balance  is  principally  due to loan
originations of $122.7 million, partially offset by principal collected on loans
of $102.6 million since June 2005. The average rate on loans  increased 17 basis
points to 6.03% for the six months  ended June 30,  2006 from 5.86% for the same
period  in 2005,  which  resulted  in an  increase  in  interest  income of $376
thousand due to rate changes.

Interest  income on  interest-bearing  deposits  increased $217 thousand to $808
thousand for the six months ended June 30, 2006 from $591  thousand for the same
period in 2005.  The average yield on interest  bearing  deposits  increased 187
basis  points to 4.18% for the six months ended June 30, 2006 from 2.31% for the
same period in


                                       16
<PAGE>

2005,  which resulted in an increase in interest  income of $361 thousand due to
rate changes.  The average balance of interest-bearing  deposits decreased $12.5
million to $38.6  million for the six months  ended June 30, 2006 from $51.1 for
the same period in 2005,  which resulted in a volume decrease in interest income
of $144 thousand.

Interest income on mortgage-backed securities decreased by $712 thousand to $6.7
million for the six months  ended June 30,  2006 from $7.4  million for the same
period in 2005. The average  balance of MBS's  decreased $57.5 million to $265.5
million for the six months ended June 30, 2006 from $323.0  million for the same
period in 2005,  which  resulted in an interest  income volume  decrease of $1.3
million.  The  decrease  in the  average  balance  during this period was due to
principal paydowns of $48.2 million and sales of $12.0 million, partially offset
by purchases of MBS's of $3.0 million since June 2005.  The average yield of the
MBS  portfolio  increased 45 basis points to 5.02% for the six months ended June
30, 2006 from 4.57% for the same period in 2005,  which  resulted in an interest
income increase of $601 thousand due to changes in rate.

INTEREST EXPENSE- YEAR TO DATE
Total  interest  expense  increased  $3.0  million to $13.1  million for the six
months ended June 30, 2006 from $10.1  million for the same period in 2005.  The
increases  in  interest  expense on  checking  deposits  of $1.3  million,  time
deposits of $1.1 million, long-term debt of $447 thousand, money market deposits
of $138  thousand and  borrowings of $37 thousand,  were  partially  offset by a
decrease in interest expense on savings deposits of $10 thousand.

Interest expense on checking deposits increased $1.3 million to $3.0 million for
the six months  ended June 30,  2006 from $1.7  million  for the same  period in
2005. The average rate on checking  deposits  increased 62 basis points to 1.49%
for the six months  ended June 30,  2006 from 0.87% for the same period in 2005,
which resulted in an increase in interest expense of $1.3 million. This increase
was due to an increase in the average rate paid on municipal government checking
accounts to 4.67% for the six months ended June 30, 2006 from 3.03% for the same
period in 2005. The average balance of checking deposits  increased $4.0 million
to $402.5 million for the six months ended June 30, 2006 from $398.5 million for
the same period in 2005, which resulted in a volume increase in interest expense
of $17 thousand.

Interest expense on time deposits increased $1.1 million to $3.3 million for the
six months  ended June 30,  2006 from $2.2  million for the same period in 2005.
The average rate on time deposits increased 97 basis points to 3.06% for the six
months  ended  June 30,  2006  from  2.09% for the same  period  in 2005,  which
resulted in a rate  increase in interest  expense of $1.0  million.  The average
balance of time deposits  increased  $4.1 million to $212.8  million for the six
months  ended June 30,  2006 from  $208.7  million  for the same period in 2005,
which resulted in an increase in interest expense of $42 thousand.

Interest  expense on long-term  debt increased $447 thousand to $1.3 million for
the six months  ended June 30,  2006 from $852  thousand  for the same period in
2005.  The average rate  increased  269 basis points to 9.30% for the six months
ended June 30,  2006 from  6.61% for the same  period in 2005,  which  increased
interest  expense  on  long-term  debt $376  thousand.  The  average  balance on
long-term  debt increased $2.1 million to $27.9 million for the six months ended
June 30, 2006 from $25.8 million for the same period in 2005,  which resulted in
an increase in interest expense of $71 thousand.

Interest  expense on money  market  deposits  increased  $138  thousand  to $728
thousand for the six months ended June 30, 2006 from $590  thousand for the same
period in 2005.  The average  rate on money market  deposits  increased 30 basis
points to 1.12% for the six months  ended June 30,  2006 from 0.82% for the same
period in 2005,  which  resulted  in an  increase  in  interest  expense of $196
thousand.  The average balance of money market deposits  decreased $14.1 million
to $130.4 million for the six months ended June 30, 2006 from $144.5 million for
the same period in 2005, which resulted in a volume decrease in interest expense
of $58 thousand.

                                       17
<PAGE>

Interest  expense on  borrowings  increased $37 thousand to $4.2 million for the
six months  ended June 30,  2006 from $4.2  million for the same period in 2005.
The average rate paid on  borrowings  increased 18 basis points to 4.99% for the
six months  ended June 30,  2006 from 4.81% for the same  period in 2005,  which
resulted  in an  increase  in  interest  expense  of $157  thousand  due to rate
changes.  The average balance of borrowings decreased $5.0 million to $168.3 for
the six months  ended  June 30,  2006 from  $173.3 for the same  period in 2005,
which resulted in a decrease in interest expense of $120 thousand.

Interest expense on savings deposits decreased $10 thousand to $569 thousand for
the six months  ended June 30,  2006 from $579  thousand  for the same period in
2005. The average balance on savings  deposits  decreased $6.8 million to $191.9
for the six months  ended June 30, 2006 from $198.7  million for the same period
in 2005,  which  resulted  in a  volume  decrease  in  interest  expense  of $20
thousand.  The average rate on savings deposits increased 1 basis point to 0.59%
for the six months  ended June 30,  2006 from 0.58% for the same period in 2005,
which resulted in an increase in interest expense of $10 thousand.

NONINTEREST INCOME - for the three and six month periods ended June 30, 2006 was
$1.9  million and $3.3  million,  respectively,  as compared to $1.4 million and
$2.7 million for the same period in 2005.  The  increase  from 2005 is primarily
due to a new fee structure for retail  banking fees,  which took effect March 1,
2006.


NONINTEREST  EXPENSE - for the three and six month  periods  ended June 30, 2006
totaled  $7.9  million  and $15.9  million  compared  to $7.4  million and $14.8
million for the same period in 2005.  The  increase in  noninterest  expense was
primarily   due   to  an   increase   in   salaries   and   employee   benefits,
telecommunications and occupancy and equipment expense.

SALARIES AND EMPLOYEE  BENEFITS - for the three and six month periods ended June
30, 2006 were $4.8 million and $9.6 million,  respectively,  as compared to $4.5
million and $8.8 million for the same period in 2005. The increase was primarily
due to annual  compensation  increases  and a $240  thousand  increase in health
insurance  cost for the six  months  ended  June 30,  2006.  Average  full  time
equivalent  employees  were 526 at June 30,  2006 as compared to 535 at June 30,
2005.

OCCUPANCY AND EQUIPMENT- for the three and six month periods ended June 30, 2006
totaled $1.5 million and $3.0 million,  respectively as compared to $1.4 million
and $2.8 million for the same periods in 2005 due primarily to increases in rent
expense of $54 thousand,  maintenance expense of $49 thousand and property taxes
of $45 thousand for the six month period ended June 30, 2006.

TELECOMMUNICATIONS- for the three and six month periods ended June 30, 2006 were
$140 thousand and $279 thousand,  respectively,  as compared to $81 thousand and
$157  thousand  for  the  same  periods  in  2005.   Enhanced  computer  network
communications services and a faster reconfigured ATM network were the principal
reasons  for the  higher  telecommunication  expenses  during  the three and six
months ended June 30, 2006.

                                       18
<PAGE>

ITEM 3: DISCLOSURE  ABOUT MARKET  RISK

There were no  significant  changes for the six months  ended June 30, 2006 from
the  information  presented in the annual report on Form 10-K for the year ended
December 31, 2005.


ITEM 4:  CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.  Based on their evaluation
of the  Corporation's  disclosure  controls and  procedures  (as defined in Rule
13a-15(e) under the Securities  Exchange Act of 1934 (the "Exchange Act")),  the
Corporation's principal executive officer and principal financial officer have

concluded that as of the end of the period  covered by this Quarterly  Report on
Form 10-Q such  disclosure  controls and procedures are effective to ensure that
information required to be disclosed by the Corporation 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 over financial  reporting.  During the quarter
under report,  there was no change in the  Corporation's  internal  control over
financial  reporting that has materially  affected,  or is reasonably  likely to
materially affect, the Corporation's internal control over financial reporting.


                                       19
<PAGE>

PART II. OTHER INFORMATION

ITEM 1:  LEGAL PROCEEDINGS

         Not Applicable

ITEM 1A: RISK FACTORS

          Information  regarding risk factors  appears in Part 1, Item 1A of our
          annual report on form 10K for the year ended December 31, 2005.  There
          have been no material  changes  from the risk  factors as disclosed in
          that report.


ITEM 2:  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


(a)      Not applicable

(b)      Not applicable

(c)      Issuer Purchase of Equity Securities
<TABLE>
<CAPTION>
                                                                     (c) Total Number        (d) Maximum Number
                                                                   of Shares (or Units)    (or Approximate Dollar
                              (a) Total             (b)             Purchased as Part       Value) of Shares (or
                                Number          Average Price          of Publicly         Units) that May Yet Be
                             of Shares (or      Paid per Share       Announced Plans         Purchased Under the
Period                     Units) Purchased       (or Unit)            or Programs*           Plans or Programs
------                     ----------------       ---------            -----------            -----------------
<S>                               <C>               <C>                    <C>                     <C>
June 15, 2006                     397               $15.86                 2,397                   197,603

Total                             397               $15.86                 2,397                   197,603
                                  ---                                      -----                   -------
</TABLE>

*On September 28, 2005, the Registrant authorized the repurchase in the open
market of up to 200,000 shares of the Company's outstanding common stock.


ITEM 3:  DEFAULTS UPON SENIOR SECURITIES

         Not Applicable

ITEM 4:  SUBMISSION OF MATTERS TO VOTE OF SECURITY OF HOLDERS

         None

ITEM 5:  OTHER INFORMATION

         Not Applicable

ITEM 6:  EXHIBITS

(a) 31 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(b) 32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


                                       20
<PAGE>



                                S I G N A T U R E

Pursuant  to the  requirements  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.

                                          FMS FINANCIAL CORPORATION


Date: August 11, 2006                     /s/ Craig W. Yates
                                          --------------------------------------
                                          Craig W. Yates
                                          President and Chief Executive Officer
                                          (Principal and Executive Officer)


Date: August 11, 2006                     /s/ Channing L. Smith
                                          --------------------------------------
                                          Channing L. Smith
                                          Vice President and
                                          Chief Financial Officer
                                          (Principal Financial Officer)

                                       21