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, 2004

                                       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 an  accelerated  filer
(as defined in Rule 12b-2 of the Exchange Act). YES     NO  X .
                                                    ---    ---

         As of August 6, 2004 there were issued and outstanding 6,500,960 shares
of the registrant's Common Stock, par value $.10 per
share.

<PAGE>
                    FMS FINANCIAL CORPORATION AND SUBSIDIARY
                    ----------------------------------------

                          QUARTERLY REPORT ON FORM 10-Q
                          -----------------------------

                                  JUNE 30, 2004
                                  -------------

                                TABLE OF CONTENTS
                                -----------------
<TABLE>
<CAPTION>

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

<S>    <C>     <C>      <C>                                                  <C>
         Item 1 - Financial Statements

                  Consolidated Statements of Financial Condition as of
                           June 30, 2004 (unaudited) and December 31, 2003...............1

                  Consolidated Statements of Operations (unaudited)
                           for the three and six months ended
                           June 30, 2004 and June 30, 2003...............................2

                  Consolidated Statements of Cash Flows (unaudited)
                           for the six months ended June 30, 2004
                           and June 30, 2003.............................................3

                  Consolidated Statements of Changes in Stockholders' Equity
                           (unaudited) for the six months ended June 30, 2004 and
                           June 30, 2003.................................................4

                  Notes to Consolidated Financial Statements........................5 -  6

         Item 2 - Management's Discussion and Analysis of
                           Financial Condition and Results of Operations............6 - 17

         Item 3 - Disclosure about Market Risk..........................................18

         Item 4 - Controls and Procedures...............................................18

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

         Item 1 - Legal Proceedings.....................................................19
         Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases
                           of Equity Securities.........................................19
         Item 3 - Defaults Upon Senior Securities.......................................19
         Item 4 - Submission of Matters to Vote Security of Holders.....................19
         Item 5 - Other Information.....................................................19
         Item 6 - Exhibits and Reports on Form 8-K......................................19
         Signatures.....................................................................20

</TABLE>

<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                                             June 30, 2004       December 31, 2003

----------------------------------------------------------------------------------------------------------------------------------

ASSETS
----------------------------------------------------------------------------------------------------------------------------------

<S>           <C>                                                                       <C>                  <C>
                 Cash and amounts due from depository institutions                        $       40,595,523   $       41,022,232
                 Interest-bearing deposits                                                            63,291              142,929
                 Short term funds                                                                 53,673,058           31,169,476

                                                                                          ------------------   ------------------
                                      Total cash and cash equivalents                             94,331,872           72,334,637
                 Investment securities held to maturity                                          189,176,335          250,383,262
                 Investment securities available for sale                                        169,987,586          149,230,862
                 Loans, net                                                                      419,173,791          402,606,056
                 Mortgage-backed securities held to maturity                                     311,266,421          294,915,606
                 Accrued interest receivable                                                       5,603,511            5,203,748
                 Federal Home Loan Bank stock                                                     11,750,120           11,809,620
                 Real estate owned, net                                                                    0               48,294
                 Office properties and equipment, net                                             31,188,366           31,429,069
                 Deferred income taxes                                                             2,034,218            2,043,909
                 Core deposit intangible                                                           2,950,134            3,308,238
                 Prepaid expenses and other assets                                                 2,103,730            1,603,294
                 FMS Statutory Trust 1 issue costs, net                                              601,233              640,154

                                                                                          -------------------  ------------------
TOTAL ASSETS                                                                              $    1,240,167,317   $    1,225,556,749
                                                                                          ===================  ==================

LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------------------------

Liabilities:
                 Deposits                                                                 $      907,516,125   $      893,006,498
                 Securities sold under agreements to repurchase                                  225,000,000          225,000,000
                 Advances from the Federal Home Loan Bank                                         10,000,000           11,191,047
                 FMS Statutory Trust 1 debentures                                                 25,774,000           25,774,000
                 Advances by borrowers for taxes and insurance                                     2,439,394            2,142,499
                 Accrued interest payable                                                          1,279,011            1,319,501
                 Dividends payable                                                                   195,029              194,576
                 Other liabilities                                                                 2,605,180            4,098,885
                                                                                          ------------------   ------------------
                 Total liabilities                                                             1,174,808,739        1,162,727,006
                                                                                          ------------------   ------------------

Commitments and contingencies
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 7,990,142 and 7,975,059 and shares
                                      outstanding 6,500,960
                                      and 6,485,877 as of June 30, 2004
                                      and December 31, 2003, respectively                            799,014              797,506
                 Paid-in capital in excess of par                                                  8,544,121            8,507,333
                 Accumulated other comprehensive income - net of deferred income taxes              (468,130)             802,239
                 Retained earnings                                                                67,418,572           63,657,664
                 Less:  Treasury stock (1,489,182 and 1,489,182 shares, at cost, as of
                                      June 30, 2004 and December 31, 2003, respectively)         (10,934,999)         (10,934,999)
                                                                                          ------------------   ------------------
Total stockholders' equity                                                                        65,358,578           62,829,743
                                                                                          ------------------   ------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                $    1,240,167,317   $    1,225,556,749
                                                                                          ==================   ==================
</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,
                                                          -------------------------------------- -----------------------------------
                                                                    2004                2003             2004            2003
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                 <C>                <C>                <C>
INTEREST  INCOME:
Interest income on:
  Loans                                                   $       6,059,107   $       6,058,727  $    12,110,883    $   12,284,453
  Mortgage-backed securities                                      4,072,439           3,770,334        8,013,004         8,306,479
  Investments                                                     3,453,157           2,608,387        7,102,094         5,278,711
                                                          ------------------  -----------------  ---------------    --------------
Total interest income                                            13,584,703          12,437,448       27,225,981        25,869,643
                                                          ------------------  -----------------  ---------------    --------------

INTEREST EXPENSE:
Interest expense on:
  Deposits                                                        1,825,981           2,236,527        3,606,190         4,837,741
  Borrowings                                                      2,345,984           2,365,150        4,700,898         4,707,350
  Long term debt                                                    335,240             327,575          639,038           659,142
                                                          ------------------  -----------------  ---------------    --------------
Total interest expense                                            4,507,205           4,929,252        8,946,126        10,204,233
                                                          ------------------  -----------------  ---------------    --------------

NET INTEREST INCOME                                               9,077,498           7,508,196       18,279,855        15,665,410
PROVISION FOR LOAN LOSSES                                            75,000              60,000          150,000           120,000
                                                          ------------------  -----------------  ---------------    --------------

NET INTEREST INCOME AFTER PROVISION
    FOR LOAN LOSSES                                               9,002,498           7,448,196       18,129,855        15,545,410
                                                          ------------------  -----------------  ---------------    --------------

OTHER INCOME (EXPENSE):
  Loan service charges and other fees                                29,932              19,920           59,176            43,734
  Gain on sale of real estate held for development, net                   0                   0                0           600,780
  Gain on sale of loans                                                   0                  22                1                51
  Gain on sale of investment securities                                   0             222,743          100,056           222,743
  Gain on disposal of fixed assets                                   46,080                   0           46,080          (141,151)
  Real estate owned operations, net                                  (3,284)             28,035           (4,547)           21,205
  Service charges on accounts                                     1,322,312           1,184,345        2,526,552         2,256,242
  Other income                                                       35,180              46,112           64,315            69,465
                                                          ------------------  -----------------  ---------------    --------------
Total other income                                                1,430,220           1,501,177        2,791,633         3,073,069
                                                          ------------------  -----------------  ---------------    --------------

OPERATING EXPENSES:
  Salaries and employee benefits                                  4,074,148           3,907,795        8,199,780         7,731,197
  Occupancy and equipment                                         1,302,436           1,360,201        2,682,092         2,688,716
  Purchased services                                                748,290             723,733        1,445,012         1,397,758
  Federal deposit insurance premiums                                 33,282              31,386           65,547            63,582
  Professional fees                                                 167,895             163,703          333,678           341,419
  Advertising                                                       104,063             117,245          216,026           232,856
  Amortization of core deposit intangible                           179,052              65,757          358,104            65,757
  Other                                                             364,166             442,754          701,350           924,915
                                                          -----------------   -----------------  ---------------    --------------

Total operating expenses                                          6,973,332           6,812,574       14,001,589        13,446,200
                                                          -----------------   -----------------  ---------------    --------------

INCOME BEFORE INCOME TAXES                                        3,459,386           2,136,799        6,919,899         5,172,279

INCOME TAXES                                                      1,386,729             836,827        2,769,355         2,032,384
                                                          -----------------   -----------------  ---------------    --------------

NET INCOME                                                $       2,072,657   $       1,299,972  $     4,150,544    $    3,139,895
                                                          =================   =================  ===============    ==============


BASIC EARNINGS PER COMMON SHARE                           $            0.32   $            0.20  $          0.64    $         0.49
                                                          ==================  =================  ===============    ==============

DILUTED EARNINGS PER COMMON SHARE                         $            0.32   $            0.20  $          0.64    $         0.48
                                                          ==================  =================  ===============    ==============

Dividends declared per common share                       $            0.03   $            0.03  $          0.06    $         0.06
                                                          =================   -----------------  ----------------   --------------

Weighted average common shares outstanding                        6,492,516           6,473,606        6,489,421         6,468,706
Potential dilutive effect of the exercise of stock options           37,920              45,208           38,631            39,763
                                                          -----------------   -----------------  ----------------   --------------
Adjusted weighted average common shares outstanding               6,530,436           6,518, 14        6,528 052         6,508,469
                                                          =================   =================  ===============    ==============
</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,
                                                                              -----------------------------------------------
                                                                                         2004                    2003
-----------------------------------------------------------------------------------------------------------------------------

<S>                                                                       <C>                       <C>
OPERATING ACTIVITIES:
Net income                                                                    $            4,150,544    $          3,139,895
Adjustments to reconcile net income to net cash provided
   by operating activities:
  Provision for loan losses                                                                  150,000                 120,000
  Amortization and Depreciation                                                            3,920,945               4,069,921
Realized (gains) and losses on:
  Sale of loans                                                                                   (1)                    (51)
  Disposal and sale of fixed assets                                                          (46,080)                 141,151
  Sale of investment securities                                                             (100,056)               (222,743)
  Sale of real estate owned                                                                     (654)                (33,432)
  Gain on sale of real estate held for development, net
  Increase) Decrease in accrued interest receivable                                         (399,763)                133,471
Increase in prepaid expenses and other assets                                               (500,438)               (387,106)
Decrease in accrued interest payable                                                         (40,490)                (86,052)
(Decrease) Increase in other liabilities                                                    (648,911)                193,347
Provision for deferred income taxes                                                            9,691               1,066,866
                                                                              ----------------------    --------------------
  Net cash provided by operating activities                                                6,494,787               7,534,487
                                                                              ----------------------    --------------------
INVESTING ACTIVITIES:
Proceeds from sale of:
  Education loans                                                                             18,626                  53,203
  Real estate held for development                                                                 0                 688,706
  Real estate owned                                                                           48,948                 332,786
  Property and equipment                                                                     238,872                 149,281
Principal collected and proceeds from maturities of investment
  securities held to maturity                                                             61,641,762             103,407,336
Proceeds from maturities of investment securities available for sale                      31,714,385              65,468,657
Principal collected on mortgage-backed securities held to maturity                        60,467,501             104,979,136
Principal collected on loans, net                                                         46,439,992              52,645,034
Loans originated or acquired, net                                                        (63,229,673)            (71,889,087)
Purchase of investment securities and mortgage-backed
  securities held to maturity                                                            (79,100,923)           (244,796,070)
Purchase of investment securities and mortgage-backed
  securities available for sale                                                          (55,127,967)            (86,629,780)
Redemption of Federal Home Loan Bank stock                                                    59,500                 252,100
Purchase of office property and equipment                                                   (933,164)             (3,309,486)
Net cash received from deposit purchase, net                                                       0              16,539,246
                                                                              ----------------------    --------------------
  Net cash used by investing activities                                                    2,237,859            (62,108,938)
                                                                              ----------------------    --------------------
FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts                                      25,478,605              40,236,760
Net decrease in time deposits                                                            (10,968,978)             (4,126,312)
Net decrease in FHLB advances                                                             (1,191,047)                (41,056)
Increase in advances from borrowers for taxes and insurance                                  296,895                 368,327
Purchase of treasury stock                                                                         0                  (3,224)
Dividends paid on common stock                                                              (389,182)               (387,828)
Net proceeds from issuance of common stock                                                    38,296                 205,000
                                                                              ----------------------    --------------------
  Net cash provided by financing activities                                               13,264,589              36,251,667
                                                                              ----------------------    --------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                          21,997,235             (18,322,784)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                            72,334,637              88,410,346
                                                                              ----------------------    --------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                      $           94,331,872    $         70,087,562
                                                                              ======================    ====================
Supplemental Disclosures:
  Cash paid for:
   Interest on deposits, advances, and other borrowings                       $            8,986,616    $         10,290,285
   Income taxes                                                                            3,918,000               2,255,500
  Non-cash investing and financing activities:
   Dividends declared and not paid at year end                                               195,029                 194,524
   Non-monetary transfers from loans to real estate owned
     through foreclosure                                                                           0                 209,575
</TABLE>

See notes to consolidated financial statements.


                                       3
<PAGE>

FMS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------  ------------

                                                                           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, 2003      6,463,811    $794,981   $ 8,279,525    $  1,216,053   $ 58,233,840  $(10,886,580)   $57,637,819
Net Income                                                                                  3,139,895                    3,139,895
Other comprehensive income
  Unrealized loss on securities
      available for sale, net of
      taxes of $353,419 and
      reclassificaton adjustment
      of $222,743                                                             (531,454)                                   (531,454)
                                                                                                                       -----------
Total comprehensive income                                                                                               2,608,441
                                                                                                                       -----------

Dividends declared ($.06)                                                                    (388,438)                    (388,438)
Exercise of stock options             20,500       2,050       202,950                                                     205,000
Purchase of common stock                (171)                                                                (3,224)        (3,224)

---------------------------------------------------------------------------------------------------------------------  -----------
Balances at June 30, 2003          6,484,140    $797,031   $ 8,482,475    $    684,599   $ 60,985,297  $(10,889,804)   $60,059,598

---------------------------------------------------------------------------------------------------------------------  -----------

Balances at December 31, 2003      6,485,877    $797,506   $ 8,507,333         802,239   $ 63,657,664   $10,934,999)   $62,829,743
Net Income                                                                                  4,150,544                    4,150,544
Other comprehensive income
  Unrealized gain on securities
      available for sale,
      net of taxes of ($844,794)                                            (1,270,369)                                 (1,270,369)
                                                                                                                       -----------
Total comprehensive income                                                                                               2,880,175
                                                                                                                       -----------

Dividends declared ($.06)                                                                    (389,636)                    (389,636)
Exercise of stock options             15,083       1,508        36,788                                                      38,296

----------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2004          6,500,960    $799,014   $ 8,544,121       $(468,130)  $ 67,418,572  $(10,934,999)   $65,358,578
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       4
<PAGE>


FMS  FINANCIAL  CORPORATION  AND  SUBSIDIARY  NOTES  TO  CONSOLIDATED  FINANCIAL
STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED).

1-GENERAL
In the opinion of management,  the accompanying unaudited consolidated financial
statements of FMS Financial  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, 2004 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 year ended December 31, 2003. The consolidated  financial statements include
the Corporation's principle subsidiary, Farmers & Mechanics Bank (the "Bank").


2-LONG-TERM DEBT
Long-Term Debt at June 30, 2004 and December 31, 2003 consisted of $25.8 million
of FMS Statutory Trust 1 debentures. The interest rate resets every three months
to LIBOR plus 360 basis points and will not exceed 11.00% through March 2007. At
June 30, 2004 and 2003 the interest rate was 5.19% and 4.61%, respectively.  The
proceeds  were  used  for  the  paydown  in  August  2002 of the  $10.0  million
subordinated  debentures,   expansion  of  the  Bank's  operations  and  general
corporate purposes.


3-REGULATORY CAPITAL REQUIREMENTS
The Bank is considered  "well  capitalized" by OTS regulations at June 30, 2004.
The  Bank's  regulatory  tangible  and tier 1 (core)  capital  ratios  are $78.1
million or 6.32% of total bank assets and $82.2 million or 16.63% for risk-based
capital.


4-STOCK OPTIONS
The  Corporation  maintains an incentive stock option plan. As permitted by SFAS
No. 148 "Accounting for Stock-Based  Compensation-Transition and Disclosure" the
Corporation  will continue to use the intrinsic  value method of accounting  for
stock options. No options have been granted during the six months ended June 30,
2004 and 2003.




                                       5

<PAGE>

5-PENSION  PLAN- The  Corporation  maintains a defined  benefit Pension Plan for
active employees.  The Corporation  contributed $21 thousand to its Pension Plan
during the six months  ended June 30, 2004 and expects to  contribute a total of
approximately  $826 thousand to its Pension Plan in 2004.  The components of the
net pension cost are as follows:

                                         Six Months ended June 30,
----------------------------------------------------------------------
                                          2004              2003
----------------------------------------------------------------------
Service cost                       $     (434,520)  $     (358,307)
Interest cost                            (282,184)        (243,193)
Return on assets                          316,100          230,728
Net amortization and deferral              (6,134)         (29,456)
----------------------------------------------------------------------
Net periodic pension cost          $     (406,738)  $     (400,228)
----------------------------------------------------------------------





                                        6

<PAGE>

ITEM 2: MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004.

The  following  discussion  and  analysis  should  be read  with  our  financial
statements and related notes included elsewhere in this report on Form 10-Q. FMS
Financial  Corporation (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.




                                       7

<PAGE>

FINANCIAL CONDITION

Total Assets - at June 30, 2004 were $1.24 billion as compared with total assets
at December 31, 2003 of $1.23 billion.

Short Term Funds -  increased  $22.5  million to $53.7  million at June 30, 2004
from $31.2 million at December 31, 2003 due to cash prepayment of investments.

Investment  Securities  Held to  Maturity -  decreased  $61.2  million to $189.2
million at June 30, 2004 from $250.4  million at December 31, 2003 primarily due
to  a   reclassification   of   securities   from   pass-thru   investments   to
mortgage-backed  securities (MBS's) held to maturity of $64.9 million,  calls of
$30.2  million in U.S.  Agency  Notes,  principal  paydowns of $29.5  million in
collateralized  mortgage obligations (CMO's) and the maturity of $1.9 million in
municipal  bonds,  partially offset by purchases of $62.6 million in U.S. Agency
Notes,  $1.6  million of CMO's and $1.4  million of  municipal  bonds during the
period.  Investment  securities  held to maturity at June 30, 2004  consisted of
$189.2 million in fixed rate  securities.  A comparison of cost and  approximate
market values of investment  securities held to maturity as of June 30, 2004 and
December 31, 2003 follows:
<TABLE>
<CAPTION>

                                                June 30, 2004                                       December 31, 2003
----------------------------------------------------------------------------------------   ----------------------------------
                                             Gross            Gross          Estimated                            Estimated
                        Amortized         Unrealized        Unrealized        Market           Amortized            Market
                           Cost              Gains            Losses           Value              Cost              Value
----------------------------------------------------------------------------------------   ----------------------------------
<S>                <C>               <C>           <C>                <C>                <C>                <C>
U. S. Gov't Agencies $  104,565,647    $    414,284  $    (1,423,919)   $    103,556,012   $    72,256,272    $    72,994,187
CMO's                    82,742,598         116,735       (2,206,442)         80,652,891       175,727,450        175,279,820
Municipal bonds           1,868,090           3,211                0           1,871,301         2,399,540          2,404,563
----------------------------------------------------------------------------------------   ----------------------------------
Total                $  189,176,335    $    534,230  $    (3,630,361)   $    186,080,204   $   250,383,262    $   250,678,570
========================================================================================   ==================================
</TABLE>


Investment  Securities  Available  for Sale - increased  $20.8 million to $170.0
million at June 30, 2004 from $149.2  million at December 31, 2003. The increase
is the result of purchases of $31.0 million of U.S. Agency Notes,  $19.0 million
of CMO's and $5.0  million  of  mortgage-backed  securities  (MBS's),  partially
offset by principal  paydowns of $23.9 million of CMO's and MBS's,  $2.4 million
of calls of U.S. Agency Notes, sales of $5.3 million of CMO's and MBS's and $2.1
million in market adjustments at June 30, 2004.  Investment securities available
for sale consisted of $169.6 million in fixed rate  securities and $365 thousand
in  adjustable  rate  securities  at June 30,  2004.  A  comparison  of cost and
approximate market values of investment securities available for sale as of June
30, 2004 and December 31, 2003 follows:
<TABLE>
<CAPTION>

                                                June 30, 2004                                   December 31, 2003
------------------------------------------------------------------------------------    ---------------------------------
                                             Gross            Gross       Estimated                           Estimated
                        Amortized         Unrealized        Unrealized     Market          Amortized            Market
                           Cost              Gains            Losses        Value             Cost              Value
-------------------------------------------------------------------------------------   ---------------------------------
<S>                  <C>              <C>             <C>             <C>             <C>               <C>
U. S. Gov't Agencies   $    41,768,298  $         0     $   (487,203)   $  41,281,095   $     13,100,525  $    13,188,525
CMO's                       42,669,606      154,089         (648,997)      42,174,698         48,250,773       48,419,522
MBS's                       86,344,371      810,491         (623,069)      86,531,793         86,559,090       87,622,815

-------------------------------------------------------------------------------------   ---------------------------------
Total                  $   170,782,275  $   964,580     $ (1,759,269)   $ 169,987,586   $    147,910,388  $   149,230,862
=====================================================================================   =================================
</TABLE>


                                       8
<PAGE>

Loans,  net - increased  $16.6  million to $419.2  million at June 30, 2004 from
$402.6  million at December 31, 2003.  This increase was primarily the result of
$63.2  million of loans  originated,  partially  offset by  approximately  $46.4
million of  principal  collected  on loans  during the six months ended June 30,
2004.  The following  table shows loans  receivable  by major  categories at the
dates indicated.
                                 June 30, 2004           December 31, 2003

                           -----------------------------------------------

Mortgage Loans             $       282,982,777     $           280,663,785
Construction Loans                     427,015                   1,324,699
Commercial Construction              9,730,113                   5,993,838
Consumer Loans                       3,041,518                   3,186,549
Commercial Real Estate             112,036,765                 104,352,118
Commercial Business                 16,088,333                  12,180,496

                           --------------------    -----------------------

Subtotal                           424,306,521                 407,701,485
Less:
    Deferred loan fees                 574,577                     687,877
    Allowance for
     loan losses                     4,558,153                   4,407,552

                           -------------------     -----------------------

Total loans, net           $       419,173,791     $           402,606,056

                           -------------------     -----------------------


At June 30, 2004, the recorded investment in loans for which impairment has been
recognized  in  accordance  with SFAS Nos.  114 and 118 totaled  $1.8 million of
which  $985  thousand  related  to loans  that were  individually  measured  for
impairment  with a valuation  allowance of $414  thousand  and $793  thousand of
loans that were collectively  measured for impairment with a valuation allowance
of $18 thousand.  The Bank had $4.6 million in total reserves for loan losses at
June 30, 2004, representing  approximately 256% of non-accrual loans and 1.1% of
total  loans.  For the six months  ended June 30,  2004,  the  average  recorded
investment in impaired loans was approximately $2.0 million. The Bank recognized
$66 thousand of interest  income on impaired loans for the six months ended June
30, 2004, all of which was recognized on the cash basis.

As of June 30, 2004 the Bank had outstanding  loan commitments of $21.0 million,
of which  $15.3  million  represented  variable  rate  loans  and  $5.7  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.


                                       9

<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, 2004    December 31, 2003
                                                  ------------------------------------------

<S>                                                  <C>             <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
    One-to-four family                                     419,948    $     507,317
    Commercial real estate                                 998,303        1,188,504
    Consumer and other                                           0                0
                                                  -----------------  ---------------
       Total non-accrual loans                        $  1,418,251    $   1,695,821
                                                  -----------------  ---------------

    Troubled debt restructuring                       $    810,708    $   1,027,054
    Real estate owned, net                                       0           48,294
    Other non-performing assets                                  0                0
                                                  -----------------  ---------------
    Total non-performing assets, net                  $  2,228,959    $   2,771,169
                                                  -----------------  ---------------


    Total non-accrual loans to net loans                      0.34%            0.42%
                                                  =================  ===============
    Total non-accrual loans to total assets                   0.11%            0.14%
                                                  =================  ===============
    Total non-performing assets to total assets               0.18%            0.23%
                                                  =================  ===============
</TABLE>


Mortgage-Backed  Securities Held to Maturity - increased $16.4 million to $311.3
million at June 30, 2004 from $294.9  million at December 31, 2003. The increase
is the result of  purchases  of $13.4  million  of  pass-thru  securities  and a
reclassification of $64.9 million of pass-thru  securities from investments held
to  maturity,   partially  offset  by  principal   paydowns  of  $60.5  million.
Mortgage-backed securities at June 30, 2004 consisted of $269.4 million in fixed
rate securities and $41.8 million in adjustable rate securities. Mortgage-backed
securities  held to  maturity  at June  30,  2004  and  December  31,  2003  are
summarized below:

<TABLE>
<CAPTION>
                                      June 30, 2004                                                December 31, 2003
------------------------------------------------------------------------------------------  ----------------------------------
                                            Gross            Gross
                        Amortized        Unrealized       Unrealized         Estimated           Amortized         Estimated
                          Cost              Gains           Losses          Market Value           Cost          Market Value
------------------------------------------------------------------------------------------  ----------------------------------

<S>              <C>                 <C>            <C>                <C>                <C>                <C>
GNMA                $    10,143,919     $    431,462   $        (327)     $    10,575,054    $    13,948,013    $   14,684,540

FNMA                    159,934,626        2,241,570      (1,028,920)         161,147,276        194,437,708       197,881,404

FHLMC                    73,082,249          579,814      (1,026,100)          72,635,963         86,529,885        87,076,088


Pass-Thru                68,105,627          414,832        (551,772)          67,968,687                  0                 0

-----------------------------------------------------------------------------------------   ----------------------------------
Total               $   311,266,421     $  3,667,678   $  (2,607,119)     $   312,326,980    $   294,915,606$   $  299,642,032
=========================================================================================   ==================================
</TABLE>


                                       10
<PAGE>

Deposits  -  increased  $14.5  million to $907.5  million at June 30,  2004 from
$893.0  million at December 31, 2003.  Non-interest  bearing  checking  accounts
increased   $13.5   million,    savings   accounts   increased   $9.4   million,
interest-bearing checking accounts increased $1.6 million, money market accounts
increased $940 thousand and certificates of deposits decreased $11.0 million for
the six months ended June 30, 2004. Interest credited to depositors accounts for
the six months ended June 30, 2004 amounted to $3.6 million. The following table
sets forth certain information concerning deposits at the dates indicated.


<TABLE>
<CAPTION>

                                         June 30, 2004                        December 31, 2003
------------------------------------------------------------------------------------------------------------
                                              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       $171,178,091      18.86%       0.00%     $157,637,346   17.65%        0.00%
Checking accounts            188,211,669      20.74%       0.64%      186,572,464   20.89%        0.55%
Savings accounts             197,594,108      21.77%       0.55%      188,235,776   21.08%        0.69%
Money market accounts        133,668,338      14.73%       0.65%      132,728,015   14.87%        0.78%
Certificates                 216,863,919      23.90%       1.85%      227,832,897   25.51%        2.40%
-------------------------------------------------------------------------------------------------------------
   Total Deposits           $907,516,125      100.00%      0.80%     $893,006,498  100.00%        1.01%
=============================================================================================================
</TABLE>


Borrowings - at June 30, 2004 amounted to $235.0 million.  Borrowings  consisted
of $225.0  million in securities  sold under the agreement to repurchase  with a
weighted  average  interest rate of 4.08% and $10.0 million in Federal Home Loan
Bank Advances with a weighted  average  interest rate of 1.57%.  At December 31,
2003 borrowings  consisted of $225.0 million in securities sold under agreements
to repurchase with a weighted average rate of 4.08% and $11.2 million in Federal
Home Loan Bank Advances with a weighted average interest rate of 1.78%.

Long-term  debt - at June 30,  2004 and  December  31, 2003  consisted  of $25.0
million of FMS  Statutory  Trust 1  debentures.  The interest  rate resets every
three months to LIBOR plus 360 basis points and will not exceed  11.00%  through
March  2007.  At June 30, 2004 and 2003 the  interest  rate was 5.19% and 4.61%,
respectively.

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.


                                       11
<PAGE>

The Corporation  recorded net income for the three months ended June 30, 2004 of
$2.1 million, or $.32 diluted earnings per share as compared to $1.3 million, or
$.20  diluted  earnings  per  share  for the  comparable  period  in  2003.  The
Corporation  recorded  net income for the six months ended June 30, 2004 of $4.2
million, or $.64 diluted earnings per share as compared to $3.1 million, or $.48
diluted earnings per share for the comparable period in 2003.

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 receivable  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. Such 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:
<TABLE>
<CAPTION>
                                                                               Three Months
                                                                              Ended June 30,
----------------------------------------------------------------------------------------------------------------------------------
                                                         2004                                               2003
-------------------------------------------------------------------------------- -------------------------------------------------
                                       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              $       416,013  $         6,059          5.83%  $         381,737  $        6,059          6.35%
  Interest-bearing deposit               60,211              151          1.00%             43,540             131          1.20%
  Mortgage-backed securities            380,660            4,072          4.28%            367,474           3,770          4.10%
  Investment securities                 291,120            3,303          4.54%            279,957           2,477          3.54%
                                ---------------- ---------------- -------------- ------------------ --------------- --------------
Total interest-earning
      assets                          1,148,004           13,585          4.73%          1,072,708          12,437          4.64%
                                ---------------- ---------------- -------------- ------------------ --------------- --------------

Interest-bearing liabilities:
  Checking deposits                     367,215              359          0.39%            306,865             238          0.31%
  Savings deposits                      197,034              271          0.55%            180,478             300          0.66%
  Money Market depsoits                 132,194              215          0.65%             91,798             236          1.03%
  Time deposit                          217,883              981          1.80%            228,478           1,462          2.56%
  Borrowings                            235,000            2,346          3.99%            236,191           2,365          4.01%
  Long-Term Debt                         25,774              335          5.20%             25,774             328          5.09%
                                ---------------- ---------------- -------------- ------------------ --------------- --------------
Total interest-bearing
      liabilities               $     1,175,100            4,507          1.53%  $       1,069,584           4,929          1.84%
                                ================ ---------------- -------------- ================== --------------- --------------
Net interest income                              $         9,078                                    $        7,508
                                                 ================                                   ===============
Interest rate spread                                                      3.20%                                             2.79%
                                                                  ==============                                    ==============

Net yield on average
      interest-earning assets                                             3.16%                                             2.80%
                                                                  ==============                                    ==============

Ratio of average interest-
  earning assets to average
  interest -bearing liabilities                                          97.69%                                           100.29%
                                                                  ==============                                    ==============

                                                                        Six Months Ended June 30,
-----------------------------------------------------------------------------------------------------------------------------------
                                                         2004                                               2003
-------------------------------------------------------------------------------- -------------------------------------------------
                                       Average                           Average         Average                         Average
                                       Balance          Interest       Yield/Rate        Balance           Interest     Yield/Rate
                                  -------------- ---------------- -------------- ------------------ --------------- --------------
                                                                          (Dollars in Thousands)
Interest-earning assets:
  Loans receivable              $       412,504  $        12,111          5.87%  $         378,892  $       12,284          6.48%
  Interest-bearing deposit               38,466              255          1.33%             44,833             287          1.28%
  Mortgage-backed securities            372,755            8,013          4.30%            379,631           8,306          4.38%
  Investment securities                 309,504            6,847          4.42%            253,532           4,992          3.94%
                                ---------------- ---------------- -------------- ------------------ --------------- --------------
Total interest-earning
      assets                          1,133,229           27,226          4.81%          1,056,888          25,869          4.90%
                                ---------------- ---------------- -------------- ------------------ --------------- --------------

Interest-bearing liabilities:
  Checking deposits                     354,950              615          0.35%            297,788             519          0.35%
  Savings deposits                      193,030              531          0.55%            173,815             719          0.83%
  Money Market depsoits                 131,649              428          0.65%            128,593             580          0.90%
  Time deposit                          220,395            2,032          1.84%            225,228           3,020          2.68%
  Borrowings                            235,272            4,701          4.00%            236,207           4,707          3.99%
  Long-Term Debt                         25,774              639          4.96%             25,774             659          5.11%
                                ---------------- ---------------- -------------- ------------------ --------------- --------------
Total interest-bearing
      liabilities               $     1,161,070            8,946          1.54%  $       1,087,405          10,204          1.88%
                                ================ ---------------- -------------- ================== --------------- --------------
Net interest income                              $        18,280                                    $       15,665
                                                 ================                                   ===============
Interest rate spread                                                      3.26%                                             3.02%
                                                                  ==============                                    ==============

Net yield on average interest-
      earning assets                                                      3.23%                                             2.96%
                                                                  ==============                                    ==============

Ratio of average interest-
      earning assets to average
      interest-bearing liabilities                                       97.60%                                            97.19%
                                                                  ==============                                    ==============
</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,
                                                       2004 vs. 2003                                     2004 vs. 2003
                                           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                               $      (544)   $      544     $         -      $    (1,263)    $     1,090     $     (173)
    Interest-bearing deposits                   (30)           50              20                9             (41)           (32)
    Mortgage-backed securities                  167           135             302             (143)           (150)          (293)
    Investment securities                       727            99             826              753           1,102          1,855
                                        -----------------------------------------      ------------------------------------------

    Total change - interest income              320           828           1,148             (644)          2,001          1,357
                                        -----------------------------------------      ------------------------------------------
Interest expense:
    Checking deposits                            74            47             121               (4)            100             96
    Savings deposit                             (57)           28             (29)            (267)             79           (188)
    Money market deposit                       (125)          104             (21)            (166)             14           (152)
    Time deposit                               (413)          (68)           (481)            (923)            (65)          (988)
    Borrowings                                   (7)          (12)            (19)              13             (19)            (6)
    Long-Term Debt                                7             -               7              (20)              -            (20)
                                        -----------------------------------------      ------------------------------------------

    Total change - interest expense            (521)            99           (422)          (1,367)            109         (1,258)
                                        -----------------------------------------      ------------------------------------------


Net change in net interest income       $       841     $     729     $     1,570      $       723     $     1,892     $    2,615
                                        =========================================      ==========================================


</TABLE>


                                       14

<PAGE>


Net Interest  Income - Net  interest  income for the three months ended June 30,
2004  increased  $1.6 million to $9.1  million  compared to $7.5 million for the
same period in 2003 due primarily to increases in interest  income on investment
securities of $826 thousand and mortgage-backed  securities of $302 thousand and
decreases  in  interest  expense on time  deposits of $481  thousand,  partially
offset by an increase in interest expense on checking accounts of $121 thousand.

The  increase  in  interest  income was  primarily  the result of an increase in
interest  income on  investment  securities of $826 thousand to $3.3 million for
the three  months  ended June 30, 2004 from $2.5  million for the same period in
2003. The average yield of the investment  portfolio  increased 100 basis points
to 4.54% for the  quarter  ended June 30, 2004 from 3.54% for the same period in
2003, which resulted in an interest income increase of $727 thousand due to rate
changes. The average balance of investment securities increased $11.1 million to
$291.1  million for the three months ended June 30, 2004 from $280.0 million for
the same period in 2003,  which resulted in a volume increase in interest income
of $99 thousand.

Interest income on  mortgage-backed  securities  increased $302 thousand to $4.1
million for the three  months ended June 30, 2004 from $3.8 million for the same
period in 2003. The average yield of the MBS portfolio increased 18 basis points
to 4.28% for the  quarter  ended June 30, 2004 from 4.10% for the same period in
2003, which resulted in an interest income increase of $167 thousand due to rate
changes.  The average balance of MBS's increased $13.2 million to $380.7 million
for the three months ended June 30, 2004 from $367.5 million for the same period
in 2003, which resulted in an interest income volume increase of $135 thousand.

Interest income on loans remained  constant at $6.1 million for the three months
ended June 30,  2004 and 2003.  The  average  rate on loans  decreased  52 basis
points to 5.83% for the three months ended June 30, 2004 from 6.35% for the same
period in 2003, which resulted in a decrease in interest income of $544 thousand
due to rate changes.  The average balance of the loan portfolio  increased $34.3
million to $416.0  million for the three  months ended June 30, 2004 from $381.7
million for the same  period in 2003,  which  resulted  in a volume  increase in
interest income of $544 thousand.

Interest  expense on time deposits  decreased $481 thousand to $981 thousand for
the three  months  ended June 30, 2004 from $1.5  million for the same period in
2003.  The average rate on time deposits  decreased 76 basis points to 1.80% for
the quarter  ended June 30,  2004 from 2.56% for the same period in 2003,  which
resulted in a decrease in interest expense of $413 thousand. The average balance
of time deposits  decreased $10.6 million to $217.9 million for the three months
ended June 30,  2004 from  $228.5  million  for the same  period in 2003,  which
resulted in a volume decrease in interest expense of $68 thousand.

Interest expense on checking  deposits  increased $121 thousand to $359 thousand
for the three months ended June 30, 2004 from $238  thousand for the same period
in 2003. The average rate on checking deposits increased 8 basis points to 0.39%
for the  quarter  ended June 30,  2004 from  0.31% for the same  period in 2003,
which resulted in an increase in interest  expense of $74 thousand.  The average
balance of checking  deposits  increased $60.3 million to $367.2 million for the
three months ended June 30, 2004 from $306.9 for the same period in 2003,  which
resulted in a volume increase in interest expense of $47 thousand.

                                       15

<PAGE>

Net  interest  income for the six  months  ended June 30,  2004  increased  $2.6
million primarily due to an increase in interest income on investment securities
of $1.8  million  and  decreases  in interest  expense on time  deposits of $988
thousand,  savings  deposits of $188 thousand and money market  accounts of $152
thousand,  partially  offset by decreases in interest income on  mortgage-backed
securities  of $293  thousand and loans of $173 thousand as compared to the same
six month period in 2003.

The increase in interest income on investment  securities was due to an increase
in the average yield on the investment portfolio of 48 basis points to 4.42% for
the six months ended June 30, 2004 from 3.94% for the same period in 2003, which
resulted in an increase in interest income of $753 thousand due to interest rate
changes.  The average balance of the portfolio increased $56.0 million to $309.5
million for the six months ended June 30, 2004 from $253.5  million for the same
period in 2003,  which resulted in a volume  increase in interest income of $1.1
million.  The increase in the average  balance was primarily due to purchases of
$278.2  million,  partially  offset by investment  calls and maturities of $77.4
million,  principal  paydowns  of  $132.7  million  and  a  reclassification  of
pass-thru investment securities to mortgage-backed securities of $64.9 million.

Interest  expense on time deposits  decreased  $988 thousand to $2.0 million for
the six months  ended June 30,  2004 from $3.0  million  for the same  period in
2003.  The average rate on time deposits  decreased 84 basis points to 1.84% for
the six months ended June 30, 2004 from 2.68% for the same period in 2003, which
resulted in a decrease in interest expense of $923 thousand. The average balance
of time  deposits  decreased  $4.8 million to $220.4  million for the six months
ended June 30,  2004 from  $225.2  million  for the same  period in 2003,  which
resulted in a volume decrease in interest expense of $65 thousand.

Interest  expense on savings  deposits  decreased $188 thousand to $531 thousand
for the six months ended June 30, 2004 from $719 thousand for the same period in
2003.  The average rate on savings  deposits  decreased 28 basis points to 0.55%
for the six months  ended June 30,  2004 from 0.83% for the same period in 2003,
which resulted in a decrease in interest  expense of $267 thousand.  The average
balance of savings  deposits  increased  $19.2 million to $193.0 million for the
six months ended June 30, 2004 from $173.8  million for the same period in 2003,
which resulted in a volume increase in interest expense of $79 thousand.

Interest  expense on money  market  deposits  decreased  $152  thousand  to $428
thousand for the six months ended June 30, 2004 from $580  thousand for the same
period in 2003.  The average  rate on money market  deposits  decreased 25 basis
points to 0.65% for the six months  ended June 30,  2004 from 0.90% for the same
period in 2003,  which  resulted  in a  decrease  in  interest  expense  of $166
thousand. The average balance of money market deposits increased $3.0 million to
$131.6  million for the six months  ended June 30, 2004 from $128.6  million for
the same period in 2003, which resulted in a volume increase in interest expense
of $14 thousand.

Interest income on  mortgage-backed  securities  decreased $293 thousand for the
six months  ended June 30, 2004 to $8.0  million  from $8.3 million for the same
period in 2003.  The  decrease in  interest  income was due to a decrease in the
average  yield on the  portfolio  of 8 basis  points to 4.30% for the six months
ended June 30, 2004 from 4.38% for the same period in 2003,  which resulted in a
decrease in interest  income of $143 thousand due to interest rate changes.  The
average  balance of the portfolio  decreased  $6.8 million to $372.8 million for
the six months ended June 30, 2004 from $379.6  million for the six months ended
June 30, 2004,  which resulted in a $150 thousand  decrease in interest  income.
The  decrease in the  average  balance  was due to $126.0  million of  principal
paydowns   from  June  2003   through   June   2004,   partially   offset  by  a
reclassification   of  pass-thru   investment   securities  to   mortgage-backed
securities of $64.9 million and purchases during this period of $18.4 million.


                                       16
<PAGE>



The  decrease in  interest  income on loans was due to a decrease in the average
yield on loans of 61 basis  points to 5.87% for the six  months  ended  June 30,
2004 from 6.48% for the same  period in 2003,  which  resulted  in a decrease in
interest  income of $1.3  million due to rate  changes.  The average  balance of
loans  increased  $33.6 million to $412.5  million for the six months ended June
30,  2004 from  $378.9  million for the six months  ended June 30,  2003,  which
resulted in a $1.1 million volume increase in interest  income.  The increase in
the average balance is primarily due to an increase in loan originations.


Critical Accounting  Estimate-Provision  for Loan Losses - A critical accounting
estimate is the provision  for loan losses which  increased $30 thousand to $150
thousand for the six months ended June 30, 2004 from $120  thousand for the same
period in 2003. At June 30, 2004 the allowance for loan losses  amounted to $4.6
million compared to $4.4 million at December 31, 2003. 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 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.

Other Income - for the three and six month  periods ended June 30, 2004 was $1.4
million and $2.8  million,  respectively,  as compared to $1.5  million and $3.1
million for the same periods in 2003.  The decrease was  primarily due to a $601
thousand  gain on the sale of real estate held for  development  sold in January
2003,  partially  offset by a $270  thousand  increase  in  service  charges  on
accounts for the six months ended June 30, 2004.

Salaries and Employee  Benefits - for the three and six month periods ended June
30, 2004 were $4.1 million and $8.2 million,  respectively,  as compared to $3.9
million and $7.7  million for the same  period in 2003.  The  increase is due to
annual  compensation  increases and $118 thousand  increase in health  insurance
cost for the six  months  ended  June 30,  2004.  Average  full time  equivalent
employees at June 30, 2004 were 525 as compared to 533 at June 30, 2003.

Purchased  Services - for the three and six month  periods  ended June 30,  2004
totaled $748  thousand and $1.4  million,  as compared to $724 thousand and $1.4
million for the same  periods in 2003.  Check  processing  costs  increased  $23
thousand for the six months  ended June 30, 2004  compared to the same period in
2003 due to higher transaction volume.

                                       17
<PAGE>


ITEM 3:  DISCLOSURE ABOUT MARKET RISK

There were no  significant  changes for the six months  ended June 30, 2004 from
the  information  presented in the annual report on Form 10-K for the year ended
December 31, 2003.

ITEM 4:  CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.  Based on their evaluation
    -------------------------------------------------
of the  Company's  disclosure  controls  and  procedures  (as  defined  in  Rule
13a-15(e) under the Securities  Exchange Act of 1934 (the "Exchange Act")),  the
Company's  principal  executive  officer and  principal  financial  officer have
concluded that as of the end of the period  covered by this Quarterly  Report of
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  control over  financial  reporting.  During the quarter
    --------------------------------------------------------
under  report,  there was no  change  in the  Company's  internal  control  over
financial  reporting that has materially  affected,  or is reasonably  likely to
materially affect, the Company's internal control over financial reporting.









                                       18



<PAGE>

PART II. OTHER INFORMATION
         -----------------

         Item 1:        Legal Proceedings
                        -----------------

                        None


         Item 2:        Changes in Securities, Use of Proceeds and Issuer
                        Purchases of Equity Securities
                        ------------------------------

                        None


         Item 3:        Defaults Upon Senior Securities
                        -------------------------------

                        None


         Item 4:        Submission of Matters to Vote of Security of Holders
                        ----------------------------------------------------

                        None

         Item 5:        Other Information
                        -----------------

                        None

         Item 6:        Exhibits and Reports on Form 8-K
                        --------------------------------

                       (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.

                       (c) The  Company  filed a Form 8-K on July  28,  2004
                        reporting the  Company's  earnings for the six months
                        ended June 30, 2004.





                                       19



<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 9, 2004                /s/ Craig W. Yates
                                    ------------------
                                    Craig W. Yates
                                    President and Chief Executive Officer
                                    (Principal Executive Officer)



Date: August 9, 2004                /s/ Channing L. Smith
                                    ---------------------
                                    Channing L. Smith
                                    Vice President and
                                    Chief Financial Officer
                                    (Principal Financial Officer)







                                       20